UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 30, 2014

OR

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

For the transition period from ________________ to ________________

Commission file number:  000-26734

SANDISK CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	77-0191793
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
951 SanDisk Drive Milpitas, California	95035
(Address of principal executive offices)	(Zip Code)

(408) 801-1000

(Registrant’s telephone number, including area code)

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

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

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

Large accelerated filer þ Accelerated filer ¨ Non accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

Yes ¨ No þ

Number of shares outstanding of the issuer’s common stock, $0.001 par value, as of March 30, 2014: 226,688,648.

SANDISK CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets as of March 30, 2014 and December 29, 2013	3
	Condensed Consolidated Statements of Operations for the three months ended March 30, 2014 and March 31, 2013	4
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 30, 2014 and March 31, 2013	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2014 and March 31, 2013	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	77
Item 6.	Exhibits	77
	Signatures	S - 1
	Exhibit Index	E - 1

2

PART I. FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

SANDISK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 30, 2014			December 29, 2013
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,116,938		$	986,246
Short-term marketable securities	1,692,801			1,919,611
Accounts receivable, net	596,669			682,809
Inventory	799,883			756,975
Deferred taxes	124,200			138,192
Other current assets	177,532			166,885
Total current assets	4,508,023			4,650,718
Long-term marketable securities	3,508,081			3,179,471
Property and equipment, net	639,653			655,794
Notes receivable and investments in Flash Ventures	1,159,264			1,134,620
Deferred taxes	136,991			134,669
Goodwill	317,930			318,111
Intangible assets, net	221,099			247,904
Other non-current assets	95,330			167,430
Total assets	$	10,586,371		$	10,488,717
LIABILITIES, CONVERTIBLE SHORT-TERM DEBT CONVERSION OBLIGATION AND EQUITY
Current liabilities:
Accounts payable trade	$	259,204		$	282,582
Accounts payable to related parties	160,536			146,964
Convertible short-term debt	840,180			—
Other current accrued liabilities	349,126			509,732
Deferred income on shipments to distributors and retailers and deferred revenue	269,349			291,302
Total current liabilities	1,878,395			1,230,580
Convertible long-term debt	1,166,497			1,985,363
Non-current liabilities	311,334			307,083
Total liabilities	3,356,226			3,523,026
Commitments and contingencies (see Note 11)
Convertible short-term debt conversion obligation	159,820			—
Stockholders’ equity:
Preferred stock	—			—
Common stock	227			225
Capital in excess of par value	4,961,666			5,040,017
Retained earnings	2,150,583			2,004,089
Accumulated other comprehensive loss	(40,038		)	(76,459		)
Total stockholders’ equity	7,072,438			6,967,872
Non-controlling interests	(2,113		)	(2,181		)
Total equity	7,070,325			6,965,691
Total liabilities, convertible short-term debt conversion obligation and equity	$	10,586,371		$	10,488,717

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

3

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended
	March 30, 2014			March 31, 2013
	(In thousands, except per share amounts)
Revenue	$	1,511,945		$	1,340,729
Cost of revenue	741,039			799,383
Amortization of acquisition-related intangible assets	19,616			9,830
Total cost of revenue	760,655			809,213
Gross profit	751,290			531,516
Operating expenses:
Research and development	198,829			171,125
Sales and marketing	76,972			59,127
General and administrative	48,669			45,104
Amortization of acquisition-related intangible assets	1,646			2,369
Total operating expenses	326,116			277,725
Operating income	425,174			253,791
Interest income	13,244			12,905
Interest (expense) and other income (expense), net	(28,879		)	(32,802		)
Total other income (expense), net	(15,635		)	(19,897		)
Income before income taxes	409,539			233,894
Provision for income taxes	140,591			67,665
Net income	$	268,948		$	166,229
Net income per share:
Basic	$	1.19		$	0.69
Diluted	$	1.14		$	0.68
Shares used in computing net income per share:
Basic	225,845			242,519
Diluted	234,914			245,577
Cash dividends declared per share	$	0.225		$	—

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

4

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three months ended
	March 30, 2014			March 31, 2013
	(In thousands)
Net income	$	268,948		$	166,229
Other comprehensive income (loss), before tax:
Unrealized holding gain on marketable securities	1,625			6,227
Reclassification adjustment for realized (gain) loss on marketable securities included in net income	(570		)	314
Net unrealized holding gain on marketable securities	1,055			6,541
Foreign currency translation adjustments	24,482			(116,179		)
Unrealized holding gain (loss) on derivatives qualifying as cash flow hedges	13,468			(30,630		)
Reclassification adjustment for realized loss on derivatives qualifying as cash flow hedges included in net income	1,564			1,441
Net unrealized holding gain (loss) on derivatives qualifying as cash flow hedges	15,032			(29,189		)
Total other comprehensive income (loss), before tax	40,569			(138,827		)
Income tax expense (benefit) related to items of other comprehensive income (loss)	4,148			(16,258		)
Total other comprehensive income (loss), net of tax	36,421			(122,569		)
Comprehensive income	$	305,369		$	43,660

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

5

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended
	March 30, 2014			March 31, 2013
	(In thousands)
Cash flows from operating activities:
Net income	$	268,948		$	166,229
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	6,951			53,151
Depreciation	60,089			53,017
Amortization	72,598			65,151
Provision for doubtful accounts	(547		)	(197		)
Share-based compensation expense	30,030			21,734
Excess tax benefit from share-based plans	(17,460		)	(8,450		)
Impairment and other	—			(3,173		)
Other non-operating	1,020			136
Changes in operating assets and liabilities:
Accounts receivable, net	86,689			186,726
Inventory	(42,117		)	16,776
Other assets	54,547			(20,156		)
Accounts payable trade	(36,546		)	2,898
Accounts payable to related parties	13,572			(37,901		)
Other liabilities	(115,695		)	(22,290		)
Total adjustments	113,131			307,422
Net cash provided by operating activities	382,079			473,651
Cash flows from investing activities:
Purchases of short and long-term marketable securities	(1,266,899		)	(1,150,347		)
Proceeds from sales of short and long-term marketable securities	1,015,605			513,354
Proceeds from maturities of short and long-term marketable securities	129,620			293,205
Acquisition of property and equipment, net	(34,517		)	(48,352		)
Notes receivable issuances to Flash Ventures	(24,352		)	—
Notes receivable proceeds from Flash Ventures	24,352			53,586
Purchased technology and other assets	(869		)	(237		)
Acquisitions, net of cash acquired	2,368			(142		)
Net cash used in investing activities	(154,692		)	(338,933		)
Cash flows from financing activities:
Distribution to non-controlling interests	—			(87		)
Proceeds from employee stock programs	51,882			93,075
Excess tax benefit from share-based plans	17,460			8,450
Dividends paid	(51,560		)	—
Share repurchases	(114,452		)	(89,621		)
Net cash provided by (used in) financing activities	(96,670		)	11,817
Effect of changes in foreign currency exchange rates on cash	(25		)	6,105
Net increase in cash and cash equivalents	130,692			152,640
Cash and cash equivalents at beginning of period	986,246			995,470
Cash and cash equivalents at end of period	$	1,116,938		$	1,148,110

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

6

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Organization

These interim Condensed Consolidated Financial Statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of March 30, 2014, the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income for the three months endedMarch 30, 2014 and March 31, 2013, and the Condensed Consolidated Statements of Cash Flows for the three months endedMarch 30, 2014 and March 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s most recent Annual Report on Form 10-K filed with the SEC on February 21, 2014. The results of operations for the three months endedMarch 30, 2014 are not necessarily indicative of the results to be expected for the entire fiscal year.

Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31 and its fiscal quarters consist of 13 weeks. The first quarters of fiscal years 2014 and 2013 ended on March 30, 2014 and March 31, 2013, respectively. For accounting and disclosure purposes, the exchange rates of 102.69, 104.94 and 94.11 at March 30, 2014, December 29, 2013 and March 31, 2013, respectively, were used to convert Japanese yen to U.S. dollars. Throughout the Notes to Condensed Consolidated Financial Statements, unless otherwise indicated, references to Net income refer to Net income attributable to common stockholders. Cash provided by operating activities and Cash used in financing activities for the three months ended March 30, 2014 included a reclassification of $24.4 million from the amounts disclosed in the Company's Preliminary Condensed Consolidated Statements of Cash Flows included in the Form 8-K furnished on April 16, 2014 to reflect cash spent to settle employee tax withholding obligations due upon the vesting of restricted stock units (“RSUs”).

Organization and Nature of Operations. The Company was incorporated in the State of Delaware on June 1, 1988. The Company designs, develops, markets and manufactures data storage solutions in a variety of form factors using its flash memory, controller and firmware technologies. The Company operates in one segment, flash memory storage products.

Principles of Consolidation. The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. Non-controlling interest represents the minority shareholders’ proportionate share of the net assets and results of operations of the Company’s majority-owned subsidiaries. The Condensed Consolidated Financial Statements also include the results of companies acquired by the Company from the date of each acquisition.

Use of Estimates. The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, intellectual property claims, product returns, allowance for doubtful accounts, inventories and inventory reserves, valuation and impairments of marketable securities and investments, valuation and impairments of goodwill and long-lived assets, income taxes, warranty obligations, restructurings, contingencies, share‑based compensation and litigation. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results could materially differ from these estimates.

7

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2. Investments and Fair Value Measurements

The Company’s total cash, cash equivalents and marketable securities was as follows (in thousands):

	March 30, 2014		December 29, 2013
Cash and cash equivalents	$	1,116,938	$	986,246
Short-term marketable securities	1,692,801		1,919,611
Long-term marketable securities	3,508,081		3,179,471
Total cash, cash equivalents and marketable securities	$	6,317,820	$	6,085,328

For certain of the Company’s financial instruments, including cash held in banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities, and are therefore excluded from the fair value tables below.

Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments (in thousands):

	March 30, 2014								December 29, 2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Money market funds	$	884,279	$	—	$	—	$	884,279	$	760,363	$	—	$	—	$	760,363
Fixed income securities	142,886		5,107,959		—		5,250,845		160,194		4,985,059		—		5,145,253
Derivative assets	—		25		—		25		—		777		—		777
Total financial assets	$	1,027,165	$	5,107,984	$	—	$	6,135,149	$	920,557	$	4,985,836	$	—	$	5,906,393
Derivative liabilities	$	—	$	17,129	$	—	$	17,129	$	—	$	45,859	$	—	$	45,859
Total financial liabilities	$	—	$	17,129	$	—	$	17,129	$	—	$	45,859	$	—	$	45,859

Financial assets and liabilities measured and recorded at fair value on a recurring basis were presented on the Company’s Condensed Consolidated Balance Sheets as follows (in thousands):

	March 30, 2014								December 29, 2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents(1)	$	884,279	$	49,963	$	—	$	934,242	$	773,435	$	33,099	$	—	$	806,534
Short-term marketable securities	22,093		1,670,708		—		1,692,801		15,090		1,904,521		—		1,919,611
Long-term marketable securities	120,793		3,387,288		—		3,508,081		132,032		3,047,439		—		3,179,471
Other current assets	—		25		—		25		—		777		—		777
Total financial assets	$	1,027,165	$	5,107,984	$	—	$	6,135,149	$	920,557	$	4,985,836	$	—	$	5,906,393
Other current accrued liabilities	$	—	$	17,129	$	—	$	17,129	$	—	$	45,741	$	—	$	45,741
Non-current liabilities	—		—		—		—		—		118		—		118
Total financial liabilities	$	—	$	17,129	$	—	$	17,129	$	—	$	45,859	$	—	$	45,859

⁽¹⁾  Cash equivalents exclude cash of $182.7 million and $179.7 million included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets as of March 30, 2014 and December 29, 2013, respectively.

8

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

During the three months endedMarch 30, 2014, the Company had no transfers of financial assets or liabilities between Level 1 and Level 2. As of March 30, 2014 and December 29, 2013, the Company had no financial assets or liabilities categorized as Level 3 and had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

Available-for-Sale Investments. Available-for-sale investments were as follows (in thousands):

	March 30, 2014									December 29, 2013
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
U.S. Treasury securities	$	143,141	$	6	$	(261	)	$	142,886	$	160,598	$	21	$	(424	)	$	160,195
U.S. government-sponsored agency securities	—		—		—			—		8,112		10		(1		)	8,121
International government securities	55,090		2		(200		)	54,892		38,492		1		(224		)	38,269
Corporate notes and bonds	948,512		1,660		(928		)	949,244		864,331		1,504		(1,565		)	864,270
Asset-backed securities	216,385		137		(239		)	216,283		226,620		114		(170		)	226,564
Mortgage-backed securities	83,951		107		(277		)	83,781		86,542		18		(554		)	86,006
Municipal notes and bonds	3,786,291		18,764		(1,296		)	3,803,759		3,744,138		18,931		(1,241		)	3,761,828
Total available-for-sale investments	$	5,233,370	$	20,676	$	(3,201	)	$	5,250,845	$	5,128,833	$	20,599	$	(4,179	)	$	5,145,253

The fair value and gross unrealized losses on the available-for-sale securities that have been in a continuous unrealized loss position, aggregated by type of investment instrument, and the length of time that individual securities have been in a continuous unrealized loss position as of March 30, 2014, are summarized in the following table (in thousands). Available-for-sale securities that were in an unrealized gain position have been excluded from the table.

	Less than 12 months					Greater than 12 months
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
U.S. Treasury securities	$	126,006	$	(261	)	$	—	$	—
International government securities	47,879		(200		)	—		—
Corporate notes and bonds	414,858		(928		)	—		—
Asset-backed securities	99,496		(239		)	—		—
Mortgage-backed securities	46,368		(273		)	294		(4		)
Municipal notes and bonds	390,305		(1,296		)	—		—
Total	$	1,124,912	$	(3,197	)	$	294	$	(4	)

The gross unrealized loss related to U.S. Treasury securities, international government securities, corporate and municipal notes and bonds, and asset-backed and mortgage-backed securities was due primarily to changes in interest rates. The gross unrealized loss on all available-for-sale fixed income securities at March 30, 2014 was considered temporary in nature. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold an investment for a period of time sufficient to allow for any anticipated recovery in market value. For debt security investments, the Company considered additional factors including the Company’s intent to sell the investments or whether it is “more likely than not” the Company will be required to sell the investments before the recovery of its amortized cost.

9

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table shows the gross realized gains and (losses) on sales of available-for-sale securities (in thousands).

	Three months ended
	March 30, 2014			March 31, 2013
Gross realized gains	$	1,013		$	718
Gross realized losses	(443		)	(1,032		)

Fixed income securities by contractual maturity as of March 30, 2014 are shown below (in thousands). Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations or the Company has the option to demand payment.

	Amortized Cost		Fair Value
Due in one year or less	$	1,286,856	$	1,290,919
After one year through five years	3,655,004		3,668,402
After five years through ten years	79,657		79,670
After ten years	211,853		211,854
Total	$	5,233,370	$	5,250,845

For those financial instruments where the carrying amounts differ from fair value, the following table represents the related carrying values and fair values, which are based on quoted market prices (in thousands). The 1.5% Convertible Senior Notes due 2017 were categorized as Level 1 and the 0.5% Convertible Senior Notes due 2020 were categorized as Level 2 as of both March 30, 2014 and December 29, 2013. See Note 6, “Financing Arrangements,” regarding details of each convertible note presented.

	March 30, 2014				December 29, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
1.5% Convertible Senior Notes due 2017	$	840,180	$	1,636,760	$	829,792	$	1,467,160
0.5% Convertible Senior Notes due 2020	1,166,497		1,648,335		1,155,571		1,480,290
Total	$	2,006,677	$	3,285,095	$	1,985,363	$	2,947,450

10

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3. Derivatives and Hedging Activities

The Company uses derivative instruments primarily to manage exposures to foreign currency. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The program is not designated for trading or speculative purposes. The Company’s derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored by the Company on an ongoing basis.

The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value and provides qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Changes in fair value (i.e., gains or losses) of the derivatives are recorded as cost of revenue or other income (expense), or as other comprehensive income (“OCI”). Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of set-off associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The Company does not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets and separately discloses the gross fair value amounts of the derivative instruments as either assets or liabilities. 

Cash Flow Hedges. The Company uses foreign exchange forward contracts designated as cash flow hedges to hedge a portion of future forecasted wafer purchases and research and development (“R&D”) expenses in Japanese yen. The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of accumulated OCI (“AOCI”) and subsequently reclassified into cost of revenue or R&D expense in the same period or periods in which the cost of revenue or R&D expenses are recognized, or reclassified into other income (expense) if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is no longer designated, because it is no longer probable of occurring or it is related to an ineffective portion of a cash flow hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized immediately as other income (expense). As of March 30, 2014, the notional amount and unrealized loss on the effective portion of the Company’s outstanding foreign exchange forward contracts to purchase Japanese yen that are designated as cash flow hedges are shown in both Japanese yen (in billions) and U.S. dollar (in thousands), based upon the exchange rate as of March 30, 2014, as follows:

	Notional Amount				Unrealized Loss
	(Japanese yen)		(U.S. dollar)		(U.S. dollar)
Foreign exchange forward contracts	¥	47.0	$	458,513	$	(15,990	)

As of March 30, 2014, the maturities of these contracts were 12 months or less.

Other Derivatives. Other derivatives that are non-designated consist primarily of foreign exchange forward contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the associated outstanding foreign exchange forward contracts were marked-to-market at March 30, 2014 with realized and unrealized gains and losses included in other income (expense). As of March 30, 2014, the Company had foreign exchange forward contracts hedging exposures in European euros, British pounds and Japanese yen. Foreign exchange forward contracts were outstanding to buy and sell U.S. dollar-equivalents of approximately $161.4 million and $21.5 million in foreign currencies, respectively, based upon the exchange rates at March 30, 2014.

11

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The amounts in the tables below include fair value adjustments related to the Company’s own credit risk and counterparty credit risk.

Fair Value of Derivative Contracts. Gross fair value of derivative contracts was as follows (in thousands):

	Derivative assets reported in
	Other Current Assets				Other Non-current Assets
	March 30, 2014		December 29, 2013		March 30, 2014		December 29, 2013
Foreign exchange forward contracts not designated	$	25	$	777	$	—	$	—

	Derivative liabilities reported in
	Other Current Accrued Liabilities				Non-current Liabilities
	March 30, 2014		December 29, 2013		March 30, 2014		December 29, 2013
Foreign exchange forward contracts designated	$	15,990	$	38,375	$	—	$	118
Foreign exchange forward contracts not designated	1,139		7,366		—		—
Total derivatives	$	17,129	$	45,741	$	—	$	118

As of March 30, 2014, the potential effect of rights of set-off associated with the above foreign exchange forward contracts would result in a net derivative liabilities balance of $17.1 million. As of December 29, 2013, the potential effect of rights of set-off would result in a net derivative liabilities balance of $45.2 million and an immaterial net derivative asset balance.

Foreign Exchange Forward Contracts and Equity Market Risk Contracts Designated as Cash Flow Hedges. The impact of the effective portion of designated cash flow derivative contracts on the Company’s results of operations was as follows (in thousands):

	Three months ended
	Amount of gain (loss) recognized in OCI					Amount of loss reclassified from AOCI to earnings
	March 30, 2014		March 31, 2013			March 30, 2014			March 31, 2013
Foreign exchange forward contracts	$	13,468	$	(30,630	)	$	(1,564	)	$	(1,441	)

Foreign exchange forward contracts designated as cash flow hedges relate to forecasted wafer purchases and R&D expenses in Japanese yen. Gains and losses associated with foreign exchange forward contracts designated as cash flow hedges are expected to be recorded in cost of revenue for wafer purchases or R&D expense when reclassified out of AOCI. Losses from the equity market risk contract were recorded in other income (expense) when reclassified out of AOCI. The Company expects to realize the majority of the AOCI balance related to foreign exchange contracts within the next twelve months.

The following table includes the ineffective portion of designated cash flow derivative contracts and the forward points excluded for the purposes of cash flow hedging designation recognized in other income (expense) (in thousands):

	Three months ended
	March 30, 2014			March 31, 2013
Foreign exchange forward contracts	$	(458	)	$	(307	)

12

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Effect of Non-Designated Derivative Contracts on the Consolidated Statements of Operations. The effect of non-designated derivative contracts on the Company’s results of operations recognized in other income (expense) was as follows (in thousands):

	Three months ended
	March 30, 2014			March 31, 2013
Gain on foreign exchange forward contracts including forward point income	$	2,186		$	9,659
Loss from revaluation of foreign currency exposures hedged by foreign exchange forward contracts	(1,743		)	(11,383		)

13

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Balance Sheet Information

Accounts Receivable, net. Accounts receivable, net was as follows (in thousands):

	March 30, 2014			December 29, 2013
Accounts receivable	$	783,573		$	904,551
Allowance for doubtful accounts	(7,646		)	(8,274		)
Price protection, promotions and other activities	(179,258		)	(213,468		)
Total accounts receivable, net	$	596,669		$	682,809

Inventory. Inventory was as follows (in thousands):

	March 30, 2014		December 29, 2013
Raw material	$	467,721	$	440,570
Work-in-process	118,249		102,543
Finished goods	213,913		213,862
Total inventory	$	799,883	$	756,975

Other Current Assets. Other current assets were as follows (in thousands):

	March 30, 2014		December 29, 2013
Income tax receivables	$	70,200	$	7,976
Other tax-related receivables	55,124		62,784
Other non-trade receivables	15,425		37,368
Prepayment to Flash Forward Ltd.	—		5,144
Derivative contract receivables	25		777
Prepaid expenses	12,715		12,630
Convertible note issuance costs	6,355		—
Other current assets	17,688		40,206
Total other current assets	$	177,532	$	166,885

Notes Receivable and Investments in Flash Ventures. Notes receivable and investments in Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd. (collectively referred to as “Flash Ventures”) were as follows (in thousands):

	March 30, 2014		December 29, 2013
Notes receivable, Flash Partners Ltd.	$	77,904	$	100,057
Notes receivable, Flash Alliance Ltd.	355,439		323,995
Notes receivable, Flash Forward Ltd.	172,850		169,144
Investment in Flash Partners Ltd.	194,222		190,694
Investment in Flash Alliance Ltd.	290,776		283,999
Investment in Flash Forward Ltd.	68,073		66,731
Total notes receivable and investments in Flash Ventures	$	1,159,264	$	1,134,620

Equity-method investments and the Company’s maximum loss exposure related to Flash Ventures are discussed further in Note 11, “Commitments, Contingencies and Guarantees – Flash Ventures” and Note 12, “Related Parties and Strategic Investments.”

14

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company assesses financing receivable credit quality through financial and operational reviews of the borrower and creditworthiness, including credit rating agency ratings, of significant investors of the borrower, where material or known. Impairments, when required for credit worthiness, are recorded in other income (expense). The Company makes or will make long-term loans to Flash Ventures to fund new process technologies and additional wafer capacities. The Company aggregates its Flash Ventures notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded.

