SANDISK CORP, 10-Q, 1996-11-14

SANDISK CORP
10-Q, 1996-11-14
COMPUTER STORAGE DEVICES

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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------------ Exchange Act of 1934 for the quarterly period ended
September 30, 1996

Transition report pursuant to Section 13 or 15(d) of the Securities
- ------------ Exchange Act of 1934 for the transition period from ________
to ________

Commission File Number 0-26734

SanDisk Corporation
(Exact name of registrant as specified in its charter)

Delaware 77-0191793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

140 Caspian Court, Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)

(408) 542-0500
(Registrant's telephone number, including area code)

3270 Jay Street, Santa Clara, California, 95054
(Former name, former address, and
former fiscal year, if changed since last report.)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 30, 1996

Common Stock, $.01 par value 22,269,016
---------------------------- ----------
Class Number of shares

<PAGE>

SanDisk Corporation

Index

PART I. FINANCIAL INFORMATION

Page No.
Item 1. Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995................... 3

Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1996 and 1995.... 4

Condensed Consolidated Statement of Cash Flows
Nine months ended September 30, 1996 and 1995.............. 5

Notes to Condensed Consolidated Financial Statements........... 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................. 19

Item 2. Changes in Securities......................................... 19

Item 3. Defaults upon Senior Securities............................... 19

Item 4. Submission of Matters to a Vote of Security Holders........... 19

Item 5. Other Information............................................. 19

Item 6. Exhibits and Reports on Form 8-K.............................. 20

Signatures.................................................... 22

Page 2
<PAGE>

PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)

ASSETS September 30, December 31,
1996 1995
(unaudited)
Current Assets:

Cash and cash equivalents $ 26,301 $ 27,255
Short-term investments 48,904 41,140
Accounts receivable, net 9,835 8,428
Inventories, net 9,117 10,411
Prepaid expenses and other current assets 724 534
--------- --------
Total current assets 94,881 87,768

Property and equipment, net 8,638 4,254
Deposits and other assets 347 125
--------- --------
Total Assets $ 103,866 $ 92,147
========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable $ 8,655 $ 9,053
Accrued payroll and related expenses 2,804 1,946
Accrued warranty 668 917
Other accrued liabilities 2,416 1,847
Deferred revenue 6,046 5,905
Current obligations under capital leases 0 98
--------- --------
Total current liabilities 20,589 19,766

Stockholders' Equity:

Common stock 98,149 97,294
Accumulated deficit (14,872) (24,913)
--------- --------
Total stockholders' equity 83,277 72,381

Total Liabilities and
--------- --------
Stockholders' Equity $ 103,866 $ 92,147
========= ========

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

Page 3

<PAGE>

SanDisk Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data; unaudited)

Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
------- ------- ------- -------

Revenues $26,048 $16,886 $71,349 $43,593
Cost of sales 15,759 10,048 43,538 24,748
------- ------- ------- -------
Gross profits 10,289 6,838 27,811 18,845

Operating expenses:
Research and development 2,735 2,192 7,280 6,019
Sales and marketing 2,161 1,691 6,467 4,816
General and administrative 2,279 950 5,580 2,546
------- ------- ------- -------
Total operating expenses 7,175 4,833 19,327 13,381

Operating income 3,114 2,005 8,484 5,464

Interest and other income, net 799 373 2,320 1,120
------- ------- ------- -------
Income before taxes 3,913 2,378 10,804 6,584

Provision for income taxes 270 81 702 261
======= ======= ======= =======
Net income $ 3,643 $ 2,297 $10,102 $ 6,323
======= ======= ======= =======

Primary net income per share $ 0.15 $ 0.38 $ 0.42 $ 1.11
======= ======= ======= =======

Fully diluted net income per share $ 0.15 $ 0.11 $ 0.42 $ 0.31
======= ======= ======= =======

Shares used in computing primary
net income per share 24,268 5,968 24,204 5,695
======= ======= ======= =======

Shares used in computing fully diluted
net income per share 24,268 20,530 24,204 20,193
======= ======= ======= =======

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

Page 4

<PAGE>

SanDisk Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)

Nine Months ended
September 30,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 10,102 $ 6,323
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,641 1,165
Accounts receivable, net (1,407) (3,834)
Inventory 1,294 (2,645)
Prepaids and other assets (412) (864)
Accounts payable (398) 4,368
Accrued payroll and related expenses 858 861
Accrued warranty (249) 196
Other accrued liabilities 569 1,096
Deferred revenue 141 738
-------- --------
Total adjustments 2,037 1,081

-------- --------
Net cash provided by operating activities 12,139 7,404

Cash flows from investing activities:
Purchases of short term investments (34,520) (17,267)
Proceeds from sale of short term investments 26,695 8,108
Acquisition of capital equipment (6,025) (3,000)
-------- --------
Net cash used in investing activities (13,850) (12,159)

Cash flows from financing activities:
Principal payments under capital leases (98) (435)
Sale of convertible preferred stock -- 6,215
Sale of common stock, net of repurchases 855 82
-------- --------
Net cash provided by financing activities 757 5,862

-------- --------
Net increase (decrease) in cash and cash equivalents (954) 1,107

Cash and cash equivalents at beginning of period 27,255 11,109

======== ========
Cash and cash equivalents at end of period $ 26,301 $ 12,216
======== ========

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

Page 5

<PAGE>

SanDisk Corporation

Notes to Condensed Consolidated Financial Statements

1. These interim condensed consolidated financial statements are unaudited but
reflect, in the opinion of management, all normal recurring adjustments
necessary to present fairly the financial position of SanDisk Corporation
and Subsidiaries (the "Company") as of September 30, 1996, including the
results of operations for the three and nine month periods ended September
30, 1996 and 1995 and cash flows for the nine month periods ended September
30, 1996 and 1995. Because all the disclosures required by generally
accepted accounting principles are not included, these interim condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto in the Company's annual
report on Form 10-K as of, and for the year ended December 31, 1995. The
year-end condensed consolidated balance sheet data as of December 31, 1995
was derived from the audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.

