SANDISK CORP, S-3, 1999-08-17

SANDISK CORP
S-3, 1999-08-17
COMPUTER STORAGE DEVICES

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<PAGE>

As filed with the Securities and Exchange Commission on August 17, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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SANDISK CORPORATION
(Exact name of Registrant as specified in its charter)

---------------
<TABLE>
<S> <C> <C>
Delaware 3572 77-0191793
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

140 Caspian Court
Sunnyvale, California 94089
(408) 542-0500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

---------------
Dr. Eli Harari
President and Chief Executive Officer
SANDISK CORPORATION
140 Caspian Court
Sunnyvale, California 94089
(408) 542-0500
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)

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Copies to:
<TABLE>
<S> <C>
John W. Larson, Esq.
Timothy R. Curry, Esq.
Jonathan G. Shapiro, Esq.
Paul L. Sieben, Esq.
BROBECK, PHLEGER & HARRISON LLP Bruce K. Dallas, Esq.
Two Embarcadero Place DAVIS POLK & WARDWELL
2200 Geng Road 450 Lexington Avenue
Palo Alto, CA 94303 New York, New York 10017
(650) 424-0160 (212) 450-4000
</TABLE>

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share(2) Offering Price(1)(2) Registration Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value(3)... 3,450,000 shares $67.19 $231,805,500 $64,442
3,423,128 shares (4) 67.19 230,000,000 63,940(5)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 450,000 shares which the U.S. underwriters have the option to
purchase from SanDisk to cover over-allotments, if any.
See "Underwriters."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933
and based upon the price of SanDisk's common stock as reported on the
Nasdaq National Market on August 10, 1999.
(3) Includes rights to purchase SanDisk's Series A Junior Participating
Preferred Stock associated with the common stock.
(4) Represents shares of common stock that may be delivered upon the exchange
of the PEPS securities described in the prospectus relating to an
offering of Premium Exchangeable Participating Shares, or PEPS, by the
SANDISK PEPS Trust included herein. The PEPS are registered on a separate
registration statement on Form N-2 (Registration Statement Nos. 333-74989
and 811-09273 (the "Trust Registration Statement)). Such number of shares
of common stock is subject to adjustment in accordance with Rule 416
under the Securities Act.
(5) Such amount is being paid in connection with the Trust Registration
Statement. Since the shares of common stock registered hereby are
deliverable only upon the exchange of PEPS for which a registration fee
is being paid pursuant to the Trust Registration Statement, no further
registration fee with respect to such shares is required pursuant to Rule
457 (i).

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

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<PAGE>

EXPLANATORY NOTE

This registration statement contains three forms of prospectus. The first
follows immediately after this explanatory note and relates to a public
offering in the United States and Canada of an aggregate of 2,400,000 shares
of the common stock of SanDisk Corporation (2,850,000 shares if the over-
allotment option described in such prospectus is exercised in full) being
offered by SanDisk and one of its stockholders. The second prospectus relates
to a concurrent offering outside the United States and Canada of an aggregate
of 600,000 shares of common stock. The prospectuses for each of the U.S.
offering and the international offering will be identical with the exception
of an alternative front cover page for the international offering. This
alternative page appears in this registration statement immediately following
the complete prospectus for the U.S. offering. The third prospectus relates to
an aggregate of up to shares of SanDisk common stock ( shares if the
over-allotment option described in such prospectus is exercised in full) also
beneficially owned by the SanDisk selling stockholder that may be delivered by
the SanDisk PEPS Trust to holders of Premium Exchangeable Participating
Shares, or PEPS, of the trust. The form of the third prospectus is identical
to the first and the second, with the exception that it has a different cover
page and the section entitled "Underwriters" in the prospectus as relating to
the U.S. and international public offerings of common stock is replaced with a
section entitled "Plan of Distribution." The alternate pages for the third
prospectus follow immediately after the alternative cover page for the
prospectus relating to the international public offering in this registration
statement.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registation statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued August 17, 1999

3,000,000 Shares

[SanDisk Corporation LOGO]

COMMON STOCK

-----------

SanDisk Corporation is offering 2,750,000 shares and the selling stockholder is
offering 250,000 shares. For information relating to the selling stockholder,
see "Selling Stockholder" on page 50.

-----------

Our common stock is listed on the Nasdaq National Market under the symbol
"SNDK." On August 16, 1999, the reported last sale price of the common stock on
the Nasdaq National Market was $88 3/16 per share.

-----------

Concurrently with this offering, the selling stockholder is entering into a
prepaid forward contract with the SanDisk PEPS Trust in connection with a
public offering of an aggregate of $200 million of Premium Exchangeable
Participating Shares, or PEPS, of the trust ($230 million if the underwriters
over-allotment option is exercised in full). See "Selling Stockholder" on page
50.

-----------

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7 of this prospectus.

-----------

PRICE $ A SHARE

-----------

<TABLE>
<CAPTION>
Underwriting Proceeds to Proceeds to
Price to Discounts and SanDisk Selling
Public Commissions Corporation Stockholder
-------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total.............. $ $ $ $
</TABLE>

-----------

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

We have granted the U.S. underwriters the right to purchase up to an additional
450,000 shares of our common stock to cover over-allotments. Morgan Stanley &
Co. Incorporated expects to deliver the shares to purchasers on , 1999.

-----------

MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
FIRST UNION CAPITAL MARKETS CORP.
MERRILL LYNCH & CO.

, 1999
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Cautionary Note on Forward Looking Statements ........................... 19
Use of Proceeds.......................................................... 19
Price Range of Common Stock.............................................. 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 24
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business.................................................................. 33
Management................................................................ 47
Selling Stockholder....................................................... 50
United States Federal Tax Considerations for Non-United States Holders.... 51
Underwriters.............................................................. 53
Legal Matters............................................................. 55
Experts................................................................... 55
Available Information..................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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The SanDisk(R) name and logo, and the CompactFlash(TM) name and logo, are
our trademarks. The CompactFlash Association makes the CompactFlash name and
logo available royalty-free to member companies. References in this Prospectus
to CompactFlash are references only to our products unless otherwise
indicated. This Prospectus also includes trademarks of other companies.

----------------

Except as otherwise indicated, all information in this prospectus assumes
no exercise of the U.S. underwriters' over-allotment option. If this option is
exercised in full, the total price to the public for this offering would be
$ , the total underwriters' discounts and commissions would be
$ and the total proceeds to us and the selling stockholder would be
$ and $ , respectively.

----------------

You should rely only upon the information contained in this prospectus. We
have not authorized anyone to provide you with different information than that
contained in this prospectus. We and the selling stockholder are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of common stock.

----------------

The words "SanDisk," "we," "ours," and "us" refer to SanDisk Corporation
and its subsidiaries, but not to any of the underwriters. Our 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, respectively. For ease
of presentation, the financial information we present in this prospectus and
the accompanying financial statements have been shown as ending on the last
day of the relevant calendar month.

2
<PAGE>

PROSPECTUS SUMMARY

This summary highlights certain information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock discussed under the caption "Risk Factors."

SANDISK

Our products include removable CompactFlash cards, FlashDisk cards,
MultiMediaCard products, embedded FlashDrives and FlashChipSet products, with
storage capacities ranging from 2 megabytes to 440 megabytes. These products
are designed to meet the storage requirements of emerging consumer electronics
and industrial/communications applications, including non-volatility, which is
the ability to retain information with the power supply turned off, small size,
high reliability, low operating power consumption and the capability to
withstand high levels of shock and vibration and extreme temperature
fluctuations.

Since our inception, we have been actively involved in all aspects of flash
memory process development, chip design, controller development and system-
level integration to ensure the creation of fully-integrated, broadly
interoperable products that are compatible with both existing and new system
platforms. To achieve compatibility among various electronic platforms
regardless of the host processors or operating systems used, we developed new
capabilities in flash memory chip design and created a new intelligent
controller. We also developed an architecture that could leverage advances in
process technology to ensure a scaleable, high-yielding, cost-effective and
highly reliable manufacturing process. The flash process and chip designs
developed by us in cooperation with our partners make our products scaleable
over multiple generations of semiconductor fabrication processes, which have
enabled us to significantly reduce our cost per megabyte of capacity as each
new process generation has been qualified while maintaining full compatibility
with prior generation products. In addition, our architecture has allowed us to
significantly reduce cell size and chip size, permitting increased storage
capacity in each of our products.

We are recognized as a leader in the development of flash card data storage
technology. We own or have exclusive access to more than 100 U.S. and foreign
patents, some of which are fundamental to the implementation of flash card data
storage systems, including the implementation of double-density, or D2, flash,
independent of the flash technology used. We design our products to be
compatible with existing industry standards and, where appropriate, develop and
promote new standards. We are a founding member of several open standards
bodies for memory card technologies including the Personal Computer Memory Card
International Association, or PCMCIA, the CompactFlash Association and the
MultiMediaCard Association.

We market our products to original equipment manufacturers, or OEMs, and
end-user customers through a combination of our direct sales force,
distributors, manufacturers' representatives, private label partners and retail
outlets. Our customers include Arrow Electronics, Inc., Avnet Electronics, Bell
Microproducts, Inc., Best Buy Company, Inc., Canon, Inc., Eastman Kodak
Company, Hewlett-Packard Company, Lucent Technologies Inc.,

3
<PAGE>

Matsushita Electric Industrial Co., Ltd., Mitsubishi Plastic Co. Ltd., NEC USA
Inc., Newbridge Networks Corporation, Nokia Corporation, Norand Corporation and
Tech Data Corporation. In addition, we currently license our technologies to
several companies including Hitachi Ltd., Intel Corporation, Samsung
Electronics Company Ltd., Sharp Electronics Corporation and Toshiba
Corporation. We have established strategic manufacturing relationships with
United Silicon, Inc., or USIC, and United Semiconductor Corporation, or USC,
subsidiaries of United Microelectronics Corporation, or UMC.

SanDisk was incorporated in Delaware in June 1988 under the name SunDisk
Corporation and changed its name to SanDisk Corporation in August 1995. Our
principal executive offices are located at 140 Caspian Court, Sunnyvale,
California 94089, and our telephone number is (408) 542-0500. Our world wide
website address is www.sandisk.com. The information in our website is not a
prospectus, does not constitute a part of this prospectus and is not
incorporated into this prospectus by reference.

THE OFFERING

<TABLE>
<C> <S>
Common stock offered:
United States offering..................... 2,400,000 shares
International offering..................... 600,000 shares
----------------
Total.................................. 3,000,000 shares

Shares offered by us....................... 2,750,000 shares
Shares offered by the selling stockholder.. 250,000 shares
----------------
Total.................................. 3,000,000 shares

Common stock to be outstanding after the
offering..................................... 30,335,340 shares
Over-allotment option......................... 450,000 shares

Use of proceeds............................... We will use the net proceeds we
receive from the offering to
obtain additional silicon wafer
foundry capacity, as well as
for working capital and general
corporate purposes. We will not
receive any proceeds from the
sale of common stock by the
selling stockholder.

Dividend policy............................... We do not anticipate paying any
cash dividends in the
foreseeable future. Any future
determination to pay dividends
will be at the discretion of
our board of directors.

Nasdaq National Market symbol................. "SNDK"
</TABLE>
- --------
The number of shares of common stock outstanding after the offering is based
upon 27,335,340 shares of common stock outstanding as of August 6, 1999 and
excludes:

. 3,796,391 shares subject to outstanding options at a weighted average
exercise price of $12.16 per share;

. 32,123 shares subject to outstanding warrants at a weighted average
exercise price of $6.62 per share;

. 3,979,670 shares that are available for future issuance under our 1995
Stock Option Plan and our 1995 Non-Employee Directors Stock Option
Plan; and

. 700,898 shares that are available for issuance under our Employee
Stock Purchase Plan.

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated statements of operations and
balance sheet data as of and for the periods indicated. The consolidated
statement of operations data for each of the fiscal years in the three year
period ended December 31, 1998 were derived from our consolidated financial
statements audited by Ernst & Young LLP included elsewhere in this prospectus.
The consolidated statement of operations data for the fiscal years ended
December 31, 1994 and 1995 were derived from our consolidated financial
statements audited by Ernst & Young LLP not included in this prospectus. The
consolidated statement of operations data for the six months ended June 30,
1998 and June 30, 1999 and consolidated balance sheet data as of June 30, 1999
were derived from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus. These interim condensed consolidated
financial statements are unaudited but reflect, in the opinion of management,
all normal recurring adjustments necessary to present fairly our financial
position as of June 30, 1999, the results of operations for the three and six
month periods ended June 30, 1999 and 1998 and cash flows for the six month
periods ended June 30, 1999 and 1998. Our results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the full year or future periods. You should read this information
together with the discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and condensed consolidated financial statements, including the notes
thereto, included elsewhere or incorporated by reference in this prospectus.

The consolidated balance sheet data as of June 30, 1999 presented on an as
adjusted basis reflects the net proceeds of the sale of the common stock
offered by us hereby at an assumed public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. The basic net income (loss) per share computation excludes
options and warrants to purchase common stock and common stock subject to
repurchase rights held by us. The diluted net income (loss) per share
computation excludes options and warrants to purchase common stock and common
stock subject to repurchase rights held by us in periods of net loss as their
effect would be antidilutive. See Note 1 of the notes to our consolidated
financial statements for a detailed explanation of the determination of shares
used in computing basic and diluted net income (loss) per share.

<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended December 31, Ended June 30,
------------------------------------------ ---------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues
Product............... $35,378 $61,589 $89,599 $105,675 $103,190 $48,906 $78,226
License and royalty... -- 1,250 8,000 19,578 32,571 16,557 18,459
------- ------- ------- -------- -------- ------- -------
Total revenues...... 35,378 62,839 97,599 125,253 135,761 65,463 96,685
Operating income
(loss)................. (4,781) 7,777 12,474 19,680 12,810 6,374 11,881
Net income (loss)....... (4,287) 9,065 14,485 19,839 11,836 5,756 10,017
Net income (loss) per
share, Basic........... $ (0.25) $ 0.48 $ 0.65 $ 0.87 $ 0.45 $ 0.22 $ 0.37
Net income (loss) per
share, Diluted......... $ (0.25) $ 0.45 $ 0.60 $ 0.79 $ 0.43 $ 0.21 $ 0.34
Shares used in computing
net income (loss) per
share
Basic................. 17,463 18,747 22,162 22,880 26,298 26,094 26,855
Diluted............... 17,463 20,328 24,206 24,970 27,672 27,928 29,414
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
As of June 30, 1999
--------------------
Actual As Adjusted
-------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments.......... $144,948
Working capital............................................ 145,459
Total assets............................................... 285,505
Long-term debt, less current portion....................... --
Total stockholders' equity................................. 219,871
</TABLE>

6
<PAGE>

RISK FACTORS

An investment in our shares is extremely risky. You should carefully
consider the risks described below and all other information contained in this
prospectus before making an investment decision. Any of the following risks
could materially harm our business, operating results and financial condition
and could result in a complete loss of your investment.

Risks Related to our Business

Our operating results may fluctuate significantly which may adversely affect
our stock price.

Our quarterly and annual operating results have fluctuated significantly in
the past and we expect that they will continue to fluctuate in the future.
This fluctuation is a result of a variety of factors, including the following:

. unpredictable demand for our products;

. decline in the average selling prices of our products due to competitive
pricing pressures;

. seasonality in sales of our products;

. adverse changes in product and customer mix;

. slower than anticipated market acceptance of new or enhanced versions of
our products;

. competing flash memory card standards which displace the standards used
in our products;

. changes in our distribution channels;

. timing of license and royalty revenue recognition;

. fluctuations in product costs, particularly due to fluctuations in
manufacturing yields and utilization;

. availability of sufficient silicon wafer foundry capacity to meet
customer demand;

. significant yield losses which could affect our ability to fulfill
customer orders and could increase our costs;

. lengthening in manufacturing cycle times due to our suppliers operating
at peak capacity;

. increased research and development expenses;

. exchange rate fluctuations, particularly the U.S. dollar to Japanese yen
exchange rate;

. changes in general economic conditions, in particular the economic
recession in Japan;

. difficulty of forecasting and management of inventory levels; and

. expenses related to obsolescence of unsold inventory.

Difficulty of estimating silicon wafer needs

When we order silicon wafers from our foundries, we have to estimate the
number of silicon wafers needed to fill product orders several months into the
future. If we overestimate this number, we will build excess inventories which
would harm our gross margins and operating results. For example, in the second
quarter of 1998, our product gross margins declined to 12% from 30% in the
previous quarter due in part to a write down of inventory to reflect net
realizable value. If we underestimate the number of silicon wafers needed to
fill product orders, we may be unable to obtain an adequate supply of wafers
which could harm our product revenues. Because our largest volume product,
Compact Flash, is sold into an emerging consumer market, it is very difficult
to accurately forecast future sales. A substantial majority of our quarterly
sales are from orders received and fulfilled in the same quarter. In addition,
our product order backlog may fluctuate substantially from quarter to quarter.
See "Business--Backlog."

Anticipated growth in expense levels

Due to anticipated growth, we increased our expense levels in the first
half of 1999. We expect operating expenses to continue to increase as a result
of the need to hire additional personnel to support expected growth

7
<PAGE>

in sales unit volumes, sales and marketing efforts and research and
development activities. In addition, we have significant fixed costs. We
cannot readily reduce these expenses over the short term. If revenues do not
increase proportionately to operating expenses, or if revenues decrease or do
not meet expectations for a particular period, our business, financial
condition and results of operations will be harmed.

Variability of average selling prices and gross margin

Our product mix varies quarterly, which affects our overall average selling
prices and gross margins. Our CompactFlash products, which currently represent
the majority of our product revenues, have lower average selling prices and
gross margins than our higher capacity FlashDisk and FlashDrive products. We
believe that sales of CompactFlash products may become an even more
significant percentage of our product revenues as consumer applications, such
as digital cameras, become more popular. Dependence on CompactFlash sales,
together with lower pricing caused by increased competition, caused average
unit selling prices to decline 28% during fiscal 1998, and 38% in the first
half of 1999 compared to the same period in 1998. We expect this trend to
continue.

Variability of license fees and royalties

Our intellectual property strategy is to cross-license our patents to other
manufacturers of flash products. Under these arrangements, we earn license
fees and royalties on individually negotiated terms. The timing of revenue
recognition from these payments is dependent on the terms of each contract and
on the timing of product shipments by the third parties. This may cause
license and royalty revenues to fluctuate significantly from quarter to
quarter. Because these revenues have higher gross margins than product
revenues, gross margins and net income fluctuate significantly with changes in
license and royalty revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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 capacity per chip. Two important factors that
enable us to decrease the costs per megabyte of our flash data storage
products are the development of higher capacity semiconductor devices and the
implementation of smaller geometry manufacturing processes. A number of
challenges exist in achieving a lower cost per megabyte, including:

. overcoming lower yields often experienced in the early production of new
semiconductor devices;

. problems with design and manufacturing of products that will incorporate
these devices; and

. production delays.

Because our products are complex, we periodically experience significant
delays in the development and volume production ramp up of our products.
Similar delays could occur in the future and could harm our business,
financial condition and results of operations.

128 Megabit Technology

We began shipments of 128 megabit products in the second quarter of 1999.
In the third quarter of 1999, we plan to increase production of our 128
megabit flash memory technology, which has a lower cost per megabyte than our
64 megabit technology currently in production and will allow us to begin
shipping products with increased capacities including the 32 megabyte
MultiMediaCard. If we are unable to bring our 128 megabit flash memory into
full production as quickly as planned or if we experience unplanned yield
problems, we may be unable to meet our customers' demand for high capacity
MultiMediaCard and CompactFlash products which could result in lost sales and
reduced revenues. In addition, our gross margins may be harmed by any problems
we encounter in the production of our 128 megabit flash memory.

8
<PAGE>

D2 Flash Technology

We have developed new products based on D2 flash technology, a new flash
architecture designed to store two bits in each flash memory cell. High
density flash memory, such as D2 flash, is a complex technology that requires
strict manufacturing controls and effective test screens. Problems from the
shift to volume production for new flash products could impact both
reliability and yields and result in increased manufacturing costs and reduced
availability. We may not be able to manufacture reliable and cost effective D2
flash products in commercial volumes and with yields sufficient to result in
lower costs per megabyte. Furthermore, D2 flash technology needs significantly
improved write speed so that it can be usefully applied to market applications
such as digital cameras. It is possible that we may not be able to achieve the
targeted write speed for our 256 megabit product.

In the fourth quarter of 1999, we expect to increase production of our 256
megabit flash memory technology, which has a lower cost per megabyte than the
128 megabit technology. If we are unable to bring our 256 megabit flash memory
into full production as quickly as planned or if we experience unplanned yield
problems, we will not be able to meet our customers' forecasted demand in the
fourth quarter of 1999 and beyond, which would result in lost sales, reduced
revenues and reduced margins.

In the second half of 1999, we will be dependent for the majority of
megabytes shipped on the successful volume shipments of cards built with our
128 megabit and 256 megabit new designs. If we are unable to successfully
achieve the planned yields for these designs, we will be unable to meet our
forecasted customer needs, and consequently our revenues and profits may fall
significantly below our expectations.

MultiMediaCard Products

We expect to increase the MultiMediaCard product family production volumes
during the second half of 1999. This product presents new challenges in
assembly and testing. During the startup phase, we have experienced
fluctuations in yields which have reduced MultiMediaCard product availability,
increased manufacturing costs and reduced product margins for this product
family. We are currently unable to meet customer demand for MultiMediaCard
products. This is primarily due to demand exceeding previous forecasts from
our customers. Although we are steadily resolving the assembly manufacturing
issues, we have not yet achieved the production assembly yields necessary for
high volume production. See "Business--SanDisk's Products."

We depend on third party foundries for silicon wafers.

All of our products require silicon wafers. We rely on USC and USIC in
Taiwan to supply all of our silicon wafers. We depend on these foundries to
allocate a portion of their capacity to our needs, produce acceptable quality
wafers with acceptable manufacturing yields and deliver our wafers on a timely
basis at a competitive price. If these foundries are unable to satisfy these
requirements, our business, financial condition and operating results may
suffer.

Currently, demand for semiconductor wafers has increased significantly, due
to increased demand in the consumer electronics and cellular phone markets.
Increased demand for advanced technology silicon wafers is increasing the
price of these wafers as supply becomes constrained. We expect this trend to
continue throughout 1999 and 2000 which could adversely impact the rate of
growth of our business, either through reduced supply, higher wafer prices or
a combination of the two.

USC and USIC are subsidiaries of UMC. We currently own 10% of USIC, have
the right to appoint one of its directors and are entitled to 12.5% of its
total wafer production. In the second quarter of 1999, UMC announced plans to
merge the USC and USIC foundries into the UMC parent company. When the merger
is complete, which is currently expected to occur in late 1999 or early 2000,
we will receive UMC shares in exchange for the USIC shares we currently own.
However, we will not have a seat on the board of directors of

9
<PAGE>

the combined company. We have received assurances from the senior management
of UMC that it intends to continue to supply us the same wafer capacity at the
prices we currently enjoy under our agreement with USIC. However, there can be
no assurance that we will be able to maintain our current wafer capacity and
competitive pricing arrangement in our future supply negotiations with UMC.

Under the wafer supply agreements with our foundries, we are obligated to
provide monthly rolling forecasts for our anticipated wafer purchases.
Generally, the estimates for the first three months of each forecast are
binding commitments. The estimates for the remaining months may only be
changed by a certain percentage from the previous month's forecast. This
limits our ability to react to fluctuations in demand for our products. For
example, if customer demand falls below our forecast 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 reduced gross
margins. Conversely, if customer demand exceeds our forecasts, we may be
unable to obtain an adequate supply of wafers to fill customer orders, which
could result in lost sales and lower revenues. In addition, if we are unable
to obtain scheduled quantities of wafers with acceptable price and yields from
any foundry, our business, financial condition and results of operations could
be harmed. See "Business--Strategic Manufacturing Relationships."

The success of our business depends on emerging markets and new products.

In order for demand for our products to grow, the markets for new products
that use CompactFlash and the MultiMediaCard, such as MP3 portable music
players and smart phones, must develop and grow. If sales of these products do
not grow, our revenues and profit margins could level off or decline.

Because we sell our products for use in many new applications, it is
difficult to forecast demand. For example, in the second quarter of 1999,
demand for our 32 megabyte capacity MultiMediaCard for use in MP3 portable
digital music players grew faster than anticipated and we were unable to fill
all customer orders during the quarter. Although we are increasing production
of the MultiMediaCard, if we are unable to fulfill customer demand for these
products in the future, we may lose sales to our competitors. In addition, the
market for MP3 portable digital music players is very new and it is uncertain
how quickly consumer demand for these players will grow. If this market does
not grow as quickly as anticipated or our customers are not successful in
selling their MP3 portable music players to consumers, our revenues could be
adversely affected. In addition, it is often the case with new consumer
markets that after an initial period of new market formation and initial
acceptance by early adopters, the market enters a period of slow growth as
standards emerge and infrastructure develops. In the event that this occurs in
the MP3 music market or other emerging markets, sales of our products would be
harmed.