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

	March 30, 2014		December 29, 2013
Prepaid tax onintercompany transactions	$	36,654	$	37,747
Convertible note issuance costs	13,283		20,612
Long-term prepaid income tax	3,168		66,176
Other non-current assets	42,225		42,895
Total other non-current assets	$	95,330	$	167,430

Other Current Accrued Liabilities. Other current accrued liabilities were as follows (in thousands):

	March 30, 2014		December 29, 2013
Accrued payroll and related expenses	$	155,434	$	227,779
Derivative contract payables	17,129		45,741
Taxes payable	12,585		59,618
Other accrued liabilities	163,978		176,594
Total other current accrued liabilities	$	349,126	$	509,732

Non-current Liabilities. Non-current liabilities were as follows (in thousands):

	March 30, 2014		December 29, 2013
Income tax liabilities	206,888		205,266
Deferred credits on intercompany transactions	11,874		15,065
Deferred tax liabilities	$	4,336	$	3,482
Other non-current liabilities	88,236		83,270
Total non-current liabilities	$	311,334	$	307,083

15

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Warranties. The liability for warranty expense is included in Other current accrued liabilities and Non-current liabilities in the accompanying Consolidated Balance Sheets, and the activity was as follows (in thousands):

	Three months ended
	March 30, 2014			March 31, 2013
Balance, beginning of period	$	43,624		$	38,787
Additions and adjustments to cost of revenue	7,431			4,878
Usage	(3,490		)	(4,693		)
Balance, end of period	$	47,565		$	38,972

The majority of the Company’s products have a warranty of less than three years, with a small number of products having a warranty ranging up to ten years or more. For warranties ten years or greater, including lifetime warranties, the Company uses the estimated useful life of the product to calculate the warranty exposure. A provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice. The Company’s warranty liability is affected by customer and consumer returns, product failures, number of units sold and repair or replacement costs incurred. Should actual product failure rates, or repair or replacement costs, differ from the Company’s estimates, increases or decreases to its warranty liability would be required.

Accumulated Other Comprehensive Income (Loss). AOCI presented in the accompanying Condensed Consolidated Balance Sheets consists of unrealized gains and losses on available-for-sale investments, foreign currency translation and hedging activities, net of tax, for all periods presented (in thousands):

	March 30, 2014			December 29, 2013
Accumulated net unrealized gain (loss) on:
Available-for-sale investments	$	11,157		$	10,479
Foreign currency translation	(26,729		)	(47,440		)
Hedging activities	(24,466		)	(39,498		)
Total accumulated other comprehensive loss	$	(40,038	)	$	(76,459	)

The amount of income tax expense (benefit) allocated to the unrealized gain (loss) on available-for-sale investments and foreign currency translation activities was as follows (in thousands):

	Three months ended
	March 30, 2014		March 31, 2013
Available-for-sale investments	$	377	$	2,053
Foreign currency translation	3,771		(18,311		)
Total income tax expense (benefit) allocated	$	4,148	$	(16,258	)

16

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The significant amounts reclassified out of each component of AOCI were as follows (in thousands):

	Three months ended
AOCI Component	March 30, 2014			March 31, 2013			Statement of Operations  Line Item
Unrealized gain (loss) on available-for-sale investments	$	570		$	(314	)	Interest (expense) and other income (expense), net
Tax impact	(195		)	(175		)	Provision for income taxes
Unrealized gain (loss) on available-for-sale investments, net of tax	375			(489		)
Unrealized holding loss on derivatives:
Foreign exchange contracts	(1,361		)	(1,441		)	Cost of revenue
Foreign exchange contracts	(203		)	—			Research and development
Loss on cash flow hedging activities	(1,564		)	(1,441		)
Total reclassifications for the period, net of tax	$	(1,189	)	$	(1,930	)

17

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5. Goodwill and Intangible Assets

Goodwill. Goodwill balances and activity during the three months ended March 30, 2014 were as follows (in thousands):

	Carrying Amount
Balance as of December 29, 2013	$	318,111
Adjustment	(181		)
Balance as of March 30, 2014	$	317,930

Goodwill decreased by $0.2 million during the three months ended March 30, 2014 due primarily to the resolution of a working capital matter during the measurement period for an acquisition from fiscal year 2013.

Intangible Assets. Intangible asset balances were as follows (in thousands):

	March 30, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed product technology	$	292,769	$	(129,520	)	$	163,249
Customer relationships	7,600		(2,326		)	5,274
Trademarks	8,900		(1,700		)	7,200
Covenants not to compete	2,400		(2,400		)	—
Acquisition-related intangible assets	311,669		(135,946		)	175,723
Technology licenses and patents	109,600		(70,524		)	39,076
Total intangible assets subject to amortization	421,269		(206,470		)	214,799
Acquired in-process research and development (“IPR&D”)	6,300		—			6,300
Total intangible assets	$	427,569	$	(206,470	)	$	221,099

	December 29, 2013
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net Carrying Amount
Developed product technology	$	348,385	$	(121,304	)	$	(44,216	)	$	182,865
Customer relationships	20,650		(14,426		)	—			6,224
Trademarks	14,200		(3,634		)	(2,812		)	7,754
Covenants not to compete	3,100		(2,959		)	—			141
Acquisition-related intangible assets	386,335		(142,323		)	(47,028		)	196,984
Technology licenses and patents	133,909		(89,289		)	—			44,620
Total intangible assets subject to amortization	520,244		(231,612		)	(47,028		)	241,604
Acquired IPR&D	42,500		—			(36,200		)	6,300
Total intangible assets	$	562,744	$	(231,612	)	$	(83,228	)	$	247,904

18

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The annual expected amortization expense of intangible assets subject to amortization as of March 30, 2014, is as follows (in thousands):

	Acquisition-related Intangible Assets		Technology Licenses and Patents
Fiscal year:
2014 (remaining 9 months)	$	62,409	$	15,687
2015	48,114		20,056
2016	40,544		3,333
2017	24,656		—
Total intangible assets subject to amortization	$	175,723	$	39,076

19

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Financing Arrangements

The following table reflects the carrying value of the Company’s convertible debt (in thousands):

	March 30, 2014			December 29, 2013
1.5% Notes due 2017	$	1,000,000		$	1,000,000
Less: Unamortized bond discount	(159,820		)	(170,208		)
Net carrying amount of 1.5% Notes due 2017	840,180			829,792
0.5% Notes due 2020	1,500,000			1,500,000
Less: Unamortized bond discount	(333,503		)	(344,429		)
Net carrying amount of 0.5% Notes due 2020	1,166,497			1,155,571
Total convertible debt	2,006,677			1,985,363
Less: Convertible short-term debt	(840,180		)	—
Convertible long-term debt	$	1,166,497		$	1,985,363

1% Convertible Senior Notes Due 2013. On May 15, 2013, the maturity date for the 1% Convertible Senior Notes due May 15, 2013 (“1% Notes due 2013”), the Company settled the 1% Notes due 2013 through an all-cash transaction for principal and accrued interest of $928.1 million and $4.6 million, respectively. As of the date of the redemption, the Company had no further obligations related to the 1% Notes due 2013. In connection with the maturity of the 1% Notes due 2013, the associated convertible bond hedge and warrant transactions also terminated, with no shares purchased under the convertible bond hedge agreement and no exercises of the warrants.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the bond discount on the liability component of the 1% Notes due 2013 (in thousands):

	Three months ended
	March 31, 2013
Contractual interest coupon	$	2,319
Amortization of bond issuance costs	696
Amortization of bond discount	14,058
Total interest cost recognized	$	17,073

The effective interest rate on the liability component of the 1% Notes due 2013 was 7.4% for the three months endedMarch 31, 2013.

1.5% Convertible Senior Notes Due 2017. In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Convertible Senior Notes due August 15, 2017 (“1.5% Notes due 2017”) at par. The 1.5% Notes due 2017 may be converted, under certain circumstances described below, based on an initial conversion rate of 19.0931 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $52.37 per share). The 1.5% Notes due 2017 contain provisions where the conversion rate and conversion price are adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. Accordingly, as of March 30, 2014, the conversion rate was adjusted for dividends paid to date to 19.2935 shares of common stock per $1,000 principal amount of notes (which represents a conversion price of approximately $51.83 per share). The net proceeds to the Company from the sale of the 1.5% Notes due 2017 were $981.0 million.

The Company separately accounts for the liability and equity components of the 1.5% Notes due 2017. The principal amount of the liability component of $706.0 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 6.85%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. As of March 30, 2014, after recognition of $159.8 million in Convertible short-term debt conversion obligation, the carrying value of the equity component was $134.2 million.

20

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the bond discount on the liability component of the 1.5% Notes due 2017 (in thousands):

	Three months ended
	March 30, 2014		March 31, 2013
Contractual interest coupon	$	3,750	$	3,750
Amortization of bond issuance costs	667		667
Amortization of bond discount	10,192		9,519
Total interest cost recognized	$	14,609	$	13,936

The effective interest rate on the liability component of the 1.5% Notes due 2017 was 6.85% for each of the three months ended March 30, 2014 and March 31, 2013. The remaining unamortized bond discount of $159.8 million as of March 30, 2014 will be amortized over the remaining life of the 1.5% Notes due 2017, which is approximately 3.4 years.

The conversion provision of the 1.5% Notes due 2017 allows the holders the option to convert their notes during the following calendar quarter if the Company’s stock price exceeds 130% of the conversion price of the 1.5% Notes due 2017 for at least 20 trading days during the last 30 consecutive trading days of the current calendar quarter. The conversion threshold was met during the calendar quarter ended March 31, 2014 and the 1.5% Notes due 2017 became convertible at the holders’ option beginning on April 1, 2014 and ending June 30, 2014. As such, the carrying value of the 1.5% Notes due 2017 was classified as a current liability and the difference between the principal amount payable in cash upon conversion and the carrying value of the 1.5% Notes due 2017 was reclassified from Stockholders’ equity to Convertible short-term debt conversion obligation on the Company’s Condensed Consolidated Balance Sheet as of March 30, 2014, and will remain so while the notes are convertible. The determination of whether or not the 1.5% Notes due 2017 are convertible must continue to be performed on a calendar-quarter basis. Consequently, the 1.5% Notes due 2017 may be reclassified as long-term debt if the conversion threshold is not met in future quarters. Upon conversion of any of the 1.5% Notes due 2017, the Company will deliver cash up to the principal amount of the 1.5% Notes due 2017 and shares of the Company’s common stock with respect to any conversion value greater than the principal amount of the 1.5% Notes due 2017. As of March 30, 2014, no 1.5% Notes due 2017 had been converted. Based on the closing price of the Company’s common stock of $80.61 on March 30, 2014, if all of the 1.5% Notes due 2017 were converted, it would result in 6.9 million shares being distributed to the holders.

Concurrent with the issuance of the 1.5% Notes due 2017, the Company sold warrants to acquire up to approximately 19.1 million shares of its common stock at an exercise price of $73.3250 per share. The 1.5% Notes due 2017 contain provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. After adjusting for the dividends paid through March 30, 2014, holders of the warrants may acquire up to approximately 19.3 million shares of the Company’s common stock at a strike price of $72.5633 per share. The warrants mature on 40 different dates from November 13, 2017 through January 10, 2018 and are exercisable at the maturity date. At each maturity date, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 30, 2014, the warrants had not been exercised and remain outstanding. In addition, concurrent with the issuance of the 1.5% Notes due 2017, the Company entered into a convertible bond hedge transaction in which counterparties initially agreed to sell to the Company up to approximately 19.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 per share. The 1.5% Notes due 2017 contain provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. After adjusting for the dividends paid through March 30, 2014, the counterparties may acquire up to approximately 19.3 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $51.83 per share. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1.5% Notes due 2017 or the first day that none of the 1.5% Notes due 2017 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 1.5% Notes due 2017, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 1.5% Notes due 2017. As of March 30, 2014, the Company had not purchased any shares under this convertible bond hedge agreement.

21

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

0.5% Convertible Senior Notes Due 2020. In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Convertible Senior Notes due October 15, 2020 (the “0.5% Notes due 2020”) at par. The 0.5% Notes due 2020 may be converted, under certain circumstances described below, based on an initial conversion rate of 10.8470 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $92.19 per share). The 0.5% Notes due 2020 contain provisions where the conversion rate and conversion price are adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. As of March 30, 2014, no adjustment has been made to the conversion rate or the conversion price. The net proceeds to the Company from the sale of the 0.5% Notes due 2020 were approximately $1.48 billion.

The Company separately accounts for the liability and equity components of the 0.5% Notes due 2020. The principal amount of the liability component of $1.15 billion as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 4.43%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. As of March 30, 2014, the carrying value of the equity component of $352.0 million was unchanged from the date of issuance.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the bond discount on the liability component of the 0.5% Notes due 2020 (in thousands):

	Three months ended
	March 30, 2014
Contractual interest coupon	$	1,875
Amortization of bond issuance costs	659
Amortization of bond discount	10,771
Total interest cost recognized	$	13,305

The effective interest rate on the liability component of the 0.5% Notes due 2020 was 4.43% for the three months ended March 30, 2014. The remaining unamortized bond discount of $333.5 million as of March 30, 2014 will be amortized over the remaining life of the 0.5% Notes due 2020, which is approximately 6.5 years.

Concurrent with the issuance of the 0.5% Notes due 2020, the Company sold warrants to acquire up to approximately 16.3 million shares of its common stock at an exercise price of $122.9220 per share. The 0.5% Notes due 2020 contain provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. The warrants mature on 40 different dates from January 13, 2021 through March 11, 2021 and are exercisable at the maturity date. At each maturity date, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 30, 2014, the warrants had not been exercised and remain outstanding. In addition, concurrent with the issuance of the 0.5% Notes due 2020, the Company entered into a convertible bond hedge transaction in which counterparties agreed to sell to the Company up to approximately 16.3 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.19 per share. The 0.5% Notes due 2020 contain provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 0.5% Notes due 2020 or the first day that none of the 0.5% Notes due 2020 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 0.5% Notes due 2020, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 0.5% Notes due 2020. As of March 30, 2014, the Company had not purchased any shares under this convertible bond hedge agreement.

22

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. Share Repurchases

In July 2013, the Company’s Board of Directors authorized a program to repurchase up to $2.50 billion of the Company’s common stock. As of March 30, 2014, the remaining authorization for share repurchases under the program was $1.84 billion. The share repurchase program will remain in effect until the available funds have been expended or the Company’s Board of Directors terminates the program. The Company’s prior share repurchase program, which was initially announced in October 2011 and authorized the repurchase over a five-year period of up to $1.25 billion, as increased by the Company’s Board of Directors in December 2012, was completed in the third quarter of fiscal year 2013.

Under the Company’s share repurchase program, shares repurchased are recorded as a reduction to Capital in excess of par value and Retained earnings in the Company’s Condensed Consolidated Balance Sheets. The repurchases will be made from time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 of the Securities Exchange Act, or in structured share repurchase programs, and may be made in one or more repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act. Share repurchases are subject to market conditions, applicable legal requirements and other factors. The share repurchase program does not obligate the Company to acquire any specific number of common stock, or any shares at all, and may be suspended at any time at the Company’s discretion. As part of the share repurchase program, the Company has entered into, and may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that the Company make an up-front payment in exchange for the right to receive a fixed number of shares of its common stock upon execution of the agreement, with a potential increase or decrease in the number of shares at the end of the term of the agreement.

In the third quarter of fiscal year 2013, under the Company’s share repurchase program, the Company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to purchase $1.0 billion of the Company’s common stock. In exchange for an up-front payment of $1.0 billion, the financial institution committed to deliver shares during the ASR’s purchase period, which ended on April 8, 2014. During the third quarter of fiscal year 2013, 14.5 million shares were initially delivered to the Company under this ASR agreement. The up-front payment of $1.0 billion was accounted for as a reduction to Stockholders’ equity in the Company’s Condensed Consolidated Balance Sheet. In April 2014, the ASR was settled and the Company received an additional 0.6 million shares from the financial institution for a total of 15.1 million shares, which resulted in a variable weighted-average price of $66.07 per share.

The Company reflected the ASR as a repurchase of common stock for purposes of calculating earnings per share and as a forward contract indexed to its own common stock. The forward contract met all of the applicable criteria for equity classification, and therefore, was not accounted for as a derivative instrument.

Under the Company’s share repurchase program, since the fourth quarter of fiscal year 2011 through March 30, 2014, the Company spent an aggregate $1.91 billion to repurchase 31.7 million shares, and an additional 0.6 million shares were received in April 2014 upon settlement of the ASR. Included in the aggregate repurchase activity are 1.3 million shares that were repurchased for an aggregate amount of $90.0 million during the three months ended March 30, 2014. In addition to repurchases under the Company’s share repurchase program, during the three months ended March 30, 2014, the Company spent $24.4 million to settle employee tax withholding obligations due upon the vesting of RSUs and withheld an equivalent value of shares from the employees’ vesting RSUs.

23

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8. Stockholders’ Equity and Share-based Compensation

Dividends

Through March 30, 2014, the Company’s Board of Directors declared the following dividends:

Declaration Date	Dividend per Share		Record Date	Total Amount Declared		Payment Date
				(In millions)
January 21, 2014	$	0.225	February 3, 2014	$	51.7	February 24, 2014

No dividends were declared or paid by the Company during the first quarter of fiscal year 2013. On April 15, 2014, the Company’s Board of Directors declared a dividend of $0.225 per share for holders of record as of May 5, 2014, which is to be paid on May 27, 2014. Future dividends are subject to declaration by the Company’s Board of Directors.

Share-based Benefit Plans

Share-based Plans. The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers, non-employee board members and non-employee service providers. This program includes incentive and non-statutory stock option awards, stock appreciation rights (“SARs”), RSUs, performance-based cash bonus awards for Section 16 executive officers and an automatic grant program for non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service. These awards are granted under various programs, all of which are stockholder approved. Stock option awards generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each quarter over the next 12 quarters of continued service. RSUs generally vest in equal annual installments over a four-year period. Initial grants to non-employee board members under the automatic grant program vest in equal annual installments over a four-year period and subsequent grants to non-employee board members generally vest over a one-year period in accordance with the specific vesting provisions set forth in that program. Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at the subscription date or the date of purchase, whichever is lower.

Valuation Assumptions

Option Plan Shares. The fair value of the Company’s stock options granted, excluding unvested stock options assumed through acquisitions, was estimated using the following weighted-average assumptions:

	Three months ended
	March 30, 2014	March 31, 2013
Dividend yield	1.25% – 1.44%	—%
Expected volatility	0.32	0.38
Risk-free interest rate	1.22%	0.67%
Expected term	4.4 years	4.4 years
Estimated annual forfeiture rate	8.51%	8.59%
Weighted-average fair value at grant date	$18.53	$16.46

RSU Plan Shares. The fair value of the Company’s RSU awards granted was valued using the closing price of the Company’s stock price on the date of grant.

24

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Employee Stock Purchase Plan Shares. The fair value of the Company’s ESPP shares issued to employees was estimated using the following weighted-average assumptions:

	Three months ended
	March 30, 2014	March 31, 2013
Dividend yield	1.65%	—%
Expected volatility	0.31	0.33
Risk-free interest rate	0.08%	0.13%
Expected term	½ year	½ year
Weighted-average fair value at purchase date	$17.25	$12.54

Share-based Compensation Plan Activities

Stock Options and SARs. A summary of stock option and SARs activities under all of the Company’s share-based compensation plans as of March 30, 2014 and changes during the three months endedMarch 30, 2014 are presented below (in thousands, except for weighted-average exercise price and remaining contractual term):

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options and SARs outstanding at December 29, 2013	6,593		$	40.66	4.2	$	195,018
Granted	937		74.50
Exercised	(1,634	)	38.48			57,828
Forfeited	(58	)	49.08
Expired	(1	)	40.77
Options and SARs outstanding at March 30, 2014	5,837		46.62		4.7	198,394
Options and SARs vested and expected to vest after March 30, 2014, net of forfeitures	5,445		45.75		4.6	189,811
Options and SARs exercisable at March 30, 2014	2,188		33.69		3.2	102,668

At March 30, 2014, the total unrecognized compensation cost related to stock options, net of estimated forfeitures, was approximately $53.9 million, and this amount is expected to be recognized over a weighted-average period of approximately 2.5years. As of March 30, 2014, the Company had fully expensed all of its SARs awards.

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

A summary of the changes in RSUs outstanding under the Company’s share-based compensation plans during the three months endedMarch 30, 2014 is presented below (in thousands, except for weighted-average grant date fair value):

	Shares		Weighted-Average Grant Date Fair Value		Aggregate Intrinsic Value
Non-vested share units at December 29, 2013	4,454		$	49.87	$	221,457
Granted	1,970		74.50
Vested	(1,077	)	46.29		80,409
Forfeited	(83	)	52.04
Non-vested share units at March 30, 2014	5,264		59.63		314,389

25

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

At March 30, 2014, the total unrecognized compensation cost related to RSUs, net of estimated forfeitures, was approximately $243.4 million, and this amount is expected to be recognized over a weighted-average period of approximately 3.1years.

Employee Stock Purchase Plan. At March 30, 2014, the total unrecognized compensation cost related to ESPP was approximately $3.5 million, and this amount is expected to be recognized over a period of fivemonths.

Share-based Compensation Expense. The following tables set forth the detailed allocation of the share-based compensation expense (in thousands):

	Three months ended
	March 30, 2014			March 31, 2013
Share-based compensation expense by caption:
Cost of revenue	$	2,610		$	1,717
Research and development	15,675			11,640
Sales and marketing	6,257			3,871
General and administrative	5,488			4,506
Total share-based compensation expense	30,030			21,734
Total tax benefit recognized	(8,776		)	(6,916		)
Decrease in net income	$	21,254		$	14,818
Share-based compensation expense by type of award:
Stock options and SARs	$	7,924		$	8,269
RSUs	19,465			11,970
ESPP	2,641			1,495
Total share-based compensation expense	30,030			21,734
Total tax benefit recognized	(8,776		)	(6,916		)
Decrease in net income	$	21,254		$	14,818

Share-based compensation expense of $3.4 million and $2.7 million related to manufacturing personnel was capitalized into inventory as of March 30, 2014 and December 29, 2013, respectively.

The total grant date fair value of options and RSUs vested during the three months endedMarch 30, 2014 and March 31, 2013 was as follows (in thousands):

	Three months ended
	March 30, 2014		March 31, 2013
Options	$	10,228	$	14,568
RSUs	49,866		29,821
Total grant date fair value of vested options and RSUs	$	60,094	$	44,389

26

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9. Provision for Income Taxes

The following table presents the provision for income taxes and the effective tax rate (in thousands, except percentages):

	Three months ended
	March 30, 2014			March 31, 2013
Provision for income taxes	$	140,591		$	67,665
Effective tax rate	34.3		%	28.9		%

The provision for income taxes for the three months ended March 30, 2014 differs from the U.S. statutory tax rate of 35% due primarily to the tax impact of earnings from foreign operations, state taxes, non-deductibility of certain share-based compensation and tax-exempt interest income. Earnings and taxes resulting from foreign operations are largely attributable to the Company’s Irish, Chinese, Israeli and Japanese entities. Earnings in these countries where tax rates are lower than the U.S. notional rate contributed to the majority of the difference between the rate of the Company’s tax provision and the U.S. statutory tax rate. The higher effective tax rate for the three months ended March 30, 2014, compared to the same period in fiscal year 2013, is attributable to the federal R&D tax credit not being extended as of March 30, 2014, while the March 31, 2013 effective tax rate includes both the 2013 federal R&D credit and retroactive inclusion of the 2012 federal R&D tax credit, and changes in the composition of operating income by tax jurisdiction. As of March 30, 2014, the Company believes that most of its deferred tax assets are more likely than not to be realized, except for certain loss and credit carry forwards in certain U.S. and foreign tax jurisdictions.

Unrecognized tax benefits were $190.9 million and $185.3 million as of March 30, 2014 and December 29, 2013, respectively. Unrecognized tax benefits that would impact the effective tax rate in the future were approximately $92.6 million at March 30, 2014. Income tax expense for both the three months ended March 30, 2014 and March 31, 2013 included interest and penalties of $0.7 million. It is reasonably possible that within the next 12 months, unrecognized tax benefits could decrease by up to $78.0 million as a result of potential settlements of tax authority examinations and could decrease by up to $10.3 million as a result of the expiration of statutes of limitation.