The results of operations for the three and nine month periods ended
September 30, 1996 and the statement of cash flows for the nine months
ended September 30, 1996 are not necessarily indicative of results of
operations and cash flows for any future period.

2. The Company's fiscal year ends on the Sunday closest to December 31, and
each fiscal quarter ends on the Sunday closest to March 31, June 30, and
September 30. The third fiscal quarter of 1996 and 1995 ended on September
29, 1996 and October 1, 1995, respectively. Fiscal year 1995 ended on
December 31, 1995. For ease of presentation, the accompanying financial
statements have been shown as ending on the last day of the calendar month.

3. The components of inventory consist of the following:

September 30, December 31,
1996 1995
------- -------
(In thousands)
Raw materials $ 2,670 $ 2,753
Work-in-process 5,491 6,921
Finished goods 956 737
------- -------
$ 9,117 $10,411
======= =======

4. Primary net income per share applicable to common stockholders is computed
using the weighted average number of shares of common stock outstanding.
Common equivalent shares from Series C convertible preferred stock (using
the if-converted method) and from stock options and warrants (using the
treasury stock method or modified treasury stock method where applicable)
have been included in the computation when dilutive. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent (common stock options and Series G preferred stock)
shares issued by the Company at prices below the initial public offering
price during the twelve-month period prior to the offering have been
included in the calculation as if they were outstanding for all periods
presented regardless of whether they are dilutive (using the treasury stock
method and the initial public offering price). The Company completed its
initial public offering in November, 1995.

Fully diluted earnings per share is calculated using net income and the
shares used in the primary calculation, as well as other dilutive preferred
stock (Series A, B, D, E, and F) which is not deemed to be a common stock
equivalent for purposes of the primary earnings per share calculation.

5. Samsung Electronics Company Ltd. filed a complaint against the Company in
the Northern District of California in October 1995 accusing the Company of
infringing two Samsung patents, seeking declaratory relief with respect to
five Company patents and alleging unspecified damages for certain other
related claims. The Company has received opinions from its patent counsel
that, based on information currently known, the Company's products do not
infringe one of these Samsung patents and that, based on certain
assumptions as to how Samsung would claim infringement, the particular
patent claim in the other Samsung patent is invalid and that the Company's
products do not infringe any of the other claims of such patent.
Nonetheless, the Company anticipates that Samsung will continue to pursue
litigation with respect to such claims. SanDisk filed its answer to
Samsung's complaint in March 1996. At that time, SanDisk asserted a number
of counterclaims based on the Company's belief that Samsung infringes three
SanDisk patents.

On January 11, 1996, the Company filed a complaint against Samsung with the
United States International Trade Commission alleging that Samsung and its
U.S. subsidiary, are importing and selling products that infringe two of
the Company's patents. By its complaint, the Company seeks a judgment by
the International Trade Commission that Samsung is infringing the Company's
patents and an order precluding Samsung from importing those infringing
products into the United States. The U.S. International Trade Commission
completed its hearings on this matter in October 1996. A decision is
expected in the first half of 1997. The Company intends to vigorously
enforce its patents against Samsung, but there can be no assurance that
these efforts will be successful.

Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails.
In addition, the results of any litigation matters are inherently
uncertain. Accordingly, there can be no assurance that any of the foregoing
matters, or any future litigation, will not have a material adverse effect
on the Company's business, financial condition and results of operations.

<PAGE>

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

The following discussion and analysis may contain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements
regarding expected possible price competition, future sales mix (product and
channel), average selling prices, inventory levels, gross margins and the
company's customer base. Such statements are subject to certain risks and
uncertainties, including those discussed below and in the Company's Form 10-K
for the year ended December 31, 1995 under the heading "Risk Factors", that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
update these forward looking statements to reflect events or circumstances
occurring after the date hereof.

Results of Operations

Revenues. Revenues for the third quarter of fiscal 1996 increased 54% to
$26.0 million compared to $16.9 million for the same period of the previous
year. The increase for the three month period ended September 30, 1996 was
primarily due to increased sales of Chipset and CompactFlash(TM) products. Unit
sales of FlashDisk products for the third quarter of 1996 increased 39% compared
to the same period of 1995, however, revenues from FlashDisk products declined
slightly due to lower average selling prices. Unit sales of all products for the
third quarter of 1996 increased 97% compared to the third quarter of 1995. This
growth in unit volume was offset by a decrease in average selling prices of
approximately 30%. Revenues for the first nine months of fiscal 1996 increased
64% to $71.3 million compared to $43.6 million for the same period in 1995. The
increase in revenues for the nine month period ended September 30, 1996 was
primarily due to increased sales of the Company's Chipset, CompactFlash(TM) and
FlashDisk products. For the first nine months of 1996, unit volumes increased
140% and average selling prices declined 37% compared to the same period in
1995. Revenues for the three and nine month periods ended September 30, 1996
also included royalties from a patent cross-license agreement that was entered
into during the fourth quarter of 1995.

Approximately 24% of revenues in the third quarter and 19% of revenues for
the nine month period ended September 30, 1996 was related to applications
destined for consumers (such as digital cameras). There is no assurance that
sales into the consumer products market will continue to represent a significant
portion of the Company's revenues, particularly on a quarter to quarter basis.
Many of the consumer products that incorporate SanDisk's flash memory are new
and the success of these products is still uncertain. As the consumer markets
develop, competition is expected to increase, which could cause lower average
selling prices and decreased gross margins on units shipped into these markets.
In addition to the consumer market, the Company sells products to the
industrial, highly portable computing and telecommunications markets. The mix of
sales to these key markets varies from quarter to quarter and may vary in the
future.

Export sales represented 61% of revenues in the third quarter of 1996 and
54% of revenues for the nine months ended September 30, 1996 compared with 48%
and 54%, respectively, for the same periods of the previous year. The Company's
top ten customers accounted for 72% of total revenues for the third quarter of
1996 compared with 79% in the third quarter of 1995. The Company expects sales
of its products to a limited number of customers to continue to account for a
substantial portion of its revenues for the foreseeable future.