The success of this new product strategy will depend upon, among other
things, the following:

. our ability to successfully develop new products with higher memory
capacities and enhanced features at a lower cost per megabyte;

. the development of new applications or markets for our flash data
storage products;

. the extent to which prospective customers design our products into their
products and successfully introduce their products; and

. the extent to which our products or technologies become obsolete or
noncompetitive due to products or technologies developed by others.

If we fail to do any of the above, our business, financial condition and
results of operations could suffer. See "Business--Applications and Markets
for Flash Data Storage."

We may be unable to maintain market share

We may be unable to increase our production volumes at a sufficiently rapid
rate so as to maintain our market share. Ultimately our growth rate depends on
our ability to obtain sufficient flash memory wafers to meet demand. If we are
unable to do so, in a timely manner, we may lose market share to our
competitors.

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<PAGE>

Our international operations make us vulnerable to changing conditions and
currency fluctuations.

Political Risks

Currently, all of our flash memory wafers are produced by two foundries in
Taiwan. We also use a third-party subcontractor in Taiwan for the assembly and
testing of our MultiMediaCard products. We may therefore be affected by the
political, economic and military conditions in Taiwan. Taiwan is currently
engaged in various political disputes with China and both countries have
recently conducted military exercises in or near the other's territorial
waters and airspace. The Taiwanese and Chinese governments may continue to
escalate these disputes, resulting in an economic embargo, a disruption in
shipping routes or even military hostilities. This could harm our business by
interrupting or delaying the production or shipment of flash memory wafers or
MultiMediaCard products by our Taiwanese foundries and subcontractor. See also
"--We depend on our suppliers and third party subcontractors."

In addition, in the second quarter of 1999, we began using a third-party
subcontractor in China for 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 property rights. As a result, enforcement of existing and
future laws and contracts is uncertain, and the implementation and
interpretation of such laws may be inconsistent. Such inconsistency could lead
to piracy and degradation of our intellectual property protection.

Economic Risks

We price our products primarily in U.S. dollars. As a result, if the value
of the U.S. dollar increases relative to foreign currencies, our products
could become less competitive in international markets. For example, our
products are relatively more expensive in Asia because of the weakness of many
Asian currencies relative to the US dollar. In addition, we currently invoice
some of our customers in Japanese yen. Therefore, fluctuations in the Japanese
yen against the U.S. dollar could harm our business, financial condition and
results of operations.

Our sales are also highly dependent upon global economic conditions. In
fiscal 1998, sales to Japan declined to 31.6% of total product sales from
38.1% in 1997. In the first half of 1999, sales to Japan represented 25.6% of
product revenue compared to 32.7% for the same period of 1998. We believe
these declines were primarily due to the Japanese economic crisis and market
recession. If the current market conditions in Japan do not improve, or if
they decline further, our results of operations may suffer. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

General Risks

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

. the need to comply with foreign government regulation;

. general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade relationships;

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

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

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<PAGE>

. potentially adverse tax consequences;

. less protection of our intellectual property rights; and

. delays in product shipments due to local customs restrictions.

We depend on our suppliers and third party subcontractors.

We rely on our vendors, some of which are sole source suppliers, for
several of our critical components. We do not have long-term supply agreements
with some of these vendors. Our business, financial condition and operating
results could be harmed by delays or reductions in shipments if we are unable
to develop alternative sources or obtain sufficient quantities of these
components. For example, we rely on USIC and USC for all of our flash memory
wafers and Motorola, Inc. and NEC to supply certain designs of
microcontrollers. Due to industry-wide increasing demand for semiconductors,
we have recently experienced resistance to price reductions from some of our
important suppliers.

We also rely on third-party subcontractors to assemble and test the memory
components for our products. We have no long-term contracts with these
subcontractors and cannot directly control product delivery schedules. This
could lead to product shortages or quality assurance problems which could
increase the manufacturing costs of our products and have adverse effects on
our operating results.

During the second quarter of 1999, we transferred a substantial portion of
wafer testing, packaged memory final testing, card assembly and card testing
to Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc. in
China. In the third quarter of 1999, we will transfer additional production to
these subcontractors, and by the end of the year we expect that they will be
assembling and testing a majority of our mature, high-volume products. This
increased reliance on subcontractors is expected to reduce manufacturing costs
and give us access to increased production capacity. During the transition
period, we will continue full operations at our Sunnyvale production facility
while simultaneously transferring testing equipment and training personnel of
our subcontractors. However, we do not have sufficient duplicative production
testing equipment at Sunnyvale and at our subcontractors. Therefore, any
significant problems in this complex transfer of operations may result in a
disruption of production and a shortage of product to meet customer demand in
the second half of 1999 and beyond. See "Business--Assembly and Testing."

Continuing declines in our average sales prices may result in declines in our
gross margins.

In 1998, the average unit selling prices of our products declined 28%
compared to 1997. In the first half of 1999, the average unit selling prices
of our products declined 38% compared to the same period of 1998. Because
flash data storage markets are characterized by intense competition and price
reductions for our products are necessary to meet consumer price points, we
expect that market-driven pricing pressures will continue. This will likely
result in a further decline in average sales prices for our products. We
believe that we can offset declining average sales prices by achieving
manufacturing cost reductions and developing new products that incorporate
more advanced technology and include more advanced features and can be sold at
stable average gross margins despite continued declines in average selling
price per megabyte. However, if we are unable to achieve such cost reductions
and technological advances, this could result in lost sales and declining
gross margins, and as a result, our business, financial condition and results
of operations could suffer.

The semiconductor industry is cyclical and we believe it is currently in a
recovery from one of its most severe down cycles. During most of 1997 and
1998, the semiconductor industry experienced significant production over
capacity, which reduced margins for substantially all flash memory suppliers.

Our markets are highly competitive.

Flash Memory Manufacturers and Memory Card Assemblers

12
<PAGE>

many large domestic and international companies that have greater access to
advanced wafer foundry capacity, substantially greater financial, technical,
marketing and other resources, broader product lines and longer standing
relationships with customers. Our primary competitors include:

. storage flash chip producers, such as Hitachi Ltd., Samsung Electronics
Company Ltd. and Toshiba Corporation;

. socket flash, linear flash and component manufacturers, such as Advanced
Micro Devices, Inc., Atmel Corporation, Intel Corporation, Macronix
International Co., Ltd., Micron Technology, Inc., Mitsubishi Electronic
Corporation, Sharp Electronics Corporation and STMicroelectronics NV; and

. module or card assemblers, such as Lexar Media, Inc., M-Systems, Inc.,
Pretec Electronics Corp., Simple Technology Inc., SMART Modular
Technologies, Inc., Sony Corporation, Kingston Technology Company,
Panasonic Consumer Electronic Company, Silicon Storage Technology, Inc.,
TDK Corporation, Matsushita Battery, Inc. and Viking Components, Inc.,
who combine controllers and flash memory chips developed by others into
flash storage cards.

In addition, over 25 companies have been certified by the CompactFlash
Association to manufacture and sell their own brand of CompactFlash. We
believe additional manufacturers will enter the CompactFlash market in the
future.

We have entered into patent cross-license agreements with several of our
leading competitors including, Hitachi, Samsung, Toshiba, Intel and Sharp.
Under these agreements, each party may manufacture and sell products that
incorporate technology covered by the other party's patents related to flash
memory devices. As we continue to license our patents to certain competitors,
competition will increase and may harm our business, financial condition and
results of operations.

Alternative Storage Media

Competing products have been introduced that promote industry standards
that are different from our CompactFlash and MultiMediaCard products,
including Toshiba's SmartMedia, Sony Corporation's Memory Stick, Sony's
standard floppy disk used for digital storage in its Mavica digital cameras,
Panasonic's Mega Storage cards, Iomega's Clik drive, a miniaturized,
mechanical, removable disk drive and M-Systems' Diskonchip for embedded
storage applications. Each competing standard is mechanically and
electronically incompatible with CompactFlash and MultiMediaCard. If a
manufacturer of digital cameras or other consumer electronic devices designs
in one of these alternative competing standards, CompactFlash or
MultiMediaCard will be eliminated from use in that product.

In September 1998, IBM introduced the microdrive, a rotating disk drive in
a Type II CompactFlash format. Initially, this product will compete directly
with our Type II CompactFlash memory cards, which we introduced in the second
quarter of 1999, for use in high-end professional digital cameras. In October
1998, M-Systems introduced their Diskonchip 2000 Millennium product which
competes against our Flash ChipSet products in embedded storage applications
such as set top boxes and networking appliances.

According to independent industry analysts, Sony's Mavica digital camera
captured a considerable portion of the United States market for digital
cameras in 1998. The Mavica uses a standard floppy disk to store digital
images and therefore uses no CompactFlash, or any other flash cards. Our sales
prospects for CompactFlash cards have been adversely impacted by the success
of the Mavica.

Our MultiMediaCard products also have faced significant competition from
Toshiba's SmartMedia flash cards and we expect to face similarly significant
competition from Sony's Memory Stick. Although the Memory Stick is proprietary
to Sony, if it is adopted and achieves widespread use in future products,
sales of our MultiMediaCard and CompactFlash products may decline.

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<PAGE>

Alternative Flash Technologies

We also face competition from products based on multilevel cell flash
technology such as Intel's 64 megabit and 128 megabit StrataFlash chips and
Hitachi's 256 megabit multilevel cell flash chip. These products compete with
our D2 multilevel cell flash technology. Multilevel cell flash is a
technological innovation 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. In the second quarter of 1999, Intel announced
their new 128Mbit multilevel cell chip and Hitachi began shipping customer
samples of CompactFlash cards employing their new multilevel cell flash chip.
In addition, Toshiba has begun customer shipments of 32 megabyte SmartMedia
cards employing their new 256Mbit flash chip. Although Toshiba has not
incorporated multilevel cell flash technology in their 256Mbit flash chip,
their use of more advanced lithographic design rules has resulted in a
comparably-sized die and may allow them to achieve a more competitive cost
structure than that of our 256Mbit D2 flash chip.

Furthermore, we expect to face competition from 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. See "Business--Competition."

Our business depends upon consumer products.

In 1998 and the first half of 1999, we received more product revenue and
shipped more units of products destined for consumer electronics applications,
principally digital cameras, than for any other application. We believe that
these products will encounter intense competition and be more price sensitive
than products sold into our other target markets. In addition, we must spend
more on marketing and promotion in consumer markets to establish brand name
recognition and preference.

A significant portion of sales to the consumer electronics market is made
through distributors and to retailers. Sales through these channels typically
include rights to return unsold inventory. As a result, we do not recognize
revenue until after the product has been sold to the end user. If our
distributors and retailers are not successful in this market, there could be
substantial product returns, which would harm our business, financial
condition and results of operations.

Sales to a small number of customers represent a significant portion of our
revenues.

More than half of our revenues come from a small number of customers. For
example, sales to our top 10 customers accounted for approximately 59%, 67%,
and 71%, respectively, of our product revenues for 1998, 1997, and 1996. In
the first six months of 1999, our top 10 customers represented approximately
57% of product revenues. In the first six months of fiscal 1999 and in fiscal
year 1998, two customers each accounted for 10% or more of our product sales.
If we were to lose any of these customers or experience any material reduction
in orders from these customers, our revenues and operating results would
suffer. Our sales are generally made by standard purchase orders rather than
long-term contracts. In addition, the composition of our major customer base
changes from year to year as the market demand for our customers' products
change. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Our multiple sales channels may compete for a limited number of customer
sales.

Web based sales of our products today represent a small but growing portion
of our overall sales. Sales on the Internet tend to undercut the traditional
distribution channels and may dramatically change the way our consumer
products are purchased in future years. We cannot assure you that we will
manage successfully the inherent channel conflicts between our retail channel
customers and customers that wish to purchase directly on the Internet.

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<PAGE>

There is seasonality in our business.

Sales of our products, in particular the sale of CompactFlash products, in
the consumer electronics applications market are subject to seasonality. As a
result, product sales are impacted by seasonal purchasing patterns with higher
sales generally occurring in the second half of each year. In 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 year. For example, our product revenues were 24% lower in
the first quarter of 1998 than in the fourth quarter of 1997, mostly due to
these seasonal factors and the Asian economic crisis. Although we did not
experience this seasonality in the first quarter of 1999, we cannot assure you
that we will not experience seasonality in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

We must achieve acceptable wafer manufacturing yields.

The fabrication of our products requires wafers to be produced in a highly
controlled and ultra clean environment. Semiconductor companies that supply
our wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of
both our design technology and the foundry's manufacturing process technology.
Low yields may result from design errors or manufacturing failures. Yield
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 on independent offshore foundries for our
wafers which increases the effort and time required to identify, communicate
and resolve manufacturing yield problems. If the foundries cannot achieve the
planned yields, this will result in higher costs and reduced product
availability, and could harm our business, financial condition and results of
operations. See "Business--Assembly and Testing."

Risks associated with patents, proprietary rights and related litigation.

General

We rely on a combination of patents, trademarks, copyright and trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. In the past, we have been involved in
significant disputes regarding our intellectual property rights and claims
that we may be infringing third parties' intellectual property rights. We
expect that we may be involved in similar disputes in the future. We cannot
assure you that:

. any of our existing patents will not be invalidated;

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

. any claims allowed from existing or pending patents will have sufficient
scope or strength; or

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

In addition, our competitors may be able to design their products around our
patents.

We intend to vigorously enforce our patents but we cannot be sure that our
efforts will be successful. If we were to have an adverse result in any
litigation, we could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology, discontinue the use of certain processes
or obtain licenses to the infringing technology. Any litigation is likely to
result in significant expense to us, as well as divert the efforts of our
technical and management personnel. For example the Lexar litigation described
below has resulted in cumulative litigation expenses approaching $1 million.

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<PAGE>

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' intellectual property, we could be
required to license intellectual property from a third party. We may also need
to license some of our intellectual property to others in order to enable us
to obtain cross-licenses to third party patents. Currently, we have patent
cross-license agreements with several companies, including Hitachi, Intel,
Samsung, Sharp and Toshiba and we are in discussions with other companies
regarding potential cross-license agreements. We cannot be certain that
licenses will be offered when we need them, or that the terms offered will be
acceptable. If we do obtain licenses from third parties, we may be required to
pay license fees or royalty payments. In addition, if we are unable to obtain
a license that is necessary to the manufacture of our products, we could be
required to suspend the manufacture of products or stop our wafer suppliers
from using processes that may infringe the rights of third parties. We cannot
assure you that we would be successful in redesigning our products or that the
necessary licenses will be available under reasonable terms.

We have historically agreed to indemnify various 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
attorney's fees. We may periodically engage in litigation as a result of these
indemnification obligations. We are not currently engaged in any such
indemnification proceedings. Our insurance policies exclude coverage for third
party claims for patent infringement. Any future obligation to indemnify our
customers or suppliers could harm our business, financial condition or results
of operations.

Litigation Risks Associated with our Intellectual Property

From time to time, it may be necessary to initiate litigation against third
parties to preserve our intellectual property rights. These parties could in
turn bring suit against us. For example, in March 1998 we filed a complaint in
Federal District Court against Lexar Media, Inc. for infringement of one of
our flash card patents. Lexar disputed this claim and asserted that our patent
was invalid or unenforceable, as well as asserting various counterclaims
including unfair competition, violation of the Lanham Act, patent misuse,
interference with prospective economic advantage, trade defamation and fraud.
We have denied all of these counterclaims. In July 1998, the federal district
court denied Lexar's request to have the case dismissed. Discovery in this
suit began in August 1998. On February 22, 1999, the Federal District Court
considered arguments and papers submitted by the parties regarding the scope
and proper interpretation of the asserted claims in our patent at issue in the
Lexar suit. On March 4, 1999, the Federal District Court issued its ruling on
the proper construction of the claim terms in our patent. On July 30, 1999, we
filed a motion for partial summary judgment that Lexar CompactFlash and PC
Cards contributorily infringe our patent. This motion is scheduled to be heard
in September 1999. In August 1999, we had a mandatory settlement meeting with
Lexar. No settlement was reached through this meeting. A trial date has not
yet been set. See "Business--Patents and Licenses."

Our rapid growth may strain our operations.

We are currently experiencing rapid growth, which has placed, and continues
to place, a significant strain on our personnel and other resources. To
accommodate this growth, we must continue to hire, train, motivate and manage
our employees. We are having difficulty hiring the 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 our rapid growth, which could in turn harm our business,
financial condition and results of operations.

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<PAGE>

Our success depends on key personnel, including our executive officers, the
loss of whom could disrupt our business.

Our success greatly depends on the continued contributions of our senior
management and other key research and development, sales, marketing and
operations personnel, including Dr. Eli Harari, our founder, President and
Chief Executive Officer. Our success will also depend on our ability to
recruit additional highly skilled personnel. We cannot assure you that we will
be successful in hiring or retaining such key personnel, or that any of our
key personnel will remain employed with us. See "Business--Employees."

Year 2000 issues may harm our business.

Many existing computer systems and applications may not function properly
when using dates beyond December 31, 1999. We have established a Year 2000
Risk Management program to assess the impact that the Year 2000 issue may have
on our business. Based on our assessment to date, all of our flash memory and
connectivity products are Year 2000 compliant. Other Year 2000 issues that we
face include assessment and remediation of the computer systems used for
facilities control, machine control and manufacturing testing and Year 2000
compliance of our key suppliers and customers.

Our estimated total costs for Year 2000 compliance issues are not expected
to have a material adverse affect on our business. However, the failure of our
key suppliers and customers to take proper remedial efforts could harm our
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness Disclosure."

Risks Related to This Offering

Anti-takeover provisions in our charter documents, stockholder rights plan and
in Delaware law could prevent or delay a change in control and, as a result,
negatively impact our stockholders.

We have taken a number of actions that could have the effect of
discouraging a takeover attempt. For example, we have adopted a stockholder
rights plan that would cause substantial dilution to a stockholder who
attempts to acquire us on terms not approved by our board of directors. In
addition, our certificate of incorporation grants the board of directors the
authority to fix the rights, preferences and privileges of and issue up to
4,000,000 shares of preferred stock without stockholder action. Although we
have no present intention to issue shares of preferred stock, such an issuance
could have the effect of making it more difficult and less attractive for a
third party to acquire a majority of our outstanding voting stock. Preferred
stock may also have other rights, including economic rights senior to the
common stock that could have a material adverse effect on the market value of
the common stock. In addition, we are subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law. This section provides
that a corporation shall not engage in any business combination with any
interested stockholder during the three-year period following the time that
such stockholder becomes an interested stockholder. This provision could have
the effect of delaying or preventing a change of control of SanDisk.

Management may apply the proceeds of this offering to uses that do not
increase our operating results or market value.

The net proceeds we receive from the sale of the common stock in this
offering will be used to obtain additional silicon wafer foundry capacity, as
well as for working capital and general corporate purposes. In addition, we
may use a portion of the net proceeds to acquire complementary assets,
technology and businesses. We are currently engaged in discussions with
potential wafer foundry partners which may result in investments before the
end of 1999. However, we have not reserved or allocated the proceeds for any
specific transaction, and we cannot specify with certainty how we will use the
net proceeds. Accordingly, our management will have

17
<PAGE>

considerable discretion in the application of the net proceeds, and you will
not have the opportunity, as part of your investment decision, to assess
whether the proceeds are being used appropriately. The net proceeds may be
used for corporate purposes that do not increase our operating results or
market value. Pending application of the proceeds, they may be placed in
investments that do not produce income or that lose value. See "Use of
Proceeds."

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, between July 1,
1998 and August 16, 1999, our closing stock price has fluctuated from a low of
$5 1/8 to a high of $88 3/16. We believe that such fluctuations will continue
as a result of future announcements concerning us, our competitors or
principal customers regarding technological innovations, new product
introductions, governmental regulations, litigation or changes in earnings
estimates by analysts. In addition, in recent years the stock market has
experienced significant price and volume fluctuations and the market prices of
the securities of high technology companies have been especially volatile,
often for reasons outside the control of the particular companies. These
fluctuations as well as general economic, political and market conditions may
have an adverse affect on the market price of our common stock. See "Price
Range of Common Stock."

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CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. You should not place undue reliance on these forward-
looking statements, which apply only as of the date of this prospectus. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us
and described in the preceding pages and elsewhere in this prospectus.

USE OF PROCEEDS

Our net proceeds from the sale of 2,750,000 shares of common stock offered,
after deducting estimated underwriting discounts and commissions and estimated
expenses payable by us, are estimated to be approximately $ million
($ million if the U.S. underwriters' over-allotment option is exercised
in full). We will use these net proceeds to obtain additional silicon wafer
foundry capacity, as well as for working capital and general corporate
purposes. In addition, we may use a portion of the net proceeds to acquire
complementary assets, technologies and businesses. We currently have no
commitments or agreements with respect to any material acquisitions or
investments. Pending use of the net proceeds, we plan to invest the net
proceeds in short-term investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

We will not receive any proceeds from the sale of common stock in the
offering by the selling stockholder. We will also not receive any proceeds
from the delivery of any shares of common stock by the selling stockholder and
the trust pursuant to the prepared forward contract and the PEPS to holders of
PEPS. See "Selling Stockholder."

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<PAGE>

PRICE RANGE OF COMMON STOCK

Our common stock commenced trading on the Nasdaq National Market on
November 8, 1995 and is traded under the symbol "SNDK." The following table
sets forth, for the periods indicated, the high and low last sale prices for
the common stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
Common Stock Price
------------------
High Low
-------- ---------
<S> <C> <C>
Fiscal Year ended December 31, 1997
First Quarter.......................................... $13 1/4 $ 8 7/8
Second Quarter......................................... 14 1/2 9 3/4
Third Quarter.......................................... 34 1/8 14 5/8
Fourth Quarter......................................... 39 5/8 18 7/16

Fiscal Year ended December 31, 1998
First Quarter.......................................... $25 7/16 $17 3/16
Second Quarter......................................... 24 7/8 13 3/8
Third Quarter.......................................... 14 5/8 7 1/2
Fourth Quarter......................................... 14 7/16 5 7/8

Fiscal Year ended December 31, 1999
First Quarter.......................................... $37 $12 11/16
Second Quarter......................................... 44 1/2 19 1/4
Third Quarter (as of August 16, 1999).................. 88 3/16 41 3/8
</TABLE>

On August 16, 1999, the reported last sale price for the common stock as
reported by the Nasdaq National Market was $88 3/16 per share. As of August 6,
1999, we had 177 stockholders of record.

DIVIDEND POLICY

We have not paid any dividends since our inception. We currently intend to
retain any earnings for use in developing and growing our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Any determination to pay dividends in the future will be at the
discretion of the board of directors and will be dependent on results of
operations, financial conditions, contractual restrictions, restrictions
imposed by applicable law and other factors deemed relevant by the board of
directors.

20
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 1999:

. on an actual basis

. as adjusted to reflect the sale of 2,750,000 shares of common stock
offered by us at an assumed offering price of $88 3/16 per share and the
application of the estimated net proceeds from the offering.

This table should be read in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
As of June 30,
1999
------------------
As
Actual Adjusted
-------- --------
(In thousands,
except share
data)
<S> <C> <C>
Stockholders' equity:
Common stock, $0.001 par value; 40,000,000 shares
authorized;
27,156,980 shares issued and outstanding actual;
29,906,980 shares issued and outstanding as adjusted..... $ 27 $
Preferred stock, $0.001 par value; 4,000,000 shares
authorized; no shares
issued and outstanding actual and as adjusted............ -- --
Capital in excess of par value............................ 188,911
Accumulated other comprehensive income.................... (331) (331)
Retained earnings......................................... 31,264 31,264
Total stockholders' equity.............................. 219,871
-------- ------
Total capitalization.................................. $219,871 $
======== ======
</TABLE>

The common stock outstanding after this offering excludes:

. 3,933,884 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $10.65 per share:

. 32,123 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $6.62 per share;

. 4,108,376 shares that are available for future issuance under our 1995
Stock Option Plan and our 1995 Non-employee Directors Stock Option Plan;
and

. 40,557 shares of common stock issued pursuant to our Employee Stock
Purchase Plan subsequent to June 30, 1999 and prior to August 6, 1999;

. 741,455 shares that are available for issuance under our Employee Stock
Purchase Plan.

21
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data as of
and for the periods indicated. The consolidated statement of operations data
and other data for each of the fiscal years in the three-year period ended
December 31, 1998 and the consolidated balance sheet data as of December 31,
1997 and 1998 were derived from our consolidated financial statements audited
by Ernst & Young LLP included elsewhere in this prospectus. The consolidated
statement of operations data for the fiscal years ended December 31, 1994 and
1995 and the consolidated balance sheet data as of December 31, 1994, 1995 and
1996 were derived from our financial statements audited by Ernst & Young LLP
not included in this prospectus. The statement of operations data and other
data as of and for the six months ended June 30, 1998 and June 30, 1999 and
consolidated balance sheet data as of June 30, 1999, were derived from our
unaudited condensed consolidated financial statements included elsewhere in
this prospectus, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, which we consider necessary
for a fair presentation of our financial position and results of operations
for these periods. Our results of operations for the six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year or future periods. You should read this information together with the
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and condensed
consolidated financial statements, including the notes thereto, included
elsewhere or incorporated by reference in this prospectus.

