Sandisk (SNDK) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2010
	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.)
601 McCarthy Blvd. Milpitas, California	95035
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code

(408) 801-1000

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

Yes þ No ¨

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 October 3, 2010: 234,503,364.

SanDisk Corporation

Index

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of October 3, 2010 and January 3, 2010	3
	Condensed Consolidated Statements of Operations for the three and nine months ended October 3, 2010 and September 27, 2009	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2010 and September 27, 2009	5
	Notes to Condensed Consolidated Financial Statements	6
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	54
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	(Removed and Reserved)	73
Item 5.	Other Information	73
Item 6.	Exhibits	73
	Signatures	74
	Exhibit Index	75

2

PART I. FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

SANDISK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	October 3,  2010			January 3,  2010
	(In thousands)
ASSETS
Current assets
Cash and cash equivalents	$	865,388		$	1,100,364
Short-term marketable securities		2,038,430			819,002
Accounts receivable from product revenues, net		339,806			234,407
Inventory		526,861			596,493
Deferred taxes		94,204			66,869
Other current assets		63,406			97,639
Total current assets		3,928,095			2,914,774
Long-term marketable securities		2,147,227			1,097,095
Property and equipment, net		248,995			300,997
Notes receivable and investments in the flash ventures with Toshiba		1,619,551			1,507,550
Deferred taxes		76,400			21,210
Intangible assets, net		41,690			58,076
Other non-current assets		54,180			102,017
Total assets	$	8,116,138		$	6,001,719
LIABILITIES
Current liabilities
Accounts payable trade	$	151,677		$	134,427
Accounts payable to related parties		163,907			182,091
Convertible short-term debt		—			75,000
Other current accrued liabilities		332,713			234,079
Deferred income on shipments to distributors and retailers and deferred revenue		253,480			245,513
Total current liabilities		901,777			871,110
Convertible long-term debt		1,687,752			934,722
Non-current liabilities		344,334			287,478
Total liabilities		2,933,863			2,093,310
Commitments and contingencies (see Note 11)
EQUITY
Stockholders’ equity
Preferred stock		—			—
Common stock		235			229
Capital in excess of par value		4,630,278			4,268,845
Retained earnings (accumulated deficit)		327,188			(487,489	)
Accumulated other comprehensive income		227,732			128,713
Total stockholders’ equity		5,185,433			3,910,298
Non-controlling interests		(3,158	)		(1,889	)
Total equity		5,182,275			3,908,409
Total liabilities and equity	$	8,116,138		$	6,001,719

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

3

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended						Nine months ended
	October 3,  2010			September 27, 2009			October 3,  2010			September 27, 2009
	(In thousands, except per share amounts)
Revenues
Product	$	1,137,593		$	813,811		$	3,222,103		$	2,012,342
License and royalty		96,080			121,360			277,301			312,873
Total revenues		1,233,673			935,171			3,499,404			2,325,215
Cost of product revenues		591,296			495,769			1,804,203			1,631,691
Amortization of acquisition-related intangible assets		3,132			3,132			9,396			9,396
Total cost of product revenues		594,428			498,901			1,813,599			1,641,087
Gross profit		639,245			436,270			1,685,805			684,128
Operating expenses
Research and development		111,518			94,925			309,970			273,080
Sales and marketing		50,390			55,750			150,985			144,037
General and administrative		44,524			45,350			118,647			122,311
Amortization of acquisition-related intangible assets		1,089			292			1,672			875
Restructuring and other		—			—			—			765
Total operating expenses		207,521			196,317			581,274			541,068
Operating income		431,724			239,953			1,104,531			143,060
Interest income		13,090			14,012			37,709			47,460
Interest (expense) and other income (expense), net		(16,258	)		(16,550	)		(31,915	)		(63,975	)
Total other income (expense)		(3,168	)		(2,538	)		5,794			(16,515	)
Income before provision for income taxes		428,556			237,415			1,110,325			126,545
Provision for income taxes		106,464			6,122			295,648			50,740
Net income	$	322,092		$	231,293		$	814,677		$	75,805
Net income per share:
Basic	$	1.38		$	1.02		$	3.52		$	0.33
Diluted	$	1.34		$	0.99		$	3.41		$	0.33
Shares used in computing net income per share:
Basic		233,918			227,771			231,631			227,092
Diluted		240,717			232,724			239,249			230,936

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

4

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	October 3, 2010			September 27, 2009
	(In thousands)
Cash flows from operating activities:
Net income	$	814,677		$	75,805
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes		(95,849	)		2,521
Depreciation		102,075			114,595
Amortization		65,349			56,686
Provision for doubtful accounts		(2,804	)		1,675
Share-based compensation expense		52,791			58,058
Excess tax benefit from share-based compensation		(19,960	)		—
Impairments, restructuring and other		(27,587	)		5,701
Other non-operating		25,708			983
Changes in operating assets and liabilities:
Accounts receivable from product revenues		(104,272	)		(159,260	)
Inventory		66,974			(37,151	)
Other assets		1,649			339,275
Accounts payable trade		17,359			(117,625	)
Accounts payable to related parties		(18,184	)		(77,269	)
Other liabilities		214,569			(164,170	)
Total adjustments		277,818			24,019
Net cash provided by operating activities		1,092,495			99,824
Cash flows from investing activities:
Purchases of short and long-term marketable securities		(4,231,953	)		(1,237,877	)
Proceeds from sales of short and long-term marketable securities		1,636,549			857,718
Proceeds from maturities of short and long-term marketable securities		317,805			143,117
Acquisition of property and equipment		(59,728	)		(43,354	)
Distribution from FlashVision Ltd.		122			12,713
Notes receivable issuance, Flash Partners Ltd. and Flash Alliance Ltd.		—			(377,923	)
Notes receivable proceeds, Flash Partners Ltd. and Flash Alliance Ltd.		59,664			330,149
Proceeds from sale of assets		17,767			—
Purchased technology and other assets		(1,982	)		(10,653	)
Net cash used in investing activities		(2,261,756	)		(326,110	)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs		982,500			—
Purchase of convertible bond hedge		(292,900	)		—
Proceeds from issuance of warrants		188,100			—
Repayment of debt financing		(75,000	)		—
Proceeds from employee stock programs		107,971			13,998
Excess tax benefit from share-based compensation		19,960			—
Net cash provided by financing activities		930,631			13,998
Effect of changes in foreign currency exchange rates on cash		3,654			2,710
Net decrease in cash and cash equivalents		(234,976	)		(209,578	)
Cash and cash equivalents at beginning of the period		1,100,364			962,061
Cash and cash equivalents at end of the period	$	865,388		$	752,483

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

5

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Organization and Summary of Significant Accounting Policies

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 October 3, 2010, the Condensed Consolidated Statements of Operations for the three and nine months ended October 3, 2010 and September 27, 2009, and the Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2010 and September 27, 2009.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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 for the fiscal year ended January 3, 2010 and filed with the SEC on February 25, 2010.  Certain prior period amounts have been reclassified to conform to the current period presentation including certain cash flow line items within investing activities.  The results of operations for the three and nine months ended October 3, 2010 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 and generally end on the Sunday closest to March 31, June 30 and September 30, respectively.  The third quarter of fiscal years 2010 and 2009 ended on October 3, 2010 and September 27, 2009, respectively.  Fiscal year 2010 consists of 52 weeks and fiscal year 2009 consisted of 53 weeks, with the fourth quarter of fiscal year 2009 having 14 weeks, ending on January 3, 2010.  For accounting and disclosure purposes, an exchange rate at October 3, 2010 of 83.36 was used to convert Japanese yen to U.S. dollars.

Organization and Nature of Operations.  The Company was incorporated in Delaware on June 1, 1988.  The Company designs, develops and markets flash storage products used in a wide variety of consumer electronics products.  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.

Use of Estimates.  The preparation of Condensed Consolidated Financial Statements in conformity with 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, revenues, 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, bad debts, inventories, investments, long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation and litigat ion.  The Company bases estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances.  These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources.  Actual results could materially differ from these estimates.

Revenue Recognition.  On January 4, 2010, the Company early adopted prospectively new accounting guidance as issued by the Financial Accounting Standards Board (“FASB”) related to revenue recognition of multiple element arrangements and revenue arrangements that include software elements.  Multiple element arrangements and arrangements that include software have been immaterial to the Company’s revenue and operating results through October 3, 2010.  The Company allocates revenue to each element based on their relative selling price in accordance with the Company’s normal pricing and discounting practices for the specific product or maintenance when sold separately for all multiple element products. & #160;In addition, the Company analyzes whether tangible products containing software and non-software components that function together should be excluded from industry-specific software revenue recognition guidance.  In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on the Company’s total net revenues in periods after the initial adoption.

Recent Accounting Pronouncements.  In July 2010, the FASB amended the existing guidance to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses.  In addition, the amendments in this update require an entity to disclose credit quality indicators, past due information, and modifications of its financing receivables.  This amendment affects the Company’s disclosures as of January 2, 2011, and the Company’s disclosures about activity in annual and interim periods beginning on January 3, 2011.  The Company believes that the adoption of this update will not have a significant impact on its disclosur es.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2.   Investments and Fair Value Measurements

The Company measures assets and liabilities at fair value based upon exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the assets or liabilities.  The Company’s financial assets are measured at fair value on a recurring basis.

Fair Value Hierarchy.  The accounting guidance provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  The three levels of the fair value hierarchy are described as follows:

Level 1	Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.
Level 2	Valuations based on quoted prices for similar assets or liabilities, valuations for interest-bearing securities based on non-daily quoted prices in active markets, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3	Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Instruments that are classified within Level 1 of the fair value hierarchy generally include money market funds, U.S. Treasury securities and equity securities.  Level 1 securities represent quoted prices in active markets, and therefore do not require significant management judgment.

Instruments that are classified within Level 2 of the fair value hierarchy primarily include government agency securities, asset-backed securities, mortgage-backed securities, commercial paper, U.S. government-sponsored agency securities, corporate notes and bonds, and municipal obligations.  The Company’s Level 2 securities are primarily valued using quoted market prices for similar instruments and nonbinding market prices that are corroborated by observable market data.  The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from independent pricing vendors, quoted market prices, or other sources to determine the ultimate fair value of our assets and liabilities.  The inputs and fair value are reviewed for reasonableness a nd may be further validated by comparison to publicly available information or compared to multiple independent valuation sources.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Financial assets and liabilities measured at fair value on a recurring basis as of October 3, 2010 were as follows (in thousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	623,042	$	623,042	$	—	$	—
Fixed income securities		4,112,218		94,578		4,017,640		—
Equity securities		77,645		77,645		—		—
Derivative assets		8,382		—		8,382		—
Other		4,465		—		4,465		—
Total financial assets	$	4,825,752	$	795,265	$	4,030,487	$	—
Derivative liabilities	$	59,048	$	—	$	59,048	$	—
Total financial liabilities	$	59,048	$	—	$	59,048	$	—

Financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2010 were as follows (in thousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	869,643	$	869,643	$	—	$	—
Fixed income securities		1,831,360		61,129		1,770,231		—
Equity securities		85,542		85,542		—		—
Derivative assets		4,433		—		4,433		—
Other		3,395		—		3,395		—
Total financial assets	$	2,794,373	$	1,016,314	$	1,778,059	$	—
Derivative liabilities	$	23,247	$	—	$	23,247	$	—
Total financial liabilities	$	23,247	$	—	$	23,247	$	—

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Financial assets and liabilities measured at fair value on a recurring basis as of October 3, 2010, were presented on the Company’s Condensed Consolidated Balance Sheets as follows (in thousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents(1)	$	627,248	$	623,042	$	4,206	$	—
Short-term marketable securities		2,038,430		95,472		1,942,958		—
Long-term marketable securities		2,147,227		76,751		2,070,476		—
Other current assets and other non-current assets		12,847		—		12,847		—
Total assets	$	4,825,752	$	795,265	$	4,030,487	$	—
Other current accrued liabilities	$	25,403	$	—	$	25,403	$	—
Non-current liabilities		33,645		—		33,645		—
Total liabilities	$	59,048	$	—	$	59,048	$	—

__________________

(1) Cash equivalents exclude cash of $238.2 million included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets as of October 3, 2010.

Financial assets and liabilities measured at fair value on a recurring basis as of January3, 2010, were presented on the Company’s Consolidated Balance Sheets as follows (inthousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents(1)	$	871,173	$	869,643	$	1,530	$	—
Short-term marketable securities		819,002		74,906		744,096		—
Long-term marketable securities		1,097,095		71,765		1,025,330		—
Other current assets and other non-current assets		7,103		—		7,103		—
Total assets	$	2,794,373	$	1,016,314	$	1,778,059	$	—
Other current accrued liabilities	$	7,794	$	—	$	7,794	$	—
Non-current liabilities		15,453		—		15,453		—
Total liabilities	$	23,247	$	—	$	23,247	$	—

__________________

(1) Cash equivalents exclude cash of $229.2million included in Cash and cash equivalents on the Consolidated Balance Sheets as of January3, 2010.

As of October 3, 2010, the Company did not elect the fair value option for any financial assets and liabilities for which such an election would have been permitted.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Available-for-Sale Investments.  Available-for-sale investments as of October 3, 2010 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed income securities:
U.S. Treasury and government agency securities	$	99,754	$	82	$	(2	)	$	99,834
U.S. government-sponsored agency securities		44,396		182		—			44,578
Corporate notes and bonds		486,336		5,050		(28	)		491,358
Asset-backed securities		5,681		65		—			5,746
Mortgage-backed securities		6,996		55		—			7,051
Municipal notes and bonds		3,448,875		16,780		(2,004	)		3,463,651
		4,092,038		22,214		(2,034	)		4,112,218
Equity investments		68,847		8,798		—			77,645
Total available-for-sale investments	$	4,160,885	$	31,012	$	(2,034	)	$	4,189,863

Available-for-sale investments as of January 3, 2010 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed income securities:
U.S. Treasury and government agency securities	$	66,984	$	90	$	(6	)	$	67,068
U.S. government-sponsored agency securities		37,211		20		(298	)		36,933
Corporate notes and bonds		251,510		1,103		(664	)		251,949
Asset-backed securities		27,719		175		—			27,894
Mortgage-backed securities		4,986		20		—			5,006
Municipal notes and bonds		1,422,126		20,581		(197	)		1,442,510
		1,810,536		21,989		(1,165	)		1,831,360
Equity investments		70,011		15,531		—			85,542
Total available-for-sale investments	$	1,880,547	$	37,520	$	(1,165	)	$	1,916,902

The fair value and gross unrealized losses on the available-for-sale securities that have been in an 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 October 3, 2010, 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
	Market Value		Gross Unrealized Loss			Market Value		Gross Unrealized Loss
U.S. Treasury and government agency securities	$	21,558	$	(2	)	$	—	$	—
Corporate notes and bonds		21,537		(20	)		4,345		(8	)
Municipal notes and bonds		882,061		(2,004	)		—		—
Total	$	925,156	$	(2,026	)	$	4,345	$	(8	)

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The gross unrealized gains and losses related to publicly-traded equity investments were due to changes in market prices.  The Company has cash flow hedges designated to substantially mitigate risks, both gain and loss, from certain of these equity investments, as discussed in Note 3, “Derivatives and Hedging Activities.”  The gross unrealized loss related to U.S. Treasury and government agency securities and corporate and municipal notes and bonds was primarily due to changes in interest rates.  The gross unrealized loss on all available-for-sale fixed income securities at October 3, 2010 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.

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

	Three months ended						Nine months ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Gross realized gains	$	3,898		$	2,253		$	15,685		$	9,424
Gross realized (losses)		(4	)		(10	)		(305	)		(570	)

Fixed income securities by contractual maturity as of October 3, 2010 are shown below (in thousands).  Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations.

	Cost		Estimated Fair Value
Due in one year or less	$	2,031,028	$	2,035,546
Due after one year through five years		2,061,010		2,076,672
Total	$	4,092,038	$	4,112,218

For certain of the Company’s financial instruments, including accounts receivable, short-term marketable securities and accounts payable, the carrying amounts approximate fair market value due to their short maturities.  For those financial instruments where the carrying amounts differ from fair market value, the following table represents the related costs and the estimated fair values, which are based on quoted market prices (in thousands).

	As of October 3, 2010				As of January 3, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
1% Notes due 2013	$	978,175	$	1,058,000	$	934,722	$	958,813
1.5% Notes due 2017		709,577		932,500		—		—

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.   Derivatives and Hedging Activities

The Company uses derivative instruments primarily to manage exposures to foreign currency and equity security price risks.  The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency and equity security prices.  The program is not designated for trading or speculative purposes.  The Company’s derivatives 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 th is type of credit risk is monitored on an ongoing basis.

The Company recognizes derivative instruments as either assets or liabilities on its balance sheets at fair value and provides qualitative disclosures about objectives and strategies for using derivatives, 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 derivative instruments are recorded as cost of product revenues, other income (expense), or as accumulated other comprehensive income (“OCI”).  The Company does not offset or net the fair value amounts of derivative instruments and separately discloses the fair value amounts of the derivative instruments as either assets or liabilities.

Cash Flow Hedges.  The Company uses a combination of forward contracts and options designated as cash flow hedges to hedge a portion of future forecasted purchases 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 and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is 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 hedge, as well as any amount excluded from t he Company’s hedge effectiveness, is recognized as other income or expense immediately, and was immaterial for the three and nine months ended October 3, 2010 and September 27, 2009.  As of October 3, 2010, the Company had option contracts in place that hedged future purchases of approximately 3.1 billion Japanese yen, or approximately $37 million based upon the exchange rate as of October 3, 2010, and the net unrealized gain on the effective portion of these cash flow hedges was $2.7 million.  The option contracts cover a portion of the Company’s future Japanese yen purchases that are expected to occur during the remainder of fiscal year 2010.

The Company has an outstanding cash flow hedge designated to mitigate equity risk associated with certain available-for-sale investments in equity securities.  The gain or loss on the cash flow hedge is reported as a component of accumulated OCI and will be reclassified into other income (expense) in the same period that the equity securities are sold.  The securities had a fair value of $70.6 million and $71.8 million as of October 3, 2010 and January 3, 2010, respectively.  The cash flow hedge designated to mitigate equity risk of these securities had a fair value of $3.7 million and $0.7 million as of October 3, 2010 and January 3, 2010, respectively.

Other Derivatives.  Other derivatives that are non-designated consist primarily of forward and cross currency swap 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 forward and cross currency swap contracts were marked-to-market at October 3, 2010 with realized and unrealized gains and losses included in other income (expense).  As of October 3, 2010, the Company had foreign currency forward contract hedging exposure in European euro, Japanese yen and British pound.  Foreign currency forward contracts were outstanding to buy and (sell) U.S. dollar equivalent of approximately $299.2 million and ($151.8) million in foreign currencies, respectively, based upon each respective country’s exchange rate at October 3, 2010.