Order visibility weakened during the third quarter of 1996. SanDisk's OEM
customers in the emerging consumer markets are still experiencing difficulty
gauging the initial market demand for their new products. The Company is also
experiencing a shift in its customer order profile. The current market situation
of ready availability, coupled with rapid price declines of semiconductor
memories, have led customers to expect ever shorter lead-times. Consequently,
the turns component of the Company's quarterly business is increasing. To adapt
to these evolving market conditions, the Company shifted to more in-house
manufacturing in the third quarter to reduce costs and lead times and to
position itself to respond quickly to changes in customer demand. The current
limited visibility of orders could continue for the next several quarters.

Gross Profits. In the third quarter of 1996, gross profits increased 50% to
$10.3 million, or 39.5% of revenues, compared to $6.8 million, or 40.5% of
revenues, for the same period of the previous year. Gross profits for the nine
month period ended September 30, 1996 increased 48% to $27.8 million, or 39.0%
of revenues from $18.8 million, or 43.2% of revenues for the comparable period
of 1995. SanDisk completed its transition from 16Mbit to 32Mbit technology
during the third quarter of 1996. For the three and nine month periods ended
September 30, 1996, 32Mbit products accounted for approximately 86% and 75%,
respectively, of the Company's unit shipments. Product gross margins declined in
1996 due to lower average selling prices. Revenues from patent cross-license
royalties partially offset the lower product gross margins in 1996. The Company
expects price competition to increase in the future, which is likely to result
in decreased average selling prices and may result in lower gross margins.

Operating Expenses. Research and development, sales and marketing, and
general and administrative expenses increased by $2.3 million, or 48%, during
the third quarter of 1996 and by $5.9 million, or 44%, for the nine month period
ended September 30, 1996 compared to the same periods of 1995. Operating
expenses declined as a percentage of revenues to 28% from 29% for the three
months ended September 30, 1996 and to 27% from 31% for the nine months ended
September 30, 1996 compared to the same periods in 1995. Salaries and payroll
related expenses increased for the three and nine month periods ended September
30, 1996 due to higher headcount in all organizations compared to the same
periods of the previous fiscal year. Legal fees related to the defense of
SanDisk's patents were significant in the third quarter of 1996. The Company
spent approximately $1.0 million on patent related litigation during the
quarter. A substantial portion of these expenses related to the SanDisk's ITC
complaint against Samsung Electronics Company. The ITC completed its hearings in
this matter in early October 1996. See Note 5 to the Company's financial
statements contained in Item 1 of this report. Increased professional fees
associated with investor relations activities also contributed to the increases
in general and administrative expenses.

Interest and Other Income, Net. Interest and other income, net, increased
$426,000 for the three months ended September 30, 1996 and $1.2 million for the
nine months ended September 30, 1996 compared to the same periods of 1995. This
was primarily due to increased investment balances associated with the proceeds
of SanDisk's initial public offering.

Provision for Income Taxes. The Company recorded a provision for income
taxes at a 6.5% effective tax rate for the first nine months of 1996 compared to
a 4% effective tax rate for the same period of 1995. The Company anticipates
that its effective tax rate will continue to increase over the next several
quarters, but will be less than the statutory rate due to the utilization of net
operating loss and tax credit carryforwards.

Liquidity and Capital Resources

As of September 30, 1996, the Company had working capital of $74.3 million,
which included $26.3 million in cash and cash equivalents and $48.9 million in
short term investments. The Company also has a line of credit with a commercial
bank under which it can borrow up to $10 million. The line of credit expires in
July 1997. As of September 30, 1996, the Company had $6.2 million committed
under the line of credit facility for standby letters of credit.

Operating activities provided $12.1 million of cash during the first nine
months of 1996. The increase was primarily due to net income of $10.1 million
and a decline in inventory of $1.3 million which were partially offset by an
increase in accounts receivable of $1.4 million. Cash used in investing
activities was $13.8 million for the nine months ended September 30, 1996 which
included net purchases of short term investments of $7.8 million. Capital
equipment additions of $6.0 million included leasehold improvements on SanDisk's
new Sunnyvale headquarters facility, purchase of the surface mount production
line and the construction of test equipment for production of 32Mbit products.

During the third quarter of 1996, the Company's net inventory decreased due
to shorter manufacturing cycle times and revaluation of the inventory to reflect
the lower costs. The Company anticipates net inventory to increase in the fourth
quarter, in line with the Company's strategy to establish a strategic buffer
inventory of critical or sole-sourced components.

Depending on the demand for the Company's products, the Company may decide
to make substantial investments in manufacturing capacity to support its
business in the future. Management believes the existing cash and cash
equivalents, and short term investments will be sufficient to meet the Company's
currently anticipated working capital and capital expenditure requirements for
the next twelve months.

Impact of Currency Exchange Rates

The Company currently purchases wafers from Matsushita under purchase
contracts denominated in yen. A portion of the Company's revenues are also
denominated in yen. Foreign exchange exposures arising from the Company's yen
denominated commitments and related accounts payable are offset to the extent
the Company has yen denominated accounts receivable and cash balances. To the
extent such foreign exchange exposures are not offset, the Company enters into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. At September 30, 1996, there were no forward contracts
outstanding. Future exchange rate fluctuations could have a material adverse
effect on the Company's business, financial condition and results of operations.

Risk Factors

Fluctuations in Operating Results. SanDisk's operating results are subject
to quarterly and annual fluctuations due to a variety of factors. The Company
has very limited visibility with respect to anticipated operating results for
any given quarter, even during the quarter in question. In addition, the Company
is requesting customers to qualify its new products based on the 32Mbit wafers
produced by LG Semicon (formerly Goldstar Electron). Any delays in customer
qualifications or product acceptance could negatively impact revenues during the
next several quarters.