The basic net income (loss) per share computation excludes options and
warrants to purchase common stock and common stock subject to repurchase
rights held by us. The diluted net income (loss) per share computation
excludes options and warrants to purchase common stock and common stock
subject to repurchase rights held by SanDisk in periods of net loss as their
effect would be antidilutive. See Note 1 of the notes to our consolidated
financial statements for a detailed explanation of the determination of shares
used in computing basic and diluted net income (loss) per share.

<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year Ended December 31, (unaudited)
-------------------------------------------- -----------------
June 30, June 30,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues
Product................ $35,378 $61,589 $89,599 $105,675 $103,190 $48,906 $78,226
License and royalty.... -- 1,250 8,000 19,578 32,571 16,557 18,459
------- ------- ------- -------- -------- ------- -------
Total revenues....... 35,378 62,839 97,599 125,253 135,761 64,463 96,685
Cost of revenues........ 28,074 36,613 58,707 72,280 80,311 38,332 57,367
------- ------- ------- -------- -------- ------- -------
Gross profits.......... 7,304 26,226 38,892 52,973 55,450 27,131 39,318
------- ------- ------- -------- -------- ------- -------
Operating Expenses:
Research and
development............ 5,918 8,043 10,181 13,577 18,174 8,805 11,219
Sales and marketing..... 3,996 6,564 8,792 12,568 16,933 8,199 10,928
General and
administrative......... 2,171 3,842 7,445 7,148 7,533 3,753 5,290
------- ------- ------- -------- -------- ------- -------
Total operating
expenses............ 12,085 18,449 26,418 33,293 42,640 20,757 27,437
------- ------- ------- -------- -------- ------- -------
Operating income
(loss)................. (4,781) 7,777 12,474 19,680 12,810 6,374 11,881
Interest and other
income, net............ 593 1,749 3,154 3,660 5,681 2,617 3,069
Interest expense........ (99) (37) (3) -- -- -- --
------- ------- ------- -------- -------- ------- -------
Income (loss) before
taxes.................. (4,287) 9,489 15,625 23,340 18,491 8,991 14,950
Provision for income
taxes.................. -- 424 1,140 3,501 6,655 3,235 4,933
------- ------- ------- -------- -------- ------- -------
Net income (loss)....... $(4,287) $ 9,065 $14,485 $ 19,839 $ 11,836 $ 5,756 $10,017
======= ======= ======= ======== ======== ======= =======
Net income (loss) Per
Share:
Basic................... $ (0.25) $ 0.48 $ 0.65 $ 0.87 $ 0.45 $ 0.22 $ 0.37
Diluted................. $ (0.25) $ 0.45 $ 0.60 $ 0.79 $ 0.43 $ 0.21 $ 0.34
Shares Used in Computing
Net Income (Loss) Per
Share:
Basic................... 17,463 18,747 22,162 22,880 26,298 26,094 26,855
Diluted................. 17,463 20,328 24,206 24,970 27,672 27,928 29,414
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
As of December 31,
------------------------------------------
1994 1995 1996 1997 1998 June 30, 1999
------- ------- -------- -------- -------- -------------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short-term
investments............ $20,635 $68,395 $ 74,288 $134,925 $134,458 $144,948
Working capital......... 20,971 68,002 77,029 134,298 138,471 145,459
Total assets............ 31,861 92,147 108,268 245,467 255,741 285,505
Long-term obligations... 93 -- -- -- -- --
Total stockholders'
equity ................ 23,672 72,381 87,810 191,374 207,838 219,871
</TABLE>
- --------

23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this discussion and analysis are forward looking
statements based on current expectations, and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. Such risks and uncertainties are
set forth under the caption "Risk Factors." The following discussion should be
read in conjunction with our consolidated financial statements and related
notes.

Overview

We were founded in 1988 to develop and market flash data storage systems.
We sell our products to the consumer electronics and industrial/communications
markets. During the course of 1998, the percentage of our product revenues
attributable to the consumer electronics market, particularly sales of
CompactFlash for use in digital camera applications, increased substantially.
In the first six months of 1999, consumer electronics continued to represent a
significant portion of our product revenues. This increase in sales to the
consumer market resulted in a shift to lower capacity products, which
typically have lower average selling prices and gross margins than higher
capacity products. In addition, these products are frequently sold into the
retail channel, which usually has shorter customer order lead-times than the
other channels we use, thereby decreasing our ability to accurately forecast
future production needs. Subject to market acceptance of our CompactFlash
products, we believe these products will continue to represent a majority of
our sales as the popularity of consumer applications, including digital
cameras, increases. The percentage of sales attributable to orders received
and fulfilled in the same quarter has increased over time and, in response, we
are continuing to work to shorten manufacturing cycle times.

Our operating results are affected by a number of factors including the
volume of product sales, the timing of significant orders, competitive pricing
pressures, 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,
availability of foundry capacity, variations in manufacturing cycle times,
fluctuations in manufacturing yields and manufacturing utilization, increased
research and development expenses, and exchange rate fluctuations. In
addition, as the proportion of our products sold for use in consumer
electronics applications increases, our revenues may become subject to
seasonal declines in the first quarter of each year.

Beginning in late 1995, we adopted a strategy of licensing our flash
technology, including our patent portfolio, to selected third party
manufacturers of flash products. To date, we have entered into patent cross-
license agreements with several companies, and we intend to pursue
opportunities to enter into additional licenses. Our current license
agreements provide for the payment of license fees, royalties, or a
combination thereof, to us. The timing and amount of these payments can vary
substantially from quarter to quarter, depending on the terms of each
agreement and, in some cases, the timing of sales of products by the other
parties. As a result, license and royalty revenues have fluctuated
significantly in the past and are likely to continue to fluctuate in the
future. Given the relatively high gross margins associated with license and
royalty revenues, gross margins and net income are likely to fluctuate more
with changes in license and royalty revenues than with changes in product
revenues.

We market our products using a direct sales organization, distributors,
manufacturers' representatives, private label partners, OEMs and retailers. We
expect that sales and distribution through the retail channel will comprise an
increasing share of total revenues in the future, and that a substantial
portion of our sales through the retail channel will be made to participants
that will have the right to return unsold products. We do not recognize
revenues from these sales until the products are sold to the end customers.

24
<PAGE>

Historically, a majority of our sales have been to a limited number of
customers. Product sales to our top 10 customers accounted for approximately
59%, 67%, and 71%, respectively, of our product revenues for 1998, 1997, and
1996. In the first six months of 1999, our top 10 customers represented
approximately 57% of product revenues. In 1998 and the first six months of
1999, two customers each accounted for 10% or more of product revenues. In
addition, in the first six months of 1999 revenues from a single customer
exceeded 10% of total revenues. In 1997, no single customer accounted for
greater than 10% of total revenues. In 1996, one customer accounted for
approximately 26% of total revenues. We expect that sales of our products to a
limited number of customers will continue to account for a substantial portion
of our product revenues for the foreseeable future. We have also experienced
significant changes in the composition of our customer base from year to year
and expect this pattern to continue as market demand for such customers'
products fluctuates. The loss of, or significant reduction in purchases by
major customers, could have a material adverse effect on our business,
financial condition and results of operations.

Due to the emerging nature of our target markets and certain planned
product transitions, we have had difficulty forecasting future inventory
levels required to meet customer demand. As a result of both contractual
obligations and manufacturing cycle times, we have been required to order
wafers from our wafer suppliers several months in advance of the ultimate
shipment of our products. Under our wafer supply agreements, there are limits
on the number of wafers we can order and our ability to change that quantity
is restricted. Accordingly, our ability to react to significant fluctuations
in demand for our products is limited. As a result, we have not been able to
match our purchases of wafers to specific customer orders and therefore we
have from time to time taken write-downs for potential excess inventory
purchased prior to the receipt of customer orders. For example, in the second
quarter of 1998, our product gross margins were negatively impacted by an
inventory write-down. These adjustments decrease gross margins in the quarter
reported and have resulted, and could in the future result, in fluctuations in
gross margins on a quarter to quarter basis.

Export sales are an important part of our business, constituting 42% of
total revenues in the first six months of 1999 and 56%, 57%, and 55% of our
total revenues in 1998, 1997, and 1996, respectively. In 1998, product sales
to Japan declined 19% from the prior year, due in part to the Asian economic
crisis. While a majority of our revenues from sales to Japan and other Asian
countries are derived from OEM customers who plan to export a portion of their
products to countries outside of Asia, the Asian economic crisis may continue
to adversely affect our revenues to the extent that demand for our products in
Asia declines. Given the recent economic conditions in Asia and the weakness
of many Asian currencies relative to the United States dollar, our products
may be relatively more expensive in Asia, which could result in a decrease in
our sales in that region. We may also experience pressure on our gross margins
as a result of increased price competition from Asian competitors. While most
of our sales are denominated in U.S. dollars, we invoice certain Japanese
customers in Japanese yen and are subject to exchange rate fluctuations on
these transactions.

For the foreseeable future, we expect to realize a significant portion of
our revenues from recently introduced and new products. Typically new products
initially have lower gross margins than more mature products because the
manufacturing yields are typically lower at the start of manufacturing each
successive product generation. In addition, manufacturing yields are generally
lower at the start of manufacturing any product at a new foundry. To remain
competitive, we are focusing on a number of programs to lower our
manufacturing costs, including development of future generations of D2 flash
and advanced technology wafers. We cannot assure you that such products or
processes will be successfully developed by us or that development of such
processes will lower manufacturing costs. In addition, we anticipate that
price competition will increase in the future, which could result in decreased
average selling prices and lower gross margins.

25
<PAGE>

Results Of Operations

The following table sets forth certain consolidated statements of income
data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
------------------- ------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Product.................................... 91.8% 84.4% 76.0% 74.7% 80.9%
License and royalty........................ 8.2 15.6 24.0 25.3 19.1
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues........................... 60.2 57.7 59.2 58.6 59.3
Gross profits.............................. 39.8 42.3 40.8 41.4 40.7
Operating Expenses:
Research and development................... 10.4 10.8 13.4 13.5 11.6
Sales and marketing........................ 9.0 10.0 12.5 12.5 11.3
General and administrative................. 7.6 5.7 5.5 5.7 5.5
----- ----- ----- ----- -----
Total operating expenses................. 27.0 26.5 31.4 31.7 28.4
----- ----- ----- ----- -----
Operating income ............................ 12.8 15.7 9.4 9.7 12.3
Interest and other income, net............... 3.2 2.9 4.2 4.0 3.2
----- ----- ----- ----- -----
Interest expense............................. (0.0) 0.0 0.0 0.0 0.0
Income before taxes.......................... 16.0 18.6 13.6 13.7 15.5
Provision for income taxes................... 1.2 2.8 4.9 4.9 5.1
----- ----- ----- ----- -----
Net income .................................. 14.8% 15.8% 8.7% 8.8% 10.4%
===== ===== ===== ===== =====
</TABLE>

Comparison of six months ended June 30, 1998 with six months ended June 30,
1999

Product Revenues. Our product revenues for the six months ended June 30,
1999 were $78.2 million, up $29.3 million or 60% from the same period in 1998.
During the six month period ended June 30, 1999, units shipped increased 156%
from the same period in 1998. The largest increase came from sales of
CompactFlash which represented 58% of product revenues for the six month
period ended June 30, 1999. Average selling prices per unit declined 38% for
the first six months of 1999 compared to the same period of the prior year.
The mix of products sold varies from quarter to quarter and may vary in the
future, affecting our overall average selling prices and gross margins.

We continue to experience limited bookings visibility as customers continue
to expect short lead-times, particularly in the growing retail component of
our business. A majority of our anticipated third quarter revenues are
expected to be for orders received and fulfilled in the same quarter. Due to a
number of factors described in this prospectus, our ability to adjust our
operating expenses is limited in the short term. As a result, if product
revenues are lower than anticipated, our results of operations will be
adversely affected.

Export sales represented 42% of our product revenues for the six month
period ended June 30, 1999 compared to 46% for the same period of the previous
year. We expect international sales to continue to represent a significant
portion of our product revenues. In the first six months of 1999, our top ten
customers represented approximately 57% of product revenues with the top two
customers representing a combined 29% of product revenues. We expect that
sales to a limited number of customers will continue to represent a
substantial portion of our revenues for the foreseeable future.

License and Royalty Revenues. We currently earn patent license fees and
royalties under several cross-license agreements. License and royalty revenues
from patent cross-license agreements were $18.5 million in the

26
<PAGE>

six months ended June 30, 1999, up from $16.6 million in the same period of
the prior year. Revenues from licenses and royalties decreased to 19% of total
revenues in the first six months of 1999 from 25% in the first six months of
1998.

Gross Profits. Gross profits for the first half of 1999 were $39.3 million
compared to $27.1 million for the same period of the previous year. Gross
margins were 41% of total revenues for the six month periods ended June 30,
1999 and 1998.

Competition remains strong and product gross margins are expected to remain
under pressure due to declining average selling prices per unit. We are
currently working on a number of cost reduction programs to strengthen product
gross margins in 1999, including the transition to offshore manufacturing
operations for high volume products that began in the second quarter. However,
there can be no assurance that we will be successful in these efforts. Also,
increased competition may negatively affect gross margins in the second half
of 1999.

Late in the second quarter of 1999, we began shipping CompactFlash and
FlashDisk products utilizing our new 128 megabit flash chip. The 128 megabit
flash chip has a lower manufacturing cost per megabyte and is expected to
contribute to improved product gross margins in the second half of 1999.
Because the initial production period of each new generation of flash
technology is subject to many risks and uncertainties, we cannot assure you
that we will successfully complete the customer qualifications of the 128
megabit flash chips in a timely manner, or that we will realize the expected
cost reductions in the second half of 1999.

In addition, in the first half of 1999, we moved the high volume production
of our CompactFlash cards to Celestica in South China and the production of
our MultiMediaCard products to Siliconware Precision Industries Co. Ltd. and
Siliconware Corporation in Taiwan. These subcontractors now assemble and test
a majority of our CompactFlash and MultiMediaCard products. Because there are
many risks and uncertainties involved with the transfer of production to these
subcontractors, we cannot assure you that these subcontractors will maintain
satisfactory production volumes and quality.

Research and Development. Research and development expenses consist
principally of salaries and payroll related expenses for design and
development engineers, prototype supplies and contract services. Research and
development expenses in the first half of 1999 increased to $11.2 million, up
$2.4 million or 27% from $8.8 million in the same period of 1998. The increase
was primarily due to increased salary and related expenses and higher
nonrecurring engineering and project related expenses. We expect research and
development expenses to continue to increase in absolute dollars to support
the development and introduction of new generations of flash data storage
products.

Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, benefits and travel expenses for our sales, marketing, customer
service and applications engineering personnel. These expenses also include
other selling and marketing expenses, such as independent manufacturers'
representative commissions, advertising and tradeshow expenses. Sales and
marketing expenses in the first half of 1999 were $10.9 million, up $2.7
million or 33% from the same period of 1998. The increase was primarily due to
increased salary and related expenses and higher commission expenses due to
increased product revenues. We expect sales and marketing expenses to increase
as sales of our products grow and as we continue to develop the retail channel
and expand our direct sales presence.

General and Administrative. General and administrative expenses include the
cost of our finance, information systems, human resources, shareholder
relations, legal and administrative functions. In the first half of 1999,
general and administrative expenses were $5.3 million, up $1.5 million or 41%
from the same period in 1998. The increase was primarily due to increased
salary and related expenses, an increase in the allowance for doubtful
accounts and higher consulting expenses. We expect general and administrative
expenses to increase as the general and administrative functions grow to
support the overall growth of our business. General and administrative
expenses could also increase substantially in the future if we continue to
pursue litigation to defend our patent portfolio.

27
<PAGE>

Interest and Other Income, Net. Interest and other income, net, was $3.1
million in the first six months of 1999 as compared to $2.6 million in the
first six months of 1998. The increase in 1999 was due to the recognition of
foreign exchange gains. In addition, interest and other income, net in 1998
included a recognition of a loss on fixed asset disposal and foreign exchange
losses.

Provision for Income Taxes. We recorded a provision for income taxes at a
33% effective tax rate for the first six months of 1999 compared to a 36%
effective tax rate for the same period of 1998. The lower effective tax rate
in 1999 reflects greater benefits from federal and state tax credits.

Comparison of years ended December 31, 1998, December 31, 1997 and December
31, 1996

Product Revenues. Our product revenues declined 2% to $103.2 million in
1998 from $105.7 million in 1997. The decrease consisted of an increase in
unit shipments of 34% which was offset by a decline in average selling prices
per unit of 28%. Fiscal year 1997 product revenues increased 18% from $89.6
million in 1996. The increase of $16.1 million consisted of a 146% increase in
units shipped offset by a 51% decline in average selling prices per unit.

In 1998 and 1997, the largest increase in unit volume came from sales of
CompactFlash products, primarily for use in digital cameras and other consumer
electronics applications. CompactFlash products represented approximately 68%
of all units shipped and 50% of product revenues in 1998 compared to 73% of
all units shipped and 49% of product revenues in 1997. In 1997, we experienced
a significant shift in product mix from PCMCIA flash cards to CompactFlash
cards, which have lower capacities. This contributed to the decline in average
selling prices per unit in 1997. We anticipate that lower capacity products
will continue to represent a significant portion of our sales as consumer
applications such as digital cameras become more popular. Sales of these lower
capacity products generally have lower average selling prices per unit and
lower gross margins than higher capacity products. The mix of products sold
varies from quarter to quarter and may vary in the future, affecting our
overall average selling prices and gross margins.

We have experienced and expect to continue to experience seasonality in our
product sales. Due to the shift in product mix towards CompactFlash products
which are sold primarily for consumer electronics applications, we expect that
our product sales will be increasingly impacted by seasonal purchasing
patterns, with higher sales in the second half of each year as compared to the
first half of each year. In the past, we have experienced a reduction in order
quantities in the first quarter from Japanese OEM customers, reflecting the
fact that most customers in Japan operate on a fiscal year ending in March and
prefer to delay purchases until the beginning of their next fiscal year. In
addition, the effects of the Asian economic crisis on our revenues is
uncertain. Our ability to adjust our operating expenses is limited in the
short term due to a number of factors described herein. As a result, if
product revenues are lower than anticipated, our results of operations will be
harmed. Our backlog at the end of 1998 was $13.4 million, compared to $18.6
million in 1997 and $5.8 million in 1996.

License and Royalty Revenues. License and royalty revenue from patent
cross-license agreements was $32.6 million in 1998, up from $19.6 million in
1997, and $8.0 million in 1996. The increase in license and royalty revenues
in 1998 was partially due to the recognition of a full year of revenues under
the Hitachi, Toshiba and Samsung agreements, which were entered into in the
third quarter of 1997. Revenues from licenses and royalties increased to 24%
of total revenues in 1998 from 16% in 1997 and from 8% in 1996.

Gross Profits. In fiscal 1998, gross profits increased to $55.5 million, or
40.8% of total revenues, from $53.0 million, or 42.3% of total revenues in
1997, and $38.9 million, or 39.8% of total revenues in 1996. In 1998 and 1997,
the growth in overall gross profits resulted from an increase in license and
royalty revenues, which was partially offset by a decline in gross profit from
product sales. Product gross profits declined as a percentage of product
revenues to 22.2% in 1998 compared to 31.6% in 1997 and 34.5% in 1996. The
decline in 1998 was primarily due to competitive pricing pressures. The
decline in 1997 was primarily due to the shift in product mix to CompactFlash
products that have lower average selling prices per unit and lower gross
margins than our FlashDisk products. This decline was partially offset by cost
reductions related to our shift to in-house assembly and testing. We
anticipate that lower capacity products will continue to represent a
significant portion of our sales as consumer applications such as digital
cameras become more popular.

28
<PAGE>

Research and Development. Research and development expenses increased to
$18.2 million in 1998 from $13.6 million in 1997 and $10.2 million in 1996. As
a percentage of revenues, research and development expenses represented 13.4%
in 1998, 10.8% in 1997, and 10.4% in 1996. In 1998 and 1997, the increase in
research and development expenses was primarily due to an increase in salaries
and payroll-related expenses associated with additional personnel. Increased
depreciation due to capital equipment additions and higher project related
expenses also contributed to the growth in research and development expenses
in both years.

Sales and Marketing. These expenses also include other selling and
marketing expenses, such as independent manufacturers' representative
commissions, advertising and tradeshow expenses. Sales and marketing expenses
increased to $16.9 million in 1998 from $12.6 million in 1997 and $8.8 million
in 1996. The increase in 1998 was primarily due to increased marketing and
sales expenses related to the development of the retail channel. Increased
salaries and payroll related expenses associated with additional personnel
also contributed significantly to the increase in 1998 and 1997. Sales and
marketing expenses increased to 12.5% of total revenues in 1998 compared to
10.0% in 1997 and 9.0% in 1996 primarily due to increased marketing expenses
related to the development of the retail channel.

General and Administrative. General and administrative expenses were $7.5
million in 1998 compared to $7.1 million in 1997 and $7.4 million in 1996. The
increase in 1998 was primarily due to increased consulting expenses related to
the implementation of our new management information system and an increase in
bad debt expense. The decrease in 1997 was primarily due to a decrease in
legal fees which was partially offset by increased salaries and payroll
related expenses associated with increased personnel, higher recruiting
expenses, increased allowance for doubtful accounts and higher consulting
expenses. General and administrative expenses represented 5.5% of total
revenues in 1998 compared to 5.7% of revenues in 1997, and 7.6% in 1996.

Interest and Other Income, Net. Interest and other income, net, was $5.7
million in 1998, $3.7 million in 1997, and $3.2 million in 1996. The increase
in 1998 was primarily due to higher investment balances as a result of the
investment of proceeds from the sale of common stock in our November 1997
follow-on public offering.

Provision for Income Taxes. Our 1998, 1997, and 1996 effective tax rates
were approximately 36.0%, 15.0%, and 7.3% respectively. Our 1998 tax rate was
substantially higher than our 1997 rate due to the utilization of all
remaining federal and state tax credit carryforwards in 1997. Our 1997
effective tax rate was substantially higher than our 1996 rate due to the
utilization of all remaining federal net operating loss carryforwards in 1996.

Liquidity And Capital Resources

As of June 30, 1999, we had working capital of $145.5 million, which
included $12.8 million in cash and cash equivalents and $132.2 million in
short-term investments. Operating activities provided $17.1 million of cash in
the first six months of 1999 primarily from net income and an increase in
current liabilities of $17.7 million, which were partially offset by increases
in accounts receivable of $8.8 million and inventory of $8.4 million.

Net cash used in investing activities of $22.5 million in the first six
months of 1999 consisted of net purchases of investments of $13.9 million and
capital equipment purchases and leasehold improvements of $8.6 million. In the
first six months of 1999, cash provided by financing activities of $2.8
million came primarily from the sale of common stock through our stock option
and employee stock purchase plans. Net cash used in investing activities of
$23.0 million in 1998 consisted of a second investment in the USIC foundry of
$10.9 million, capital equipment purchases of $7.5 million and net purchases
of investments of $4.6 million. In 1997, net cash used in investing activities
of $108.9 million consisted of net purchases of investments of $59.0 million,
an investment of $40.3 in the USIC foundry and $9.6 million of capital
equipment purchases. In 1996, cash used for investing purposes of $22.2
million included net purchases of short term investments of $13.8 million and
capital equipment purchases of $8.4 million. We currently intend to make
additional investments, which could be substantial, in silicon wafer foundry
capacity as well as in assembly and test manufacturing equipment to support
our business in the future. We anticipate using a substantial portion of the
net proceeds that we receive in the offering for these purposes.

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<PAGE>

Operating activities provided $13.4 million of cash in 1998 primarily from
net income, a reduction in inventory of $6.7 million and an increase in other
accrued liabilities of $1.5 million, which were partially offset by a decrease
in accounts payable of $7.2 million and an increase in prepaid and other
assets of $5.3 million. Cash provided by operations was $26.8 million in 1997
and $13.4 million in 1996.

During 1998, cash provided by financing activities of $4.2 million was
primarily from the sale of common stock through our stock option and employee
stock purchase plans. Financing activities provided $83.7 million of cash in
1997, primarily from the sale of common stock in our November 1997 follow-on
public offering and $0.8 million in 1996 primarily from the sale of common
stock through our stock option and employee stock purchase plans.

Impact of Currency Exchange Rates

A portion of our revenues are denominated in Japanese yen. We enter into
foreign exchange forward contracts to hedge against changes in foreign
currency exchange rates. At June 30, 1999, forward contracts with a notional
amount of $11.9 million were outstanding. Future exchange rate fluctuations
could have a material adverse effect on our business, financial condition and
results of operations.

Market Risk Disclosure Information

Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. The primary objective of
our investment activities is to preserve principal while maximizing yields
without significantly increasing risk. This is accomplished by investing in
widely diversified short-term investments, consisting primarily of investment
grade securities, substantially all of which either mature within the next
twelve months or have characteristics of short-term investments. As of
December 31, 1998, a hypothetical 0.5% increase in market interest rates would
have resulted in a decrease of approximately $390,000, or less than 0.4%, in
the fair value of our available-for-sale securities.

