2000 Annual Report 0

Founded in 1988, SanDisk Corporation is the world’s largest supplier of flash data storage systems. Today SanDisk designs, manufactures and markets industry-standard, solid-state data, digital imaging and audio storage products using its patented, high-density flash memory and controller technologies. SanDisk sells its growing array of products to original equipment manufacturers and to end-users through more than 20,000 retail outlets worldwide. SNDK

1 . SanDisk Corporation . 2000 Annual Report

$525,950

$482,793

$138,471

$134,298 $77,029 0 100 500 400 300 200 $600 Working Capital Working (in thousands) 1999 1998 1999 1999 1998 41,220 32,571 41,220 61,433 55,344

572,127 207,838 572,127 207,838 657,724 255,741 657,724 255,741 $298,672 246,990 135,761 246,990

$ 205,77011,836 $$ 103,190 $ 26,550 $ 0.43 $ 0.21 $ 482,793 $ 138,471 $26,550

$11,836

$19,839 $14,485 0 50 2000 2000 150 100 250 200 $300 72,651 Net Income (in thousands) 75,453 601,812 863,058 1,107,907

$ 526,359 $ 298,672 $ 4.11 $ 525,950

$124,666

$30,085

$12,810

$19,680 $12,474 0 80 60 40 20 100

$120

Operating Income (in thousands)

$601,812

$246,990

$135,761

$125,253 $97,599 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 Product License and royalty 0 100 500 400 300 200 Financial Highlights Financial $600 Revenues (in thousands) Revenues capital Working Total stockholders’ equity Total Total revenues Total per share Diluted net income share calculations Shares used in per assets Total At December 31, (In thousands, except per share data) except per share (In thousands, December 31, Ended Year Net income

most of the year was to ramp up our production the year was to most of achieve To quickly as possible. output as memory we output of flash the maximum 128 transition from our technology accelerated single bit per cell flash megabit .28 micron megabit D2 cell flash, first at memory to 256 at .24 micron. By the fourth .28 micron, then running the 256 megabit D2 quarter we were at three UMC fabs, up from .24 micron design were also We quarter. one fab in the first of our card assembly and running the majority and in China, Taiwan test at our subcontractors the US economy the Philippines. Unfortunately, for the worse late in the took a sudden turn to deal and we exited fiscal 2000 having year, challenges for with a completely different set of fiscal 2001. on the first day Our vision is the same as it was The post PC era at SanDisk almost 13 years ago. for flash presents us enormous opportunities of digital memory storage with the convergence consumer electronics, wireless communications The key to devices and Internet appliances. supplying unleashing these opportunities is manufactured reliable flash memory that can be new at an affordable cost which enables and mega-markets, such as digital cameras path to wireless Internet appliances. The on rapid affordability is our passionate focus memory development of leading edge flash our strategic technology and controllers. With SanDisk allies in Taiwan, and our partner Toshiba for the has an extremely aggressive roadmap development and future mass production of advanced flash memories and low-cost high- performance controllers. For example, SanDisk are currently the only suppliers and Toshiba shipping monolithic 512 megabit flash chips, manufactured for both companies at Toshiba’s wafer fab in Japan. In mid 2001 this Yokkaichi technology is expected to begin production at the FlashVision joint venture fab in Virginia. Joint development activities are proceeding on track to introduce higher capacity and lower cost flash memory and controller chips in 2002. In 2001, we also expect our investments of the past 18 months in the Secure Digital Card standard to begin to pay off as numerous platforms supporting the Secure Digital Card enter the market. There are currently 225 members in the SD Association and the pace

FY 2000 – A Banner Year for SanDisk. FY 2000 – A Banner Year Opportunity. FY 2001 – A Challenge and an growth Fiscal 2000 was a year of phenomenal saw our for SanDisk. During the year we past several hard work and investments of the and growing years translate into booming sales This was our seventh consecutive profitability. year of revenue growth. The financial performance numbers are outstanding; up 144% from revenues grew to $601.8 million, to $526.4 1999. Product revenues grew 156% increased 6% million and product gross margins units sold in to 32%. Total over the prior year, compared to fiscal 2000 exceeded 13 million, was Pricing just under 5 million in the prior year. and we experienced stable for most of the year, a relatively moderate decline of 22% in the price per megabyte shipped in 2000 compared to 1999. Net income was $94.7 million, up 256% from 1999, excluding the one time after tax gain on the UMC investment of $204 million. License and royalty revenues grew 83% to $75.5 million in fiscal 2000, and we received a strong boost to our patent portfolio from the successful settlement with Lexar of our ’987 also renewed our patent infringement case. We patent cross license with Hitachi and signed a patent cross license with TDK. During the first three calendar quarters of 2000 we were under severe production capacity constraints, resulting in product allocations to our customers as the digital consumer markets for our products began to grow at an accelerating pace. Our challenge throughout A Letter from the President from A Letter

2 / 3 . SanDisk Corporation . 2000 Annual Report of new designs for Secure Digital Card and cooperation agreement with Zoran platforms is accelerating. For example on Microelectronics, Ltd. to develop MPEG4 March 19, 2001, Palm announced the compression for future digital cameras, to allow introduction of the new Palm computers that movie clips of several minutes duration, up from will employ Secure Digital Cards supplied by the current limit of 5 to 20 seconds. We are SanDisk, for removable storage. SanDisk has also working closely with the leading DSP and been a leading participant in the PDA market controller host providers, Microsoft and others, since its inception, and believes that Palm’s to help promote the widespread acceptance of decision is an acknowledgement of the growing removable flash memory card standards, as consumer demand for digital music and other well as copyright protection of content stored electronic content on their mobile devices. We on our cards. believe that the same pattern for the adoption of Secure Digital Cards will repeat itself in The current market conditions at the end of the next generation (3G) cell phones and Internet first quarter of 2001 are quite challenging. appliances, which, over the next 3 to 5 Bookings visibility is unusually low and is not years will create an explosive demand for expected to improve materially while our flash memory cards. According to market customers continue to work down their excess projections, in 2003 more Internet enabled cell inventories. Competition is fierce and prices are phones will be sold than PCs, and by 2005 coming down more rapidly than we have seen the vast majority of cell phones sold will be for several years, putting downward pressure Internet appliances. We also believe that on our gross margins. These conditions are NAND flash memory components are rapidly difficult for all competitors. At SanDisk we view becoming the standard for embedded storage them as an opportunity for us to gain market applications and that this trend will open up share through good execution under adversity. for SanDisk major new market opportunities SanDisk is fortunate to have a very strong selling flash chips, in addition to removable balance sheet, which will allow us to continue flash memory cards. our strategic programs for advanced technology and products, as well as our During 2000 we also undertook several strategic investments in FlashVision in 2001. strategic initiatives to expand our future market We are confident that these investments opportunities. We formed the DigitalPortal Inc. will position SanDisk to be the long-term market joint venture with Photo-Me International, Plc. leader once the current slow-down comes to to develop and market self vending photo an end. At the same time we have taken strict kiosks employing a superb high-resolution, measures in Q1 2001 to manage our operating low-cost silver halide printing process. The spending to reflect the current business DigitalPortal photo kiosks will allow digital environment. camera users to quickly and easily get top quality prints from their digital film. We expect More than at any time in recent years, we are the rollout of these kiosks to commence in seeing our people, our number one asset, the second half of 2001. We made a strategic stepping up to the challenges, and putting forth investment in Tower Semiconductor to tremendous dedication and hard work to participate in their future advanced wafer achieve SanDisk’s vision. We are deeply foundry where we expect to produce some of indebted to our employees. We are also our future advanced programmable controller encouraged by the support from our long-term designs, starting in late 2002. We made a investors, who share our vision for renewed strategic investment in Divio, Inc., a Silicon growth and profitability in the next up-cycle. Valley startup that is developing MPEG4 video compression chips for future solid state digital camcorders where flash memory is expected to replace tape. We expect Divio to launch their first product within the next Eli Harari year. We also announced a joint development President and Chief Executive Officer 4 / 5 . SanDisk Corporation 2000 Annual Report

CompactFlashTM MultiMediaCard Invented by SanDisk and SanDisk co-invented this introduced in 1994, CompactFlash postage-stamp-sized solid-state memory cards are now the primary storage card to meet the unique storage medium for more than 250 requirements of digital music products, including digital players, smart phones, cellular cameras, handheld computers, phones, camcorders and digital music players, medical pagers. MultiMediaCards are monitors, and audio recorders. available in capacities ranging Matchbook-size CompactFlash from 8MB – 128MB. cards come in capacities ranging from 8MB – 512MB. Flash data storage – pioneered by SanDisk in 1988 – has come of age. Digital cameras and camcorders. Digital music players. Smart phones. PDAs and handheld computers. Voice recorders. SanDisk flash data storage products provide the enabling technology for them all.

What’s more, the convergence of digital consumer electronics, wireless communications devices and Internet appliances is creating a host of multimedia applications that offer new market opportunities for SanDisk flash Building a memory cards.

As consumers discover the convenience Retail Brand of portable electronic devices such as digital cameras and digital music players, they are seeking greater memory capacity to store more pictures, music and data. SanDisk removable flash data storage solutions make it easy for

SanDisk answers consumer consumers to increase capacity as their demand for rugged, portable, needs change. Today more than 20,000 major retail stores worldwide, including high-performance, non-volatile leading office supply chains, e-tailers and data storage with a broad discount retailers, carry SanDisk’s high- array of flash memory cards capacity flash memory products – and and connectivity solutions. that is just the beginning.

Available at leading retail Well-known and respected among original stores, SanDisk memory cards equipment manufacturers, the SanDisk name is offer unmatched compatibility gaining brand recognition among retail shoppers. and performance that SanDisk is reinforcing this visibility with new consumers can buy with packaging and advertising aimed at mainstream confidence. consumer markets. The demographics for removable flash memory cards now range from grandparents to pre-teens. Our goal is to build brand preference and make SanDisk a product line that shoppers ask for by name. Drive and Adapter TM TM The ImageMate external drive is a fast and convenient way to transfer data between a memory card and a computer. FlashPath is an adapter that lets users read and write data to memory cards using a floppy disk drive. ImageMate FlashPath TM SmartMedia This semiconductor-based memory card offers high performance and high capacity and is appropriate for all SmartMedia devices. It is available in capacities ranging from 8MB – 128MB.

6 / 7 . SanDisk Corporation . 2000 Annual Report SanDisk brings to the retail market the largest flash memory storage offering of any single company. Not only have we developed the industry standard for removable flash memory cards, we have created different formats to meet the needs of emerging applications and have introduced accessories that allow users to move data efficiently from our flash memory cards to PCs in a variety of ways.

The unsurpassed compatibility of our products gives us universal access to emerging mega-markets. SanDisk data storage products are truly plug-and-play. They are compatible with today’s major operating systems and applications as well as forward and backward compatible between generations. What’s more, they give users unprecedented flexibility for storing any type of file – data, voice, video clips, email, and photographs, all on a portable card small enough to fit into your pocket.

Current growth is most dynamic in the retail Unsurpassed market where sophisticated digital cameras and digital music players have found widespread acceptance with consumers. Compatibility Mega-pixel digital cameras are now able to produce pictures of exceptionally high- resolution. Similarly, digital music players will let users carry an entire library of music with them. As capabilities increase so does the need for greater data storage capacity. SanDisk is meeting this demand with flash data products that come in a range of storage capacities. New generation cellular phones, PDAs, and smart phones that combine a cell phone and palm-PC in a single unit are also recognizing the advantages of flash memory cards.

All of these product categories offer tremendous opportunities for SanDisk’s family of flash data storage solutions. SanDisk is not only exceptionally well-positioned to benefit from the proliferation of portable digital devices, we are dedicated to being the global market leader in flash memory storage in the post-PC consumer era. 8 . SanDisk Corporation 2000 Annual Report

SanDisk helps to bring about revolutionary new applications for consumer electronic devices through our commitment to continuous technology innovations. Over the years, we have proactively worked with original equipment manufacturers to solve their memory storage needs in portable devices that have become smaller and more sophisticated. Our support of Secure Digital technology that protects artistic properties, for example, has encouraged the growth of digital music players and paved the way for other copyright-protected materials to be sold in downloadable digital form. SanDisk has also taken a pioneering role in creating new retail venues SanDisk® FlashDrive for the digital photo market. In this way, we are not only participating in Designed to replace traditional rotating disk mega-markets, we are helping to spur their growth. drives, SanDisk FlashDrives are used in a growing number of applications including networking, industrial computers, telecommunications, gaming, SanDisk® DigitalPortalTM military, avionics and point- Industry analysts predict of-sale systems. that 20 billion photographs will be created digitally by 2002. To address this vast emerging market, SanDisk has joined forces with Photo-Me International, PIc. to form DigitalPortal Inc., a venture created to develop and operate digital photo-processing Secure Digital (SD) kiosks in convenient retail SanDisk® PC Card Memory Card. locations in the United SanDisk Type II PC Cards are ideal for storage, data Designed by the consortium States and Canada. These backup and data transport of Matsushita Electric, self-service vending applications. This removable SanDisk and Toshiba, the machines will let users ATA industry-standard Secure Digital memory card download images from memory card is available in meets the demand for flash memory cards, CDs, capacities ranging from 8 increased security in a wide floppy disks or the Internet megabytes to 1.0 gigabyte. range of emerging audio and print out high-quality, and video consumer low-cost photographs. In electronics devices such the future, DigitalPortal as digital music players, plans to integrate global positioning systems, multimedia capabilities electronic books and that will tap new personal video players. Its application opportunities design complies with both for flash card sales current and future SDMI through retail partners. (Secure Digital Music Initiative) portable device requirements. The Secure TriFlashTM Digital memory card’s I/O An embedded chip product, functionality also offers TriFlash can be seamlessly enormous possibilities for integrated with removable extending functionality in MultiMediaCards or Secure a variety of consumer and Digital Cards for incremental telecommunications storage. TriFlash is ideally products. SanDisk began suited for storing audio, shipping Secure Digital video, data and images on small portable devices such cards to retail markets in as cell phones and digital spring 2001. music players. 9 . SanDisk Corporation . 2000 Annual Report of Operations. 1999 1998 1999 1996 1997 1999 1998 1997 1996 41,220 32,571 19,578 41,220 32,571 8,000 61,433 55,344 49,940 48,412 94,847 55,450 94,847 55,450 38,892 52,973 30,085 12,810 19,680 12,474 19,680 30,085 12,810 55,834 52,596 45,760 44,324 152,143 80,311 72,280 58,707 72,280 152,143 80,311 572,127 207,838 191,374 87,810 657,724 255,741 245,467 108,268 245,467 657,724 255,741 246,990 135,761 125,253 97,599 246,990 135,761 $134,298 $77,029 482,793 $ 138,471 $ $ 205,770 $ 103,190 $ $ 105,675 89,599 $14,485 $ 19,839 11,836 $ 26,550 $ 0.40$ $ 0.21 $ 0.30 0.48 $ $ $ 0.43 0.23 $ 0.43 $ 0.33 2000 2000 72,651 66,861 75,453 601,812 357,017 124,666 244,795 863,058 1,107,907 $ 525,950 $ 526,359 $ 298,672 $ 4.47 4.11$ Product Basic Diluted Basic License and royalty Diluted Revenues Gross profits capital Working Total assets Total stockholders’ equity Total See Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results Discussion and Analysis of Financial and Management’s See Notes to the Consolidated Financial Statements Total revenues Total Net income per share Shares used in per share calculations At December 31, Cost of revenues (In thousands, except per share data) except per share (In thousands, December 31, Ended Year Selected Financial Data Financial Selected Net income Operating income ge for our USIC f Operations. resulting in a pretax number of options License and royaltyBasicDiluted 8,210 10,249 9,910 12,851 $ $ 0.08 $ 0.07 0.1 $ $ 1 0.10 $ 0.12 $ 0.1 $ 1 0.17 0.15 Product69,920 57,624 $ 42,300 $ 35,926 $ $ License and royaltyBasicDiluted** 12,120 21,377 19,022 22,934 $ 3.00 $ 3.320.330.36 $ $ 0.350.38 $ $ 0.40.44 $ 1 $ Product $ 97,249 $ $ 122,572 151,817 $ 154,721 included or omitted from diluted calculations based on the stock price or option strike prices. included or omitted from diluted calculations based shares, we received 111 million UMC shares. These shares were valued at approximately $396 million at the time of the merger, shares were valued at approximately $396 million at the time of the merger, shares, we received 111 million UMC shares. These first quarter of 2000. in the gain of $344.2 million ($203.9 million after-tax) * had invested $51.2 million in USIC. In exchan We the USIC foundry was merged into the UMC parent company. On January 3, 2000, ** in the per share figures may not total to yearly earnings per share, due to rounding and the fluctuations Quarterly earnings See Notes to the Consolidated Financial Statement and Management’s Discussion and Analysis of Financial Condition and Results o Discussion and Analysis of Financial and Management’s See Notes to the Consolidated Financial Statement Total revenuesTotal incomeGross profitsOperating incomeNet Net income per share 44,136 52,549 4,848 17,627 10,028 4,323 5,694 6,505 67,534 7,033 21,691 82,771 23,637 6,956 31,892 11,248 Quarterly/1999 Revenues Total revenuesTotal profitsincomeGross income*Operating Net Net income per share 109,369 17,551 30,852 35,535 40,728 143,949 59,435 68,965 41,611 74,784 170,839 219,271 24,269 25,602 29,530 177,655 (Unaudited. In thousands except per share data) In thousands except (Unaudited. Quarterly/2000 Revenues 1st 2nd 3rd 4th Supplementary Quarterly Data Supplementary