Other factors affecting the Company's operating results include volume of
product sales, availability of foundry capacity, the timing of significant
orders, competitive pricing pressures, the ability of the Company to match
supply with demand or to accurately forecast future inventory levels,
fluctuations in product costs, fluctuation in manufacturing yields,
manufacturing utilization, changes in product and customer mix, changes in the
channels through which the Company's products are distributed, timing of new
product announcements and introductions by the Company and its competitors,
quality of the Company's products, increased research and development expenses
associated with new product introductions, exchange rate fluctuations and market
acceptance of new or enhanced versions of the Company's products. In addition,
the Company expects to continue to increase its operating expenses in connection
with the hiring of additional personnel and the development of new applications.
If the Company does not achieve increased levels of revenues commensurate with
these increased levels of operating expenses, the Company's business, financial
condition and results of operations will be materially adversely affected. All
of these factors are difficult to forecast and these or other factors can
materially affect the Company's quarterly or annual operating results.

Due to the emerging nature of the Company's markets and certain planned
product transitions, it is difficult for the Company to forecast future
inventory levels required to meet customer demand. As a result of both
contractual obligations and manufacturing cycle time, the Company is required to
order wafers from its foundries approximately six months in advance of the
ultimate shipment of its products. Under the Company's wafer supply agreements,
there are limits on the number of wafers the Company can order and the Company's
ability to change that quantity is restricted. Accordingly, the Company's
ability to react to significant fluctuations in demand for its products is
limited. As a result, the Company is not able to match its purchases of wafers
to specific customer orders and therefore, the Company may take provisions for
potential excess inventory purchased prior to the receipt of customer orders.
These provisions decrease gross margins in the quarter reported and can result
in significant fluctuations in gross margins on a quarter to quarter basis. As
demand for the Company's products has increased and its manufacturing cycle time
has decreased over the past 12 months, the Company's ability to respond to
changes in customer demand has improved. However, there can be no assurance that
future gross margin volatility will not reoccur as a result of the Company's
inability to match supply with demand or for other reasons.

During the first and second calendar quarters of 1996, the price of dynamic
random access memory (DRAM) decreased dramatically, in some cases by 75%. All
DRAM suppliers were adversely impacted, including the Company's two Flash
foundry suppliers, which now have excess capacity of foundry wafers that can be
made available to the Company at reduced prices. Such reduced wafer prices
should help the Company to accelerate its cost reduction efforts. However,
because SanDisk values its inventory on a lower of cost or market basis, these
cost reductions may have an adverse effect on the Company's gross margins and
results of operations in the fourth quarter of 1996 and the first quarter of
1997 as the Company's inventory is written down to reflect the lower wafer
costs. Due to the highly competitive nature of the DRAM business, there can be
no assurance that wafer costs will remain low or that increased capacities will
remain available.

Dependence on Third Party Foundries. All of the Company's products require
silicon wafers, which are currently supplied by Matsushita in Japan and LG
Semicon in Korea, which was qualified as a second foundry source in late 1995.
The Company is dependent on Matsushita and LG Semicon to produce wafers of
acceptable quality and with acceptable manufacturing yields, to deliver those
wafers to the Company on a timely basis and to allocate to the Company a portion
of their foundry capacity sufficient to meet the Company's needs. On occasion,
the Company has experienced difficulties in each of these areas. The loss or
reduction of capacity from Matsushita and LG Semicon or the inability to qualify
or receive the anticipated level of capacity from Matsushita and LG Semicon
could have a material adverse effect on the Company's business, financial
condition and results of operations. Each time a new foundry is brought into
operation, it typically requires several months before acceptable quality and
manufacturing yields are achieved. There can be no assurance that Matsushita and
LG Semicon will be able to maintain acceptable yields or that they will continue
to deliver sufficient quantities of wafers on a timely basis.

Under the Company's wafer supply agreements with Matsushita and LG Semicon,
the Company is obligated monthly to provide a 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 percentage from the previous
month's forecast. This limits the Company's ability to react to any significant
fluctuations in demand for its products. To the extent the Company inaccurately
forecasts the number of wafers required, it may have either a shortage or an
excess supply of wafers, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. The wafer
supply agreements with Matsushita and LG Semicon each include a target number of
wafers to be delivered per month that is substantially higher than the level of
supply from either foundry as of September 30, 1996. To the extent the Company
is unable to obtain scheduled quantities of wafers from Matsushita or LG Semicon
with planned yields, the Company's business, financial condition and results of
operations could be negatively impacted.

The Company has entered into a joint development agreement with NEC for the
development of future generations of semiconductor devices to be used in the
manufacture of the Company's products. However, there can be no assurance that
future generations of the semiconductor devices will be successfully developed
or, if developed, that a wafer supply agreement will be entered into with NEC.
Because the lead time to qualify a new foundry is approximately 18 to 24 months,
in the event that the Company and NEC do enter into a wafer supply agreement,
the Company could not expect to receive volume shipments from NEC until 1998 at
the earliest.

Due to the unpredictable nature of the new markets for the Company's
products, the Company may periodically experience shortages in the future.
Because of the lengthy lead times required to qualify a new foundry, there is no
readily available alternative source of supply. The inability of the Company to
obtain expanded foundry capacity, to qualify other wafer manufacturers or to
correctly forecast the number of wafers required from its current suppliers, as
well as any inability to obtain timely and adequate deliveries from the
Company's current or future suppliers or any other circumstance that would
require the Company to seek alternative sources of supply, could delay shipments
of the Company's products and could have a material adverse effect on the
Company's business, financial condition and results of operations.

SanDisk has received recent indications from its foundries that additional
capacity is available. Finished goods inventory levels increased during the
first nine months of 1996 and the Company is now quoting average delivery times
of two to six weeks. There can be no assurance, however, that this situation
will continue.