The Company is subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In February 2012, the Internal Revenue Service (“IRS”) completed its field audit of the Company’s federal income tax returns for fiscal years 2005 through 2008 and issued the Revenue Agent’s Report. The most significant proposed adjustments are comprised of related party transactions between SanDisk Corporation and its foreign subsidiaries. The Company is contesting these adjustments through the IRS Appeals Office and cannot predict when a resolution will be reached.

The Company strongly believes the IRS’s position regarding the intercompany transactions is inconsistent with applicable tax laws, judicial precedents and existing Treasury regulations, and that the Company’s previously reported income tax provisions for the years in question are appropriate. The Company believes that an adequate provision has been made for the adjustments from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner that is not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

The IRS recently initiated an examination of the Company’s federal income tax returns for fiscal years 2009 through 2011. The Company does not expect a resolution of this audit to be reached during the next twelve months. In addition, the Company is currently under audit by various state and international tax authorities. The Company cannot reasonably estimate the outcome of these examinations, or provide assurance that the outcome of these examinations will not materially harm the Company’s financial position, results of operations or liquidity.

27

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. Net Income per Share

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

	Three months ended
	March 30, 2014		March 31, 2013
Numerator for basic net income per share:
Net income	$	268,948	$	166,229
Denominator for basic net income per share:
Weighted-average common shares outstanding	225,845		242,519
Basic net income per share	$	1.19	$	0.69
Numerator for diluted net income per share:
Net income	$	268,948	$	166,229
Denominator for diluted net income per share:
Weighted-average common shares outstanding	225,845		242,519
Incremental common shares attributable to exercise of outstanding employee stock options, SARs and ESPP (assuming proceeds would be used to purchase common stock), and RSUs	3,103		3,058
1.5% Notes due 2017	5,702		—
Warrants	264		—
Shares used in computing diluted net income per share	234,914		245,577
Diluted net income per share	$	1.14	$	0.68
Anti-dilutive shares excluded from net income per share calculation	33,000		68,296

Basic earnings per share exclude any dilutive effects of stock options, SARs, RSUs, warrants and convertible debt. Diluted earnings per share include the dilutive effects of stock options, SARs, RSUs, ESPP and the 1.5% Notes due 2017. Certain common stock issuable under stock options, SARs, RSUs, warrants and the 0.5% Notes due 2020 has been omitted from the current year diluted net income per share calculation because the inclusion is considered anti-dilutive. Certain common stock issuable under stock options, SARs, RSUs, warrants, the 1% Notes due 2013 and the 1.5% Notes due 2017 has been omitted from the prior year diluted net income per share calculation because the inclusion is considered anti-dilutive.

28

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 11. Commitments, Contingencies and Guarantees

Flash Ventures

Flash Ventures, the Company’s business ventures with Toshiba, consists of three separate legal entities: Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd. The Company has a 49.9%ownership interest in each of these entities and Toshiba owns 50.1% of each of these entities. Through these ventures, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products which are manufactured by Toshiba at its wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Ventures. The Flash Ventures purchase wafers from Toshiba at cost and then resell those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its 49.9% ownership position in each Flash Ventures entity under the equity method of accounting. The Company is committed to purchase its provided three-month forecast of Flash Ventures’ NAND wafer supply, which generally equals 50% of Flash Ventures’ output. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund 49.9% of Flash Ventures’ costs to the extent that Flash Ventures’ revenue from wafer sales to the Company and Toshiba are insufficient to cover these costs.

Flash Partners. Flash Partners Ltd. (“Flash Partners”) was formed in fiscal year 2004. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan. As of March 30, 2014, the Company had notes receivable from Flash Partners of $77.9 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners with the note proceeds. The Company also has guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” At March 30, 2014 and December 29, 2013, the Company had an equity investment in Flash Partners of $194.2 million and $190.7 million, respectively, denominated in Japanese yen, offset by $21.5 million and $17.3 million, respectively, of cumulative translation adjustments recorded in AOCI. In the three months endedMarch 30, 2014 and March 31, 2013, the Company recorded a basis adjustment of zero and $0.3 million, respectively, to its equity in earnings from Flash Partners related to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Partners. Flash Partners’ share of the Fab 3 fabrication facility is fully equipped.

Flash Alliance. Flash Alliance Ltd. (“Flash Alliance”) was formed in fiscal year 2006. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan. As of March 30, 2014, the Company had notes receivable from Flash Alliance of $355.4 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance with the note proceeds. The Company also has guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” At March 30, 2014 and December 29, 2013, the Company had an equity investment in Flash Alliance of $290.8 million and $284.0 million, respectively, denominated in Japanese yen, offset by $(2.5) million and $(8.7) million, respectively, of cumulative translation adjustments recorded in AOCI. In the three months endedMarch 30, 2014 and March 31, 2013, the Company recorded a basis adjustment of zero and $2.9 million, respectively, to its equity earnings from Flash Alliance related to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Alliance. Flash Alliance’s share of the Fab 4 fabrication facility is fully equipped.

Flash Forward. Flash Forward Ltd. (“Flash Forward”) was formed in fiscal year 2010. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan. Fab 5 is to be built in two phases. By the third quarter of fiscal year 2014, Phase 1 of the building is expected to be fully utilized with the addition of equipment including 1Y-nanometer technology transition tools, development tools for 3D NAND, and tools for a planned increase in Flash Ventures wafer capacity of less than 5%. The Company and Toshiba each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps. Construction of the Phase 2 shell of the Fab 5 wafer fabrication facility is underway with expected completion in mid-2014. The Phase 2 shell is currently intended to be used primarily for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 1Z‑nanometer technology nodes and for a 3‑dimensional NAND (“3D NAND”) pilot line.

As of March 30, 2014, the Company had notes receivable from Flash Forward of $172.9 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Forward with the note proceeds. The Company also has guarantee obligations to Flash Forward; see “Off-Balance Sheet Liabilities.” At March 30, 2014 and December 29, 2013, the

29

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Company had an equity investment in Flash Forward of $68.1 million and $66.7 million, respectively, denominated in Japanese yen, offset by $(14.7) million and $(16.2) million, respectively, of cumulative translation adjustments recorded in AOCI.

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled. These outstanding purchase commitments are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Off-Balance Sheet Liabilities

Flash Ventures. Flash Ventures sell and lease back from a consortium of financial institutions (“lessors”) a portion of their tools and have entered into equipment master lease agreements totaling 178.2 billion Japanese yen, or approximately $1.73 billion based upon the exchange rate at March 30, 2014. As of March 30, 2014, the total amount outstanding from these master leases was 114.2 billion Japanese yen, or approximately $1.11 billion based upon the exchange rate at March 30, 2014, of which the amount of the Company’s guarantee obligation of the Flash Ventures’ master lease agreements, which reflects future payments and any lease adjustments, was 57.1 billion Japanese yen, or approximately $556 million based upon the exchange rate at March 30, 2014.

The master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to the Company as guarantor, including, among other things, the Company’s failure to maintain a minimum stockholders’ equity of at least $1.51 billion. As of March 30, 2014, Flash Ventures was in compliance with all of its master lease covenants, including the shareholders’ equity covenant with the Company’s stockholders’ equity at $7.07 billion as of March 30, 2014. If the Company’s stockholders’ equity falls below $1.51 billion, or other events of default occur, Flash Ventures would become non-compliant under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by the Company, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances. If a non-compliance event were to occur and if the Company failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding lease obligations covered by its guarantees under such Flash Ventures master lease agreements.

30

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities (both initial and refinanced leases) in both Japanese yen (in billions) and U.S. dollar-equivalent (in thousands) based upon the exchange rate at March 30, 2014:

Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Japanese yen)		(U.S. dollar)
Flash Partners
April 2010	Refinanced	¥	1.0	$	9,112	2014
January 2011	Refinanced	1.0		9,707		2014
November 2011	Refinanced	3.9		38,086		2014
March 2012	Refinanced	2.9		28,555		2015
March 2014	Initial	5.0		48,481		2019
		13.8		133,941
Flash Alliance
March 2012	Initial	6.6		64,555		2017
July 2012	Refinanced	12.6		122,094		2017
March 2014	Initial	5.0		48,896		2019
		24.2		235,545
Flash Forward
November 2011	Initial	10.2		99,317		2016
March 2012	Initial	6.4		62,840		2017
July 2012	Initial	2.5		24,216		2017
		19.1		186,373
Total guarantee obligations		¥	57.1	$	555,859

The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the end of the term of the master lease agreements, in annual installments as of March 30, 2014 in U.S. dollars based upon the yen/dollar exchange rate at March 30, 2014 (in thousands):

Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	155,624	$	37,950	$	193,574
Year 2	115,895		17,699		133,594
Year 3	85,475		26,261		111,736
Year 4	33,440		53,922		87,362
Year 5	13,628		15,965		29,593
Total guarantee obligations	$	404,062	$	151,797	$	555,859

31

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for alleged intellectual property infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. The Company may periodically engage in litigation as a result of these indemnification obligations. The Company’s insurance policies exclude coverage for third-party claims for patent infringement. Although the liability is not remote, the nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and customers. Historically, the Company has not made any significant indemnification payments under any such agreements. As of March 30, 2014, no amounts had been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

As permitted under Delaware law and the Company’s certificate of incorporation and bylaws, the Company has agreements, or has assumed agreements in connection with its acquisitions, whereby it indemnifies certain of its officers and employees, and each of its directors for certain events or occurrences while the officer, employee or director is, or was, serving at the Company’s or the acquired company’s request in such capacity. The term of the indemnification period is for the officer’s, employee’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of March 30, 2014 or December 29, 2013, as these liabilities are not reasonably estimable even though liabilities under these agreements are not remote.

The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash Ventures for, environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which, in many cases, the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for the Company against third-party claims that NAND flash memory products manufactured and sold by Flash Ventures infringe third-party patents. The Company has not made any indemnification payments under any such agreements. As of March 30, 2014, no amounts have been accrued in the Company’s Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

32

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Contractual Obligations and Off-Balance Sheet Arrangements

The following tables summarize the Company’s contractual cash obligations, commitments and off-balance sheet arrangements at March 30, 2014, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Contractual Obligations. Contractual cash obligations and commitments as of March 30, 2014 are as follows (in thousands):

	Total			1 Year (Remaining 9 months in Fiscal 2014)		2 – 3 Years (Fiscal 2015 and 2016)		4 – 5 Years (Fiscal 2017 and 2018)		More than 5 Years (Beyond Fiscal 2018)
Facility and other operating leases	$	17,451	(5)	$	6,029	$	9,219	$	2,060	$	143
Flash Partners (1)	679,740		(5)(6)	113,078		366,261		178,394		22,007
Flash Alliance (1)	2,098,738		(5)(6)	413,220		1,103,143		477,107		105,268
Flash Forward (1)	901,628		(5)(6)	346,912		335,840		166,935		51,941
Toshiba research and development	136,855		(5)	93,357		43,498		—		—
Capital equipment purchase commitments	52,187			51,833		328		26		—
1.5% Notes due 2017 principal and interest (2)	1,060,000			15,000		30,000		1,015,000		—
0.5% Notes due 2020 principal and interest (3)	1,552,250			7,250		15,000		15,000		1,515,000
Operating expense commitments	56,742			56,239		503		—		—
Noncancelable production purchase commitments (4)	255,439		(5)	255,439		—		—		—
Total contractual cash obligations	$	6,811,030		$	1,358,357	$	1,903,792	$	1,854,522	$	1,694,359

⁽¹⁾  Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and reimbursement for other committed expenses. Funding commitments assume no additional operating lease guarantees; new operating lease guarantees can reduce funding commitments.

⁽²⁾  In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Notes due 2017. The Company will pay cash interest on the outstanding notes at an annual rate of 1.5%, payable semi-annually on August 15 and February 15 of each year until August 15, 2017.

⁽³⁾  In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Notes due 2020. The Company will pay cash interest on the outstanding notes at an annual rate of 0.5%, payable semi-annually on April 15 and October 15 of each year until October 15, 2020.

⁽⁴⁾  Includes Flash Ventures, related party vendors and other silicon source vendor purchase commitments.

⁽⁵⁾  Includes amounts denominated in a currency other than the U.S. dollar, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at March 30, 2014.

⁽⁶⁾  Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.

The Company has excluded $207.2 million of unrecognized tax benefits (which includes penalties and interest) from the contractual obligation table above due to the uncertainty with respect to the timing of associated future cash flows at March 30, 2014. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Off-Balance Sheet Arrangements. Off-balance sheet arrangements are as follows (in thousands):

	March 30, 2014
Guarantee of Flash Ventures equipment leases (1)	$	555,859

⁽¹⁾  The Company’s guarantee obligation, net of cumulative lease payments, was 57.1 billion Japanese yen, or approximately $556 million based upon the exchange rate at March 30, 2014.

33

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company leases many of its office facilities and operating equipment for various terms under long-term, noncancelable operating lease agreements. The leases expire at various dates from fiscal year 2014 through fiscal year 2022. Future minimum lease payments are presented below (in thousands):

	Future minimum lease payments
Fiscal year:
2014 (Remaining 9 months)	$	6,436
2015	6,794
2016	3,136
2017	1,477
2018	583
2019 and thereafter	143
Operating leases, gross	18,569
Sublease income to be received in the future under noncancelable subleases	(1,118		)
Operating leases, net	$	17,451

Net rent expense was as follows (in thousands):

	Three months ended
	March 30, 2014		March 31, 2013
Rent expense, net	$	1,624	$	1,843

34

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 12. Related Parties and Strategic Investments

Flash Ventures with Toshiba. The Company owns 49.9% of each entity within Flash Ventures and accounts for its ownership position under the equity method of accounting. The Company’s obligations with respect to the Flash Ventures master lease agreements, take-or-pay supply arrangements and R&D cost sharing are described in Note 11, “Commitments, Contingencies and Guarantees.” The financial and other support provided by the Company in all periods presented was either contractually required or the result of a joint decision to expand wafer capacity, transition to new technologies or refinance existing equipment lease commitments. Flash Ventures are variable interest entities (“VIEs”). The Company evaluated whether it is the primary beneficiary of any of the entities within Flash Ventures for all periods presented and determined that it is not the primary beneficiary of any of the entities within Flash Ventures because it does not have a controlling financial interest in any of those entities. In determining whether the Company is the primary beneficiary, the Company analyzed the primary purpose and design of Flash Ventures, the activities that most significantly impact Flash Ventures’ economic performance, and whether the Company had the power to direct those activities. The Company concluded based upon its 49.9% ownership in Flash Ventures, the voting structure of Flash Ventures and the manner in which the day-to-day operations of Flash Ventures are conducted that the Company lacked the power to direct most of the activities that most significantly impact Flash Ventures’ economic performance.

The Company purchased NAND flash memory wafers from Flash Ventures and made prepayments, investments and loans to Flash Ventures totaling $460.1 million and $478.9 million during the three months ended March 30, 2014 and March 31, 2013, respectively. The Company received loan repayments from Flash Ventures of $24.4 million and $53.6 million during the three months ended March 30, 2014 and March 31, 2013, respectively. At March 30, 2014 and December 29, 2013, the Company had accounts payable balances due to Flash Ventures of $160.5 million and $146.0 million, respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits), based upon the exchange rate at each respective balance sheet date, as a result of its involvement with Flash Ventures, is presented below (in millions). The Flash Venture investments are denominated in Japanese yen and the maximum possible loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.

	March 30, 2014		December 29, 2013
Notes receivable	$	606	$	593
Equity investments	553		541
Operating lease guarantees	556		492
Prepayments	—		5
Maximum estimable loss exposure	$	1,715	$	1,631

Solid State Storage Solutions, Inc. Solid State Storage Solutions, Inc. (“S4”) is a venture with third parties to license intellectual property. S4 qualifies as a VIE. The Company is considered the primary beneficiary of S4 and the Company consolidates S4 in its Condensed Consolidated Financial Statements for all periods presented. The Company considered multiple factors in determining it was the primary beneficiary, including its overall involvement with the venture, contributions and participation in operating activities. S4’s assets and liabilities were not material to the Company’s Condensed Consolidated Balance Sheets as of March 30, 2014 and December 29, 2013.

35

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 13. Litigation

From time to time, the Company is involved in various litigation matters, including those described below, among others. The litigation proceedings in which the Company is involved from time to time may include matters such as intellectual property, antitrust, commercial, labor, class action and insurance disputes. The semiconductor industry is characterized by significant litigation seeking to enforce patent and other intellectual property rights. The Company has enforced, and likely will continue to enforce, its own intellectual property rights through litigation and related proceedings.

In each case listed below where the Company is the defendant, the Company intends to vigorously defend the action. At this time, the Company does not believe it is reasonably possible that losses related to the litigation described below have occurred beyond the amounts, if any, which have been accrued. However, legal discovery and litigation is highly unpredictable and future legal developments may cause current estimates to change in future periods.

Patent Infringement and Antitrust Litigation With Round Rock Research LLC. On October 27, 2011, in response to infringement allegations by Round Rock Research LLC (“Round Rock”), the Company filed a lawsuit against Round Rock in the U.S. District Court for the Northern District of California. The lawsuit seeks a declaratory judgment that twelve Round Rock patents are invalid and/or not infringed by flash memory products sold by the Company. Round Rock has since withdrawn its infringement allegations as to eight of the patents. The parties have filed several motions for summary judgment directed to various claims and defenses. These motions are currently pending. Trial on the four patents remaining in the case is scheduled to begin on August 11, 2014.

On May 3, 2012, Round Rock filed an action in the U.S. District Court for the District of Delaware alleging that the Company infringed eleven patents, and subsequently filed an amended complaint alleging that the Company’s infringement was willful. The parties agreed to dismiss one patent from this Delaware lawsuit that was also being litigated in the California case described above. Trial is currently scheduled to begin on January 20, 2015.

On March 19, 2014, the Company filed an action against Round Rock in the U.S. District Court for the District of Delaware for antitrust violations arising from Round Rock's acquisition of patents from Micron Technology, Inc. (“Micron”) and demand for royalties that are not reasonable and non-discriminatory for alleged infringement of patents that Round Rock claims are standards-essential. The Company alleges that Round Rock violated the antitrust laws by conspiring with Micron and violating commitments that Micron made to the standards-setting organization, JEDEC Solid State Technology Association. Round Rock has not yet filed its response.

Ritz Camera Federal Antitrust Class Action. On June 25, 2010, Ritz Camera & Image, LLC (“Ritz”) filed a complaint in the U.S. District Court for the Northern District of California (the “District Court”), alleging that the Company violated federal antitrust law by conspiring to monopolize and monopolizing the market for flash memory products. The lawsuit captioned Ritz Camera & Image, LLC v. SanDisk Corporation, Inc. and Eliyahou Harari, purports to be on behalf of direct purchasers of flash memory products sold by the Company and joint ventures controlled by the Company from June 25, 2006 through the present. The complaint alleges that the Company created and maintained a monopoly by fraudulently obtaining patents and using them to restrain competition and by allegedly converting other patents for its competitive use. On February 24, 2011, the District Court issued an Order granting in part and denying in part the Company’s motion to dismiss, which resulted in Dr. Harari being dismissed as a defendant. On September 19, 2011, the Company filed a petition for permission to file an interlocutory appeal in the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) for the portion of the District Court’s Order denying the Company’s motion to dismiss based on Ritz’s lack of standing to pursue Walker Process antitrust claims. On October 27, 2011, the District Court administratively closed the case pending the Federal Circuit’s ruling on the Company’s petition. On November 20, 2012, the Federal Circuit affirmed the District Court’s order denying SanDisk’s motion to dismiss. On December 2, 2012, the Federal Circuit issued its mandate returning the case to the District Court. Discovery is now open in the District Court. On February 20, 2013, Ritz filed a motion requesting that Albert Giuliano, the Chapter 7 Trustee of the Ritz bankruptcy estate, be substituted as the plaintiff in this case, which the District Court granted on July 5, 2013. On October 1, 2013, the District Court granted the Trustee’s motion for leave to file a third amended complaint, which adds CPM Electronics Inc. and E.S.E. Electronics, Inc. as named plaintiffs. On December 17, 2013, Ritz sought leave to file a fourth amended complaint, which would add a cause of action for attempted monopolization and add another named plaintiff.

36

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Samsung Federal Antitrust Action Against Panasonic and SD‑3C. On July 15, 2010, Samsung Electronics Co., Ltd. (“Samsung”) filed an action in the U.S. District Court for the Northern District of California (the “District Court”) alleging various claims against Panasonic Corporation and Panasonic Corporation of North America (collectively, “Panasonic”) and SD‑3C, LLC (“SD‑3C”) under federal antitrust law pursuant to Sections 1 and 2 of the Sherman Act, and under California antitrust and unfair competition laws relating to the licensing practices and operations of SD‑3C. The complaint seeks an injunction against collection of Secure Digital (“SD”) card royalties, treble damages, restitution, pre- and post-judgment interest, costs, and attorneys’ fees, as well as a declaration that Panasonic and SD-3C engaged in patent misuse and that the patents subject to such alleged misuse should be held unenforceable. The Company is not named as a defendant in this case, but it established SD‑3C along with Panasonic and Toshiba, and the complaint includes various factual allegations concerning the Company. As a member of SD‑3C, the Company may be responsible for a portion of any monetary award. Other requested relief, including an injunction or declaration of patent misuse, could result in a loss of revenue to the Company. Defendants filed a motion to dismiss on September 24, 2010, and Samsung filed a First Amended Complaint (“FAC”) on October 14, 2010. On August 25, 2011, the District Court dismissed the patent misuse claim with prejudice but gave Samsung leave to amend its other claims. On January 3, 2012, the District Court granted defendants’ motion to dismiss Samsung’s complaint without leave to amend. Samsung appealed. On April 4, 2014, the U.S. Court of Appeals for the Ninth Circuit issued a decision reversing the District Court’s dismissal on statute of limitations grounds and remanding the case to the District Court for further proceedings.

Federal Antitrust Class Action Against SanDisk, et al. On March 15, 2011, a putative class action captioned Oliver v. SD‑3C LLC, et al was filed in the U.S. District Court for the Northern District of California (the “District Court”) on behalf of a nationwide class of indirect purchasers of SD cards alleging various claims against the Company, SD‑3C, LLC (“SD‑3C”), Panasonic Corporation, Panasonic Corporation of North America, Toshiba and Toshiba America Electronic Components, Inc. under federal antitrust law pursuant to Section 1 of the Sherman Act, California antitrust and unfair competition laws, and common law. The complaint seeks an injunction of the challenged conduct, dissolution of “the cooperation agreements, joint ventures and/or cross-licenses alleged herein,” treble damages, restitution, disgorgement, pre- and post-judgment interest, costs, and attorneys’ fees. Plaintiffs allege that the Company (along with the other members of SD‑3C) conspired to artificially inflate the royalty costs associated with manufacturing SD cards in violation of federal and California antitrust and unfair competition laws, which in turn allegedly caused plaintiffs to pay higher prices for SD cards. The allegations are similar to, and incorporate by reference the complaint in the Samsung Electronics Co., Ltd. v. Panasonic Corporation; Panasonic Corporation of North America; and SD‑3C LLC described above. On May 21, 2012, the District Court granted Defendants’ motion to dismiss the complaint with prejudice. Plaintiffs appealed. Briefing on the appeal was completed on June 21, 2013. Oral argument took place on December 5, 2013.