Foreign Currency Risk. We enter into foreign exchange contracts to reduce
the impact of currency fluctuations on firm purchase order commitments for
inventory. Gains and losses on these foreign currency investments would
generally be offset by corresponding losses and gains on the related hedging
instruments, resulting in negligible net exposure to us. A substantial
majority of our revenue, expense and capital purchasing activity are
transacted in U.S. dollars. However, we enter into transactions in other
currencies, primarily the Japanese yen. To protect against reductions in value
and the volatility of future cash flows caused by changes in foreign exchange
rates, we have established a hedging program. Currency forward contracts are
utilized in these hedging programs. Our hedging programs reduce, but do not
always entirely eliminate, the impact of foreign currency exchange rate
movements. As of December 31, 1998, an adverse change of 10% in exchange rates
would have resulted in a decline in income before taxes of approximately
$431,000. All of the potential changes noted above are based on sensitivity
analyses performed on our financial positions at December 31, 1998.

Year 2000 Readiness Disclosure

We are aware of problems associated with computer systems as the Year 2000
approaches. Year 2000 problems are the result of common computer programming
techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The issue is complex and
wide-ranging. The problem may affect transaction processing computer
applications we use for accounting, distribution, manufacturing, planning and
communications. The problem may also affect embedded systems such as building
security systems, machine controllers and production testing equipment. Year
2000 problems with these systems may affect the ability or efficiency with
which we can perform many significant functions, including but not limited to
order processing and fulfillment, material planning, product assembly, product
testing, invoicing and financial reporting. While there can be no guarantee of
unaffected operation, the completed implementation of our new management
information system, and the completed assessment of our embedded systems
indicates limited exposure in these areas. The Year 2000 problem may also
affect the computer systems of our suppliers and customers, potentially
disrupting their operations. Year 2000 problems with our business partners may
impact our sources of supply and demand.

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<PAGE>

Year 2000 Readiness. We have a Year 2000 risk management program to assess
the impact of the Year 2000 issue on us, and to coordinate remediation
activities. We completed the evaluation of our products for Year 2000
compliance in the third quarter of 1998. Our FlashDisk, FlashDrive, Flash
ChipSet, CompactFlash, MultiMediaCard and ImageMate product lines do not
perform date related processing and do not contain real time clock circuitry
and, therefore, are Year 2000 ready. Our storage and connectivity products are
used as components in a variety of host systems. The firmware, operating
system and application software of these host systems are designed and
manufactured by others. We make no claim with regard to the Year 2000
readiness of host systems designed by others in which our products are used.
Independent system designers make derivative works from our Host Developer's
Toolkit source code product. Sample date related subroutines and data
structures are included in the Toolkit for use by system designers. Designers
modify the sample routines in order to fit the specific requirements of their
host operating system. The designer is responsible for the formatting and
processing logic associated with the date values that pass through the Toolkit
subsystem and for the Year 2000 readiness of the systems in which the Toolkit
is used. We make no claims with regard to the Year 2000 readiness of host
firmware and operating systems designed by others that contain derivative
works of the Toolkit.

The Year 2000 remediation of our transaction processing systems was
completed with the installation and testing of our new management information
system in the fourth quarter of 1998. The new system is a commercially
available, fully integrated materials requirement planning and accounting
system software application. This system is used for accounting, order
processing, planning, inventory control, shop floor control and distribution.

In the second quarter of 1999, we completed all of the primary elements of
our Year 2000 assessment and remediation program for our principal hardware
and software. Tests of software applications, which have been identified by
their vendors as Year 2000 compliant, and several minor software upgrades will
be completed in the third quarter of 1999. Well over 90% of our investment in
desktop personal computer hardware is known to be Year 2000 compliant, and
proven remediation solutions have been implemented for the remaining 10%. The
majority of the software used on these systems and network servers are recent
versions of vendor supported, commercially available products. Upgrading these
applications as Year 2000 compliant patches are released by the respective
vendors has not been a significant burden on us and is expected to be
completed before the end of 1999.

Our assessment and remediation of Year 2000 problems in computer systems
used for facilities control, machine control and manufacturing testing is
complete. The most significant Year 2000 issue in this area has been found to
be related to older wafer testing equipment. This equipment is not expected to
be used in the year 2000. We are phasing in new Year 2000 compliant wafer
testing equipment in conjunction with the introduction of new generations of
flash memory.

Our assessment of Year 2000 risks related to material suppliers, customers
and other third parties is substantially complete. Inquiries were made of all
critical suppliers and an assessment of their Year 2000 readiness was the
basis for strategic decisions regarding alternate material sourcing and/or
increasing inventory safety stocks. The survey of our service suppliers is
ongoing, as many of these suppliers have third or fourth quarter 1999 target
compliance dates for their Year 2000 programs. We are also contacting our
significant customers regarding their Year 2000 readiness in order to
understand the potential for any disruptions in their ordering patterns.
Completion of these reviews will depend on the responsiveness of our vendors
and customers, over which we have no control.

Year 2000 Risk Management Program Costs. The cost of the Year 2000 project
related to upgrading our core management information system was approximately
$1.0 million, $400,000 of which was related to the purchase of software and
hardware which we capitalized. In the first half of 1999, we spent
approximately $175,000 for application software upgrades and computer
hardware. We estimate that costs to upgrade or replace any remaining software
applications and non-compliant computer hardware will not be material to our
operating results. We would have incurred the majority of these costs, in
spite of Year 2000 issues, due to the need to

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<PAGE>

upgrade our management information system, application software and personal
computers to support our growth. Our Year 2000 remediation projects were
funded from operating cash flows. No material projects were deferred in order
to complete our Year 2000 assessment and remediation project. The additional
expenses related to the management of the Year 2000 compliance program and
completing the remaining assessment of our internal and external risks are not
expected to be material to our quarterly operating results.

The costs and time schedule for the Year 2000 problem abatement are based
on management's best estimates for the remediation of Year 2000 problems
uncovered to date. These estimates were derived utilizing numerous
assumptions, including that the most significant Year 2000 risks have already
been identified, that certain resources will continue to be available, that
third party plans will be fulfilled and other factors. However, we cannot
guarantee that these estimates will be achieved or that the anticipated time
schedule will be met and actual results could differ significantly from those
anticipated.

Contingency Plans. Specific contingency plans for systems that pose
significant risk to ongoing operations are being developed under the auspices
of our Year 2000 risk management program. Should previously undetected Year
2000 problems be found in other systems, these systems will either be
upgraded, replaced, turned off or operated in place with manual procedures to
compensate for their deficiencies. While we believe that these alternative
plans would be adequate to meet our needs without materially impacting our
operations, we cannot assure you that these alternatives would be successful
or that our results of operations would not be harmed affected by the delays
and inefficiencies inherent in conducting operations in this manner.

Risks Related to Year 2000 Readiness. Success of our Year 2000 compliance
effort depends, in part, on the success of our key suppliers and customers in
dealing with their Year 2000 issues. We do not have any control over the
remediation efforts of our key suppliers and customers and cannot fully
determine the extent to which they have resolved their Year 2000 compliance
issues. We currently purchase several critical components from single or sole
source vendors. While this issue is being carefully managed, disruptions in
the supply of components from any of these sole source suppliers due to Year
2000 issues, could cause delays in our fulfillment of customer orders which
could result in reduced or lost revenues. Furthermore, our sales have
historically been to a limited number of customers. Any disruption in the
purchasing patterns of these customers or potential customers due to Year 2000
issues could cause a decline in our revenues. We cannot assure you that we and
our key suppliers and customers will identify and remediate all significant
Year 2000 problems on a timely basis. Furthermore, we cannot assure you that
our insurance will cover losses from business interruptions arising from Year
2000 problems or those of our suppliers. If our key suppliers and customers
have Year 2000 problems, our business could be harmed.

The foregoing statements regarding our Year 2000 readiness are based upon
management's best estimates at the present time, which were derived utilizing
assumptions regarding future events, including the continued availability of
certain resources, third party modification plans and other factors. We cannot
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to:

. the availability and cost of personnel trained in this area;

. the ability to locate and correct all relevant computer codes;

. the nature and amount of programming required to upgrade or replace each
of the affected programs;

. the rate and magnitude of related labor and consulting costs; and

. the success of our external customers and suppliers in addressing the
Year 2000 issue.

Our evaluation is ongoing and we expect that new and different information
will become available to us as the evaluation continues. Consequently, we
cannot guarantee that all material elements will be Year 2000 ready in time.

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<PAGE>

BUSINESS

We design, manufacture and market flash memory storage products that are
used in a wide variety of electronic systems. We have designed our flash
memory storage solutions to address the storage requirements of emerging
applications in the consumer electronics and industrial/communications
markets. Our products are used in a number of rapidly growing consumer
electronics applications, such as digital cameras, personal digital
assistants, MP3 portable music players, digital video recorders and smart
phones, as well as in industrial/communications applications, such as
communications routers and switches, wireless communications systems, point of
sale, or POS, terminals, transportation systems and medical instrumentation.
We are the world's leading provider of flash memory card storage products,
with over 40% market share in 1998, according to International Data
Corporation. In the quarter ended June 30, 1999, we shipped over one million
flash memory cards and flash chip sets. Our products include removable
CompactFlash cards, FlashDisk cards, MultiMediaCard products, embedded
FlashDrives and FlashChipSet products, with storage capacities ranging from 2
megabytes to 440 megabytes. Our customers include Arrow Electronics, Inc.,
Avnet Electronics, Bell Microproducts, Inc., Best Buy Company, Inc., Canon,
Inc., Eastman Kodak Company, Hewlett-Packard Company, Lucent Technologies
Inc., Matsushita Electric Industrial Co., Ltd., Mitsubishi Plastic Co. Ltd.,
NEC USA Inc., Newbridge Networks Corporation, Nokia Corporation, Norand
Corporation and Tech Data Corporation. In addition, we currently license our
technologies to several companies including Hitachi Ltd., Intel Corporation,
Samsung Electronics Company Ltd., Sharp Electronics Corporation and Toshiba
Corporation.

Industry Background

In recent years, digital computing and processing have expanded beyond the
boundaries of desktop computer systems to include a broader array of consumer
electronics, industrial and communications products. These new devices include
digital cameras, personal digital assistants, or PDAs, highly portable
computers, MP3 portable music players, digital video recorders, wireless base
stations, network computers, communication routers and switches, cellular
telephones, mobile communication systems, handheld data collection terminals,
medical monitors and other electronic systems. These emerging applications
have storage requirements that are not well addressed by traditional storage
solutions. These requirements include small form factor size, high
reliability, low power consumption and the capability to withstand high levels
of shock and vibration and extreme temperature fluctuations. Because storage
products based on flash semiconductor technology can meet these requirements,
these devices and systems represent new market opportunities for flash storage
systems.

The traditional data storage market encompasses several types of memory and
storage devices designed primarily for specific components of computer
systems. Dynamic random access memory, or DRAM, provides main system memory;
static random access memory, or SRAM, provides specialized and high speed
memory; hard disk drives provide high capacity data storage; and floppy disk
drives permit low capacity removable data storage. In the late 1980s, a new
memory technology, flash memory, was developed as an extension of ultraviolet
erasable programmable read-only memory, or EPROM. Flash memory is non-
volatile, unlike DRAM and SRAM, requiring no power to retain data, and is
electrically reprogrammable, unlike EPROM. Flash memory has the potential to
satisfy the requirements for a variety of data storage applications although
the most common types of flash memory are not well suited for many purposes.

Today, there are two types of flash memory on the market: ATA storage such
as our flash data storage and socket flash, also called linear flash when used
in memory cards. Linear flash is based on proprietary, non-standard
architectures that are not fully DOS-compatible or platform independent. While
linear flash cards provide a low-cost mass storage solution, they provide
limited built-in intelligence, and rely instead on the host microprocessor and
specialized software to manage the socket flash chips as a mass data storage
device. This limits the portability of linear flash cards between different
systems, as well as their ability to be upgraded for use in future generation
products. A linear flash card used for data storage in one system may not be
usable in other systems because of potential incompatibilities in the host
processors, as well as different operating system software. Furthermore,
because of differences in the socket flash of various suppliers, linear flash
cards from one manufacturer may not function properly with flash file system
software designed for linear flash cards from other manufacturers.

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Linear flash is slow when writing data, which makes it impractical for the
constant erase and write demands of portable or handheld data storage. In
addition, linear flash has not been optimized for defect management. With
frequent erase and write operations, bits in flash storage media deteriorate
over time. As a result, the longevity and durability of linear flash is
limited in frequent erase and write applications. Also since linear flash
chips are optimized for fast read access rather than low-cost, they are
relatively large and expensive compared to other types of flash memory.

Customers in the consumer electronics and industrial/communications markets
are seeking data storage solutions that satisfy requirements such as small
size, high reliability, low power consumption and the capability to withstand
high levels of shock and vibration and extreme temperature fluctuations, which
are not well addressed by traditional storage solutions such as hard disk
drives and DRAM, or by linear flash cards based on socket flash memory chips.

The SanDisk Solution

We have optimized our flash memory storage solution, known as system flash,
to address the needs of many emerging applications in the consumer electronics
and industrial/communications markets. Since our inception, we have been
actively involved in all aspects of flash memory process development, chip
design, controller development and system-level integration to ensure the
creation of fully-integrated, broadly interoperable products that are
compatible with both existing and new system platforms. We believe our core
technical competencies are in high-density flash memory process and design,
controller design, system-level integration, compact packaging and low-cost
system testing. To achieve compatibility among various electronic platforms
regardless of the host processor or operating system used, we have developed
new capabilities in flash memory chip design and created a new intelligent
controller. We also developed an architecture that can leverage advances in
flash memory process technology to ensure a scaleable, high-yielding, cost-
effective and highly reliable manufacturing process. CompactFlash,
MultiMediaCard, and FlashDisks are portable, have an on-board controller and
use DOS file formats so they are forward and backward compatible. Once a
system is designed, future high capacity cards can be used in the same system.
All of our flash data products can store almost any type of digital
information, including voice mail, e-mail, music, video clips and digital
images.

SanDisk's products offer the following features:

Small form factor. Our CompactFlash products weigh about one-half ounce and
are approximately the size of a matchbook. Our FlashDisk cards are small and
lightweight with a length of 85.6 mm, width of 54.0 mm, thickness of 5.0 mm or
10.5 mm and weight of less than 2.0 ounces. Our MultiMediaCard products are
approximately the size of a quarter coin and weigh less than two grams.

Non-volatility. Our products store information in non-volatile memory cells
that do not require power to retain information.

High degree of ruggedness. Our devices have an operating shock rating of
2,000 Gs for CompactFlash and 1,000 Gs for all other products (equivalent to
being able to withstand ten foot and eight foot drops onto concrete,
respectively). Our products are also designed to tolerate extreme fluctuations
in temperatures and humidity.

Low power consumption. During read and write operations, our products use
less power than the 1.8 inch and 2.5 inch rotating disk drives found in many
portable computers. At all other times during system operation, our products
require virtually no power. Depending upon the end product making use of our
flash data storage, this can translate into longer battery life.

High reliability. Our products utilize sophisticated error detection and
correction algorithms and dynamic defect management techniques to provide high
data reliability and endurance.

High performance. We believe that the read and write data rates of our
products meet or exceed the read and write data rates required today by the
majority of consumer and industrial/communications applications.

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<PAGE>

We have developed core competencies in low-cost micropackaging technology
as well as low-cost batch testing, both of which are important elements in
building high capacity, high reliability flash cards at a competitive cost and
in high volumes.

SanDisk's Strategy

Our goal is to be the global leader in flash memory products for storage of
digital voice, music, videos and computer files. To meet our objective, we are
pursuing the following strategies:

Enable New Products in Large and Emerging Markets; Develop and Promote
Industry Standards. We develop products that we believe will have applications
in large, emerging markets such as the markets for digital cameras, PDAs,
digital video recorders, smart phones and MP3 portable music players. We
believe that the widespread acceptance of universal industry standards is
important to the development of the market for flash data storage. We design
our products to be compatible with existing industry standards and, where
appropriate, develop and promote new standards. We were one of the founding
members of PCMCIA, where we have worked to establish the ATA standard
interface for PC Cards which is globally supported by all PC Card slots. We
developed the CompactFlash format and were one of the founding members of the
CompactFlash Association, an organization established in October 1995 to
promote CompactFlash as a small form factor flash data storage standard. We
believe that this format has become the de facto industry standard storage
platform for digital cameras, where it is used instead of traditional film.
Our CompactFlash, FlashDisk, FlashDrive and Flash ChipSet products are
compatible with integrated drive electronics, or IDE, and ATA standard
interfaces used in all IBM compatible personal computers and are compatible
with Windows 95, Windows 98, Windows NT, Windows CE, Macintosh System 8.0 and
other operating systems. The interoperability afforded by adherence to these
industry standards enables users of flash data storage cards to transfer data
quickly and easily from one device to another, such as from a digital camera
to a desktop computer system equipped with a PCMCIA or CompactFlash slot.

In November 1997, along with Siemens AG, we introduced the MultiMediaCard
format which was initially designed to meet the requirements of the mobile
communications industry for a small form factor storage card with a simple
high performance serial interface. We are a founding member of the
MultiMediaCard Association and are committed to making MultiMediaCard a
broadly supported industry standard. We believe that working with industry
groups to develop widely-adhered-to standards will lead to the acceptance of
our products in other large markets.

Maintain Technology Leadership. We believe that we were the first to
develop and introduce removable flash data storage cards and that we have led
the industry with several technological innovations. We believe that our
technological expertise in flash memory design and process engineering,
intelligent controllers and system-level integration, in conjunction with
relationships with our semiconductor manufacturing partners, provide us with a
competitive advantage. We are actively developing advanced flash data storage
technologies designed to enable us to continue to meet evolving customer
requirements for flash data storage system products. We have developed double
density, or D2, flash, which is a technological innovation that allows each
flash memory cell to store two bits of information instead of the traditional
single bit per cell, effectively doubling the amount of storage capacity on
approximately the same size chip. We plan to use this technology to achieve a
significant reduction in the cost per megabyte of flash data storage.

Reduce Cost Per Megabyte of Flash Data Storage. We are focused on reducing
the cost per megabyte of our products in order to increase the number of
applications for these products and to enhance our ability to

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address new markets. We have designed our patented flash memory technology and
integrated intelligent controller to increase the amount of usable flash
storage per wafer and to realize high yields through the built-in ability to
utilize partial die. We work closely with our strategic manufacturing partners
to increase the amount of storage capacity per wafer by using very small flash
memory cells and to facilitate the migration to smaller geometry manufacturing
processes through several generations of flash technology.

Leverage Intellectual Property. We have cross-licensed our flash
technology, including our patent portfolio, to selected third parties. We
believe that permitting other flash memory providers to use our technology
will facilitate the development of our target markets, will provide a second
source of supply of CompactFlash and MultiMediaCard which is required by many
OEM customers, and can serve as a significant source of license fees and
royalty revenues for us. To date, we have entered into patent cross-license
agreements with several companies including Hitachi, Intel, Samsung, Sharp and
Toshiba, and intend to pursue opportunities to enter into additional licenses.

Applications and Markets for Flash Data Storage

We are targeting the consumer electronics and the industrial/communications
markets for our flash data storage products.

Our products are used in a number of rapidly growing consumer electronics
applications, such as digital cameras, personal digital assistants, MP3
portable music players, digital video recorders and smart phones, as well as
in industrial and communications applications, such as POS terminals,
transportation systems, medical instrumentation, communications routers and
switches and wireless communications systems. Our customers include Arrow
Electronics, Inc., Avnet Electronics, Bell Microproducts, Inc., Best Buy
Company, Inc., Canon, Inc., Eastman Kodak Company, Ltd., Hewlett-Packard
Company, Lucent Technologies Inc., Matsushita Electric Industrial Co., Ltd.,
Mitsubishi Plastic Co. Ltd., NEC USA Inc., Newbridge Networks Corporation,
Nokia Corporation, Norand Corporation and Tech Data Corporation.

Consumer Electronics. The increasing trend towards the use of digital
technology in consumer electronics devices has created requirements for new
data storage products. For example, a number of major camera and imaging
companies have introduced digital cameras that we believe will enable
professionals and consumers to eliminate the need for standard 35mm
photographic film by replacing it with re-usable compact digital data storage
devices. Removable and embedded flash data storage products such as our
CompactFlash, MultiMediaCard and Flash ChipSet products, are used in personal
digital assistants, highly portable computers, digital audio recorders,
network computers, cellular telephones, two-way pagers, next-generation smart
telephones, digital audio samplers and other devices. These data storage
devices need to have a very small form factor, must be lightweight, shock and
vibration tolerant, non-volatile and interoperable with computer systems and
software that can process and manipulate data, audio and digital images.

Industrial/Communications Market. Emerging applications in the industrial
market encompass a wide variety of electronic systems used by personnel such
as inventory controllers, service technicians, route salesmen, delivery crews,
meter readers, car-rental service employees, physicians, real estate agents,
insurance agents and public safety officers. The systems used by these workers
are often subjected to rough handling, used in a variety of temperature and
humidity conditions and required to operate for extended periods of time
without external power sources or frequent battery changes. The information
collected by these individuals is critical to the successful operation of
their business or agency and hence must be stored reliably regardless of the
operating environment. In addition, the information is frequently processed by
a central computer system at some point, typically the end of the work day or
night, and must therefore be easily transferable. The communications market
has applications that are beginning to require new types of data storage. For
example, communications switches and cellular base stations require data
storage in environments that are subject to shock and vibration and a wide
range of temperature and humidity conditions.

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In the fiscal years ended December 31, 1998, 1997 and 1996, product sales
to our top 10 customers accounted for approximately 59%, 67%, and 71%,
respectively, of our product revenues. In 1998 and the first six months of
1999, two customers each accounted for 10% or more of our product revenues. In
1997, no single customer accounted for greater than 10% of total revenues. In
1996, one customer accounted for approximately 26% of our total revenues. We
expect that sales of our products to a limited number of customers will
continue to account for a substantial portion of our revenues for the
foreseeable future. We have also experienced significant changes in the
composition of our major customer base from year to year and expect this
pattern to continue as certain customers increase or decrease their purchases
of our products as a result of fluctuations in market demand for such
customers' products. Sales to our customers are generally made pursuant to
standard purchase orders rather than long-term contracts. The loss of, or
significant reduction in purchases by our major customers, could harm our
business, financial condition and results of operations.

SanDisk's Products

Our storage products are high capacity, solid-state, non-volatile flash
memory devices which comply with PC Card ATA and/or IDE industry standards. We
offer a broad line of flash data storage system products in terms of
capacities, form factors, operating voltage and temperature ranges. Our
current product families include removable CompactFlash, FlashDisk and
MultiMediaCard products, embedded FlashDrive products and Flash ChipSets. All
of our products use our proprietary 512 byte sector erase flash memory chips
and intelligent controller. Our products are compatible with the majority of
today's computing and communications systems that are based on industry
standards. Our products, as of June 30, 1999, are listed in the following
table:

<TABLE>
<CAPTION>
Uncompressed
Capacity
Product Family Form Factor (In Megabytes)
- -------------------------------------------------------------------------------
<C> <S> <C>
Type I (36.4 mm X 42.8 mm X 3.3
CompactFlash (Removable) mm) 4 to 96
Type II (36.4 mm X 48.8 mm X 5.0
mm) 160

PC Card Type II (54.0 mm X 85.6
FlashDisk (Removable) mm X 5.0 mm) 4 to 440

Flash ChipSet (Embedded) 2 chips 4 to 32

FlashDrive (Embedded) 1.8 inches 4 to 220
2.5 & 3.5 inches 20 to 440

MultiMediaCard (Removable) 32.0 mm X 24.0 mm X 1.4 mm 4 to 32
</TABLE>

Unlike rotating disk drives, our flash products are solid-state devices.
They have no moving parts that are subject to mechanical failure and are
therefore very reliable. Our products are non-volatile, meaning that no
ongoing source of power is required in order for the products to retain
indefinitely digital data, images or audio files. Flash memory is noiseless,
considerably lighter, more rugged and consumes substantially less power than a
rotating disk drive. Our CompactFlash, MultiMediaCard and Flash ChipSet are
small enough to be used in many of the new miniaturized electronic systems
being developed today.

CompactFlash. Our CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard PC Card.
CompactFlash's compact size, ruggedness and low-power requirements and its
ability to operate at either 3.3V or 5V make it well-suited for a range of
current and next-generation, small form factor consumer applications such as
digital cameras, PDAs, personal communicators and audio recorders.
CompactFlash products provide interoperability with systems based upon the PC
Card ATA standard by using a low-cost passive Type II adapter. CompactFlash
cards are available in capacities ranging from 4 megabytes to 96 megabytes in
Type I form factor and 160 megabytes in Type II form factor.

FlashDisk. Our FlashDisk products are used in storage, data backup and data
transport applications. Our FlashDisk products are available in the PC Card
Type II form factor with capacities ranging from 4 megabytes to 440 megabytes.