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has cross currency swap transactions with one counterparty to exchange Japanese yen for U.S. dollars that has a combined notional amount of ($397.1) million and which requires the Company to maintain a minimum liquidity of $1.0 billion.  Liquidity is defined as the sum of the Company’s cash and cash equivalents, and short and long-term marketable securities.  The Company was in compliance with this covenant as of October 3, 2010.  Should the Company fail to comply with this covenant, the Company may be required to settle the unrealized gain or loss on the foreign exchange contracts prior to the original maturity.

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.  Fair value of derivative contracts were as follows (in thousands):

	Derivative assets reported in
	Other Current Assets				Other Non-current Assets
	October 3, 2010		January 3, 2010		October 3, 2010		January 3, 2010
Designated cash flow hedges
Foreign exchange contracts	$	2,753	$	—	$	—	$	—
Equity market risk contract		—		—		3,695		725
		2,753		—		3,695		725
Foreign exchange contracts not designated		1,934		3,708		—		—
Total derivatives	$	4,687	$	3,708	$	3,695	$	725

	Derivative liabilities reported in
	Other Current Accrued Liabilities				Non-current Liabilities
	October 3, 2010		January 3, 2010		October 3, 2010		January 3, 2010
Foreign exchange contracts not designated	$	25,403	$	7,794	$	33,645	$	15,453

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Foreign Exchange 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										Nine months ended
	Amount of gain (loss) recognized in OCI						Amount of gain reclassified from OCI to the Statement of Operations				Amount of gain (loss) recognized in OCI					Amount of gain reclassified from OCI to the Statement of Operations
	October 3, 2010			September 27,  2009			October 3, 2010		September 27,  2009		October 3, 2010		September 27,  2009			October 3, 2010		September 27,  2009
Foreign exchange contracts	$	3,098		$	823		$	226	$	25,642	$	14,310	$	(10,759	)	$	8,856	$	49,209
Equity market risk contract		(4,349	)		(14,841	)		—		—		2,970		(28,520	)		—		—

Foreign exchange contracts designated as cash flow hedges relate primarily to wafer purchases.  Gains and losses associated with foreign exchange contracts designated as cash flow hedges are expected to be recorded in cost of product revenues when reclassified out of accumulated OCI.  Gains and losses from the equity market risk contract are expected to be recorded in other income (expense) when reclassified out of accumulated OCI.  The Company expects to realize the accumulated OCI balance related to foreign exchange contracts within the next twelve months and realize the OCI balance related to the equity market risk contract by the end of fiscal year 2011.

The impact of the ineffective portion and amount excluded from effectiveness testing on designated cash flow derivative contracts on the Company’s results of operations recognized in other income (expense) was as follows (in thousands):

	Three months ended				Nine months ended
	October 3, 2010		September 27, 2009		October 3, 2010			September 27, 2009
Foreign exchange contracts	$	21	$	69	$	(40	)	$	(1,046	)

Effect of Non-Designated Derivative Contracts on the Condensed 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						Nine months ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Gain (loss) on foreign exchange contracts including forward point income	$	(18,784	)	$	(18,322	)	$	(33,345	)	$	76,642
Gain (loss) from revaluation of foreign currency exposures hedged by foreign exchange contracts		24,007			17,719			33,965			(72,552	)

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.   Balance Sheet Information

Accounts Receivable from Product Revenues, net.  Accounts receivable from product revenues, net, were as follows (in thousands):

	October 3,  2010			January 3,  2010
Trade accounts receivable	$	571,105		$	534,549
Allowance for doubtful accounts		(8,696	)		(12,348	)
Price protection, promotions and other activities		(222,603	)		(287,794	)
Total accounts receivable from product revenues, net	$	339,806		$	234,407

Inventory.  Inventories were as follows (in thousands):

	October 3,  2010		January 3,  2010
Raw material	$	324,033	$	329,966
Work-in-process		60,520		63,767
Finished goods		142,308		202,760
Total inventory	$	526,861	$	596,493

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

	October 3,  2010		January 3,  2010
Royalty and other receivables	$	5,704	$	53,864
Prepaid expenses		17,386		14,309
Prepaid income taxes and tax-related receivables		35,628		25,758
Other current assets		4,688		3,708
Total other current assets	$	63,406	$	97,639

Notes Receivable and Investments in the Flash Ventures with Toshiba.  Notes receivable and investments in the flash ventures with Toshiba Corporation (“Toshiba”) were as follows (in thousands):

	October 3,  2010		January 3,  2010
Notes receivable, Flash Partners Ltd.	$	563,820	$	562,946
Notes receivable, Flash Alliance Ltd.		577,015		520,225
Investment in Flash Partners Ltd.		229,327		199,106
Investment in Flash Alliance Ltd.		249,389		225,273
Total notes receivable and investments in flash ventures with Toshiba	$	1,619,551	$	1,507,550

See Note 11, “Commitments, Contingencies and Guarantees – Flash Partners and Flash Alliance,” regarding equity method investments and Note 12, “Related Parties and Strategic Investments,” for the Company’s maximum loss exposure related to these variable interest entities.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	October 3,  2010		January 3,  2010
Accrued payroll and related expenses	$	121,620	$	118,648
Accrued restructuring		1,681		2,622
Foreign currency forward contract payables		25,403		7,794
Income taxes payable		91,020		7,136
Other accrued liabilities		92,989		97,879
Total other current accrued liabilities	$	332,713	$	234,079

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

	October 3,  2010		January 3,  2010
Deferred tax liability	$	34,521	$	35,470
Income taxes payable		238,968		206,464
Accrued restructuring		8,079		9,228
Other non-current liabilities		62,766		36,316
Total non-current liabilities	$	344,334	$	287,478

As of October 3, 2010 and January 3, 2010, the total current accrued restructuring liability was primarily comprised of the current portion of the Company’s excess facility lease obligations.  The non-current accrued restructuring balance and activity from the prior year end was primarily related to excess lease obligations and cash lease obligation payments.  The facility lease obligations extend through the end of the lease term in fiscal year 2016.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.   Intangible Assets

Intangible Assets.  Intangible asset balances are presented below (in thousands):

	October 3, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core technology	$	179,300	$	(154,321	)	$	24,979
Developed product technology		12,900		(9,168	)		3,732
Acquisition-related intangible assets		192,200		(163,489	)		28,711
Technology licenses and patents		34,026		(21,047	)		12,979
Total	$	226,226	$	(184,536	)	$	41,690

	January 3, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core technology	$	179,300	$	(144,474	)	$	34,826
Developed product technology		12,900		(7,946	)		4,954
Acquisition-related intangible assets		192,200		(152,420	)		39,780
Technology licenses and patents		34,026		(15,730	)		18,296
Total	$	226,226	$	(168,150	)	$	58,076

The annual expected amortization expense of intangible assets as of October 3, 2010, is presented below (in thousands):

	Estimated Amortization Expenses
	Acquisition-Related Intangible Assets		Technology Licenses and Patents
Fiscal Year:
2010 (remaining three months)	$	3,132	$	1,155
2011		12,529		4,619
2012		12,529		3,971
2013		521		2,670
2014		—		564
Total	$	28,711	$	12,979

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.   Warranties

Liability for warranty expense is included in Other current accrued liabilities and Non-current liabilities in the accompanying Condensed Consolidated Balance Sheets and the activity for the three and nine months ended October 3, 2010 and September 27, 2009 was as follows (in thousands):

	Three months ended						Nine months ended
	October 3, 2010			September 27,  2009			October 3, 2010			September 27, 2009
Balance, beginning of period	$	26,305		$	33,119		$	25,909		$	36,469
Additions		2,973			6,949			25,978			22,737
Usage		(5,075	)		(7,977	)		(27,684	)		(27,115	)
Balance, end of period	$	24,203		$	32,091		$	24,203		$	32,091

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.  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.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.   Financing Arrangements

The following table reflects the carrying value of the Company’s convertible debt as of October 3, 2010 and January 3, 2010 (in millions):

	October 3, 2010			January 3, 2010
1% Notes due 2013	$	1,150.0		$	1,150.0
Less: Unamortized interest discount		(171.8	)		(215.3	)
Net carrying amount of 1% Notes due 2013		978.2			934.7
1.5% Notes due 2017		1,000.0		─
Less: Unamortized interest discount		(290.4	)	─
Net carrying amount of 1.5% Notes due 2017		709.6		─
1% Notes due 2035	─				75.0
Total convertible debt		1,687.8			1,009.7
Less: convertible short-term debt	─				(75.0	)
Convertible long-term debt	$	1,687.8		$	934.7

1% Convertible Senior Notes Due 2013.  In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes due May 15, 2013 (the “1% Notes due 2013”) at par.  The 1% Notes due 2013 may be converted, under certain circumstances, based on an initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share).  The net proceeds to the Company from the sale of the 1% Notes due 2013 were $1.13 billion.

The Company separately accounts for the liability and equity components of the 1% Notes due 2013.  The principal amount of the liability component of $753.5 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 7.4%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature.  The carrying value of the equity component was $241.9 million as of October 3, 2010 and January 3, 2010.  The effective interest rate on the liability component of the 1% Notes due 2013 for each of the three and nine months ended October 3, 2010 and September 27, 2009 was 7.4%.

The following table presents the amount of interest cost recognized for the periods relating to both the contractual interest coupon and amortization of the discount on the liability component of the1% Notes due 2013 (in millions):

	Three months ended				Nine months ended
	October 3, 2010		September 27, 2009		October 3, 2010		September 27, 2009
Contractual interest coupon	$	2.9	$	2.9	$	8.6	$	8.6
Amortization of interest discount		14.7		13.7		43.5		40.4
Total interest cost recognized	$	17.6	$	16.6	$	52.1	$	49.0

The remaining bond discount of $171.8 million as of October 3, 2010 will be amortized over the remaining life of the 1% Notes due 2013, which is approximately 2.6 years.

Concurrent with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire shares of its common stock at an exercise price of $95.03 per share.  As of October 3, 2010, the warrants had an expected life of approximately 2.9 years and expire in August 2013.  At expiration, the Company may, at its option, elect to settle the warrants on a net share basis.  As of October 3, 2010, the warrants had not been exercised and remain outstanding.  In addition, counterparties agreed to sell to the Company up to approximately 14.0 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 1% Notes due 2013 in full, at a price of $82.36 per share.  The convertible bond hedge transaction will be set tled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes due 2013 or the first day none of the 1% Notes due 2013 remains 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% Notes due 2013, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 1% Notes due 2013.  As of October 3, 2010, the Company had not purchased any shares under the convertible bond hedge agreement.

19

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 (the “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 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.  The carrying value of the equity component was $294.0 million as of October 3, 2010.  The effective interest rate on the liability component of the 1.5% Notes due 2017 for each of the three and nine months ended October 3, 2010 was 6.85%.

The following table presents the amount of interest cost recognized for the periods relating to both the contractual interest coupon and amortization of the discount on the liability component of the 1.5% Notes due 2017 (in millions):

	Three months ended		Nine months ended
	October 3, 2010		October 3, 2010
Contractual interest coupon	$	1.5	$	1.5
Amortization of interest discount		3.6		3.6
Total interest cost recognized	$	5.1	$	5.1

The remaining bond discount of $290.4 million as of October 3, 2010 will be amortized over the remaining life of the 1.5% Notes due 2017, which is approximately 6.9 years.

The 1.5% Notes due 2017 may be converted prior to the close of business on the scheduled trading day immediately preceding May 15, 2017, in multiples of $1,000 principal amount at the option of the holder under any of the following circumstances: 1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; 2) during any calendar quarter after the calendar quarter ending September 30, 2010, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last t rading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or 3) upon the occurrence of specified corporate transactions.  On and after May 15, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date of August 15, 2017, holders may convert their notes at any time, regardless of the foregoing circumstances.

20

Upon conversion, a holder will receive the conversion value of the 1.5% Notes due 2017 to be converted equal to the conversion rate multiplied by the volume weighted average price of the Company’s common stock during a specified period following the conversion date.  The conversion value of each 1.5% Notes due 2017 will be paid in: 1) cash equal to the lesser of the principal amount of the note or the conversion value, as defined, and 2) to the extent the conversion value exceeds the principal amount of the note, a combination of common stock and cash.  The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest.  Upon a “fundamental change” at any time, as defined, the Company will in some cases increase the conversion rate for a holder w ho elects to convert its 1.5% Notes due 2017 in connection with such fundamental change.  In addition, the holders may require the Company to repurchase for cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of the notes being repurchased plus accrued and unpaid interest, if any.

The Company pays cash interest at an annual rate of 1.5%, payable semi-annually on February 15 and August 15 of each year, beginning February 15, 2011.  Debt issuance costs were approximately $19.0 million, of which $5.6 million was allocated to capital in excess of par value and $13.4 million was allocated to deferred issuance costs and is amortized to interest expense over the term of the 1.5% Notes due 2017.

Concurrently with the issuance of the 1.5% Notes due 2017, the Company purchased a convertible bond hedge and sold warrants.  The convertible bond hedge transaction is structured to reduce the potential future economic dilution associated with the conversion of the 1.5% Notes due 2017 and, combined with the warrants, to increase the initial conversion price to $73.33 per share.  Each of these components is discussed separately below:

• Convertible Bond Hedge.  Counterparties 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 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 none of the 1.5% Notes due 2017 remains 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.  Should there be an early unwind of the convertible bond hedge transaction, the number of net shares potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of the convertible bond hedge.  The convertible bond hedge transaction cost of $292.9 million has been accounted for as an equity transaction.  The Company initially recorded a tax benefit of approximately $1.7 million in stockholders’ equity from the deferred tax asset related to the convertible bond hedge at inception of the transaction.
• Sold Warrants.  The Company received $188.1 million from the same counterparties from the sale of warrants to purchase up to approximately 19.1 million shares of the Company’s common stock at an exercise price of $73.33 per share.  As of October 3, 2010, the warrants (separated into 40 separate components) had an average expected life of 7.2 years and expire over 40 different dates from November 13, 2017 through January 10, 2018.  At each expiration date, the Company may, at its option, elect to settle the warrants on a net share basis.  As of October 3, 2010, the warrants had not been exercised and remained outstanding.  The value of the warrants has been classified as equity.

1% Convertible Notes Due 2035.  On February 11, 2010, the Company notified the holders of its 1% Convertible Notes due 2035 that it would exercise its option to redeem the $75.0 million principal amount outstanding on March 15, 2010 for a redemption price of $1,000 per $1,000 principal amount of the notes, plus accrued interest.  On March 15, 2010, the Company completed the redemption of the 1% Convertible Notes due 2035 through an all-cash transaction of $75.0 million plus accrued interest of $0.4 million.  As of the date of the completion of the redemption, the Company had no further obligations related to the 1% Convertible Notes due 2035.

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.   Accumulated Other Comprehensive Income

Accumulated other comprehensive income, net of tax, presented in the accompanying Condensed Consolidated Balance Sheets consists of the accumulated unrealized gains and losses on available-for-sale investments, including the Company’s investments in equity securities, as well as currency translation adjustments relating to local currency-denominated subsidiaries and equity investees, and the accumulated unrealized gains and losses related to derivative instruments accounted for under hedge accounting (in thousands).

	October 3,  2010		January 3,  2010
Accumulated net unrealized gain on:
Available-for-sale investments	$	16,758	$	26,920
Foreign currency translation		199,181		98,424
Hedging activities		11,793		3,369
Total accumulated other comprehensive income	$	227,732	$	128,713

Comprehensive income is presented below (in thousands):

	Three months ended						Nine months ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Net income	$	322,092		$	231,293		$	814,677		$	75,805
Non-controlling interest		(199	)		(551	)		(1,269	)		(1,561	)
		321,893			230,742			813,408			74,244
Change in accumulated unrealized gain (loss) on:
Available-for-sale investments		5,431			26,021			(10,162	)		40,733
Foreign currency translation		52,129			48,677			100,757			19,740
Hedging activities		(1,477	)		(39,660	)		8,424			(88,488	)
Comprehensive income	$	377,976		$	265,780		$	912,427		$	46,229

Non-controlling interest is included in Other income (expense) in the Condensed Consolidated Statements of Operations.

The amount of income tax (benefit) expense allocated to accumulated unrealized gain (loss) on available-for-sale investments and hedging activities was ($1.8) million and $6.8 million at October 3, 2010 and January 3, 2010, respectively.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.   Share-Based Compensation

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 right awards, restricted stock awards, 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 plans, all of which are stockholder approved. 0; 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 3 years of continued service.  Restricted stock awards generally vest in equal annual installments over a 2 or 4-year period.  Initial grants under the automatic grant program for non-employee board members vest over a 4-year period and subsequent grants vest over a 1-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.  The fair value of the Company’s stock options granted to employees, officers and non-employee board members and ESPP shares granted to employees for the three and nine months ended October 3, 2010 and September 27, 2009 was estimated using the following weighted average assumptions.

	Three months ended		Nine months ended
	October 3,  2010	September 27, 2009	October 3,  2010	September 27,  2009
Option Plan Shares
Dividend yield	None	None	None	None
Expected volatility	0.54	0.67	0.51	0.87
Risk free interest rate	1.18%	1.58%	1.56%	1.40%
Expected lives	4.3 years	3.4 years	3.8 Years	3.6 years
Estimated annual forfeiture rate	7.32%	9.07%	7.32%	9.07%
Weighted average fair value at grant date	$17.41	$8.30	$12.30	$5.18
Employee Stock Purchase Plan Shares
Dividend yield	None	None	None	None
Expected volatility	0.50	0.59	0.56	0.73
Risk free interest rate	0.19%	0.28%	0.18%	0.35%
Expected lives	½ year	½ year	½ year	½ year
Weighted average fair value for grant period	$12.34	$5.86	$9.95	$4.82

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation Plan Activities

Stock Options and SARs.  A summary of stock option and stock appreciation right (“SARs”) activity under all of the Company’s share-based compensation plans as of October 3, 2010 and changes during the nine months ended October 3, 2010 is presented below (in thousands, except exercise price and contractual term).

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Options and SARs outstanding at January 3, 2010		24,896		$	29.87		4.4	$	180,834
Granted		2,818			30.95
Exercised		(4,469	)		21.44				91,817
Forfeited		(275	)		24.38
Expired		(559	)		49.00
Options and SARs outstanding at October 3, 2010		22,411			31.29		4.1		241,141
Options and SARs vested and expected to vest after October 3, 2010, net of forfeitures		20,815			31.94		2.6		216,528
Options and SARs exercisable at October 3, 2010		15,337			35.09		3.4		134,666

At October 3, 2010, the total compensation cost related to options and SARs granted to employees under the Company’s share-based compensation plans but not yet recognized was approximately $49.7 million, net of estimated forfeitures.  This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.6 years.

Restricted Stock Units.  Restricted stock units (“RSUs”) are converted into 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 the 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 plan during the nine months ended October 3, 2010 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 January 3, 2010		844		$	24.69	$	24,476
Granted		1,068			29.10
Vested		(577	)		24.83		21,750
Forfeited		(39	)		23.43
Non-vested share units at October 3, 2010		1,296			28.30		47,976

As of October 3, 2010, the Company had approximately $25.0 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining life of 2.9 years.