Risks Associated with Transitioning to New Products and Processes.
Successive generations of the Company's products incorporate semiconductor
devices with greater memory capacity per chip. In addition, the Company is
continually involved in joint development with its foundries to produce
semiconductor devices based upon smaller geometry manufacturing processes. Both
the development of higher capacity semiconductor devices and the implementation
of smaller geometry manufacturing processes are important determinants of the
Company's ability to decrease the cost per megabyte of its flash data storage
products. The utilization of semiconductor devices with greater memory capacity
and the design and implementation of new semiconductor manufacturing processes
can entail a number of problems, including lower yields associated with
semiconductor device production, problems associated with design and manufacture
of products to incorporate such devices, and production delays. There can be no
assurance that such devices or processes will be successfully developed by the
Company. For example, the Company discovered and successfully corrected a design
flaw in its new Flash ChipSet product in the fourth quarter of 1995. As a result
of delays in supplying this product to a major customer, this customer canceled
approximately $500,000 of product orders that were scheduled for delivery in the
fourth quarter of 1995. The Company shipped the majority of its backlog
scheduled for this customer during the fourth quarter of 1995 and no additional
order cancellations were received. However, there can be no assurance that the
Company will not experience similar problems in the future that could have a
material adverse effect on the Company's business, financial condition and
results of operations.

During the first quarter of 1996, the Company began receiving 32Mbit
devices from LG Semicon and began the qualification of this process, which it
completed in October 1996. During the third quarter of 1996, the Company began
production of the 32Mbit devices at LG Semicon. High density flash memory, such
as the 32Mbit, is a complex technology requiring tight manufacturing controls
and effective test screens. The production ramp up period for a flash device at
a new foundry is particularly prone to problems which can impact both
reliability and yields exposing the Company to increased manufacturing costs.
Any problems experienced by the Company in its current or future transitions to
higher capacity memory devices or to new semiconductor manufacturing processes
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's 32Mbit devices are designed to work only in conjunction with
a new integrated microcontroller developed by the Company in cooperation with
Motorola Inc. ("Motorola"). Qualification of the Motorola microcontroller was
completed during the fourth quarter of 1995. The transition to 32Mbit devices
exposes the Company to risks related to the ability to obtain sufficient
quantities of 32Mbit wafers and integrated microcontrollers on a timely basis.
Such factors are difficult to forecast and may have a material adverse effect on
the Company's business, financial condition and results of operations.

Manufacturing Yields. The fabrication of the Company's products is a
complex and precise process requiring wafers that are produced in a highly
controlled and clean environment. Semiconductor companies supplying the Company
with wafers periodically have experienced problems in achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function both of
design technology, which is developed by the Company, and process technology,
which is typically proprietary to the foundry. Because low yields may result
from either design or process technology failures, yield problems may not be
effectively determined or improved until an actual product exists that can be
analyzed and tested to recognize process sensitivities in relation to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process and would require cooperation by and
communication between the Company and the foundry for resolution. This risk is
increased due to the fact that the Company receives its wafers from independent
offshore foundries, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems. At the end of the third
quarter of 1996, the Company experienced manufacturing related difficulties at
both of its wafer foundries suppliers, which resulted in reductions in effective
yields of between 5% and 10%. The Company and its foundries identified the
issues and corrective steps are being implemented. There can be no assurance
that the Company's foundries will achieve or maintain acceptable manufacturing
yields in the future. The inability of the Company to achieve planned yields
from its foundries could have a material adverse effect on the Company's
business, financial condition and results of operations.

Dependence on Key and Sole Source Suppliers. The majority of the memory
components of the Company's products are assembled by Alphatec in Manteca,
California. The majority of the controller sub-assemblies for the Company's
products are assembled by ATI in Milpitas, California. In the third quarter of
1996, the Company stopped using GSS Array in Thailand and Anam in Korea and
installed its own surface mount line in its new Sunnyvale facility. The Company
expects to do a substantial portion of its assembly on this new line. The
remainder will be done by other third party subcontractors. Unexpected costs or
delays in bringing the surface mount line to full production capability could
adversely affect the Company's results from operations in the fourth quarter of
1996. The Company also has no long term agreement with Alphatec. As a result of
this reliance on third party subcontractors for assembly of a portion its
products, the Company cannot directly control product delivery schedules, which
could lead to product shortages or quality assurance problems that could
increase the costs of manufacture or assembly of the Company's products. Any
problems associated with the delivery, quality or cost of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company purchases several key components from sole or single source
vendors for which alternative sources are not currently available. Even where
alternative vendors are available, a significant amount of time would be
required to qualify an additional vendor in the case of certain of the Company's
other components. The Company does not maintain long-term supply agreements with
any of these vendors. The inability to develop alternative sources for these
single or sole source components or to obtain sufficient quantities of these
components could result in delays or reductions in product shipments which could
adversely affect the Company's business, financial condition and results of
operations. For example, the Company relies on Motorola as the sole source of
microcontrollers, which are critical components in the Company's products. The
sole source risk associated with microcontrollers from Motorola is heightened
during transitions from one generation of microcontrollers to the next given the
lack of safety stock available during these transitions. In the event Motorola
were to stop shipment of microcontrollers for any reason, the time to design and
qualify an alternative source would be approximately nine to twelve months. The
Company's reliance on Motorola as its sole source of microcontrollers exposes
the Company to interruptions of supply that could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company is continuing to identify and establish second sources for its key
single and sole source component vendors as sales volumes increase.

Patents, Proprietary Rights and Related Litigation. The Company relies on a
combination of patents, mask work protection, 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 the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications 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. Additionally, competitors of the Company
may be able to design around the Company's patents.

From time to time the Company has been notified and its foundries may in
the future be notified, of claims that they may be infringing patents or other
intellectual property rights owned by third parties. If it is necessary or
desirable, the Company may seek licenses under such patents or intellectual
property rights. However, there can be no assurance that licenses will be
offered or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license from a third party for technology used
by the Company could cause the Company to incur substantial liabilities and to
suspend the manufacture of products or the use by the Company's foundries of
processes requiring the technology, or to expend substantial resources
redesigning its products to eliminate the infringement. There can be no
assurance that the Company would be successful in redesigning its products or
that such licenses would be available under reasonable terms, and any such
development or license could require expenditures by the Company of substantial
time and other resources.