Trade Secret Litigation Against SK Hynix, et al. On March 13, 2014, the Company filed a civil action in Santa Clara Superior Court in California against SK Hynix, Inc. and certain related entities (collectively, “defendants”) for trade secret misappropriation arising from the theft of trade secrets by a former employee of the Company and defendants’ wrongful receipt and use of such information. The lawsuit seeks damages, an injunction and other remedies. Additionally, in March 2014, SanDisk submitted a criminal complaint to the Tokyo Metropolitan Police Department against the former employee. On April 3, 2014, the former employee was indicted by the Tokyo District Public Prosecutor’s Office for theft of trade secrets.

37

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

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

Overview

We are a global leader in flash memory storage solutions. Our goal is to provide simple, reliable and affordable storage solutions for consumer and enterprise use in a wide variety of formats and devices. We sell our products globally to commercial and retail customers.

We design, develop, market and manufacture data storage solutions in a variety of form factors using our flash memory, controller and firmware technologies. Our flash-based products enable businesses and consumers to efficiently and effectively capture, share, use and preserve digital content. Our solutions include solid state drives, or SSDs, removable cards, embedded products, universal serial bus, or USB, drives, digital media players, wafers and components. Our SSD products are used in client computing platforms and enterprise data centers to provide high-speed, high-capacity storage solutions that can be used in lieu of, or in conjunction with, hard disk drives. Our removable cards are used in a wide range of consumer electronics devices such as mobile phones, tablets, digital cameras, gaming devices and PCs. Our embedded flash products are used in mobile phones, tablets, thin-and-light laptops, eReaders, global positioning system, or GPS, devices, gaming systems, imaging devices and computing platforms.

We strive to continuously reduce the cost of NAND flash memory in order to enable us to profitably grow our business, supply a diverse set of customers and channels, and continue to grow our markets. A key component of our ability to reduce the cost of NAND flash memory is our ability to continue to transition our NAND flash memory process technology to smaller nodes. We currently expect to be able to continue to scale our current NAND flash memory architecture, also known as 2‑dimensional NAND, or 2D NAND, through at least two more technology nodes (1Y‑nanometer and 1Z‑nanometer), but beyond that there is no certainty that further technology scaling can be achieved cost-effectively with the 2D NAND flash memory architecture. We continue to invest in future generations of 2D NAND flash memory, and we are also pursuing alternative technologies, such as 3‑dimensional NAND, or 3D NAND, and 3‑dimensional resistive RAM, or 3D ReRAM, technologies, both of which we believe may be viable alternatives to 2D NAND flash memory when 2D NAND flash memory can no longer cost-effectively scale at a sufficient rate, or at all. However, even when 2D NAND flash memory can no longer scale further, we expect 2D NAND flash memory and potential alternative technologies to coexist for an extended period of time.

Through our investments in our ventures with Toshiba Corporation, or Toshiba, and our in-house assembly and test facility, we have invested heavily in a vertically-integrated business model. We purchase the vast majority of our NAND flash memory supply requirements through Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd., collectively referred to as Flash Ventures, our significant flash venture relationships with Toshiba, which produce and provide us with leading-edge, low-cost memory wafers. Our manufacturing operations are concentrated in two locations, with Flash Ventures located in Yokkaichi, Japan, and our in-house assembly and test operations located in Shanghai, China. While we do not unilaterally control the operations of Flash Ventures, we believe that our vertically integrated business model helps us to reduce the costs of producing our products, increases our ability to control the quality of our products, speeds delivery, and ensures continuity and predictability of supply to our customers.

Industry and Company Trends

We operate in an industry characterized by rapid technology transitions, price declines and evolving end-user markets for NAND flash memory. We currently generate revenue from sales of removable products, embedded flash memory and client and enterprise SSDs. Removable products, including cards for mobile and imaging devices and USB drives, provide the largest portion of our revenue. We expect our revenue from removable products to remain constant or decline over the next several years. Our revenue from embedded NAND flash memory products has grown over the past several years, and we expect

38

continued revenue growth from embedded products driven by the increasing demand for varying types of smartphones, tablets and other portable devices. Currently and over the next several years, we believe the largest growth area for NAND flash memory will be SSD solutions. We continue to focus on adapting our business to the changing end-market demands for NAND flash memory and aligning our resources accordingly.

We currently expect that industry bit-supply growth for fiscal year 2014 will be approximately 40%, similar to the estimated industry supply growth rate in fiscal year 2013 and significantly lower than in fiscal year 2012. We expect that our captive bit-supply growth for fiscal year 2014 will be between 25% and 35%, compared to 18% in fiscal year 2013 and 86% in fiscal year 2012. In fiscal year 2014, we expect our business to experience a modest decline in our blended average selling price per gigabyte compared to no change in fiscal year 2013. Our revenue for fiscal year 2014 will be influenced primarily by our captive bit-supply growth, industry pricing trends and the mix of our product sales. We expect our fiscal year 2014 cost reduction per gigabyte to be in the range of 15% to 25%. The primary cost reduction drivers in fiscal year 2014 are expected to be the 1Y‑nanometer technology transition and expected positive impact of the Japanese yen to U.S. dollar exchange rate for Japanese yen-denominated wafer purchases. The mix of our product sales is having an increasing impact on both our cost per gigabyte and our average selling price per gigabyte. For example, certain of our products include higher non-flash memory content which can offset some of the expected cost improvement from our flash memory transitions, and these same products generally also carry a higher average selling price per gigabyte which impacts our blended average selling price per gigabyte.

As part of our efforts to continuously reduce the cost of NAND flash memory, we are currently focused on transitioning our products to 19‑nanometer and 1Y‑nanometer technologies and we plan to transition to 1Z‑nanometer technology beginning in the second half of 2014. 1Y‑nanometer and subsequent technology nodes have increased manufacturing equipment requirements, which will impact the cost reduction benefits obtainable through these technologies. We continue to develop our 3D NAND technology, which we have referred to as BiCS, which we view as a medium-term alternative technology to 2D NAND flash memory, and 3D ReRAM, which we view as a potential long-term successor to NAND technology. As we progress with our 3D NAND development, we are evaluating and modifying certain aspects of our technology architecture to optimize for manufacturability, scalability, cost and product specifications, targeting a broader range of applications. We continue to target pilot production for our 3D NAND in 2015 and volume ramp of our 3D NAND products in 2016. Some of our competitors have announced the launch of 3D NAND technologies, such as 3D vertical NAND, or 3D VNAND, with volume production beginning in 2014. At this time, these technologies are still emerging and it is unclear how these new technologies will compare to our 3D NAND technology and what implications 3D VNAND or other 3D NAND approaches may have for our industry or our business in terms of cost leadership, technology leadership, supply increases and product specifications. We believe that continued 2D NAND scaling is the most efficient method of reducing NAND costs in the near term and addressing the broadest range of market opportunities and therefore continue to focus on scaling 2D NAND flash memory at least through the 1Y‑nanometer and 1Z‑nanometer technology nodes while we work on alternative technologies, primarily 3D NAND and 3D ReRAM, in parallel.

Dividends

In the first quarter of fiscal year 2014, we paid a cash dividend of $0.225 per common share. On April 15, 2014, our Board of Directors declared a dividend of $0.225 per share for holders of record as of May 5, 2014, to be paid on May 27, 2014. We expect to continue to pay quarterly dividends subject to declaration by our Board of Directors.

Share Repurchases

In the third quarter of fiscal year 2013, under our share repurchase program, we entered into an accelerated share repurchase, or ASR, agreement with a financial institution to purchase $1.0 billion of our common stock. In exchange for an up-front payment of $1.0 billion, the financial institution committed to deliver shares during the ASR’s purchase period, which ended on April 8, 2014. During the third quarter of fiscal year 2013, 14.5 million shares were initially delivered to us under this ASR agreement. In April 2014, the ASR was settled and we received an additional 0.6 million shares from the financial institution for a total of 15.1 million shares, which resulted in a variable weighted-average price of $66.07 per share.

Under our share repurchase program, since the fourth quarter of fiscal year 2011 through March 30, 2014, we spent an aggregate $1.91 billion to repurchase 31.7 million shares, and an additional 0.6 million shares were received in April 2014 upon settlement of the ASR. Included in the aggregate repurchase activity are 1.3 million shares that were repurchased for an aggregate amount of $90 million during the three months ended March 30, 2014. In addition to repurchases under our repurchase program, during the three months ended March 30, 2014, we spent $24 million to settle employee tax withholding obligations due upon the vesting of restricted stock units, or RSUs, and withheld an equivalent value of shares from the employees’ vesting RSUs.

39

Convertible Debt

The conversion provision of the 1.5% Notes due 2017 allows the holders the option to convert their notes during the following calendar quarter if our stock price exceeds 130% of the conversion price of the 1.5% Notes due 2017 for at least 20 trading days during the last 30 consecutive trading days of the current calendar quarter. The conversion threshold was met during the calendar quarter ended March 31, 2014 and the 1.5% Notes due 2017 became convertible at the holders’ option beginning on April 1, 2014 and ending June 30, 2014. Accordingly, the carrying value of the notes was reclassified from long-term to short-term debt as of March 30, 2014 and the difference between the principal amount payable in cash upon conversion and the carrying value of the 1.5% Notes due 2017 was reclassified from Stockholders’ equity to Convertible short-term debt conversion obligation on our Condensed Consolidated Balance Sheet as of March 30, 2014, and will remain so while the notes are convertible. The determination of whether or not the 1.5% Notes due 2017 are convertible must continue to be performed on a calendar-quarter basis. Consequently, the 1.5% Notes due 2017 may be reclassified as long-term debt if the conversion threshold is not met in future quarters. Upon conversion of any of the 1.5% Notes due 2017, we will deliver cash up to the principal amount of the 1.5% Notes due 2017, and we will deliver shares of our common stock with respect to any conversion value greater than the principal amount of the 1.5% Notes due 2017. As of March 30, 2014, no 1.5% Notes due 2017 had been converted. Based on the closing price of our common stock of $80.61 on March 30, 2014, if all of the 1.5% Notes due 2017 were converted, it would result in 6.9 million shares being distributed to the holders.

Results of Operations

	Three months ended
	March 30, 2014			% of Revenue		March 31, 2013			% of Revenue
	(In millions, except percentages)
Revenue	$	1,511.9		100.0	%	$	1,340.7		100.0	%
Cost of revenue	741.0			49.0	%	799.4			59.6	%
Amortization of acquisition-related intangible assets	19.6			1.3	%	9.8			0.8	%
Total cost of revenue	760.6			50.3	%	809.2			60.4	%
Gross profit	751.3			49.7	%	531.5			39.6	%
Operating expenses:
Research and development	198.8			13.2	%	171.1			12.8	%
Sales and marketing	77.0			5.1	%	59.1			4.3	%
General and administrative	48.7			3.2	%	45.1			3.4	%
Amortization of acquisition-related intangible assets	1.6			0.1	%	2.4			0.2	%
Total operating expenses	326.1			21.6	%	277.7			20.7	%
Operating income	425.2			28.1	%	253.8			18.9	%
Other income (expense), net	(15.7		)	(1.0	%)	(19.9		)	(1.4	%)
Income before income taxes	409.5			27.1	%	233.9			17.5	%
Provision for income taxes	140.6			9.3	%	67.7			5.1	%
Net income	$	268.9		17.8	%	$	166.2		12.4	%

Revenue by Channel.

	Three months ended
	March 30, 2014		% of Revenue		March 31, 2013		% of Revenue		% Change
	(In millions, except percentages)
Commercial	$	978.6	64.7	%	$	828.7	61.8	%	18.1	%
Retail	533.3		35.3	%	512.0		38.2	%	4.1	%
Total revenue	$	1,511.9	100.0	%	$	1,340.7	100.0	%	12.8	%

The increase in our Commercial revenue for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was driven by higher sales of client and enterprise SSDs. The increase in Retail revenue for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was driven by increased sales of cards and USB drives. Overall, gigabytes sold for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, increased 20%.

40

Our ten largest customers represented 49% of our total revenue in each of the three months ended March 30, 2014 and March 31, 2013. We had one customer that exceeded 10% of our total revenue in the three months ended March 30, 2014, representing 17% of our total revenue. We had two customers that exceeded 10% of our total revenues in the three months ended March 31, 2013, representing 19% and 12% of our total revenue.

Revenue by Category.

	% of Revenue for the three months ended
	March 30, 2014		March 31, 2013
Embedded	20	%	23	%
Removable	40	%	45	%
SSD solutions	28	%	20	%
Other (1)	12	%	12	%
Total revenue	100	%	100	%

⁽¹⁾  Other revenue includes license and royalty, wafers and components, and accessories.

SSDs represented our fastest growing revenue category in the first quarter of fiscal year 2014, growing to 28% of our total revenue, driven by strong year-over-year growth in both client and enterprise SSDs. Embedded revenue was flat year-over-year comprising 20% of our revenue mix in our first quarter of fiscal year 2014. Within Embedded revenue, we experienced increased sales of iNAND™ solutions and decreased sales of custom embedded products due to a major customer shifting its demand during the quarter from custom embedded products to our client SSDs. Our Removable revenues, consisting primarily of cards and USB drives, grew slightly year-over-year, comprising 40% of our revenue mix in our first quarter of fiscal year 2014.

Revenue by Geography.

	Three months ended
	March 30, 2014		% of Revenue		March 31, 2013		% of Revenue		% Change
	(In millions, except percentages)
United States	$	243.7	16.1	%	$	213.5	15.9	%	14.1	%
Asia-Pacific	1,011.4		66.9	%	909.9		67.9	%	11.2	%
Europe, Middle East and Africa	191.0		12.6	%	173.6		12.9	%	10.0	%
Other foreign countries	65.8		4.4	%	43.7		3.3	%	50.6	%
Total revenue	$	1,511.9	100.0	%	$	1,340.7	100.0	%	12.8	%

U.S. revenue for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, increased due primarily to higher sales of SSDs, partially offset by a reduction in sales of removable products. Asia-Pacific revenue for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, increased due primarily to higher sales of SSDs. Europe, Middle East and Africa revenue for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, increased due primarily to higher sales of SSDs and USB drives. The increase in Other foreign countries revenue for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was due primarily to higher sales of SSDs and USB drives.

Our revenues are designated based on the geographic location where the product is delivered, or in the case of license and royalty revenue, the location of the headquarters of the licensee, and therefore may not be indicative of the actual demand in those regions.

41

Gross Profit and Margin.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
Gross profit	$	751.3		$	531.5		41.4	%
Gross margin	49.7		%	39.6		%

Gross margin increased in the three months ended March 30, 2014, compared to the three months ended March 31, 2013, due primarily to a decrease of 7% in our average selling price per gigabyte, while our cost per gigabyte declined by 23%. Cost declines in the first quarter of fiscal year 2014, compared to the first quarter of fiscal year 2013, were derived primarily from the weakening of the Japanese yen relative to the U.S. dollar, reduced Flash Ventures manufacturing cost and our increased mix of 1Y‑nanometer wafers, partially offset by increased non-flash memory costs in our SSD and iNAND products. Our average selling price per gigabyte was lower in the three months ended March 30, 2014, compared to the three months ended March 31, 2013, driven by product line price declines, which were partially offset by an increased mix of sales of higher value products, such as SSDs and iNAND products.

Research and Development.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
Research and development	$	198.8		$	171.1		16.2	%
% of revenue	13.2		%	12.8		%

The increase in our research and development expense for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was due primarily to higher employee-related costs of $25 million, which includes an increase in salary and benefits of $19 million, and an increase in share-based compensation of $4 million, both due primarily to increased head count, and higher facility costs of $2 million.

Sales and Marketing.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
Sales and marketing	$	77.0		$	59.1		30.3	%
% of revenue	5.1		%	4.3		%

The increase in our sales and marketing expense for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was due primarily to higher employee-related costs of $12 million, which includes an increase in salary and benefits of $9 million and an increase in share-based compensation of $3 million, both due primarily to increased head count. In addition, branding and merchandising costs were $5 million higher in the first quarter of fiscal year 2014 compared to the first quarter of fiscal year 2013.

General and Administrative.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
General and administrative	$	48.7		$	45.1		8.0	%
% of revenue	3.2		%	3.4		%

The increase in our general and administrative expense for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was due primarily to higher employee-related costs of $5 million, which includes an increase in

42

salary and benefits of $4 million and an increase in share-based compensation of $1 million, both due primarily to increased head count, partially offset by a reduction in other expenses of $2 million.

Amortization of Acquisition-related Intangible Assets.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
Amortization of acquisition-related intangible assets	$	1.6		$	2.4		(33.3	%)
% of revenue	0.1		%	0.2		%

Amortization of acquisition-related intangible assets for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, was lower due primarily to lower amortization of intangible assets from our Pliant acquisition.

Other Income (Expense), net.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
Interest income	$	13.2		$	12.9		2.3	%
Interest expense	(27.9		)	(31.0		)	10.0	%
Other income (expense), net	(1.0		)	(1.8		)	45.0	%
Total other income (expense), net	$	(15.7	)	$	(19.9	)	21.1	%

“Total other income (expense), net” for the three months ended March 30, 2014 reflected a lower net expense, compared to the three months ended March 31, 2013, due primarily to lower interest expense as a result of a lower interest rate on our 0.5% Notes due 2020 issued in the fourth quarter of fiscal year 2013 compared to our 1.5% Notes due 2013, which matured in the second quarter of fiscal year 2013.

Provision for Income Taxes.

	Three months ended
	March 30, 2014			March 31, 2013			% Change
	(In millions, except percentages)
Provision for income taxes	$	140.6		$	67.7		107.7	%
Effective tax rate	34.3		%	28.9		%

The provision for income taxes for the three months ended March 30, 2014 differs from the U.S. statutory tax rate of 35% due primarily to the tax impact of earnings from foreign operations, state taxes, non-deductibility of certain share-based compensation, and tax-exempt interest income. Earnings and taxes resulting from foreign operations are largely attributable to our Irish, Chinese, Israeli and Japanese entities. Earnings in these countries where tax rates are lower than the U.S. notional rate contributed to the majority of the difference between the rate of our tax provision and the U.S. statutory tax rate. The higher effective tax rate for the three months ended March 30, 2014, compared to the same period in fiscal year 2013, is attributable to the federal R&D tax credit not being extended as of March 30, 2014, while the March 31, 2013 effective tax rate includes both the 2013 federal R&D credit and retroactive inclusion of the 2012 federal R&D tax credit, and changes in the composition of operating income by tax jurisdiction. As of March 30, 2014, we believe that most of our deferred tax assets are more likely than not to be realized, except for certain loss and credit carry forwards in certain U.S. and foreign tax jurisdictions.

Unrecognized tax benefits were $191 million and $185 million as of March 30, 2014 and December 29, 2013, respectively. Unrecognized tax benefits that would impact the effective tax rate in the future were approximately $93 million at March 30, 2014. Income tax expense for both the three months ended March 30, 2014 and March 31, 2013 included interest and penalties of $1 million. It is reasonably possible that within the next 12 months, unrecognized tax benefits could decrease by up to $78 million as a result of potential settlements of tax authority examinations and could decrease by up to $10 million as a result of the expiration of statutes of limitation.

43

We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In February 2012, the Internal Revenue Service, or IRS, completed its field audit of our federal income tax returns for fiscal years 2005 through 2008 and issued the Revenue Agent’s Report.  The most significant proposed adjustments are comprised of related party transactions between our U.S. parent company and our foreign subsidiaries. We are contesting these adjustments through the IRS Appeals Office and cannot predict when a resolution will be reached.

We strongly believe the IRS’s position regarding the intercompany transactions is inconsistent with applicable tax laws, judicial precedents and existing Treasury regulations, and that our previously reported income tax provisions for the years in question are appropriate. Management believes that an adequate provision has been made for the adjustments from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner that is not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs.

The IRS recently initiated an examination of our federal income tax returns for fiscal years 2009 through 2011. We do not expect a resolution of this audit to be reached during the next twelve months. In addition, we are currently under audit by various state and international tax authorities. We cannot reasonably estimate the outcome of these examinations, or provide assurance that the outcome of these examinations will not materially harm our financial position, results of operations or liquidity.

Non-GAAP Financial Measures

Reconciliation of Net Income.

	Three months ended
	March 30, 2014			March 31, 2013
	(In millions except per share amounts)
Net income	$	268.9		$	166.2
Share-based compensation	30.0			21.7
Amortization of acquisition-related intangible assets	21.3			12.2
Convertible debt interest	21.0			23.6
Income tax adjustments	(11.2		)	(16.8		)
Non-GAAP net income	$	330.0		$	206.9
Diluted net income per share:	$	1.14		$	0.68
Share-based compensation	0.15			0.09
Amortization of acquisition-related intangible assets	0.10			0.05
Convertible debt interest	0.10			0.10
Income tax adjustments	(0.05		)	(0.07		)
Non-GAAP diluted net income per share	$	1.44		$	0.85

Reconciliation of Diluted Shares.

	Three months ended
	March 30, 2014		March 31, 2013
	(In thousands)
GAAP diluted shares	234,914		245,577
Adjustment for share-based compensation	296		19
Offsetting shares from bond hedge	(5,702	)	—
Non-GAAP diluted shares	229,508		245,596

We believe these non-GAAP measures provide investors the ability to better assess and understand operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because management typically monitors the business excluding these items. We also use these non-GAAP measures to establish operational goals and for measuring performance for compensation purposes. However, analysis of results on a non-GAAP

44

basis should be used as a complement to, and in conjunction with, and not as a replacement for, data presented in accordance with GAAP.

We believe that the presentation of non-GAAP measures, including non-GAAP net income and non-GAAP diluted net income per share, provides important supplemental information to management and investors about financial and business trends relating to our operating results. We believe that the use of these non-GAAP financial measures also provides consistency and comparability with our past financial reports.

We have historically used these non-GAAP measures when evaluating operating performance because we believe that the inclusion or exclusion of the items described below provides an additional measure of our core operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have chosen to provide this information to investors to enable them to perform additional analyses of past, present and future operating performance and as a supplemental means to evaluate our ongoing core operations. Externally, we believe that these non-GAAP measures continue to be useful to investors in their assessment of our operating performance and their valuation of our company.

Internally, these non-GAAP measures are significant measures used by us for purposes of:

•evaluating our core operating performance;

•establishing internal budgets;

•setting and determining variable compensation levels;

•calculating return on investment for development programs and growth initiatives;

•comparing performance with internal forecasts and targeted business models;

•strategic planning; and

•benchmarking performance externally against our competitors.

We exclude the following items from our non-GAAP measures:

• Share-based Compensation Expense. These expenses consist primarily of expenses for share-based compensation, such as stock options, restricted stock units and our employee stock purchase plan. Although share-based compensation is an important aspect of the compensation of our employees, we exclude share-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses. Further, share-based compensation expenses are based on valuations with many underlying assumptions not in our control that vary over time and may include modifications that may not occur on a predictable cycle, neither of which is necessarily indicative of our ongoing business performance. In addition, the share-based compensation expenses recorded are often unrelated to the actual compensation an employee realizes. We believe that it is useful to exclude share-based compensation expense for investors to better understand the long-term performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies.

• Amortization and Impairment of Acquisition-related Intangible Assets. We incur amortization, and, occasionally, impair intangible assets in connection with acquisitions. Since we do not acquire businesses on a predictable cycle, we exclude these items in order to provide investors and others with a consistent basis for comparison across accounting periods.

• Convertible Debt Interest. We incur non-cash economic interest expense relating to the implied value of the equity conversion component of our convertible debt. The value of the equity conversion component is treated as a debt discount and amortized to interest expense over the life of the notes using the effective interest rate method. We also incur interest expense equal to the change in fair value of the liability component of the convertible debt when we repurchase a portion of the convertible debt. We exclude these non-cash interest expenses that do not represent cash interest payments made to our note holders.