Employee Stock Purchase Plan.  At October 3, 2010, there was approximately $2.0 million of total unrecognized compensation cost related to the Company’s ESPP that is expected to be recognized over a period of approximately 4.4 months.  The Company’s ESPP has an original authorization of 5,000,000 shares to be issued, of which 1,267,651 shares were available to be issued as of October 3, 2010.

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation Expense. The following tables set forth the detail allocation of the Company’s share-based compensation expense and tax benefit recognized for the three and nine months ended October 3, 2010 and September 27, 2009, respectively (in thousands).

	Three months ended						Nine months ended
	October 3,  2010			September 27, 2009			October 3,  2010			September 27, 2009
Share-based compensation expense by caption:
Cost of product revenues	$	1,205		$	2,347		$	4,972		$	7,167
Research and development		6,629			5,971			19,975			22,341
Sales and marketing		2,959			3,917			8,299			11,153
General and administrative		10,151			7,137			19,545			17,397
Total share-based compensation expense		20,944			19,372			52,791			58,058
Total tax benefit recognized		(6,360	)		(5,352	)		(15,108	)		(16,038	)
Decrease in net income	$	14,584		$	14,020		$	37,683		$	42,020
Share-based compensation expense by type of award:
Stock options and SARs	$	15,650		$	14,223		$	36,411		$	44,182
RSUs		3,339			4,061			11,047			11,455
ESPP		1,955			1,088			5,333			2,421
Total share-based compensation expense		20,944			19,372			52,791			58,058
Total tax benefit recognized		(6,360	)		(5,352	)		(15,108	)		(16,038	)
Decrease in net income	$	14,584		$	14,020		$	37,683		$	42,020

Share-based compensation expense of $0.8 million and $2.3 million related to manufacturing personnel was capitalized into inventory as of October 3, 2010 and January 3, 2010, respectively.

Modification of Stock Awards.  The Company expects to recognize $17.3 million of expense related to the modification of stock awards, pursuant to the retirement agreement, of the Company’s Chief Executive Officer.  The Company recognized $6.3 million in the third quarter of fiscal year 2010, and expects to recognize the remaining $11.0 million in the fourth quarter of fiscal year 2010.

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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				Nine months ended
	October 3,  2010		September 27, 2009		October 3,  2010		September 27,  2009
Numerator for basic net income per share:
Net income	$	322,092	$	231,293	$	814,677	$	75,805
Denominator for basic net income per share:
Weighted average common shares outstanding		233,918		227,771		231,631		227,092
Basic net income per share	$	1.38	$	1.02	$	3.52	$	0.33

Numerator for diluted net income per share:
Net income	$	322,092	$	231,293	$	814,677	$	75,805
Interest on the 1% Notes due 2035, net of tax		—		116		156		348
Net income for diluted net income per share	$	322,092	$	231,409	$	814,833	$	76,153
Denominator for diluted net income per share:
Weighted average common shares		233,918		227,771		231,631		227,092
Incremental common shares attributable to exercise of outstanding employee stock options, restricted stock, restricted stock units and warrants (assuming proceeds would be used to purchase common stock)		6,799		2,941		7,095		1,832
Effect of dilutive 1% Notes due 2035		—		2,012		523		2,012
Shares used in computing diluted net income per share		240,717		232,724		239,249		230,936
Diluted net income per share	$	1.34	$	0.99	$	3.41	$	0.33

Anti-dilutive shares excluded from net income per share calculation 74,746 47,391 75,528 48,311

Basic earnings per share exclude any dilutive effects of stock options, SARs, RSUs, warrants and convertible securities.  Certain common stock issuable under stock options, SARs, RSUs, warrants and the convertible notes were omitted from the diluted earnings per share calculation because their inclusion is considered anti-dilutive.

26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11.   Commitments, Contingencies and Guarantees

Flash Partners.  The Company has a 49.9% ownership interest in Flash Partners Ltd. (“Flash Partners”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2004.  In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.  These NAND flash memory products are manufactured by Toshiba at a 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Partners.  Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.  The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting.  The Company is committed to purchase its provided three-month forecast of Flash Partners’ NAND wafer supply, which generally equals 50% of the venture’s 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 Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

As of October 3, 2010, the Company had notes receivable from Flash Partners of $563.8 million, denominated in Japanese yen.  These notes are secured by the equipment purchased by Flash Partners using the note proceeds.  The Company has additional guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.”  At October 3, 2010 and January 3, 2010, the Company had an equity investment in Flash Partners of $229.3 million and $199.1 million, respectively, denominated in Japanese yen, offset by $66.5 million and $43.9 million, respectively, of cumulative translation adjustments recorded in accumulated OCI.  In the nine months ended October 3, 2010, the Company recorded a $7.7 million basis adjustment 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 Alliance.  The Company has a 49.9% ownership interest in Flash Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2006.  In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.  These NAND flash memory products are manufactured by Toshiba at its 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Alliance.  Flash Alliance purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.  The Company accounts for its 49.9% ownership po sition in Flash Alliance under the equity method of accounting.  The Company is committed to purchase its provided three-month forecast of Flash Alliance’s NAND wafer supply, which generally equals 50% of the venture’s 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 Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

As of October 3, 2010, the Company had notes receivable from Flash Alliance of $577.0 million, denominated in Japanese yen.  These notes are secured by the equipment purchased by Flash Alliance using the note proceeds.  The Company has additional guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.”  At October 3, 2010 and January 3, 2010, the Company had an equity investment in Flash Alliance of $249.4 million and $225.3 million, respectively, denominated in Japanese yen, offset by $69.7 million and $45.3 million, respectively, of cumulative translation adjustments recorded in accumulated OCI.  In the nine months ended October 3, 2010, the Company recorded ($0.4) million of basis adjustment 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.

27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FlashVision.  In the first quarter of fiscal year 2010, the wind-down was completed of FlashVision Ltd. (“FlashVision”), a business venture with Toshiba in which the Company owned 49.9%.  The Company recorded a gain of $4.1 million in the first quarter of fiscal year 2010 in Other income (expense) related to the completion of this wind-down.

Flash Partners and Flash Alliance Restructuring.  The Company and Toshiba restructured Flash Partners and Flash Alliance in the first quarter of fiscal year 2009 by selling more than 20% of these ventures’ capacity to Toshiba.  The restructuring resulted in the Company receiving value of 79.3 billion Japanese yen of which 26.1 billion Japanese yen, or $277.1 million, was received in cash, reducing outstanding notes receivable from these ventures, and 53.2 billion Japanese yen reflected the transfer of off-balance sheet equipment lease guarantee obligations from the Company to Toshiba.  The restructuring was completed in a series of closings through March 31, 2009.  The Company received the cash and transferred 53.2  billion Japanese yen of off-balance sheet equipment lease guarantee obligations in the first half of fiscal year 2009.  Transaction costs of $10.9 million related to the sale and transfer of equipment and lease obligations were expensed in the first quarter of fiscal year 2009.

Flash Forward.  In July 2010, the Company and Toshiba entered into an agreement to create a new flash venture (hereinafter referred to as “Flash Forward Ltd.” or “Flash Forward”), of which the Company owns 49.9% and Toshiba owns 50.1%.  Flash Forward will operate in Toshiba’s Fab 5 facility (“Fab 5”) once construction of Fab 5 is completed.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of the parties’ current Flash Partners and Flash Alliance ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fis cal year 2011, with initial NAND production scheduled for the second half of fiscal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  The Company expects that Fab 5 will increase the Company’s 2011 wafer output by less than 10%.  The Company is committed to 50% of the initial ramp within Phase 1 of Fab 5, for which the Company’s portion of equipment investments and startup costs is approximately $500 million, which the Company expects to primarily incur in fiscal year 2011; however, the timing of the investment is dependent upon future decisions including finalization of the Flash Forward capacity plan.  No timelines have been finalized for Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, the Company will also provide a cash prepayment of approximately $60 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, the Company is committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  The Company and Toshiba will each retain some flexibility as to the extent and timing of its respective fab capacity ramps and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.

Research and Development Activities.  The Company participates in common research and development activities with Toshiba but is not committed to any minimum funding level.

Toshiba Foundry.  The Company has the ability to purchase additional capacity under a foundry arrangement with Toshiba.

Business Ventures and Foundry Arrangement with Toshiba.  Purchase orders placed under Flash Partners, Flash Alliance and Flash Forward (hereinafter collectively referred to as “Flash Ventures”) and the foundry arrangement with Toshiba 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.

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

Subcontractors.  In the normal course of business, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them.  The Company’s agreements with these subcontractors require that the Company reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast.  Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors.  These commitments for production materials to subcontractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

28

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Off-Balance Sheet Liabilities

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities in both Japanese yen and U.S. dollar equivalent based upon the exchange rate at October 3, 2010.

Master Lease Agreements by Execution Date	Lease Amounts				Expiration
	(Yen in billions)		(Dollars in thousands)
Flash Partners
December 2004	¥	1.9	$	23,194		2010
December 2005		2.8		33,216		2011
June 2006		4.4		52,378		2011
September 2006		14.0		168,642		2011
March 2007		7.5		89,585		2012
March 2008		3.1		37,830		2013
April 2010		2.5		29,925		2014
		36.2		434,770
Flash Alliance
November 2007		15.8		188,785		2013
June 2008		22.3		267,810		2013
		38.1		456,595
Total guarantee obligations	¥	74.3	$	891,365

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 term of the master lease agreements, in annual installments as of October 3, 2010 in U.S. dollars based upon the exchange rate at October 3, 2010 (in thousands).

Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	259,575	$	202,454	$	462,029
Year 2		135,561		94,925		230,486
Year 3		51,853		139,311		191,164
Year 4		1,337		6,349		7,686
Total guarantee obligations	$	448,326	$	443,039	$	891,365

29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Flash Partners.  Flash Partners sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into six equipment master lease agreements totaling 300.0 billion Japanese yen, or approximately $3.60 billion based upon the exchange rate at October 3, 2010.  On April 26, 2010, Flash Partners refinanced one of the six maturing master leases that matures in stages in fiscal year 2010 totaling 8.65 billion yen, or approximately $104 million based upon the exchange rate at October 3, 2010.  Flash Partners is expected to draw upon this refinanced master lease as each tranc he of the original master lease becomes due in fiscal year 2010.  As of October 3, 2010, Flash Partners had drawn 5.0 billion Japanese yen, or approximately $60 million based upon the exchange rate at October 3, 2010, from the refinanced master lease, and retired an equal amount from the original master lease.

As of October 3, 2010, the total amount outstanding from these master leases was 72.5 billion Japanese yen, or approximately $870 million based upon the exchange rate at October 3, 2010, of which the amount of the Company’s guarantee obligation of the Flash Partners’ master lease agreements, which reflects future payments and any lease adjustments, was 36.2 billion Japanese yen, or approximately $435 million based upon the exchange rate at October 3, 2010.  The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Partners’ obligations under the master lease agreements.  In addition, these master lease agreements are secured by the underlying equipment.  For both the original six master leases and the refinanced master lease, certain lease payme nts are due quarterly and certain lease payments are due semi-annually, and are scheduled to be completed in stages through fiscal year 2014.  At each lease payment date, Flash Partners has the option of purchasing the tools from the lessors.  Flash Partners is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets.  The fair value of the Company’s guarantee obligation of Flash Partners’ master lease agreements was not material at inception of each master lease.

The master lease agreements contain customary covenants for Japanese lease facilities.  In addition to containing customary events of default related to Flash Partners that could result in an acceleration of Flash Partners’ 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 shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of BB- from Standard & Poors (“S&P”) or Moody’s Corporation (“Moody’s”), or a minimum corporate rating of BB+ from Rating & Investment Information, Inc. (“R&I”).  As of October 3, 2010, Flash Part ners was in compliance with all of its master lease covenants.  As of October 3, 2010, the Company’s R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I, and the Company’s S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.  On November 1, 2010, the Company’s R&I credit rating was raised to BBB.  If both S&P and R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash Partners 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 nee d 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 guarantee under such Flash Partners master lease agreements.

30

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Flash Alliance.  Flash Alliance sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into two equipment master lease agreements totaling 200.0 billion Japanese yen, or approximately $2.40 billion based upon the exchange rate at October 3, 2010, of which 76.1 billion Japanese yen, or approximately $913 million based upon the exchange rate at October 3, 2010, was outstanding as of October 3, 2010.  The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Alliance’s obligation under the master lease agreements.  In addition, these master lease agreements are secured by the underlying equipment.   As of October 3, 2010, the amount of the Company’s guarantee obligation of the Flash Alliance’s master lease agreements was 38.1 billion Japanese yen, or approximately $457 million based upon the exchange rate at October 3, 2010.  Remaining master lease payments are due semi-annually and are scheduled to be completed in fiscal year 2013.  At each lease payment date, Flash Alliance has the option of purchasing the tools from the lessors.  Flash Alliance is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets.  The fair value of the Company’s guarantee obligation of Flash Alliance’s master lease agreements was not material at inception of each master lease.

The master lease agreements contain customary covenants for Japanese lease facilities.  In addition to containing customary events of default related to Flash Alliance that could result in an acceleration of Flash Alliance’s 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 shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of BB- from S&P or Moody’s or a minimum corporate rating of BB+ from R&I.  As of October 3, 2010, Flash Alliance was in compliance with all of its master lease covenants.  As of October 3, 2010, the Company’s R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I, and the Company’s S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.  On November 1, 2010, the Company’s R&I credit rating was raised to BBB.  If both S&P and R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash Alliance 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 guarantee under such Flash Alliance master lease agreements.

31

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Guarantees

Indemnification Agreements.  The Company has agreed to indemnify suppliers and customers for alleged patent infringement.  The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees.  The Company may periodically engage in litigation as a result of these indemnification obligations.  The Company’s insurance policies exclude coverage for third-party claims for patent infringement.  Although the liability is not remote, the nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and c ustomers.  Historically, the Company has not made any significant indemnification payments under any such agreements.  As of October 3, 2010, 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, 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 policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.  The Company has no liabilities recorded for these agreements as of October 3, 2010 or January 3, 2010, 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 infringes third party patents.  The Company has not made any indemnification payments under any such agreements and as of October 3, 2010, no amounts have been accrued in the accompan ying Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

32

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contractual Obligations and Off-Balance Sheet Arrangements

The following tables summarize the Company’s contractual cash obligations, commitments and off-balance sheet arrangements at October 3, 2010, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in thousands).

Contractual Obligations.

	Total				1 Year or Less (3 months)		2 - 3 Years (Fiscal 2011 and 2012)		4 –5 Years (Fiscal 2013 and 2014)		More than 5 Years (Beyond Fiscal 2014)
Facility and other operating leases	$	29,897			$	2,475	$	17,486	$	6,666	$	3,270
Flash Partners reimbursement for certain fixed costs including depreciation		1,042,842	(4	)(5)		123,319		655,145		189,508		74,870
Flash Alliance reimbursement for certain fixed costs including depreciation		2,688,026	(4	)(5)		124,642		1,707,134		603,762		252,488
Flash Forward equipment investments and expense reimbursement		584,141	(4	)(6)		12,240		549,901		1,920		20,080
Toshiba research and development		47,259	(4	)		22,757		24,502		―		―
Capital equipment purchase commitments		16,428				16,392		26		10		―
1% Convertible senior notes principal and interest (1)		1,180,130				2,875		23,000		1,154,255		―
1.5% Convertible senior notes principal and interest (2)		1,103,050				3,750		30,000		30,000		1,039,300
Operating expense commitments		40,030				29,598		10,337		95		―
Noncancelable production purchase commitments (3)		255,454	(4	)		255,454		―		―		―
Total contractual cash obligations	$	6,987,257			$	593,502	$	3,017,531	$	1,986,216	$	1,390,008

Off-Balance Sheet Arrangements.

	As of October 3, 2010
Guarantee of Flash Ventures equipment leases (7)	$	891,365

(1) In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Notes due 2013.  The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year until calendar year 2013.

(2) In August 2010, the Company issued and sold $1.00 billion in aggregate principal amount of 1.5% Notes due 2017.  The Company will pay cash interest at an annual rate of 1.5%, payable semi-annually on August 15 and February 15 of each year until calendar year 2017.

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

(4) Includes amounts denominated in Japanese yen, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at October 3, 2010.

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

(6) Includes estimated timing and amounts of investments; however, timing is dependent upon future decisions including finalization of Flash Forward’s capacity plan.

(7) The Company’s guarantee obligation, net of cumulative lease payments, is 74.3 billion Japanese yen, or approximately $891 million based upon the exchange rate at October 3, 2010.

33

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has excluded $239.0 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 October 3, 2010.  The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

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 2010 through fiscal year 2016.  Future minimum lease payments at October 3, 2010 are presented below (in thousands).

Fiscal Year:
2010 (remaining 3 months)	$	2,589
2011		9,060
2012		9,379
2013		5,141
2014		3,291
2015 and thereafter		3,270
		32,730
Sublease income to be received in the future under noncancelable subleases		(2,833	)
Net operating leases	$	29,897

Net rent expense for the three and nine months ended October 3, 2010 and September 27, 2009 was $1.8 million, $5.6 million, $2.3 million and $6.3 million, respectively.

34

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12.   Related Parties and Strategic Investments

Flash Ventures with Toshiba.  The Company owns 49.9% of each of the flash ventures with Toshiba and accounts for its ownership position under the equity method of accounting.  The Company’s obligations with respect to Flash Ventures master lease agreements, take-or-pay supply arrangements and research and development cost sharing are described in Note 11, “Commitments, Contingencies and Guarantees.”  Flash Ventures are variable interest entities.  On January 4, 2010, the Company adopted new accounting guidance, as issued by the FASB, related to the consolidation of variable interest entities.  Under this new guidance, the Company evaluated whether it is the primary beneficiary of any of the Flash Ventures for all periods presented and determined that it is not the primary beneficiary of any of the Flash Ventures because it does not have a controlling financial interest in any entity, and therefore this evaluation does not change the Company’s original conclusions related to the consolidation of Flash Partners and Flash Alliance.

The Company purchased NAND flash memory wafers from Flash Ventures and made loans to Flash Ventures totaling approximately $475.7 million, $1,406.8 million, $360.0 million and $1,424.3 million in the three and nine months ended October 3, 2010 and September 27, 2009, respectively.  The Company received loan repayments from Flash Ventures of $59.7 million in the three and nine months ended October 3, 2010 and $330.1 million in the nine months ended September 27, 2009.  At October 3, 2010 and January 3, 2010, the Company had accounts payable balances due to Flash Ventures of $163.2 million and $182.1 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).

	October 3,  2010		January 3,  2010
Notes receivable	$	1,141	$	1,083
Equity investments		479		424
Operating lease guarantees		891		1,070
Maximum loss exposure	$	2,511	$	2,577

Solid State Storage Solutions LLC.  During the second quarter of fiscal year 2007, the Company formed Solid State Storage Solutions LLC (“S4”), a venture with third parties to license intellectual property.  S4 qualifies as a variable interest entity.  The Company is considered the primary beneficiary of S4 and the Company consolidates S4 in its Condensed Consolidated Financial Statements for all periods presented.  Due to the adoption of new accounting guidance by the FASB related to consolidation of variable interest entities in the first quarter of fiscal year 2010, the Company considered multiple factors in determining it was still 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 October 3, 2010 and January 3, 2010.