The Company has notified IBM Microelectronics, Samsung Electronics Company
Ltd. ("Samsung") and Toshiba Corporation ("Toshiba") that the Company believes
certain of their existing or announced products infringe certain of the
Company's patents. In addition, from time to time, the Company has entered into
discussions with other companies regarding potential cross-license agreements
for the Company's patents.

In response to the Company's allegations of infringement of five of the
Company's patents, Samsung has filed a complaint in October 1995 accusing the
Company of infringing two of its patents, seeking declaratory relief with
respect to these five Company patents and alleging unspecified damages for
certain other related claims. As written, the complaint potentially implicates
products that comprise substantially all of the Company's revenues for 1995. The
Company has received opinions from its Patent Counsel that, based on information
currently known, the Company's products do not infringe one of these Samsung
patents and that, based on certain assumptions as to how Samsung would claim
infringement, the particular patent claim in the other Samsung patent that
Samsung has accused the Company of infringing is invalid and that the Company's
products do not infringe any of the other claims of such patent. Nonetheless,
the Company anticipates that Samsung will continue to pursue litigation with
respect to these claims. SanDisk filed its answer to Samsung's complaint in
March 1996. At that time, SanDisk asserted a number of counterclaims based on
Samsung's alleged infringement of three SanDisk patents.

On January 11, 1996, the Company filed a complaint against Samsung with the
United States International Trade Commission alleging that Samsung and its U.S.
sales arm, are importing and selling products that infringe two of the Company's
patents. By its Complaint, the Company seeks a judgment by the International
Trade Commission that Samsung is infringing the Company's patents and an order
precluding Samsung from importing those infringing products into the United
States. The U.S. International Trade Commission completed its hearing on this
matter in October 1996. A decision is expected in the first half of 1997. The
Company intends to vigorously enforce its patents against Samsung, but there can
be no assurance that these efforts will be successful.

As is common in the industry, the Company agrees to indemnify certain of
its suppliers and customers for alleged patent infringement. The scope of such
indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
For example, in 1995 one of the Company's customers with which the Company has
an indemnification obligation was served with a complaint alleging patent
infringement with respect to a product manufactured by the Company. Although the
Company has received an opinion from its Patent Counsel that, based on certain
assumptions as to how the plaintiff would claim infringement, the Company's
products do not infringe any valid claim under this patent, the Company
anticipates that the plaintiff will continue to pursue this litigation. Third
party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that the Company's
obligation to indemnify this customer, or any future obligation to indemnify its
customers or suppliers, will not have a material adverse effect on the Company's
business, financial condition and results of operations.

If any third party patents are deemed to be valid and infringed by the
Company's products, the Company would be required to obtain a license to the
patents or to redesign its products to eliminate the infringement. Such a
redesign effort, if possible, could result in substantial delays in marketing
its products and in significant costs. There can be no assurance that the
Company could successfully design around the technology in question or that it
could obtain a license to the infringed patents on reasonable terms, or at all.
The Company's inability to design around a valid patent or to obtain a license
on reasonable terms could have a material adverse effect on the Company's
business, financial condition and results of operations.

To preserve its intellectual property rights, the Company believes it may
be necessary to initiate litigation with one or more third parties, including
but not limited to those the Company has notified of possible patent
infringement. In addition, one or more of these parties may bring suit against
the Company. Any litigation, whether as a plaintiff or as a defendant, would
likely result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such litigation
is ultimately determined in favor of the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology.

In addition to litigation, the Company may need to license some or all of
its patent portfolio to be able to obtain cross-licenses to the patents of
others. In October 1995, the Company entered into a cross-license agreement with
Intel Corporation ("Intel"). There can be no assurance that any other licenses
will be available on commercially reasonable terms, or at all. Moreover, any
such cross-licenses could result in more rapid and intense competition for the
Company's products, by much larger and better financed competitors. Any such
limitations on the Company's ability to market its products, or delays and costs
associated with redesigning its products, or payments of license fees or
licenses of Company rights to others could have a material adverse effect on the
Company's business, financial condition and results of operations.

Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails. Legal
fees associated with the Samsung ITC hearings were approximately $1.0 million in
both the second and third quarters of 1996. While these expenses are expected to
decline in the fourth quarter of 1996, they will remain significant. In
addition, the results of any litigation matters are inherently uncertain.
Accordingly, there can be no assurance that any of the foregoing matters, or any
future litigation, will not have a material adverse effect on the Company's
business, financial condition and results of operations.

Competition. The flash data storage markets in which the Company competes
are characterized by rapid technological change, evolving industry standards,
declining average selling prices and rapid product obsolescence. The Company's
competitors include many large domestic and international companies that have
greater access to foundry capacity, substantially greater financial, technical,
marketing and other resources, broader product lines and longer standing
relationships with customers than the Company. The Company expects competition
to increase in the future from existing competitors and from other companies
that may enter the Company's existing or future markets with similar or
alternative data storage solutions that may be less costly or provide additional
features. In addition, competition will increase to the extent that the Company
determines to license its patents to certain of its competitors in order to gain
licenses to their patents. For example, in October 1995, the Company entered
into a patent cross-license agreement with Intel pursuant to which each party is
entitled to manufacture and sell products that incorporate technology covered by
their respective patents related to flash memory devices. Increased competition
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company recently settled patent infringement issues relating to
features embodied in M-Systems' TFFS and FTL technology. Subsequent to the
M-System's settlement, the PCMCIA standards committee adopted FTL technology as
part of the PCMCIA standard, which enables flash file system software to operate
with linear flash cards. Intel has announced the Miniature Card and Toshiba
announced the Solid-State Floppy Disk Card (SSFDC). Both products are aimed at
the mass storage market for consumer applications, such as digital filmless
cameras. The Company expects these products to compete against its CompactFlash
(TM) product. A manufacturer of digital cameras wishing to design any one of
these three alternatives as removable "digital film" will eliminate the other
two from use in their product, since all three are mechanically and
electronically incompatible with each other. Competition to win the initial
design-in is therefore expected to be fierce. Due to the high price sensitivity
in the market for consumer products, aggressive price competition is expected
for these applications. Such competition may result in lower gross margins in
future quarters, should the relative percentage of sales of CompactFlash(TM)
products increase.