• Income Tax Adjustments. This amount is used to present each of the amounts described above on an after-tax basis, considering jurisdictional tax rates, consistent with the presentation of non-GAAP net income.

• Diluted Share Adjustments. As share-based compensation is excluded from our presentation of non-GAAP net income, the impact of share-based compensation on diluted share calculations is also excluded from non-GAAP diluted shares.Concurrent with the issuance of our convertible debt, we entered into convertible bond hedge transactions in which counterparties agreed to sell us a number of shares of our common stock which will be equal to the number of shares issuable upon conversion of the convertible debt. As a result, our convertible bond hedges, when

45

exercised, will deliver shares to offset the issuance of dilutive shares from our convertible debt. Because the bond hedges will ultimately offset the shares issued at maturity of our convertible debt, we include the impact of the bond hedges in our non-GAAP dilutive shares in any period where the associated convertible debt is dilutive. The impact of the convertible bond hedges is excluded from GAAP dilutive shares.

From time-to-time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.

Limitations of Relying on Non-GAAP Financial Measures. We have incurred and will incur in the future, many of the costs that we exclude from the non-GAAP measures, including share-based compensation expense, impairment of goodwill and acquisition-related intangible assets, amortization of acquisition-related intangible assets and other acquisition-related costs, non-cash economic interest expense associated with our convertible debt and income tax adjustments. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP measures may be different than the non-GAAP measures used by other companies.

46

Liquidity and Capital Resources

Cash Flows. Our cash flows were as follows:

	Three months ended
	March 30, 2014			March 31, 2013
	(In millions)
Net cash provided by operating activities	$	382.1		$	473.6
Net cash used in investing activities	(154.7		)	(338.9		)
Net cash provided by (used in) financing activities	(96.7		)	11.8
Effect of changes in foreign currency exchange rates on cash	—			6.1
Net increase in cash and cash equivalents	$	130.7		$	152.6

Operating Activities. Cash provided by operating activities is generated by net income adjusted for certain non-cash items and changes in assets and liabilities.The decrease in cash provided by operations in the first quarter of fiscal year 2014, compared to the first quarter of fiscal year 2013, resulted primarily from higher cash used for working capital. The cash provided by accounts receivable was lower in the first quarter of fiscal year 2014, compared to the first quarter of fiscal year 2013, due primarily to higher sales in the first quarter of fiscal year 2014. Inventory was a use of cash in the first quarter of fiscal year 2014, compared to a source of cash in the first quarter of fiscal year 2013, due primarily to an increased balance of raw materials and work-in-progress. The lower usage of cash for accounts payable trade and related parties in the first quarter of fiscal year 2014, compared to the first quarter of fiscal year 2013, was due primarily to the timing of payments. The increase in cash used for other liabilities in the first quarter of fiscal year 2014, compared to the first quarter of fiscal year 2013, was due primarily to higher payments related to payroll, incentive compensation and income taxes in the first quarter of fiscal year 2014.

Investing Activities. Net cash used by investing activities in the first quarter of fiscal year 2014 was primarily related to the net purchases of short and long-term marketable securities of $122 million and acquisition of property and equipment of $35 million. Net cash used in investing activities in the first quarter of fiscal year 2013 was primarily related to the net purchase of short and long-term marketable securities of $344 million and acquisition of property and equipment of $48 million, offset by repayments of notes receivables from Flash Ventures of $54 million.

Financing Activities. Net cash used in financing activities in the first quarter of fiscal year 2014 was primarily related to cash paid for share repurchases of $114 million and dividends paid of $52 million, offset by cash received from employee stock programs of $52 million and excess tax benefit from share-based plans of $17 million. Net cash provided by financing activities in the first quarter of fiscal year 2013 was primarily related to cash received from employee stock programs of $93 million and excess tax benefit from share-based plans of $8 million, offset by share repurchases of $90 million.

Liquid Assets. At March 30, 2014, we had cash, cash equivalents and short-term marketable securities of $2.81 billion. We had $3.51 billion of long-term marketable securities, which we believe are also liquid assets, but are classified as long-term marketable securities due to the remaining maturity of each marketable security being greater than one year.

Short-Term Liquidity. As of March 30, 2014, our working capital balance was $2.63 billion. During fiscal year 2014, we expect our total capital investment to be $1.5 billion to $1.7 billion, including our net capital investments in Flash Ventures and our investment in non-fab property and equipment. We expect these fiscal year 2014 investments to be funded approximately half by our cash and half by the Flash Ventures’ working capital and equipment leases. Through the first quarter of fiscal year 2014, total capital investments were $275 million, of which $35 million was funded by our cash.

The conversion provision of the 1.5% Notes due 2017 allows the holders the option to convert their notes during the following calendar quarter if our stock price exceeds 130% of the conversion price of the 1.5% Notes due 2017 for at least 20 trading days during the last 30 consecutive trading days of the current calendar quarter. The conversion threshold was met during the calendar quarter ended March 31, 2014 and the 1.5% Notes due 2017 became convertible at the holders’ option beginning on April 1, 2014 and ending June 30, 2014. Accordingly, the carrying value of the notes was reclassified from long-term to short-term debt as of March 30, 2014 and the difference between the principal amount payable in cash upon conversion and the carrying value of the 1.5% Notes due 2017 was reclassified from Stockholders’ equity to Convertible short-term debt conversion obligation on our Condensed Consolidated Balance Sheet as of March 30, 2014, and will remain so while the notes are convertible. The determination of whether or not the 1.5% Notes due 2017 are convertible must continue to be performed on a calendar-quarter basis. Consequently, the 1.5% Notes due 2017 may be reclassified as long-term debt if the conversion threshold is not met in future quarters. Upon conversion of any of the 1.5% Notes due 2017, we will deliver cash up to the

47

principal amount of the 1.5% Notes due 2017, and we will deliver shares of our common stock with respect to any conversion value greater than the principal amount of the 1.5% Notes due 2017. As of March 30, 2014, no 1.5% Notes due 2017 had been converted. Based on the closing price of our common stock of $80.61 on March 30, 2014, if all of the 1.5% Notes due 2017 were converted, it would result in 6.9 million shares being distributed to the holders.

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

On April 15, 2014, our Board of Directors declared a dividend of $0.225 per share for holders of record as of May 5, 2014. We plan to pay approximately $52 million to these holders of record on May 27, 2014. We expect to continue to pay quarterly dividends subject to declaration by our Board of Directors.

Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the outstanding Flash Ventures master lease agreements. The Flash Ventures master lease agreements contain customary covenants for Japanese lease facilities as well as an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain shareholder equity of at least $1.51 billion. As of March 30, 2014, Flash Ventures was in compliance with all of its master lease covenants, including the shareholder equity covenant with our stockholders’ equity at $7.07 billion as of March 30, 2014. If our shareholders’ equity falls below $1.51 billion or other events of default occur, Flash Ventures would become non-compliant with certain covenants under certain master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements, which at March 30, 2014 was 57 billion Japanese yen, or approximately $556 million based upon the exchange rate at March 30, 2014.

As of March 30, 2014, the amount of cash and cash equivalents and short and long-term marketable securities held by foreign subsidiaries was $921 million, and a portion of this amount could be subject to U.S. income taxes if repatriated to the U.S. We provide for U.S. income taxes on the earnings of foreign subsidiaries unless the earnings are considered indefinitely invested outside of the U.S. As of March 30, 2014, no provision had been made for U.S. income taxes or foreign withholding taxes on $752 million of undistributed earnings of foreign subsidiaries since we intend to indefinitely reinvest these earnings outside the U.S. We determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings was not practicable. If these earnings were distributed to the U.S., we would be subject to additional U.S. income taxes and foreign withholding taxes reduced by available foreign tax credits.

In the third quarter of fiscal year 2013, under our share repurchase program, we entered into an ASR agreement with a financial institution to purchase $1.0 billion of our common stock. In exchange for an up-front payment of $1.0 billion, the financial institution committed to deliver shares during the ASR’s purchase period, which ended on April 8, 2014. During the third quarter of fiscal year 2013, 14.5 million shares were initially delivered to us under this ASR agreement. In April 2014, the ASR was settled and we received an additional 0.6 million shares from the financial institution for a total of 15.1 million shares, which resulted in a variable weighted-average price of $66.07 per share.

Of the aggregate $3.75 billion authorized for share repurchases by our Board of Directors since the fourth quarter of fiscal year 2011, approximately $1.84 billion remained available for share repurchases as of March 30, 2014. Since the fourth quarter of fiscal year 2011 through March 30, 2014, we have spent an aggregate $1.91 billion to repurchase 31.7 million shares, and an additional 0.6 million shares were received in April 2014 upon settlement of the ASR. Included in the aggregate repurchase activity are 1.3 million shares that were repurchased for an aggregate amount of $90 million during the three months ended March 30, 2014. In addition to repurchases under our repurchase program, during the three months ended March 30, 2014, we spent $24 million to settle employee tax withholding obligations due upon the vesting of RSUs and withheld an equivalent value of shares from the employees’ vesting RSUs.

48

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

Financing Arrangements. At March 30, 2014, we had $1.0 billion aggregate principal amount of our 1.5% Notes due 2017 and $1.5 billion aggregate principal amount of our 0.5% Notes due 2020 outstanding. See Note 6, “Financing Arrangements,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

1.5% Notes due 2017. Concurrent with the issuance of the 1.5% Notes due 2017, we sold warrants to acquire up to approximately 19.1 million shares of our common stock at an exercise price of $73.3250 per share. The 1.5% Notes due 2017 contain provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if we pay a cash dividend or make a distribution to all or substantially all holders of our common stock. After adjusting for the dividends paid through March 30, 2014, holders of the warrants may acquire up to approximately 19.3 million shares of our common stock at a strike price of $72.5633 per share. The warrants mature on 40 different dates from November 13, 2017 through January 10, 2018, and are exercisable at the maturity date. At each maturity date, we may, at our option, elect to settle the warrants on a net share basis. As of March 30, 2014, the warrants had not been exercised and remain outstanding. In addition, concurrent with the issuance of the 1.5% Notes due 2017, we entered into a convertible bond hedge transaction in which counterparties initially agreed to sell to us up to approximately 19.1 million shares of our common stock, which is the number of shares initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 per share. The 1.5% Notes due 2017 contain provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if we pay a cash dividend or make a distribution to all or substantially all holders of our common stock. After adjusting for the dividends paid through March 30, 2014, the counterparties may acquire up to approximately 19.3 million shares of our common stock, which is the number of shares issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $51.83 per share. The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1.5% Notes due 2017 or the first day that none of the 1.5% Notes due 2017 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 1.5% Notes due 2017, on the expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon conversion of the 1.5% Notes due 2017. As of March 30, 2014, we had not purchased any shares under this convertible bond hedge agreement.

0.5% Notes due 2020. Concurrent with the issuance of the 0.5% Notes due 2020, we sold warrants to acquire up to approximately 16.3 million shares of our common stock at an exercise price of $122.9220 per share. The 0.5% Notes due 2020 contain provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if we pay a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or make a distribution to all or substantially all holders of our common stock. The warrants mature on 40 different dates from January 13, 2021 through March 11, 2021, and are exercisable at the maturity date. At each maturity date, we may, at our option, elect to settle the warrants on a net share basis. As of March 30, 2014, the warrants had not been exercised and remain outstanding. In addition, concurrent with the issuance of the 0.5% Notes due 2020, we entered into a convertible bond hedge transaction in which counterparties agreed to sell to us up to approximately 16.3 million shares of our common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.19 per share. The 0.5% Notes due 2020 contain provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if we pay a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or make a distribution to all or substantially all holders of our common stock. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 0.5% Notes due 2020 or the first day that none of the 0.5% Notes due 2020 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 0.5% Notes due 2020, on the expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon conversion of the 0.5% Notes due 2020. As of March 30, 2014, we had not purchased any shares under this convertible bond hedge agreement.

49

Ventures with Toshiba. We are a 49.9% owner in each of the Flash Ventures, our business ventures with Toshiba to develop and manufacture NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by the Flash Ventures. This equipment is funded or will be funded by investments in or loans to the Flash Ventures from us and Toshiba as well as through operating leases received by Flash Ventures from third-party banks and guaranteed by us and Toshiba. The Flash Ventures purchase wafers from Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a markup. We are contractually obligated to purchase half of the Flash Ventures’ NAND wafer supply or pay for 50% of the fixed costs of the Flash Ventures. We are not able to estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because the price is determined by reference to the future cost to produce the semiconductor wafers. See Note 12, “Related Parties and Strategic Investments,” in the Notes to Condensed Consolidated Financial Statements of this Form 10‑Q.

From time-to-time, we and Toshiba mutually approve the purchase of equipment for Flash Ventures in order to convert to new process technologies or add wafer capacity. Flash Partners Ltd., or Flash Partners, and Flash Alliance Ltd., or Flash Alliance, have been previously equipped to full wafer capacity. Flash Forward Ltd, or Flash Forward, occupies Fab 5 which is being built in two phases. By the third quarter of fiscal year 2014, Phase 1 of the building is expected to be fully utilized with the addition of equipment including 1Y-nanometer technology transition tools, development tools for 3D NAND, and tools for a planned increase in Flash Ventures wafer capacity of less than 5%.

Construction of the Phase 2 shell of the Fab 5 wafer fabrication facility is underway with expected completion in mid-2014. Our current plans are to use the Phase 2 shell primarily for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 1Z‑nanometer technology nodes and the addition of a 3D NAND pilot line. We and Toshiba each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps. To date, we have invested in 50% of the Flash Forward equipment and the output has been in accordance with each party’s proportionate level of equipment funding.

The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost of revenue. Flash Ventures are variable interest entities; however, we are not the primary beneficiary of these ventures because we do not have a controlling financial interest in each venture. Accordingly, we account for our investments under the equity method and do not consolidate.

For semiconductor manufacturing equipment that is leased by Flash Ventures, we and Toshiba jointly guarantee, on an unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations under original master lease agreements entered into by Flash Ventures. These master lease obligations are denominated in Japanese yen and are noncancelable. Our total master lease obligation guarantees as of March 30, 2014 were $556 million, based upon the exchange rate at March 30, 2014.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements at March 30, 2014 and the effect those contractual obligations are expected to have on our liquidity and cash flow over the next five years are presented in textual and tabular format in Note 11, “Commitments, Contingencies and Guarantees,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Impact of Currency Exchange Rates

Exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations. Our most significant foreign currency exposure is to the Japanese yen in which we purchase substantially all of our NAND flash wafers and incur R&D expenditures. In addition, we also have significant costs denominated in the Chinese renminbi and the Israeli new shekel, and we have revenue denominated in the European euro, the British pound, the Japanese yen, the Chinese renminbi and the Canadian dollar. We do not enter into derivatives for speculative or trading purposes. We use foreign currency forward and cross currency swap contracts to mitigate transaction gains and losses generated by certain monetary assets and liabilities denominated in currencies other than the U.S. dollar. From time-to-time, we use foreign currency forward contracts to partially hedge our future Japanese yen requirements for NAND flash wafers and R&D expenses. Our derivative instruments are recorded at fair value in assets or liabilities with final gains or losses recorded in other income (expense) or as a component of accumulated other comprehensive income, or AOCI, and subsequently reclassified into cost of revenue in the same period or periods in which the cost of revenue is recognized or into R&D expense as the R&D expenses are incurred. These foreign currency exchange exposures may change over time as our business and business practices evolve, and they could harm our financial results and cash flows. See Note 3, “Derivatives and Hedging Activities,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

50

Because we purchase substantially all of our flash memory wafers from Flash Ventures, our flash memory costs, which represent the largest portion of our cost of revenue, are based upon wafer purchases denominated in Japanese yen. However, our cost of revenue in any given quarter generally reflects wafer purchases that were made in the previous quarter, and is impacted by hedging decisions we may make from time to time, including entering into forward contracts or other instruments to hedge our future Japanese yen purchase rate. Based on wafer purchases made in the first quarter of fiscal year 2014 and forward contracts entered into for early 2014, changes in the Japanese yen to U.S. dollar exchange rate after March 2014 are not expected to have a material impact on our cost of revenue in the second quarter of fiscal year 2014. We expect the average rate of the Japanese yen to the U.S. dollar for the wafer portion of our cost of revenue to be approximately 101 Japanese yen to the U.S. dollar for the second quarter of fiscal year 2014, in comparison to a rate of approximately 99 Japanese yen to the U.S. dollar in our first quarter of fiscal year 2014. Our wafer purchases are denominated in Japanese yen and generally comprise approximately 50% of our cost of revenue. As of March 30, 2014, approximately 38% of our expected Japanese yen denominated wafer purchases for the remainder of fiscal year 2014 have been hedged at an average rate of approximately 100 Japanese yen to the U.S. dollar. See Item 3, “Quantitative and Qualitative Disclosure About Market Risk - Foreign Currency Risk” for more information about our foreign currency forward and cross currency swap contracts.

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

Critical Accounting Policies

Our discussion and analysis of our financial condition and operating results is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate estimates, including those related to customer programs and incentives, intellectual property claims, product returns, allowance for doubtful accounts, inventories and inventory reserves, valuation and impairments of marketable securities and investments, impairments of goodwill and long-lived assets, income taxes, warranty obligations, restructurings, contingencies, share-based compensation and litigation. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results could materially differ from these estimates.

There were no significant changes to our critical accounting policies during the three months ended March 30, 2014. For information about critical accounting policies, see the discussion of critical accounting policies in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 21, 2014.

51

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. As of March 30, 2014, a hypothetical 50 basis point increase in interest rates would result in an approximate $38 million decline (less than 0.8%) of the fair value of our available-for-sale debt securities.

Foreign Currency Risk. The majority of our revenue is transacted in the U.S. dollar, with some revenue transacted in the European euro, the British pound, the Japanese yen, the Chinese renminbi and the Canadian dollar. Our flash memory costs, which represent the largest portion of our cost of revenue, are denominated in Japanese yen. We also have some cost of revenue denominated in the Chinese renminbi and the Malaysian ringgit. The majority of our operating expenses are denominated in the U.S. dollar; however, we have expenses denominated in Japanese yen, the Chinese renminbi, the Israeli new shekel and numerous other currencies. On the balance sheet, we have numerous foreign currency denominated monetary assets and liabilities, with the largest monetary exposure being our balances with Flash Ventures, which are denominated in Japanese yen.

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

We use foreign exchange forward contracts to partially hedge future Japanese yen wafer purchases and to partially hedge future Japanese yen R&D expenses. These contracts are designated as cash flow hedges and are carried on our balance sheet at fair value with the effective portion of the contracts’ gains or losses included in AOCI and subsequently reclassified to cost of revenue or R&D expenses in the same period the hedged cost of revenue or R&D expenses are recognized.

At March 30, 2014, we had foreign exchange forward contracts in place that amounted to a net purchase in U.S. dollar-equivalents of $140 million in foreign currencies to hedge our foreign currency denominated monetary net liability position. The notional amount and unrealized loss of our outstanding foreign exchange forward contracts that are non-designated (balance sheet hedges) as of March 30, 2014, based upon the exchange rate as of March 30, 2014, are shown in the table below. In addition, this table shows the change in fair value of these balance sheet hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10%. These changes in fair values would be largely offset in other income (expense) by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.

	Notional Amount			Unrealized Loss			Change in Fair Value Due to 10% Adverse Rate Movement
	(In millions)
Balance sheet hedges:
Forward contracts sold	$	(21.5	)	$	—		$	(2.1	)
Forward contracts purchased	161.4			(1.1		)	(11.4		)
Total net outstanding contracts	$	139.9		$	(1.1	)	$	(13.5	)

52

At March 30, 2014, we had foreign exchange forward contracts in place that amounted to a net purchase in U.S. dollar-equivalent of approximately $459 million to partially hedge our expected future wafer purchases and R&D expenses in Japanese yen. As of March 30, 2014, the maturities of these contracts were 12 months or less. The notional amount and unrealized loss of our outstanding foreign exchange forward contracts that are designated as cash flow hedges as of March 30, 2014 based upon the exchange rate as of March 30, 2014 are shown in the table below. In addition, this table shows the change in fair value of these cash flow hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10% as of March 30, 2014.

	Notional Amount		Unrealized Loss			Change in Fair Value Due to 10% Adverse Rate Movement
	(In millions)
Cash flow hedges	$	458.5	$	(16.0	)	$	(57.5	)

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

Market Risk. With the U.S. long-term sovereign credit rating below the highest available rating and the risk of additional future downgrades or related downgrades by recognized credit rating agencies, the investment choices for our cash and marketable securities portfolio could be reduced, which could negatively impact our non-operating results. We have foreign exchange forward contracts with two European banks. With one bank we have contracts outstanding to purchase foreign currency with a U.S. dollar-equivalent of $13 million and to sell foreign currency with a U.S. dollar-equivalent of $9 million. With regards to the second bank we have contracts outstanding to purchase foreign currency with a U.S. dollar-equivalent of $21 million and to sell foreign currency with a U.S. dollar-equivalent of $12 million. We do not have any European sovereign debt. We manage our investments and foreign exchange contracts to limit our exposure to any one issuer or bank.

All of the potential changes noted above are based on sensitivity analysis performed on our financial position at March 30, 2014. Actual results may differ materially.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of March 30, 2014. Based on their evaluation as of March 30, 2014, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10‑Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended March 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

53

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a discussion of legal proceedings, see Note 13, “Litigation,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Item 1A. Risk Factors

The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.

Our operating results may fluctuate significantly, which may harm our financial condition and our stock price. Our quarterly and annual operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future. Our results of operations are subject to fluctuations and other risks, including, among others:

• competitive pricing pressures or product mix changes, resulting in lower average selling prices, lower revenue and reduced margins;

• weakness in demand in one or more of our product categories, such as embedded products or SSDs, or adverse changes in our product or customer mix;

• inability to reduce product costs to keep pace with reductions in average selling prices, resulting in lower or negative product gross margin;

• potential delays in product development or lack of customer acceptance and qualification of our solutions, including on new technology nodes, particularly OEM products such as our embedded flash storage and SSD solutions;

• inability to develop, or unexpected difficulties or delays in developing or ramping with acceptable yields, new technologies such as 1Y and 1Z‑nanometer process technologies, X3 NAND memory architecture, 3D NAND technology, 3D ReRAM, or other advanced technologies, or the failure of these new technologies to effectively compete with those of our competitors;

• fluctuations in customer concentration and the loss of, or reduction in orders from, one or more of our major customers;

• inability to penetrate new or growing markets for flash memory, including the SSD markets, failure of existing or new markets for flash memory to grow or develop, or failure to maintain or improve our position in any of these markets;

• excess or mismatched captive memory output or capacity, resulting in lower average selling prices, financial charges and impairments, lower gross margin or other consequences, or insufficient or mismatched captive memory output or capacity, resulting in lost revenue and growth opportunities;

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

• fluctuations or declines in our license and royalty revenue due to license agreement renewals on less favorable terms, non-renewals, declines in sales of the products or use of technology underlying the license and royalty revenue by our licensees, or failure by our licensees to perform on contractual obligations;

• lengthy, costly and unpredictable design, qualification and sales processes for OEM customers, particularly with embedded and SSD products;

• increased costs and lower gross margin due to potentially higher warranty claims from our more complex solutions;

• excess inventory or lost sales resulting from unpredictable or changing demand for our products;

• failure to manage the risks associated with our ventures and strategic partnerships with Toshiba;

• failure of the rate of growth of our captive flash memory supply to keep pace with that of our competitors for an extended period of time, resulting in lost sales opportunities and reduced market share;

• insufficient non-flash memory materials or capacity from our suppliers and contract manufacturers to meet demand or increases in the cost of non-flash memory materials or capacity;

• disruptions in our supply chain, whether due to natural disasters, emergencies such as power outages, fires or chemical spills, or employee strikes or other job actions;

• inability to enhance current products, develop new products or transition products to new technologies on a timely basis or in advance of our competitors;

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

54

• inability to obtain non-captive memory supply of the right product mix and quality in the time frame necessary to meet demand, or inability to realize an adequate margin on non-captive purchases;

• insufficient assembly and test or retail packaging and shipping capacity from our Shanghai, China facility or our contract manufacturers, or labor unrest, employee strikes or other disruptions at any of these facilities;

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

• inability to realize the potential financial or strategic benefits of business acquisitions or strategic investments;

• the financial strength and market position of our customers; and

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

Competitive pricing pressures or product mix changes may result in lower average selling prices for our products, and if such price declines are not offset by a corresponding increase in demand for our products or a reduction in our costs, our revenue, margins or both may decline. The price of NAND flash memory is influenced by, among other factors, the balance between supply and demand, including the effects of new industry fab capacity, macroeconomic factors and business conditions, technology transitions, conversion of industry DRAM capacity to NAND, development of new technologies such as 3D NAND or other actions taken by us or our competitors to gain market share. In particular, the NAND flash memory industry has, from time-to-time, experienced periods of excess supply, resulting in price declines. Industry bit supply is expected to continue to grow, and if bit supply grows at a faster rate than market demand, the industry could again experience unanticipated price declines. If we are not able to offset price declines with sufficient increases in unit sales or average memory capacity per unit or a shift in product mix towards products with higher average selling prices, our revenue may be harmed. In addition, our products have varying gross margins and, to the extent our revenue mix shifts towards products with lower gross margins, our overall profitability may decline or not grow as expected.