Sale of SIM Business Net Assets.In February 2010, the Company sold its SIM business net assets for $17.8 million which resulted in a gain of $13.2 million recorded in other income (expense).  The sale proceeds are included in “Proceeds from sale of assets” in investing activities on the Condensed Consolidated Statements of Cash Flows.  The operating results of the SIM business assets were immaterial for all periods presented.  

35

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13.   Litigation

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

Patent Infringement Litigation Initiated by SanDisk.On October 24, 2007, the Company filed a complaint for patent infringement in the United States District Court for the Western District of Wisconsin against the following defendants:  Phison Electronics Corp. (“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan), Silicon Motion, Inc. (California), and Silicon Motion International, Inc. (collectively, “Silicon Motion”); Synergistic Sales, Inc. (“Synergistic”); USBest Technology, Inc. dba AFA Technologies, Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbank Microelectronics (HK) Co., Ltd., Chipsbank Techno logy (Shenzhen) Co., Ltd., and Chipsbank Microelectronics Co., Ltd., (collectively, “Chipsbank”); Infotech Logistic LLC (“Infotech”); Zotek Electronic Co., Ltd., dba Zodata Technology Ltd. (collectively, “Zotek”); Power Quotient International Co., Ltd., and PQI Corp., (collectively, “PQI”); PNY Technologies, Inc. (“PNY”); Kingston Technology Co., Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc. (collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo Technology (USA), Inc. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”); Transcend Information, Inc. (Taiwan), Transcend Information ,Inc. (California), and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively, “Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals, LLC (col lectively, “Add-On Computer Peripherals”); Add-On Technology Co., A-Data Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively, “A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively, “Apacer”); Acer, Inc. (“Acer”), Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. (collectively, “Behavior”); Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and Dane-Elec Corp. USA, (collectively, “Dane-Elec”) EDGE Tech Corp. (“EDGE”); Interactive Media Corp, (“Interactive”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively, “LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co. (“Welldone”).  In this action, Case No. 07-C-0607-C (“the ’607 Action”), the Company initially asserted that the defendants infringed U.S. Patent No. 5,719,808 (the “’808 pat ent”), U.S. Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893 (the “’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and U.S. Patent No. 7,137,011 (the “’011 patent”).  The Company has since entered into a stipulation dismissing the ’332 patent.  The Company concurrently filed a second complaint for patent infringement in the same court against the following defendants:  Phison, Silicon Motion, Synergistic, USBest, Skymedi, Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation, A-DATA, Apacer, Behavior and Dane-Elec.  In this action, Case No. 07-C-0605-C (“the ’605 Action”), the Company asserted that the defendants infringed U.S. Patent No. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842 patent”).  The Company seeks damages and injunctive relief in b oth actions.  In light of settlement agreements, the Company dismissed its claims against Phison, Silicon Motion, Skymedi, Verbatim, Corsair, Add-On Computer Peripherals, EDGE, Infotech, Interactive, PNY, TSR and Welldone.  The Company’s claims against Chipsbank, Acer, Behavior, Dane-Elec, LG, PQI, USBest, Transcend, A-DATA, Apacer, Buffalo and Synergistic have been dismissed without prejudice.  The Court consolidated the ’605 and ’607 Actions and stayed these actions during the pendency of related proceedings before the U.S. International Trade Commission, which are now closed.  After lifting the stay, the Court set the trial to begin on February 28, 2011.  The two remaining defendants (Kingston and Imation) have answered the Company’s complaints by denying infringement and raising several affirmative defenses and related counterclaims.   These defenses and related counterclaims include, among others, lack of standing, unclean hands, non-infringement, invalidity, unenforceability for alleged patent misuse, express license, implied license, patent exhaustion, waiver, laches, and estoppel.  On September 22, 2010, the Court issued a Markman Order construing certain terms from the remaining patents.  In light of the Court’s Markman Order, the Company withdrew its allegations regarding the ’808 and ’893 patents.  On September 29, 2010, the defendants filed motions for summary judgment on several grounds, including non-infringement as to each remaining patent and for limitations on damages.  The Company opposed each of these motions for summary judgment and has filed its own motions for summary judgment of infringement for certain claims and regarding certain defenses raised by the defendants.  The defendants have opposed the Company’s motions for summary judgment.

Federal Civil Antitrust Class Actions.Between August 31, 2007 and December 14, 2007, the Company (along with a number of other manufacturers of flash memory products) was sued in the Northern District of California, in eight purported class action complaints.  On February 7, 2008, all of the civil complaints were consolidated into two complaints, one on behalf of direct purchasers and one on behalf of indirect purchasers, in the Northern District of California in a purported class action captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086.  Plaintiffs alleged the Company and a number of other manufacturers of flash memory and flash memory products c onspired to fix, raise, maintain, and stabilize the price of NAND flash memory in violation of state and federal laws and sought an injunction, damages, restitution, fees, costs, and disgorgement of profits.  The direct purchaser lawsuit was recently dismissed with prejudice.  On April 15, 2010, the Court denied the indirect purchaser plaintiffs’ class certification motion, and denied plaintiffs’ motion for leave to amend the Consolidated Amended Complaint to substitute certain class representatives, and dismissed the claims on behalf of South Dakota purchasers with prejudice.  Indirect purchaser plaintiffs have moved for leave to file a motion for reconsideration of that decision.

36

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Patent Infringement Litigation Initiated by SanDisk. On May 4, 2010, the Company filed a complaint for patent infringement in the United States District Court for the Western District of Wisconsin against Kingston and Imation.  In this action, Case No. 3:10-cv-00243, the Company asserts U.S. Patent No. 7,397,713; U.S. Patent No. 7,492,660; U.S. Patent No. 7,657,702; U.S. Patent No. 7,532,511; U.S. Patent No. 7,646,666; U.S. Patent No. 7,646,667; and U.S. Patent No. 6,968,421.  The Company seeks damages and injunctive relief.   The defendants answered the complaint denying infringement and raising several affirmative defenses and related counterclaims.   ;These defenses and related counterclaims include, among others, non-infringement, invalidity, implied license, express license, unenforceability for alleged patent misuse, lack of standing, and bad faith litigation.  Kingston also asserted antitrust counterclaims against the Company alleging monopolization, attempted monopolization, and agreement in restraint of trade, all under the Sherman Act.  Kingston also asserted state law unfair competition counterclaims.  On July 30, 2010, the Company answered Imation’s counterclaims and filed a motion to dismiss Kingston’s antitrust and unfair competition counterclaims.  On August 3, 2010, the Court issued a scheduling order setting the claim construction hearing for January 14, 2011, requiring that dispositive motions be filed by May 9, 2011 and that a trial commence on November 7, 2011.  The Court has consolidated discovery in this action with the Patent Infringement Litigation initiated by the Company on October 24, 2007 (as described above).

Ritz Camera Federal Antitrust Class Action.  On June 25, 2010, Ritz Camera & Image, LLC (“Ritz”) filed a complaint in the United States District Court for the Northern District of California, alleging that the Company violated federal antitrust law by conspiring to monopolize and monopolizing the market for flash memory products.  The lawsuit, Ritz Camera & Image, LLC v. SanDisk Corporation and Eliyahou Harari, Case No. 5:10-cv-02787-HRL, purports to be on behalf of 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 ma intained a monopoly by fraudulently obtaining patents and using them to restrain competition and by allegedly converting other patents for its competitive use.  On October 1, 2010, the Company filed a motion to dismiss Ritz's claims.  A court hearing on the motion is scheduled for December 17, 2010.

Samsung Federal Antitrust Action Against Panasonic and SD-3C.  On July 15, 2010, Samsung Electronics Co., Ltd. (“Samsung”) filed an action in the United States District Court for the Northern District of California, Case No. CV 10 3098 (ND Cal.), 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.  Such claims are based on, inter alia, alleged conduct related to the licensing practices and operations of SD-3C.  The complaint further seeks a declaration that Panaso nic 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 Corporation, and the complaint includes various factual allegations concerning the Company.  Defendants filed a motion to dismiss on September 24, 2010, and thereafter plaintiff filed an amended complaint on October 14, 2010.

Washington Research Foundation Patent Infringement Litigation.  On June 25, 2010, Washington Research Foundation (“WRF”) filed an action in the United States District Court for the Western District of Washington against Silicon Laboratories Inc. (“SiLabs”) alleging infringement of various patents exclusively licensed to WRF relating to Low Intermediate Frequency radio frequency receiver technology by certain SiLabs chipsets.  An amended complaint was thereafter filed on July 23, 2010, adding as defendants the Company, Apple Inc. (“Apple”), Garmin Ltd. and Garmin International, Inc. (collectively “Garmin”), iriver Ltd. and iriver Inc. (collectively “iriver”), Avnet, Inc. (“A vnet”), and Pantech Co., Ltd., Pantech & Curitel Communications, Inc. and Pantech Wireless, Inc. (collectively “Pantech”), Case No. 2:10-cv-1050 JLR.  In the amended complaint, WRF alleges that the Company has used infringing SiLabs chipsets in certain of the Company’s portable media players.  SiLabs subsequently obtained a license to the technology and the litigation was dismissed.

Patent Infringement Litigation Initiated by SanDisk.  On August 17, 2010, in response to infringement allegations by Shea Integration Solutions Corp. (“Shea”), the Company filed a lawsuit against Shea in the United States District Court for Northern California.  The complaint seeks a declaration that the Company does not infringe United States Patent No. 7,069,447 (the “’447 patent”) allegedly owned by Shea, declarations of invalidity and unenforceability of the ’447 patent, and it includes state law counterclaims seeking damages for unfair competition and business interference based on the infringement allegations made by Shea to certain of the Company’s customers.  Shea’s filed a n answer to the complaint on October 7, 2010, denying the Company’s material allegations and asserting a counterclaim for patent infringement.  The Company filed an answer to Shea’s counterclaims on November 1, 2010, denying Shea’s material allegations.

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 adversely affected 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 the global leader in flash memory cards.  Our mission is to provide simple, reliable and affordable storage for use in portable devices.  We sell our products globally through broad retail and original equipment manufacturer, or OEM, distribution channels.

We design, develop and manufacture data storage products and solutions in a variety of form factors using our flash memory, proprietary controller and firmware technologies.  We purchase the vast majority of our NAND flash memory supply requirements through our significant flash venture relationships with Toshiba which provide us with leading-edge, low-cost memory wafers.  Our removable flash memory products, including cards and universal serial bus, or USB, drives, are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and computers.  Our embedded flash memory products are used in mobile phones, navigation devices, gaming systems, imaging devices and computing devices.  For computing platforms, we provide high-speed, high-capacity storage so lutions known as solid-state drives, or SSDs, that can be used in lieu of hard disk drives in a variety of computing devices.

Our strategy is to be an industry-leading supplier of flash storage solutions and to develop large scale markets for flash-based storage products.  We maintain our technology leadership by investing in advanced technologies and flash memory fabrication capacity in order to produce leading-edge, low-cost flash memory for use in a variety of end-products.  We are a one-stop-shop for our retail and OEM customers, selling all major flash storage card formats for our target markets in high volumes.

Our results are primarily driven by worldwide demand for flash storage devices, which in turn primarily depends on end-user demand for consumer electronic products.  We believe the market for flash storage is generally price elastic.  Accordingly, we expect that as we reduce the price of our flash devices, consumers will demand an increasing number of gigabytes and/or units of memory and that over time, new markets will emerge.  In order to profitably capitalize on this price elasticity, we must reduce our cost per gigabyte at a rate similar to the change in selling price per gigabyte, while at the same time, increasing the average capacity and/or the number of units of our products enough to offset price declines.  We continually seek to achieve these cost reductions through technology improvement s, primarily by increasing the amount of memory stored in a given area of silicon.

Our industry is characterized by rapid technology transitions.  Since our inception, we have been able to scale NAND technology through fourteen generations over approximately twenty years.  However, the pace at which NAND technology is transitioning to new generations is expected to slow due to inherent physical technology limitations.  We currently expect to be able to continue to scale our NAND technology through a few additional generations, but beyond that there is no certainty that further technology scaling can be achieved cost effectively with the current NAND flash technology and architecture.  We also continue to invest in future alternative technologies, particularly our 3D Read/Write technology, which we believe may be a viable alternative to NAND when NAND can no longer scale at a sufficient rate, or at all.  However, even when NAND flash can no longer be further scaled, we expect NAND and potential alternative technologies to coexist for an extended period of time.

In March 2010, we completed the redemption of the 1% Convertible Notes due 2035 through an all-cash transaction of $75 million plus accrued interest of $0.4 million.

38

In July 2010, we and Toshiba entered into an agreement to create a new flash venture, hereinafter referred to as Flash Forward Ltd., or Flash Forward, of which we own 49.9% and Toshiba owns 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners Ltd., or Flash Partners, and Flash Alliance Ltd., or Flash Alliance, ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial NAND production scheduled for the second half of fiscal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  We expect that Fab 5 will increase our 2011 wafer output by less than 10%.  We are committed to 50% of the initial ramp within Phase 1 of Fab 5, for which our portion of equipment investments and startup costs is approximately $500 million, which we expect to primarily incur in fiscal year 2011; however, the timing of the investment is dependent upon future decisions including finalization of the Flash Forward capacity plan.  No timelines have been finalized for Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, we will also provide a cash prepayment of approximately $60 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, we are committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  We and Toshiba will each retain some flexibility as to the extent and timing of e ach party’s respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.  Flash Partners, Flash Alliance and Flash Forward hereinafter are collectively referred to as “Flash Ventures.”

In July 2010, we announced that Dr. Eli Harari, our Founder, Chairman and Chief Executive Officer, will retire from his current positions on December 31, 2010.  Dr. Harari will provide consulting services, particularly technology related, to us for a period of two years starting January 1, 2011.  Our Board of Directors appointed Sanjay Mehrotra, currently our President and Chief Operating Officer, to be our President and Chief Executive Officer effective January 1, 2011.  In addition, the Board also appointed Mr. Mehrotra to serve as a director of the Company effective July 21, 2010.  The Board also announced that Michael Marks, a member of our Board since 2003, will assume the role of Chairman effective January 1, 2011.  

In August 2010, we issued and sold $1.0 billion in aggregate principal amount of 1.5% Convertible Senior Notes due August 15, 2017, or the “1.5% Notes due 2017.”  The 1.5% Notes due 2017 were issued at par and pay interest at a rate of 1.5% per annum.  The 1.5% Notes due 2017 may be converted into our common stock, under certain circumstances, 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 conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest.  The net proceeds to us from the offering of the 1% Notes were $981.0 million.  Concurrently with the issuance of the 1.5% Notes due 2017, we purchased a convertible bond hedge for ($292.9) million and sold warrants for $188.1 million.  The separate convertible bond hedge and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the 1.5% Notes due 2017.  We currently intend to use the net proceeds of the offering for general corporate purposes, including the repayment at maturity or repurchase, from time to time, of a portion of our outstanding 1% Convertible Senior Notes due 2013, which mature on May 15, 2013, capital expenditures for new and existing manufacturing facilities, development of new technologies, general working capital, and other non-manufacturing capital expenditures.  The net proceeds may also be used to fund strategic investments or acquisitions of products, technologies or complementary businesses or to obtain the right or license to use additional technologies.

39

Results of Operations.

	Three months ended												Nine months ended
	October 3, 2010			% of Revenues			September 27, 2009			% of Revenues			October 3, 2010		% of Revenues			September 27, 2009			% of Revenues
	(In millions, except percentages)
Product revenues	$	1,137.6			92.2	%	$	813.8			87.0	%	$	3,222.1		92.1	%	$	2,012.3			86.5	%
License and royalty revenues		96.1			7.8	%		121.4			13.0	%		277.3		7.9	%		312.9			13.5	%
Total revenues		1,233.7			100.0	%		935.2			100.0	%		3,499.4		100.0	%		2,325.2			100.0	%
Cost of product revenues		591.3			47.9	%		495.8			53.0	%		1,804.2		51.6	%		1,631.7			70.2	%
Amortization of acquisition-related intangible assets		3.2			0.3	%		3.1			0.3	%		9.4		0.2	%		9.4			0.4	%
Total cost of product revenues		594.5			48.2	%		498.9			53.3	%		1,813.6		51.8	%		1,641.1			70.6	%
Gross profit		639.2			51.8	%		436.3			46.7	%		1,685.8		48.2	%		684.1			29.4	%
Operating expenses
Research and development		111.5			9.0	%		94.9			10.2	%		310.0		8.9	%		273.0			11.7	%
Sales and marketing		50.4			4.1	%		55.8			6.0	%		151.0		4.3	%		144.0			6.2	%
General and administrative		44.5			3.6	%		45.3			4.8	%		118.6		3.4	%		122.3			5.3	%
Amortization of acquisition-related intangible assets		1.1			0.1	%		0.3		─				1.7	─				0.9		─
Restructuring and other	─			─			─			─			─		─				0.8		─
Total operating expenses		207.5			16.8	%		196.3			21.0	%		581.3		16.6	%		541.0			23.2	%
Operating income		431.7			35.0	%		240.0			25.7	%		1,104.5		31.6	%		143.1			6.2	%
Other income (expense)		(3.1	)		(0.3	%)		(2.6	)		(0.3	%)		5.8		0.1	%		(16.6	)		(0.7	%)
Income before provision for income taxes		428.6			34.7	%		237.4			25.4	%		1,110.3		31.7	%		126.5			5.5	%
Provision for income taxes		106.5			8.6	%		6.1			0.7	%		295.6		8.5	%		50.7			2.2	%
Net income	$	322.1			26.1	%	$	231.3			24.7	%	$	814.7		23.3	%	$	75.8			3.3	%

Product Revenues.

	Three months ended							Nine months ended
	October 3, 2010		September 27, 2009		Percent Change			October 3, 2010		September 27, 2009		Percent Change
	(In millions, except percentages)
Retail	$	429.9	$	357.6		20.2	%	$	1,182.0	$	1,062.0		11.3	%
OEM		707.7		456.2		55.1	%		2,040.1		950.3		114.7	%
Product revenues	$	1,137.6	$	813.8		39.8	%	$	3,222.1	$	2,012.3		60.1	%

The increase in our product revenues for the three months ended October 3, 2010 compared to the three months ended September 27, 2009 reflected growth in total gigabytes sold of 71% and decline in average selling price per gigabyte of 20%.  OEM revenues in the three months ended October 3, 2010 increased compared to the three months ended September 27, 2009 due primarily to increased sales of removable and embedded products for the mobile market.  Retail product revenues in the three months ended October 3, 2010 increased compared to the three months ended September 27, 2009, reflecting higher demand in all major regions, primarily for imaging and USB products.

The increase in our product revenues for the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 reflected growth in total gigabytes sold of 84% and decline in average selling price per gigabyte of 14%.  OEM revenues increased in the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 due to increased sales of cards, embedded solutions, non-branded products, wafers and components, primarily to the mobile market and to new channels that we added in the second half of fiscal year 2009.  The increase in retail product revenues for the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 was driven primarily by growth in Asia-Pacific and increased demand for imaging and USB products.
 