In the third quarter of 1996, the Company experienced strong competition
from Toshiba's SSFDC 2 Mbyte product. The Company also believes that Samsung has
begun shipment of competing 32Mbit NAND flash products.

Dependence on Emerging Markets and New Products. The Company's success
depends to a significant extent upon the development of emerging and new
applications and markets for flash data storage systems, as well as on its
ability to introduce commercially attractive and competitively priced new
products on a timely basis and to reduce production costs of existing products.
There can be no assurance that new applications or markets for flash data
storage will develop as expected by the Company or that prospective customers
developing products for any such markets will design the Company's products into
their products and successfully introduce such products. In addition, there can
be no assurance that the Company's new products, including its CompactFlash(TM)
or Flash ChipSet products, will achieve market acceptance. The failure of new
applications or markets to develop or the failure of new markets to be receptive
to the Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company believes that continued significant expenditures for research
and development will be required in the future. In particular, the Company
intends to develop new products with increased memory capacity at lower prices,
which the Company believes will be essential to its ability to remain
competitive. There can be no assurance that these products will be successfully
developed or will achieve market acceptance, or that the Company will be
successful in identifying new product opportunities and develop and bring new
products to market in a timely manner, or that products or technologies
developed by others will not render the Company's products or technologies
obsolete or noncompetitive. The failure of any of the Company's new product
development efforts or lack of market acceptance of such products would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Development of Double Density Flash. On November 6, 1996, the Company
announced its first 64Mbit products based on double density flash ("D2 flash")
technology, a new flash system designed to store two bits in each flash memory
cell. The Company believes that D2 flash will be important to the Company's
ability to increase the capacity and decrease the cost of certain of its
products, maintain its competitive advantage, broaden its target markets and
attract strategic partners. The Company does not expect to generate significant
revenues from sales of 64Mbit products in the first half of 1997. The
implementation of D2 flash in a production environment is currently planned for
the second half of 1997 and will be highly complex. There can be no assurance
that reliable and cost effective D2 flash products can be manufactured reliably
in commercial volumes and with yields sufficient to result in a lower cost per
megabyte. Furthermore, flash data storage products designed with D2 flash will
initially exhibit approximately one quarter of the performance of the Company's
existing products when writing data into memory. This may preclude their use in
certain applications. The failure of the Company to successfully manufacture D2
flash devices could have a material adverse effect on the Company's business,
financial condition and results of operations.

Customer Concentration. A limited number of customers historically have
accounted for a substantial portion of the Company's revenues. The Company
expects that sales of its products to a limited number of customers will
continue to account for a substantial portion of its revenues for the
foreseeable future. Sales to the Company's customers are generally made pursuant
to standard purchase orders rather than long-term contracts. The Company has
also experienced significant changes in the composition of its major customer
base from year to year and expects this variability to continue as certain
customers increase or decrease their purchases of the Company's products as a
result of fluctuations in market demand for such customers' products. Under a
joint cooperation agreement signed in January 1993, Seagate has the option to
market the Company's products beginning in 1997. During the third quarter of
1996, this option was extended for two years. Under the amended agreement,
beginning in 1999, if Seagate exercises its option to market the Company's
products, the Company and Seagate will coordinate their efforts so that
approximately one-third of the Company's worldwide net revenues would be
generated from sales of the Company's flash products through Seagate.

International Operations. All of the Company's wafers are, and for the
foreseeable future will be, produced by foreign foundries. Because the Company
currently purchases the majority of its flash wafers in Japanese Yen at a set
price, fluctuations in currencies could materially adversely affect the
Company's business, financial condition and results of operations. Due to its
reliance on export sales and its dependence on foundries outside the United
States, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships. In addition,
since most of the Company's international sales are denominated in U.S. dollars,
the Company's products may be less competitive in countries with currencies
declining in value against the dollar. Manufacturing and sales of the Company's
products may also be materially adversely affected by factors such as unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions and other barriers and restrictions, longer payment cycles,
greater difficulty in accounts receivable collection, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws and other
factors beyond the Company's control. In addition, the laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States and thus make piracy of the Company's products a more likely possibility.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, financial condition or results of operations.

Possible Volatility of Stock Price. The Company believes that future
announcements concerning the Company, its competitors or its principal
customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimated by
analysts, may cause the market price of the Common Stock to fluctuate
substantially. In addition, an aggregate of approximately 18,185,920 shares of
Common Stock became eligible for sale in May 1996 after the expiration of
lock-up agreements. Sales of substantial amounts of the Company's outstanding
Common Stock in the public market could materially adversely affect the market
price of the Common Stock. Further, in recent years the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. These fluctuations as well as general
economic, political and market conditions such as recessions or international
currency fluctuations, may materially adversely affect the market price of the
Common Stock.

<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is set forth in Note 5 of the
Condensed Consolidated Financial Statements on page 7 of this Form 10-Q for the
quarterly period ended September 30, 1996, and is hereby incorporated by
reference.