10 . SanDisk Corporation . 2000 Annual Report 11 . SanDisk Corporation . 2000 Annual Report Beginning in late 1995, we adopted a strategy of a strategy in late 1995, we adopted Beginning our products using a direct sales market We a majority of our sales have been to a Historically, All of our products require silicon wafers, the licensing our flash technology, including our patent our flash technology, licensing prod- of flash to third party manufacturers portfolio, cross- date, we have entered into patent ucts. To with several companies, and license agreements to enter into additional intend to pursue opportunities current license agreements, licenses. Under our fees, royalties, or a combination licensees pay license the compensation to us may thereof. In some cases, of guaranteed access to flash be partially in the form capacity from the licensee memory manufacturing payments The timing and amount of royalty company. of license fees can vary substan- and the recognition quarter depending on the terms tially from quarter to the timing of of each agreement and, in some cases, As a result, sales of products by the other parties. signifi- license and royalty revenues have fluctuated to fluctuate cantly in the past and are likely to continue gross margins in the future. Given the relatively high gross associated with license and royalty revenues, fluctuate more margins and net income are likely to than with with changes in license and royalty revenues changes in product revenues. representa- organization, distributors, manufacturers’ retailers. We tives, private label partners, OEMs and will com- expect that sales through the retail channel revenues in prise an increasing share of our product of our sales the future, and that a substantial portion participants that into the retail channel will be made to Our policy will have the right to return unsold products. these sales is to defer recognition of revenues from customers. until the products are sold to the end our top 10 cus- limited number of customers. Sales to 48%, 57%, and tomers accounted for approximately our product revenues for 2000, of 59%, respectively, 1999, and 1998. In 2000, no single customer accounted for greater than 10% of our total revenues. In 1999 and 1998, revenues from one customer exceeded 10% expect that sales of our prod- of total revenues. We ucts to a limited number of customers will continue to account for a substantial portion of our product rev- have also experi- enues for the foreseeable future. We enced significant changes in the composition of our customer base from year to year and expect this pattern to continue as market demand for our customers’ products fluctuates. The loss of, or a significant reduction in purchases by any of our major customers, could harm our business, financial condition and results of operations. See “Factors That May Affect Future Results – Sales to a Small Number of Customers Represent a Significant Portion of Our Revenues.” majority of which are currently manufactured for us by demand for semicon- Industry-wide UMC in Taiwan. ductors increased significantly in 1999 and the first nine Our operating results are affected by a number of Our operating results are affected by Certain statements in this discussion and analysis are and analysis in this discussion Certain statements expecta- based on current statements forward looking that and uncertainties entail various risks tions, and results to differ materially from could cause actual such forward looking statements. those expressed in are set forth in “Factors Such risks and uncertainties Results” and elsewhere in this That May Affect Future discussion should be read in con- report. The following financial statements and junction with our consolidated the notes thereto. Overview in 1988 to develop and market SanDisk was founded sell our products to systems. We flash data storage the consumer electronics and industrial/communica- 77% of our tions markets. In fiscal 2000, approximately consumer elec- product sales were attributable to the and tronics market, particularly sales of CompactFlash camera MultiMediaCard products for use in digital have lower applications. Our CompactFlash products than our average selling prices and gross margins products. In higher capacity FlashDisk and FlashDrive CompactFlash addition, a substantial portion of our into the retail and MultiMediaCard products are sold order channel, which usually has shorter customer majority of our lead-times than our other channels. A with sales to the retail channel are turns business, there- quarter, orders received and fulfilled in the same forecast future by decreasing our ability to accurately believe sales to the consumer production needs. We of our market will continue to represent a majority of sales in future sales, and increase as a percentage applications, years, as the popularity of consumer including digital cameras, increases. sales, competi- factors including the volume of product tive pricing pressures, availability of foundry capacity, variations in manufacturing cycle times, fluctuations in manufacturing yields and manufacturing utilization, the timing of significant orders, our ability to match supply with demand, changes in product and customer mix, market acceptance of new or enhanced versions of our products, changes in the channels through which our products are distributed, timing of new product announcements and introductions by us and our competitors, the timing of license and royalty revenues, fluctuations in product costs, increased research and development expenses, and exchange rate fluctua- have experienced seasonality in the past. As tions. We the proportion of our products sold for use in consumer electronics applications increases, our revenues may become subject to seasonal declines in the first See “Factors That May Affect quarter of each year. Future Results – Our Operating Results May Fluctuate Significantly Which May Adversely Affect Our Stock Price” and “– There is Seasonality in Our Business.” Management’s Discussion and Analysis Analysis and Discussion Management’s of Operations Results and Conditions of Financial In 2000, our product revenues Export sales are an important part of our business, are an important Export sales to realize a For the foreseeable future, we expect they occur. See “Factors That May Affect Future That May “Factors See occur. they May Fluctuate Results Operating – Our Results Significantly.” 56% of our total revenues 57%, 53% and representing may Our sales and 1998, respectively. in 2000, 1999, in our economic conditions by changes in be impacted our inter- conditions in markets. Economic international Asia and the European national markets, including affect our revenues to the extent Union, may adversely products in these regions that demand for our recent economic conditions in Asia declines. Given the Union and the weakness of the and the European currencies relative to the United and other Euro, Yen more our products may be relatively States dollar, regions, which could result in a expensive in these in these regions. While most of decrease of our sales in U.S. Dollars, we invoice our sales are denominated and are in Japanese Yen certain Japanese customers on these transac- subject to exchange rate fluctuations financial conditions which could affect our business, That May tion and results of operations. See “Factors operations Affect Future Results – Our international and curren- make us vulnerable to changing conditions cy fluctuations.” recently significant portion of our revenues from new products introduced and new products. Typically, more mature initially have lower gross margins than yields are lower products because the manufacturing product at the start of manufacturing each successive yields are gener- generation. In addition, manufacturing any product at ally lower at the start of manufacturing remain competitive, we are focusing To a new foundry. on a number of programs to lower manufacturing generations of costs, including development of future There can D2 flash and advanced technology wafers. develop such be no assurance that we will successfully of such products or processes or that development If the current processes will lower manufacturing costs. slowdown con- industry-wide and worldwide economic tinues for the rest of fiscal 2001, we may be unable to efficiently utilize the NAND flash wafer production from FlashVision, which would force us to amortize the fixed costs of the fabrication facility over a reduced wafer output, making these wafers significantly more expensive. See “Factors That May Affect Future Results – We must achieve acceptable manufacturing yields.” Results of Operations Product Revenues. increased 156% to $526.4 million from $205.8 million in 1999. The increase consisted of an increase of 173% in unit sales, which was partially offset by a 7% decline in average selling prices per unit. In 2000, the largest increase in unit volume came from sales of CompactFlash Products that represented 47% of product revenues and MultiMediaCard products that represented 21% of product revenues. The continuing move towards higher capacity cards in 2000 partially offset a decline in the average selling price per megabyte of We have from time to time taken write-downs for have We Excess inventory not only ties up our cash, but months of 2000, due to increased demand in the con- demand increased due to of 2000, months This markets. cellular phone and electronics sumer for most constraints demand caused supply increased manufacturers, semiconductor of 2000. However, new been adding have UMC and Toshiba including This additional capacity, wafer fab capacity. advanced conditions experienced slowing economic along with has 2000 and into 2001, fourth quarter of late in the supply and intense pricing pressure. resulted in excess for our products continues to If industry-wide demand our prod- available supply, be below the industry-wide further causing our revenues uct prices could decrease our wafer Under significantly. and profits to decline there are limits on the number of supply agreements, and our ability to change that wafers we can order Accordingly, either up or down, is restricted. quantity, to significant fluctuations in demand our ability to react limited. If customer demand falls for our products is and we are unable to reschedule or below our forecast long lead-time cancel our orders for wafers or other circuit boards, items such as controller chips or printed which could we may end up with excess inventories, reduced gross result in higher operating expenses and our forecasts, margins. If customer demand exceeds supply of we may be unable to obtain an adequate could result in lost wafers to fill customer orders, which to obtain sales and lower revenues. If we are unable wafers with adequate quantities of flash memory current and acceptable prices and yields from our financial condition future wafer foundries, our business, and results of operations could be harmed. to do so again excess inventories, and may be forced demand for our if the current deterioration in market levels exceed products continues and our inventory have to write- customer orders. In addition, we may pressure down our inventories if continued pricing lower than our results in a net realizable value that is obsolete. Due cost, or if part of the inventory becomes products chang- to the current market demand for our we ended the fourth quarter with signifi- ing so rapidly, Although we are cant amounts of excess inventory. working to reduce this inventory in line with the current level of business, we are obligated to honor existing purchase orders, which we have placed with our suppliers. Furthermore, to assure favorable future business relations with our major suppliers, we may choose not to shut down their production of our products. In the case of FlashVision manufacturing at and SanDisk are Dominion in Virginia, both Toshiba obligated to purchase their share of the production output, which may make it more difficult for us to reduce our inventory. or also can result in substantial losses if such inventory, large portions thereof, has to be revalued due to lower market pricing or product obsolescence. These inventory adjustments decrease gross margins and have resulted, and could in the future result in, fluctuations in gross margins and net earnings in the quarter in which

12 . SanDisk Corporation . 2000 Annual Report 13 . SanDisk Corporation . 2000 Annual Report Research and In fiscal 2000, gross profits In fiscal 2000, gross Our income from patent licenses and royalties can and royalties licenses patent from Our income Gross Profits. supply Due to weak economic conditions, excess Research and Development. fluctuate significantly from quarter to quarter. A sub- to quarter. quarter from significantly fluctuate comes from royalties of this income stantial portion the our licensees. Given the actual sales by based on flash sales of licensed outlook for 2001, current market lower be substantially by our licensees may products which in recent quarters, sales than the corresponding in our royalty revenues. a substantial drop may cause million, or 41% of total revenues increased to $244.8 or 38% of total revenues in 1999 from $94.8 million, 41% of total revenues in 1998. and $55.5 million, or increased to 32% in 2000 from Product gross margins in 1998. The increases in 2000 26% in 1999 and 22% to the lower cost per megabyte of were primarily due memory products, which repre- our 256 megabit flash of our product sales in 2000. The sented the majority due to the lower cost per increases in 1999 were megabit and 128 megabit flash megabyte of our 256 in volume in memory products, which began shipping the second half of 1999. lower demand in the markets for our products, and their from customers as they continue to reduce pricing pres- inventories, we are experiencing intense our average sures. Due to these factors, we expect significantly in selling prices per megabyte to decline selling prices will the first quarter of 2001. Our average future quarters continue to be negatively impacted in until market throughout 2001 and possibly beyond, returns to equilib- supply and demand for our products steps to lower rium. Although we are taking significant market condi- our product costs, given the current decline more tions, we expect our selling prices to in a decline in quickly than our product cost, resulting our product gross margins in 2001. development expenses consist principally of salaries development expenses consist principally and develop- and payroll-related expenses for design contract serv- ment engineers, prototype supplies and increased ices. Research and development expenses to $46.1 million in 2000 from $26.9 million in 1999 and $18.2 million in 1998. As a percentage of revenues, research and development expenses were 8% in 2000, 11% in 1999 and 13% in 1998. In 2000 and 1999, the increase in research and development expenses was primarily due to an increase in salaries and payroll-related expenses associated with additional personnel and higher project related expenses. Increased depreciation due to capital equipment additions also contributed to the growth in research and development expenses in both years. The additional project expenses in 2000 were to support the development of new generations of flash data storage products including the 512 megabit and 1 gigabit flash memory co- expect our research We development with Toshiba. and development expenses to continue to increase in future quarters to support the development and introduction of new generations of flash data storage prod- and the ucts, including the joint venture with Toshiba development of advanced controller chips. We currently We Our backlog as of December 31, 2000 was $63.3 Our backlog as of December 31, 2000 In 1999, our product revenues were $205.8 million, product revenues In 1999, our our major In the first quarter of 2001, demand from License and Royalty Revenues. capacity shipped. In 2000, the average megabyte the average In 2000, shipped. capacity the 17% while increased shipped per unit capacity of flash memory price per megabyte average selling The to the prior year. 22% compared shipped declined and from quarter to quarter sold varies mix of products our overall average in the future, affecting may vary and gross margins. selling prices from $103.2 million in 1998. In 1999 an increase of 99% in unit volume came from sales of the largest increase represented 61% of product rev- CompactFlash which products which represent- enues, and MultiMediaCard A shift in product mix to ed 7% of product revenues. in 1999 partially offset a decline higher capacity cards price per megabyte of capacity in the average selling average megabyte capacity per shipped. In 1999, the 65% while the average selling unit shipped increased of flash memory shipped declined price per megabyte the prior year. 52% compared to 1999 and $13.4 million compared to $157.2 million in Affect Future million in 1998. See “Factors That May Fluctuate Results – Our Operating Results May in Our Significantly” and “– There is Seasonality significantly late Business.” Bookings visibility declined experienced in the fourth quarter of 2000, and we of exist- material order cancellations and rescheduling customers. ing purchase orders from some of our of 2001 due to Visibility remains low in the first quarter markets. Since the current economic uncertainty in our are subject to orders constituting our current backlog back- changes in delivery schedules or cancellations, future revenue. log is not necessarily an indication of shipped in the Retail sales are typically booked and same quarter. below forecast, OEM customers has been substantially reduce their as these customers continue to try to orders have inventories. In addition, retail channel in the been lower than the levels we experienced weak- fourth quarter of 2000. Due to this continuing ness of economic conditions and ongoing customer inventory corrections, we expect first quarter 2001 revenues to be significantly below our revenues in the fourth quarter of 2000. earn patent license fees and royalties under nine cross-license agreements with Hitachi, Intel, Lexar, TDK and Toshiba. Sharp, Samsung, SmartDisk, SST, License and royalty revenues from patent cross- license agreements was $75.5 million in 2000, up from $41.2 million in 1999 and $32.6 million in 1998. The increase in license and royalty revenues in 2000 was primarily due to patent royalties from increased sales by certain of our licensees, and the revenue of $4.7 million recognized in conjunction with the settlement of the Lexar litigation. The increase in license and royalty revenues in 1999, as compared to 1998, was primarily due to an increase in patent royalty revenues. Revenues from licenses and royalties were 13% of total revenues in 2000, 17% in 1999 and 24% in 1998. In the first quar- In the first Our 2000, 1999 and Other income, net was Provision for Income Taxes. Provision for Income Taxes. Gain on investment in foundry. in foundry. Gain on investment of both At December 31, 2000, the market value of our As of March 22, 2001, the market value Other Income, Net. the proceeds from the sale of common stock in our stock sale of common from the the proceeds expect We offering. public follow-on 1999 November due 2001 relative to 2000 to decline in interest income from balances resulting and investment to lower cash combined and Tower, in FlashVision our investments recent rates due to in risk-free interest with the drop Reserve Board. by the U.S. Federal actions taken a gain of $344.2 million as ter of 2000, we recognized of our investment of $51.2 a result of the exchange Inc., or USIC, for an investment million in United Silicon, Corporation, or UMC. We in United Microelectronics shares of UMC in exchange for our received 111 million shares were valued at $396 million USIC shares. These and were subject to trad- at the time of the exchange Stock by UMC and the Taiwan ing restrictions imposed restrictions expired on one-half Exchange. The trading 3, 2000. The remaining shares of the shares on July for sale over a two-year period will become available shares are ulti- beginning in January 2002. When the additional mately sold, it is likely that we will recognize a stock divi- gains or losses. In May 2000, we received shares of dend of 200 UMC shares for every 1,000 of 22 million UMC owned, resulting in our ownership additional UMC shares. in UMC had our short-term and long-term investment basis. It was declined $201.9 million below its carrying to the down- determined that this decline was related a whole and was turn in the semiconductor industry as cyclical temporary in nature due to the historically portion of The available-for-sale nature of the industry. through other our investment was marked-to-market 115. SFAS comprehensive income as required by below our investment in UMC remained significantly industry and cost. The downturn in the semiconductor more severe the economy in general appears to be a great deal of than previously anticipated. There is indus- uncertainty regarding when the semiconductor Because of the try will recover from this down cycle. we believe that continued downturn in the economy, the decline in the market value of our investment in and UMC at March 22, 2001 is other than temporary, we will report a loss in other income and expense in the first quarter of 2001. This loss will be based upon the fair market value of the investment at the end of the first quarter of fiscal 2001, as compared to the cost basis. investment’s $572,000 in 2000 compared to $1.3 million in 1999 and $374,000 in 1998. The fluctuations largely relate to foreign currency transaction gains. In 2000, 1999, and 1998 we had net foreign currency transaction gains of $428,000, $1.1 million and $412,000, respectively. 1998 effective tax rates were approximately 39%, 33% Our 2000 effective tax rate was and 36%, respectively. higher than our 1999 rate due primarily to effects of state income taxes on significantly increased income and a reduced proportional rate benefit from federal General and admin- Sales and marketing Sales Interest income was $22.8 mil- General and Administrative. Sales and Marketing. and Marketing. Sales Given the current market conditions and expected Interest Income. expenses include salaries, sales commissions, benefits commissions, sales salaries, include expenses customer sales, marketing, expenses for our and travel These personnel. applications engineering service and selling and marketing also include other expenses repre- manufacturer’s such as independent expenses, and tradeshow commissions, advertising sentative to expenses increased Sales and marketing expenses. from $25.3 million in 1999 and $49.3 million in 2000 The increases in both 2000 and $16.9 million in 1998. due to increased salaries and pay- 1999 were primarily and increased commission roll-related expenses product revenues and expenses due to higher expenses. Sales and marketing increased marketing 8% of total revenues in 2000 expenses represented expect in 1999 and 12% in 1998. We compared to 10% expenses to continue to increase sales and marketing as we continue to grow, as sales of our products and brand awareness for our develop the retail channel activities products and as we increase our marketing for our Secure Digital Card products. our finance, infor- istrative expenses include the cost of rela- mation systems, human resources, shareholder General and tions, legal and administrative functions. million in 2000 administrative expenses were $24.8 $7.5 million in compared to $12.6 million in 1999 and 1999 were pri- 1998. The increases for both 2000 and expenses marily due to increased salary and related increased legal associated with additional personnel, for doubtful fees and an increase in the allowance receivable accounts related to higher trade accounts and balances from increased revenues. General 4% of total rev- administrative expenses represented and 6% in enues in 2000 compared to 5% in 1999 general and administrative expenses expect 1998. We our infrastruc- to increase as we expand and develop growth. General ture to support our anticipated future increase sub- and administrative expenses could also litigation stantially in the future if we pursue additional That May to defend our patent portfolio. See “Factors Affect Future Results – Risks Associated with Patents, Proprietary Rights and Related Litigation.” decline in product revenues in the first quarter of 2001, we have instituted strict expense control measures. These measures in the first quarter of 2001 included a reduction in our work force and significant cuts in dis- we are continuing to cretionary spending. However, invest in research and development of advanced technologies and future products. lion in 2000 compared to $8.3 million in 1999 and $5.3 million in 1998. The increase in 2000 is primarily due to a full year of higher interest income resulting from the investment of the proceeds from the sale of common stock in our November 1999 follow-on public offering, as well as increased cash flows as a result of the increase in revenue and operating margin. The increase in 1999 is primarily due to higher interest income in the fourth quarter due to the investment of