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Flash ChipSet. Our Flash ChipSet products provide a very small footprint,
solid-state ATA mass storage system. Our Flash ChipSet products consist of a
single chip ATA controller and a flash memory chip and are available in
capacities of 4, 8, 16 and 32 megabytes. We provide full PC Card, ATA and IDE
disk drive compatibility in a chip set format.

FlashDrive. Our FlashDrives come in 1.8, 2.5 and 3.5 inch form factors and
are targeted at applications that require embedded data storage devices.
FlashDrives offer rugged, portable, low-power data storage and are plug and
play replacements for rotating IDE drives making them ideal for mobile
computers, communication devices and other systems that require embedded
storage. Capacities of our FlashDrive products range between 4 and 440
megabytes.

MultiMediaCard. Our MultiMediaCard measures 32.0 mm by 24.0 mm by 1.4 mm,
about the size of a quarter coin, and weighs less than two grams.
MultiMediaCard is targeted at the emerging markets for mobile smart phones,
consumer multimedia devices, digital audio recorders, digital video recorders,
portable MP3 music players and other products that need removable data storage
in a small form factor. Our MultiMediaCard is available in storage capacities
of 4, 8, 16 and 32 megabytes. We began shipping our MultiMediaCard products in
the second half of 1998. We cannot assure you that MultiMediaCard will receive
substantial market acceptance. Any failure by our customers to accept our
MultiMediaCard products could harm our business, financial condition and
results of operations.

Technology

Since our inception, we have focused our research and development efforts
on developing highly reliable and cost-effective flash memory storage products
to address a number of emerging markets. We have been actively involved in all
aspects of this development, including flash memory process development, chip
design, controller development and system-level integration, to ensure the
creation of fully-integrated, broadly interoperable products that are
compatible with both existing and newly developed system platforms. We believe
our core technical competencies are in high density flash memory process and
design, controller design, system-level integration, compact packaging and
low-cost system testing.

To achieve compatibility with various electronic platforms regardless of
the host processors or operating systems used, we developed new capabilities
in flash memory chip design and created a new intelligent controller. We also
developed an architecture that could leverage advances in process technology
to ensure a scaleable, high-yielding, cost-effective and highly reliable
manufacturing process. We believe that these technical competencies and our
system design approach have enabled us to introduce flash data storage
products that are better suited for our targeted market than linear flash
cards based on socket flash chips or SmartMedia flash cards, which do not
contain an intelligent controller.

We design our products to be compatible with industry-standard IDE and ATA
interfaces used in all IBM compatible personal computers. To achieve this
design, we use a 512 byte memory sector size that requires a departure from
the typical socket flash chip design. By decreasing the sector size to be the
same as the sector size of all 3.5 inch, 2.5 inch and 1.8 inch hard disk
drives, we were able to achieve compatibility with DOS and Windows, as well as
other popular operating systems.

Our patented intelligent controller coupled with the intelligent
controller's advanced defect management system permits our products to achieve
a high level of reliability and longevity. This defect management system,
which currently resides on a single proprietary controller chip, is able to
detect bit wearout, a common problem with flash memory, both immediately
following manufacture and late in the product's life. Late bit failure can
occur several years into the life of a product and can be difficult to detect
with traditional flash technology. Our defect management system automatically
detects bits that have failed or are likely to fail due to the number of erase
and write cycles such bits have undergone and switches memory to spare good
bits incorporated into the design. The system also allows the automatic
substitution of entire sectors or major blocks of the memory chip.
Additionally, the controller generates an error correcting code which is
stored simultaneously with the data and is used to detect and correct any
errors when the data is read. This design permits our products to maintain
error-free operation for hundreds of thousands of erase and write cycles and
reduces manufacturing costs by allowing

38
<PAGE>

us to incorporate partial die with less than 100% of the physical bits on each
chip into the products without loss of functionality.

The flash process and flash memory chip designs developed by us in
cooperation with our partners make our products scaleable over several
generations of semiconductor fabrication processes. This feature has allowed
us to significantly reduce our cost per megabyte of capacity as each new
process generation is qualified. By maintaining the same basic design
parameters, each new generation of our products maintains full compatibility
with prior generations. This chip architecture, which incorporates three
polysilicon layers and one or two metal layers, as well as a virtual ground
array and a split gate transistor cell, has allowed us to significantly reduce
cell size and thereby chip size. This has permitted increased storage capacity
in all of our products. Our patented flash process requires some modifications
to the typical complementary metal-oxide semiconductor, or CMOS, semiconductor
fabrication process, but can be implemented on existing advanced fabrication
lines without the need for special materials or equipment.

Double density flash, or D2, is a technological innovation which allows
each flash memory cell to store two bits of information instead of the
traditional single bit per cell employed by standard binary flash technology.
The D2 flash technology is highly complex, and the write speed of D2 flash
products is typically slower than our current binary flash products. In
addition, D2 flash involves several techniques never proven in a high volume
production environment. We have terminated production of our 80 megabit D2
designs and are preparing for production of the next generation 256 megabit D2
design, which is expected to have write speeds matching the write speed of our
binary products. We cannot assure you that the write speed of D2 flash will be
accepted by our customers. Any failure by our customers to accept our D2 flash
products, or any failure to successfully establish volume production of our D2
flash products, could harm our business, financial condition and results of
operations.

We also have developed core competencies in low-cost micropackaging
technology as well as low-cost batch testing, both of which are important
elements in building high capacity flash cards to high reliability standards
at a competitive cost and in high volumes.

Strategic Manufacturing Relationships

An important element of our strategy has been to establish strategic
relationships with leading technology companies that can provide us with
access to leading edge semiconductor manufacturing capacity and participate in
the development of some of our products. This enables us to concentrate our
resources on the product design and development areas where we believe we have
competitive advantages and eliminate the high cost of owning and operating a
semiconductor wafer fabrication facility. We have developed strategic
relationships with USIC and USC, semiconductor manufacturing facilities
founded by UMC in Taiwan. We plan to establish relationships with other
foundries to increase our supply of wafers. We cannot assure you that we will
be successful in establishing new relationships.

All of our products require silicon wafers which are currently supplied by
USIC and USC. Most of our wafers are currently manufactured using 0.28 micron
process technology. We have been informed by our manufacturing partners that
they are experiencing a significant increase in demand for wafers from other
customers, which, if this continues, may create capacity shortages, longer
lead-times and higher wafer prices. Any delays in wafer availability or
uncompetitive wafer pricing could limit our revenue growth and harm our
business, financial condition and results of operations.

We invested $51.2 million in USIC, which represents an ownership interest
of approximately 10% in the venture, and guarantees us a seat on its board of
directors and access to approximately 12.5% of the facility's wafer output.
USIC is expected to have a total wafer capacity of between 20,000 to 25,000
wafers per month by the end of 1999. We also receive a substantial number of
wafers each month from USC. In the second quarter of 1999, UMC announced plans
to merge the USC and USIC foundries into the UMC parent company. When the
merger is complete, which is currently expected to occur in late 1999 or early
2000, we will receive UMC shares in exchange for the USIC shares we currently
own. However, we will not have a seat on the board of directors

39
<PAGE>

of the combined company. We have received written assurances from the senior
management of UMC that it intends to continue to supply us the same wafer
capacity at the prices we currently enjoy under our agreements with USIC and
USC. However, we cannot assure you that we will be able to maintain our
current wafer capacity and competitive pricing arrangement in our future
supply negotiations with UMC.

Under the general terms of our wafer supply agreements with our foundry
partners, we are 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 a portion of the forecast,
generally three months, 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 months forecast. These requirements limit our
ability to react to any significant fluctuations in demand for our products.
For example, if customer demand falls below our forecast 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 reduced gross
margins. Conversely, if customer demand exceeds our forecasts, we may be
unable to obtain an adequate supply of wafers to fill customer orders, which
could result in lost sales and lower revenues. We are dependent upon our
foundry partners to deliver wafers and to maintain acceptable yields and
quality.

Although we believe that shipments of wafers from our foundry partners are
sufficient to meet our current demand for wafers, we believe additional
foundry capacity will be necessary to meet future demand for our products. Our
ability to increase our revenue and net income in future periods is dependent
on establishing additional wafer supply relationships and on receiving an
uninterrupted supply of wafers from our manufacturing partners.

Our reliance on third-party wafer manufacturers involves several material
risks, including shortages of manufacturing capacity, reduced control over
delivery schedules, quality assurance, production yields and costs. In
addition, as a result of our dependence on foreign wafer manufacturers, we are
subject to the risks of conducting business internationally, including
political risks and exchange rate fluctuations.

We have also developed manufacturing relationships with Motorola and NEC,
who supply microcontrollers for our products. The small form factor of this
single chip integrated controller is necessary to produce our CompactFlash
products, as well as our FlashChipSet products. To reduce our reliance on
Motorola as our sole source of microcontrollers, we have developed a strategic
manufacturing relationship with NEC as an alternate source of controller
chips. Any interruption in the supply of our controller chips from Motorola or
NEC could harm our business.

We are continuing to identify and establish second sources for our key
single and sole source component vendors and subcontractors, although we
cannot assure you that these efforts will be successful. During the next
several quarters, if the demand for our products exceeds our supplier's
ability to deliver needed components or subassemblies, we may be unable to
meet customer demand.

Assembly and Testing

We test wafers at our headquarters in Sunnyvale, California and at the UMC
facility in Taiwan. Substantially all of the tested wafers are then shipped to
our third party memory assembly subcontractors: Silicon Precision Industries
Co., Ltd. in Taiwan and Mitsui & Co., Ltd. in Japan.

During the second quarter of 1999, we transferred a substantial portion of
wafer testing, packaged memory final test, card assembly and card test to
Celestica, Inc. in China and Silicon Precision Industries in Taiwan. In the
third quarter of 1999, we will transfer additional production to these
subcontractors, and by the end of the year, we expect that they will be
assembling and testing a majority of our mature, high-volume products. This
increased reliance on subcontractors is expected to reduce the cost of such
operations and give us access to increased production capacity. During the
transition period, we will continue full operations at our Sunnyvale
production facility while simultaneously transferring testing equipment and
training personnel at our subcontractors. Any significant problems in this
complex transfer of operations may result in a disruption of production and a
shortage of products to meet customer demand in the second half of 1999 and
beyond.

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<PAGE>

Our customers have demanding requirements for quality and reliability. To
maximize quality and reliability, we monitor electrical and inspection data
from our wafer foundries and assembly subcontractors. We monitor wafer foundry
production for consistent overall quality, reliability and yield levels. Most
of our major component suppliers and subcontractors are ISO 9001 or 9002
certified.

Seagate Relationship

Our stockholder rights plan, adopted by our board of directors on April 21,
1997, permits Seagate Technology, Inc. to continue to hold its ownership
interest in our stock without triggering the provisions of the plan. As of
August 6, 1999, Seagate Technology owned approximately 22.5% of our common
stock. See "Selling Stockholder."

Research and Development

We believe that our future success will depend on the continued development
and introduction of new generations of flash memory chips, controllers and
products designed specifically for the flash data storage market. To date, we
have developed and put into production flash data storage products utilizing
semiconductor devices with the following memory capacity and geometries: 4
megabit (0.9 micron), 8 megabit (0.8 micron), 16 megabit (0.5 micron), 32
megabit (0.5, 0.4 and 0.35 micron), 64 megabit (0.35 micron), 64 megabit D2
flash (0.5 micron) and 80 megabit D2 flash (0.35 micron) and 128 megabit (0.28
micron). In addition, we have developed several generations of controllers for
these flash memory chips. In the third quarter of 1999, the majority of our
production output is shifting from the 64 megabit to the 128 megabit
technology. Because of the complexity of our products, we have periodically
experienced significant delays in the development and volume production ramp
up of our products. We cannot assure you that similar delays will not occur in
the future.

We began shipments of 128 megabit flash products in the second quarter of
1999 and expect to begin shipping customer samples of 256 megabit by the end
of 1999. To date, we have not successfully completed the qualification of the
256 megabit process and we cannot assure you that we will be able to
successfully commence volume production with this process at these foundries
in the future. We have periodically experienced delays in the development of
new processes at our foundry partners and such delays may occur again in the
future. Our foundry partners may also experience delays in establishing
development capabilities for new processes and these delays may harm our
business. We have also begun development of 512 megabit flash memory which is
expected to employ 0.18 micron process feature size. We do not expect any
material revenues from this 512 megabit research and development during the
next two years.

Research and development expenses were $11.2 million for the six months
ended June 30, 1999 and $18.2 million, $13.6 million, and $10.2 million for
the fiscal years ended December 31, 1998, 1997 and 1996, respectively. As of
June 30, 1999, we had 101 full-time employees engaged in research and
development activities, including 11 in our Israel design center. We expect to
increase our 1999 spending on process and design research and development to
accelerate future transitions into 0.28 micron, 0.24 micron, and 0.18 micron
geometries.

Sales and Distribution

We market our products using a direct sales organization, distributors and
manufacturers' representatives. We also sell products to various customers on
a private label basis and under the SanDisk brand in the retail channel. Our
sales efforts are organized as follows:

Direct Sales Force. Our direct sales force is located in Maitland, Florida;
Herndon, Virginia; Dublin, Ohio; Irvine, California; Sunnyvale, California;
Hannover, Germany; Paris, France; Amsterdam, the Netherlands;

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<PAGE>

Hong Kong; and Yokohama and Osaka, Japan. This organization supports major OEM
customers and our distribution and manufacturers' representative partners.

Distributors. In the United States, our products are sold through Arrow
Electronics Inc., Avnet Inc. and Bell MicroProducts Inc. to OEM customers for
a wide variety of industrial applications. In addition, we have distributors
in various regions of the world including Europe, Japan, Australia, New
Zealand, Taiwan, Korea and Hong Kong.

Independent Manufacturers' Representatives. In the United States, Canada
and Europe, our direct sales force is supported in our sales efforts by more
than 30 independent firms. These domestic and international firms receive a
commission for providing support to our direct sales force and distributors in
the industrial distribution, OEM and retail channels. The manufacturers'
representative companies sell our products as well as products from other
manufacturers.

OEMs. We provide private label products to OEMs in the United States and
the Pacific Rim.

Retail. We ship SanDisk brand name products directly to retail superstores,
office clubs and selected retail distributors. Our distributors include Ingram
Micro, Inc., Wynit, Inc., and Tech Data Corporation. Our products are
available in more than 11,000 stores worldwide. Eleven independent
manufacturers' representative firms are supporting our sales efforts in the
retail channel.

Customer Service and Technical Support

We provide customers with comprehensive product service and support. We
provide technical support through our application engineering group located in
the United States, Japan and Hong Kong. We work closely with our customers to
monitor the performance of our product designs, to provide application design
support and assistance and to gain insight into our customers' needs to help
in the definition of subsequent generations of products.

Our support package is generally offered with product sales and includes
technical documentation and application design assistance. In some cases, we
offer additional support which includes training, system-level design,
implementation and integration support and failure analysis. We believe that
tailoring the technical support level to our customers' needs is essential for
the success of product introductions and to achieve a high level of
satisfaction among our customers. We generally provide a one-year warranty on
our products.

Patents and Licenses

We rely on a combination of patents, trademarks, copyright and trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We vigorously protect and defend our
intellectual property rights. In the past, we have been involved in
significant disputes regarding our intellectual property rights and we believe
we may be involved in similar disputes in the future.

In 1988, we developed the concept of emulation of a hard disk drive with
flash solid-state memory. The first related patents were filed in 1988 by Dr.
Eli Harari and exclusively licensed to us. We currently own or have exclusive
rights to 85 United States and 18 foreign issued patents, and over 52 patent
applications pending in the United States, as well as 22 pending in foreign
patent offices. We intend to seek additional international and United States
patents on our technology. We believe some of our patents are fundamental to
the implementation of flash data storage systems, as well as the
implementation of D2 flash, independent of the flash technology used. However,
we cannot assure you that any patents held by us will not be invalidated, that
patents will be issued for any of our 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 our products can be sold
to provide meaningful protection or any commercial advantage to us.
Additionally, our competitors may be able to design their products around our
patents.

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<PAGE>

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which has resulted in
significant and often protracted and expensive litigation. To preserve our
intellectual property rights, we believe it may be necessary to initiate
litigation against one or more third parties, including but not limited to
those we have already notified of possible patent infringement. In addition,
one or more of these parties may bring suit against us. For example, in March
1998, we filed a complaint in federal court against Lexar Media, Inc. for
infringement of a fundamental flash disk patent. Lexar has disputed our claim
of patent infringement, claimed our patent is invalid or unenforceable and
asserted various counterclaims including unfair competition, violation of the
Lanham Act, patent misuse, interference with prospective economic advantage,
trade defamation and fraud. We have denied each of Lexar's counterclaims. In
July 1998, the federal district court denied Lexar's request to have the case
dismissed on the grounds we failed to perform an adequate prefiling
investigation. Discovery in the Lexar suit commenced in August 1998. On
February 22, 1999, the Federal District Court considered arguments and papers
submitted by the parties regarding the scope and proper interpretation of the
asserted claims in our patent at issue in the Lexar suit. On March 4, 1999,
the Federal District Court issued its ruling on the proper construction of the
claim terms in our patent. On July 30, 1999, we filed a motion for partial
summary judgment that Lexar CompactFlash and PC Cards contributorily infringe
our patent. This motion is scheduled to be heard in September 1999. In August
1999 we had a mandatory settlement meeting with Lexar. No settlement was
reached through this meeting. A trial date has not yet been set. We intend to
vigorously enforce our patents, but we cannot assure you that these efforts
will be successful.

In the event of an adverse result in any such litigation, we could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. Any litigation, whether as a plaintiff or as a
defendant, would likely result in significant expense to us and divert the
efforts of our technical and management personnel, whether or not such
litigation is ultimately determined in our favor. In addition, the results of
any litigation are inherently uncertain.

In the event we desire to incorporate third party technology into our
products or our products are found to infringe on others' patents or
intellectual property rights, we may be required to license such patents or
intellectual property rights. We may also need to license some or all of our
patent portfolio to be able to obtain cross-licenses to the patents of others.
We currently have patent cross-license agreements with several companies
including Hitachi, Intel, Samsung, Sharp and Toshiba. From time to time, we
have also entered into discussions with other companies regarding potential
cross-license agreements for our patents. However, we cannot assure you that
licenses will be offered or that the terms of any offered licenses will be
acceptable to us. If we obtain licenses from third parties, we may be required
to pay license fees or make royalty payments, which could reduce our gross
margins. If we are unable to obtain a license from a third party for
technology, we could incur substantial liabilities or be required to expend
substantial resources redesigning our products to eliminate the infringement.
In addition, we might be required to suspend the manufacture of products or
the use by our foundries of processes requiring the technology, We cannot
assure you that we would be successful in redesigning our products or that we
could obtain licenses under reasonable terms. Furthermore, any development or
license negotiations could require substantial expenditures of time and other
resources by us.

As is common in the industry, we agree to indemnify certain of our
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. We may from time to time be
engaged in litigation as a result of such indemnification obligations.

In our efforts to maintain the confidentiality and ownership of trade
secrets and other confidential information, we require all regular and
temporary employees, consultants, foundry partners, certain customers,
suppliers and partners to execute confidentiality and invention assignment
agreements upon commencement of a relationship with us and extending for a
period of time beyond termination of the relationship. We cannot assure you
that these agreements will provide meaningful protection for our trade secrets
or other confidential information in the event of unauthorized use or
disclosure of such information.

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Backlog

We manufacture and market primarily standard products. Sales are generally
made pursuant to standard purchase orders. We include in our backlog only
those customer orders for which we have accepted purchase orders and assigned
shipment dates within the upcoming twelve months. Since orders constituting
our current backlog are subject to changes in delivery schedules, backlog is
not necessarily an indication of future revenue. In addition, we cannot assure
you that the current backlog will necessarily lead to revenues in any future
period. As of December 31, 1998, our total backlog was $13.4 million compared
to $18.6 million at December 31, 1997. Bookings visibility continues to be
limited with a substantial majority of our quarterly product revenues coming
from orders that are received and fulfilled in the same quarter. We believe
that the current situation will continue until the new markets addressed by
our products enter a more predictable growth phase and demand begins to create
longer lead times.

Competition

We compete in an industry characterized by intense 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 foundry capacity, substantially greater financial, technical, marketing
and other resources, broader product lines and longer standing relationships
with customers. Our primary competitors include:

. storage flash chip producers, such as Hitachi, Samsung and Toshiba;

. socket flash, linear flash and component manufacturers, such as Advanced
Micro Devices, Atmel, Intel, Macronix, Micron Technology, Mitsubishi,
Sharp Electronics and ST Microelectronics; and

. module or card assemblers, such as Lexar Media, M-Systems, Pretec, Simple
Technology, SMART Modular Technologies, Sony Corporation, Kingston
Technology, Panasonic, Silicon Storage Technology, TDK Corporation,
Matsushita Battery and Viking Components, who combine controllers and
flash memory chips developed by others into flash storage cards.

We have entered into patent cross-license agreements with several of our
leading competitors including Hitachi, Intel, Sharp, Samsung and Toshiba.
Under these agreements, each party may manufacture and sell products that
incorporate technology covered by each party's patents 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.

Competing products have been introduced that promote industry standards
that are different from our CompactFlash and MultiMediaCard products,
including Toshiba's SmartMedia, Sony Corporation's Memory Stick, Sony's
standard floppy disk used for digital storage in their Mavica digital cameras,
Panasonic's Mega Storage cards, Iomega's Clik drive, a miniaturized
mechanical, removable disk drive and M-System's Diskonchip for embedded
storage applications. Each competing standard is mechanically and
electronically incompatible with CompactFlash and MultiMediaCard. If a
manufacturer of products such as digital cameras, designs in one of these
alternative competing standards, CompactFlash and MultiMediaCard will be
eliminated from use in that product.

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<PAGE>

Our MultiMediaCard products also have faced significant competition from
Toshiba's SmartMedia flash cards and we expect to face similarly significant
competition from Sony's Memory Stick. Although the Memory Stick is proprietary
to Sony, Sony has offered to license its Memory Stick to other companies. If
it is adopted and achieves widespread use in future products, sales of our
MultiMediaCard and CompactFlash products may decline.

We also face competition from products based on multilevel cell flash
technology such as Intel's 64Mbit chips and Hitachi's 256 megabit multilevel
cell flash chip. These products compete with our D2 multilevel cell flash
technology. Multilevel cell flash is a technological innovation 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. In
the second quarter of 1999, Intel announced their new 128 megabit multilevel
cell chip and Hitachi began shipping customer samples of CompactFlash cards
employing their new multilevel cell flash chip. In addition, Toshiba has begun
customer shipments of 32 megabyte SmartMedia cards employing their new 256
megabit flash chip. Although Toshiba has not incorporated multilevel cell
flash technology in their 256 megabit flash chip, their use of more advanced
lithographic design rules may allow them achieve a more competitive cost
structure than that of our 256 megabit D2 flash chip.

Furthermore, we expect to face competition from 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.

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

. price and quality;

. product performance and availability;

. success in developing new applications for system flash technology;

. adequate foundry capacity;

. efficiency of production;

. timing of new product announcements or introductions by us, our customers
and our competitors;

. the ability of our competitors to incorporate their flash data storage
systems into their customers' products;

. the number and nature of our competitors in a given market;

. successful protection of intellectual property rights; and

. general market and economic conditions.

We believe that we compete favorably with other companies with respect to
these factors. We cannot assure you that we will be able to compete
successfully against current and future competitors or that competitive
pressures faced by us will not materially adversely affect our business,
financial condition or results of operations.

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Employees

As of June 30, 1999, we had 486 full-time employees and 158 temporary
employees, including 101 in research and development, 81 in sales and
marketing, 65 in finance and administration and 397 in operations. Our success
is dependent on our retention of key technical, sales and marketing employees
and members of senior management. Additionally, our success is contingent on
our ability to attract and recruit skilled employees in a very competitive
market. None of our employees are represented by a collective bargaining
agreement and we have never experienced any work stoppage. We believe that our
employee relations are good.

Legal Proceedings

In March 1988, we filed a complaint in federal court against Lexar for
infringement of a fundamental flash disk patent. Lexar disputed this claim and
asserted that our patent was invalid or unenforceable, as well as asserting
various counterclaims including unfair competition, violation of the Lanham
Act, patent misuse, interference with prospective economic advantage, trade
defamation and fraud. We have denied all of these counterclaims. In July 1998,
the Federal District Court denied Lexar's request to have the case dismissed,
Discovery in this suit began in August 1998. On February 22, 1999, the Federal
District Court considered arguments and papers submitted by the parties
regarding the scope and proper interpretation of the asserted claims in our
patent at issue in the Lexar suit. On March 4, 1999, the Federal District
Court issued its ruling on the proper construction of the claim terms in our
patent. On July 30, 1999, we filed a motion for partial summary judgment that
Lexar CompactFlash and PC Cards contributorily infringe our patent. This
motion is scheduled to be heard in September 1999. In August 1999, we had a
mandatory settlement meeting with Lexar. No settlement was reached through
this meeting. A trial date has not yet been set.