If we are unable to reduce our product costs to keep pace with reductions in average selling prices, our gross margin may be harmed. Because of the historical and expected future declines in the price of NAND flash memory, we need to reduce our product costs in order to maintain adequate gross margin. Our ability to reduce our cost per gigabyte of memory produced depends on technology transitions and the improvement of manufacturing efficiency, including manufacturing yields. If our technology transitions (for example, the production ramp of NAND technology on the 1Y‑nanometer or 1Z‑nanometer process nodes) take longer or are more costly to complete than anticipated, our flash memory costs may not remain competitive with other NAND flash memory producers, which would harm our gross margin and financial results. The transitions to 1Y‑nanometer and 1Z‑nanometer will likely lead to less product cost reduction than we have experienced with prior technology node transitions. Furthermore, the inherent physical technology limitations of NAND flash technology may result in more costly technology transitions than we have experienced in the past, particularly with respect to required capital expenditures, which could further limit our ability to keep pace with reductions in average selling prices. Manufacturing yields are a function of both design and manufacturing process technology, and yields may also be impacted by equipment malfunctions, fabrication facility accidents or human error. Manufacturing yield issues may not be identified during the development or production process or solved until an actual product is manufactured and tested, further increasing our costs. If we are unable to improve manufacturing yields or other manufacturing efficiencies, our gross margin and results of operations would be harmed. In addition, our products contain non-flash memory materials and require product level assembly and test. Our non-flash memory product costs are increasing as a percentage of our overall products costs as we grow our sales mix of more complex products. If we are unable to reduce the cost of non-flash memory materials and manufacturing, our gross margin and results of operations would be harmed. In addition, as 2D NAND technology reaches its limits of cost-effective technology scaling, the development of alternative technologies, such as the 3D NAND and 3D ReRAM technologies we are working on, is crucial to continue the cost reductions necessary to maintain adequate gross margin. For example, we have announced that we expect our 3D NAND to go into pilot production in the second half of fiscal year 2015, with commercial ramp in 2016. Our failure to develop 3D NAND or other alternative technologies in a timely or effective manner, or at all, or the failure of these technologies to effectively compete with those of our competitors, could harm our revenue, gross margin and results of operations.

55

Our captive manufacturing capacity requires significant investments by us, and our reliance on and investments in captive manufacturing capacity limit our ability to respond to industry fluctuations in supply and demand. We rely on our significant investments in Flash Ventures as a captive source of substantially all of our NAND flash memory supply. Growth in our captive memory supply comes from investments in technology transitions, productivity improvements and new capacity at Flash Ventures. The future transition to 3D NAND will require a significantly greater amount of equipment and, correspondingly, require additional cleanroom space to house the new equipment necessary for the transition without reducing wafer capacity. If we do not have adequate existing cleanroom space, we would need to reduce our wafer capacity or invest in new facilities to provide additional cleanroom space to fully implement the transition to 3D NAND, which may increase our capital requirements and could adversely impact our financial results.

The semiconductor industry, and the NAND flash memory industry in particular, is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand. We are limited in our ability to react or adjust our cost structure and technology mix in response to these cyclical fluctuations. Investment decisions regarding our captive memory supply require significant planning and lead-time before an increase in supply can be realized, and are further determined by factors such as the timing, rate and type of investment by us and Toshiba, our partner in Flash Ventures, agreement between us and Toshiba as to these matters, our evaluation of the potential return on investment of the addition of new capacity, particularly in light of the timing, cost and availability of next generation technology, our profitability, our estimation of market demand and our liquidity position. A failure to accurately forecast demand for our products or industry capacity could cause us to over-invest or under-invest in the expansion of captive memory capacity in Flash Ventures. Over-investment could result in excess supply, which could cause significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs or under-utilization charges, and the potential impairment of our investments in Flash Ventures. For example, in fiscal year 2008 and the first quarter of fiscal year 2009, we recorded charges for adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity. On the other hand, if we or Toshiba under-invest in captive memory capacity or technology transitions, if we grow capacity more slowly than the rest of the industry, if our technology transitions do not occur on the timeline that we expect or we encounter unanticipated difficulties in implementing these transitions, or if we implement technology transitions more slowly than our competitors, we may not have enough captive supply to meet demand on a timely and cost effective basis and we may lose opportunities for revenue growth and market share as a result, which would harm our ability to grow revenue. In such cases, we may have only a limited ability to satisfy our supply needs from non-captive supply sources and may not be able to obtain the right mix of non-captive product that meets our requirements within an adequate lead time or at a cost that allows us to generate an adequate gross margin. Furthermore, if our memory supply is limited, we may make strategic decisions with respect to the allocation of our supply among our products and customers in an effort to preserve our long-term goals. However, these strategic allocation decisions may result in less favorable gross margin in the short term or damage certain customer relationships. Our customers also may not allow us to change the memory in the products that they have already qualified, which can further limit our ability to satisfy our supply needs from other sources for products that require long and extensive qualification cycles. For example, certain of our embedded products and SSDs utilize older memory technology nodes for extended periods of time, based on customer demand, requiring us to produce multiple technology nodes in parallel, increasing the complexity and cost of our business and limiting our manufacturing flexibility. Our inability to obtain sufficient cost-effective non-captive memory that meets our requirements may cause us to lose sales, market share and profits, which would harm our operating results. In addition, we are contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether we purchase any wafers from Flash Ventures. Furthermore, purchase orders placed under Flash Ventures and the foundry arrangement with Toshiba for up to three months are binding and cannot be canceled. Therefore, once our purchase decisions have been made, our production costs are fixed, and we may be unable to reduce costs to match any subsequent declines in pricing or demand, which would harm our gross margin. Our limited ability to react to fluctuations in supply and demand makes us particularly susceptible to variations from our forecasts and expectations, and even in times of excess demand, our operating results may be harmed.

56

The future growth of our business depends on the development and performance of new and existing markets for flash memory, including the SSD markets, and on our ability to penetrate, maintain or improve our position in these markets. Historically, removable flash memory imaging cards and USB drives, both sold primarily through the retail channel, provided the majority of our revenue. As growth in these retail products slowed, we increased sales of embedded NAND flash memory and cards for devices such as mobile phones, tablets, and other mobile devices, which now represent the largest percentage of our revenue. More recently, SSD products have generated the largest portion of our revenue growth. Our future growth is dependent on the development of new markets, new applications and new products for NAND flash memory, and on the continued use of NAND flash memory in existing markets and on our ability to penetrate, maintain or improve our position in such markets. There can be no assurance that the use of NAND flash memory in existing markets and products will continue or grow fast enough, or at all, that we will be able to maintain or improve our position in existing markets, or that new markets will adopt NAND flash technologies in general or our products in particular, to enable us to grow.

Over the next several years, we believe that the largest growth areas for NAND flash will be SSD solutions, whereas the mobile market for NAND flash is expected to grow at a slower rate than in the past, and the retail market for NAND flash is expected to be approximately constant or declining. We will continue to make significant investments in the development of hardware and software solutions for SSD markets in order to successfully penetrate and gain market share in SSD solutions. Our ability to succeed in the SSD solutions market is subject to various risks and uncertainties, including, among other things:

• we may be unable to successfully develop or qualify SSD solutions that meet our customers’ requirements, and even if we do, we cannot guarantee that customers will adopt our SSD solutions;

• designing and qualifying products in the SSD solutions market will require greater investments and customization than our traditional products, which results in longer development cycles and higher costs;

• the complexity and longer development cycles required for SSD solutions increase the risk of development delays that can result in missing customer qualification cycles and other market opportunities;

• due to longer customer product cycles and end-of-life product support requirements in SSD solutions, we may be unable to transition customers to our leading edge products in a timely manner, or at all, which would prevent us from achieving the full cost advantage of new technology transitions, or adequately supply products that utilize older memory technology nodes;

• we may transition fab capacity to new technology nodes too quickly, which could result in inadequate supply of older memory technology nodes required for certain SSD solutions, limiting or reducing our revenue or market share;

• products that contain our leading-edge technologies, whether based on 2D NAND or our alternative 3D NAND or 3D ReRAM technologies, may be unable to meet the performance requirements of SSDs or to compete effectively with products from our competitors, which would inhibit our ability to succeed in these markets and could impair our growth and profitability prospects;

• we may be unable to reap the expected benefits of our recently completed and pending acquisitions, many of which relate to the SSD solutions space;

• SSD solutions require more software than our traditional products, therefore we must continue to develop software expertise;

• SSD solutions require more complex controllers than our traditional products, and we may be unable to develop or source controllers that meet the performance requirements of SSDs;

• SSD solutions incorporate unique non-flash memory parts, and if there is lower than expected demand, we may be unable to incorporate these unique parts in other non-SSD products;

• SSD solutions require longer production cycle times due to, among other things, more complex assembly and testing to produce a finished product, as well as customer requirements for consigned inventory and increased use of hubs for order fulfillment, which could lead to higher levels and cost of inventory; and

• SSD solutions require different go-to-market strategies compared to our historical consumer and mobile products, which could increase our operating expenses, and we may be unable to build an effective sales and marketing operation to sell our SSD solutions.

If we are unable to successfully develop, qualify and sell SSD solutions, we could lose sales and corresponding profit opportunities, which would harm our operating results.

57

Our revenue depends in large part on our ability to achieve design wins with OEM customers and the success of products sold by our OEM customers. Our primary OEM products include cards for mobile devices, embedded memory products, and SSDs for the notebook, storage and server markets. Our OEM revenue is primarily dependent upon our products meeting OEM specifications and the achievement of design wins in an OEM’s products such as mobile phones, tablets, computers and enterprise servers. Even if our products meet OEM specifications, our sales to these customers are dependent upon the OEMs choosing our products over those of our competitors, on the OEMs’ ability to create, market and sell their products successfully, and our ability to supply our products in sufficient quantity and in a timely manner. For example, in the first half of fiscal year 2012, our OEM sales declined because our next generations of mobile embedded products were in various stages of development and qualification, and because mobile OEM customers reduced their rate of card bundling and bundled lower capacity cards. If our OEM customers are not successful in selling their current or future products in sufficient volume or in a timely manner, should they decide not to use our products in the volumes and within the timeframes that we anticipate, or at all, or should we not be able to produce our products in sufficient quantity or quality, our revenue, operating results and financial condition could be harmed.

Sales to a small number of customers represent a significant portion of our revenue, and if we were to lose one or more of our major customers or licensees, or experience any material reduction in orders from any of our customers, our revenue and operating results could suffer. Our ten largest customers represented approximately 49% of our revenue in both of the three month periods ended March 30, 2014 and March 31, 2013. In the three months ended March 30, 2014, one customer accounted for 17% of our revenue. We had two customers that exceeded 10% of our total revenue in the three months ended March 31, 2013, representing 19% and 12% of our total revenue. The composition of our major customer base has changed over time, including shifts between OEM and retail-based customers, and there have been changes in the market share concentration among our customers. Many of our OEM customers purchase more than one product category from us. We expect fluctuations in our customer and licensee base and the mix of our revenue by customer and licensee to continue as our markets and strategies evolve, which could make our revenue less predictable from period-to-period. Our sales are generally made from standard purchase orders and short-term commitments rather than long-term contracts. Accordingly, our customers, including our major customers, may generally terminate or reduce their purchases from us at any time with limited notice or penalty. If we were to lose one or more of our major customers or experience any material reduction in orders from, or a material shift in product mix by, any of these customers, or if we were to lose one or more of our licensees or any of our licensees were to materially reduce their sales of licensed products, our revenue and operating results could suffer.

Our SSD products are more complex and rely on more sophisticated firmware than our other products, which may result in increased costs and lower gross margin due to more frequent product updates. Our SSD solutions are more complex than our traditional products due to, among other things, an increased dependence on more sophisticated firmware and customization of our products for specific OEM customers. Changes in our OEM customers’ specifications for these products could require us to update the firmware for our SSD products, which would result in increased costs for processing these updates. Furthermore, our failure to update our products to comply with the new specifications may result in reduced demand from our customers for a particular SSD solution, notwithstanding the long design, qualification and test cycles we have undertaken as part of our sales process for that solution, which may harm our results of operations.

58

We sell our enterprise SSDs to a limited number of OEM customers that have long design, qualification and sales processes, and we expect growing demand from hyperscale customers that may be difficult to forecast. The enterprise SSD market is comprised of a relatively limited number of OEM customers, with long design, qualification and test cycles prior to sales. OEM customers in the enterprise SSD market typically also require us to customize our products, which could further lengthen the product design, qualification, manufacturing and sales process. We spend substantial time, money and other resources in our sales process without any assurance that our efforts will produce any customer orders on the timelines or in the quantities we expect. These lengthy and uncertain processes also make it difficult for us to forecast demand and timing of customer orders. Moreover, we start manufacturing our products and placing orders for materials and components based on non-binding forecasts that our OEM customers provide to us, further increasing our inventory exposure when actual sales vary from the OEM customer’s forecasts. The difficulty in forecasting demand and the customized nature of our products for certain OEMs make it difficult to anticipate our inventory requirements, which may cause us to over-purchase materials and components or over-produce finished goods, resulting in inventory write-offs, or under-produce finished goods, harming our ability to meet customer requirements and generate sales. Furthermore, due to longer customer product cycles, we may not be able to transition customers to our leading edge products, which would prevent us from benefitting from the technology transitions that enable cost reductions, which may harm our gross margin. For the enterprise products we acquired with the SMART Storage Systems, or SMART Storage, acquisition, we are in the process of transitioning these products from non-captive memory to captive memory, and delays in the qualification of captive memory for these products may cause unexpected declines in our revenue or margins from these products. We expect growing demand for our SSD solutions from hyperscale customers. These hyperscale customers may place orders for significant volumes with short lead times that may be difficult for us to forecast and fulfill, which could result in the loss of sales opportunities and adversely affect our business.

We rely substantially on our ventures and strategic partnerships with Toshiba, which subjects us to risks and uncertainties that could harm our business, financial condition and operating results. Substantially all of our NAND flash memory is supplied by Flash Ventures. In addition, we partner with Toshiba on the development of NAND flash technology and we have entered into strategic partnerships with Toshiba relating to research and development for the next technology transitions of NAND flash and alternative technologies beyond NAND flash technologies. These ventures and strategic partnerships are subject to various risks that could harm the value of our investments, our revenue and costs, our future rate of spending or our future growth opportunities, including, among others:

• under the terms of our venture agreements with Toshiba, which govern the operations of Flash Ventures, we have limited power to unilaterally direct most of the activities that most significantly impact Flash Ventures’ performance, including technology transitions, capital investment and other manufacturing and operational activities at Flash Ventures; the process of reaching agreement with Toshiba may be time consuming and may result in decisions that could harm our future results of operations, financial condition or competitiveness;

• the terms of our arrangements with Toshiba include provisions such as exclusivity, transfer restrictions, and limited termination rights, which limit our flexibility; and

• we may not always agree with Toshiba on the NAND research and development roadmap or the technology path beyond NAND flash memory, we or Toshiba may have different priorities with respect to investment in Flash Ventures or future technologies, and divergent technology paths and investment priorities may adversely impact our results of operations.

59

Future alternative non-volatile storage technologies or other disruptive technologies could make NAND flash memory or the alternative technologies that we are developing obsolete or less attractive, and we may not have access to those new technologies on a cost-effective basis, or at all, or new technologies could reduce the demand for flash memory in a variety of applications or devices, any of which could harm our operating results and financial condition. Due to inherent technology limitations, the bit growth and cost reduction from 2D NAND flash technology transitions is slowing down. We currently expect to be able to continue to scale our current 2D NAND flash memory architecture through at least two more technology nodes (1Y‑nanometer and 1Z‑nanometer), but beyond that there is no certainty that further technology scaling can be achieved cost effectively with the 2D NAND flash memory architecture. In the first quarter of fiscal year 2011, we began investing in our 3D NAND flash technology, which we have referred to as BiCS, and other alternative technologies. In 3D NAND technology, the memory cells are packed along the vertical axis as opposed to the horizontal axis as in the current 2D NAND flash technologies. As we progress with our 3D NAND development, we are evaluating and modifying certain aspects of our technology architecture to optimize for manufacturability, scalability, cost and product specifications, targeting a broader range of applications. We continue to invest in other alternative technologies, primarily our 3D ReRAM technology. We believe that both 3D NAND and 3D ReRAM technologies may be viable alternatives to 2D NAND flash memory, when 2D NAND flash memory can no longer cost-effectively scale at a sufficient rate, or at all. However, even when 2D NAND flash memory can no longer be further scaled, we expect 2D NAND flash technology and potential alternative technologies to coexist for an extended period of time. The success of our overall technology strategy is also dependent in part upon the development by third-party suppliers of advanced semiconductor materials and process technologies, such as extreme ultraviolet, or EUV. Our technology development of NAND, 3D NAND and 3D ReRAM is done in conjunction with Toshiba, and the success of our development could be influenced by whether we are able to agree with Toshiba on a technology path or the timing and amount of investment. There can be no assurance that we will be successful in developing 3D NAND, 3D ReRAM or other technologies in a timely manner or at all, or that we will be able to achieve the yields, quality or capacities to be cost competitive with existing or other alternative technologies. Furthermore, we cannot guarantee that 3D NAND, 3D ReRAM or other technologies we develop will be sufficient alternatives for 2D NAND flash memory, will match or exceed all of the performance characteristics of 2D NAND flash technology, will be developed at a rate that matches market needs, will result in cost reductions that will enable us to be competitive, or will be well-suited, in a timely manner or at all, for all of the applications in the end markets that 2D NAND flash memory currently addresses or may address in the future. Additionally, 3D NAND, 3D ReRAM or other technologies may require different capital equipment or manufacturing processes than existing 2D NAND which could impact the cost reduction benefits obtainable through these technologies.

Many companies, including some of our competitors, have developed or are attempting to develop alternative non-volatile technologies such as magnetoresistive RAM, or MRAM, ReRAM, Memristor, vertical or stacked NAND, phase-change and charge-trap flash technologies and other technologies. Samsung Electronics Co., Ltd., or Samsung, has announced the launch of its 3D NAND flash technology, known as 3D VNAND, with volume production beginning in 2014, and other companies have indicated they are working on 3D NAND technologies. At this time, these technologies are still emerging and it is unclear how these new technologies will compare to our 3D NAND technology and what implications 3D NAND approaches may have for our industry or our business in terms of cost leadership, technology leadership, supply increases and product specifications. For example, the specifications of competitors’ 3D NAND may make it more competitive in certain products than the 2D NAND currently produced by us. Successful broad-based commercialization of one or more of these technologies could reduce the competitiveness and future revenue and profitability of our current and future generations of 2D NAND flash technology, and it could reduce the competitiveness and future revenue and profitability of the potential alternative 3D NAND or 3D ReRAM technologies that we are developing or even supplant them in their entirety. In addition, we generate license and royalty revenue from NAND flash technology, and if NAND flash technology is replaced by a technology where our IP is less relevant, our license and royalty revenue would decrease. Also, we may not have access to or we may have to pay royalties to access alternative technologies that we do not develop internally. If our competitors successfully develop new or alternative technologies, and we are unable to scale our technology on an equivalent basis, or if our competitors’ new or alternative technologies satisfy application-specific requirements that our technologies are not able to, we may not be able to compete effectively, and our operating results and financial condition would suffer.

Alternative technologies or storage solutions such as cloud storage, enabled by high bandwidth wireless or internet-based storage, could reduce the need for physical flash storage within electronic devices or reduce the rate by which average capacity increases in such devices, which could materially harm our operating results.

60

Growth of our NAND flash memory bit-supply at a slower rate than the overall industry for an extended period of time would result in lowering our industry market share which could limit our future opportunities or harm our financial results.Our strategy has been to focus on increasing our share of high-value solutions rather than our industry bit share. During 2013, our competitors in total grew their NAND flash memory bits faster than us and we expect this trend to continue in 2014. Successful broad-based commercialization of 3D NAND may accelerate the growth of NAND flash bits more than we anticipate. If our bit growth lags behind our competitors for an extended period of time, it will reduce our captive flash bit market share in the industry. With lower bit market share, we may not be able to sufficiently address all market opportunities. Some of our customers may want to buy multiple types of products or specific quantities of our products and if we limit the growth of our production, we may not be able to meet customer volume supply requirements or other competitors with greater market share may become more preferred suppliers based upon either the breadth of product offerings or volume of product supply. In addition to the potential loss of bit market share, our competitors may realize better cost declines than us enabled by improved economies of scale achieved through additional bit growth. If our competitors have lower costs, this could allow our competitors to offer similar products at a lower price than us which could harm our competitiveness and financial results. If we decide to purchase non-captive supply from competitors to provide supply to our customers, there is no guarantee we will be able to secure such supply at a competitive price, or in the right product mix or quality level or in sufficient volume, or at all.

Difficulty in forecasting demand for our products may result in excess inventory or lost sales, either of which could harm our financial results. A significant portion of our quarterly sales are from orders received and fulfilled in that quarter. Additionally, we depend upon timely reporting from some of our customers as to their inventory levels and sales of our products in order to forecast demand for our products. The failure to accurately forecast demand for our products may result in lost sales or excess inventory and associated reserves or write-downs, any of which could harm our business, financial condition and operating results.

The long lead times for some of our purchasing or other arrangements further restrict our ability to respond to variations from our forecasts. Some of our silicon purchasing arrangements provide that the first three months of our rolling six-month projected supply requirements are fixed and we may make only limited percentage changes in the second three months of the period covered by our supply requirement projections. Our products also contain non-silicon components that have long lead-times requiring us to place orders several months in advance of anticipated demand. In addition, purchasing decisions for manufacturing tools in Flash Ventures as well as tools in our captive assembly and test manufacturing facility near Shanghai, China often need to be made several months in advance in order to ensure that the tools can be integrated into the manufacturing process when increased capacity is needed. These purchasing arrangements increase the risk of excess inventory or loss of sales in the event our forecasts vary substantially from actual demand.