14 . SanDisk Corporation . 2000 Annual Report 15 . SanDisk Corporation . 2000 Annual Report On July 4, 2000, we entered into a share purchase On July 4, 2000, we a joint ven- On August 9, 2000, we entered into On November 2, 2000, we made a strategic 50% ownership of the joint venture we had invested we had venture of the joint ownership 50% in January 2000, and 31, as of December million $134.7 have We $15.3 million. invested the remaining 2001, we lease million in equipment up to $215 also guaranteed man- Dominion Semiconductor Toshiba’s lines to equip wafer processing clean room with advanced ufacturing of this 2001, $20 million As of January 26, equipment. by FlashVision. been borrowed amount had a $75 million investment in Tower agreement to make in Israel, representing or Tower, Semiconductor, In exchange ownership of Tower. approximately 10% we received one seat on the board for our investment, portion of the and a guaranteed of directors of Tower the advanced fabrication facility wafer output from Israel. has started to build in Migdal Haemek, Tower the agreement, we will make our Under the terms of period of approximately 18 months if investment over a to the construction, equipping key milestones related fabrication and wafer production at the new wafer satisfied Tower facility are met. On January 26, 2001, agree- the closing conditions of the share purchase million of our ment, and we transferred the first $20 to purchase investment from an escrow account million in pre- 866,551 ordinary shares and obtain $8.8 we paid Tower paid wafer credits. On March 1, 2001, one, to $11 million upon its completion of milestone obtain addition- purchase 366,690 ordinary shares and will al prepaid wafer credits. Additional contributions exercises for ordi- take the form of mandatory warrant per share if nary shares at an exercise price of $30.00 will expire five other milestones are met. The warrants event the key years from the date of grant, and in the of these milestones are not achieved, the exercise expect first wafer We warrants will not be mandatory. fabrication facility production to commence at the new in late 2002. ture, Digital Portal Inc , or DPI, with Photo-Me installation, International, or PMI, for the manufacture, digital photo marketing and service of self-service, printing labs, or kiosks, bearing the SanDisk brand name in locations in the U.S. and Canada. These low-cost, silver halide kiosks employ high-quality, photo processing technology developed by PMI. Under the agreement, SanDisk and PMI will each make an initial investment of $4 million in the DPI joint venture, and secure lease financing for the purchase of the kiosks. The total value of the lease financing will depend on the number of kiosks deployed by the joint venture. lease estimate that we will guarantee equipment We arrangements of approximately $40 million over the first two years of the agreement. PMI will manufacture the kiosks for the joint venture and will install and maintain the kiosks under contract with the joint ven- expect to deploy the first kiosks in pilot pro- ture. We grams in selected retail stores in the United States starting in the first half of 2001. investment of $7.2 million in Divio, Inc. Divio is a privately-held manufacturer of digital imaging On June 30, 2000, we closed a transaction with Net cash used in investing activities of $137.9 mil- Net cash used in investing activities of $13.6 million, In 2000, financing activities provided and state credits and tax exempt interest income due interest exempt and tax credits and state over 1999. income in taxable increase significant to the 1998 lower than our effective tax rate was Our 1999 federal rate benefits from the proportional rate due to tax credits. and state Resources and Capital Liquidity of had working capital 31, 2000, we As of December included $106.3 million in cash $526.0 million, which and $373.3 million in short-term and cash equivalents activities provided $84.9 million investments. Operating from net income, increases in of cash in 2000 primarily million largely due to the gain deferred taxes of $114.5 payable of $39.8 million as a on UMC, income taxes income than in 1999, accounts result of higher taxable primarily from increased inven- payable of $36.4 million revenue of $21.4 million related to tories, and deferred were partially offset by an increase license fees, which million and an increase in in inventory of $60.9 with accounts receivable of $52.2 million associated was higher revenues. Cash provided by operations in 1998. $17.0 million in 1999 and $15.1 million in lion in 2000 included $134.7 million invested with FlashVision LLC, our foundry joint venture $26.6 million of capital equipment purchases, Toshiba, account for our a $20.0 million deposit in an escrow and our $7.2 mil- Semiconductor, investment in Tower by proceeds lion investment in Divio, partially offset million. In 1999, from net sales of investments of $51.5 $214.4 million net cash used in investing activities of purchases consisted $21.4 million of capital equipment $193.0 million. In and net purchases of investments of of $23.0 mil- 1998, net cash used in investing activities in the USIC lion consisted of a second investment capital equip- foundry of $10.9 million, $7.5 million of investments of ment purchases and net purchases of $4.6 million. through the primarily from the sale of common stock purchase plans. our stock option and employee stock During 1999, cash provided by financing activities of $328.2 million was primarily from $320.3 million from the net proceeds of the sale of common stock in our November 1999 follow-on stock offering and $7.9 million from the sale of common stock through the SanDisk stock option and employee stock purchase plans. During 1998, cash provided by financing activities of $2.4 million was primarily from the sale of common stock through the SanDisk stock option and employee stock purchase plans. the joint development and manu- providing for Toshiba facture of 512 megabit and 1 gigabit flash memory chips and Secure Digital Card controllers. As part of formed this transaction, SanDisk and Toshiba FlashVision LLC, a joint venture to equip and operate a silicon wafer manufacturing line at Dominion Semiconductor in Virginia. The cost of equipping the Virginia wafer manufacturing line is estimated at between $700 million and $800 million. As part of our In December 1999, The Securities and Exchange Securities The 1999, In December Financial Accounting Standards In March 2000, the ucts due to competitive pricing pressures; capacity; petitors and our own new flash wafer building a large inventory levels; and in particular, tory of unsold product due to non-cancelable contractual obligations to purchase materials such as flash wafers, controllers, printed circuit boards and discrete components; and or reserves necessary to pro- of unsold inventory, tect us against future write-offs of such unsold inventory. or enhanced versions of our products; place the standards used in our products; fluctuations in manufacturing yields and utilization; ty to meet customer demand; • demand for our products; unpredictable • in the average selling prices of our prod- decline • in sales of our products; seasonality • capacity of flash memory from our com- excess • of inven- difficulty of forecasting and management •devaluation expenses related to obsolescence or • mix; adverse changes in product and customer • of new slower than anticipated market acceptance • which dis- competing flash memory card standards • changes in our distribution channels; • timing of license and royalty revenue; • due to fluctuations in product costs, particularly • capaci- availability of sufficient silicon wafer foundry Commission issued Staff Accounting Bulletin No. 101 Bulletin Accounting Staff issued Commission SAB 101 Statements.” Recognition in Financial “Revenue and presentation guidance on the recognition, provides All regis- statements. of revenue in financial disclosure disclo- the accounting and expected to apply trants are of SAB Our implementation in SAB 101. sures described on our consolidated have a material impact 101 did not financial position and cash flows. results of operations, Interpretation No. 44 (“FIN 44”), Board issued FASB Involving Stock Transactions “Accounting for Certain Interpretation of APB Opinion No. Compensation-an the application of APB Opinion 25 25.” FIN 44 clarifies issues clarifies the following: the defi- and, among other for the purposes of applying APB nition of an employee criteria for determining whether a Opinion No. 25; the noncompensatory plan; the account- plan qualifies as a of various modifications to the terms ing consequences or awards; and for the previously fixed stock options compensation the accounting for an exchange of stock 44 became awards in a business combination. FIN a material effective July 1, 2000 and did not have operations, finan- impact on our consolidated results of cial position, and cash flows. Results Factors That May Affect Future Our operating results may fluctuate significantly, Our operating results may fluctuate price. which may adversely affect our stock have fluc- Our quarterly and annual operating results expect that tuated significantly in the past and we This fluctu- they will continue to fluctuate in the future. including the ation is a result of a variety of factors, following: Depending on the demand for our products, we on the demand Depending merged In January 2000, the USIC foundry was compression technology and products for future digital for and products technology compression our flash of using capable will be that camcorders video movies, replacing to store home memory cards used in these systems. tape currently the magnetic 10% of approximately agreement, we own Under the board seat. are entitled to one Divio and investments, which to make additional may decide in assembly and test manufactur- could be substantial, capacity to support our busi- ing equipment or foundry Our operating expenses may ness in the future. of the need to hire additional per- increase as a result our sales and marketing efforts and sonnel to support activities, including our pro- research and development joint develop- for the with Toshiba posed collaboration and 1 gigabit flash memory chips. ment of 512 megabit and cash equivalents and believe the existing cash We will be sufficient to meet our short-term investments working capital and capital expen- currently anticipated months. diture requirements for the next twelve In exchange for our into the UMC parent company. shares. USIC shares, we received 111 million UMC $396 mil- These shares were valued at approximately resulting in a pretax gain lion at the time of the merger, in the first of $344.2 million ($203.9 million after-tax) we received as quarter of 2000. All of the UMC shares trading restric- a result of the merger were subject to Stock tions imposed by UMC and the Taiwan on one-half Exchange. The trading restrictions expired of the merger, of the shares six months after the date will become on July 3, 2000. The remaining shares beginning in available for sale over a two-year period ultimately sold, it January 2002. When the shares are gains or losses is likely that we will recognize additional UMC shares. due to fluctuations in the price of the for such funds in While we do not anticipate the need we may liquidate a portion of the the current year, and use the UMC shares that are available for sale, capital expen- proceeds to support our operations and ditures. Impact of Currency Exchange Rates A portion of our revenues are denominated in enter into foreign exchange forward We Japanese Yen. contracts to hedge against changes in foreign currency exchange rates. No forward contracts were outstanding at December 31, 2000. At December 31, 1999, two forward contracts with notional amounts of $8.2 million were outstanding. Future exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement 133, Accounting for Derivative Instruments and Hedging Activities, which we are we have required to adopt in fiscal 2001. Historically, had a minimal use of derivatives and do not anticipate that the adoption of the new Statement will have a significant effect on our earnings or financial position.

16 . SanDisk Corporation . 2000 Annual Report 17 . SanDisk Corporation . 2000 Annual Report Variability of average selling prices and and selling prices average of Variability margin gross our which affects mix varies quarterly, Our product Our and gross margins. selling prices overall average which products, and MultiMediaCard CompactFlash rev- of our product represent the majority currently gross selling prices and lower average enues, have FlashDisk and our higher capacity margins than that sales of believe We FlashDrive products. MultiMediaCard products will con- CompactFlash and a significant percentage of our prod- tinue to represent applications, such as digital uct revenues as consumer music players, become more pop- cameras and digital per megabyte In fiscal 2000, average selling prices ular. to fiscal 1999, reflecting the decreased 22% compared shortages that prevailed during Flash memory supply helped to keep which of the year, the first nine months more stable than in 1999. selling prices in 2000 declined 52% in selling prices per megabyte Average increases in 1999 compared to 1998. Due to recent economic slow- flash memory foundry capacity and the expect that the down in the first quarter of 2001, we 2001 will be decline in our average selling prices in reduce our more severe than in 2000. If we cannot to offset these product manufacturing costs in 2001 net profitability reduced prices, our gross margins and will suffer. and royalties of license fees Variability of cross- Our intellectual property strategy consists of flash licensing our patents to other manufacturers we earn license products. Under these arrangements, terms. The fees and royalties on individually negotiated payments is timing of revenue recognition from these and on the dependent on the terms of each contract parties. Our timing of product shipments by the third can fluctu- income from patent licenses and royalties A substantial ate significantly from quarter to quarter. based on portion of this income comes from royalties the current the actual sales by our licensees. Given flash prod- market outlook for 2001, sales of licensed ucts by our licensees may be substantially lower than the corresponding sales in recent quarters, which may cause a substantial drop in our royalty revenues. Because these revenues have higher gross margins than product revenues, gross margins and net income fluctuate significantly with changes in license and royalty revenues. Continuing declines in our average sales prices may result in declines in our gross margins. In 2000, the average price per megabyte shipped declined 22% compared to 1999. Flash data storage markets are intensely competitive and accordingly, price reductions for our products are necessary to meet consumer price points. Due to recent increases in flash memory foundry capacity and the worldwide economic slow-down in the first quarter of 2001, we expect that price declines for our products could be significant on an annualized basis. If we cannot reduce our product manufacturing costs in 2001 to offset these reduced prices, our gross margins and net profitability will suffer. printed circuit boards required for the manufactur- for boards required circuit printed products; ing of our our could increase customer orders and ty to fulfill costs; products which performance of our tionality or product costs, reduce demand could increase our require product recalls; for our products or at peak capacity; our suppliers operating yen exchange rate; dollar to Japanese European Union; larly in Japan and the particularly Taiwan, we conduct our business, Japan and the United States; • and capacitors such as of components shortages •could affect our abili- losses which significant yield • func- the reliability, flaws affecting manufacturing • cycle times due to lengthening in manufacturing •and development expenses; increased research • particularly the U.S. exchange rate fluctuations, •economic conditions, particu- changes in general • the countries in which natural disasters affecting Difficulty of estimating silicon wafer needs Difficulty of estimating silicon wafer foundries, we When we order silicon wafers from our wafers needed have to estimate the number of silicon into the future. If to fill product orders several months we will build excess we overestimate this number, margins and inventories, which could harm our gross signifi- operating results. Bookings visibility declined and remains cantly late in the fourth quarter of 2000, uncertainty in low in 2001 due to the current economic underestimate our markets. On the other hand, if we to fill product the number of silicon wafers needed an adequate sup- orders, we may be unable to obtain product revenues. ply of wafers, which could harm our CompactFlash Because our largest volume products, consumer and MultiMediaCard, are sold into emerging forecast markets, it has been difficult to accurately our quarterly future sales. A substantial majority of received and sales have historically been from orders which makes accurate fulfilled in the same quarter, our product order forecasting very difficult. In addition, backlog may fluctuate substantially from quarter to quarter. Anticipated growth in expense levels in 2000 significantly increased our expense levels We may need to hire additional to support our growth. We personnel or increase our operating expenses in 2001 to support our sales and marketing efforts and research and development activities, including our providing for the develop- joint venture with Toshiba ment of 512 megabit and 1 gigabit flash memory have significant fixed costs and we cannot chips. We readily reduce these expenses over the short term. If our revenues do not increase proportionately to our operating expenses, or if revenues decrease or do not meet expectations for a particular period, such as we are forecasting for the first quarter of 2001, our business, financial condition and results of operations will be harmed. tion of new semiconductor devices; semiconductor tion of new at our subcontractors manufacturing processes complex; which may be extremely these devices; and ucts that will incorporate The Secure Digital Card incorporates a number of • in the early produc- often experienced lower yields • processes including flaws with new manufacturing • and manufacturing of prod- problems with design • production delays. data storage products: the development of higher the development storage products: data implementa- and the devices semiconductor capacity A processes. geometry manufacturing tion of smaller cost in achieving a lower challenges exist number of including: per megabyte, are complex, we periodically Because our products delays in the development and experience significant ramp up of our products. Similar volume production in the future and could harm our delays could occur condition and results of operations. business, financial D2 flash technology developed new products based on D2 flash have We a flash architecture designed to store two technology, flash bits in each flash memory cell. High density such as D2 flash, is a complex technology memory, and effec- that requires strict manufacturing controls in the shift to tive test screens. Problems encountered could impact volume production for new flash products increased man- both reliability and yields, and result in We availability. ufacturing costs and reduced product generations of may not be able to manufacture future to result in lower our D2 products with yields sufficient to bring future costs per megabyte. If we are unable flash memory generations of our 256 and 512 megabit or if we expe- into full production as quickly as planned our rev- rience unplanned yield or reliability problems, enues and gross margins will decline. Secure Digital Card products jointly SanDisk, along with Matsushita and Toshiba, Digital Card. developed and will promote the Secure version of our The Secure Digital Card is an enhanced MultiMediaCard that incorporates advanced security and copyright protection features required by the emerging markets for the electronic distribution of began music, video and other copyrighted works. We shipping our Secure Digital Card products in the first quarter of 2001, and expect to begin high-volume production in the first half of 2001. new features, including SDMI compliant security and copy protection, a mechanical write protect switch and have never before built a high data transfer rate. We products incorporating these features. Any problems or delays in establishing production capabilities or ramping up production volumes of our Secure Digital Card products could result in lost sales or increased manufacturing costs in 2001 and beyond. In addition, we cannot be sure that manufacturers of consumer electronic products will develop new products that use the Secure Digital Card or that content providers such as music studios will agree to distribute their copyrighted content for storage on Secure Digital Cards. For example, in 2000 the major U.S. based content A significant portion of our sales to the consumer A significant portion of our sales to the In transitioning to new processes and products, we face production and market acceptance risks. General Successive generations of our products have incorporated semiconductor devices with greater memory important factors have enabled capacity per chip. Two us to decrease the cost per megabyte of our flash Sales of our products, in particular the sale of CompactFlash and MultiMediaCard products, in the consumer electronics market may be subject to sea- product sales may be impacted As a result, sonality. by seasonal purchasing patterns with higher sales In generally occurring in the second half of each year. addition, in the past we have experienced a decrease in orders in the first quarter from our Japanese OEM customers primarily because most customers in Japan operate on a fiscal year ending in March and prefer to delay purchases until the beginning of their next fiscal not experience seasonality in Although we did year. 2000, we cannot assure you that we will not experience seasonality in 2001 or future years. There is seasonality in our business. In 2000, we continued to receive more product rev- In 2000, we continued to receive more for consumer enue and ship more units of products cameras, electronics applications, principally digital consumer market compared to other applications. The sensitive is intensely competitive and is more price we must than our other target markets. In addition, in consumer spend more on marketing and promotion and drive markets to establish brand name recognition demand. and to electronics market is made through distributors typically include retailers. Sales through these channels As a result, we do not rights to return unsold inventory. has been recognize revenue until after the product If our distributors and sold through to the end user. there could retailers are not successful in this market, would harm our be substantial product returns, which of operations. business, financial condition and results Our business depends upon consumer products. Our business depends upon consumer In the first nine months of 2000, industry-wide demand industry-wide nine months of 2000, In the first the available products exceeded for flash memory cellular in the growth of by an explosion driven supply, elec- shift in consumer the accelerating phones and devices. Flash memory analog to digital tronics from strong responded to this including SanDisk, suppliers, increasing investments in new demand by significantly This has production capacity. advanced flash memory increase in worldwide flash memory led to a significant customer demand has supply at a time when supply in the causing excess decreased significantly, and significant declines in markets for our products If this situation continues average selling prices. expect that price declines for our throughout 2001, we significant on an annualized basis. If products could be our product manufacturing costs in we cannot reduce reduced prices, our gross margins 2001 to offset these and net profitability will suffer. Our selling prices may be affected by excess by be affected may selling prices Our products. memory for flash market in the capacity