In May 1999, Lexar filed a complaint against us for claims of unfair
competition, false advertising, trade libel and intentional and negligent
interference with prospective business advantage. On July 1, 1999, we filed a
motion to dismiss the Lexar complaint. Also, in July 1999, Lexar filed a
motion for preliminary injunction seeking to stop certain advertising
practices that Lexar alleges were misleading. We intend to vigorously oppose
this motion. Both motions are scheduled to be heard in September 1999. We
cannot assure you that these motions or claims will be decided in our favor.

Compaq Corporation has opposed in several countries, including the United
States, our attempting to register CompactFlash as a trademark. We do not
believe that our failure to obtain registration for the CompactFlash mark will
materially harm our business.

We have no other material legal proceedings.

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MANAGEMENT

The executive officers and directors of SanDisk, and their ages as of
August 13, 1999, are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and
Dr. Eli Harari.............. 53 Director
Irwin Federman(2)........... 63 Chairman of the Board of Directors
Cindy L. Burgdorf........... 51 Chief Financial Officer, Senior Vice
President, Finance and Administration and
Secretary
Leon Malmed................. 61 Senior Vice President, Marketing and Sales
Daniel Auclair.............. 52 Senior Vice President, Business Development
and Intellectual Property
Ralph Hudson................ 54 Senior Vice President, Worldwide Operations
Sanjay Mehrotra............. 41 Senior Vice President, Engineering
Jocelyn Scarborough......... 54 Vice President, Human Resources
William V. Campbell(1)...... 58 Director
Catherine P. Lego(1)(2)..... 42 Director
Dr. James D. Meindl......... 65 Director
Alan F. Shugart(1).......... 68 Director
</TABLE>
- --------
(1) Member of Compensation Committee

(2) Member of Audit Committee

Dr. Eli Harari, the founder of SanDisk, has served as President and Chief
Executive Officer and as a director of SanDisk since June 1988. Dr. Harari
founded Wafer Scale Integration, a privately held semiconductor company, in
1983 and was its President and Chief Executive Officer from 1983 to 1986, and
Chairman and Chief Technical Officer from 1986 to 1988. From 1973 to 1983, Dr.
Harari held various management positions with Honeywell Inc., Intel and Hughes
Aircraft Microelectronics. Dr. Harari holds a Ph.D. degree in Solid State
Sciences from Princeton University.

Mr. Irwin Federman has served as Chairman of the Board of Directors since
September 1988. Since April 1990, Mr. Federman has been a general partner in
U.S. Venture Partners, a venture capital firm. From 1988 to 1990, he was a
Managing Director of Dillon Read & Co., an investment banking firm, and a
general partner in its venture capital affiliate, Concord Partners. From
August 1987 to December 1987, Mr. Federman was Vice Chairman of Advanced Micro
Devices, Inc., which acquired Monolithic Memories, a corporation engaged in
the production of integrated circuits, with which he was affiliated for 16
years. From 1979 to 1987, Mr. Federman was President of Monolithic Memories.
Mr. Federman served as Chairman of the Semiconductor Industry Association from
1986 to 1988. He is also a director of Komag Incorporated, Western Digital
Corporation, NeoMagic, Inc., Check Point Software Technologies, Inc., MMC
Networks, Inc. and various private corporations. Mr. Federman holds a
B.S. degree from Brooklyn College.

Ms. Cindy L. Burgdorf joined SanDisk as Chief Financial Officer, Vice
President, Finance and Secretary in June 1994 and has served as Senior Vice
President of Finance and Administration since July 1995. From 1992 to 1994,
Ms. Burgdorf was Vice President of Operations Administration and Vice
President of Materials and Planning at Maxtor Corp. From 1978 to 1992, Ms.
Burgdorf held various financial management positions including Corporate
Controller, Group Controller of the Components Group and director of the
worldwide customer satisfaction program at Intel. Ms. Burgdorf is a Certified
Public Accountant and holds a B.S. degree in Business Administration from San
Jose State University.

Mr. Leon Malmed joined SanDisk as Vice President, Worldwide Marketing and
Sales in December 1992 and has served as Senior Vice President of Marketing
and Sales since July 1995. From 1991 to 1992, Mr. Malmed was Executive Vice
President of Marketing/Sales at SyQuest Technology, Inc., a manufacturer of

47
<PAGE>

removable-cartridge disk drives. From 1990 to 1991, Mr. Malmed was Senior Vice
President of Sales and Marketing at Prairetek, Inc., a manufacturer of disk
drives. From 1983 to 1990, Mr. Malmed held various management positions at
Maxtor. Mr. Malmed holds a B.S. degree in Mechanical Engineering from the
University of Paris.

Mr. Daniel Auclair has served as Vice President of Systems Engineering from
1990 to June 1993, Vice President of Engineering and Technology from June 1993
to July 1995, Senior Vice President of Operations and Technology from July
1995 to January 1998 and has served as Senior Vice President of Business
Development and Intellectual Property since January 1998. From 1988 to 1990,
Mr. Auclair was Vice President of Engineering at Anamartic, a company that
utilizes wafer scale technology to build DRAM mass storage systems. From 1984
to 1988, Mr. Auclair was Vice President and General Manager of the OMTI
division of Scientific MicroSystems, a supplier of disk controllers and disk
controller chips to the disk drive industry. Mr. Auclair holds a B.S. degree
in Engineering Physics from the University of Maine and an M.S. degree in
Computer Science from the University of Santa Clara.

Mr. Ralph Hudson joined SanDisk as Senior Vice President of World Wide
Operations in August of 1998. He was previously President of RJ Hudson
Consulting from 1997 to 1998, Vice President of Operations for
USRobotics/3Com's Network Work Systems Division from 1996 to 1997, Senior Vice
President and General Manager for Bell and Howell from 1993 to 1996 and held
various senior management positions with Data General from 1977 to 1993 where
he was Vice President of World Wide Operations from 1989 to 1993. Prior to
this, he held various management and senior management positions with NCR
Corporation from 1967 to 1977. Mr. Hudson holds a B.S. degree in Industrial
Engineering from Allied Institute of Technology.

Mr. Sanjay Mehrotra is a co-founder of SanDisk, has served as Director of
Memory Design and Product Engineering from November 1988, to June 1995; Vice
President of Product Development from July 1995 to July 1999; and as Senior
Vice President of Engineering since July 1999. From January 1980 until
November 1988, Mr. Mehrotra worked at Intel Corporation, Seeq Technology,
Integrated Device Technology and Atmel Corporation in the area of design
engineering and engineering management, mostly in EPROM and EEPROM product
development. Mr. Mehrotra holds B.S. and M.S. degrees in Electrical
Engineering and Computer Science from the University of California at
Berkeley.

Ms. Jocelyn Scarborough joined SanDisk as Vice President of Human Resources
in March 1999. She was previously President of Scarborough and Associates from
1997 to 1999 and Vice President of Human Resources for the California State
Automobile Association from 1994 to 1997. From 1973 to 1993, Ms. Scarborough
held various management positions, including Director of Human Resources and
Organization Development, at Digital Equipment Corporation. Ms. Scarborough
holds a B.S. degree in Psychology from Gordon College.

Mr. William V. Campbell has served as a director of SanDisk since October
1993. Mr. Campbell is Chairman of the Board of Directors of Intuit Inc. and
was President and Chief Executive Officer and a director of Intuit Inc. from
1994 to 1998. From 1991 to 1993, Mr. Campbell was President and Chief
Executive Officer of GO Corporation, a pen-based computing software company.
From 1987 to 1991, Mr. Campbell was President and Chief Executive Officer of
Claris Corporation, a software subsidiary of Apple Computer, Inc. Mr. Campbell
holds both B.A. and M.A. degrees in Economics from Columbia University.

Ms. Catherine P. Lego has served as a director of SanDisk since March 1989.
Ms. Lego has been self-employed with her consulting firm, Lego Ventures, since
1992. From 1981 to 1992, Ms. Lego held various positions with Oak Investment
Partners, a venture capital firm and was general partner of several of the
venture capital partnerships affiliated with Oak Investment Partners. Ms. Lego
also serves as a director of Uniphase Corporation, Zitel Corporation and
various private corporations. Ms. Lego is a Certified Public Accountant and
holds a B.A. degree in Economics and Biology from Williams College and an M.S.
degree in Accounting from the New York University Graduate School of Business.

Dr. James D. Meindl has served as a director of SanDisk since March 1989.
Dr. Meindl has been the Joseph M. Pettit Chair Professor of Microelectronics
at the Georgia Institute of Technology in Atlanta, Georgia

48
<PAGE>

since 1993. From 1986 to 1993, Dr. Meindl served as Senior Vice President for
Academic Affairs and Provost of Rensselaer Polytechnic Institute. From 1967 to
1986, he was the John M. Fluke Professor of Electrical Engineering at Stanford
University. Dr. Meindl serves as a director of Zoran, Inc. and Digital
Microwave. Dr. Meindl holds B.S., M.S. and Ph.D. degrees in Electrical
Engineering from Carnegie-Mellon University.

Mr. Alan F. Shugart has served as a director of SanDisk since January 1993.
Mr. Shugart founded Seagate Technology, Inc. in 1979, building the company
into the world's largest independent manufacturer of disk drives and related
components. In 1998, he left Seagate to establish Al Shugart International, a
management/consultant company focused on helping entrepreneurs launch new
enterprises. Mr. Shugart also serves as a director of Cypress Semiconductor
Corp., Valence Technology, Inktomi, and Sarnoff Digital Communications. Mr.
Shugart holds a B.S. degree in Engineering/Physics from the University of
Redlands.

Thomas F. Mulvaney resigned from our board of directors on August 13, 1999.

49
<PAGE>

SELLING STOCKHOLDER

The following table provides certain information with respect to Seagate
Technology, Inc. and the number of shares of common stock currently owned, to
be offered and to be owned by Seagate Technology after this offering. The
number of shares of common stock owned by Seagate Technology before and after
the offering is based on the number of shares owned by Seagate Technology as
of August 6, 1999.

<TABLE>
<CAPTION>
Before the Offering After the Offering
------------------------ ------------------------
Shares Percent of Shares Shares Percent of
Beneficially Shares Being Beneficially Shares
Name and Address Owned Outstanding Offered Owned Outstanding
- ---------------- ------------ ----------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Seagate Technology,
Inc. .................. 6,141,374 22.5% 250,000
920 Disc Drive
Scotts Valley, CA 95067
</TABLE>

In addition, concurrently with this offering, Seagate Technology is
entering into a prepaid forward contract with the SanDisk PEPS Trust covering
the sale of up to shares of common stock ( shares if the underwriters'
over-allotment option is exercised in full). The forward contract is being
entered into in connection with the public offering by the trust of $200
million ($230 million if the underwriters' over-allotment option is exercised
in full) of Premium Exchangeable Participating Shares, or PEPS, which is equal
to the maximum number of shares deliverable under the forward contract.
Pursuant to the terms of the forward contract and the PEPS, on , the
PEPS will be exchangeable for a number of shares of common stock based on a
formula and Seagate Technology will have the option to deliver cash in lieu of
shares of common stock. Assuming the delivery by Seagate Technology of the
maximum number of shares of common stock on the exchange date, following the
exchange date, Seagate Technology would beneficially own shares of common
stock, or % of the number of shares outstanding as of the date hereof.

50
<PAGE>

UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS

The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock
applicable to Non-U.S. Holders.

A "Non-U.S. Holder" is generally a person other than:

. an individual who is a citizen or resident of the United States for U.S.
federal income tax purposes;

. a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any
subdivision thereof;

. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source; and

. a trust subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons.

The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, and
administrative and judicial interpretations as of the date of this prospectus,
all of which are subject to change, possibly with retroactive effect. The
following summary is for general information. If you are a Non-U.S. Holder,
you should consult a tax advisor on the U.S. federal tax consequences of
holding and disposing of our common stock with respect to your particular
circumstances (e.g. if you are a former citizen or resident of the United
States), as well as any tax consequences under the laws of any U.S. state or
local or non-U.S. taxing jurisdiction.

Dividends

Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or a lower
rate that an applicable income tax treaty may specify. Non-U.S. Holders should
consult their tax advisors on their entitlement to benefits under a relevant
income tax treaty.

Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the U.S. are generally subject to U.S. federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the 30% withholding tax if the Non-U.S. Holder files the
appropriate IRS form with the withholding agent. Any U.S. trade or business
income received by a Non-U.S. Holder that is a corporation may, under specific
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or a lower rate that an applicable income tax treaty may specify.

Dividends paid prior to January 1, 2001 to an address in a foreign country
are presumed, absent actual knowledge to the contrary, to be paid to a
resident of that country for purposes of the withholding discussed above and
for purposes of determining the applicability of an income tax treaty rate.
For dividends paid after December 31, 2000:

. a Non-U.S. Holder of common stock that claims the benefit of an income
tax treaty rate generally will be required to satisfy applicable
certification and other requirements;

. in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership, and the partnership will be required to provide a U.S.
taxpayer identification number and other information; and

. look-through rules will apply to tiered partnerships.

A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit
of any excess amounts withheld by filing an appropriate claim for a refund
with the IRS.

51
<PAGE>

Disposition of Common Stock

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:

. the gain is effectively connected with a U.S. trade or business, in which
case the branch profits tax may also apply to a corporate Non-U.S.
Holder;

. the Non-U.S. Holder is an individual who is present in the United States
for 183 or more days in the taxable year of the disposition and meets
other requirements; or

. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the five-
year period ending on the date of disposition and the Non-U.S. Holder's
holding period for the common stock.

The tax relating to stock in a "U.S. real property holding corporation"
does not apply to a Non-U.S. Holder whose holdings, actual and constructive,
at all times during the applicable period, amount to 5% or less of the common
stock, provided that the common stock is regularly traded on an established
securities market. Generally, a corporation is a "U.S. real property holding
corporation" if the fair market value of its "U.S. real property interests"
equals or exceeds 50% of the sum of the fair market value of its worldwide
real property interests and its other assets used or held for use in a trade
or business. We believe that we have not been, are not, and do not anticipate
becoming, a "U.S. real property holding corporation" for U.S. federal income
tax purposes.

Federal Estates Taxes

Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax treaty provides otherwise.

Information Reporting Requirements And Backup Withholding Tax

We must report annually to the IRS and to each Non-U.S. Holder the amount
of the dividends paid to that holder and any tax withheld with respect to
those dividends. The information reporting requirements apply regardless of
whether withholding is required. Copies of the information returns reporting
those dividends and withholding may also be made available, under an
applicable income tax treaty or agreement, to the tax authorities in the Non-
U.S. Holder's country of residence.

Under specific circumstances, the IRS requires information reporting and
backup withholding at a rate of 31% on specific payments on common stock.
Under currently applicable law, Non-U.S. Holders of common stock generally
will be exempt from information reporting and backup withholding on dividends
paid prior to January 1, 2001 to an address outside the U.S. For dividends
paid after December 31, 2000, however, a Non-U.S. Holder of common stock that
fails to certify its Non-U.S. Holder status under applicable Treasury
regulations may be subject to backup withholding at a rate of 31% on payments
of dividends.

Non-U.S. Holders should consult their own tax advisors on the application
of information withholding and backup withholding to them in their particular
circumstances (including, upon their disposition of common stock).

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded
or credited against the holder's U.S. federal income tax liability, if any, if
the holder provides the required information to the IRS.

52
<PAGE>

UNDERWRITERS

We intend to offer our common stock in the United States through a number
of U.S. underwriters as well as elsewhere through a number of international
underwriters. Under the terms and subject to the conditions of the
underwriting agreement dated the date of this prospectus, the U.S.
underwriters named below, for whom Morgan Stanley & Co. Incorporated,
BancBoston Robertson Stephens Inc., First Union Capital Markets Corp. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as U.S.
representatives, and the international underwriters named below, for whom
Morgan Stanley & Co. International Limited, BancBoston Robertson Stephens
International Limited and Merrill Lynch International are acting as
international representatives, have severally agreed to purchase, and we and
the selling stockholder have severally agreed to sell to them, the respective
number of shares of our common stock set forth opposite the names of the
underwriters below:

<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
U.S. underwriters:
Morgan Stanley & Co. Incorporated..............................
BancBoston Robertson Stephens Inc..............................
First Union Capital Markets Corp...............................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
---------

Subtotal..................................................... 2,400,000
---------

International underwriters:
Morgan Stanley & Co. International Limited.....................
BancBoston Robertson Stephens International Limited............
Merrill Lynch International....................................
---------

Subtotal..................................................... 600,000
---------

Total........................................................ 3,000,000
=========
</TABLE>

The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively
referred to as the underwriters and the representatives, respectively. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of our common stock
offered hereby are subject to the approval of specific legal matters by their
counsel and to other conditions. The underwriters are obligated to purchase
all of the shares of our common stock except those covered by the U.S.
underwriters' over-allotment option described below if any are purchased.

The underwriters initially propose to offer part of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus. The underwriters may also offer the shares to securities dealers
at a price that represents a concession not in excess of $ per share under
the public offering price. Any underwriter may allow and dealers may reallow,
a concession not in excess of $ per share to other underwriters or to
securities dealers. After the initial offering of the shares, the offering
price and other selling terms may from time to time be changed by the
representatives.

We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus to purchase up to an aggregate of 450,000
additional shares at the public offering price set forth on the cover page of
this prospectus, less underwriting discounts and commissions. The U.S.
underwriters may exercise this

53
<PAGE>

option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares offered pursuant to this
prospectus. To the extent this option is exercised, each U.S. underwriter will
become obligated, subject to specified conditions, to purchase about the same
percentage of additional shares as the number set forth next to the U.S.
underwriter's name in the preceding table bears to the total number of shares
set forth next to the names of all U.S. underwriters in the preceding table.

Our common stock is listed on the Nasdaq National Market under the symbol
"SNDK."

We, the selling stockholder and each of our executive officers and
directors have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, we will not, during
the period ending 90 days after the date of this prospectus:

. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or

. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;

whether any transaction described above is to be settled by delivery of shares
of common stock or other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

. the sale of the shares to the underwriters;

. the issuance by us of shares of common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
of this prospectus of which the underwriters have been advised in
writing;

. the granting of stock options and/or restricted stock units pursuant to
our existing employee benefit plans and to directors in connection with
their initial appointment to the board of directors, provided that these
options, other than director options, do not become exercisable and these
units do not vest during the 90-day period;

. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market or other transactions
after the completion of the offering; and

. sales of up to an aggregate of 250,000 shares of our common stock by our
executive officers and directors.

In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of common stock. Specifically, the underwriters may agree to sell or
allot more shares than the 3,000,000 shares of our common stock which we and
the selling stockholder have agreed to sell to them. This over-allotment would
create a short position in our common stock for the underwriters' account. To
cover any over-allotments or to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the common stock in the
offering, if the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. The underwriters have reserved the right to reclaim selling
concessions in order to encourage underwriters and dealers to distribute the
common stock for investment, rather than for short-term profit taking.
Increasing the proportion of the offering held for investment may reduce the
supply of common stock available for short-term trading. Any of these
activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage
in these activities and may end any of these activities at any time.

We, the selling stockholder and the underwriters have agreed to indemnify
each other against a variety of liabilities, including liabilities under the
Securities Act.

54
<PAGE>

LEGAL MATTERS

The validity of the shares of common stock offered by us hereby will be
passed upon for us by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
Members of Brobeck, Phleger & Harrison LLP beneficially own 1,901 shares of
our common stock. Certain legal matters will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York. Certain legal
matters will be passed upon for the selling stockholder by Wilson, Sonsini,
Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The consolidated financial statements of SanDisk Corporation at December
31, 1997 and 1998 and for each of the three years in the period ended December
31, 1998 appearing in this Prospectus and Registration Statement and in
SanDisk Corporation's Annual Report (Form 10-K/A) for the year ended December
31, 1998, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and as set forth in
their report included in the Form 10-K/A and incorporated herein by reference.
Such consolidated financial statements are included herein and incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.

55
<PAGE>

AVAILABLE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-3 to register the shares of common stock being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the
registration statement. For further information about us and the shares of
common stock offered in this prospectus, you should refer to the registration
statement and its exhibits and our other SEC filings. You may read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference rooms. Our SEC filings
are also available to the public from the SEC's website at http://www.sec.gov.

The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus. We incorporate by reference the
documents listed below.

1. Our Annual Report on Form 10-K for the fiscal year ended December 31,
1998.

2. Our Quarterly Reports on Form 10-Q for the periods ended June 30,
1999 and March 31, 1999.

3. Our Current Report on Form 8-K filed January 8, 1999.

4. The description of our common stock contained in our Registration
Statement on Form 8-A filed under Section 12 of the Exchange Act with the
Commission on September 9, 1995, including any amendment or report updating
such description.

5. The description of stockholder rights contained in our Registration
Statement on Form 8-A filed with the Commission on April 28, 1997, as
amended on May 15, 1997.

If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct
request for such copies to SanDisk Corporation, Chief Financial Officer, 140
Caspian Court, Sunnyvale, California, 94089, (408) 542-0500.

56
<PAGE>

SANDISK CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

Contents

<TABLE>
<CAPTION>
Page
----
<S> <C>
For Years Ended December 31, 1996, 1997 and 1998 (audited)
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
For the Six Months Ended June 30, 1998 and 1999 (unaudited)
Condensed Consolidated Balance Sheets June 30, 1999 and December 31,
1998.................................................................... F-22
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1999 and 1998....................... F-23
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998................................. F-24
Notes to Condensed Consolidated Financial Statements..................... F-25
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
SanDisk Corporation

We have audited the accompanying consolidated balance sheets of SanDisk
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SanDisk Corporation at December 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

/s/ Ernst & Young LLP
San Jose, California
January 22, 1999

F-2
<PAGE>

SANDISK CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 15,384 $ 20,888
Short-term investments..................................... 119,074 114,037
Accounts receivable, net of allowance for doubtful accounts
of $1,069 in 1998 and $756 in 1997........................ 20,400 19,352
Inventories................................................ 8,922 15,648
Deferred tax assets........................................ 15,900 17,060
Prepaid expenses and other current assets.................. 6,694 1,406
-------- --------
Total current assets....................................... 186,374 188,391
Property and equipment, net.................................. 17,542 15,892
Investment in foundry........................................ 51,208 40,284
Deposits and other assets.................................... 617 900
-------- --------
Total assets................................................. $255,741 $245,467
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 6,938 $ 14,111
Accrued payroll and related expenses....................... 3,768 4,674
Income taxes payable....................................... 4,668 3,812
Other accrued liabilities.................................. 5,077 3,529
Deferred revenue........................................... 27,452 27,967
-------- --------
Total current liabilities.................................. 47,903 54,093
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares: 4,000,000
Issued: none............................................. -- --
Common stock, $0.001 par value
Authorized shares: 40,000,000
Issued and outstanding: 26,628,110 in 1998 and 25,865,229
in 1997................................................. 27 26
Capital in excess of par value............................. 186,093 181,895
Retained earnings.......................................... 21,247 9,411
Accumulated other comprehensive income..................... 471 42
-------- --------
Total stockholders' equity................................... 207,838 191,374
-------- --------
Total liabilities and stockholders' equity................... $255,741 $245,467
======== ========
</TABLE>

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

F-3
<PAGE>

SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenues
Product............................................ $103,190 $105,675 $89,599
License and royalty................................ 32,571 19,578 8,000
-------- -------- -------
Total revenues....................................... 135,761 125,253 97,599
Cost of revenues..................................... 80,311 72,280 58,707
-------- -------- -------
Gross profits........................................ 55,450 52,973 38,892
Operating expenses
Research and development........................... 18,174 13,577 10,181
Sales and marketing................................ 16,933 12,568 8,792
General and administrative......................... 7,533 7,148 7,445
-------- -------- -------
Total operating expenses............................. 42,640 33,293 26,418
-------- -------- -------
Operating income..................................... 12,810 19,680 12,474
Interest and other income, net....................... 5,681 3,660 3,154
Interest expense..................................... -- -- (3)
-------- -------- -------
Income before taxes.................................. 18,491 23,340 15,625
Provision for income taxes........................... 6,655 3,501 1,140
-------- -------- -------
Net income........................................... $ 11,836 $ 19,839 $14,485
======== ======== =======
Net income per share
Basic.............................................. $ 0.45 $ 0.87 $ 0.65
Diluted............................................ $ 0.43 $ 0.79 $ 0.60
Shares used in computing net income per share
Basic.............................................. 26,298 22,880 22,162
Diluted............................................ 27,672 24,970 24,206
</TABLE>