Our ten largest customers represented approximately 50% and 46% of our total revenues in the three and nine months ended October 3, 2010, respectively, compared to 46% and 43% in the three and nine months ended September 27, 2009, respectively.  In the three months ended October 3, 2010 and the three and nine months ended September 27, 2009, revenues from one customer accounted for 11% of our total revenues.  Other than this customer in the periods stated above, no other customer exceeded 10% of our total revenues during the three and nine months ended October 3, 2010 and September 27, 2009.

40

Geographical Product Revenues.

	Three months ended													Nine months ended
	October 3, 2010		% of Product Revenues			September 27, 2009		% of Product Revenues			Percent Change			October 3, 2010		% of Product Revenues			September 27, 2009		% of Product Revenues			Percent Change
	(In millions, except percentages)
United States	$	195.9		17.2	%	$	211.8		26.0	%		(7.5	%)	$	531.9		16.5	%	$	654.0		32.5	%		(18.7	%)
Europe, Middle East and Africa		191.0		16.8	%		161.1		19.8	%		18.6	%		527.4		16.4	%		464.1		23.1	%		13.6	%
Asia-Pacific		699.1		61.5	%		413.3		50.8	%		69.2	%		2,054.0		63.7	%		845.1		42.0	%		143.0	%
Other foreign countries		51.6		4.5	%		27.6		3.4	%		87.0	%		108.8		3.4	%		49.1		2.4	%		121.6	%
Product revenues	$	1,137.6		100.0	%	$	813.8		100.0	%		39.8	%	$	3,222.1		100.0	%	$	2,012.3		100.0	%		60.1	%

Product revenues in Asia-Pacific, which includes Japan, increased for the three and nine months ended October 3, 2010 as compared to the three and nine months ended September 27, 2009, due primarily to mobile and imaging products in both our OEM and retail channels.  The decrease in product revenues for the United States in the three and nine months ended October 3, 2010 compared to the three and nine months ended September 27, 2009 primarily reflected a shift in the shipment location of OEM products from the U.S. to Asia-Pacific.  The increase in product revenues for Europe, Middle East and Africa in the three months ended October 3, 2010 compared to the three months ended September 27, 2009 was primarily a result of increased retail sales primarily for the imaging market.  0;The increase in product revenues for Europe, Middle East and Africa in the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 was primarily a result of increased OEM sales primarily for the mobile market.

License and Royalty Revenues.

	Three months ended							Nine months ended
	October 3, 2010		September 27, 2009		Percent Change			October 3, 2010		September 27, 2009		Percent Change
	(In millions, except percentages)
License and royalty revenues	$	96.1	$	121.4		(20.8	%)	$	277.3	$	312.9		(11.4	%)

The decrease in our license and royalty revenues for the three and nine months ended October 3, 2010 compared to the three and nine months ended September 27, 2009 was primarily due to a lower effective royalty rate in a renewed license agreement with one of our significant licensees.

Gross Profit and Margin.

	Three months ended									Nine months ended
	October 3, 2010			September 27, 2009			Percent Change			October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
Product gross profit	$	543.2		$	314.9			72.5	%	$	1,408.5		$	371.3			279.3	%
Product gross margin (as a percent of product revenues)		47.7	%		38.7	%					43.7	%		18.4	%
Total gross margin (as a percent of total revenues)		51.8	%		46.7	%					48.2	%		29.4	%

Product gross profit and product gross margin for the three and nine months ended October 3, 2010 was substantially higher than the three and nine months ended September 27, 2009 due to cost reductions exceeding average selling price reductions.  The decrease in product cost is primarily due to wafer production transitioning from 43-nanometer to 32-nanometer technology, increased usage of 3-bits per cell, or X3, memory, and production at Flash Partners and Flash Alliance running at full utilization in fiscal year 2010 compared to less than full utilization in the first half of fiscal year 2009.

41

Research and Development.

	Three months ended									Nine months ended
	October 3, 2010			September 27, 2009			Percent Change			October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
Research and development	$	111.5		$	94.9			17.5	%	$	310.0		$	273.0			13.6	%
Percent of revenue		9.0	%		10.2	%					8.9	%		11.7	%

The increase in our research and development expense for the three months ended October 3, 2010 compared to the three months ended September 27, 2009 was due primarily to higher third-party engineering costs of $8.3 million and employee-related costs of $8.1 million related to increased headcount and compensation expense.

The increase in our research and development expense for the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 was due primarily to higher employee-related costs of $23.1 million related to increased headcount and compensation expense, and higher third-party engineering costs of $13.1 million.

Sales and Marketing.

	Three months ended									Nine months ended
	October 3, 2010			September 27, 2009			Percent Change			October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
Sales and marketing	$	50.4		$	55.8			(9.7	%)	$	151.0		$	144.0			4.9	%
Percent of revenue		4.1	%		6.0	%					4.3	%		6.2	%

The decrease in our sales and marketing expense for the three months ended October 3, 2010 compared to the three months ended September 27, 2009 was primarily due to lower branding and merchandising costs of ($6.5) million, partially offset by higher employee-related costs of $0.9 million.  The increase in our sales and marketing expense for the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 was primarily due to increased branding and merchandising costs of $3.6 million and employee-related costs of $4.9 million, partially offset by lower outside service costs of ($2.7) million.

General and Administrative.

	Three months ended									Nine months ended
	October 3, 2010			September 27, 2009			Percent Change			October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
General and administrative	$	44.5		$	45.3			(1.8	%)	$	118.6		$	122.3			(3.0	%)
Percent of revenue		3.6	%		4.8	%					3.4	%		5.3	%

The decline in our general and administrative expense for the three months ended October 3, 2010 compared to the three months ended September 27, 2009 primarily reflects lower legal costs of ($6.9) million and bad debt expense of ($2.7) million, offset by higher employee-related costs of $9.4 million, which included a non-cash charge of $6.3 million related to the modification of stock awards and a cash charge of $1.5 million related to certain provisions and benefits pursuant to the retirement agreement of our Chief Executive Officer, or CEO.  The decline in our general and administrative expense for the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 primarily reflects lower legal and outside service costs of ($15.3) million and bad debt expense of ($4.5) million, partially offset by higher employee-related costs of $14.8 million, which included a non-cash charge of $6.3 million related to the modification of stock awards and a cash charge of $1.5 million related to certain provisions and benefits pursuant to the retirement agreement of our CEO.

In the fourth quarter of fiscal year 2010, we expect to recognize an additional $11.0 million of non-cash charge related to the modification of stock awards and an additional $2.3 million of cash charge related to certain provisions and benefits pursuant to the retirement agreement of our CEO.

42

Amortization of Acquisition-Related Intangible Assets.

	Three months ended								Nine months ended
	October 3, 2010			September 27, 2009		Percent Change			October 3, 2010		September 27, 2009		Percent Change
	(In millions, except percentages)
Amortization of acquisition-related intangible assets	$	1.1		$	0.3		266.7	%	$	1.7	$	0.9		88.9	%
Percent of revenue		0.1	%	─					─		─

The increase in amortization of acquisition-related intangible assets for the three and nine months ended October 3, 2010 compared to the three and nine months ended September 27, 2009 was primarily due to the acceleration of amortization expense in the third quarter of fiscal year 2010 relating to the remaining intangible asset acquired from MusicGremlin, Inc.  Amortization of acquisition-related intangible assets related to the intangible assets acquired from Matrix Semiconductor, Inc. will continue to be amortized through fiscal year 2014.

Restructuring and Other.

Three months ended

Nine months ended

October 3, 2010

September 27, 2009

Percent Change

October 3, 2010

September 27, 2009

Percent Change

(In millions, except percentages)

Restructuring and others

$

─

$

─

─

$

─

$

0.8

(100.0

%)

Percent of revenue

─

─

─

─

For the three and nine months ended October 3, 2010, we recorded no charge related to employee severance costs under our restructuring plans compared to zero and $0.8 million recorded for employee severance costs for the same periods in fiscal year 2009.

Other Income (Expense).

	Three months ended									Nine months ended
	October 3, 2010			September 27, 2009			Percent Change			October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
Interest income	$	13.1		$	14.0			(6.4	%)	$	37.7		$	47.4			(20.5	%)
Interest expense		(23.8	)		(17.6	)		35.2	%		(59.9	)		(51.8	)		15.6	%
Income (loss) from equity investments		(0.1	)		(2.1	)		95.2	%		(0.4	)	─				(100.0	%)
Other income (expense), net		7.7			3.1			148.4	%		28.4			(12.2	)		332.8	%
Total other income (expense), net	$	(3.1	)	$	(2.6	)		(19.2	%)	$	5.8		$	(16.6	)		134.9	%

The decrease in “Total other income (expense), net” for the three months ended October 3, 2010 compared to the three months ended September 27, 2009 was primarily due to increased interest expense related to the issuance of the 1.5% Notes due 2017 in August 2010 and lower interest income due to lower interest rates, offset by gains from our non-designated foreign exchange contracts.  The increase in “Total other income (expense), net” for the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 was primarily due to non-recurring gains on the sale of assets and investments in the first quarter of fiscal year 2010 reflected in “Other income (expense), net,” offset by a decrease in interest income due to lower interest rates.   In the first quarter of fiscal year 2010, we sold our SIM business net assets which resulted in a gain of $13.2 million recorded in “Other income (expense).”  “Other income (expense), net” was negative for the nine months ended September 27, 2009 due to bank charges and fees of ($10.9) million related to the restructuring of the Flash Partners and Flash Alliance master equipment leases and impairment of our equity investment in FlashVision Ltd. of ($7.9) million.

43

Provision for Income Taxes.

	Three months ended									Nine months ended
	October 3, 2010			September 27, 2009			Percent Change			October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
Provision for income taxes	$	106.5		$	6.1			1645.9	%	$	295.6		$	50.7			483.0	%
Effective tax rate		24.8	%		2.6	%					26.6	%		40.1	%

The provision for income taxes for the three and nine months ended October 3, 2010 increased from the three and nine months ended September 27, 2009 primarily due to increased federal taxes based upon higher U.S. income.  The tax provision for the three and nine months ended October 3, 2010 includes U.S. taxes net of changes in the valuation allowance of the U.S. deferred tax assets.  Due to our valuation allowance for U.S. deferred tax assets, the tax provision for the three and nine months ended September 27, 2009 primarily reflects taxes on our income generated in foreign jurisdictions, and withholding taxes on license and royalty income from certain foreign licensees.  As of October 3, 2010, due to recent net cumulative losses, a valuation allowance remains on certain U .S. deferred tax assets that are not more-likely-than-not to be realized.  We evaluate our deferred tax asset valuation allowance position on a regular basis.  As a result, management believes a reversal of a substantial portion of the Company's valuation allowance is possible in the fourth quarter of fiscal year 2010.

Unrecognized tax benefits increased $8.7 million and $22.1 million during the three and nine months ended October 3, 2010.  Unrecognized tax benefits were $201.9 million and $179.8 million as of October 3, 2010 and January 3, 2010, respectively.  Unrecognized tax benefits that would impact the effective tax rate in the future are approximately $111.8 million at October 3, 2010.  Income tax expense in the three and nine months ended October 3, 2010 included interest and penalties of $2.1 million and $5.8 million, respectively.

In October 2009, the Internal Revenue Service commenced an examination of our federal income tax returns for fiscal years 2005 through 2008.  We do not expect a resolution to be reached during the next twelve months.  In addition, we are currently under audit by various state and international tax authorities and cannot reasonably estimate that the outcome of these examinations will not have a material effect on our financial position, results of operations or liquidity.

44

Non-GAAP Financial Measures

Reconciliation of Net Income.

	Three months ended						Nine months ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
	(In thousands except per share amounts)
Net income	$	322,092		$	231,293		$	814,677		$	75,805
Share-based compensation		20,944			19,374			52,791			58,058
Amortization of acquisition-related intangible assets		4,221			3,424			11,068			10,271
Convertible debt interest		17,983			13,410			46,112			39,495
Income tax adjustments		(54,387	)		(91,990	)		(130,953	)		(33,633	)
Non-GAAP net income	$	310,853		$	175,511		$	793,695		$	149,996
Diluted net income per share:	$	1.34		$	0.99		$	3.41		$	0.33
Share-based compensation		0.09			0.08			0.22			0.25
Amortization of acquisition-related intangible assets		0.02			0.01			0.05			0.04
Convertible debt interest		0.07			0.06			0.20			0.17
Income tax adjustments		(0.22	)		(0.39	)		(0.55	)		(0.14	)
Non-GAAP diluted net income per share:	$	1.30		$	0.75		$	3.33		$	0.65
Shares used in computing diluted net income per share:
GAAP		240,717			232,724			239,249			230,936
Non-GAAP		239,798			232,961			238,302			231,424

We believe that providing this additional information is useful in enabling investors to better assess and understand our operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because our management typically monitors our 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 basis should be used as a complement to, and in conjunction with, and not as a replacement for, results presented in accordance with GAAP.

We believe that the presentation of non-GAAP measures, including net income (loss) and non-GAAP net income (loss) per diluted share, provides important supplemental information to management and investors regarding financial and business trends relating to our results of operations.  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:

·evaluating the core operating performance of the company;

·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.

45

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

Share-based Compensation Expense.  These expenses consist primarily of expenses for employee stock options, employee restricted stock units and the employee stock purchase plan.  Although share-based compensation is an important aspect of the compensation of our employees and executives, we exclude share-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses that we do not believe are reflective of ongoing operating results.  Further, we believe that it is useful to exclude share-based compensation expense for investors to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies.

Amortization of Acquisition-related Intangible Assets.  We incur amortization of 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.  This is the non-cash economic interest expense relating to the implied value of the equity conversion component of the 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 exclude this non-cash interest expense as it does not represent the semi-annual 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.  It also represents the amount of tax expense or benefit that we would record, considering jurisdictional tax rates, if we did not have any valuation allowance on our net deferred tax assets.

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 excluded 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, convertible debt interest expense 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.

Our cash flows were as follows:

	Nine months ended
	October 3, 2010			September 27, 2009			Percent Change
	(In millions, except percentages)
Net cash provided by operating activities	$	1,092.5		$	99.8			994.7	%
Net cash used in investing activities		(2,261.8	)		(326.1	)		593.6	%
Net cash provided by financing activities		930.6			14.0			6547.1	%
Effect of changes in foreign currency exchange rates on cash		3.7			2.7			37.0	%
Net decrease in cash and cash equivalents	$	(235.0	)	$	(209.6	)		12.1	%

Operating Activities.  Cash provided by operations was $1,092.5 million for the nine months ended October 3, 2010 as compared to cash provided by operations of $99.8 million for the nine months ended September 27, 2009.  The increase in cash provided by operations in the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 resulted primarily from net income of $814.7 million compared to a net income of $75.8 million.  Cash flow used by accounts receivable decreased compared with the prior year due to a lower rate of growth in accounts receivable as compared to the prior year.  Cash flow from inventory increased primarily due to a reduction in inventor y from increased product sales.  Cash flow from other assets decreased compared to the prior year primarily due to a tax refund received in the first quarter of fiscal year 2009.  Accounts payable trade increased primarily due to higher cost and expense activity compared to the prior year.  Cash flow used by accounts payable to related parties decreased due to the timing of payments to Flash Ventures as compared to the prior year.  Cash flow from other liabilities increased in the nine months ended October 3, 2010 compared to the nine months ended September 27, 2009 primarily as a result of increased income taxes payable.

Investing Activities.  Cash used for investing activities for the nine months ended October 3, 2010 was ($2.26) billion as compared to cash used for investing activities of ($326.1) million in the nine months ended September 27, 2009.  The higher usage of cash in investing activities in the nine months ended October 3, 2010 was primarily due to a net increase in short and long-term marketable securities and net proceeds from notes receivable of $59.7 million from Flash Ventures in the nine months ended October 3, 2010 compared to a net issuance of ($47.8) million in notes receivable to Flash Ventures in the prior year.  In addition, in the first nine months of fiscal year 2010, we received proc eeds of $17.8 million related to the sale of our SIM business net assets.

Financing Activities.  Net cash provided by financing activities for the first nine months of fiscal year 2010 was $930.6 million compared to $14.0 million in the first nine months of fiscal year 2009, primarily due to net proceeds from the issuance of our 1.5% Notes due 2017 and related warrants in August 2010, higher cash received from employee stock programs and the realized tax benefit related to the excess of the deductible amount over the compensation cost recognized, offset by the purchase of a convertible bond hedge of ($292.9) million in August 2010 and the redemption of our 1% Convertible Notes due 2035 of ($75.0) million in the first quarter of fiscal year 2010.

47

Liquid Assets.  At October 3, 2010, we had cash, cash equivalents and short-term marketable securities of $2.90 billion.  We had $2.15 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 contractual maturity of the investment being greater than one year.

Short-Term Liquidity.  As of October 3, 2010, our working capital balance was $3.03 billion.  We expect cash usage related to our loans to Flash Ventures as well as our investments in property and equipment in the remaining three months of fiscal year 2010 to be approximately $105 million.

Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the outstanding Flash Ventures master lease agreements.  The Flash Ventures master lease agreements contain customary covenants for Japanese lease facilities as well as an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum shareholder equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I.  As of October 3, 2010, Flash Ventures was in compliance with all of its master lease covenants.  As of October 3, 2010, our R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I and our S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.  On November 1, 2010, R&I raised our credit rating to BBB.

If both S&P and R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.  Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances.  If a resolution was unsuccessful, we could be required to pay a portion or up to the entire $891.4 million outstanding lease obligations covered by our guarantee under such Flash Ventures master lease agre ements, based upon the exchange rate at October 3, 2010, which would negatively impact our short-term liquidity.

Long-Term Requirements.  Depending on the demand for our products, we may decide to make additional investments, which could be substantial, in wafer fabrication foundry capacity and assembly and test manufacturing equipment to support our business in the future including our recently announced Flash Forward venture.  We may also make equity investments in other companies, or engage in merger or acquisition transactions.  These activities may require us to raise additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts, could prevent us from funding Flash Ventures, increasing our wafer supply, developing or enhancing our products, taking advantage of future opportunitie s, 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 October 3, 2010, we had $1.15 billion aggregate principal amount of the 1% Convertible Senior Notes due 2013, or 1% Notes due 2013, outstanding and $1.00 billion aggregate principal amount of the 1.5% Notes due 2017 outstanding.  See Note 7, “Financing Arrangements,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for more detail.

Concurrent with the issuance of the 1% Notes due 2013, we sold warrants to acquire shares of our common stock at an exercise price of $95.03 per share.  As of October 3, 2010, the warrants had an expected life of approximately 2.9 years and expire in August 2013.  At expiration, we may, at our option, elect to settle the warrants on a net share basis.  As of October 3, 2010, the warrants had not been exercised and remain outstanding.  In addition, concurrent with the issuance of the 1% Notes due 2013, we entered into a convertible bond hedge transaction in which counterparties agreed to sell to us up to approximately 14.0 million shares of our common stock, which is the number of shares initially issuable upon conversion of the 1% Notes due 2013 in full, at a conversion pri ce of $82.36 per share.  The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding due to conversion or otherwise.  Settlement of the convertible bond hedge in net shares on the expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon conversion of the 1% Notes due 2013.  As of October 3, 2010, we had not purchased any shares under this convertible bond hedge agreement.