18 . SanDisk Corporation . 2000 Annual Report 19 . SanDisk Corporation . 2000 Annual Report In the third quarter of 2000, we completed qualifi- quarter of 2000, In the third We expect to incur substantial start up expenses We UMC, a foundry in which we have ownership, totaling ownership, we have in which a foundry UMC, mil- and $11.6 million $22.8 $161.6 million, approximately lion, respectively. of the 256 began volume production cations and fabs. in two UMC 0.24 micron technology megabit D2 our 0.24 UMC fabs producing now have three We from these wafers vary The yields on micron wafers. relative stage of start-up or pro- fab to fab due to the third UMC fab to begin production is duction ramp. The we have been experiencing lower a new UMC fab and other fabs. There can be no assur- yields than the two not experience delays in wafer avail- ances that we will flaws low yields, or undetected manufacturing ability, impact the reliable operation of which may adversely such difficulties may adversely our products. Any supply and gross margins. impact our product Our investment in new flash memory wafer produc- Our investment in and fluctua- tion may result in increased expenses tions in operating results. with On June 30, 2000, we closed a transaction providing for the joint development and manu- Toshiba memory facture of 512 megabit and 1 gigabit flash Under this chips and Secure Digital Card controllers. as of agreement, we had invested $134.7 million invested the December 31, 2000 and in January 2001 have also guaranteed up to remaining $15.3 million. We entered into by $215 million in equipment lease lines by us and FlashVision LLC, which is jointly owned million in equipment lease lines to equip Toshiba, Dominion Semiconductor manufacturing Toshiba’s equip- clean room with advanced wafer processing of this ment. As of January 26, 2001, $20 million is Toshiba amount had been borrowed by FlashVision. equal amount and obligated to invest and guarantee an expenses and each of us will equally share the startup will use the new production the wafer output. We primarily NAND capacity at Dominion to manufacture feature flash memory wafers with minimum lithographic moving to 0.13 micron in the size of 0.16 micron initially, future. Such minimum feature sizes are considered today to be among the most advanced for mass production of silicon wafers and have never been used for the high volume manufacture of flash memory chips. Therefore, it is difficult to predict how long it will take to equip and commence production at the new facility and achieve adequate yields, reliable operation, and eco- nomically attractive product costs based on our new have not operated our own wafer fabrica- designs. We tion facility in the past and therefore we rely on Toshiba to address these challenges. With our investments in we are now exposed to the the Dominion facility, adverse financial impact of any delays or manufacturing problems associated with the wafer production line. Any problems or delays in commencing production at the new Dominion facility could adversely impact our operating results in 2001 and beyond. related to the hiring and training of manufacturing personnel, facilitizing the clean room and installing equipment. During the ramp-up period, currently expected to Under the terms of our wafer supply agreements Under the terms of our wafer supply We depend on third party foundries for silicon depend on third party foundries We wafers. rely on We All of our products require silicon wafers. Japan to sup- in Yokkaichi, and Toshiba UMC in Taiwan depend on We ply the majority of our silicon wafers. to meet our UMC to allocate a portion of its capacity with accept- needs, produce acceptable quality wafers our wafers on a able manufacturing yields and deliver UMC is unable to timely basis at a competitive price. If financial con- satisfy these requirements, our business, Any disruption dition and operating results may suffer. power fail- in supply from UMC due to natural disaster, harm our busi- ure or other causes could significantly operations. ness, financial condition and results of a rolling fore- with UMC, we are obligated to provide the next six cast of anticipated purchase orders for the estimates for the first calendar months. Generally, commit- three months of each forecast are binding months may ments. The estimates for the remaining from the only be changed by a certain percentage limits our ability to forecast. This previous month’s products. For react to fluctuations in demand for our our forecast example, if customer demand falls below and we are unable to reschedule or cancel our wafer orders, we may end up with excess wafer inventories, which could result in higher operating expenses and if customer reduced gross margins. Conversely, demand exceeds our forecasts, we may be unable to obtain an adequate supply of wafers to fill customer orders, which could result in dissatisfied customers, lost sales and lower revenues. In addition, in February 2000, we entered into a capacity and reservation reserve additional deposit agreement with UMC. To foundry capacity under this agreement, we paid UMC a reservation deposit. This deposit will be refunded to us on a quarterly basis, over the agreement term, if we purchase the full wafer capacity reserved for us. to may forfeit part of our deposit if we are unable We utilize our reserved capacity within four quarters of the end of the agreement term. If we are unable to obtain scheduled quantities of wafers with acceptable price our business, financial and yields from any foundry, condition and results of operations could be harmed. In 2000, 1999, and 1998, we purchased wafers from providers have had significant success in U.S. courts in U.S. courts in success had significant have providers and MP3.Com, and with Napster.Com litigation their the widespread distribu- slowed down this may have Although the music on the internet. tion of digital address specifically to Card is designed Secure Digital the content providers, protection rights of the copy that these content be no assurance there can will sufficient or will find these measures providers Furthermore, there is no agree to support them. will widely adopt Secure assurance that consumers only operate with copyrighted Digital Cards, as they of our Secure broad acceptance content. Conversely, may reduce demand for our Digital Card by consumers CompactFlash card products. See MultiMediaCard and our business depends on emerging “– The success of markets and new products.” Because we sell our products for use in many new Because we sell our products for use Haemek, Israel is in a secure geographic location, the location, geographic is in a secure Israel Haemek, We delays. scheduling cause may nevertheless unrest com- facility will be Tower you that the cannot assure that as scheduled, or will begin production pleted or will be our wafers needed to fabricate the processes we cannot Moreover, the new facility. qualified at achieve will be able to that this new facility assure you of sufficient quantities yields or deliver acceptable basis at a competitive price. wafers on a timely The success of our business depends on emerg- The success of our products. ing markets and new the for our products to grow, In order for demand that use CompactFlash, the markets for new products Secure Digital Card such as MultiMediaCard, and players and smart phones, must portable digital music sales of these products do not If develop and grow. and profit margins could level off our revenues grow, or decline. During applications, it is difficult to forecast demand. ruled against the third quarter of 2000, the U.S. Courts and MP3.Com in two cases involving Napster.Com digital music unlicensed distribution of copyrighted carefully studied over the Internet. This action is being or OEMs, by the original equipment manufacturers, using Flash who have been developing MP3 players for stor- memory cards such as our MultiMediaCards their production of age of music. If these OEMs reduce recent court digital music players in response to these our products decisions or other factors, demand for that these OEMs will decrease. In addition, we believe with our Secure may redesign their platforms to work in the first quar- Digital Card, which we began shipping we may experience a drop in ter of 2001. Accordingly, before demand from our MultiMediaCard customers Secure Digital the new anticipated demand for our Card materializes. Secure Digital Card products with Toshiba, As part of our June 2000 joint venture we will jointly develop the Secure Digital Card, an enhanced version of our MultiMediaCard, which will incorporate advanced security and copyright protection features required by the emerging markets for the electronic distribution of music, video and other copy- began shipping our Secure Digital righted works. We Card products in 32 and 64 megabyte capacities in the first quarter of 2001. The Secure Digital Card is slightly thicker and uses a different interface than our MultiMediaCard. Because of these differences, the Secure Digital Card will not work in current products that include a MultiMediaCard slot. In order for the market for our Secure Digital Card to develop, manufacturers of digital audio/video and portable computing products must include a Secure Digital Card compatible slot in their products and acquire a license to the security algorithms. If OEMs do not incorporate Secure Digital Card slots in their products or do not buy our Secure Digital Cards, our business, financial condition and results of operations may be harmed. In addition, consumers may postpone or altogether forego buying On July 4, 2000, SanDisk entered into a share pur- On July 4, 2000, SanDisk entered into Although we do not believe the current political begin in the middle of 2001, equipment depreciation equipment of 2001, in the middle begin substan- increase expenses operating and line begins the is still relatively low, the wafer output While tially. to facility is expected from the Dominion cost of wafers from our cost of wafers higher than the be significantly overall impact our This may negatively other suppliers. from flash wafer output margins until product gross never level, which may reaches an optimum Dominion we are Under our agreement with Toshiba, occur. 50% of the output from the committed to purchase will incur startup costs and pay We Dominion facility. operating activities even if we do our share of ongoing of the Dominion output. Should not utilize our full share for NAND flash products be less customer demand from reduced we may suffer supply, than our available expenses, and increased revenues and increased NAND flash wafers, which could inventory of unsold cannot operating results. We adversely affect our able to secure will be or Toshiba assure you that we line. sufficient funding to support this manufacturing based Furthermore, in order for us to sell NAND SD Cards, we will CompactFlash, MultiMediaCards and circuit boards have to develop new controllers, printed of NAND and test algorithms because the architecture current NOR flash flash is significantly different from our of these ele- designs. Any delays in the development of the ments could prevent us from taking advantage affect our available NAND output and could adversely results of operations. investment in chase agreement to make a $75 million representing in Israel, or Tower, Semiconductor, Tower In exchange approximately 10% ownership of Tower. seat on the board for our investment, we received one and a guaranteed portion of the of directors of Tower facility wafer output from the advanced fabrication is starting to build in Migdal Haemek, Israel. Tower will make our Under the terms of the agreement, we 18 months if investment over a period of approximately equipping key milestones related to the construction, fabrication facil- and wafer production at the new wafer satisfied the ity are met. On January 26, 2001, Tower closing conditions of the share purchase agreement, and we transferred the first $20 million of our invest- in exchange ment from an escrow account to Tower for 866,551 ordinary shares and obtain $8.8 million in pre-paid wafer credits. On March 1, 2001, we paid its completion of milestone one, $11 million upon Tower to purchase 366,690 ordinary shares and obtain additional prepaid wafer credits. Additional contributions will take the form of mandatory warrant exercises for ordinary shares at an exercise price of $30.00 per share if other milestones are met. The warrants will expire five years from the date of grant, and in the event the key milestones are not achieved, the exercise of these expect first wafer We warrants will not be mandatory. production to commence at the new fabrication facility in late 2002. unrest in Israel represents a major security problem for in which we recently invested, since Migdal Tower,

20 . SanDisk Corporation . 2000 Annual Report 21 . SanDisk Corporation . 2000 Annual Report We use a third-party subcontractor in China for We memory chips and Secure Digital Card controllers is Card controllers Digital and Secure chips memory and SanDisk and incorporates complex to be expected We under development. that is still technology Toshiba will successful- and Toshiba you that we cannot assure production with accept- and bring into full ly develop the new products or and reliability these able yields or pro- any development or that technology, underlying cost- in a timely or will be completed duction ramp in any of the If we are not successful effective manner. financial condition and results of above, our business, operations could suffer. Our international operations make us vulnerable to Our international operations make fluctuations. changing conditions and currency Political risks the majority of our flash memory wafers Currently, We in Taiwan. are produced by three UMC foundries for the in Taiwan also use a third-party subcontractor prod- assembly and testing of our MultiMediaCard therefore be affected by the political, may ucts. We is Taiwan economic and military conditions in Taiwan. disputes with currently engaged in various political have conducted China and in the past both countries territorial military exercises in or near the other’s and Chinese waters and airspace. The Taiwanese resulting governments may escalate these disputes, in shipping in an economic embargo, a disruption routes or even military hostilities. This could harm our business by interrupting or delaying the production or shipment of flash memory wafers or MultiMediaCard foundries and subcon- products by our Taiwanese depend on our suppliers and third See “– We tractor. party subcontractors.” the assembly and testing of our CompactFlash products. As a result, our business could be harmed by the effect of political, economic, legal and other uncertainties in China. Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. The Chinese government may not continue to pursue these policies and, even if it does continue, these policies may not be successful. The Chinese government may also significantly alter these policies from time to time. In addition, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual We may be unable to maintain market share. may be unable to maintain We supply in the market for our During periods of excess such as we are experiencing flash memory products, we may lose market share to in the first half of 2001, lower their prices. competitors who aggressively memory under conditions of tight flash Conversely, our production we may be unable to increase supply, as to maintain volumes at a sufficiently rapid rate so our growth rate depends our market share. Ultimately, memory wafers on our ability to obtain sufficient flash If we are and other components to meet demand. we may lose mar- unable to do so in a timely manner, ket share to our competitors. In addition, the market for portable digital music In addition, the market will The success of our new product strategy fea- with higher memory capacities and enhanced tures at a lower cost per megabyte; for our flash data storage products; Secure copy protection features offered by our Digital Card products; successfully our products into their products and introduce their products; and due to prod- become obsolete or noncompetitive ucts or technologies developed by others. • ability to successfully develop new products our • development of new applications or markets the • adoption by the major content providers of the the • extent to which prospective customers design the • extent to which our products or technologies the products that utilize our MultiMediaCard in anticipation in MultiMediaCard utilize our that products digital cam- and MP3 players such as products of new Card. If the Secure Digital will incorporate corders that may products sales of our MultiMediaCard this occurs, for the Secure The main competition be harmed. from the Sony is expected to come Digital Card greater financial Sony has substantially Memory Stick. mar- do and extensive resources than we and other and brand recognition. We keting and sales channels that our Secure Digital Card will be cannot assure you of such competition. successful in the face and it is uncertain how quickly con- players is very new If this mar- these players will grow. sumer demand for as quickly as anticipated or our ket does not grow successful in selling their portable customers are not to consumers, our revenues could digital music players In addition, it is often the case be adversely affected. markets that after an initial period with new consumer by of new market formation and initial acceptance of slow early adopters, the market enters a period devel- growth as standards emerge and infrastructure portable digital ops. In the event that this occurs in the markets, sales music player market or other emerging of our products would be harmed. following: depend upon, among other things, the 512 megabit and 1 gigabit flash memory card products On June 30, 2000, we closed a transaction with the joint development and manu- providing for Toshiba facture of 512 megabit and 1 gigabit flash memory chips and Secure Digital Card controllers. As part of plan to employ this collaboration, we and Toshiba micron and future 0.13 micron NAND 0.16 Toshiba’s flash integrated circuit manufacturing technology and multilevel cell flash and controller system SanDisk’s the third quarter of 2000, we During technology. the completion of the joint announced with Toshiba development of the 512 Megabit NAND flash chip .16 micron manufacturing process employing Toshiba’s expect cards employing the 512 We technology. megabit technology to be shipped in significant quantities in the second half of 2001, and cards employing the 1 gigabit technology to be shipped in 2002. The development of 512 megabit and 1 gigabit flash We also rely on third-party subcontractors for a also rely on third-party subcontractors We Our primary competitors include companies that with some of these vendors. Our business, financial business, Our vendors. some of these with be significantly results could operating and condition if we are in shipments delays or reductions harmed by suffi- sources or obtain develop alternative unable to we For example, of these components. cient quantities of our flash memory for the majority rely on UMC of of certain designs NEC to supply 100% wafers and microcontrollers. of wafer testing, packaged memory substantial portion and card testing, including final testing, card assembly Co., Ltd. in Taiwan, Silicon Precision Industries the Philippines. in and Amkor, Celestica, Inc. in China, will also be assembling These three subcontractors of our mature, high-volume and testing a majority portions of our test- began transferring products. We to these subcontractors ing and assembly operations of 1999 and are still continuing this in the second half at our Sunnyvale will continue operations transition. We special cus- production facility for new products and we do not have suffi- tomer requirements. However, at cient duplicative production testing equipment Any problems in Sunnyvale and at our subcontractors. a disruption of this complex transition may result in to meet cus- production and a shortage of product have no long-term contracts with tomer demand. We control prod- these subcontractors and cannot directly problems that uct delivery schedules. Any significant failure to perform occur at our subcontractors, or their shortages at the level we expect could lead to product could increase or quality assurance problems, which and have the manufacturing costs of our products Furthermore, adverse effects on our operating results. with some of we are moving to turnkey manufacturing reduce our visi- our subcontract suppliers, which may purchased parts bility and control of their inventories of necessary to build our products. Our markets are highly competitive. memory card Flash memory manufacturers and assemblers compete in an industry characterized by intense We competition, rapid technological changes, evolving industry standards, declining average selling prices and rapid product obsolescence. Our competitors include many large domestic and international companies that have greater access to advanced wafer greater financial, techni- substantially foundry capacity, cal, marketing and other resources, broader product lines and longer standing relationships with customers. develop and manufacture storage flash chips, such as In and Toshiba. Hitachi, Samsung, Micron Technology addition, we compete with companies that manufacture other forms of flash memory and companies that purchase flash memory components and assemble memory cards. Companies that manufacture socket flash, linear flash and components include Advanced Micro Devices, Atmel, Intel, Macronix, Mitsubishi, Fujitsu, Sharp Electronics and ST Microelectronics. Companies that combine controllers and flash memory chips developed by others into flash storage cards In addition, while the political unrest in Israel has while the political In addition, upon global Our sales are also highly dependent lation; potential hostilities and changes nomic instability, in diplomatic and trade relationships; we conduct our business, such as the earthquake in 1999; experienced in Taiwan import and export restrictions and other barriers and restrictions, particularly in China; accounts receivable collection, particularly as we increase our sales through the retail distribution channel; and restrictions. • need to comply with foreign government regu- the • geopolitical risks such as political and eco- general • in which natural disasters affecting the countries • tariffs, imposition of regulatory requirements, • in longer payment cycles and greater difficulty • adverse tax rules and regulations; • rights; weak protection of our intellectual property • customs delays in product shipments due to local We depend on our suppliers and third party sub- depend on We contractors. rely on our vendors, some of which are sole We source suppliers, for several of our critical compo- do not have long-term supply agreements nents. We property rights. As a result, enforcement of existing enforcement As a result, rights. property and the uncertain, is and contracts laws and future may be of such laws and interpretation implementation piracy could lead to Such inconsistency inconsistent. property protection. of our intellectual and degradation risk to our engineering a direct security not yet posed investment in Tower or our foundry design center to their geographic location, it may Semiconductor due unforeseen delays in the develop- nevertheless cause or the construction of the Tower ment of our products wafer foundry. Economic risks in U.S. dollars. Given price our products primarily We conditions in Asia and the the recent economic the weakness of the Euro, Yen European Union and relative to the United States dol- and other currencies expensive in our products may be relatively more lar, decrease in our these regions, which could result in a in U.S. sales. While most of our sales are denominated customers in Dollars, we invoice certain Japanese rate fluctu- and are subject to exchange Japanese Yen harm our ations on these transactions which could of operations. business, financial condition and results this is our sales to economic conditions. An example of revenue in Japan, which declined to 21% of product in 1999. In 1998 2000, from 22% of product revenue product revenue, our sales to Japan were 32% of total believe these declines down from 38% in 1997. We recession. were primarily due to the ongoing Japanese General risks also be limit- Our international business activities could factors: ed or disrupted by any of the following