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

F-4
<PAGE>

SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
Accumulated
Common Stock Capital In Other Total
------------- Excess of Retained Comprehensive Stockholders'
Shares Amount Par Value Earnings Income Equity
------ ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 22,005 $22 $ 97,272 $(24,913) $ -- $ 72,381
Net income.............. -- -- -- 14,485 -- 14,485
Unrealized gain on
available for sale
securities............. -- -- -- -- 5 5
--------
Comprehensive income.... 14,490
--------
Exercise of stock
options for cash....... 168 -- 95 -- -- 95
Issuance of stock
pursuant to employee
stock purchase plan.... 92 -- 783 -- -- 783
Exercise of common stock
warrants............... 62 -- -- -- -- --
Income tax benefit from
stock options
exercised.............. -- -- 61 -- -- 61
------ --- -------- -------- ---- --------
Balance at December 31,
1996................... 22,327 22 98,211 (10,428) 5 87,810
Net income.............. -- -- -- 19,839 -- 19,839
Unrealized gain on
available for sale
securities............. -- -- -- -- 37 37
--------
Comprehensive income.... 19,876
--------
Exercise of stock
options for cash....... 357 1 583 -- -- 584
Issuance of stock
pursuant to employee
stock purchase plan.... 126 -- 1,189 -- -- 1,189
Exercise of common stock
warrants............... 55 -- -- -- -- --
Sale of common stock,
net of issuance costs.. 3,000 3 79,414 -- -- 79,417
Income tax benefit from
stock options
exercised.............. -- -- 2,498 -- -- 2,498
------ --- -------- -------- ---- --------
Balance at December 31,
1997................... 25,865 26 181,895 9,411 42 191,374
Net income.............. -- -- -- 11,836 -- 11,836
Unrealized gain on
available for sale
securities............. -- -- -- -- 429 429
--------
Comprehensive income.... 12,265
--------
Exercise of stock
options for cash....... 630 -- 930 -- -- 930
Issuance of stock
pursuant to employee
stock purchase plan.... 130 1 1,474 -- -- 1,475
Exercise of common stock
warrants............... 3 -- -- -- -- --
Income tax benefit from
stock options
exercised.............. -- -- 1,761 -- -- 1,761
Compensation expense
related to modification
of stock options....... -- -- 33 -- -- 33
------ --- -------- -------- ---- --------
Balance at December 31,
1998................... 26,628 $27 $186,093 $ 21,247 $471 $207,838
====== === ======== ======== ==== ========
</TABLE>

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

F-5
<PAGE>

SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 11,836 $ 19,839 $ 14,485
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 5,839 3,985 2,347
Deferred tax................................ 1,160 (16,055) (1,000)
Compensation related to modification of
stock option terms......................... 33 -- --
Changes in assets and liabilities:
Accounts receivable....................... (1,048) (7,467) (3,457)
Inventory................................. 6,726 (6,018) 781
Prepaid expenses and other current
assets................................... (5,288) (1,122) (250)
Deposits and other assets................. 283 (9) (271)
Accounts payable.......................... (7,174) 6,516 (1,458)
Accrued payroll and related expenses...... (906) 1,817 911
Income taxes payable...................... 856 1,997 1,441
Other accrued liabilities................. 1,548 990 149
Deferred revenue.......................... (515) 22,315 (253)
--------- --------- --------
Total adjustments........................... 1,514 6,949 (1,060)
--------- --------- --------
Net cash provided by operating activities..... 13,350 26,788 13,425
--------- --------- --------
Cash flows from investing activities:
Purchases of short-term investments........... (137,822) (148,954) (47,977)
Proceeds from short-term investments.......... 133,214 89,919 34,157
Acquisition of property and equipment......... (7,489) (9,592) (8,378)
Investment in foundry......................... (10,923) (40,284) --
--------- --------- --------
Net cash used in investing activities......... (23,020) (108,911) (22,198)
--------- --------- --------
Cash flows from financing activities:
Sale of common stock and warrants, net of
repurchases.................................. 4,166 83,688 939
Principal payments under capital leases....... -- -- (98)
--------- --------- --------
Net cash provided by financing activities..... 4,166 83,688 841
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................. (5,504) 1,565 (7,932)
--------- --------- --------
Cash and cash equivalents at beginning of
year......................................... 20,888 19,323 27,255
--------- --------- --------
Cash and cash equivalents at end of year...... $ 15,384 $ 20,888 $ 19,323
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest...... $ -- $ -- $ 3
Cash paid for income taxes.................... $ 8,277 $ 15,172 $ 451
</TABLE>

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

F-6
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization and Summary of Significant Accounting Policies

Organization and Nature of Operations

SanDisk Corporation (the Company) was incorporated in Delaware on June 1,
1988, to design, manufacture, and market industry-standard, solid-state mass
storage products using proprietary, high-density flash memory technology. The
Company operates in one segment and serves customers in the industrial,
communications, highly portable computing and consumer electronics markets.
Principal geographic markets for the Company's products include the United
States, Japan, Europe and the Far East.

Supplier and Customer Concentrations

A limited number of customers historically have accounted for a substantial
portion of the Company's revenues. In 1998, one customer accounted for more
than 10% of the Company's total revenues. In 1997, no single customer
accounted for greater than 10% of total revenues. During 1996, one customer
accounted for approximately 26% of the Company's total revenues. Sales of the
Company's products will vary as a result of fluctuations in market demand.
Further, 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 technological obsolescence.

Certain of the raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. For example, all of
the Company's products require silicon wafers which are currently supplied by
United Semiconductor, Inc. ("USIC") and United Silicon Corporation ("USC"),
subsidiaries of United Microelectronics Corporation ("UMC") in Taiwan and by
Matsushita in Japan. The Company is dependent on its foundries to allocate to
the Company a portion of their foundry capacity sufficient to meet the
Company's needs, to produce 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.

Under each of the Company's wafer supply agreements, 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 percentage from the previous
month's forecast. These restrictions limit the Company's ability to react to
significant 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 Company has taken write downs for potential excess
inventory purchased prior to the receipt of customer orders and may be
required to do so in the future. These adjustments decrease gross margins in
the quarter reported and have resulted, and could in the future result in
fluctuations in gross margins on a quarter to quarter basis. 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. Additionally, if the Company is unable to obtain
scheduled quantities of wafers from any foundry with acceptable yields, the
Company's business, financial condition and results of operations could be
negatively impacted.

In addition, certain key components, are purchased from single source
vendors for which alternative sources are currently not available. Shortages
could occur in these essential materials due to an interruption of supply or
increased demand in the industry. If the Company were unable to procure
certain of such materials, it would be required to reduce its manufacturing
operations which could have a material adverse effect upon its results of
operations.

F-7
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

The Company's fiscal year ends on the Sunday closest to December 31. Fiscal
year 1998 ended on December 27, 1998. Fiscal years 1997 and 1996 ended on
December 28, 1997 and December 29, 1996, respectively. For ease of
presentation, the accompanying financial statements have been shown as ending
on the last day of the calendar month.

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.

Foreign Currency Transactions

Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts (principally cash, accounts
receivable and liabilities) are remeasured using the foreign exchange rate at
the balance sheet date. Operations accounts and nonmonetary balance sheet
accounts are remeasured at the rate in effect at the date of transaction. The
effects of foreign currency remeasurement are reported in current operations.
See "Note 2."

Reclassifications

Certain reclassifications, none of which affected net income, have been
made to prior year's amounts to conform to the current year's presentation.

Cash Equivalents and Short-Term Investments

Cash equivalents consist of short-term, highly liquid financial instruments
with insignificant interest rate risk that are readily convertible to cash and
have maturities of three months or less from the date of purchase. Cash
equivalents and short-term investments consist of money market funds, taxable
commercial paper, certificates of deposit, U.S. government agency obligations,
corporate/municipal notes and bonds with high-credit quality, money market
preferred stock and auction rate preferred stock. The fair market value, based
on quoted market prices, of cash equivalents and short-term investments is
substantially equal to their carrying value at December 31, 1998 and 1997.

Under FAS 115, management classifies investments as available-for-sale at
the time of purchase and periodically reevaluates such designation. Debt
securities classified as available-for-sale are reported at fair value.
Unrecognized gains or losses on available-for-sale securities are included, in
equity until their disposition. Realized gains and losses and declines in
value judged to be other than temporary on available-for-sale securities are
included in interest income. The cost of securities sold is based on the
specific identification method.

F-8
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

All cash equivalents and short-term investments as of December 31, 1998 and
1997 are classified as available-for-sale securities and consist of the
following:

<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Cash equivalents:
Money market fund.......................................... $ 1,389 $ 115
Commercial paper........................................... 9,178 2,000
Municipal notes............................................ -- 5,800
U.S. government agency obligations......................... -- 694
Corporate notes/bonds...................................... 2,251 1,650
-------- --------
Total.................................................... $ 12,818 $ 10,259
======== ========
Short term investments:
U.S. government agency obligations......................... $ -- $ 7,463
Municipal notes/bonds...................................... 91,073 54,059
Corporate notes/bonds...................................... 12,550 24,429
Money market preferred stock............................... -- 4,000
Certificates of deposit.................................... -- 4,036
Auction rate preferred stock............................... 15,451 20,050
-------- --------
Total.................................................... $119,074 $114,037
======== ========
</TABLE>

Unrealized holding gains and losses on available-for-sale securities at
December 31, 1998 and 1997 were $471,000 and $42,000, respectively. Gross
realized gains and losses on sales of available-for-sale securities during the
years ended December 31, 1998 and 1997 were immaterial.

Debt securities at December 31, 1998 and 1997, by contractual maturity, are
shown below. Actual maturities may differ from contractual maturities because
issuers of the securities may have the right to prepay obligations.

<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Short-term investments:
Due in one year or less.................................... $ 93,983 $ 68,937
Due after one year through two years....................... 25,091 45,100
-------- --------
Total.................................................... $119,074 $114,037
======== ========
</TABLE>

F-9
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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:

<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ -------
(In thousands)
<S> <C> <C>
Raw materials.................................................... $2,710 $ 3,289
Work-in-process.................................................. 3,818 10,340
Finished goods................................................... 2,394 2,019
------ -------
$8,922 $15,648
====== =======
</TABLE>

Given the volatility of the market, the Company makes inventory provisions
for potentially excess and obsolete inventory based on backlog and forecasted
demand. However, backlog is subject to revisions, cancellations and
rescheduling. Actual demand may differ from forecasted demand and such
differences may have a material effect on the Company's financial position and
results of operations.

Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Machinery and equipment..................................... $ 30,008 $ 23,919
Software.................................................... 3,413 2,450
Furniture and fixtures...................................... 1,173 875
Leasehold improvements...................................... 2,120 1,981
-------- --------
Property and equipment, at cost............................. 36,714 29,225
Accumulated depreciation and amortization................... (19,172) (13,333)
-------- --------
Property and equipment, net................................. $ 17,542 $ 15,892
======== ========
</TABLE>

Depreciation and Amortization

Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or the remaining lease term, whichever is shorter,
generally two to seven years.

Investment in Foundry

In 1997, the Company invested $40.3 million in United Silicon, Inc.,
("USIC") a semiconductor manufacturing subsidiary of United Microelectronics
Corporation in Taiwan. The transaction gives the Company an equity stake of
approximately 10% in the facility (which is accounted for on the cost basis)
and guarantees access to approximately 12.5% of the wafer output from the
facility. In 1998, the Company increased its investment by $10.9 million to
retain its 10% ownership interest. No changes were made to the production
agreement.

F-10
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenue Recognition

Product revenue is generally recognized at the time of shipment, less a
provision for estimated sales returns. However, revenue on shipments to
distributors and retailers, subject to certain rights of return and price
protection, is deferred until the merchandise is sold by the distributors or
retailers, or the rights expire.

The Company earns patent license and royalty revenue under patent cross-
license agreements with Hitachi Ltd. ("Hitachi"), Intel Corporation ("Intel"),
Samsung Electronics Company Ltd. ("Samsung"), Sharp Electronics Corporation
("Sharp"), Silicon Storage Technology, Inc. ("SST") and Toshiba Corporation
("Toshiba"). The Company's current license agreements provide for the payment
of license fees, royalties, or a combination thereof, to the Company. The
timing and amount of these payments can vary substantially from quarter to
quarter, depending on the terms of each agreement and, in some cases, the
timing of sales of products by the other parties.

Patent license and royalty revenue is recognized when earned. In 1998 and
1997, the Company received payments under these cross license agreements,
portions of which were recognized as revenue and portions of which are
deferred revenue. Recognition of deferred revenue is expected to occur in
future periods as the Company meets certain obligations as provided in the
various agreements.

Net Income Per Share

The Company determines net income per share in accordance with Financial
Accounting Standards Statement 128, Earnings Per Share.

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

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share--net income................................... $11,836 $19,839 $14,485
======= ======= =======
Denominator for basic net income per share:
Weighted average common shares....................... 26,298 22,880 22,162
------- ------- -------
Shares used in computing basic net income per share.... 26,298 22,880 22,162
======= ======= =======
Basic net income per share............................. $ 0.45 $ 0.87 $ 0.65
======= ======= =======
Denominator for diluted net income per share:
Weighted average common shares....................... 26,298 22,880 22,162
Dilutive effect of employee stock options and
warrants to purchase common stock................... 1,374 2,090 2,044
------- ------- -------
Shares used in computing diluted net income per share.. 27,672 24,970 24,206
======= ======= =======
Diluted net income per share........................... $ 0.43 $ 0.79 $ 0.60
======= ======= =======
</TABLE>

Options and warrants to purchase 901,443, 257,008, and 64,962 shares of
common stock in 1998, 1997 and 1996, respectively, have been omitted from the
earnings per share calculation, as their effect is antidilutive.

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 are disclosures
required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation," and are included in Note 5.

F-11
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.

Note 2: Financial Instruments

Concentration of Credit Risk

The Company's concentration of credit risk consists principally of cash,
cash equivalents, short-term investments and trade receivables. The Company's
investment policy restricts investments to high-credit quality investments and
limits the amounts invested with any one issuer. The Company sells to original
equipment 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

In connection with the credit agreement discussed in Note 3, the Company
has a foreign exchange contract line in the amount of $15.0 million at
December 31, 1998. Under this line, the Company may enter into forward
exchange contracts which require the Company to sell or purchase foreign
currencies. One forward exchange contract in the amount of $4.3 million was
outstanding at December 31, 1998. There were no forward exchange contracts
outstanding at December 31, 1997. Foreign currency translation losses of
$34,000 were deferred at December 31, 1998 in connection with this forward
contract.

Certain of the Company's purchase commitments and balance sheet accounts
are denominated in Japanese Yen. Foreign exchange exposures arising from the
Company's yen denominated purchase commitments and related accounts payable
are mitigated to the extent the Company has yen denominated current assets. To
the extent such foreign exchange exposures are not mitigated, the Company
enters 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 impact of movements in currency exchange rates on
foreign exchange contracts substantially mitigates the related impact on the
underlying items hedged. The Company had net transaction gains (losses) of
approximately $412,000, ($7,000) and ($193,000) for the years ended December
31, 1998, 1997 and 1996, respectively. These amounts are included in interest
and other income, net, in the statement of income.

Note 3: Line of Credit

The Company has a credit agreement (the Agreement) with a bank, which
expires in July 1999 and is collateralized by certain assets of the Company.
Under the provisions of the Agreement, the Company may borrow up to $10.0
million on a revolving line of credit at the bank's prime interest rate (7.75%
at December 31, 1998). Amounts under the revolving line of credit can be
applied to the issuance of letters of credit of up to $10.0 million. At
December 31, 1998, $1.0 million in letters of credit were outstanding. In
addition, under the Agreement, the Company also has a $15.0 million foreign
exchange contract line (see Note 2) under which the Company may enter into
forward exchange contracts. No amounts were outstanding under the revolving
line of credit portion of the Agreement, and $4.3 million was outstanding
under the foreign exchange contract portion of the line at December 31, 1998.
The Agreement contains covenants that require the Company to maintain certain
financial ratios and levels of net worth. The agreement also does not permit
the payment of cash dividends to stockholders. As of December 31, 1998, the
Company was in compliance with the covenants. Based on available collateral
and outstanding letters of credit, the amount available under the Agreement at
December 31, 1998 was approximately $9.0 million.

F-12
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4: Commitments and Contingencies

Commitments

The Company leases its headquarters and sales offices under operating
leases that expire at various dates through 2001. Future minimum lease
payments under operating leases at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Year Ending
December 31,
--------------
(in thousands)
<S> <C>
1999...................................................... $1,968
2000...................................................... 1,733
2001...................................................... 978
2002...................................................... --
2003...................................................... --
Thereafter................................................ --
------
Total................................................... $4,679
======
</TABLE>

Rental expense under all operating leases was $1.7 million, $1.3 million
and $1.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

Contingencies

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.

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 March 1998, the Company filed a complaint in federal court against Lexar
Media, Inc. ("Lexar") for infringement of a fundamental flashdisk patent.
Lexar has disputed the Company's claim of patent infringement, claimed
SanDisk's patent is invalid or unenforceable and asserted various
counterclaims including unfair competition, violation of the Lanham Act,
patent misuse, interference with prospective economic advantage, trade
defamation and fraud. SanDisk has denied each of Lexar's counterclaims.

In July 1998, the federal district court denied Lexar's request to have the
case dismissed on the grounds the Company failed to perform an adequate
prefiling investigation. Discovery in the Lexar suit commenced in August 1998.
The claims construction phase commenced in February 1999. The Company intends
to vigorously enforce its patents, but there can be no assurance that these
efforts will be successful.

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 or obtain licenses to the infringing technology, or discontinue the
use of certain processes.

F-13
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In October 1995, Samsung Electronics Company Ltd. filed a complaint against
the Company in the Northern District of California 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. 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, were importing and selling products that
infringe two of the Company's patents. On February 26, 1997, the
Administrative Law Judge assigned to the case issued an Initial Determination
finding both SanDisk patents valid and infringed and further finding a
violation of Section 337 of the Trade Act. On June 2, 1997, the Commission
issued a limited exclusion order prohibiting the unlicensed entry of
infringing flash memory circuits, and carriers and circuit boards containing
such circuits, that are manufactured by or on behalf of Samsung. On August 14,
1997, in connection with the settlement of all disputes between them, the
Company and Samsung announced the signing of a patent cross-license agreement
for flash memory related patents. Under the agreement, the Company and Samsung
have licensed each others patents covering the design and manufacture of flash
memory products.

From time to time 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. Third
party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that any future
obligation to indemnify the Company's customers or suppliers, will not 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. 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.

Note 5: Stockholders' Equity

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 immediately
purchase the Company's common stock at a fair value as determined by the Board
of Directors. Such shares may be fully vested when issued or may vest over
time as determined by the Board of Directors. Under the Option Grant Program,
eligible individuals were granted options to purchase shares of the Company's
common stock at a fair value, as determined 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 date of grant. Unexercised
options are canceled upon the termination of employment or services. Options
that are canceled under this plan will be available for future grants under
the 1995 Stock Option Plan. There were no shares available for option grants
under this plan at December 31, 1998.

The 1995 Stock Option Plan provides for the issuance of incentive stock
options and nonqualified stock options. Under this plan, the vesting and
exercise provisions of option grants are determined by the Board of Directors.
The options generally vest over a four-year period, expiring no later than ten
years from the date of grant.

F-14
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1995 Non-employee Directors Stock Option Plan

In August 1995, the Company adopted the 1995 Non-employee Directors Stock
Option Plan (the Directors' Plan). The Company reserved 200,000 shares of
common stock for issuance thereunder. Under this plan, automatic option grants
are made at periodic intervals to eligible non-employee members of the Board
of Directors. Initial option grants vest over a four-year period. Subsequent
annual 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. At December 31, 1998, a total of 136,000 options had been granted at
exercise prices ranging from $9.50 to $20.875 per share.

On July 17, 1998, the Board of Directors approved an option
cancellation/regrant program. Under the cancellation/regrant program,
employees could elect to exchange their stock options with exercise prices in
excess of $12.00 per share for new options priced at $10.00 per share, the
market price of the Company's common stock on the date of implementation,
August 21, 1998. Under the new options, shares become exercisable six to
twelve months later than under the old higher-priced options. The new options
have a maximum term of ten years from the August 21, 1998, grant date.
Officers and directors of the Company were not eligible for participation in
the option cancellation/regrant program. Options covering a total of
approximately 903,423 shares were canceled and regranted in connection with
the program. The number of options shown as granted and canceled in the table
below reflect this exchange of options. Such options had a weighted average
exercise price before repricing of $20.661, and the new options were granted
at an exercise price of $10.00.

A summary of activity under all stock option plans follows:

<TABLE>
<CAPTION>
Total
Available Weighted
for Future Total Average
Grant/Issuance Outstanding Exercise Price
-------------- ----------- --------------
(Shares in thousands)
<S> <C> <C> <C>
Balance at December 31, 1995.......... 1,176 2,458 $ 2.67
Granted............................. (922) 922 $12.35
Exercised........................... -- (168) $ 0.57
Canceled............................ 68 (68) $ 8.46
------ ------
Balance at December 31, 1996.......... 322 3,144 $ 5.49
Increase in authorized shares....... 2,550 --
Granted............................. (912) 912 $20.59
Exercised........................... -- (358) $ 1.63
Canceled............................ 145 (145) $ 9.83
------ ------
Balance at December 31, 1997.......... 2,105 3,553 $ 9.58
Granted............................. (2,222) 2,222 $11.94
Exercised........................... -- (630) $ 1.48
Canceled............................ 1,019 (1,019) $20.08
------ ------
Balance at December 31, 1998.......... 902 4,126 $ 9.50
====== ======
</TABLE>

F-15
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 31, 1998, options outstanding were as follows:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------ ---------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
as of Remaining Average as of Average
Range of Excercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
- ------------------ ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.15--$ 4.50.......... 648,626 5.45 $ 1.4472 648,626 $ 1.4472
$ 6.56--$ 9.50.......... 707,049 7.30 $ 7.0006 564,384 $ 6.8299
$10.00--$11.63.......... 1,075,555 9.39 $10.1734 116,269 $10.7072
$12.00--$14.63.......... 1,512,922 9.10 $12.3693 339,935 $12.1688
$17.25--$21.88.......... 181,975 9.02 $19.9861 58,281 $20.1208
--------- ---- -------- --------- --------
$ 0.15--$21.88.......... 4,126,127 8.29 $ 9.4959 1,727,495 $ 6.5688
</TABLE>

Employee Stock Purchase Plan

In August 1995, the Company adopted the Employee Stock Purchase Plan (the
Purchase Plan). The Company has reserved 883,333 shares of common stock for
issuance thereunder. Under the 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 offering period, whichever is lower. As of
December 31, 1998, shares issued under the Purchase Plan totaled 347,889.

In April 1997, the stockholders (i) increased the shares available for
future issuance under the 1995 Stock Benefit Plan by 2,500,000 shares, (ii)
increased the shares available for future issuance under the 1995 Non-Employee
Directors Stock Option Plan by 50,000 and (iii) increased the shares available
for future issuance under the Employee Stock Purchase Plan by 450,000.

Accounting for Stock Based Compensation

The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.

Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also 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 granted prior to the
Company's initial public offering in 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 options granted subsequent to the Company's initial 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 4.84%, 6.24%, and 6.23% for 1998,
1997, and 1996, respectively; a dividend yield of 0.0%, a volatility factor of
the expected market price of the Company's common stock of 0.60, 0.655, and
0.588 for 1998, 1997, and 1996, respectively; and a weighted-average expected
life of the option of 5 years. The weighted average fair value of those
options granted were $6.65, $12.45, and $6.98 for 1998, 1997, and 1996,
respectively.

F-16
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

Under the 1995 Employee Stock Purchase Plan, the Company is authorized to
issue up to 883,333 shares of common stock to participating employees. Under
the terms of the Plan, employees can choose to have up to 10% of their annual
base earnings withheld to purchase the Company's common stock. The purchase
price of the stock is 85% of the lower of the subscription date fair market
value and the purchase date fair market value. Approximately 65% of eligible
employees have participated in the plan in 1998 and 75% and 86% in 1997 and
1996, respectively. Under the Plan, the Company sold 129,742; 125,797 and
92,350 shares to employees in 1998, 1997 and 1996, respectively. Pursuant to
APB 25 and related interpretations, the Company does not recognize
compensation cost related to employee purchase rights under the Plan. To
comply with the pro forma reporting requirements of SFAS 123, compensation
cost is estimated for the fair value of the employees' purchase rights using
the Black-Scholes model with the following assumptions for those rights
granted in 1998, 1997, and 1996: dividend yield of 0.0%; and expected life of
6 months; expected volatility factor of .65 and 1.02 in 1998, 0.63 and 0.89 in
1997, and 0.588 in 1996; and a risk free interest rate ranging from 5.36% to
6.08%. The weighted average fair value of those purchase rights granted in
February 1996, August 1996, February 1997, August 1997, February 1998 and
August 1998 were $2.47, $2.52, $3.42, $4.69, $7.00 and $4.50 respectively.

Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
Years ended December
31,
----------------------
1998 1997 1996
------ ------- -------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Pro forma net income.................................... $5,178 $17,156 $13,553
Pro forma net income per share
Basic................................................. $ 0.20 $ 0.75 $ 0.61
Diluted............................................... $ 0.19 $ 0.69 $ 0.56
</TABLE>

Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1999.

Shareholder Rights Plan

On April 21, 1997, the Company adopted a shareholder rights plan (the
Rights Agreement). Under the Rights Agreement, rights were distributed as a
dividend at the rate of one right for each share of common stock of the
Company held by stockholders of record as of the close of business on April
28, 1997. The rights will expire on April 28, 2007 unless redeemed or
exchanged. Under the Rights Agreement, each right will initially entitle the
registered holder to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock for $65.00. The rights will become exercisable
only if a person or group (other than Seagate Technology, Inc., which is
permitted to maintain its 25 percent stake in the Company) acquires beneficial
ownership of 15 percent or more of the Company's common stock or commences a
tender offer or exchange offer upon consummation of which such person or group
would beneficially own 15 percent or more of the Company's common stock.