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Concurrent with the issuance of the 1.5% Notes due 2017, we sold warrants to acquire shares of our common stock at an exercise price of $73.33 per share.  As of October 3, 2010, the warrants had an expected life of approximately 7.2 years and expire over 40 different dates from November 13, 2017 through January 10, 2018.  At each expiration date, the Company may, at its option, elect to settle the warrants on a net share basis.  As of October 3, 2010, the warrants had not been exercised and remained 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 agreed to sell to us up to approximately 19.1 million shares of our common stock, which is the number of shares i nitially issuable upon conversion of the 1.5% Notes due 2017 in full, at a conversion price of $52.37 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 none of the 1.5% Notes due 2017 remains 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 October 3, 2010, we had not purchased any shares under this convertible bond hedge agreement.

Ventures with Toshiba.  We are a 49.9% owner in both Flash Partners and Flash Alliance, our business ventures with Toshiba to develop and manufacture NAND flash memory products.  In July 2010, we and Toshiba entered into an agreement to create Flash Forward, of which we own 49.9% and Toshiba owns 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners and Flash Alliance ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial NAND produc tion scheduled for the second half of fiscal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  We expect that Fab 5 will increase our 2011 wafer output by less than 10%.  We are committed to 50% of the initial ramp within Phase 1 of Fab 5, for which our portion of equipment investments and startup costs is approximately $500 million, which we expect to primarily incur in fiscal year 2011; however, the timing of the investment is dependent upon future decisions including finalization of the Flash Forward capacity plan.  No timelines have been finalized for Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, we will also provide a cash prepayment of approximately $60 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, we are committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  We and Toshiba will each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.

With these ventures, we and Toshiba collaborate in the development and manufacture of NAND flash memory products.  These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by these 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.  These 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 these ventures’ NAND wafer supply or pay for 50% of the fixed costs of these ventures.
60; We are not able to estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because the price is determined by reference to the future cost to produce the wafers.  See Note 12, “Related Parties and Strategic Investments,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

The cost of the wafers we purchase from these ventures is recorded in inventory and ultimately cost of product revenues.  These 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.

We participate in other common research and development activities with Toshiba but are not committed to any minimum funding level.

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For semiconductor fixed assets that are leased by these ventures, we and/or Toshiba jointly guarantee on an unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations under master lease agreements entered into from December 2004 through April 2010.  These master lease obligations are denominated in Japanese yen and are noncancelable.  Our total master lease obligation guarantee as of October 3, 2010 was 74.3 billion Japanese yen, or approximately $891 million based upon the exchange rate at October 3, 2010.

In our fiscal year 2009, we and Toshiba restructured Flash Partners and Flash Alliance by selling more than 20% of their capacity to Toshiba.  The restructuring resulted in us receiving value of 79.3 billion Japanese yen of which 26.1 billion Japanese yen, or $277 million, was received in cash, reducing outstanding notes receivable from Flash Ventures and 53.2 billion Japanese yen of value reflected the transfer of off-balance sheet equipment lease guarantee obligations from us to Toshiba.  The restructuring was completed in a series of closings beginning in January 2009 and extending through March 31, 2009.  In the first quarter of fiscal year 2009, transaction costs of $10.9 million related to the sale and transfer of equipment and lease obligations were expensed.

From time-to-time, we and Toshiba mutually approve the purchase of equipment for the ventures in order to convert to new process technologies or add wafer capacity.  Flash Partners has previously reached full wafer capacity.  Flash Alliance is expected to reach full wafer capacity in 2011.  During the remainder of fiscal year 2010, we expect our portion of capital investments in Flash Partners and Flash Alliance for new process technologies and additional wafer capacity to be between $400 million to $450 million, of which we expect approximately $75 million will be funded through additional loans to these ventures, and the remaining amount is expected to be funded through working capital contributions from these ventures.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements at October 3, 2010, 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,” of 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 the vast majority of our NAND flash wafers.  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 and the British pound.  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.  We use foreign currency forward contracts and options to partia lly hedge our future Japanese yen costs for NAND flash wafers.  Our derivative instruments are recorded at fair value in assets or liabilities with final gains or losses recorded in other income (expense), or as a component of accumulated other comprehensive income and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is recognized.  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,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

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

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Critical Accounting Policies

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

There were no significant changes to our critical accounting policies during the fiscal quarter ended October 3, 2010.  For information about critical accounting policies, see the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended January 3, 2010, filed on February 25, 2010.

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Item 3.   Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk.  Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio.  The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk.  As of October 3, 2010, a hypothetical 50 basis point increase in interest rates would result in an approximate $26.4 million decline (less than 0.65%) of the fair value of our available-for-sale debt securities.

Foreign Currency Risk.  The majority of our revenues are transacted in the U.S. dollar, with some revenues transacted in the European euro, the British pound, and the Japanese yen.  Our flash memory costs, which represent the largest portion of our cost of product revenues, are denominated in the Japanese yen.  We also have some cost of product revenues denominated in Chinese renminbi.  The majority of our operating expenses are denominated in the U.S. dollar; however, we have expenses denominated in 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 notes receivable from Flash Ventures, which are denominated in Japanese yen.

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

At October 3, 2010, we had foreign currency forward contracts and cross currency swap contracts in place that amounted to a net sale in U.S. dollar equivalent of approximately $249.7 million in foreign currencies to hedge our foreign currency denominated monetary net asset position.  The maturities of these contracts were 24 months or less.

At October 3, 2010, we had foreign currency forward and option contracts in place that amounted to a net purchase in U.S. dollar equivalent of approximately $37.2 million to partially hedge our expected future wafer purchases in Japanese yen.  The maturities of these contracts were 3 months or less.

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The notional amount and unrealized gain or loss of our outstanding cross currency swap and foreign currency forward contracts that are non-designated (balance sheet hedges) as of October 3, 2010 is shown in the table below.  These unrealized gains and losses for non-designated hedges have already been included in other income (expense).  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 percent.  These changes in fair values would be largely offset in other income (expense) by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.

	Notional Amount			Unrealized Gain (Loss) as of October 3, 2010			Change in Fair Value Due to 10% Adverse Rate Movement
	(In thousands)
Cross currency swap contracts entered	$	(397,073	)	$	(54,599	)	$	(42,422	)
Forward contracts sold		(151,803	)		(4,432	)		(15,388	)
Forward contracts purchased		299,156			1,917			33,196
Total net outstanding contracts	$	(249,720	)	$	(57,114	)	$	(24,614	)

The notional amount and fair value of our outstanding forward and option contracts that are designated as cash flow hedges as of October 3, 2010 is 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 percent.

	Notional Amount		Fair Value  as of October 3, 2010		Change in Fair Value Due to 10% Adverse Rate Movement
	(In thousands)
Option contracts purchased	$	37,191	$	2,754	$	(2,670	)

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

Market Risk.  We also hold available-for-sale equity securities, a portion of which is hedged.  As of October 3, 2010, a reduction in price of 10% of these marketable equity securities would result in a decrease in the fair value of our investments in marketable equity securities of approximately $7.8 million.

All of the potential changes noted above are based on sensitivity analysis performed on our financial position at October 3, 2010.  Actual results may differ materially.

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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 October 3, 2010.  Based on their evaluation as of October 3, 2010, 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) 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 re ported 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 three months ended October 3, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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 II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2010.

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

• competitive pricing pressures, resulting in lower average selling prices and lower or negative product gross margins;
• unpredictable or changing demand for our products, particularly for certain form factors or capacities, or the mix of X2 and X3;
• expansion of supply, including low grade supply, from industry suppliers creating excess market supply, causing our average selling prices to decline faster than our costs;
• excess captive memory output or capacity which could result in write-downs for excess inventory, lower of cost or market charges, fixed costs associated with under-utilized capacity, or other consequences;
• increased memory component and other costs as a result of currency exchange rate fluctuations to the U.S. dollar, particularly with respect to the Japanese yen;
• less than anticipated demand, including general economic weakness in our markets;
• inability to maintain or grow sales through our channels to which we are selling non-branded products, wafers and components or potential loss of branded product sales as a result;
• insufficient supply from captive flash memory sources, inability to obtain non-captive flash memory supply of the right product mix with adequate margins in the time frame necessary to meet demand, or inability to realize a positive margin on non-captive purchases;
• inability to adequately invest in future technologies and products while controlling operating expenses;
• our license and royalty revenues may fluctuate or decline significantly in the future due to license agreement renewals, non-renewals, business performance of our licensees, or if licensees or we fail to perform on contractual obligations;
• inability to develop or unexpected difficulties or delays in developing, manufacturing with acceptable yields, or ramping, new technologies such as 24-nanometer or next generation process technology, 3-bits per cell NAND memory architecture, 3-Dimensional, or 3D, Read/Write, Extreme Ultra-Violet, or EUV, lithography, or other advanced, alternative technologies;
• price increases, which could result in lower unit and gigabyte demand, potentially leading to reduced revenues and/or excess inventory;
• insufficient non-memory materials or capacity from our suppliers and contract manufacturers to meet demand or increases in the cost of non-memory materials or capacity;
• insufficient assembly and test capacity from our Shanghai facility or our contract manufacturers, labor unrest, strikes or other disruptions in operations at any of these facilities;
• increased purchases of non-captive flash memory, which typically costs more than captive flash memory and may be of less consistent quality;
• difficulty in forecasting and managing inventory levels due to noncancelable contractual obligations to purchase materials, such as custom non-memory materials, and the need to build finished product in advance of customer purchase orders;
• timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, lower than expected yields or production interruptions;
• disruption in the manufacturing operations of suppliers, including suppliers of sole-sourced components;
• potential delays in the emergence of new markets and products for NAND-based flash memory and lack of acceptance of our products in these markets or by our OEM customers;
• inability to enhance current products or develop new products on a timely basis;
• timing of sell-through and the financial liquidity and strength of our distributors and retail customers;
• errors or defects in our products caused by, among other things, errors or defects in the memory or controller components, including memory and non-memory components we procure from third-party suppliers; and
• the other factors described under “Risk Factors” and elsewhere in this report.

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We require an adequate level of product gross margins to continue to invest in our business.  While product gross margins improved in fiscal year 2009 and the first nine months of fiscal year 2010, our ability to sustain sufficient product gross margin and profitability on a quarterly or annual basis in the future depends in part on industry and our supply/demand balance, our ability to reduce 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 ability to manage expenses.  For example, we experienced negative product gross margins 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.  Beginning in the second half of 2010, we are investing in expanded wafer capacity in Flash Alliance.  In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which we will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  We will need an adequate level of product gross margins to sufficiently fund these capital expansions.  If we fail to maintain adequate product gross margins 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.

Competitive pricing pressures and excess supply have resulted in lower average selling prices and negative product gross margins in the past, and if we do not experience adequate price elasticity, our revenues may decline.  For more than a year through 2008, the NAND flash memory industry was characterized by supply exceeding demand, which led to significant declines in average selling prices.  Price declines exceeded our cost declines in fiscal years 2008, 2007 and 2006.  Significant price declines resulted in negative product gross margins in fiscal year 2008 and the first quarter of fiscal year 2009.  Price declines may be influenced by, among other factors, supply exceeding demand, macroeconomic factors, technology transitions, conversion of industry DRAM capacity to NAND, and new technologies or other strategic actions taken by us or our competitors to gain market share.  During 2010, we, as well as other NAND manufacturers, have announced plans for new capacity expansion primarily beginning in the second half of 2011.  If capacity grows at a faster rate than market demand, the industry could again experience significant price declines, which would negatively affect average selling prices, or we may incur adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity, both of which would negatively impact our margins and operating results.  Additionally, if our technology transitions take longer or are more costly than anticipated to complete, or our cost reductions fail to keep pace with the rate of price declines, our product gross margins and operating results will be harmed, which could lead to quarterly or annual net losses.

Over our history, price decreases have generally been more than offset by increased unit demand and demand for products with increased storage capacity.  However, in fiscal year 2008 and the first half of 2009, price declines outpaced unit and megabyte growth resulting in reduced revenue as compared to prior comparable periods.  There can be no assurance that current and future price reductions will result in sufficient demand for increased product capacity or unit sales, which could harm our revenues and margins.

Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose one of our major licensees or customers, or experience any material reduction in orders from any of our customers, our revenues and operating results would suffer.  Our ten largest customers represented approximately 50% and 46% of our total revenues in the three and nine months ended October 3, 2010, respectively, compared to 46% and 43% in the three and nine months ended and September 27, 2009, respectively.  In the three months ended October 3, 2010 and the three and nine months ended September 27, 2009, revenues from one customer accounted for 11% of our total revenues.  Other than this customer in the periods stated abov e, no other customer exceeded 10% of our total revenues during the three and nine months ended October 3, 2010 and September 27, 2009.  The composition of our major customer base has changed over time, including shifts between OEM and retail-based customers, and we expect fluctuations to continue as our markets and strategies evolve, which could make our revenues less predictable from period-to-period.  If we were to lose one of our major customers or licensees, or experience any material reduction in orders from any of our customers or in sales of licensed products by our licensees, our revenues and operating results would suffer.  If we fail to comply with the contractual terms of our significant customer contracts, the business covered under these contracts and our financial results may be harmed.  Additionally, our license and royalty revenues may decline significantly in the future as our existing license agreements and patents expire or if lic ensees fail to perform on a portion or all of their contractual obligations.  Our sales are generally made from standard purchase orders rather than long-term contracts.  Accordingly, our customers may generally terminate or reduce their purchases from us at any time without notice or penalty.

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Our revenues depend in part on the success of products sold by our OEM customers.  A majority of our sales are to OEM customers.  Most of our OEM customers bundle or embed our flash memory products with their products, such as mobile phones, global positioning systems, or GPS, devices and computers.  We also sell wafers and components to some of our OEM customers, as well as non-branded products which are re-branded and distributed by certain OEM customers.  Our sales to these customers are dependent upon the OEMs choosing our products over those of our competitors and on the OEMs’ ability to create, market and sell their products successfully in their markets.  Should our OEM customers be unsuccessful in selling their current or future products that include our products, or should they decide to not use our products, our results of operations and financial condition could be harmed.  OEM manufacturers of consumer devices, including mobile phones and tablets continue to increase their usage of embedded flash storage.  Embedded flash storage solutions typically require lengthy customer product qualifications, which could slow the adoption of our latest technology transitions and thereby have a negative impact on our gross margins by limiting our ability to reduce costs.  In addition, our OEM revenue is dependent in part upon our embedded flash storage solutions meeting OEM product specifications and achieving design wins.  Also, since our embedded solutions are specifically qualified, we could be restricted from using our sources of non-captive supply, resulting in the potential need for further capital investment in our captive capacity.  In 2009, we added OEM customers to whom we are selli ng non-branded products, wafers and components.  The sales to these OEMs could be more variable than the sales to our historical customer base, 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.  Sales to these OEMs could also cause a decline in sales of our branded products.  In addition, we are selling certain customized products and if the intended customer does not purchase these products as scheduled, we may incur excess inventory or rework costs.

Our business depends significantly upon sales through retailers and distributors, and if our retailers and distributors are not successful, we could experience reduced sales, substantial product returns or increased price protection, any of which would negatively impact our business, financial condition and results of operations.  A significant portion of our sales is made through retailers, either directly or through distributors.  Sales through these channels typically include rights to return unsold inventory and protection against price declines, as well as participation in various cooperative marketing programs.  As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailer s, or to our distributors’ customers, in the case of sales to distributors.  Price protection against declines in our selling prices has the effect of reducing our deferred revenues, and eventually our revenues.  If our retailers and distributors are not successful, due to weak consumer retail demand caused by an economic downturn, competitive issues, decline in consumer confidence, or other factors, we could continue to experience reduced sales as well as substantial product returns or price protection claims, which would harm our business, financial condition and results of operations.  Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors and, therefore, must rely on them to effectively sell our products over those of our competitors.  Certain of our retail and distributor partners are experiencing financial difficulty and prolonged negative economic conditions could cause liquidity issues for our retail and distributor customers and channels.  For example, two of our North American retail customers, Circuit City Stores, Inc. and Ritz Camera Centers, Inc., filed for bankruptcy protection in 2008 and 2009, respectively.  Negative changes in customer credit-worthiness; the ability of our customers to access credit; or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our revenue and our ability to collect outstanding receivable balances.  In addition, we have certain retail customers to which we provide inventory on a consigned basis, and a bankruptcy or shutdown of these customers could preclude us from taking possession of our consigned inventory, which could result in inventory charges.

Our inability to obtain sufficient flash memory supply could cause us to lose sales and market share and harm our operating results.  We are currently experiencing significant growth in demand for our flash memory products, and demand from our customers may exceed the supply of captive and non-captive flash memory available to us.  We are in the process of completing the expansion of Flash Alliance, and have announced a new flash venture with Toshiba.  However, it is uncertain whether additional supply provided by these expansions will enable us to meet expected demand.  While we have various sources of non-captive supply, our purchases of non-captive supply may be limited due to the required advanced purchase order lead-times, the product mix available and the higher cost of this non-captive supply.  Our inability to obtain supply to meet demand may cause us to lose sales, market share and corresponding profits, which would harm our operating results.

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The future growth of our business depends on the development and performance of new markets and products for NAND-based flash memory.  Our future growth is dependent on development of new markets, new applications and new products for NAND-based flash memory.  Historically, the digital camera market provided the majority of our revenues; however the mobile phone end-market now represents approximately half of our product revenues.  Other markets for flash memory include digital audio and video players, embedded memory, universal serial bus, or USB, drives and solid-state drives, or SSDs.  We cannot assure you that the use of flash memory in mobile handsets or other existing markets and products will develop and grow fast enough, or that new m arkets will adopt NAND flash technologies in general or our products in particular, to enable us to grow.  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.  Some international markets are subject to a higher degree of commodity pricing or tariffs and import taxes than in the U.S., subjecting us to increased pricing and margin pressure.

Our strategy of investing in captive manufacturing sources could harm us if our competitors are able to produce products at lower costs or if industry supply exceeds demand.  We secure captive sources of NAND through our significant investments in manufacturing capacity.  We believe that by investing in captive sources of NAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of high demand.  Our significant investments in manufacturing capacity require us to obtain and guarantee capital equipment leases and use available cash, which could be used for other corporate purposes.  To the extent we secure manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other NAND suppliers, we may not achieve an adequate return on our significant investments and our revenues, gross margins and related market share may be harmed.  For example, we recorded charges of $121 million and $63 million in fiscal year 2008 and the first quarter of fiscal year 2009, respectively, for adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity for the 90-day period in which we had non-cancelable production plans utilizing less than our share of Flash Ventures’ full capacity.