22 . SanDisk Corporation . 2000 Annual Report 23 . SanDisk Corporation . 2000 Annual Report IBM’s microdrive, a rotating disk drive in a Type II a Type disk drive in microdrive, a rotating IBM’s industry analysts, Sony’s According to independent faced sig- Our MultiMediaCard products also have that In the first quarter of 2000, Sanyo announced Furthermore, we expect to face competition from Secure MultiMediaCard from Hitachi and Infineon. Each Infineon. and from Hitachi MultiMediaCard Secure and electronically mechanically is standard competing If and MultiMediaCard. with CompactFlash incompatible or other consumer of digital cameras a manufacturer one of these alternative devices designs in electronic or MultiMediaCard standards, CompactFlash competing that product. from use in will be eliminated II competes directly with our Type CompactFlash format cards for use in high-end pro- CompactFlash memory M-Systems’ Diskonchip 2000 fessional digital cameras. competes against our Flash ChipSet Millennium product storage applications such as set products in embedded appliances. top boxes and networking captured a considerable portion Mavica digital camera for digital cameras from 1998 to of the U.S. market uses a standard floppy disk to store 2000. The Mavica therefore uses no CompactFlash, or digital images and for any other flash cards. Our sales prospects impacted by CompactFlash cards have been adversely Sony has shifted the success of the Mavica. Recently, Stick in its latest its focus to the use of its flash Memory digital camera models. SmartMedia flash nificant competition from Toshiba’s significant com- cards and we expect to face similarly Sony has licensed Memory Stick. petition from Sony’s companies. If it is its proprietary Memory Stick to other in future prod- adopted and achieves widespread use CompactFlash ucts, sales of our MultiMediaCard and Hitachi, Infineon, Sanyo products may decline. Recently, MultiMediaCard and Fujitsu have proposed their Secure that is which provides the copy protection function this initiative included in our Secure Digital Card. Should reduce the wide- gain industry wide acceptance, it may Card. spread adoption of the Secure Digital storage it is developing a miniature magneto-optical music players device for use in future digital cameras, that this and camcorders. There can be no assurance device will not be adopted by some of our OEM customers. Alternative flash technologies on mul- also face competition from products based We tilevel cell flash technology from Intel and Hitachi. These products compete with our D2 multilevel cell flash tech- flash is a technological innovation Multilevel cell nology. that allows each flash memory cell to store two bits of information instead of the traditional single bit stored by the industry standard flash technology. existing competitors and from other companies that may enter our existing or future markets that have similar or alternative data storage solutions which may be less costly or provide additional features. Price is an important competitive factor in the market for consumer products. Increased price competition could lower gross margins if our average selling prices decrease faster than our costs and could also result in lost sales. In addition, many companies have been certified many companies In addition, with have announced an agreement We will each separately In addition, we and Toshiba entered into patent cross-license agree- have We include Lexar Media, M-Systems, Pretec, Simple Pretec, Media, M-Systems, Lexar include Technology, Kingston Corporation, Sony Technology, TDK Silicon Storage Technology, Panasonic, Inc., Delkin Devices, Matsushita Battery, Corporation, Dane-Elec Corporation, Feiya Technology and Technologies Infineon Silicon Tek, Manufacturing, Viking Components. Association to manufacture and by the CompactFlash believe of CompactFlash. We sell their own brand will enter the CompactFlash additional manufacturers market in the future. and promote to jointly develop Matsushita and Toshiba flash memory card called the Secure a next generation this agreement, Secure Digital Card Digital Card. Under will be granted to other flash royalty-bearing licenses which will increase the memory card manufacturers, Secure Digital Card, CompactFlash competition for our Matsushita and MultiMediaCard products. In addition, have commenced selling Secure Digital and Toshiba our products. Cards that will compete directly with will be required While other flash card manufacturers and royalties to pay the SD Association license fees and Toshiba which will be shared between Matsushita, license fees SanDisk, there will be no royalties or for their respec- payable among the three companies Thus, we will for- tive sales of the Secure Digital Card. Digital Card feit potential royalty income from Secure sales by Matsushita and Toshiba. 1 gigabit flash market and sell any 512 megabit and controllers memory chips and Secure Digital Card our relationship. developed and manufactured under for we will compete directly with Toshiba Accordingly, sales of these advanced chips and controllers. including ments with several of our leading competitors Sharp, Intel, SST, Samsung, Toshiba, Hitachi, Lexar, each SmartDisk and TDK. Under these agreements, that incorpo- party may manufacture and sell products patents rate technology covered by the other party’s related to flash memory devices. As we continue to license our patents to certain of our competitors, competition will increase and may harm our business, financial condition and results of operations. Currently, we are engaged in licensing discussions with several of our competitors. There can be no assurance that we will be successful in concluding licensing agreements under terms, which are favorable to us. Alternative storage media Competing products have been introduced that promote industry standards that are different from our CompactFlash and MultiMediaCard products including Memory Sony Corporation’s SmartMedia, Toshiba’s standard floppy disk used for digital stor- Stick, Sony’s Mega age in its Mavica digital cameras, Panasonic’s Clik drive, a miniaturized, Storage cards, Iomega’s mechanical, removable disk drive, and M-Systems’ Diskonchip for embedded storage applications and the cations; patents will have sufficient scope or strength; to protect where our products are sold in order or our rights and potential commercial advantage; other companies. • of our existing patents will not be invalidated; any • will be issued for any of our pending appli- patents • claims allowed from existing or pending any • patents will be issued in the primary countries our • of our products may infringe on the patents of any the diversion of resources from other important areas other important from resources of the diversion in have no experience we In addition, business. of our to line and we intend a wafer manufacturing operating at the organization existing manufacturing rely on the in will be trained This organization facility. Dominion cannot but we Toshiba, manufacturing by NAND flash successful in manufactur- that they will be assure you cost- products on a advanced NAND flash ing these all. effective basis or at In addition, our competitors may be able to design In addition, our competitors may be their products around our patents. to vigorously enforce our patents but we intend We successful. If we cannot be sure that our efforts will be litigation, we were to have an adverse result in any damages, cease could be required to pay substantial products, the manufacture, use and sale of infringing non-infringing expend significant resources to develop discontinue the use of certain processes technology, Any liti- or obtain licenses to the infringing technology. gation is likely to result in significant expense to us, as well as divert the efforts of our technical and management personnel. For example, our recent Litigation with Lexar lasted for two and one-half years and resulted in cumulative litigation expenses of approximately $6.0 million. Cross-licenses and indemnification obligations If we decide to incorporate third party technology into our products or if we are found to infringe on others’ we could be required to license intellectual property, may also We intellectual property from a third party. need to license some of our intellectual property to others in order to enable us to obtain cross-licenses to we have patent cross- third party patents. Currently, license agreements with several companies, including SmartDisk, Samsung, Sharp, SST, Hitachi, Intel, Lexar, we are in discussions with other and TDK and Toshiba companies regarding potential cross-license agree- Risks associated with patents, proprietary rights Risks associated and related litigation. General patents, trademarks, rely on a combination of We secret laws, confidentiality copyright and trade arrangements to protect our procedures and licensing rights. In the past, we have been intellectual property disputes regarding our intellectu- involved in significant claims that we may be infringing al property rights and expect We third parties’ intellectual property rights. in the that we may be involved in similar disputes assure you that: cannot future. We In addition, we cannot assure you that the We must achieve acceptable wafer manufacturing We yields. wafers to be The fabrication of our products requires clean environ- produced in a highly controlled and ultra supply our ment. Semiconductor companies that problems achiev- wafers sometimes have experienced yields. ing acceptable wafer manufacturing are a function of Semiconductor manufacturing yields manu- both our design technology and the foundry’s Low yields may result facturing process technology. failures. Yield from design errors or manufacturing problems may not be determined or improved until an actual product is made and can be tested. As a result, yield problems may not be identified until the wafers are well into the production process. The risks associated with yields are even greater because we rely exclusively on independent offshore foundries for our wafers which increases the effort and time required to and resolve manufacturing yield communicate identify, problems. If the foundries cannot achieve planned yields, we will experience higher costs and reduced which could harm our business, product availability, financial condition and results of operations. Dominion fabrication facility we are co-developing with satisfactory quantities of wafers will produce Toshiba, with acceptable prices, reliability and yields. Any failure in this regard could materially harm our business, financial condition and results of operations. In addition, the construction and operation of this line will cause us to incur significant expense and may result in Our multiple sales channels may compete for a Our multiple sales channels may compete limited number of customer sales. sales of our products today represent a based Web sales. Sales on small but growing portion of our overall distribution the Internet tend to undercut traditional the way our channels and may dramatically change future years. We consumer products are purchased in develop cannot assure you that we will successfully manage the the Internet sales channel or successfully and our tradi- inherent conflict between the Internet tional sales channels. Approximately one-half of our revenues come from a revenues come one-half of our Approximately to our For example, sales of customers. small number 48%, for approximately accounted top 10 customers of our product revenues 59%, respectively, 57%, and 2000, no single customer 1999, and 1998. In for 2000, 10% of our total revenues. for greater than accounted from one customer In 1999 and 1998, revenues total revenues. If we were to exceeded 10% of our customers or experience any lose one of our major in orders from any of these cus- material reduction and operating results would suf- tomers, our revenues pur- Our sales are generally made by standard fer. than long-term contracts. In addi- chase orders rather of our major customer base tion, the composition to year as the market demand for changes from year changes. our customers’ products Sales to a small number of customers represent a represent of customers number to a small Sales our revenues. of portion significant

24 . SanDisk Corporation . 2000 Annual Report 25 . SanDisk Corporation . 2000 Annual Report Anti-takeover provisions in our charter documents, Anti-takeover provisions in our charter taken a number of actions that could have We Our stock price has been, and may continue to be, volatile. The market price of our stock has fluctuated significantly in the past and is likely to continue to fluctuate in the future. For example, in 2000 our stock price fluctuated significantly from a low of $27.50 to a high California energy crisis energy California a been experiencing has California months, In recent shortage is expected This of energy supply. shortage future and possibly into throughout 2001 to continue of our product assembly the majority years. Although of California, we may is done outside and testing and to rolling blackouts some hardship due experience well as consumption, as for reduced power the need increased power costs. on key personnel, including Our success depends the loss of whom could dis- our executive officers, rupt our business. depends on the continued contri- Our success greatly management and other key butions of our senior sales, marketing and oper- research and development, our founder, Eli Harari, Dr. ations personnel, including Our success will Executive Officer. President and Chief ability to recruit additional highly also depend on our cannot assure you that we will skilled personnel. We key personnel, be successful in hiring or retaining such employed or that any of our key personnel will remain with us. law could pre- stockholder rights plan and in Delaware as a result, neg- vent or delay a change in control and, atively impact our stockholders. attempt. have the effect of discouraging a takeover rights For example, we have adopted a stockholder to a stock- plan that would cause substantial dilution and substantially increase the cost paid by a holder, who attempts to acquire us on terms not stockholder, This could prevent approved by our board of directors. certificate of us from being acquired. In addition, our the authori- incorporation grants the board of directors of and ty to fix the rights, preferences and privileges stock with- issue up to 4,000,000 shares of preferred have no present out stockholder action. Although we stock, such an intention to issue shares of preferred it more diffi- issuance could have the effect of making cult 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 This section provides that a General Corporation Law. corporation shall not engage in any business combination with any interested stockholder during the three- year period following the time that such stockholder This provision becomes an interested stockholder. could have the effect of delaying or preventing a change of control of SanDisk. We have historically agreed to indemnify various have historically agreed We Our rapid growth may strain our operations. placed have experienced rapid growth, which has We a significant strain on our personnel and other future growth, we must accommodate resources. To continue to hire, train, motivate and manage our have experienced difficulty hiring the employees. We necessary engineering, sales and marketing personnel to support our growth. In addition, we must make a significant investment in our existing internal information management systems to support increased manufacturing, as well as accounting and other management related functions. Our systems, procedures and controls may not be adequate to support rapid growth, which could in turn harm our business, financial condition and results of operations. ments. We cannot be certain that licenses will be will that licenses be certain cannot We ments. offered that the terms them, or we need when offered third obtain licenses from If we do will be acceptable. or roy- to pay license fees may be required parties, we obtain a we are unable to In addition, if alty payments. our the manufacture of is necessary to license that manu- to suspend the we could be required products, from our wafer suppliers products or stop facture of may infringe the rights of third using processes that we would be suc- cannot assure you that parties. We our products or that the neces- cessful in redesigning available under reasonable terms. sary licenses will be for alleged patent infringe- suppliers and customers in such indemnity varies, but may, ment. The scope of indemnification for damages some instances, include may peri- fees. We attorney’s and expenses, including litigation as a result of these indem- odically engage in currently engaged in are not We nification obligations. Our insurance any such indemnification proceedings. claims for policies exclude coverage for third party to indemnify patent infringement. Any future obligation our business, our customers or suppliers could harm financial condition or results of operations. intellectual Litigation risks associated with our property to initiate litiga- From time to time, it may be necessary our intellectual tion against third parties to preserve turn bring suit property rights. These parties could in Denki Co. against us. On March 21, 2000, Mitsubishi in Tokyo Ltd. (Mitsubishi Electric) filed a complaint wholly owned District Court against SanDisk K.K., our that SanDisk subsidiary in Japan. The complaint alleges on three Japan, infringes K.K., based in Yokohama, patents in Mitsubishi Japanese patents. The Mitsubishi and question are #JP2099342, #JP2129071 to the #JP2138047, which are related primarily cards. In the com- mechanical construction of memory a preliminary plaint, Mitsubishi asked the court for CompactFlash injunction halting the sale of SanDisk memory cards in Japan. Mitsubishi has and flash ATA since dropped patents #JP2129071 and #JP2138047 and SanDisk K.K. are vigorously from the suit. We remaining claims. defending against Mitsubishi’s We conducted our audits in accordance with conducted our audits in We state- In our opinion, the consolidated financial The Board of Directors and Stockholders of Directors and The Board SanDisk Corporation consolidated bal- have audited the accompanying We Corporation as of December ance sheets of SanDisk and the related consolidated state- 31, 2000 and 1999, and cash flows equity, ments of income, stockholders' years in the period ended for each of the three These financial statements are December 31, 2000. the Company's management. Our the responsibility of express an opinion on these finan- responsibility is to on our audits. cial statements based generally accepted in the United auditing standards we plan and per- States. Those standards require that about form the audit to obtain reasonable assurance free of material whether the financial statements are on a test misstatement. An audit includes examining, and disclo- basis, evidence supporting the amounts audit also sures in the financial statements. An used and includes assessing the accounting principles as well as significant estimates made by management, presentation. evaluating the overall financial statement basis believe that our audits provide a reasonable We for our opinion. in all material ments referred to above present fairly, of SanDisk respects, the consolidated financial position 1999 and the Corporation at December 31, 2000 and and its cash consolidated results of its operations period ended flows for each of the three years in the accounting December 31, 2000, in conformity with States. principles generally accepted in the United San Jose, California January 23, 2001 Report of Report Auditors Independent A substantial majority of our Our exposure to market risk for Our exposure to market All of the potential changes noted above are revenue, expense and capital purchasing activity are revenue, expense and capital purchasing we do enter into transacted in U.S. dollars. However, the transactions in other currencies, primarily protect against reductions in value To Japanese Yen. caused by and the volatility of future cash flows have estab- changes in foreign exchange rates, we forward contracts lished a hedging program. Currency Our hedging are utilized in these hedging programs. entirely eliminate, programs reduce, but do not always the impact of foreign currency exchange rate movements. An adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $294,000. based on sensitivity analyses performed on our financial positions at December 31, 2000. of $169.63, and has recently traded as low as $18.63. as low traded has recently and of $169.63, as a will continue such fluctuations that believe We our concerning us, announcements result of future techno- regarding or principal customers competitors gov- introductions, new product logical innovations, earnings or changes in regulations, litigation ernmental the in recent years by analysts. In addition, estimates and significant price has experienced stock market and the market prices of the volume fluctuations companies have been securities of high technology often for reasons outside the con- especially volatile, companies. These fluctuations as trol of the particular political and market condi- well as general economic, adverse affect on the market price tions may have an of our common stock. Information Market Risk Disclosure Interest Rate Risk. rates relates primarily to our invest- changes in interest of our investment ment portfolio. The primary objective maximizing activities is to preserve principal while risk. This is yields without significantly increasing short- accomplished by investing in widely diversified of investment term investments, consisting primarily either grade securities, substantially all of which or have charac- mature within the next twelve months hypothetical 50 teristics of short-term investments. A would result in an basis point increase in interest rates 0.28%) in the approximate $731,000 decline (less than securities. debt fair value of our available-for-sale Foreign Currency Risk.