F-17
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Warrants

The Company has periodically granted warrants in connection with the sale
of its stock and certain lease and bank agreements. The Company has the
following warrants outstanding to purchase capital stock at December 31, 1998:

<TABLE>
<CAPTION>
Number of Price Per Expiration
Issuance Date Capital Stock Shares Share Date
- ------------- ------------- --------- --------- ----------
<S> <C> <C> <C> <C>
May 1990........................ Common 12,094 $6.615 November 2000
June 1991....................... Common 6,666 $6.615 November 2000
November 1991................... Common 13,363 $6.615 November 2000
</TABLE>

During 1998, the Company issued 3,010 shares of common stock for no
proceeds in the net issuance of shares upon the exercise of 3,788 warrants
with an exercise price of $3.30 per share.

Note 6: Retirement Plan

Effective January 1, 1992, the Company adopted a tax-deferred savings plan,
the SanDisk 401(k) Plan, for the benefit of qualified employees. The plan is
designed to provide employees with an accumulation of funds at retirement.
Qualified employees may elect to make contributions to the plan on a monthly
basis. The Company may make annual contributions to the plan at the discretion
of the Board of Directors. No contributions were made by the Company for the
years ended December 31, 1998, 1997 and 1996.

Note 7: Income Taxes

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997 1996
------ ------- ------
(in thousands)
<S> <C> <C> <C>
Current:
Federal............................................... $1,413 $12,131 $1,701
State................................................. 651 2,662 42
Foreign............................................... 2,936 5,263 397
------ ------- ------
5,000 20,056 2,140
Deferred:
Federal............................................... 1,305 (13,205) (1,000)
State................................................. 350 (3,350) --
------ ------- ------
1,655 (16,555) (1,000)
Provision for income taxes.............................. $6,655 $ 3,501 $1,140
====== ======= ======
</TABLE>

The tax benefits associated with stock options reduces taxes currently
payable as shown above by $1,761,000, $2,498,000 and $61,000 in 1998, 1997 and
1996, respectively. Such benefits are credited to capital in excess of par
when realized.

F-18
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's provision for income taxes differs from the amount computed
by applying the federal statutory rates to income before taxes as follows:

<TABLE>
<CAPTION>
December 31,
------------------
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit......................... 3.5 (1.9) --
Operating losses utilized................................... -- -- (17.4)
Research credit............................................. (1.9) (3.8) (5.6)
Valuation allowance......................................... -- (14.9) (8.0)
Foreign taxes in excess of U.S. rate........................ -- 0.4 2.1
Other individually immaterial items......................... 5.5 0.2 1.2
Tax exempt interest income.................................. (6.1) -- --
---- ----- -----
36.0% 15.0% 7.3%
==== ===== =====
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components
of the Company's deferred tax assets as of December 31, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory reserves........................................... $ 2,700 $ 3,338
Deferred revenue............................................. 10,300 9,913
Accruals and reserves........................................ 2,900 3,970
Other........................................................ -- 334
------- -------
Total deferred tax assets.................................. $15,900 $17,555
======= =======
</TABLE>

Note 8: Related Party Transactions

In January 1993, the Company entered into a joint cooperation agreement
with a stockholder. Under the terms of the agreement, the stockholder had a
nonexclusive right to distribute flash memory products produced by the
Company. There were no revenues attributable to this agreement in 1998, 1997
and 1996. The agreement was terminated by consent of both parties in 1998.

The Company has invested $51.2 million in United Silicon, Inc., a
semiconductor manufacturing subsidiary of United Microelectronics Corporation
in Taiwan. The transaction gives the Company an equity stake of approximately
10% in the facility (which is accounted for on the cost basis) and guarantees
access to approximately 12.5% of the wafer output from the facility. In 1998,
the Company purchased wafers from USIC totaling approximately $11.6 million.

Note 9: Segment Information

The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in fiscal 1998. SFAS No. 131 supersedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise and
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or group, in deciding how to allocate
resources and in assessing performance.

F-19
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company operates in one segment, flash memory products. The Company
markets its products in the United States and in foreign countries through its
sales personnel, dealers, distributors, retailers and its subsidiaries. The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker ("CODM") because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about individual components of the market.

Geographic Information: Information regarding geographic areas for the
years ended December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Revenues:
United States....................................... $ 60,113 $ 53,820 $43,999
Japan............................................... 46,276 51,677 43,947
Europe.............................................. 9,810 10,774 5,339
Other foreign countries............................. 19,562 8,982 4,314
-------- -------- -------
Total............................................. $135,761 $125,253 $97,599
======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Long Lived Assets:
United States......................................... $16,779 $15,422 $ 9,932
Japan................................................. 445 246 130
Europe................................................ 9 3 2
Other foreign countries............................... 51,517 40,505 221
------- ------- -------
Total............................................... $68,750 $56,176 $10,285
======= ======= =======
</TABLE>

Revenues are attributed to countries based on the location of the
customers. Long lived assets in other foreign countries includes the
investment in USIC of $51.2 million in 1998 and $40.3 million in 1997.

Major Customers

In 1998, revenues from one customer represented approximately $14.0 million
of consolidated revenues. In 1997, there were no customers who accounted for
more than 10% of total revenue. In 1996, revenues from one customer
represented approximately $25.1 million of consolidated revenues.

Note 10: Accumulated Other Comprehensive Income

As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Comprehensive income consists of net income and other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of Statement 130.

F-20
<PAGE>

SANDISK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accumulated other comprehensive income presented in the accompanying balance
sheet consists of the accumulated unrealized gains and loses on available-for-
sale marketable securities for all periods presented. The tax effects for other
comprehensive income were immaterial for all periods presented.

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Accumulated other
comprehensive income at
beginning of year:
Unrealized gain......... $ 42 $ 5 $--
Change of accumulated
other comprehensive
income during the year
Unrealized gain on
available-for-sale
securities............. 429 37 5
---- --- ---
Accumulated other
comprehensive income at
year end................. $471 $42 $ 5
==== === ===
</TABLE>

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

Not applicable.

F-21
<PAGE>

SANDISK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998*
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 12,766 $ 15,384
Short-term investments............................... 132,182 119,074
Accounts receivable, net............................. 29,213 20,400
Inventories.......................................... 17,332 8,922
Deferred tax assets.................................. 15,900 15,900
Prepaid expenses and other current assets............ 3,700 6,694
-------- --------
Total current assets................................... 211,093 186,374
Property and equipment, net............................ 22,410 17,542
Investment in foundry.................................. 51,208 51,208
Deposits and other assets.............................. 794 617
-------- --------
Total Assets....................................... $285,505 $255,741
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 18,563 $ 6,938
Accrued payroll and related expenses................. 5,523 3,768
Other accrued liabilities............................ 14,316 9,745
Deferred revenue..................................... 27,232 27,452
-------- --------
Total current liabilities.............................. 65,634 47,903
Stockholders' Equity:
Common stock......................................... 188,938 186,120
Retained earnings.................................... 30,933 21,718
-------- --------
Total stockholders' equity............................. 219,871 207,838
-------- --------
Total Liabilities and Stockholders' Equity......... $285,505 $255,741
======== ========
</TABLE>

* Information derived from the audited Consolidated Financial Statements.

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

F-22
<PAGE>

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data; unaudited)

<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product...................................... $42,300 $23,480 $78,226 $48,906
License and royalty.......................... 10,249 7,881 18,459 16,557
------- ------- ------- -------
Total revenues................................. 52,549 31,361 96,685 65,463
Cost of sales.................................. 30,858 20,560 57,367 38,332
------- ------- ------- -------
Gross profits.................................. 21,691 10,801 39,318 27,131
Operating expenses:
Research and development..................... 6,007 4,474 11,219 8,805
Sales and marketing.......................... 5,755 4,248 10,928 8,199
General and administrative................... 2,896 1,709 5,290 3,753
------- ------- ------- -------
Total operating expenses....................... 14,658 10,431 27,437 20,757
Operating income............................... 7,033 370 11,881 6,374
Interest and other income, net................. 1,465 1,278 3,069 2,617
------- ------- ------- -------
Income before taxes............................ 8,498 1,648 14,950 8,991
Provision for income taxes..................... 2,804 595 4,933 3,235
------- ------- ------- -------
Net income..................................... $ 5,694 $ 1,053 $10,017 $ 5,756
======= ======= ======= =======
Net income per share
Basic........................................ $ 0.21 $ 0.04 $ 0.37 $ 0.22
Diluted...................................... $ 0.19 $ 0.04 $ 0.34 $ 0.21
Shares used in computing net income per share
Basic........................................ 26,943 26,168 26,855 26,094
Diluted...................................... 29,514 27,834 29,414 27,928
</TABLE>

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

F-23
<PAGE>

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)

<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 10,017 $ 5,756
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 3,750 3,166
Accounts receivable, net................................ (8,813) 3,235
Inventory............................................... (8,410) (5,920)
Prepaid expenses and other assets....................... 2,817 (90)
Accounts payable........................................ 11,626 (3,197)
Accrued payroll and related expenses.................... 1,755 (938)
Other accrued liabilities............................... 4,571 (1,993)
Deferred revenue........................................ (220) (1,746)
-------- --------
Total adjustments..................................... 7,076 (7,483)
-------- --------
Net cash provided by (used in) operating activities..... 17,093 (1,727)
Cash flows from investing activities:
Purchases of short term investments..................... (73,456) (85,654)
Proceeds from sale of short term investments............ 59,546 81,632
Acquisition of capital equipment........................ (8,619) (2,865)
-------- --------
Net cash used in investing activities................... (22,529) (6,887)
Cash flows from financing activities:
Sale of common stock.................................... 2,818 1,193
-------- --------
Net cash provided by financing activities............... 2,818 1,193
-------- --------
Net decrease in cash and cash equivalents................. (2,618) (7,421)
Cash and cash equivalents at beginning of period.......... 15,384 20,888
Cash and cash equivalents at end of period................ $ 12,766 $ 13,467
======== ========
</TABLE>

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

F-24
<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
its subsidiaries (the "Company") as of June 30, 1999, the results of
operations for the three and six month periods ended June 30, 1999 and 1998
and cash flows for the six month periods ended June 30, 1999 and 1998. 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/A as of, and for the year ended
December 31, 1998. The condensed consolidated balance sheet data as of
December 31, 1998 was derived from the audited financial statements.

The results of operations for the three and six month periods ended June
30, 1999 and cash flows for the six month periods ended June 30, 1999 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 second fiscal quarter of 1999 and 1998 ended on June 27,
1999 and June 28, 1998, respectively. Fiscal year 1998 was 52 weeks long and
ended on December 27, 1998. Fiscal year 1999 is 53 weeks long and ends on
January 2, 2000. For ease of presentation, the accompanying financial
statements have been shown as ending on the last day of the calendar month.

3. 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.

4. The components of inventory consist of the following:

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(In thousands)
<S> <C> <C>
Raw materials............................................. $ 2,646 $2,710
Work-in-process........................................... 9,866 3,818
Finished goods............................................ 4,820 2,394
------- ------
$17,332 $8,922
======= ======
</TABLE>

F-25
<PAGE>

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
(In thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net
income per share--net income........... $ 5,694 $ 1,053 $ 10,017 $ 5,756
========= ========= ======== =======
Denominator for basic net income per
share:
Weighted average common shares.......... 26,943 26,168 26,855 26,094
--------- --------- -------- -------
Shares used in computing basic net income
per share................................ 26,943 26,168 26,855 26,094
========= ========= ======== =======
Basic net income per share................ $ 0.21 $ 0.04 $ 0.37 $ 0.22
========= ========= ======== =======
Denominator for diluted net income per
share:
Weighted average common shares.......... 26,943 26,168 26,855 26,094
Employee stock options and warrants to
purchase common stock.................. 2,571 1,666 2,559 1,834
--------- --------- -------- -------
Shares used in computing diluted net
income per share......................... 29,514 27,834 29,414 27,928
========= ========= ======== =======
Diluted net income per share.............. $ 0.19 $ 0.04 $ 0.34 $ 0.21
========= ========= ======== =======
</TABLE>

For the three and six month periods ending June 30, 1999, options to
purchase 100,465 and 55,609 shares of common stock, respectively have been
excluded from the earnings per share calculation, as their effect is
antidilutive. For the three and six month period ended June 30, 1998, options
to purchase 885,839 and 254,634 shares of common stock, respectively, have
been excluded from the earnings per share calculation, as their effect is
antidilutive.

6. 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, or others, may bring
suit against the Company.

In July 1998, the federal district court denied Lexar's request to have the
case dismissed on the grounds the Company failed to perform an adequate
prefiling investigation. Discovery in the Lexar suit commenced in August 1998.
On February 22, 1999, the Federal District Court considered arguments and
papers submitted by the parties regarding the scope and proper interpretation
of the asserted claims in SanDisk's patent at issue in the Lexar suit. On
March 4, 1999, the Federal District Court issued its ruling on the proper
construction of the claim terms in SanDisk's patent. On July 30, 1999, the
Company filed a motion for partial summary judgment that Lexar CompactFlash
and PC Cards contributorily infringe SanDisk's patent. This motion is
scheduled to be heard in September 1999. A trial date has not yet been set.
The Company intends to vigorously enforce its patents, but there can be no
assurance that these efforts will be successful.

F-26
<PAGE>

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In May 1999, Lexar filed a complaint against the Company for claims of
unfair competition, false advertising, trade libel and intentional and
negligent interference with prospective business advantage. On July 1, 1999,
the Company filed a motion to dismiss the Lexar complaint. Also, in July 1999,
Lexar filed a motion for preliminary injunction seeking to stop certain
advertising practices that Lexar alleges were misleading. The Company intends
to vigorously oppose this motion. Both motions are scheduled to be heard in
September 1999. There can be no assurances that these motions will be decided
in favor of the Company.

From time to time 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. Third
party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that any future
obligation to indemnify the Company's customers or suppliers, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.

Any litigation, whether as a plaintiff or as a defendant, will 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 or
obtain licenses to the infringing technology, or discontinue the use of
certain processes. 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.

7. The Company had a credit agreement (the Agreement) with a bank, which
expired in July 1999. At June 30, 1999, there were no amounts outstanding
under the line of credit. The Agreement contained covenants that required the
Company to maintain certain financial ratios and levels of net worth and
prohibited the payment of cash dividends to stockholders. The Company was in
compliance with these covenants at June 30, 1999.

8. Certain of the Company's balance sheet accounts and purchase commitments
are denominated in Japanese Yen. The Company enters 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 impact of movements in currency exchange rates on foreign exchange
contracts substantially mitigates the related impact on the underlying items
hedged. At June 30, 1999, forward contracts with a notional amount of $11.9
million were outstanding.

9. Accumulated other comprehensive income presented in the accompanying
balance sheet consists of the accumulated unrealized gains and loses on
available-for-sale marketable securities, net of the related tax effects, for
all periods presented.

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income............................. $ 5,694 $ 1,053 $ 10,017 $ 5,756
Unrealized gain (loss) on available-
for-sale securities................... (550) 19 (802) 144
--------- --------- -------- -------
Comprehensive income................... $ 5,144 $ 1,072 $ 9,215 $ 5,900
========= ========= ======== =======
</TABLE>

Accumulated other comprehensive income (loss) was ($331,000) and $471,000
at June 30, 1999 and December 31, 1998, respectively.

F-27
<PAGE>

[SanDisk Corporation Logo]
<PAGE>

3,000,000 Shares

[SanDisk Corporation LOGO]

COMMON STOCK

-----------

SanDisk Corporation is offering 2,750,000 shares and the selling stockholder is
offering 250,000 shares. For information relating to the selling stockholder,
see "Selling Stockholder" on page 50.

-----------

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7 of this prospectus.

-----------

PRICE $ A SHARE

-----------

MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL

, 1999
<PAGE>

[ALTERNATE COVER
PAGE FOR PEPS PROSPECTUS]

SANDISK CORPORATION

[SanDisk Corporation LOGO]

COMMON STOCK

----------------

This prospectus relates to an aggregate of up to shares ( shares if
the over-allotment option described in the trust prospectus described below is
exercised in full) of our common stock, par value $0.001 per share,
beneficially owned by the selling stockholder identified in this prospectus
under the heading "Selling Stockholder" which may be delivered by the SanDisk
PEPS Trust to holders of Premium Exchangeable Participating Shares, or PEPS,
securities of the trust. We will receive no portion of the proceeds from the
sale of the shares of our common stock offered by this prospectus or from the
sale of the PEPS securities. The PEPS securities are being sold by the trust
in an offering described in the separate prospectus of the trust. This
prospectus relates only to the shares of our common stock that may be
delivered upon exchange of the PEPS securities. We take no responsibility for
any information included or omitted from the trust prospectus. The trust
prospectus does not constitute a part of, and is not incorporated by reference
in, this prospectus.

The shares of our common stock are traded on the Nasdaq National market
under the symbol "SNDK." On August 16, 1999, the last reported sales price for
our common stock as reported by Nasdaq was $88 3/16 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning
on page 7 of this prospectus.

----------------

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

----------------

The date of this Prospectus is , 1999.
<PAGE>

[ALTERNATE PAGE
FOR PEPS PROSPECTUS]

PLAN OF DISTRIBUTION

Pursuant to a prepaid forward contract, the SanDisk PEPS Trust has agreed,
subject to the terms and conditions set forth therein, to purchase from
Seagate Technology, Inc. a number of shares of our common stock equal to the
total number of PEPS to be purchased by the underwriters from the trust
pursuant to an underwriting agreement (including any PEPS that may be
purchased by the underwriters upon exercise of an over-allotment option, among
Morgan Stanley & Co. Incorporated, the trust, Seagate Technology and SanDisk.
Pursuant to the terms of the prepared forward contract, Seagate Technology
will deliver to the trust on an exchange date a number of shares of our common
stock (or, at the option of Seagate Technology, the cash equivalent) and/or
such other consideration as may be permitted or required by the terms of the
prepaid forward contract, that are expected to have the same value as the
shares of our common stock delivered pursuant to the PEPS.

We, Seagate Technology and our directors and executive officers have agreed
that, without the prior written consent of Morgan Stanley & Co. Incorporated
on behalf of the underwriters, we will not, during the period ending 90 days
after the date of this prospectus:

. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;

whether any transaction described above is to be settled by delivery of shares
of common stock or other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

. the sale of the PEPS to the underwriters;

. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market or other transactions
after the completion of the offering; and

. sales of up to an aggregate of 250,000 shares of our common stock by our
executive officers and directors.

In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of common stock or the PEPS. Specifically, the underwriters may agree
to sell or allot more shares than the 2,976,633 PEPS which the trust has
agreed to sell to them. This over-allotment would create a short position in
the PEPS for the underwriters' account. To cover any over-allotments or to
stabilize the price of the common stock or the PEPS, the underwriters may bid
for, and purchase, shares of common stock or PEPS in the open market. Finally,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the PEPS in the offering, if the
syndicate repurchases previously distributed PEPS in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. The
underwriters have reserved the right to reclaim selling concessions in order
to encourage
<PAGE>

underwriters and dealers to distribute PEPS for investment, rather than for
short-term profit taking. Increasing the proportion of the offering held for
investment may reduce the supply of PEPS available for short-term trading. Any
of these activities may stabilize or maintain the market price of the PEPS
above independent market levels. The underwriters are not required to engage
in these activities and may end any of these activities at any time.

We, the trust, Seagate Technology and the underwriters have agreed to
indemnify each other against a variety of liabilities, including liabilities
under the Securities Act.

3
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC Registration fee.............................................. $128,382
NASD fee.......................................................... 30,500
Nasdaq National Market listing fee................................ 17,500
Printing and engraving............................................ 70,000
Legal fees and expenses of SanDisk................................ 150,000
Accounting fees and expenses...................................... 100,000
Blue sky fees and expenses........................................ 5,000
Transfer agent fees............................................... 10,000
Miscellaneous..................................................... 38,618
--------
Total........................................................... $550,000
========
</TABLE>

Item 15. Indemnification of Directors and Officers

We have adopted provisions in our Amended and Restated Certificate of
Incorporation that limit the liability of our directors in certain instances.
As permitted by the Delaware General Corporation Law, directors will not be
liable to us for monetary damages arising from a breach of their fiduciary
duty as directors in certain circumstances. See Item 17 of this Registration
Statement regarding the opinion of the Securities and Exchange Commission as
to indemnification of liabilities arising under the Securities Act. Such
limitation does not affect liability for any breach of a director's duty to us
or our stockholders (i) with respect to approval by the director of any
transaction from which he derives an improper personal benefit, (ii) with
respect to acts or omissions involving an absence of good faith, that he
believes to be contrary to our best interests or the best interest of our
stockholders, that involve intentional misconduct or a knowing and culpable
violation of law, that constitute an unexcused pattern of inattention that
amounts to an abdication of his duty to us or our stockholders, or that show a
reckless disregard for his duty to us or our stockholders in circumstances in
which he was, or should have been, aware, in the ordinary course of performing
his duties, of a risk of serious injury to us or our stockholders, or (iii)
based on transactions between us and our directors or another corporation with
interrelated directors or on improper distributions, loans, or guarantees
under applicable sections of the Delaware General Corporation Law. Such
limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission, although in certain
circumstances equitable relief may not be available as a practical matter. The
limitation may relieve the directors of monetary liability to us for grossly
negligent conduct, including conduct in situations involving attempted
takeovers. No claim or litigation is currently pending against our directors
that would be affected by the limitation of liability.

Our Amended and Restated Certificate of Incorporation and Bylaws provide
that we shall indemnify our directors and may indemnify our officers to the
fullest extent permitted by Delaware law, including circumstances in which
indemnification is otherwise discretionary under Delaware law. We have entered
into separate indemnification agreements with our directors and officers,
which may require us, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors
or officers (other than liabilities arising from willful misconduct of a
culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. To the extent
we may be required to make substantial payments under the indemnification
agreements that are not covered by insurance, our available cash and
stockholder's equity would be adversely affected.

II-1
<PAGE>

Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors by the several Underwriters.

Item 16. Exhibits and Consolidated Financial Statement Schedule

UPDATE

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
4.1** Specimen common stock certificate
4.2** Amended and Restated Investors' Rights Agreement, dated September 23,
1994, among SanDisk and the investors and the founders named therein,
as amended
4.3** Amended and Restated Shareholders Agreement, dated September 23, 1994,
among SanDisk and the employee holders and the preferred stock
investors named therein
4.4** Forms of Warrants to Purchase Shares of Series A and Series C
preferred stock
5.1* Opinion of Brobeck, Phleger & Harrison LLP
21.1* Subsidiaries of SanDisk
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Brobeck, Phleger & Harrison LLP. Reference is made to
Exhibit 5.1.
24.1 Power of Attorney (see signature page)
</TABLE>
- --------
* To be filed by subsequent amendment.
** Previously filed as an exhibit to SanDisk's Registration Statement on Form
S-1 (Reg. No. 33-96298).

(b) Consolidated Financial Statement Schedule

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to
the Delaware General Corporation Code, our Certificate of Incorporation or the
Bylaws, indemnification agreements entered into between us and our officers
and directors, the Underwriting Agreement, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

II-2
<PAGE>

We hereby undertake that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
SanDisk Corporation certifies that it has reasonable ground to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sunnyvale, State of California, on
this 17th day of August, 1999.

Sandisk Corporation

/s/ Dr. Eli Harari
By: _________________________________.
Dr. Eli Harari
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint, jointly and severally, Dr.
Eli Harari and Cindy L. Burgdorf, or either of them, as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign the Registration Statement filed herewith and any
and all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Dr. Eli Harari President, Chief Executive August 17, 1999
____________________________________ Officer (Principal
Dr. Eli Harari Executive Officer) and
Director

/s/ Cindy L. Burgdorf Chief Financial Officer, August 17, 1999
____________________________________ Senior Vice President,
Cindy L. Burgdorf Finance and Administration
and Secretary (Principal
Financial and Accounting
Officer)

/s/ Irwin Federman Chairman of the Board of August 17, 1999
____________________________________ Directors
Irwin Federman

/s/ William V. Campbell Director August 17, 1999
____________________________________
William V. Campbell
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Catherine P. Lego Director August 17, 1999
____________________________________
Catherine P. Lego

/s/ Dr. James D. Meindl Director August 17, 1999
____________________________________
Dr. James D. Meindl

/s/ Alan F. Shugart Director August 17, 1999
____________________________________
Alan F. Shugart
</TABLE>

II-5

<PAGE>

Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Summary
Consolidated Financial Data", Selected Consolidated Financial Data" and
"Experts" in the Registration Statement (Form S-3) and related Prospectus of
SanDisk Corporation for the registration of 3,450,000 shares of its common
stock and to the use of our report dated January 22, 1999 and to the
incorporation by reference therein of our report dated January 22, 1999, with
respect to the consolidated financial statements and schedule of SanDisk
Corporation included in its Annual Report (Form 10-K/A) for the year ended
December 31, 1998, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

San Jose, CA
August 17, 1999