Our business and the markets we address are subject to significant fluctuations in supply and demand, and our commitments to Flash Ventures may result in periods of significant excess inventory.  The start of production by Flash Alliance at the end of fiscal year 2007 and the ramp of production in fiscal year 2008 increased our captive supply and resulted in excess inventory.  As a result, we restructured and reduced our total capacity at Flash Ventures in the first quarter of fiscal year 2009.  However, beginning in the second half of 2010, we are investing in expanded wafer capacity in Flash Alliance, and we and Toshiba have entered into a new venture, Flash Forward, which will further increase our captive memory supply, possibly beginning in the second half of fiscal year 2011.  Increases in captive memory supply from these ventures could harm our business and results of operations if our committed supply exceeds demand for our products.  The adverse effects could include, among other things, significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs, or under-utilization charges such as those we experienced in fiscal year 2008, which would harm our gross margins and could result in the impairment of our investments in Flash Ventures.

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We continually develop new applications, products, technologies and standards, which may not be widely adopted by consumers or, if adopted, may reduce demand for our older products; and our competitors seek to develop new standards which could reduce demand for our products.  We continually devote significant resources to the development of new applications, products and standards and the enhancement of existing products and standards with higher memory capacities and other enhanced features.  Any new applications, products, technologies, standards or enhancements we develop may not be commercially successful.  The success of our new products is dependent on a number of factors, including market acceptance, OEM design wins, our ability t o manage risks associated with new products and production ramp issues.  New applications such as SSD solutions that are designed to replace hard disk drives in devices such as tablet, notebook and desktop computers, and ebooks are emerging rapidly and are expected to grow significantly in the coming years.  We cannot guarantee that manufacturers will adopt our SSD solutions or that this market will grow as we anticipate.  For certain SSD solutions to be adopted widely, the cost of flash memory must still decline further from current levels so that the price point for the end consumer is compelling.  In addition, we will need to develop new SSD solutions for mobile computing products and enterprise applications, and our current or new SSDs must meet the specifications required to gain customer qualification and acceptance.  Other new products, such as slotMusic™, slotRadio™ and our pre-loaded flash memory cards, may not gain market acceptance, and we may not be successful in penetrating the new markets that we target.  Sony Corporation’s, or Sony’s, decision to transition its future devices from the Memory Stick® format to the SD™ format could harm our market share or margins since there are now a greater number of competitors selling SD products.

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

Competitors or other market participants could seek to develop new standards for flash memory products that, if accepted by device manufacturers or consumers, could reduce demand for our products.  For example, certain handset manufacturers and flash memory chip producers are currently advocating and developing a new standard, referred to as Universal Flash Storage, or UFS, for flash memory cards used in mobile phones.  Intel Corporation, or Intel, and Micron Technology, Inc., or Micron, have also developed a new specification for a NAND flash interface, called Open NAND Flash Interface, or ONFI, which would be used primarily in computing devices.  Broad acceptance of new standards and products may reduce demand for some of our products.  If this decreased demand is not offset by increased dem and for new form factors or products that we offer, our operational results would be harmed.

Future alternative non-volatile storage technologies or other disruptive technologies could make NAND flash memory obsolete, and we may not have access to those new technologies on a cost-effective basis, or at all, which could harm our results of operations and financial condition.  The pace at which NAND technology is transitioning to new generations is expected to slow due to inherent physical technology limitations.  We currently expect to be able to continue to scale our NAND technology through a few additional generations, but beyond that there is no certainty that further technology scaling can be achieved cost effectively with the current NAND flash technology and architecture.  We also continue to invest in future alternative technologies , particularly our 3D Read/Write technology, which we believe may be a viable alternative to NAND when NAND can no longer scale at a sufficient rate, or at all.  However, even when NAND flash can no longer be further scaled, we expect NAND and potential alternative technologies to coexist for an extended period of time.  There can be no assurance that we will be successful in developing 3D Read/Write technology or other technologies, or that we will be able to achieve the yields, quality or capacities to be cost competitive with existing or other alternative technologies.

Others are developing alternative non-volatile technologies such as ReRAM, Memristor, vertical or stacked NAND, charge-trap flash, and other technologies.  Successful broad-based commercialization of one or more of these technologies could reduce the future revenue and profitability of NAND flash technology and could supplant the alternative 3D Read/Write technology that we are developing.  In addition, we generate license and royalty revenues from NAND technology and we own intellectual property for 3D Read/Write technology, and if NAND is replaced by a technology other than 3D Read/Write, our ability to generate license and royalty revenues would be reduced.

Alternative 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.  These alternative technologies could negatively impact the overall market for flash-based products, which could seriously harm our results of operations.

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We face competition from numerous manufacturers and marketers of products using flash memory, as well as from manufacturers of new and alternative technologies, and if we cannot compete effectively, our results of operations and financial condition will suffer.  Our competitors include many large companies that may have greater advanced wafer manufacturing capacity, substantially greater financial, technical, marketing and other resources and more diversified 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 flash card competitors at a low cost.  Some of our competitors may sell their flash memory chips at or below their true manufacturin g costs to gain market share and to cover their fixed costs.  Such practices occurred in the DRAM industry during periods of excess supply and resulted in substantial losses in the DRAM industry.  Our primary semiconductor competitors include Hynix Semiconductor, Inc., or Hynix, Intel, Micron, Samsung and Toshiba.  These current and future competitors produce or could produce alternative flash or other memory technologies that compete against our NAND-based flash memory technology or our alternative technologies, which may reduce demand or accelerate price declines for NAND.  Furthermore, the future rate of scaling of the NAND-based flash technology design that we employ may slow down significantly, which would slow down cost reductions that are fundamental to the adoption of flash memory technology in new applications.  If the scaling of NAND-based flash technology slows down or alternative technologies prove to be more economical, our business wou ld be harmed, and our investments in captive fabrication facilities could be impaired.  Our cost reduction activities are dependent in part on the purchase of new specialized manufacturing equipment, and if this equipment is not generally available or is allocated to our competitors, our ability to reduce costs could be limited.

We also compete with flash memory card manufacturers and resellers.  These companies purchase or have a captive supply of flash memory components and assemble memory cards.  Our primary competitors currently include, among others, A-DATA Technology Co., Ltd., or A-DATA, Buffalo, Inc., Chips and More GmbH, Dane-Elec Memory, Dexxxon Digital Storage, Inc., dba Emtec Electronics, or EMTEC, Eastman Kodak Company, Elecom Co., Ltd., FUJIFILM Corporation, Gemalto N.V., Hagiwara Sys-Com Co., Ltd., Hama GmbH & Co. KG, Hynix, Imation Corporation, or Imation, and its division Memorex Products, Inc., or Memorex, I-O Data Device, Inc., Kingmax Digital, Inc., Kingston Technology Company, Inc., or Kingston, Lexar Media, Inc., or Lexar, a subsidiary of Micron, Netac Technology Co., Ltd., Panasonic Corporation, PNY Technologies, In c., or PNY, Power Quotient International Co., Ltd, RITEK Corporation, Samsung, Sony, STMicroelectronics N.V., Toshiba, Transcend Information, Inc., or Transcend, and Verbatim Americas LLC, or Verbatim.

Some of our competitors have substantially greater resources than we do, have well recognized brand names or have the ability to operate their business on lower margins than we do.  The success of our competitors may adversely affect our future revenues or margins and may result in the loss of our key customers.  For example, Toshiba and other manufacturers have increased their market share of flash memory cards for mobile phones, including the microSD™ card, which have been a significant driver of our growth.  In the digital audio market, we face competition from well established companies such as Apple Inc., ARCHOS Technology, Coby Electronics Corporation, Creative Technology Ltd., Koninklijke Philips Electronics N.V., Microsoft Corporation, or Microsoft, Samsung and Sony.  In the USB flash drive market, we face competition from a large number of competitors, including EMTEC, Hynix, Imation, Kingston, Lexar, Memorex, PNY, Sony and Verbatim.  In the market for SSDs, we face competition from large NAND flash producers such as Intel, Samsung and Toshiba, as well as from hard drive manufacturers, such as Seagate Technology LLC, Samsung, Western Digital Corporation, and others, who have established relationships with computer manufacturers.  We also face competition from third-party SSD solutions providers such as A-DATA, Kingston, Phison Electronics Corporation, STEC, Inc. and Transcend.

We sell flash memory in the form of white label cards, wafers or components to certain companies who sell flash products that may ultimately compete with SanDisk branded products in the retail or OEM channels.  This could harm the SanDisk branded market share and reduce our sales and profits.

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

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

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

• price, quality and on-time delivery of products;
• product performance, availability and differentiation;
• success in developing new applications and new market segments;
• sufficient availability of cost-efficient supply;
• efficiency of production;
• ownership and monetization of intellectual property rights;
• timing of new product announcements or introductions;
• the development of industry standards and formats;
• the number and nature of competitors in a given market; and
• general market and economic conditions.

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

Price increases could reduce our overall product revenues and harm our financial position.  In the first half of fiscal year 2009, we increased prices in order to improve profitability.  Price increases can result in reduced growth in gigabyte demand or even an absolute reduction in gigabyte demand.  For example, in the second quarter of fiscal year 2009, our average selling price per gigabyte increased 12% and our gigabytes sold decreased 7%, both on a sequential basis.  In the future, if we raise prices, our product revenues may be harmed and we may have excess inventory.

Our financial performance depends significantly on worldwide economic conditions and the related impact on levels of consumer spending, which have deteriorated in many countries and regions, including the U.S., and may not recover in the foreseeable future.  Demand for our products is adversely affected by negative macroeconomic factors affecting consumer spending.  The tightening of consumer credit, low level of consumer liquidity, and volatility in credit and equity markets have weakened consumer confidence and decreased consumer spending in the U.S. and European retail markets.  These and other economic factors have reduced demand growth for our products and harmed our business, financial condition and results of operations, and to the extent s uch economic conditions continue, they could cause further harm to our business, financial condition and results of operations.

Our license and royalty revenues may fluctuate or decline significantly in the future due to license agreement renewals 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 and we are not successful in signing new licensees in the future, our license revenue, profitability, and cash provided by operating activities would be harmed.  For example, in the first quarter of fiscal year 2010, our license and royalty revenues decreased sequentially primarily due to a new license agreement with Samsung, effective in the third quarter of fiscal 2009, which reflects a lower effective royalty rate as compared to the previous license agreement.  To the exte nt 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.  If our licensees or we fail to perform on contractual obligations, we may incur costs to enforce the terms of our licenses and there can be no assurance that our enforcement and 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 revenues.  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.

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Under certain conditions, a portion or the entire outstanding lease obligations related to Flash Ventures’ master equipment lease agreements could be accelerated, which would harm our business, results of operations, cash flows, and liquidity.  Flash Ventures’ master lease agreements contain customary covenants for Japanese lease facilities.  In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum stockholders’ equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of either BB- from Standard & Poor’s, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I.  As of October 3, 2010, Flash Ventures were in compliance with all of their master lease covenants.  As of October 3, 2010, our R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I and our S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.  On November 1, 2010, R&I raised our credit rating to BBB.

If both S&P and R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.  Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration.  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 $891.4 million, based upon the exchange rate at October 3, 2010, covered by our guarantee under the Flash Ventures master lease agreements, which would significantly reduce our cash position and may force us to seek additional financing, which may or may not be available.

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

We depend on Flash Ventures and third parties for silicon supply and any disruption or shortage in our supply from these sources will reduce our revenues, earnings and gross margins.  All of our flash memory products require silicon supply for the memory and controller components.  The substantial majority of our flash memory is currently supplied by Flash Ventures and to a much lesser extent by third-party silicon suppliers.  Any disruption or shortage in supply of flash memory from our captive or non-captive sources would harm our operating results.

The risks of supply disruption are magnified at Toshiba’s Yokkaichi, Japan operations, where Flash Ventures are operated and Toshiba’s foundry capacity is located.  Earthquakes and power outages have resulted in production line stoppages and loss of wafers in Yokkaichi, and similar stoppages and losses may occur in the future.  For example, in the first quarter of fiscal year 2006, a brief power outage occurred at Fab 3, which resulted in a loss of wafers and significant costs associated with bringing the fab back on line.  In addition, the Yokkaichi location is often subject to earthquakes, which could result in production stoppage, a loss of wafers and the incurrence of significant costs.  Moreover, Toshiba’s employees that produce Flash Ventures’ products are covered by collective bargaining agreements and any strike or other job action by those employees could interrupt our wafer supply from Flash Ventures.  If we have disruption in our captive wafer supply or if our non-captive sources fail to supply wafers in the amounts and at the times we expect, or we do not place orders with sufficient lead time to receive non-captive supply, we may not have sufficient supply to meet demand and our operating results could be harmed.

Currently, our controller wafers are manufactured by third-party foundries.  Any disruption in the manufacturing operations of our controller wafer vendors would 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 our controller wafers, which could take several quarters to complete.

In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers available to us from our current sources.  If our silicon vendors are unable to satisfy our requirements on competitive terms or at all, we may lose potential sales and market share, and our business, financial condition and operating results may suffer.  Any disruption or delay in supply from our silicon sources could significantly harm our business, financial condition and results of operations.

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Increased captive memory supply from our new venture with Toshiba may not produce results as expected.  In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which we own 49.9% and Toshiba owns 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners and Flash Alliance ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial NAND production scheduled for the second half of fis cal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  We expect that Fab 5 will increase our 2011 wafer output by less than 10%.  We are committed to 50% of the initial ramp within Phase 1 of Fab 5, for which our portion of equipment investments and startup costs is approximately $500 million, which we expect to primarily incur in fiscal year 2011; however, the timing of the investment is dependent upon future decisions including finalization of the Flash Forward capacity plan.  No timelines have been finalized for Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, we will also provide a cash prepayment of approximately $60 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, we are committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  We and Toshiba will each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.  However, if this new venture does not commence production as planned or does not meet anticipated manufacturing output, we may not have sufficient supply to meet demand, which may lead to a loss in market share and potential revenue growth.  Conversely, this new venture with Toshiba could harm our business and results of operations if our committed supply exceeds demand for our products.  The adverse effects from excess supply could include significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs, and the impairment of our investment in this new venture with Toshiba.  Any future excess or shortage of supply could h arm our business, financial condition and results of operations.  In addition, because all of the Flash Ventures are located in close proximity, any risk of supply disruption at Toshiba’s Yokkaichi, Japan operations may impact all of our ventures with Toshiba, including this new venture, which could impact all of our captive memory wafer supply.

If actual manufacturing yields are lower than our expectations, this may result in increased costs and product shortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra-clean environment.  Semiconductor manufacturing yields and product reliability are a function of both design and manufacturing process technology, and production delays may be caused by equipment malfunctions, fabrication facility accidents or human error.  Yield problems may not be identified during the production process or improved until an actual product is manufactured and can be tested.  We have, from time-to-time, experienced yields that have adversely aff ected our business and results of operations.  On more than one occasion, we have experienced adverse yields when we have transitioned to new generations of products.  If actual yields are low, we will experience higher costs and reduced product supply, which could harm our business, financial condition and results of operations.  For example, if the production ramp and/or yield of 24-nanometer 2-bits per cell and 3-bits per cell NAND technology wafers does not increase as expected, our cost competitiveness would be harmed, we may not have adequate supply or the right product mix to meet demand, and our business, financial condition and results of operations will be harmed.

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 significant portion of our assembly and test requirements, to produce products with leading-edge technologies such as multi-stack die packages and to provide order fulfillment to certain locations.  In addition, our Shanghai facility is responsible for packaging and shipping our retail products within Asia and Europe.  Any delays or interruptions in production or the ability to ship product, or issues with manufacturing yields at our captiv e facility could harm our results of operations and financial condition.  Furthermore, if we were to experience labor unrest, or strikes, or if wages were to increase, our ability to produce and ship products could be impaired and we could experience higher labor costs, which could harm our results of operations, financial condition, and liquidity.

We depend on our third-party subcontractors and our business could be harmed if our subcontractors do not perform as planned.  We rely on third-party subcontractors for a portion of our wafer testing, IC assembly, 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.  We do not have exclusive relationships with any of our subcontractors and, therefore, cannot guarantee that they will devote sufficient resources to manufacturing our products.  We are not able to directly control product delivery schedules.  Furthermore, we manufacture on a turnkey basis with some of our 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 have adverse effects on our operating results.

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In transitioning to new processes, products and silicon sources, we face production and market acceptance risks that may cause significant product delays, cost overruns or performance issues that could harm our business.  Successive generations of our products have incorporated semiconductors with greater memory capacity per chip.  The transition to new generations of products, such as products containing 24-nanometer process technologies and/or 3-bits per cell and 4-bits per cell NAND technologies, is highly complex and requires new controllers, new test procedures, potentially new equipment and modifications to numerous aspects of any manufacturing processes, as well as extensive qualification of the new products by our OEM customers and us.  If we fail to achieve OEM design wins with new technologies such as the use of 3-bits per cell in embedded mobile applications, we may be unable to achieve the cost structure required to support our profit objectives.  There can be no assurance that technology transitions will occur on schedule, at the yields or costs that we anticipate, or that they will meet the specifications of certain customers or products.  If Flash Ventures encounters difficulties in transitioning to new technologies, our cost per gigabyte may not remain competitive with the costs achieved by other flash memory producers, which would harm our gross margins and financial results.  In addition, we could face design, manufacturing and equipment challenges when transitioning to the next generation of technologies beyond NAND.  Any material delay in a development or qualification schedule could delay deliveries and harm our operating results.  We have periodically experienced signif icant delays in the development and volume production ramp-up of our products.  Similar delays could occur in the future and could harm our business, financial condition and results of operations.

Our products may contain errors or defects, which could result in the rejection of our products, product recalls, damage to our reputation, lost revenues, diverted development resources and increased service costs and warranty claims and litigation.  Our products are complex, must meet stringent user requirements, may contain errors or defects and the majority of our products provide a warranty period, which ranges up to ten years.  Generally, our OEM customers have more stringent requirements than other customers and increases in OEM product revenue could require additional cost to test products or increase service costs and warranty claims.  Errors or defects in our products may be caused by, among other things, errors or defects in th e memory or controller components, including components we procure from non-captive sources.  In addition, the substantial majority of our flash memory is supplied by Flash Ventures, and if the wafers contain errors or defects, our overall supply could be adversely affected.  These factors could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs, indemnification of our customer’s product recall costs, warranty claims and litigation.  We record an allowance for warranty and similar costs in connection with sales of our products, but actual warranty and similar costs may be significantly higher than our recorded estimate and result in an adverse effect on our results of operations and financial condition.

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

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

During periods of excess supply in the market for our flash memory products, we may lose market share to competitors who aggressively lower their prices.  In order to remain competitive, we may be forced to sell inventory below cost.  If we lose market share due to price competition or we must write-down inventory, our results of operations and financial condition could be harmed.  Conversely, under conditions of tight flash memory supply, we may be unable to adequately increase our production volumes or secure sufficient supply in order to maintain our market share.  In addition, longer than anticipated lead times for advanced semiconductor manufacturing equipment or higher than expected equipment costs could negatively impact our ability to meet our supply requirements or to reduce future production costs.  If we are unable to maintain market share, our results of operations and financial condition could be harmed.