26 . SanDisk Corporation . 2000 Annual Report 27 . SanDisk Corporation . 2000 Annual Report – – – 65 199 1999 6,058 6,338 8,259 5,843 11,378 17,000 31,788 47,797 51,208 35,679 85,597 85,597 52,434 29,383 311,049 572,127 524,066 568,390 $ 146,170 $ 657,724 $ 657,724 $ 30,734 – 67 2000 9,431 7,066 16,215 16,427 41,095 37,087 50,740 73,492 20,863 96,600 171,357 (50,412) 104,617 373,316 197,688 134,730 697,307 244,849 566,934 346,469 863,058 $ 1,107,907 $ 1,107,907 $ 67,112 $ 106,277 $5,010 in 2000 and $1,871 in 1999 $5,010 in 2000 and Authorized shares: 125,000,000 Issued and outstanding: 67,464,000 in 2000 and 65,248,000 in 1999 Authorized shares: 4,000,000 Issued: none Accrued payroll and related expenses Accounts receivable, net of allowance for doubtful accounts of net of allowance for doubtful accounts Accounts receivable, Total current assets Total Income taxes payable Other accrued liabilities Common stock, $0.001 par value Accumulated other comprehensive income (loss) Deferred taxes and other liabilities liabilities Total Retained earnings Deferred revenue Accounts payable Prepaid expenses and other current assets Prepaid expenses Cash and cash equivalents Short-term investments Capital in excess of par value Inventories current liabilities Total Deferred tax assets Preferred stock, $0.001 par value The accompanying notes are an integral part of these consolidated financial statements Total stockholders’ equity stockholders’ Total equity liabilities and stockholders’ Total Deposits and other non-current assets assets Total Liabilities and Stockholders’ Equity Current liabilities: Current assets: (In thousands, except share and per share amounts) except share (In thousands, 31, December Assets Property and equipment, net Consolidated Balance Sheets Balance Consolidated Investment in joint venture Investment in foundry Stockholders’ equity: –– 1999 1998 1999 1,261 374 8,280 5,307 13,076 6,655 61,433 55,344 41,220 32,571 41,220 32,571 12,585 7,533 94,847 55,450 94,847 55,450 64,762 42,640 39,626 18,491 55,834 52,596 26,883 18,174 26,883 18,174 25,294 16,933 30,085 12,810 152,143 80,311 152,143 80,311 246,990 135,761 246,990 135,761 $ 205,770 103,190 $ $ 26,550 11,836 $ $ 0.48 $ 0.43 $ 0.23 $ 0.2 1 572 2000 72,651 66,861 75,453 46,057 24,786 22,786 49,286 601,812 120,129 357,017 492,192 193,520 124,666 344,168 244,795 $ 298,672 $ 526,359 $ $ 4.1 1 $ $ 4.47 Basic Product Diluted Diluted General and administrative License and royalty Basic Sales and marketing Research and development Net income per share Revenues Gross profits Gain on investment in foundry The accompanying notes are an integral part of these consolidated financial statements The accompanying notes are an integral part of these Net income Other income, net Provision for income taxes Total operating expenses Total Cost of revenues (In thousands, except per share data) except per share (In thousands, December 31, Ended Years Total revenues Total Consolidated Statements of Income of Statements Consolidated Income before taxes Shares used in computing net income per share Shares used in computing net income Interest income Operating expenses Operating income

28 . SanDisk Corporation . 2000 Annual Report 29 . SanDisk Corporation . 2000 Annual Report 12,265 26,278 248,061 429 429 (272) (272) (343) (343) (50,268) (50,268) Accumulated Accumulated Capital In Other Total ––––– ––––– –––––– –––– –––– –––– –––– Common Stock Common Stock of Excess Retained Comprehensive Stockholders’ Shares Amount Par Value Earnings Income Value Equity Par Amount Shares employee stock purchase planmodification of stock options 69issuance costs – – 2,815 – 425 – – – 2,815 – 425 options exercised 29,258 29,258 employee stock purchase planemployee stock purchase stock warrants 260 options exercised 1 1,474 6 – –employee stock purchase planstock warrants – – 268 issuance costs 1,761 1,475 options exercised – – 1,807 sale securities 58 9,900 – – – 9 1,761 320,277 – – 1,807 – 9,809 – – 320,286 – 9,809 modification of stock optionssale securities – – 33 – – 33 sale securities Exercise of stock options for cashIssuance of stock pursuant to 2,147Compensation expense related to Sale of common stock, net of 2Income tax benefit from stock 10,370 – – 10,372 Balance at December 31, 2000The accompanying notes are an integral part of these consolidated financial statements 67,464 $ 67 $ 566,934 $ 346,469 $ 50,412 $ 863,058 Unrealized loss on investments Comprehensive income Exercise of stock options for cashExercise of stock options pursuant to Issuance of stock 1,260 Net exercise of common Income tax benefit from stock 1 Compensation expense related to 929 –Exercise of stock options for cashIssuance of stock pursuant to 1,766 Net exercise of common –Sale of common stock, net of 930 2 Income tax benefit from stock 6,107 Balance at December 31, 1999Net incomeUnrealized loss on available for 65,248 – 65 – 524,066 47,797 6,109 199 – 572,127 – – 298,672 – 298,672 Balance at December 31, 1998Net incomeUnrealized loss on available for 53,256 Comprehensive income 54 186,066 21,247 – 471 207,838 – – 26,550 – 26,550 Balance at December 31, 1997Balance at December Net income available for Unrealized gain on 51,730 Comprehensive income $ 52 $ 181,869 $ 9,411 $ 42 $ 191,374 – – – 11,836 – 11,836 (In thousands) Consolidated Statements of Stockholders’ Equity Stockholders’ of Statements Consolidated –– – 33 00 00 0 (10,923) 1999 1998 1999 1,931 (515) 7,145 5,839 7,145 5,839 6,301 1,548 4,491 (906) (1,100) 1,160 2,959 (6,089) (5,721) 283 (9,587) 3,275 10,984 2,617 16,963 15,111 15,384 20,888 23,796 (7,174) (21,391) (7,489) (33,616) (247) 139,391 133,214 (26,757) 6,726 130,786 (5,504) 328,202 2,405 328,202 2,405 (214,379) (23,020) (332,379) (137,822) $ 4,306 $ 8,277 $ 26,550 $ 11,836 $ 146,170 $ 15,384 425 1,013 2000 7,956 9,485 3,485 13,187 13,187 (7,200) (3,373) (3,545) 21,357 15,928 36,378 39,842 84,852 114,501 (52,183) (60,921) 146,170 (26,586) (20,004) (39,893) 643,734 (134,730) (137,932) (213,820) (593,146) (344,168) $ 37,260 $ 298,672 $ 106,277 Deposits and other assets Other non-current liabilities stock option terms Accounts receivable Inventories Other accrued liabilities Prepaid expenses and other current assets Prepaid expenses and other current Accounts payable Deferred revenue Income taxes payable Accrued payroll and related expenses Deferred taxes equipment Loss on disposal of Compensation related to modification of Compensation related Gain on investment in foundry Gain on investment Depreciation and liabilities: Changes in assets provided by operating activities: provided by operating Adjustments to reconcile net income to net cash Adjustments to reconcile Acquisition of property and equipment Investment in equity securities Investment in joint venture Proceeds from short-term investments The accompanying notes are an integral part of these consolidated financial statements Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Cash paid for income taxes Cash flows from financing activities: Sale of common stock and warrants Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Deposit in escrow account for investment in equity securities Deposit in escrow account for investment Net cash used in investing activities Total adjustments Total Net cash provided by operating activities Cash flows from investing activities: Purchases of short-term investments Net income ((In thousands) December 31, Ended Years activities: from operating Cash flows Consolidated Statements of Cash Flows Cash of Statements Consolidated

30 . SanDisk Corporation . 2000 Annual Report 31 . SanDisk Corporation . 2000 Annual Report In addition, certain key components are purchased In addition, certain key components are Company has taken write downs for potential excess for potential has taken write downs Company the receipt of customer purchased prior to inventory to do so in the future. may be required orders and decrease gross margins in the These adjustments have resulted, and could in the quarter reported and in gross margins on a quar- future result in fluctuations Company inac- the extent the To ter to quarter basis. the number of wafers required, it curately forecasts shortage or an excess supply of may have either a could have a material adverse wafers, either of which business, financial condition effect on the Company’s if the Company Additionally, and results of operations. scheduled quantities of wafers from is unable to obtain yields, the Company’s any foundry with acceptable of operations business, financial condition and results could be negatively impacted. alternative from single source vendors for which could sources are currently not available. Shortages to an interruption occur in these essential materials due If the industry. of supply or increased demand in the of such Company were unable to procure certain its manufac- materials, it would be required to reduce adverse turing operations that could have a material also rely on We effect upon its results of operations. and test the third-party subcontractors to assemble have no We memory components for our products. and long-term contracts with these subcontractors schedules. This cannot directly control product delivery assurance could lead to product shortages or quality costs problems that could increase the manufacturing on our oper- of our products and have adverse effects ating results. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Basis of Presentation fiscal year ends on the Sunday closest The Company’s to December 31. Fiscal year 2000 ended on December 31, 2000 and was 52 weeks in length. Fiscal year 1999 ended on January 2, 2000 and was 53 weeks in length. Fiscal year 1998 ended on December 27, 1998 and was 52 weeks in length. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. Certain of the raw materials used by the Company Certain of the raw materials used by wafer supply agree- Under each of the Company’s A limited number of customers historically have A limited number of customers historically the Company’s accounted for a substantial portion of accounted for revenues. In 2000, no single customer and 1998, more than 10% of total revenues. In 1999 10% of total revenues from one customer exceeded products will vary as revenues. Sales of the Company’s the Further, a result of fluctuations in market demand. Company flash data storage markets in which the technological competes are characterized by rapid declining average change, evolving industry standards, obsolescence. selling prices and rapid technological available from a in the manufacture of its products are all of the limited number of suppliers. For example, wafers, the majori- products require silicon Company’s United ty of which are currently supplied by and in Taiwan Microelectronics Corporation (“UMC’) facility in Japan. The through its Yokaaichi Toshiba, Company is dependent on its foundries to allocate to the Company a portion of their foundry capacity suffi- needs, to produce cient to meet the Company’s wafers of acceptable quality and with acceptable manufacturing yields and to deliver those wafers to the Company on a timely basis. On occasion, the Company has experienced difficulties in each of these areas. ments, the Company is obligated to provide a monthly rolling forecast of anticipated purchase orders. Except in limited circumstances and subject to acceptance by the foundries, the estimates for the first three months of each forecast constitute a binding commitment and the estimates for the remaining months may not increase or decrease by more than a certain percent- forecast. These restric- age from the previous month’s ability to react to significant tions limit the Company’s fluctuations in demand for its products. As a result, the Company has not been able to match its purchases of wafers to specific customer orders, and therefore the Supplier and Customer Concentrations Organization and Nature of Operations Organization and (the Company) was incorporated SanDisk Corporation 1, 1988, to design, manufacture, in Delaware on June solid-state mass stor- and market industry-standard, flash high-density proprietary, age products using in one The Company operates memory technology. customers in the consumer elec- segment and serves and highly portable tronics, industrial, communications Principal geographic markets for computing markets. the United States, products include the Company’s Japan, Europe and the Far East. Note 1: Note of Significant and Summary Organization Accounting Policies Notes to Consolidated Financial Statements Statements Financial Consolidated to Notes 1999 1999 4,584 20,708 140,952 $ 35,679 $ 10,387 $ 170,097 $ 311,049 2000 2000 9,587 53,921 165,907 $ 33,092 $ 96,600 $ 260,461 $ 94,554 Additions Total Total 19981999 $ 756 $ 1,069 $ 345 $ 945 $ 32 $ 143 $ 1,069 $ 1,871 2000 $ 1,871 $ 3,991 $ 852 $ 5,010 Debt securities at December 31, 2000 and 1999, Debt securities at December two years For the Balance at Charged to Balance Dec. 31, of Period Expenses (Write-offs) of Period Due in one year or less Due after one year through December 31, Raw materials Work-in-process Finished goods Accounts Receivable The activity in the allowance for doubtful accounts is as follows (in thousands): Inventories Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard basis (which approximates actual costs on a first-in, first-out basis). Market value is based upon an estimated average selling price reduced by normal gross margins. Inventories are as follows (in thousands): Unrealized gain and losses on available-for-sale on available-for-sale and losses gain Unrealized were ($50.4 and 1999 31, 2000 at December securities loss The unrealized $199,000, respectively. million) and of $50.3 million 31, 2000 includes as of December portion of the loss on the current unrealized in in UMC (see “Investment investment Company’s securi- of available-for-sale below). Fair value Foundry” real- prices. Gross upon quoted market ties is based on sales of available-for-sale ized gains and losses years ended December 31, 2000 securities during the and 1999 were immaterial. Actual are shown below. by contractual maturity, from contractual maturities maturities may differ the securities may have the right to because issuers of prepay obligations. (In thousands) December 31, Short-term investments: Investments Long-Term in The Company holds minority equity investments in areas companies having operations or technology Certain of the invest- strategic focus. within SanDisk’s disposition. ments carry restrictions on immediate restrictions of Investments in public companies with less than one year are classified as available-for-sale value with unreal- and are adjusted to their fair market component of ized gains and losses recorded as a Upon dis- accumulated other comprehensive income. identification position of these investments, the specific basis in comput- method is used to determine the cost in value that are ing realized gains or losses. Declines reported in judged to be other than temporary are other income and expense. year ended Beginning Costs and Deductions at End – – 1999 4,009 111,640 58,969 117,769 133,462 $ 2,969 $ 139,622 $ 21,853 $ 311,049 6,115 2000 12,492 47,795 59,967 60,505 112,855 136,580 $ 10,004 $ 75,918 $ 373,316 $ 2,921 Total Total Total Total Under FAS 115, management classifies invest- 115, management classifies Under FAS All cash equivalents and short-term investments Corporate notes / bonds Commercial paper Municipal notes / bonds Auction rate preferred stock U.S. government agency obligations Marketable equity securities * Corporate notes / bonds Commercial paper Money market fund Short term investments: * Investment in UMC. No such amounts were recorded in fiscal 1999. December 31, Cash equivalents: Cash Equivalents and Short-Term Investments and Short-Term Cash Equivalents of short-term, highly liquid Cash equivalents consist with insignificant interest rate risk financial instruments to cash and have maturities that are readily convertible less from the date of purchase. of three months or short-term investments consist Cash equivalents and taxable commercial paper, of money market funds, obligations, corporate / U.S. government agency quality, municipal notes and bonds with high-credit rate pre- money market preferred stock and auction also include 50% ferred stock. Short-term investments (“Investment in of the UMC shares referred to below on quoted Foundry”). The fair market value, based short-term market prices, of cash equivalents and their carrying investments is substantially equal to value at December 31, 2000 and 1999. of purchase at the time ments as available-for-sale Debt and periodically reevaluates such designation. are reported securities classified as available-for-sale on avail- at fair value. Unrecognized gains or losses equity until their securities are included, in able-for-sale and declines in disposition. Realized gains and losses on available- value judged to be other than temporary income securities are included in other for-sale is based on the (expense). The cost of securities sold specific identification method. classified as as of December 31, 2000 and 1999 are securities and consist of the following available-for-sale (in thousands): Foreign Currency Transactions Currency Foreign U.S. dollar using the measured are operations Foreign monetary Accordingly, currency. as the functional and lia- receivable (principally cash, accounts accounts the foreign exchange remeasured using bilities) are Operations accounts balance sheet date. rate at the remea- accounts are balance sheet and nonmonetary the date of transaction. rate in effect at sured at the currency remeasurement are The effects of foreign operations. See Note 2. reported in current