Our license and royalty revenue may fluctuate or decline significantly in the future due to license agreement renewals, declines in sales of the products or use of technology underlying the license and royalty revenue by our licensees, or if licensees fail to perform on a portion or all of their contractual obligations. If our existing licensees do not renew their licenses upon expiration, renew them on less favorable terms, exercise their option to terminate the license or fail to exercise their option to extend the licenses, or we are not successful in signing new licensees in the future, our license revenue, profitability, and cash provided by operating activities would be harmed. As our older patents expire, and the coverage of our newer patents may be different, it may be more difficult to negotiate or renew favorable license agreement terms or a license agreement at all. For example, in the first quarter of fiscal year 2010, our license and royalty revenue decreased sequentially primarily due to a new license agreement with Samsung that was effective in the third quarter of fiscal year 2009 with a term of seven years, and contains a lower effective royalty rate compared to the previous license agreement. To the extent that we are unable to renew license agreements under similar terms, or at all, our financial results would be harmed by the reduced license and royalty revenue and we may incur significant patent litigation costs to enforce our patents against these licensees. Our agreements may require us in certain instances to recognize license revenue related to a particular licensee all in one period instead of over time which could create additional volatility in our licensing revenue. A portion of our license and royalty revenue is based on sales of product categories as well as underlying technology, and fluctuations in the sales of those products or technology adoption rates would also result in fluctuations in the license and royalty revenue due to us under our agreements. If our licensees or we fail to perform on contractual obligations, we may incur costs to enforce or defend the terms of our licenses and there can be no assurance that our enforcement, defense or collection efforts will be effective. If we license new IP from third-parties or existing licensees, we may be required to pay license fees, royalty payments or offset existing license revenue. In addition, we may be subject to disputes, claims or other disagreements on the timing, amount or collection of royalties or license payments under our existing license agreements.

61

In transitioning to new technologies and products, we may not achieve OEM design wins, our OEM customers may delay transition to new technologies, our competitors may transition more quickly than we do, or we may experience product delays, cost overruns or performance issues that could harm our business. The transition to new generations of products, such as products containing 19‑nanometer, 1Y‑nanometer or subsequent process technologies such as 1Z‑nanometer 2D NAND and 3D NAND and/or X3 NAND memory architecture, is highly complex and requires new controllers, new test procedures and modifications to numerous aspects of our manufacturing processes, resulting in the need for extensive qualification of the new products by our OEM customers and us. In addition, our competitors may transition to these new technologies more quickly or more effectively than we are able to, which could harm our ability to compete effectively. If we fail to achieve OEM design wins with new technologies such as 19‑nanometer, 1Y‑nanometer or subsequent process technologies or the use of X3 in certain products, if our OEM customers choose to transition to these new technologies more slowly than our roadmap plans, if the demand for the products that we developed is lower than expected, if the supporting technologies to implement these new technologies are not available, or if our competitors transition to these new technologies, including X3, more quickly or more effectively than we are able to, we may be unable to achieve the cost structure required to support our profit objectives or may be unable to grow or maintain our OEM market position. Furthermore, there can be no assurance that technology transitions will occur on schedule or at the yields or costs that we anticipate, that the tools and equipment required for the technology transitions will be available on a cost-effective basis or at all, or that products based on the new technologies will meet customer specifications. The vast majority of products require controllers or firmware, and any delays in developing or sourcing controllers or firmware, or incompatibility or quality issues relating to the controllers or firmware in our products, could harm our revenue and gross margin, as well as business relationships with our customers. Any material delay in a development or qualification schedule could delay deliveries and harm our operating results.

We require an adequate level of product gross margin to continue to invest in our business, and our product gross margin may vary significantly depending on a number of factors. Our ability to generate sufficient product gross margin and profitability to invest in our business is influenced by supply and demand balance in the flash memory industry, the mix of our product sales, our ability to reduce our cost per gigabyte at an equal or higher rate than the price decline per gigabyte, our ability to develop new products and technologies, the rate of growth of our target markets, the competitive position of our products, the continued acceptance of our products by our customers and our management of production capacity and technology transitions. Other factors that could result in volatility in our product gross margin include fluctuations in customer mix, as well as variations in the technologies or form factors of our products. For example, we experienced negative product gross margin for fiscal year 2008 and the first quarter of fiscal year 2009 due to sustained aggressive industry price declines as well as inventory charges primarily due to lower of cost or market write-downs. If we fail to maintain adequate product gross margin and profitability, our business and financial condition would be harmed and we may have to reduce, curtail or terminate certain business activities, including funding technology development and capacity expansion. Furthermore, as we diversify the products that we sell, changes in our product mix could result in volatility in our product gross margin, since we have significant variation in our product gross margin across product lines, and some of the products that we sell have product gross margin that is significantly below our overall average.

Any disruption or shortage in our supply chain could reduce our revenue, earnings and gross margin. All of our flash memory products require silicon supply for the memory and controller components. Substantially all of our flash memory is currently supplied by Flash Ventures and to a much lesser extent by third-party silicon suppliers. Any disruption or shortage in supply of flash memory from our captive or non-captive sources, including disruptions due to disasters, work stoppages, supply chain interruptions and other factors, would harm our operating results.

The concentration of Flash Ventures in Yokkaichi, Japan, magnifies the risks of supply disruption. The Yokkaichi location and Japan in general are subject to earthquakes, typhoons and other natural disasters. Moreover, Toshiba’s employees who produce Flash Ventures’ products are covered by collective bargaining agreements and any strike or other job action by those employees could interrupt our wafer supply from Flash Ventures. A disruption in our captive wafer supply, including but not limited to disruptions from natural disasters, emergencies such as power outages, fires or chemical spills, or employee strikes or other job actions could cause us not to have sufficient supply to meet demand, resulting in lost sales and market share, as well as significant costs, including wafer loss. For example, the March 11, 2011 earthquake and tsunami in Japan caused a brief equipment shutdown at Flash Ventures, which resulted in some wafer loss as well as delayed or canceled deliveries of certain tools and materials from suppliers impacted by the earthquake. In addition, Flash Ventures has, from time-to-time, experienced power outages and power fluctuations, which have resulted in a loss of wafers and increased costs associated with bringing the facility back online.

62

Currently, wafers for our internally-designed controllers are manufactured by third-party foundries. In addition, we purchase controllers from third-party sources, and some of our products require other non-flash memory components and materials for which we do not have captive supply, such as the DRAM included in some of our SSDs and MCP storage solutions that we supply for use in mobile devices. A disruption in the manufacturing operations of our controller wafer vendors, third-party controller vendors or suppliers of other non-flash memory components, such as DRAM, could result in delivery delays, harm our ability to make timely shipments of our products and harm our operating results until we could qualify an alternate source of supply for these components, which could take several quarters to complete.

Our business depends significantly upon sales through retailers and distributors, and if our retailers and distributors are not successful, we could experience reduced sales, substantial product returns or increased price protection claims, any of which would harm our business, financial condition and operating results. A significant portion of our sales is made through retailers (for our retail channel) and distributors (for both our retail and commercial channels), and we must rely on them to effectively sell our products. Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors. In addition, sales through retailers and distributors typically include commercial terms such as the right to return unsold inventory and protection against price declines. As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in the case of sales to distributors. If our retailers and distributors are not successful in selling our products, not only would our revenue decrease, but we could also experience lower gross margin due to substantial product returns or price protection claims. Furthermore, negative changes in the credit-worthiness or the ability to access credit, or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our revenue and our ability to collect outstanding receivable balances. We also provide inventory on a consigned basis to certain of our retailers, and a bankruptcy or shutdown of these customers could preclude us from taking possession of our consigned inventory, which could result in inventory charges.

We develop new products, technologies and standards, which may not be widely adopted by consumers or enterprises, or, if adopted, may reduce demand for our older products. We devote significant resources to the development of new products, technologies and standards. New products may require significant upfront investment with no assurance of long-term commercial success or profitability. As we introduce new products, standards or technologies, such as our ULLtraDIMM™ SSD, which we announced in January 2014, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated, if at all. Failure of consumers or enterprises to adopt our new products, standards or technologies could harm our results of operations as we fail to reap the benefits of our investments. Competitors or other market participants could seek to develop new standards for flash memory products that, if accepted by device manufacturers or consumers, could reduce demand for our products, negatively impact our license and royalty revenue, or increase license and royalty expense. If new standards are broadly accepted and we do not adopt these new standards in our products, our revenue and results of operations may be harmed.

We face competition from numerous manufacturers and marketers of products using flash memory and if we cannot compete effectively, our operating results and financial condition will suffer. We face competition from NAND flash memory manufacturers and from companies that buy NAND flash memory and incorporate it into their end products. We face different competitive pressures in different markets, and we compete to varying degrees on the basis of, among other things, price, quality and timely delivery of products, product performance, availability and differentiation, and the development of industry standards and formats. The success of our competitors may harm our future revenue or margins and may result in the loss of our key customers.

• NAND Manufacturers. We compete with NAND flash memory manufacturers, including Hynix Semiconductor, Inc., Intel Corporation, or Intel, Micron Technology, Inc., or Micron, Samsung and Toshiba. These companies compete with us in selling a range of flash based products and form factors, including embedded, solid state drives, removable and other form factors. These competitors are large companies that may have greater and more advanced wafer manufacturing capacity, substantially greater financial, technical, marketing and other resources, better recognized brand names and more diversified and lower cost businesses than we do, which may allow them to produce flash memory chips in high volumes at low costs and to sell these flash memory chips themselves or to our competitors at a low cost. In addition, many of our competitors have more diversified semiconductor manufacturing capabilities and can internally produce integrated solutions or hybrid products that may include a combination of NAND flash, DRAM, custom ASICs or other integrated products, while our captive manufacturing capability is solely dedicated to NAND flash. These diversified capabilities may also provide these competitors with a competitive advantage not only in product design and manufacturing due to the ability to leverage know-how in DRAM, custom ASICs or other technologies, but also in a greater ability to respond to industry fluctuations due to their ability to convert their DRAM and other semiconductor manufacturing capacity or equipment to NAND flash and vice-versa. Furthermore, some of

63

these competitors manufacture and sell products that are complementary to flash memory products, and may be able to leverage their competencies and customer relationships to gain a competitive advantage. Current and future memory manufacturer competitors could produce alternative flash or other memory technologies that could compete against our NAND flash technology or our alternative technologies, which may reduce demand or accelerate price declines for our products. Furthermore, the future rate of scaling of the NAND flash technology design that we employ may slow down significantly, which would slow down cost reductions that are fundamental to the adoption of NAND flash technology in new applications. If our scaling of NAND flash technology slows down relative to our competitors, our business and operating results would be harmed and our investments in captive fabrication facilities could be impaired.

• Flash Memory Card and USB Drive Manufacturers and Resellers. We compete with manufacturers and resellers of flash memory card and USB drives, which purchase or have a captive supply of flash memory components and assemble memory cards. Price fluctuations, the timing of product availability and resources allocated to marketing programs can harm our branded market share and reduce our sales and profits. We also sell flash memory in the form of private label cards, wafers or components to certain OEMs who sell flash products that may ultimately compete with our branded products in the retail or commercial channels. The sales volumes and pricing to these OEMs can be highly variable and these OEMs may be more inclined to switch to an alternative supplier based on short-term price fluctuations or the timing of product availability, which could harm our sales and profits.

• Client Storage Solution Manufacturers. In the market for client computing SSDs, we face competition from large NAND flash producers such as Intel, Micron, Samsung and Toshiba, from third-party client SSD solution providers such as Kingston Technology Co., Inc., and from hard drive manufacturers such as Seagate Technology PLC, or Seagate, and Western Digital Corporation, or WDC. In this market, we compete with these industry players largely on the basis of performance capabilities, price and product reliability. Many of the large NAND flash producers have long established relationships with computer manufacturers, or are computer manufacturers themselves, which gives them a competitive advantage in qualifying and integrating their client storage solutions in this market as well as the ability to leverage competencies that have been developed through these relationships in the past. Hard drive manufacturers may also have a competitive advantage in their ability to leverage their existing relationships and brand recognition with customers, as well as their ability to leverage existing technology in creating hybrid drive products. Our failure to compete effectively against these industry players could harm our business and results of operations.

• Enterprise Storage Solution Manufacturers. In the market for enterprise data center SSDs, we face competition from large NAND flash producers such as Intel, Micron, Samsung and Toshiba, from enterprise SSD solution providers such as Fusion-io and LSI, and from hard drive manufacturers such as Seagate and WDC. Many of these competitors have significantly more experience with the software components that are required for successful enterprise SSD solutions, and our failure to continue to develop software expertise could harm our ability to effectively compete in this market. Many established and start-up companies are contributing to the development of the enterprise data center SSD market. Our competitors in this market may be able to leverage existing resources and competencies or acquire or develop other strategic relationships with established or start-up companies before we are able to, which could give them a competitive advantage, and if we are unable to independently develop comparable capabilities, we may be unable to effectively compete.

Our ability to generate revenue or adequate margins for certain products may be limited by our ability to secure, at competitive prices or at all, components or materials required to produce those products. Our products require certain non-flash memory components and materials for which we do not have captive supply. Our ability to generate revenue or adequate margins could be impacted by an inability to source those components or materials in a cost-effective manner, or at all. For example, some of our SSDs and the MCP storage solutions that we supply for use in mobile devices include both NAND flash memory and DRAM; however, since we do not have a captive supply of DRAM, there could be periods in which we are unable to cost-effectively source the DRAM that we require or to source DRAM in the quantities or on the timeline that we require. In addition, costs of DRAM have increased in the past and continued increases in the future would harm our gross margin for our products that include DRAM. Over the past year, the non-flash memory content in our cost of sales has increased due to the increased mix of more complex products in our revenue. If we are unable to source certain components or materials cost effectively, or at all, or if we are unable to reduce the cost of non-flash memory materials and other costs, our revenue and margin may be harmed.

64

We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments, which could harm our ability to grow our business, develop new products or sell our products. We have in the past and may in the future enter into acquisitions of, or investments in, businesses in order to complement or expand our current businesses or enter into new markets. Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our previous or future acquisitions will be successful, will deliver the intended benefits, and will not materially harm our business, operating results or financial condition. Furthermore, negotiation and integration of acquisitions or strategic investments could divert management’s attention and other company resources.

Factors associated with past or future acquisitions or investments that could harm our growth prospects or results of operations include but are not limited to:

• difficulty in integrating the technology, products, operations or workforce of the acquired business into our business;

• difficulty in entering into new markets in which we have limited or no experience, such as software solutions, and where competitors have stronger positions;

• loss of, or the impairment of or failure to maintain and grow relationships with, key employees, vendors or customers of the acquired business;

• difficulty in operating in new and potentially disperse locations;

• disruption of our ongoing businesses or the ongoing business of the company we invest in or acquire;

• failure to realize the potential financial or strategic benefits of the transaction, including but not limited to any expected cost savings or synergies from the acquisition;

• difficulty integrating the accounting, management information, human resources and other administrative systems of the acquired business;

• disruption of or delays in ongoing research and development efforts and release of new products to market;

• diversion of capital and other resources;

• assumption of liabilities;

• issuance of equity securities that may be dilutive to our existing stockholders;

• diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments;

• failure of the due diligence processes to identify significant issues with product quality, technology and development, or legal and financial issues, among other things;

• incurring non-recurring charges, increased contingent liabilities, adverse tax consequences, depreciation or deferred compensation charges, amortization or impairment of intangible assets or impairment of goodwill, which could harm our results of operations; and

• potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings or those of the acquired business.

In August 2013, we completed the acquisition of SMART Storage, a developer of enterprise SSDs. In addition to the risks described above, additional factors associated with the acquisition of SMART Storage that could harm our ability to realize the potential financial or strategic benefits of the acquisition and thereby harm our growth prospects or results of operations include but are not limited to:

• failure of SMART Storage’s products or technologies to perform as expected or to meet customer qualification requirements;

• failure of the enterprise SSD space to grow as expected;

• delays in the timing and successful integration of SMART Storage, including the transition of the SMART Storage business from third-party sources of NAND flash memory and other components to our captive supply of these materials, which could harm our ability to achieve the expected benefits from the acquisition in a timely manner or at all;

• difficulty in maintaining SMART Storage’s supplier or vendor arrangements, upon some of which SMART Storage is significantly reliant, which could harm our ability to maintain the business after the acquisition;

• failure to retain SMART Storage’s key employees, particularly for the continued development of SMART Storage’s technology; and

• difficulty in integrating SMART Storage’s technology into other product lines, which could diminish our expected benefits of the acquisition.

65

In the third quarter of fiscal year 2013, we recorded impairment charges of $47 million related to amortizable intangible assets and $36 million related to an in-process research and development intangible asset, both from the acquisition of Pliant Technology, Inc., or Pliant. These impairment charges stem primarily from our decision to integrate more of the SMART Storage architecture and technology into our future enterprise product roadmap and from the delay of our next-generation SSD platform built on the Pliant technology. We will continue to monitor for any events or circumstances that could indicate whether an impairment of the remaining Pliant acquisition-related intangible assets is required.

Our financial performance and the value of our investments depend significantly on worldwide economic conditions, which have deteriorated in many countries and regions, and may not recover in the foreseeable future. Demand for our products is harmed by negative macroeconomic factors affecting consumer and enterprise spending. Continuing high unemployment rates, low levels of consumer liquidity, risk of default on sovereign debt and volatility in credit and equity markets have weakened consumer confidence and decreased consumer and enterprise spending in many regions around the world. These and other economic factors may reduce demand for our products and harm our business, financial condition and operating results. In addition, we maintain investments, including our cash, cash equivalents and marketable securities, of various holdings, types and maturities and, given the global nature of our business, our investment portfolio includes both domestic and international investments. Credit ratings and pricing of these investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors, and declines in the credit ratings or pricing of our investments could result in a decline in the value and liquidity of our investments, including our cash, cash equivalents and marketable securities, and result in a significant impairment of our assets.

We depend on our captive assembly and test manufacturing facility in China and our business could be harmed if this facility does not perform as planned. Our reliance on our captive assembly and test manufacturing facility near Shanghai, China has increased significantly and we now utilize this factory to satisfy a majority of our assembly and test requirements, to produce products with leading-edge technologies such as multi-stack die packages and to provide order fulfillment. In addition, our Shanghai, China facility is responsible for packaging and shipping our retail products within the U.S., Asia, Europe, Canada and Latin America. Any delays in adding new equipment capacity, interruptions in production or the ability to ship product, or issues with manufacturing yields at our captive facility could harm our operating results and financial condition. In addition, investment decisions in adding new assembly and test capacity require significant planning and lead-time, and a failure to accurately forecast demand for our products could cause us to over-invest or under-invest in the expansion of captive assembly and test capacity in our facility, which would lead to excess capacity and under-utilization charges, in the event of over-investment, or insufficient assembly and test capacity resulting in a loss of sales and revenue opportunities, in the event of under-investment. Furthermore, if we were to experience labor unrest, or strikes, or if wages were to significantly increase, our ability to produce and ship products could be impaired and we could experience higher labor costs, which could harm our operating results, financial condition and liquidity.

We rely on our suppliers, some of which are the sole source of supply for our non-memory components, and capacity limitations of these suppliers expose our supply chain to unanticipated disruptions or potential additional costs. We do not have long-term supply commitments from many of our suppliers, certain of which are sole sources of supply for our non-memory components. For example, the controllers for a majority of our SSD revenue are sourced from one third-party controller vendor. From time-to-time, certain materials may become difficult or more expensive to obtain, including as a result of capacity constraints of these suppliers, which could impact our ability to meet demand and could harm our profitability. Our business, financial condition and operating results could be significantly harmed by delays or reductions in shipments if we are unable to obtain sufficient quantities of these components or develop alternative sources of supply in a timely manner, on competitive terms, or at all.

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

66

Our products may contain errors or defects, which could result in the rejection of our products, product recalls, damage to our reputation, lost revenue, diverted development resources, increased service costs, warranty and indemnification claims and litigation. Our products are complex, must meet stringent user requirements and may contain errors or defects, and the majority of our products provide a warranty period. Errors or defects in our products may be caused by, among other things, errors or defects in the memory or controller components or firmware, including memory and components that we procure from non-captive sources. In addition, the substantial majority of our flash memory is supplied by Flash Ventures, and if the wafers from Flash Ventures contain errors or defects, our overall supply could be harmed. These factors could result in the rejection of our products, damage to our reputation, lost revenue, diverted development resources, increased customer service and support costs, indemnification of our customers’ product recall and other costs, warranty claims and litigation. Generally, our OEM customers have more stringent requirements than other customers and our concentration of revenue from OEMs, especially OEMs who purchase our enterprise and client SSD products, could result in increased expenditures for product testing, or increase our service costs and potentially lead to increased warranty or indemnification claims. Furthermore, the costs of errors or defects in our embedded products may be greater than those of stand-alone, removable products due to the effect that such errors or defects may have on other components of the device in which they are embedded. We record an allowance for warranty and similar costs in connection with sales of our products, but actual warranty and similar costs may be significantly higher than our recorded estimate and harm our operating results and financial condition.

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

Certain of our products contain encryption or security algorithms to protect third-party content and user-generated data stored on our products. To the extent our products are hacked or the encryption schemes are compromised or breached, this could harm our business by hurting our reputation, requiring us to employ additional resources to fix the errors or defects and expose us to litigation and indemnification claims. This could potentially impact future collaboration with content providers or lead to product returns or claims against us due to actual or perceived vulnerabilities.

We are exposed to foreign currency exchange rate fluctuations that could harm our business, operating results and financial condition. A significant portion of our business is conducted in currencies other than the U.S. dollar, which exposes us to adverse changes in foreign currency exchange rates. An increase in the value of the U.S. dollar could increase the real cost to our customers of our products in those markets outside the U.S. where we sell in dollars, and a weakened U.S. dollar could increase local operating expenses and the cost of raw materials to the extent purchased in foreign currencies. These exposures may change over time as our business and business practices evolve, and they could harm our financial results and cash flows.

Our most significant exposure is related to our purchases of NAND flash memory from Flash Ventures, which are denominated in Japanese yen. Appreciation in the value of the Japanese yen relative to the U.S. dollar would increase our cost of NAND flash wafers, negatively impacting our gross margin and operating results. In addition, our investments in Flash Ventures are denominated in Japanese yen and strengthening of the Japanese yen would increase the cost to us of future funding and increase the value of our Japanese yen-denominated investments, increasing our exposure to asset impairments. Macroeconomic weakness in the U.S. or other parts of the world could lead to strengthening of the Japanese yen, which would harm our gross margin, operating results, and the cost of future Flash Venture funding, and increase the risk of asset impairment. We also have foreign currency exposures related to certain non-U.S. dollar-denominated revenue and operating expenses in Europe and Asia. Additionally, we have exposures to emerging market currencies, which can be extremely volatile. We also have significant monetary assets and liabilities that are denominated in non-functional currencies.

We enter into foreign exchange forward and cross currency swap contracts to reduce the impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, from time-to-time, we hedge certain anticipated foreign currency cash flows with foreign exchange forward and option contracts, primarily for Japanese yen-denominated inventory purchases. We generally have not hedged our future equity investments, distributions and loans denominated in Japanese yen related to Flash Ventures.