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

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

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We rely on our suppliers and contract manufacturers, some of which are the sole source of supply for our non-memory components, and capacity limitations or the absence of a back-up supplier exposes our supply chain to unanticipated disruptions or potential additional costs.  We do not have long-term supply agreements with some of these suppliers and contract manufacturers.  From time-to-time, certain materials may become difficult or more expensive to obtain, 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 alternati ve sources of supply in a timely manner, or at all.

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

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

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

Our attempts to hedge against currency risks may not be successful, resulting in an adverse impact on our results of operations.  In addition, if we do not successfully manage our hedging program in accordance with current accounting guidelines, we may be subject to adverse accounting treatment of our hedging program, which could harm our results of operations.  There can be no assurance that this hedging program will be economically beneficial to us.  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 could impact our ability to effectively manage our foreign currency exchange rate risk, which could harm our business, results of operations and financial condition.

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

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

We cannot assure you 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;
• our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or
• any of our products or technologies do not infringe on the patents of other companies.

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

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

For example, on October 24, 2007, we initiated two patent infringement actions in the United States District Court for the Western District of Wisconsin and one action in the United States International Trade Commission, or ITC, against certain companies that manufacture, sell and import USB flash drives, CompactFlash® cards, multimedia cards, MP3/media players and/or other removable flash storage products.  In this ITC action, an Initial Determination was issued in April 2009 and a Final Determination was issued in October 2009 finding non-infringement of certain accused flash memory products.  There can be no assurance that we will be successful in future patent infringement actions or that the validity of the asserted patents will be preserved or that we will not face counterclaims of the nature described above.

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

We and numerous other companies have been sued in the United States District Court of the Northern District of California in purported consumer class actions alleging a conspiracy to fix, raise, maintain or stabilize the pricing of flash memory, and concealment thereof, in violation of state and federal laws.  The lawsuits purport to be on behalf of classes of purchasers of flash memory.  The lawsuits seek restitution, injunction and damages, including treble damages, in an unspecified amount.  We are unable to predict the outcome of these lawsuits and investigations.  The cost of discovery and defense in these actions as well as the final resolution of these alleged violations of antitrust laws could result in significant liability and expense and may harm our business, financial condition an d results of operations.

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

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

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.

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

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

For additional information concerning legal proceedings, including the examples set forth above, see Part II, Item 1, “Legal Proceedings.”

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We may be unable to license, or license at a reasonable cost, intellectual property to or from third parties as needed, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling products.  If we incorporate third-party technology into our products or if we are found to infringe others’ intellectual property, we could be required to license intellectual property from a third party.  We may also need to license some of our intellectual property to others in order to enable us to obtain important cross-licenses to third-party patents.  We cannot be certain that licenses will be offered when we need them, that the terms offered will be acceptable, or that these licenses will help our business.&# 160; If we do obtain licenses from third parties, we may be required to pay license fees, royalty payments, or offset license revenues.  In addition, if we are unable to obtain a license that is necessary to manufacture our products, we could be required to suspend the manufacture of products or stop our product suppliers from using processes that may infringe the rights of third parties.  We may not be successful in redesigning our products, or the necessary licenses may not be available under reasonable terms.

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.  For example, sales have typically increased significantly in the fourth quarter of each fiscal year, sometimes followed by significant declines in the first quarter of the following fiscal year.  This seasonality makes it more difficult for us to forecast our business, especially in the current global economic environment and its corresponding decline in consumer confidence, which may impact typical seasonal trends.  Changes in the product or channel mix of our business can also impact seasonal patterns, adding to comple xity 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 results of operations.  This seasonality also may lead to higher volatility in our stock price, the need for significant working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons.

Because of our international business and operations, we must comply with numerous international laws and regulations, and we are vulnerable to political instability and other risks related to international operations.  Currently, a large portion of our revenues are derived from our international operations, and all of our products are produced overseas in China, Japan and Taiwan.  We are, therefore, affected by the political, economic, labor, environmental, public health and military conditions in these countries.

For example, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights.  This results, among other things, in the prevalence of counterfeit goods in China.  The enforcement of existing and future laws and contracts remains uncertain, and the implementation and interpretation of such laws may be inconsistent.  Such inconsistency could lead to piracy and degradation of our intellectual property protection.  Although we engage in efforts to prevent counterfeit products from entering the market, those efforts may not be successful.  Our results of operations and financial condition could be harmed by the sale of counterfeit products.  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 results of operations 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;
• changes in diplomatic and trade relationships;
• reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional issues in Asia, including labor strikes;
• imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
• changes in, or the particular application of, government regulations;
• duties and/or fees related to customs entries for our products, which are all manufactured offshore;
• longer payment cycles and greater difficulty in accounts receivable collection;
• adverse tax rules and regulations;
• weak protection of our intellectual property rights;
• delays in product shipments due to local customs restrictions; and
• delays in research and development that may arise from political unrest at our development centers in Israel.

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Our stock price 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 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, including financing plans, future announcements concerning us, our competitors or our principal customers regarding financial results or expectations, technological innovations, industry supply or demand dynamics, new product introductions, governmental regulations, the commencement or results of litigation or changes in earnin gs estimates by analysts.  In addition, in recent years the stock market has experienced significant price and volume fluctuations and the market prices of the securities of high-technology and semiconductor companies have been especially volatile, often for reasons outside the control of the particular companies.  These fluctuations as well as general economic, political and market conditions may have an adverse affect on the market price of our common stock as well as the prices of our outstanding convertible notes.

We may engage in business combinations that are dilutive to existing stockholders, result in unanticipated accounting charges or otherwise harm our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses.  We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets.  If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existing stockholders.  Alternatively, acquisitions made entirely or partially for cash would reduce our cash reserves.

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

Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition.  Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.  Even when an acquired company has already developed and marketed products, there can be no assurance that such products will be successful after the closing, will not cannibalize sales of our existing products, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such company.& #160; Failed business combinations, or the efforts to create a business combination, can also result in litigation.

Our success depends on our key personnel, including our executive officers, and the loss of key personnel or the transition of key personnel, including our Chief Executive Officer, 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.  In July 2010, we announced that Dr. Eli Harari, our Founder, Chairman and Chief Executive Officer, will retire from his current positions on December 31, 2010.  Dr. Harari will provide consulting services, particularly technology related, to us for a period of two years starting January 1, 2011.  Our Board of Directors appointed Sanjay Mehrotra, currently our President and Chief Operating Officer, to be our President and Chief Executive Officer effective January 1, 2011.  In addition, the Board also appointed Mr. Mehrotra to serve as a director of the Company effective July 21, 2010.  The Board of Directors also announced that Michael Marks, a member of the SanDisk Board of Directors since 2003, will assume the role of Chairman effective January 1, 2011.  While we will strive to make this transition as smooth as possible, this leadership change may result in disruptions to our business or operations.  In addition, 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 pr ice may reduce the effectiveness of share-based awards for retaining employees. 

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Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenues, costs and stock price.  Terrorist attacks, U.S. military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer 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 t he 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 or the Middle East could cause delays in the development or production of our products.  This could harm our business and results of operations.

Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could negatively impact our operations.  Our operations, including those of our suppliers and subcontractors, are concentrated in Milpitas, California; Raleigh, North Carolina; Brno, Czech Republic; Astugi and Yokkaichi, Japan; Hsinchu and Taichung, Taiwan; and Dongguan, Futian, Shanghai and Shenzen, China.  In the past, these areas have been affected by natural disasters such as earthquakes, tsunamis, floods and typhoons, and some areas have been affected by epidemics, such as avian flu or H1N1 flu.  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, including earthquakes.  The impact of a natural disaster could harm our business and results of operations.

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 product are primarily distributed via air.  If there are significant disruptions in air travel, we may not be able to deliver our products or receive raw materials.  For example, the volcanic eruption in Iceland in April 2010 halted air traffic for several days over Europe and disrupted other travel routes that pass through Europe, resulting in delayed delivery of our products to certain European countries.  In addition, a natural disaster that affects air travel in Asia could disrupt our ability to receive raw materials in, or ship finished product from, our Shanghai facility or our Asia-based contract manufacturers.  As a result, our business and results of operations may be harmed.

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

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.  We are subject to income tax in the U.S. and numerous foreign jurisdictions.  Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions.  We are subject to ongoing tax audits in various jurisdictions.  Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes.  For example, we are currently under a federal income tax audit by the Internal Revenue Service, or IRS, for fiscal years 2005 through 2008.  While we regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision, examinations are inherently uncertain and an unfavorable outcome could occur.  An unanticipated unfavorable outcome in any specific period could harm our results of operations for that period or future periods.  The financial cost and our attention and time devoted to defending income tax positions may divert resources from our business operations, which could harm our business and profitability.  The IRS audit may also impact the timing and/or amount of our refund claim.  In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process.  In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S.  Any of these changes could affect our profitability.

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We may be subject to risks associated with environmental regulations.  Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances, the responsibility for environmentally safe disposal or recycling.  Such laws and regulations have recently been passed in several jurisdictions in which we operate, including Japan and certain states within the U.S.  Although we do not anticipate any material adverse effects in the future based on the nature of our operations and the focus of such laws, there is no assurance such existing laws or future laws will not harm our financial condition, liquidity or results of operations.

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

We have significant financial obligations related to Flash Ventures, which could impact our ability to comply with our obligations under our 1% Convertible Senior Notes due 2013 and 1.5% Convertible Senior Notes due 2017.  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 October 3, 2010, we had guarantee obligations for Flash Ventures’ master lease agreements of approximately $891.4 million.  In addition, we have significant commitments for the future fixed costs of Flash Ventures, and we will incur significant obligations with respect to Flash Forward as well as continued investment in Flash Partners and Flash Alliance.  Due to these and our other commitments, we may not have sufficient funds to make payments under or repay the notes.

Our debt service obligations may adversely affect our cash flow. While our 1% Convertible Senior Notes due May 15, 2013, or 1% Notes due 2013, are outstanding, we will have debt service obligations on the 1% Notes due 2013 of approximately $11.5 million per year.  While our 1.5% Convertible Senior Notes due August 15, 2017, or 1.5% Notes due 2017, are outstanding, we will have debt service obligations on the 1.5% Notes due 2017 of approximately $15.0 million per year.  If we issue other debt securities in the future, our debt service obligations will increase.  If we are unable to generate sufficient cash to meet these obligations and must instead use our existing ca sh or investments, we may have to reduce, curtail or terminate other activities of our business.

We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments.  We may enter into other senior financial instruments in the future.

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

• increase our vulnerability to general adverse economic and industry conditions;
• limit our ability to obtain additional financing;
• require the dedication of a substantial portion of any cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and our industry;
• place us at a competitive disadvantage relative to our competitors with less debt; and
• increase our risk of credit rating downgrades.
  

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The net share settlement feature of the 1% Convertible Senior Notes due 2013 and 1.5% Convertible Senior Notes due 2017 may have adverse consequences.  The 1% Notes due 2013 and 1.5% Notes due 2017 are subject to net share settlement, which means that we will satisfy our conversion obligation to holders by paying cash in settlement of the lesser of the principal amount and the conversion value of the 1% Notes due 2013 and 1.5% Notes due 2017 and by delivering shares of our common stock in settlement of any and all conversion obligations in excess of the principal amount.  Accordingly, upon conversion of a note, holders might not receive any shares of our common stock, or they might receive fewer shares of common stock relative to the conversion value of the note.

Our failure to convert the 1% Notes due 2013 and 1.5% Notes due 2017 into cash or a combination of cash and common stock upon exercise of a holder’s conversion right in accordance with the provisions of the applicable indenture would constitute a default under that indenture.  We may not have the financial resources or be able to arrange for financing to pay such principal amount in connection with the surrender of the 1% Notes due 2013 and 1.5% Notes due 2017 for conversion.  While we do not currently have any debt or other agreements that would restrict our ability to pay the principal amount of any convertible notes in cash, we may enter into such an agreement in the future, which may limit or prohibit our ability to make any such payment.  In addition, a default under either indentur e could lead to a default under existing and future agreements governing our indebtedness.  If, due to a default, the repayment of related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and amounts owing in respect of the conversion of any convertible notes.

The convertible note hedge transactions and warrant transactions and/or early termination of the 2006 hedge and warrant transactions may affect the value of the notes and our common stock.  In connection with the pricing of the 1% Notes due 2013 and 1.5% Notes due 2017, we have entered into privately negotiated convertible note hedge transactions with the underwriters in the offerings of the notes (collectively, the “dealers”) or their respective affiliates.  The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the 1% Notes due 2013 and the 1.5% Notes due 2017.  These transactions are expected to reduce the potential dilution with respect to our common stock upon conversion of the 1% Notes due 2013 and 1.5% Notes due 2017.  Separately, we have also entered into privately negotiated warrant transactions with the dealers or their respective affiliates, relating to the same number of shares of our common stock, subject to customary anti-dilution adjustments.  We used approximately $67.3 million of the net proceeds of the offering of the 1% Notes due 2013 and $104.8 million of the net proceeds of the offering of the 1.5% Notes due 2017 to fund the cost to us of the convertible note hedge transactions (after taking into account the proceeds to us from the warrant transactions) entered into in connection with the offerings of the notes.  These transactions were accounted for as an adjustment to our stockholders’ equity.

In addition, we may, from time to time, repurchase a certain portion of our 1% Notes due 2013.  In connection with any such repurchases, we may early terminate a portion of the convertible note hedge transactions we entered into in May 2006 with respect to the 1% Notes due 2013 we repurchase, and a portion of the warrant transactions we entered into in May 2006.  In connection with any such termination of a portion of the 2006 hedge and warrant transactions, the counterparties to those transactions are expected to unwind various over-the-counter derivatives and/or sell our common stock in open market and/or privately negotiated transactions, which could adversely impact the market price of our common stock and of the notes.

In connection with the convertible note hedge and warrant transactions, the dealers or their respective affiliates:

• have entered into various over-the-counter cash-settled derivative transactions with respect to our common stock concurrently with, or shortly following, the pricing of the notes; and
• may enter into, or may unwind, various over-the-counter cash-settled derivative transactions and/or purchase or sell shares of our common stock in open market and/or privately negotiated transactions following the pricing of the notes, including during any observation period related to a conversion of notes.

The dealers or their respective affiliates are likely to modify their hedge positions, from time-to-time, prior to conversion or maturity of the notes by purchasing and selling shares of our common stock, other of our securities or other instruments they may wish to use in connection with such hedging.  In particular, such hedging modification may occur during any observation period for a conversion of the 1% Notes due 2013 and 1.5% Notes due 2017, which may have a negative effect on the value of the consideration received in relation to the conversion of those notes.  In addition, we intend to exercise options we hold under the convertible note hedge transactions whenever notes are converted.  To unwind their hedge positions with respect to those exercised options, the dealers or their respec tive affiliates expect to purchase or sell shares of our common stock in open market and/or privately negotiated transactions and/or enter into or unwind various over-the-counter derivative transactions with respect to our common stock during the observation period, if any, for the converted notes.

The effect, if any, of any of these transactions and activities on the market price of our common stock or the 1% Notes due 2013 and 1.5% Notes due 2017 will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our common stock and the value of the 1% Notes due 2013 and 1.5% Notes due 2017, and, as a result, the amount of cash and the number of shares of common stock, if any, the holders will receive upon the conversion of the notes.

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

None.

Item 3.   Defaults upon Senior Securities

None.

Item 4.   (Removed and Reserved)

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.

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SIGNATURES

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

SANDISK CORPORATION

(Registrant)

Dated: November 12, 2010	By: /s/ Judy Bruner
	Judy Bruner Executive Vice President, Administration and Chief Financial Officer (On behalf of the Registrant and as Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

Exhibit  Number	Exhibit Title
3.1	Restated Certificate of Incorporation of the Registrant.(2)
3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December 9, 1999.(3)
3.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11, 2000.(4)
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 26, 2006.(5)
3.5	Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997.(6)
3.6	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.(7)
3.7	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 27, 2009.(8)
3.8	Amended and Restated Bylaws of Registrant dated July 21, 2010.(9)
4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7 and 3.8. (2), (3), (4), (5), (6), (7), (8) and (9)
4.2	Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust Company, Inc.(7)
4.3	Amendment No. 1 to Rights Agreement by and between the Registrant and Computershare Trust Company, Inc., dated as of November 6, 2006.(10)
4.4	Registrant Form of Indenture (including notes).(11)
4.5	Indenture (including form of Notes) with respect to the Registrant’s 1.00% Convertible Senior Notes due 2013 dated as of May 15, 2006 by and between the Registrant and The Bank of New York.(12)
4.6	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, N.A.(13)
10.1	Flash Forward Master Agreement, dated as of July 13, 2010 by and among Toshiba Corporation, a Japanese corporation, Registrant and SanDisk Flash B.V.(*)+
10.2	Transition Agreement, dated as of July 13, 2010 by and among Toshiba, Registrant and SanDisk Flash B.V.(*)+
10.3	Flash Forward Mutual Contribution and Environmental Indemnification Agreement, dated as of July 13, 2010, by and among Toshiba, Registrant and SanDisk Flash B.V.(*)
10.4	Patent Indemnification Agreement, dated as of July 13, 2010, by and among Toshiba, Registrant and SanDisk Flash B.V.(*)+
10.5	Operating Agreement of Flash Forward, Ltd. by and between Toshiba and SanDisk Flash B.V. (*)+
10.6	Underwriting Agreement dated as of August 19, 2010 by and among the Registrant, Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.(13)
10.7	Form of Amended and Restated Change of Control Benefits Agreement entered into by and between the Registrant and its Named Executive Officers other than the Registrant’s CEO.(14)(***)
10.8	Agreement by and between Registrant and Eli Harari dated as of July 30, 2010(*)(***)
10.9	Sanjay Mehrotra Offer Letter effective as of January 1, 2011(*)(***)
10.10	Change of Control Executive Benefits Agreement by and between Registrant and Sanjay Mehrotra effective as of January 1, 2011(*)(***)
10.11	Executive Severance Agreement by and between Registrant and Sanjay Mehrotra effective as of January 1, 2011(*)(***)
10.12	Reference is made to Exhibit 4.6. (13)
12.1	Computation of Ratio of Earnings to Fixed Charges.(*)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(**)
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(**)

*	Filed herewith.
**	Furnished herewith.
***	Indicates management contract or compensatory plan or arrangement.
+	Confidential treatment has been requested with respect to certain portions hereof.

1.	Confidential treatment granted as to certain portions of these exhibits.
2.	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-96298).
3.	Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 2000.
4.	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No. 333-85686).
5.	Previously filed as an Exhibit to the Registrant’s Form 8-K dated June 1, 2006.
6.	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18, 1997.
7.	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated September 25, 2003.
8.	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 28, 2009.
9.	Previously filed as an Exhibit to the Registrant’s Form 8-K dated July 21, 2010.
10.	Previously filed as an Exhibit to the Registrant’s Form 8-A/A dated November 8, 2006.
11.	Previously filed as an Exhibit to the Registrant’s Form 8-K dated May 9, 2006.
12.	Previously filed as an Exhibit to the Registrant’s Form 8-K dated May 15, 2006.
13.	Previously filed as an Exhibit to the Registrant’s Form 8-K dated August 19, 2010.
14.	Previously filed as an Exhibit to the Registrant’s Form 8-K dated October 7, 2010.

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