32 . SanDisk Corporation . 2000 Annual Report 33 . SanDisk Corporation . 2000 Annual Report In May 2000, the Company received a stock divi- a stock received the Company 2000, In May The Company earns patent license and royalty The Company earns patent license and Patent license and royalty revenue is recognized dend from UMC of 200 shares for every 1,000 shares every 1,000 shares for of 200 from UMC dend million its ownership of 22 resulting in of UMC owned, as a shares received shares of UMC. The additional as of the shares received and the 50% stock dividend in July unrestricted the merger that became a result of under securities treated as available-for-sale 2000 are Standards 115, of Financial Accounting Statement Investments in Debt and Equity “Accounting for Certain 31, 2000 and are included in Securities”, at December These shares were adjusted short-term investments. the resulting unrealized loss of to market value and 2000 is included in accumulated $50.3 million in fiscal income. In addition, on other comprehensive UMC completed its American September 18, 2000, (“ADRs”) offering. In connection Depositary Shares signed a lock-up agreement with this offering, SanDisk of all but 5 million of these unre- that prohibits the sale days following stricted UMC shares for a period of 90 50% of the completion of the offering. The remaining that will merger, the shares received as a result of the accounted for at be restricted from sale until 2002, are quarter of their historical cost beginning in the first to market 2001. These securities will be marked when the when through other comprehensive income the related restrictions lapse. Revenue Recognition estimated sales Product revenue, less a provision for which is gen- returns, is recognized when title passes revenue on erally at the time of shipment. However, subject to cer- shipments to distributors and retailers, is deferred tain rights of return and price protection, or until the merchandise is sold by the distributors retailers, or the rights expire. with revenue under patent cross-license agreements Samsung Hitachi Ltd., Intel Corporation, Lexar, Electronics Company Ltd., Sharp Electronics Inc., Corporation, Silicon Storage Technology, Corporation. SmartDisk Corporation, TDK and Toshiba current license agreements provide for The Company’s the payment of license fees, royalties, or a combina- The timing and amount tion thereof, to the Company. of these payments can vary substantially from quarter on the terms of each agreement depending to quarter, and, in some cases, the timing of sales of products by the other parties. when earned. In 2000, 1999 and 1998, the Company received payments under these cross-license agreements, portions of which were recognized as revenue and portions of which are deferred revenue. Recog- nition of deferred revenue is expected to occur in future periods over the life of the agreements, as the Company meets certain obligations as provided in the various agreements. 1999 1,335 3,772 5,994 58,105 (26,317) $ 47,004 $ 31,788 2000 2,103 7,435 5,842 77,690 (36,595) $ 41,095 $ 62,310 In January 2000, the USIC foundry was merged In January 2000, the USIC foundry was In exchange for USIC shares, we received 111 mil- amortization Software Furniture and fixtures and Accumulated depreciation Investment in Foundry million in United In 1997, the Company invested $40.3 manufacturing Silicon, Inc., (“USIC”) a semiconductor Corporation in subsidiary of United Microelectronics (“UMC”). The transaction gave the Company Taiwan in the facility an equity stake of approximately 10% basis) and guar- (which was accounted for on the cost of the wafer anteed access to approximately 12.5% In 1998, the Company output from the facility. to retain its increased its investment by $10.9 million were made to the 10% ownership interest. No changes production agreement. The Company received into the UMC parent company. shares. The UMC shares in exchange for its USIC Company does not have a right to a seat on the board of directors of the combined company. lion UMC shares. These shares were valued at approximately $396 million at the time of the merger, resulting in a pretax gain of $344.2 million ($203.9 mil- in the first quarter of 2000. All of the lion after-tax) UMC shares received by the Company as a result of the merger were subject to trading restrictions Stock Exchange. The imposed by UMC and the Taiwan trading restrictions expired on one-half of the shares on July 3, 2000. The remaining shares will become available for sale over a two-year period beginning in January 2002. When the shares are ultimately sold, it is likely that the Company will recognize additional gains or losses due to fluctuations in the price of the UMC shares. Property and equipment, net Property and equipment, Depreciation and Amortization using the Depreciation and amortization is computed useful lives of straight-line method over the estimated whichever is the assets or the remaining lease term, generally two to seven years. shorter, Property and equipment consist of the following (in Property and equipment thousands): December 31, Leasehold improvements Property and Equipment Given the volatility of the market, the Company writes the Company market, of the the volatility Given on value based realizable to net inventories down is backlog However, forecasted demand. backlog and and rescheduling. revisions, cancellations subject to forecasted demand may differ from Actual demand on the a material effect differences may have and such of operations. and results financial position Company’s Machinery and equipment at cost Property and equipment, In December 1999, The Securities and Exchange 1999, The Securities In December Financial Accounting Standards In March 2000, the studied the actual impact, and have determined that it that determined and have impact, the actual studied or earnings. position financial to our immaterial will be 101 Bulletin No. issued Staff Accounting Commission SAB Statements". Recognition in Financial "Revenue recognition, presentation guidance on the 101 provides All financial statements. of revenue in and disclosure and apply the accounting are expected to registrants in SAB 101. The Company’s disclosures described SAB 101 did not have a material implementation of results of operations, financial impact on consolidated flows. position and cash Interpretation No. 44 (“FIN 44”), Board issued FASB Involving Stock Transactions “Accounting for Certain Interpretation of APB Opinion No. Compensation-an the application of APB Opinion 25 25.” FIN 44 clarifies issues clarifies the following: the and, among other of applying definition of an employee for the purposes APB Opinion No. 25; the criteria for determining plan; whether a plan qualifies as a noncompensatory modifications the accounting consequences of various options or to the terms for the previously fixed stock of stock awards; and the accounting for an exchange combination. FIN compensation awards in a business did not have a 44 became effective July 1, 2000 and consolidated results material impact on the Company’s cash flows. of operations, financial position, and Note 2: 2: Note Financial Instruments Concentration of Credit Risk credit risk consists concentration of The Company’s short-term invest- principally of cash, cash equivalents, investments and trade receivables. The Company’s quality ment policy restricts investments to high-credit with any investments and limits the amounts invested The Company sells to original equipment one issuer. manufacturers, retailers and distributors in the United States, Japan, Europe and the Far East, performs ongoing credit evaluations of its customers’ financial condition, and generally requires no collateral. Reserves are maintained for potential credit losses. Off Balance Sheet Risk balance sheet accounts are Certain of the Company’s The Company enters denominated in Japanese Yen. into foreign exchange contracts to hedge against changes in foreign currency exchange rates. The effects of movements in currency exchange rates on these instruments are recognized when the related operating revenues and expenses are recognized. The Company has a foreign exchange contract line in the amount of $15.0 million at December 31, 1999. Under this line, the Company may enter into forward exchange contracts that require the Company to sell forward exchange or purchase foreign currencies. Two contracts in the notional amount of $8.2 million were 1999 1998 5,599 2,748 61,433 55,344 55,834 52,596 55,834 52,596 $ 26,550 $ 11,836 $ 0.43 $ 0.21 $ 0.48 $ 0.23 2000 5,790 72,651 66,861 66,861 $ 298,672 $ 4.11 $ 4.47 common stock) common shares shares attributable to exercise of outstanding employee stock options and warrants (assuming proceeds would be used to purchase common shares Weighted average Weighted share – net income diluted net income per diluted net income per Incremental common Weighted average average Weighted income per share: share Numerator for basic and Numerator for basic and diluted net income per income per share: Denominator for basic net Denominator for basic Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted by the Company beginning January 1, Company has had a minimal use the 2001. Historically, of derivatives and do not anticipate that the adoption of the new Statement will have a significant effect on we have our earnings or financial position; however, Stock Based Compensation The Company accounts for employee stock based compensation under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Pro forma net income and net income per share disclosures are required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation,” and are included in Note 4. Options and warrants to purchase 907,380, 190,807, Options and warrants to purchase 907,380, were out- and 1,802,886 shares of common stock but respectively, standing during 2000, 1999 and 1998, per share have been omitted from the diluted earnings price was calculation because the options’ exercise of the common greater than the average market price shares and, therefore the effect would be antidilutive. Diluted net income per share Basic net income per share Basic net income per Net Income Per Share Net Income of basic the computation table sets forth The following share (in thousands, net income per and diluted except per share amounts): Advertising Expense Advertising as incurred. is expensed of advertising The cost and million, $3.6 million, costs were $8.2 Advertising 1998, respectively. in 2000, 1999, and $2.0 million Numerator: Shares used in computing Denominator for diluted net

34 . SanDisk Corporation . 2000 Annual Report 35 . SanDisk Corporation . 2000 Annual Report For example, in March 1998, the Company sued For example, in March in the In September 2000, Lexar sued SanDisk the Under the settlement, Lexar has provided On March 21, 2000, Mitsubishi Denki Co. Ltd. limited to those the Company has notified of possible notified has the Company to those limited of these one or more addition, In infringement. patent litiga- Any the Company. bring suit against parties may as a defendant, would as a plaintiff or tion, whether and to the Company in significant expense likely result and man- technical efforts of the Company’s divert the is or not such litigation personnel, whether agement of the Company. determined in favor ultimately District of California alleging that Lexar in the Northern U.S. and PC Cards infringe our CompactFlash Lexar’s (“’987 Patent”). Lexar disputed Patent No. 5,602,987 various counter claims, includ- this claim and asserted violation of the Lanham Act, ing unfair competition, with prospective economic patent misuse, interference unenforceability and advantage, trade defamation, 14, 2000, in resolution of these fraud. On November is ’987 Patent that SanDisk’s actions, Lexar stipulated CompactFlash current valid and infringed by Lexar’s payment of and PC Cards. Lexar made a lump sum due on the $8.0 million in December 2000 for royalties Subject to Lexar’s ’987 Patent, through March 31, 2001. to Lexar’s representations and warranties relating Cards, SanDisk newly designed CompactFlash and PC not infringe has stipulated that these designs do into a 4% royal- SanDisk’ s ’987 Patent. Lexar entered Lexar prod- ty-bearing license agreement for certain March 31, ucts that may use the ’987 Patent beyond to dismiss with 2001. SanDisk and Lexar have agreed infringement and prejudice all pending claims of patent advertising, counterclaims involving claims of false unfair competition and patent misuse. SmartMedia prod- District of Delaware alleging that our Patent No. United States ucts infringe Lexar’s of this action, 5,479,638 (“’638 Patent”). In resolution payment of $2.0 the Company paid Lexar a lump sum of the ’638 million for a fully-paid up license for use Patent in SmartMedia products. Company with an option for a royalty bearing license to its patents for use in certain future products. SanDisk and Lexar have agreed to resolve any future disputes relating to the use by Lexar of the ’987 Patent through have also agreed that for a peri- binding arbitration. We od of seven years, neither SanDisk nor Lexar shall seek injunctive relief against the other in any patent lawsuit. we retain the right to seek at all times, However, injunctive relief to enforce the payment of royalties pur- ruling. suant to an arbitrator’s District (Mitsubishi Electric) filed a complaint in Tokyo Court against SanDisk K.K., SanDisk’ s wholly owned subsidiary in Japan. The complaint alleges that Japan, infringes on SanDisk K.K., based in Yokohama, three Mitsubishi Japanese patents. The Mitsubishi patents in question are #JP2099342, #JP2129071 and #JP2138047, which are related primarily to the To preserve its intellectual property rights, the preserve its intellectual To The impact of movements in currency exchange The impact of movements The Company relies on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. There can be no assurance that there will not be any disputes regarding intellectual property rights. Specifically, the Company’s there can be no assurance that any patents held by the Company will not be invalidated, that patents will pending applica- be issued for any of the Company’s tions or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company’s products can be sold to provide meaningful protection or any commercial advantage to the Company. of the Company may be able competitors Additionally, patents. to design around the Company’s Company believes it may be necessary to initiate litigation with one or more third parties, including but not Total was $2.5 Rental expense under all operating leases the years ended million, $2.1 million and $1.7 million for respectively. December 31, 2000, 1999 and 1998, $ 13,157 Contingencies Year Ending December 31, Year 200120022003200420052006 $ 2,685 2,411 2,370 2,416 2,251 1,024 Commitments and sales The Company leases its headquarters at various offices under operating leases that expire lease payments dates through 2006. Future minimum 31, 2000 are as under operating leases at December follows (in thousands): Note 3: 3: Note Commitments and Contingencies outstanding at December 31, 1999. Foreign currency Foreign 31, 1999. December at outstanding at deferred were of $122,000 gains translation with these contracts 31, 1999 in connection December con- identified as hedging have been as the contracts amount contract in the forward exchange tracts. One 1998. at December 31, was outstanding of $4.3 million were losses of $34,000 translation Foreign currency with this in connection at December 31, 1998 deferred forward contract. contracts substantially miti- rates on foreign exchange on the underlying items gates the related impact had net transaction gains of hedged. The Company $1,467,000 and $412,000 for approximately $428,000, 31, 2000, 1999 and 1998, the years ended December in other These amounts are included respectively. in the statement of income. income (loss), net, On July 17, 1998, the Board of Directors approved On July 17, 1998, the the In May 1999, the stockholders increased date of grant. Unexercised options are canceled upon are canceled options Unexercised of grant. date Options services. or of employment the termination for plan will be available under this that are canceled There Stock Option Plan. under the 1995 future grants the option grants under available for were no shares 31, 2000. Benefit Plan at December 1989 Stock In August 1995, the Company adopted the 1995 Non- employee Directors Stock Option Plan (the Directors’ Plan. Under this plan, automatic option grants are made at periodic intervals to eligible non-employee members of the Board of Directors. Initial option grants period. Subsequent annual vest over a four-year grants vest one year after date of grant. All options granted under the Non-employee Directors Stock Option Plan expire ten years after the date of grant. In 1995 Non-employee Directors Stock Option Plan 1995 Stock Benefit Plan 1995 Stock Plan provides for the issuance The 1995 Stock Option and nonqualified stock of incentive stock options plan, the vesting and exercise pro- options. Under this are determined by the Board visions of option grants generally vest over a four- of Directors. The options no later than ten years from the year period, expiring date of grant. program. Under the an option cancellation/regrant program, employees could elect cancellation/regrant options with exercise prices in to exchange their stock priced at excess of $6.00 per share for new options the Company’s $5.00 per share, the market price of August common stock on the date of implementation, become exer- 21, 1998. Under the new options, shares under the old cisable six to twelve months later than have a maxi- options. The new options higher-priced 21, 1998 grant mum term of ten years from the August were not date. Officers and directors of the Company eligible for participation in the option covering a total cancellation/regrant program. Options canceled and of approximately 1,806,846 shares were The number regranted in connection with the program. in the table of options shown as granted and canceled Such options below reflect this exchange of options. before repric- had a weighted average exercise price granted at ing of $10.331, and the new options were an exercise price of $5.00. the 1995 shares available for future issuance under and approved Stock Benefit Plan by 7,000,000 shares pursuant to which an automatic share increase feature the number of shares available for issuance under the plan will automatically increase on the first trading day beginning with calendar in January each calendar year, year 2002 and continuing over the remaining term of the plan, by an amount equal to approximately 4% of the total number of shares outstanding on the last trading day in December in the immediately preceding no event will any such annual but in calendar year, increase exceed 4,000,000 shares. In the event of an adverse result in any such liti- In the event of an Compaq Corporation has opposed in several Compaq Corporation to indem- From time to time the Company agrees expendi- Litigation frequently involves substantial Stock Benefit Plan The 1989 Stock Benefit Plan, in effect through August 1995, comprised two separate programs, the Stock Issuance Program and the Option Grant Program. The Stock Issuance Program allowed eligible individuals to common stock immediately purchase the Company’s at a fair value as determined by the Board of Directors. Under the Option Grant Program, eligible individuals were granted options to purchase shares of the common stock at a fair value, as deter- Company’s mined by the Board of Directors, of such shares on the date of grant. The options generally vest over a four- year period, expiring no later than ten years from the Note 4: Stockholders’ Equity mechanical construction of memory cards. In the cards. of memory construction mechanical a preliminary court for the asked Mitsubishi complaint, SanDisk CompactFlash halting the sale of injunction has in Japan. Mitsubishi memory cards ATA and flash and #JP2138047 patents #JP2129071 since dropped are vig- and SanDisk K.K. suit. The Company from the remaining against Mitsubishi’s orously defending claims. the United States, our attempting countries, including do not as a trademark. We to register CompactFlash to obtain registration for the believe that our failure will materially harm our business. CompactFlash mark could be required to pay sub- gation, the Company cease the manufacture, use and stantial damages, expend significant sale of infringing products, non-infringing technology or resources to develop or discon- obtain licenses to the infringing technology, tinue the use of certain processes. for alleged nify certain of its suppliers and customers indemnity patent infringement. The scope of such indemnifica- varies but may in some instances include attorneys’ tion for damages and expenses, including time be engaged fees. The Company may from time to obliga- in litigation as a result of such indemnification are tions. Third party claims for patent infringement insur- excluded from coverage under the Company’s that any ance policies. There can be no assurance cus- future obligation to indemnify the Company’s adverse tomers or suppliers, will not have a material financial condition business, effect on the Company’s and results of operations. atten- tures and can require significant management In addition, even if the Company ultimately prevails. are inherently tion, the results of any litigation matters there can be no assurance that uncertain. Accordingly, future litigation, any of the foregoing matters, or any will not have a material adverse effect on the business, financial condition and results of Company’s operations.

36 . SanDisk Corporation . 2000 Annual Report 37 . SanDisk Corporation . 2000 Annual Report Total Total Grant/ Total Exercise Total Grant/ Available Weighted Issuance Price Outstanding for Future Average A summary of activity under all stock option plans option all stock activity under of A summary Pro forma information regarding net income and Pro forma information regarding net CanceledCanceledGrantedExercised 2,038Canceled (2,038) $ 10.04 308 (2,290) (308) $ 2,290 9.69 – 469 $ 53.57 (2,147) (469) $ $ 4.85 9.69 GrantedExercised sharesIncrease in authorized Granted 7,400Exercised (4,444) – 4,444 – $ 5.97 (1,260) (3,000) $ 0.74 3,000 – $ 31.00 (1,766) $ 3.47 follows (shares in thousands): (shares follows “Accounting for Stock-Based Compensation,” requires “Accounting for Stock-Based Compensation,” not devel- use of option valuation models that were options. Under oped for use in valuing employee stock of the Company’s APB 25, because the exercise price of the underlying stock options equals the market price expense stock on the date of grant, no compensation is recognized. 123, which also earnings per share is required by SFAS requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of this Statement. For all grants subsequent to December 31, 1994 that were initial public offering in granted prior to the Company’s November 1995, the fair value of these options was determined using the minimum value method with a weighted average risk free interest rate of 6.32% and an expected life of 5 years. The fair value for the initial options granted subsequent to the Company’s public offering in November 1995 was estimated at the date of grant using a Black-Scholes single option pricing model with the following weighted average assumptions: risk-free interest rates of 6.16%, 5.52% and 4.84% for 2000, 1999 and 1998, respectively; a dividend yield of 0.0%, a volatility factor of the expect- common stock of ed market price of the Company’s 0.951, 0.888 and 0.600 for 2000, 1999 and 1998 respectively; and a weighted-average expected life of Balance at December 31, 1997Balance at 4,210 7,106 31, 1998Balance at December $ 4.79 1,804 8,252 $ 31, 1999Balance at December 4.75 6,512 9,178 31, 2000Balance at December $ 4,691 9.50 8,852 $ 25.29 Average Weighted Weighted Weighted Number Remaining Average Number Average Options Outstanding Options Exercisable Range of as of Outstanding Contractual Exercise Exercisable as of Exercise Exercise Prices 31, 1999 December Life Price 31, 1999 December Price $ 0.188 -$ 5.094 $ - $$ 5.000$ 6.438 6.250 - 16.750$ $ - 30.000 $ 15.219 - $ 29.919 41.031 1,752,233 1,801,785 526,006 647,778 3,119,537 6.77 7.274.270 $ $ 7.52 6.122 8.59 9.32 $ $ 10.304 1,088,408 $ 23.517 35.1443.963 $ 1,119,848 $ 316,648 6.078 172,426 485,486 $ 10.563 $ $ 23.340 34.778 May 1999, the stockholders increased the shares avail- the increased stockholders 1999, the May 1995 Non-Employee under the issuance for future able by 400,000 and approved Stock Option Plan Directors to which feature pursuant share increase an automatic the for issuance under of shares available the number day on the first trading increase plan will automatically calendar beginning with each calendar year, in January of the remaining term and continuing over year 2002 equal to 0.2% of the total num- the plan, by an amount on the last trading day in ber of shares outstanding preceding calendar year, December in the immediately any such annual increase exceed but in no event will December 31, 2000, the Company 200,000 shares. At shares for issuance under the had reserved 800,000 a total of 448,000 options had been Directors’ Plan and prices ranging from $5.00 to granted at exercise $70.063 per share. Accounting for Stock Based Compensation The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock the alternative options because, as discussed below, 123 fair value accounting provided for under SFAS $ 43.438$ - $ 139.500 0.188 - $ 139.500Employee Stock Purchase Plan the Employee In August 1995, the Company adopted In May 1999, Stock Purchase Plan (the Purchase Plan). 1,004,515 available for the stockholders increased the shares 8,851,854Stock Purchase future issuance under the Employee share Plan by 600,000 and approved an automatic number of increase feature pursuant to which the 9.40 plan will auto- shares available for issuance under the matically increase on the first trading day in January 8.25 $ beginning with calendar year 2002 74.707each calendar year, $and continuing over the remaining term of the plan, by 25.288an amount equal to forty-three hundredths of one percent (0.43%) of the total number of shares outstanding on the last trading day in December in the immediately 90,000 3,330,457 but in no event will any such preceding calendar year, $annual increase exceed 400,000 shares. Under the $ 69.167 12.858 Purchase Plan, qualified employees are entitled to purchase shares through payroll deductions at 85% of the fair market value at the beginning or end of the offer- As of December 31, ing period, whichever is lower. 2000, the Company had reserved 2,366,666 shares of common stock for issuance under the Purchase Plan and a total of 1,034,293 shares had been issued. At December 31, 2000, options outstanding were as follows: At December 31, 2000, options outstanding (500) – (400) 350 1999 1998 2,117 651 4,105 2,936 16,576 5,000 (3,500) 1,655 (2,600) 1,305 $ 13,076 $ 6,655 $ 13,076 $ $ 10,354 $ 1,413 500 2000 10,211 77,190 94,147 13,296 21,683 116,330 $ 53,683 $ 193,520 Foreign Foreign Federal State Federal State December 31, Current: Provision for income taxes Note 5: 5: Note Retirement Plan adopted a tax- Effective January 1, 1992, the Company Plan, for the deferred savings plan, the SanDisk 401(k) is designed to benefit of qualified employees. The plan of funds at provide employees with an accumulation elect to make retirement. Qualified employees may basis. The contributions to the plan on a monthly to the plan at Company may make annual contributions The Company the discretion of the Board of Directors. contributed $105,000 for the plan year ended December 31, 1999. No contributions were made by the Company for the years ended December 31, 2000 and 1998. 6: Note Income Taxes The provision for income taxes consists of the following (in thousands): Shareholder Rights Plan Shareholder shareholder adopted a the Company 21, 1997, On April Rights Under the (the Rights Agreement). rights plan at as a dividend rights were distributed Agreement, stock share of common one right for each the rate of as of of record held by stockholders of the Company will 28, 1997. The rights of business on April the close redeemed or April 28, 2007 unless expire on the Rights Agreement, each right exchanged. Under registered holder to buy one will initially entitle the of Series A Junior Participating one-fiftieth of a share $250.00. The rights will become Preferred Stock for a person or group acquires benefi- exercisable only if percent or more of the cial ownership of 15 stock or commences a tender common Company’s offer upon consummation of which offer or exchange would beneficially own 15 per- such person or group common stock. Company’s cent or more of the Stock Split board of direc- On January 26, 2000, the Company’s form of a stock split, in the tors approved a 2-for-1 of record 100% stock dividend, payable to stockholders was paid and the as of February 8, 2000. The dividend Shares, per split was effected on February 22, 2000. value and capital share amounts, common stock at par to reflect the in excess of par value have been restated stock split for all periods presented. Deferred: 1999 1998 $ 19,625 $ 7,575 $ 0.35 $ 0.14 $ 0.32 $ 0.14 2000 $ 276,421 $ 3.80 $ 4.13 Diluted The Black-Scholes option valuation model was option valuation The Black-Scholes Stock Purchase Plan Under the 1995 Employee stock- Had compensation cost for the Company’s Basic per share Pro forma net income Pro forma net income Because SFAS 123 is applicable only to options granted Because SFAS subsequent to December 31, 1994, its pro forma effect was not fully reflected until 1999. Years ended December 31, Years the option of approximately 5 years. The weighted The 5 years. of approximately the option were granted options of those fair value average 1998, for 2000, 1999 and and $3.325 $39.82, $22.38 respectively. traded the fair value of for use in estimating developed fully restrictions and are have no vesting options that the models require In addition, option transferable. assumptions including the input of highly subjective the Company’s Because volatility. expected stock price have characteristics signifi- employee stock options those of traded options, and cantly different from in the subjective assumptions can because changes fair value estimate, in manage- materially affect the the existing models do not necessarily opinion, ment’s measure of the fair value of its provide a reliable single employee stock options. to have up to 10% participating employees can choose to purchase the of their annual base earnings withheld purchase price of the common stock. The Company’s date fair stock is 85% of the lower of the subscription fair market value. market value and the purchase date participated in Approximately 78% of eligible employees 1999 and 1998, the plan in 2000 and 79% and 65% in Under the Plan, the Company sold 69,423, respectively. in 2000, 269,092 and 259,484 shares to employees Pursuant to APB 25 and 1999 and 1998, respectively. does not recog- related interpretations, the Company purchase nize compensation cost related to employee comply with the pro forma rights under the Plan. To 123, compensation reporting requirements of SFAS the employees’ cost is estimated for the fair value of model with the purchase rights using the Black-Scholes granted in 2000, following assumptions for those rights and expected 1999 and 1998: dividend yield of 0.0%; of 1.56 and life of 6 months; expected volatility factor .65 and 1.02 in 1.18 in 2000, .98 and 1.16 in 1999, and from 5.35% 1998; and a risk free interest rate ranging value of those to 6.43%. The weighted average fair purchase rights granted in February 1998, August 1998, February 1999, August 1999, February 2000 and August 2000 were $3.50, $2.25, $6.01, $17.72, $38.69 and $29.24, respectively. based compensation plans been determined based on the fair value at the grant dates for awards under those 123, the plans consistent with the method of SFAS net income and earnings per share would Company’s have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