67

Our decisions and hedging strategy with respect to currency risks may not be successful, which could harm our operating results. In addition, if we do not successfully manage our hedging program in accordance with accounting guidelines, we may be subject to adverse accounting treatment, which could harm our operating results. There can be no assurance that this hedging program will be economically beneficial to us for numerous reasons, including that hedging may reduce volatility, but prevent us from benefiting from a favorable market trend. Further, the ability to enter into foreign exchange contracts with financial institutions is based upon our available credit from such institutions and compliance with covenants and other restrictions. Operating losses, third-party downgrades of our credit rating or instability in the worldwide financial markets, including the downgrade of the credit rating of the U.S. government, could impact our ability to effectively manage our foreign currency exchange rate risk, which could harm our business, operating results and financial condition.

Our global operations and operations at Flash Ventures and third-party subcontractors are subject to risks for which we may not be adequately insured. Our global operations are subject to many risks, including but not limited to errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers, supply chain interruptions, third-party liabilities and fires or natural disasters. No assurance can be given that we will not incur losses beyond the limits of, or outside the scope of, the coverage of our insurance policies. From time-to-time, various types of insurance have not been available on commercially acceptable terms or, in some cases, at all. There can be no assurance that in the future we will be able to maintain existing insurance coverage or that premiums will not increase substantially. We maintain limited insurance coverage and, in some cases, no coverage at all, for natural disasters and environmental damages, as these types of insurance are sometimes not available or available only at a prohibitive cost. For example, our test and assembly facility in Shanghai, China, on which we significantly rely, may not be adequately insured against all potential losses. Accordingly, we may be subject to uninsured or under-insured losses. We depend upon Toshiba to obtain and maintain sufficient property, business interruption and other insurance for Flash Ventures. If Toshiba fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause Flash Ventures to breach various financing covenants. In addition, we insure against property loss and business interruption resulting from the risks incurred at our third-party subcontractors; however, we have limited control as to how those sub-contractors run their operations and manage their risks, and as a result, we may not be adequately insured.

If our security measures or security measures of our suppliers, vendors and partners are breached and unauthorized access to our or their information technology systems is obtained, we may lose proprietary data.Our security measures and the security measures of our suppliers, vendors and partners may be breached and our or their information technology systems accessed as a result of third-party action, including computer hackers, employee error, malfeasance or otherwise, and result in unauthorized access to our customers’ data or our data, including IP and other confidential business information. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, we may be unable to anticipate these techniques or to implement adequate preventative measures. Furthermore, we have limited or no control over the implementation of preventative measures of our suppliers, vendors and partners. Any security breach could result in disclosure of our trade secrets or confidential customer, supplier or employee data, which could result in legal liability, harm to our reputation and other harm to our business.

We may need to raise additional financing, which could be difficult to obtain, and which, if not obtained in satisfactory amounts, may prevent us from funding Flash Ventures, increasing our wafer supply, developing or enhancing our products, taking advantage of future opportunities, engaging in acquisitions of or investments in companies, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business. We currently believe that we have sufficient cash resources to fund our operations as well as our anticipated investments in Flash Ventures for at least the next twelve months; however, we may decide to raise additional funds to maintain the strength of our balance sheet or fund our operations through equity, public or private debt, or lease financings. However, we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we issue additional equity securities, our stockholders will experience dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we raise funds through debt or lease financing, we will have to pay interest and may be subject to restrictive covenants, which could harm our business. If we cannot raise funds on acceptable terms, if and when needed, our credit rating may be downgraded, and we may not be able to develop or enhance our technology or products, fulfill our obligations to Flash Ventures, increase our wafer supply, take advantage of future opportunities, engage in acquisitions of or investments in companies, grow our business or respond to competitive pressures or unanticipated industry changes, any of which could harm our business.

68

We may be unable to protect our IP rights, which would harm our business, financial condition and operating results. We rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect our IP rights. In the past, we have been involved in significant and expensive disputes regarding our IP rights and those of others, including claims that we may be infringing patents, trademarks and other IP rights of third-parties. We expect that we will be involved in similar disputes in the future.

There can be no assurance that:

• any of our existing patents will continue to be held valid, if challenged;

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

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

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

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

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

There are flash memory producers, flash memory card manufacturers and other companies that utilize flash memory who we believe may infringe our IP. Enforcement of our rights often requires litigation. If we bring a patent infringement action and are not successful, our competitors would be able to use similar technology to compete with us. Moreover, the defendant in such an action may successfully countersue us for infringement of their patents or assert a counterclaim that our patents are invalid or unenforceable. If we do not prevail in the defense of patent infringement claims, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products in one or more geographic locations, expend significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the technology infringed. If we are enjoined from selling our products, or if we are required to develop new technologies or pay significant monetary damages or are required to make substantial royalty payments, our business and results of operations would be harmed.

We rely on trade secrets to protect some of our intellectual property. Trade secrets are difficult to maintain and protect. We have taken measures to protect our trade secrets and proprietary information, such as the use of confidentiality agreements with employees and business partners, but there is no guarantee that these measures will be effective. These agreements may be unenforceable or difficult and costly to enforce, and our proprietary information may be stolen or misused, otherwise become known or be independently developed by competitors. Enforcement of claims that a third party has illegally obtained or used trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than domestic courts to protect trade secrets. Our failure to obtain or maintain trade secret protection could adversely affect our competitive position and harm our business.

The success of our branded products depends in part on the positive image that consumers have of our brands. We believe the popularity of our brands makes them a target of counterfeiting or imitation, with third parties attempting to pass off counterfeit products as our products. Any occurrence of counterfeiting, imitation or confusion with our brands could adversely affect our reputation and impair the value of our brands, which in turn could negatively impact sales of our branded products, our market share and our gross margin, as well as increase our administrative costs related to brand protection and counterfeit detection and prosecution.

We and our suppliers rely upon certain rare earth materials that are necessary for the manufacturing of our products, and our business could be harmed if we or our suppliers experience shortages or delays of these rare earth materials. Rare earth materials are critical to the manufacture of some of our products. We and/or our suppliers acquire these materials from a number of countries, including the People’s Republic of China. We cannot predict whether the government of China or any other nation will impose regulations, quotas or embargoes upon the materials incorporated into our products that would restrict the worldwide supply of these materials or increase their cost. If China or any other major supplier were to restrict the supply available to us or our suppliers or increase the cost of the materials used in our products, we could experience a shortage in supply and an increase in production costs, which would harm our operating results.

69

We and certain of our officers are at times involved in litigation, including litigation regarding our IP rights or that of third parties, which may be costly, may divert the efforts of our key personnel and could result in adverse court rulings, which could materially harm our business. We are often involved in litigation, including cases involving our IP rights and those of others. We are the plaintiff in some of these actions and the defendant in others. Some of the actions seek injunctions against the sale of our products and/or substantial monetary damages, which if granted or awarded, could materially harm our business, financial condition and operating results.

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

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

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

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

Changes in the seasonality of our business may result in our inability to accurately forecast our product purchase requirements. Sales of our products in the consumer electronics market are subject to seasonality. Sales have typically increased significantly in the fourth quarter of each fiscal year, sometimes followed by significant declines in the first quarter of the following fiscal year. However, the global economic environment may impact typical seasonal trends, making it more difficult for us to forecast our business. Changes in the product or channel mix of our business can also impact seasonal patterns, adding to complexity in forecasting demand. If our forecasts are inaccurate, we may lose market share or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and operating results. Changes in seasonality may also lead to greater volatility in our stock price and the need for significant working capital investments in receivables and inventory, including the need to build inventory levels in advance of our projected high volume selling seasons.

70

The Flash Ventures’ master equipment lease obligations contain covenants, which if breached, would harm our business, operating results, cash flows and liquidity. Flash Ventures’ master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, some of the master lease agreements contain an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum stockholders’ equity of at least $1.51 billion. As of March 30, 2014, Flash Ventures was in compliance with all of its master lease covenants.

If our stockholders’ equity were to fall below $1.51 billion, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration. If an event of default occurs and if we fail to reach a resolution, we may be required to pay a portion or the entire outstanding lease obligations up to approximately $556 million, based upon the exchange rate at March 30, 2014, covered by our guarantee under Flash Ventures’ master lease agreements, which would significantly reduce our cash position and may force us to seek additional financing, which may not be available.

We are vulnerable to numerous risks related to our international operations, including political instability, and we must comply with numerous laws and regulations, many of which are complex. Currently, a large portion of our revenue is derived from our international operations, and all of our products and many of our components are produced overseas in China, Japan, Malaysia and Taiwan. Our revenue and future growth is also significantly dependent on international markets, and we may face difficulties entering or maintaining sales in some international markets. We are, therefore, affected by the political, economic, labor, environmental, public health and military conditions in these countries. For example, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of IP rights, which results in the prevalence of counterfeit goods in China, among other things, as well as piracy and degradation of our IP protection. Our efforts to prevent counterfeit products from entering the market may not be successful, and the sale of counterfeit products could harm our operating results and financial condition. In addition, customs regulations in China are complex and subject to frequent changes and, in the event of a customs compliance issue, our ability to import to, and export from, our factory in Shanghai, China could be adversely affected, which could harm our operating results and financial condition.

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

• the need to comply with foreign government regulation;

• the need to comply with U.S. regulations on international business, including the Foreign Corrupt Practices Act, the United Kingdom Bribery Act 2010 and rules regarding conflict minerals;

• changes in diplomatic and trade relationships or government intervention, which may impact our ability to sell to certain customers;

• reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional issues in Asia, including natural disasters or labor strikes;

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

• a higher degree of commodity pricing than in the U.S.;

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

• import or export restrictions that could affect some of our products, including those with encryption technology;

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

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

• adverse tax rules and regulations;

• weak protection of our IP rights;

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

• delays in research and development that may arise from political unrest at our development centers in Israel or other countries.

71

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

Our success depends on our key personnel, including our senior management, and the loss of key personnel or the transition of key personnel could disrupt our business. Our success greatly depends on the continued contributions of our senior management and other key research and development, sales, marketing and operations personnel. We do not have employment agreements with any of our executive officers and they are free to terminate their employment with us at any time. Our success will depend on our ability to recruit and retain additional highly-skilled personnel. We have relied on equity awards in the form of stock options and restricted stock units as one means for recruiting and retaining highly skilled talent and a reduction in our stock price may reduce the effectiveness of these equity awards in retaining employees. We also rely on cash incentive awards to motivate and retain employees. These cash incentive awards depend significantly on our financial and business performance, and variations in our financial and business performance from our expectations at the time we set the targets for such cash incentive awards could result in decreased or eliminated awards, reducing the effectiveness of these cash incentive awards in retaining employees.

Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenue, costs and stock price. Terrorist attacks, U.S. military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer demand. Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Any of these events could also increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers, or adversely affect consumer confidence. We have substantial operations in Israel including a development center in Northern Israel, near the border with Lebanon, and a research center in Omer, Israel, which is near the Gaza Strip, areas that have experienced significant violence and political unrest. Turmoil and unrest in Israel, the Middle East or other regions could cause delays in the development or production of our products and could harm our business and operating results.

Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could harm our operations. Our supply chain operations, including those of our suppliers and subcontractors, are concentrated in the U.S., China, Japan, Malaysia, Singapore and Taiwan. In the past, certain of these areas have been affected by natural disasters such as earthquakes, tsunamis, floods and typhoons, and some areas have been affected by epidemics. In addition, our headquarters, which house a significant concentration of our research and development and engineering staff, are located in the San Francisco Bay Area, an area that is prone to earthquakes. If a natural disaster or epidemic were to occur in one or more of these areas, we could incur a significant work or production stoppage. The impact of these potential events is magnified by the fact that we do not have insurance for most natural disasters or epidemics, including earthquakes and tsunamis. The impact of a natural disaster or epidemic could harm our business and operating results.

Disruptions in global transportation could impair our ability to deliver or receive product on a timely basis, or at all, causing harm to our financial results. Our raw materials, work-in-process and finished products are primarily distributed via air transport. If there are significant disruptions in air transport, we may not be able to deliver our products or receive raw materials. Any natural disaster or other event that affects air transport in Asia could disrupt our ability to receive raw materials in, or ship finished product from, our Shanghai, China facility or our Asia-based contract manufacturers. As a result, our business and operating results may be harmed.

72

We rely on information systems to run our business and any prolonged down time could harm our business operations and/or financial results. We rely on an enterprise resource planning system, as well as multiple other systems, databases, and data centers to operate and manage our business. Any information system problems, programming errors or unanticipated system or data center interruptions could impact our continued ability to successfully operate our business and could harm our financial results or our ability to accurately report our financial results on a timely basis.

Anti-takeover provisions in our charter documents, stockholder rights plan and Delaware law could discourage or delay a change in control and negatively impact our stockholders. We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have a stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could discourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action (2,000,000 shares of preferred stock have already been reserved under our stockholder rights plan). Issuing preferred stock could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could harm the market value of our common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that a corporation may not engage in any business combination with any interested stockholder, defined broadly as a beneficial owner of 15% or more of that corporation’s voting stock, during the three-year period following the time that a stockholder became an interested stockholder, without certain conditions being satisfied. This provision could delay or discourage a change of control of SanDisk.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability. We are subject to income and other taxes in the U.S. and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes. For example, we were under a federal income tax audit by the U.S. Internal Revenue Service, or IRS, for fiscal years 2005 through 2008 and issued the Revenue Agent’s report in February 2012. The most significant proposed adjustments are comprised of related party transactions between our U.S. parent entity and our foreign subsidiaries. We are contesting these adjustments through the IRS Appeals Office and cannot predict when a resolution will be reached. Furthermore, we are currently under a federal income tax audit by the IRS for fiscal years 2009 through 2011, and we do not expect a resolution of this audit to be reached during the next twelve months. While we regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision, tax audits are inherently uncertain and an unfavorable outcome could occur. An unanticipated unfavorable outcome in any specific period could harm our operating results for that period or future periods. The financial cost and management attention and time devoted to defending income tax positions may divert resources from our business operations, which could harm our business and profitability. IRS audits may also impact the timing and/or amount of our refund claims. In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S.

We may be subject to risks associated with laws, regulations and customer initiatives relating to the environment or other social responsibility issues. Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances, the responsibility for environmentally safe disposal or recycling. Such laws and regulations have recently been passed in several jurisdictions in which we operate, including Japan and certain states within the U.S. In addition, climate change issues, energy usage and emissions controls may result in new environmental legislation and regulations, at the international, federal or state level, that may make it more difficult or expensive for us, our suppliers and our customers to conduct business. Any of these regulations could cause us to incur additional direct costs, as well as increased indirect costs related to our relationships with our customers and suppliers, and otherwise harm our operations and financial condition.

Government regulators or our customers may require us to comply with product or manufacturing standards that are more restrictive than current laws and regulations related to environmental matters, conflict minerals or other social responsibility initiatives. The implementation of these standards could affect the sourcing, cost and availability of materials used in the manufacture of our products. Non-compliance with these standards could cause us to lose sales to these customers and compliance with these standards could increase our costs, which may harm our operating results.

73

New conflict minerals regulations are causing us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.In August 2012, the SEC adopted new rules establishing additional disclosure and reporting requirements regarding the use of specified minerals, or conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. These new rules require us to determine, disclose and report whether or not such conflict minerals originate from the Democratic Republic of the Congo or any adjoining country. These new rules could affect our ability to source certain materials used in our products at competitive prices and could impact the availability of certain minerals used in the manufacture of our products, including gold, tantalum, tin and tungsten. During the course of our diligence procedures, we could find that the minerals procured by one or more of our suppliers are not “conflict free” or discover violations of other rules, regulations or laws. As there may be only a limited number of suppliers of “conflict free” minerals, we cannot be sure that we will be able to obtain necessary conflict free minerals in sufficient quantities or at competitive prices. Our customers, including OEM and other customers in our commercial channel, may require that our products be free of conflict minerals, and our revenue and margin may be harmed if we are unable to provide assurances to our customers that our products are “conflict free” or to procure conflict free minerals at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting these demands. Additionally, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through the due diligence procedures that we implement. We may also face challenges with government regulators and our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict free. We expect that there may be significant costs associated with complying with the diligence and disclosure requirements, such as costs related to determining the source of certain minerals used in our products and costs of an independent private sector audit, to the extent required, as well as costs related to possible changes to products, processes, or sources of supply as a consequence of such verification and disclosure requirements.

In the event we are unable to satisfy regulatory requirements relating to internal controls, or if our internal control over financial reporting is not effective, our business could suffer. In connection with our certification process under Section 404 of the Sarbanes-Oxley Act, we have identified in the past and will, from time-to-time in the future, identify deficiencies in our internal control over financial reporting. There can be no assurance that individually or in the aggregate these deficiencies would not be deemed to be a material weakness or significant deficiency. A material weakness or significant deficiency in internal control over financial reporting could have a materially adverse impact on our reported financial results and the market price of our stock could significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness in internal controls could harm our reputation, business and stock price. Any internal control or procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot prevent human error, intentional misconduct or fraud.

We have significant financial obligations related to Flash Ventures, as well as under our 1.5% Convertible Senior Notes due 2017 and our 0.5% Convertible Senior Notes due 2020, which could negatively impact our cash flows and financial position. We have entered into agreements to guarantee or provide financial support with respect to lease and certain other obligations of Flash Ventures in which we have a 49.9% ownership interest. As of March 30, 2014, we had guarantee obligations for Flash Ventures’ master lease agreements denominated in Japanese yen of approximately $556 million based on the exchange rate at March 30, 2014. We also have significant commitments for the future fixed costs of Flash Ventures, and we expect to continue to incur significant obligations with respect to, as well as make continued investments in, Flash Ventures. In addition, as of March 30, 2014, the aggregate principal amount outstanding under our 1.5% Convertible Senior Notes due 2017 (the “1.5% Notes due 2017”) and our 0.5% Convertible Senior Notes due 2020 (the “0.5% Notes due 2020,” and together with the 1.5% Notes due 2017, the “Notes”) was $2.5 billion. The Notes may become convertible at the option of the holders for certain periods as a result of, among other things, fluctuations in our stock price. For example, the 1.5% Notes due 2017 became convertible on April 1, 2014, and will remain convertible through June 30, 2014, as a result of the trading price of our common stock exceeding 130% of the conversion price for at least 20 trading days during the 30 consecutive trading day period ended March 31, 2014. Convertibility of the Notes based on the trading price of our common stock is assessed on a calendar-quarter basis. Upon any conversion of the Notes, we will be required to deliver cash up to the principal amount of the Notes that are converted and, with respect to any excess conversion value greater than the principal amount of the Notes, shares of our common stock, which would result in dilution to our shareholders. We may not have sufficient funds to make payments related to our Flash Ventures obligations or under the Notes when converted or due. Further, these obligations could negatively impact our cash flows and limit our ability to use our cash flow for our other liquidity needs, including working capital, capital expenditures, acquisitions, investments and other general corporate purposes.

74

There can be no assurance that we will continue to declare cash dividends. Our continuation of declaring quarterly dividends is subject to capital availability and periodic determination by our Board of Directors that cash dividends are in the best interest of our shareholders. Future dividends may be affected by, among other factors, our views on potential future capital requirements, acquisition transactions, stock repurchases, changes in tax laws, and changes in our business model. A reduction in our dividend payments or discontinuance of dividend payments could have a negative effect on our stock price, which could have a material adverse impact on investor confidence and employee retention.

75

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

Issuer Purchases of Equity Securities. The table below summarizes information about our purchases of equity securities registered pursuant to Section 12 of the Exchange Act based upon settlement date during the three months ended March 30, 2014 (in millions, except share and per share amounts).

Period	Total Number of Shares Purchased (a)	Average Price Paid per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (a)
December 29, 2013 to January 26, 2014	—	$	—	—
January 27, 2014 to February 23, 2014	1,273,485	70.67		1,273,485
February 24, 2014 to March 30, 2014	—	—		—
Total	1,273,485			1,273,485	$	1,837

^(a)  Our Board of Directors has authorized a share repurchase program that allows management to repurchase shares of our stock. The share repurchase program does not obligate us to acquire any specific number of common stock, or any shares at all, and may be suspended at any time at our discretion. The timing and amount of any repurchase of shares is determined by our management, based on its evaluation of market conditions, cash on hand, applicable legal requirements and other factors. Under the share repurchase program, shares may be repurchased from time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 of the Exchange Act. Our current program to repurchase shares up to $2.5 billion of our common stock was announced on July 31, 2013 and will remain in effect until the available funds have been expended or it is terminated by our Board of Directors. Funds available for share repurchases under our prior share repurchase program, which our Board of Directors authorized in October 2011 and increased in December 2012, were fully expended in the third quarter of fiscal year 2013.

^(b)  Does not include amounts paid for commissions.

In the third quarter of fiscal year 2013, under our share repurchase program, we entered into an accelerated share repurchase, or ASR, agreement with a financial institution to purchase $1.0 billion of our common stock. In exchange for an up-front payment of $1.0 billion, the financial institution committed to deliver shares during the ASR’s purchase period, which ended on April 8, 2014. During the third quarter of fiscal year 2013, 14.5 million shares were initially delivered to us under this ASR agreement. In April 2014, the ASR was settled and we received an additional 0.6 million shares from the financial institution for a total of 15.1 million shares, which resulted in a variable weighted-average price of $66.07 per share.

76

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

Item 6.    Exhibits

The information required by this item is set forth on the exhibit index which follows the signature page of this report.

77

SIGNATURES

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

		SANDISK CORPORATION
Dated:	May 1, 2014	By:	/s/ Judy Bruner
			Judy Bruner
			Executive Vice President, Administration and Chief Financial Officer (Principal Financial Officer)

S - 1

EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Exhibit Title	Form	File No.	Exhibit No.	Filing Date	Provided Herewith
3.1	Restated Certificate of Incorporation of the Registrant.	S-1	33-96298	3.2	8/29/1995
3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December 9, 1999.	10-Q	000-26734	3.1	8/16/2000
3.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11, 2000.	S-3	333-85686	4.3	4/5/2002
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 26, 2006.	8-K	000-26734	3.1	6/1/2006
3.5	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 27, 2009.	8-K	000-26734	3.1	5/28/2009
3.6	Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997.	8-K/A	000-26734	3.5	5/16/1997
3.7	Certificate of Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on September 24, 2003.	8-A	000-26734	3.2	9/25/2003
3.8	Amended and Restated Bylaws of the Registrant dated September 11, 2013.	8-K	000-26734	3.1	9/17/2013
4.1	Rights Agreement, dated as of September 15, 2003, by and between the Registrant and Computershare Trust Company, Inc.	8-A	000-26734	4.2	9/25/2003
4.2	Amendment No. 1 to Rights Agreement, dated as of November 6, 2006. by and between the Registrant and Computershare Trust Company, Inc.	8-A/A	000-26734	4.2	11/8/2006
4.3	Indenture (including form of Notes) with respect to the Registrant’s 1.5% Convertible Senior Notes due 2017, dated as of August 25, 2010, by and between the Registrant and The Bank of New York Mellon Trust Company, N.A.	8-K	000-26734	4.1	8/25/2010
4.4	Indenture (including form of Notes) with respect to the Registrant’s 0.5% Convertible Senior Notes due 2020, dated as of October 29, 2013, by and between the Registrant and The Bank of New York Mellon Trust Company, N.A.	8-K	000-26734	4.1	10/29/2013
10.1	Consultant Services Agreement, dated January 13, 2014, between the Registrant and Dr. Chenming Hu					l
12.1	Computation of ratio of earnings to fixed charges.					l
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					l
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					l
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*					l
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*					l
101.INS	XBRL Instance Document.					l
101.SCH	XBRL Taxonomy Extension Schema Document.					l
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.					l
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.					l
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.					l
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.					l

* Furnished herewith.

E - 1