Item 2. Changes in Securities
None

Item 3. Defaults upon Senior Securities
None

Item 4. Submission of Matters to a Vote of Security Holders
None

Item 5. Other Information
None

Page 19

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

A. Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<S> <C>
3.1* Certificate of Incorporation of the Registrant, as amended to date.
3.2* Form of Amended and Restated Certificate of Incorporation of the Registrant
3.3* Bylaws of the Registrant, as amended.
3.4* Form of Amended and Restated Bylaws of the Registrant
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.3* Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein,
dated March 3, 1995.
4.4* Amendment No. 1 to the Stock Purchase Agreements among the Registrant and the holders
of Series A, B and D Preferred Stock, and certain holders of Series E Preferred
Stock, dated January 15, 1993.
4.5* Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and
the Registrant, dated January 15, 1993.
4.6* Amendment Agreement between Seagate Technology, Inc. and the Registrant, dated
August 23, 1995.
4.7* Form of Stock Purchase Agreement between the Registrant and Seagate Technology, Inc.
9.1* Amended and Restated Voting Agreement, among the Registrant and the investors
named therein, dated March 3, 1995.
10.1* Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
10.2*+ Foundry Agreement between Matsushita Electronics Corporation, Matsushita
Electronic Industrial Co., Ltd. and the Registrant, dated May 20, 1992.
10.3*+ Amendment No. 1 to MEC/SunDisk Foundry Agreement, between Matsushita Electronics
Corporation, Matsushita Electronic Industrial Co., Ltd. and the Registrant, dated
April 17, 1995.
10.4*+ Foundry Agreement between Goldstar Electron Co., Ltd. and the Registrant, dated
October 13, 1993.
10.5*+ Amendment No. 1 to the Foundry Agreement between Goldstar Electron Co., Ltd. and
the Registrant, dated May 10, 1994.
10.6*+ SanDisk/Goldstar Technical Collaboration Agreement between Goldstar Electron
Co., Ltd. and the Registrant, dated March 25, 1994.
10.7*+ Joint Development Agreement between NEC Corporation and the Registrant, dated
June 20, 1994.
10.8*+ Joint Cooperation Agreement between the Registrant and Seagate Technology, Inc.,
dated January 15, 1993.
10.9*+ Amendment and Termination Agreement between the Registrant
and Seagate Technology, Inc., dated October 28, 1994.
10.10* License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988
10.11* Lease Agreement between the Registrant and A&P Family Investments, dated June 24,
1991, as amended on February 26, 1992, January 31, 1994,
January 30, 1995 and April 7, 1995.
10.12* Business Loan Agreement between the Registrant and Silicon
Valley Bank, dated July 31, 1992, as modified February 8,
1995 and July 27, 1995.
10.13* 1989 Stock Benefit Plan.
10.14* 1995 Stock Option Plan.
10.15* Employee Stock Purchase Plan.
10.16* 1995 Non-Employee Directors Stock Option Plan.
10.17* Patent Cross License Agreement between the Registrant and Intel Corporation,
dated October 12, 1995.
10.18** Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.
10.19# Business loan agreement between the Registrant and Union Bank of California, dated July 3,
1996.
11.1 Computation of Earnings Per Share (three and nine months ended September 30, 1996).
21.1* Subsidiaries of the Registrant.
27.1 Financial Data Schedule for nine months ended September 30, 1996 (In EDGAR format only)
<FN>
- ----------

* Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-96298).

** Previously filed as an Exhibit to the Registrant's 1995 Annual Report on Form 10-K.

# Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1996.

+ Confidential treatment granted as to certain portions of these exhibits.
</FN>
</TABLE>

B. Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended September 30,
1996.

Page 21

<PAGE>

SIGNATURES

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

SanDisk Corporation
(Registrant)

By: /s/ Cindy L. Burgdorf
---------------------------
Cindy L. Burgdorf
Chief Financial Officer,
Senior Vice President, Finance and
Administration and Secretary

DATED: November 13, 1996

Page 22

<TABLE>
<CAPTION>
Exhibit 11.1

SanDisk Corporation
Statement Regarding Computation of Per Share Earnings
(In thousands, except per share data; unaudited)

Three Months ended, Nine Months ended,
September 30, September 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary:
Net income ................................... $ 3,643 $ 2,297 $10,102 $ 6,323
Computations of weighted average common
and common equivalent shares outstanding:
Weighted average common
shares outstanding ................... 22,218 2,959 22,116 2,893
Common equivalent shares from stock
options and convertible preferred
stock granted or issued during the
twelve-month period prior to the
Company's initial public offering .... -- 1,408 -- 1,408
Common stock options .................... 2,050 1,374 2,088 1,167
Convertible preferred stock ............. -- 227 -- 227
------- ------- ------- -------
Shares used in computing net income
per share ............................... 24,268 5,968 24,204 5,695
======= ======= ======= =======

Net income per share applicable
to common stockholders .................. $ 0.15 $ 0.38 $ 0.42 $ 1.11
======= ======= ======= =======

Fully Diluted:
Net income ................................... $ 3,643 $ 2,297 $10,102 $ 6,323
Computation of weighted average common
and common equivalent shares outstanding:
Weighted average common
shares outstanding ................... 22,218 2,959 22,116 2,893
Common equivalent shares from stock
options and convertible preferred
stock granted or issued during the
twelve-month period prior to the
Company's initial public offering .... -- 1,408 -- 1,408
Common stock options .................... 2,050 1,498 2,088 1,227
Convertible preferred stock ............. -- 14,665 -- 14,665
------- ------- ------- -------
Shares used in computing net income
per share ............................... 24,268 20,530 24,204 20,193
======= ======= ======= =======

Net income per share ......................... $ 0.15 $ 0.11 $ 0.42 $ 0.31
======= ======= ======= =======

</TABLE>

<ARTICLE> 5
<LEGEND>
SanDisk Financial Data Schedule, September 30, 1996
</LEGEND>
<CIK> 0001000180
<NAME> SanDisk Corporation
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996

<PERIOD-END> SEP-30-1996
<CASH> 26,301
<SECURITIES> 48,904
<RECEIVABLES> 9,835
<ALLOWANCES> 0
<INVENTORY> 9,117
<CURRENT-ASSETS> 94,881
<PP&E> 8,638
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,866
<CURRENT-LIABILITIES> 20,589
<BONDS> 0
0
0
<COMMON> 98,149
<OTHER-SE> (14,872)
<TOTAL-LIABILITY-AND-EQUITY> 103,866
<SALES> 71,349
<TOTAL-REVENUES> 71,349
<CGS> 43,538
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,804
<INCOME-TAX> 702
<INCOME-CONTINUING> 10,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,102
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42

</TABLE>