38 . SanDisk Corporation . 2000 Annual Report 39 . SanDisk Corporation . 2000 Annual Report On July 4, 2000, SanDisk entered into a share pur- into a share 2000, SanDisk entered On July 4, into a joint On August 9, 2000, SanDisk entered On November 2, 2000, SanDisk made a strategic 2002. The Company accounts for this investment for accounts The Company 2002. of losses Company’s and the method, the equity under are December 31, 2000 venture through on this joint not material. in $75 million investment to make a chase agreement in Israel, representing or Tower, Semiconductor, Tower In exchange of Tower. 10% ownership approximately the Company will receive one seat for its investment, a guaranteed and of Tower on the board of directors output from the advanced fabrica- portion of the wafer Migdal Haemek, is starting to build in tion facility Tower of the agreement, the Israel. Under the terms our investment over a period of Company will make if key milestones related to approximately 18 months and wafer production at the construction, equipping facility are met. On January the new wafer fabrication of the satisfied the closing conditions 26, 2001, Tower Company trans- share purchase agreement, and the from an ferred the first $20 million of its investment shares ordinary escrow account to purchase 866,551 wafer cred- shares and obtain $8.8 million in pre-paid $11 Tower its. On March 1, 2001, the Company paid one, to pur- million upon its completion of milestone additional chase 366,690 ordinary shares and obtain will take prepaid wafer credits. Additional contributions for ordinary the form of mandatory warrant exercises per share if shares at an exercise price of $30.00 will expire five other milestones are met. The warrants event the key years from the date of grant, and in the of these milestones are not achieved, the exercise expect first wafer We warrants will not be mandatory. fabrication facility production to commence at the new for this invest- in late 2002. The Company accounts ment under the cost method. Photo-Me venture, DigitalPortal Inc., or DPI, with installation, International, or PMI, for the manufacture, digital photo marketing and service of self-service, brand printing labs, or kiosks, bearing the SanDisk name in locations in the U.S. and Canada. These low-cost, silver halide kiosks employ high-quality, photo processing technology developed by PMI. Under the agreement, SanDisk and PMI will each make an initial investment of $4 million and secure lease financing for the purchase of the kiosks. The total value of the lease financing will depend on the number of kiosks deployed by the joint venture. The Company estimates that it will guarantee equipment lease arrangements of approximately $40 million over the first two years of the agreement. PMI will manufacture the kiosks for the joint venture and will install and maintain the kiosks under contract with the joint venture. The Company expects the first kiosks to be deployed in pilot programs in select retail stores in the United States starting in the first half of 2001. The Company accounts for this investment under the equity method, and the of losses on this joint venture through Company’s December 31, 2000 are not material. investment of $7.2 million in Divio, Inc. Divio is a – 800 1999 4,000 10,600 $ 3,400 $ 18,800 $ 18,800 1999 1998 2.8 3.5 0.8 5.5 (1.7) (1.9) (3.9) (6.1) 35.0% 35.0% 33.0% 36.0% 2000 1,200 17,100 11,400 (105,600) $ 42,700 $ (62,900) $ 13,000 4.6 0.7 2000 (0.2) (0.8) 35.0% 39.3% exchange of UMC shares The tax benefits associated with stock options with associated benefits The tax differs for income taxes provision The Company’s Total deferred tax assets deferred Total Unrealized gain receipt on Other Deferred revenue Accruals and other reserves Inventory writedown reserves Research credit exempt interest income Tax Deferred tax liabilities: Note 7: 7: Note Strategic Manufacturing Joint Venture, Relationships and Investments closed a Toshiba On June 30, 2000, the Company and and transaction providing for the joint development manufacture of 512 megabit and 1 gigabit flash memory chips and Secure Digital Card controllers. As a part of formed and this transaction, the Company and Toshiba contributed initial funding to FlashVision LLC, a joint venture to equip and operate a silicon wafer manufacturing line at Dominion Semiconductor in Virginia. The cost of equipping the Virginia wafer manufacturing line is estimated at between $700 million and $800 million. 50% ownership of the joint As part of the Company’s venture it had invested $134.7 million as of December 31, 2000, and in January 2001, we invested the remaining $15.3 million. The Company has also guaranteed up to $215 million in equipment lease lines to equip Semiconductor manufacturing Dominion Toshiba’s clean room with advanced wafer processing equipment. As of January 26, 2001, $20 million was guaranteed. In addition, the Company will share certain research and development costs. The Company expects to generate revenues from the sale of products using 512 megabit technology during the second half of 2001, and from the 1 gigabit technology during Total deferred tax assets/ (liabilities) deferred Total December 31, Deferred income taxes reflect the net tax effects of Deferred income taxes between the carrying amounts temporary differences for financial reporting purposes of assets and liabilities purposes. and the amount used for income tax deferred tax Significant components of the Company’s 1999 are as fol- assets as of December 31, 2000 and lows (in thousands): December 31, Federal statutory rate benefit State taxes, net of federal items Other individually immaterial reduces taxes currently payable as shown above by as shown payable currently taxes reduces 1999 $1,761,000 in 2000, $9,809,000, and $29,258,000, to benefits are credited Such respectively. and 1998, realized. excess of par when capital in by applying the federal amount computed from the taxes as follows: rates to income before statutory Deferred tax assets: –– 1999 1998 $ 199 $ 471 $ $ 199 $ (272) $ 429 $ 471 $ 42 2000 $ (343) $ $ 199 $ (50,412) $ (50,268) available-for-sale securities available-for-sale As of March 22, 2001, the market value of our Accumulated other comprehensive income pre- Accumulated other comprehensive income during the year Unrealized loss on investments income at year end income at beginning of year Unrealized gain (loss) on Accumulated other comprehensive Change of accumulated other Accumulated other comprehensive $28.0 million and $14.0 million, respectively, of consoli- million, respectively, $14.0 million and $28.0 revenues. dated The unrealized loss on investments includes a tax ben- The unrealized loss on investments includes efit of approximately $34.6 million. 10: Note Subsequent Event (unaudited) of both our At December 31, 2000, the market value in UMC had short-term and long-term investment basis. It was declined $201.9 million below its carrying determined that this decline was related to the downturn in the semiconductor industry as a whole and was temporary in nature due to the historically cyclical portion of The available-for-sale nature of the industry. our investment was marked-to-market through other 115. comprehensive income as required by SFAS investment in UMC remained significantly below our cost. The downturn in the semiconductor industry and the economy in general appears to be more severe than previously anticipated. There is a great deal of uncertainty regarding when the semiconductor industry will recover from this down cycle. Because of the we believe that continued downturn in the economy, the decline in the market value of our investment in and UMC at March 22, 2001 is other than temporary, we will report a loss in other income and expense in the first quarter of 2001.This loss will be based upon the fair market value of the investment at the end of the first quarter in fiscal 2001, as compared to the cost basis. investment’s Note 9: Note Other Comprehensive Accumulated Income No. Board Statement Accounting Standards Financial Income”,requires 130, “Reporting Comprehensive available- losses on the Company’s unrealized gains or be included in other comprehen- securities to for-sale income consists of net sive income. Comprehensive comprehensive income. income and other balance sheet consists of sented in the accompanying gains and loses on avail- the accumulated unrealized securities for all periods pre- marketable able-for-sale for other comprehensive sented. The tax effects presented (in income were immaterial for all periods thousands). 20 9 261 445 1999 1998 62,176 46,276 45,218 19,562 57,273 51,517 22,674 9,810 $ 116,92260,113 $ $ 246,990 $ 135,761 $ 25,442 $ 16,779 $ 82,996 $ 68,750 55 520 2000 65,181 99,352 178,564 198,253 $ 174,685 $ 258,715 $ 373,517 $ 601,812 The Company operates in one segment, flash The Company operates in one segment, In 2000, 1999, and 1998, the Company purchased In 2000, 1999, and Japan Europe Other foreign countries Other foreign countries United States Japan Europe United States Total Long Lived Assets: Major Customers In 2000, there were no customers who accounted for more than 10% of total revenue. In 1999 and 1998, revenues from one customer represented approximately Total Total Revenues are attributed to countries based on the location of the customers. Long lived assets in other foreign countries includes the long-term investment in UMC of $197.7 in 2000 and $51.2 million in 1999 and 1998. Long lived assets in the United States includes the investment in FlashVision of $134.7 in 2000. Information regarding geographic areas for the years Information regarding geographic areas 1998 are as fol- ended December 31, 2000, 1999, and lows (in thousands): Ended December 31, Years Geographic Information: Revenues: Segment Information about No. 131, “Disclosures SFAS The Company applied and Related Information”. Segments of an Enterprise of an Operating segments are defined as components information is enterprise about which separate financial the chief operat- available that is evaluated regularly by or group, in deciding how to allo- ing decision maker, cate resources and in assessing performance. its products memory products. The Company markets through its in the United States and in foreign countries retailers and its sales personnel, dealers, distributors, has been iden- subsidiaries. The Chief Executive Officer Maker (“CODM”) tified as the Chief Operating Decision allocation because he has final authority over resource The CODM decisions and performance assessment. about does not receive discrete financial information individual components of the market. Note 8: Note privately-held manufacturer of digital imaging compres- imaging of digital manufacturer privately-held cam- future digital for and products technology sion memory of using our flash will be capable corders that mag- replacing the home video movies, cards to store the these systems. Under currently used in netic tape of Divio 10% SanDisk owns approximately agreement, seat. The Company to one board and is entitled under the cost method. for this investment accounts a foundry in which the wafers from USIC/UMC, totaling approximately $161.6 Company has ownership, and $11.6 million, respectively. million, $22.8 million

40 . SanDisk Corporation . 2000 Annual Report 41 . SanDisk Corporation 2000 Annual Report Corporate Information

Board of Directors Central Region USA 2100 Camino A Los Cerros William V. Campbell (2) 545 Metro Place South, Suite 100 Menlo Park, California 94025 Intuit Inc. Dublin, Ohio 43017 T: 650-854-9003 Chairman of the Board T: 614.760.3700 F: 650-854-7400 F: 614.760.3701 Irwin Federman (1) 32500 Mills Road SanDisk Corporation Mid-Atlantic Region USA Avon, Ohio 44011 Chairman 620 Herndon Pkwy, Suite 200 T: 440.327.0490 U.S. Venture Partners Herndon, Virginia 22070 F: 440.327.0295 General Partner T: 703.481.9828 F: 703.437.9215 2220 Airport Frwy. #440-129 Dr. Eli Harari Bedford, Texas 76022 SanDisk Corporation Eastern Region USA & Canada T: 817.355.9365 President and CEO 20 Trafalgar Square, Suite 400 F: 817.571.0958 Nashua, New Hampshire 03063 Catherine P. Lego (1)(2) T: 603.882.0888 11524 Tottenham Place Photonics Fund F: 603.882.2201 Richmond, Virginia 23233 General Partner T: 804-217-7845 Latin & South America F: 804-217-7846 Dr. James D. Meindl 101 Southhall Lane, Suite 400 Georgia Institute of Technology Maitland, Florida 32751 European Retail Sales T: 407.667.4880 Wilhelminastraat 18 (1)(2) Alan F. Shugart F: 407.667.4834 2011 VM Haarlem Al Shugart International The Netherlands President and CEO Germany T: 31.23.5514226 Karlsruhler Str. 2C F: 31.23.5348625 D-30519 Hannover Executive Officers Germany Unit 21 Horseshoe Business Park Frank Calderoni T: 49.511.875.9185 Upper Lye Lane CFO and Senior Vice President, F: 49.511.875.9187 Bricket Wood, St. Albans Finance and Administration Herfordshire AL2 3TA Rudolf-Diesel-Str. 3 England Nelson Chan 40822 Mettmann T: 44.01923.671222 Senior Vice President, Sales and Germany F: 44.01923.671244 Marketing T: 49.210.495.3433 F: 49.210.495.3434 Japan Retail Sales Dr. Eli Harari Umeda-Shinmichi Building 10F President and CEO Sweden 1-1-5 Dojima, Kita-ku Videroegatan 3 B Osaka 530-0003 Ralph Hudson S-16440 Kista Japan Senior Vice President, Worldwide Sweden T: 81.6.6343.6480 Operations T: 46.08.75084.63 F: 81.6.6343.6481 Sanjay Mehrotra F: 46.08.75084.26 Senior Vice President, Engineering Japan Registrar and Transfer Agent Jocelyn Scarborough 8F Nisso Building 15 Computershare Investor Services Vice President, Human Resources 2-17-19 Shin-Yokohama Chicago, Illinois Kohoku-ku Yokohama 222-0033 Corporate Headquarters Japan Independent Public Auditors 140 Caspian Court T: 81.45.474.0181 Ernst & Young LLP Sunnyvale, California 94089 F: 81.45.474.0371 San Jose, California USA T: 408.542.0500 Asia/Pacific Rim Legal Counsel F: 408.542.0503 89 Queensway, Lippo Center Brobeck, Phleger & Harrison LLP www.sandisk.com Tower II, Suite 4104 Admiralty, Hong Kong Palo Alto, California China Industrial/OEM Sales Offices T: 852.2712.0501 Investor/Shareholder Relations Western Region USA F: 852.2712.9385 Frank Calderoni 140 Caspian Court CFO and Senior Vice President, Finance Sunnyvale, California 94089 and Administration T: 408.542.0730 Retail Sales Offices F: 408.542.0403 US Retail Sales 10 Flastone Michael Gray Coto de Caza, California 92679 Vice President, Finance T: 949.589.8351 Sharon Spehar F: 949.589.8364 Shareholder Relations

(1) Audit Committee (2) Compensation Committee

©2001 SanDisk Corporation. All rights reserved. SanDisk and the SanDisk logo are registered trademarks, and CompactFlash and ImageMate are trademarks of SanDisk Corporation. FlashPath is a trademark of SmartDisk Corporation. SmartMedia is a trademark of Toshiba Corporation. SD logo is a trademark of Toshiba Corporation. DigitalPortal is a trademark of DigitalPortal Inc. Other brands and products are trademarks of their respective holder(s). 4/01 SanDisk Corporation 140 Caspian Court Sunnyvale, California 94089-1000 USA T: 408.542.0500 F: 408.542.0503 www.sandisk.com