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                                    UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 8-K
  
                  Current Report Pursuant to Section 13 or 15(d) of
  
                         The Securities Exchange Act of 1934
  
  
  
  Date of Report (Date of earliest event reported)  December 17, 2001
                                                  --------------------------------
  
                                 SanDisk Corporation
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               (Exact name of registrant as specified in its charter)
  
             Delaware                   000-26734                77-0191793
  ----------------------------------------------------------------------- --------
  (State or other jurisdiction         (Commission             (IRS Employer
       of incorporation)               File Number)          Identification No.)
  
         140 Caspian Court, Sunnyvale, California                 94089
  --------------------------------------------------------------------------------
         (Address of principal executive offices)              (Zip Code)
  
  Registrant's telephone number, including area code  (408) 542-0500
                                                    ------------------------------
                                        None
  --------------------------------------------------------------------------------
            (Former name or former address, if changed since last report)
  
  
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  ITEM 5.  OTHER EVENTS
  
  A. On December 18, 2001, we issued the following press release regarding our
  Memorandum of Understanding with Toshiba Corporation:
  
       TOSHIBA AND SANDISK SIGN MEMORANDUM OF UNDERSTANDING TO CONSOLIDATE THEIR
  FLASHVISION MANUFACTURING AT TOSHIBA'S YOKKAICHI, JAPAN MEMORY FAB
  
       Move Expected To Realize  Significantly More Cost Competitive Manufacturing
       ---------------------------------------------------------------------------
  
       Of Advanced NAND  Flash Memory And Accelerate The Volume Production
       --------------------------------------------------------------------
  
       Of Next Generation .13-Micron NAND Flash
       ----------------------------------------
  
       Currently Under Joint Development
       ---------------------------------
  
       SUNNYVALE, CA, Dec. 18, 2001 - SanDisk Corporation (NASDAQ:SNDK) and
  Toshiba Corporation announced today that they have signed a binding Memorandum
  Of Understanding (MOU) under which the two companies will consolidate their
  FlashVision advanced NAND flash wafer fab manufacturing operations at Toshiba's
  memory fab at Yokkaichi, Japan. The two companies believe that they can achieve
  significantly more cost competitive NAND wafer manufacturing by consolidating
  all NAND wafer fab operations at Yokkaichi Toshiba currently manufactures
   .16-micron NAND flash wafers for the FlashVision joint venture at both Yokkaichi
  and at the Dominion Semiconductor facility in Manassas, Virginia. Yokkaichi is
  Toshiba's most advanced memory fab and has approximately twice the wafer fab
  capacity of the Dominion fab. Through this consolidation, Yokkaichi can provide
  significantly more cost-competitive NAND flash wafers than is possible at
  Dominion.
  
       Under the terms of the MOU, Toshiba will equip a portion of the Yokkaichi
  Fab which is currently not being utilized with the more advanced,
  FlashVision-owned NAND production tool-set from Dominion. Toshiba has agreed to
  undertake full responsibility for the NAND production transition from Dominion
  to Yokkaichi which is expected to be completed in 2002. The companies expect to
  be able to meet 100% of their customers' NAND requirements during the transition
  through increasing the current NAND manufacturing output at Yokkaichi. Once the
  consolidation is completed, Yokkaichi's total NAND wafer output will match the
  combined current NAND capacity of Yokkaichi and Dominion. The parties
  contemplate that the FlashVision operation at Yokkaichi will continue in
  essentially the same 50-50 joint venture form as it has done at the Dominion
  facility in Virginia.
  
       Yokkaichi is the site of Toshiba's advanced NAND development pilot line,
  and currently all new NAND products first enter volume production at Yokkaichi.
  This consolidation will streamline the transfer of new technology and thereby
  accelerate the volume transition in 2002 from .16-micron NAND to the more cost
  competitive NAND/MLC (multi-level cell), as well as the .13-micron NAND.
  
       Takeshi Nakagawa, President of Toshiba Semiconductor Company, said, "The
  centralization of flash memory production at Yokkaichi from Dominion will
  reinforce cost competitiveness and support smooth mass production at the initial
  stage of new products. We position NAND flash memory as the most important
  pillar of our memory business and we will try our best to expand its business.
  In line with this move, Toshiba will solidify relations with SanDisk, including
  product development with multi-level cell technology and advanced process
  technology. Under this alliance, we are very confident that we are leading and
  enjoy an advantageous position over our competitors."
  
       Eli Harari, SanDisk President and CEO, said, "Our NAND flash partnership
  with Toshiba is coming out stronger as a result of this consolidation. Toshiba's
  senior management shares our vision that the NAND flash partnership between our
  two companies has a great future and Toshiba has agreed to forego any NAND
  
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  participation from a third partner. Although we are pleased with Dominion's
  performance, we feel that the consolidation opportunity with Toshiba at
  Yokkaichi affords us a unique opportunity to accelerate our access to one of the
  world's lowest cost sources for our NAND wafers. We believe the combination of
  the highly cost-efficient Yokkaichi facility and the FlashVision advanced
  equipment tool-set from Dominion will provide us with materially lower wafer
  costs over the long-term while preserving our near-term access to wafer supply.
  We plan to negotiate with our current lenders for the leasing of the FlashVision
  tool-set that will permit the transfer of these tools by FlashVision to the
  Yokkaichi facility. Assuming that the consolidation proceeds as planned, we do
  not expect to see any adverse financial impact in 2002, nor do we expect any
  reduction to our NAND supply relative to the current FlashVision plan at
  Dominion. We expect to begin to see a substantial positive impact to our NAND
  memory cost structure starting in the second half of 2002 and improving further
  in 2003 and beyond."
  
       SanDisk, the world's largest supplier of flash data storage products,
  designs, manufactures and markets industry-standard, solid-state data, digital
  imaging and audio storage products using its patented, high density flash memory
  and controller technology. SanDisk is based in Sunnyvale, CA.
  
       The matters discussed in this news release contain forward looking
  statements that are subject to risks and uncertainties including but not limited
  to statements relating to more competitive manufacturing costs, meeting customer
  product demands, accelerated transition of future technologies, margin
  improvements and successful re-negotiation of our lease commitments. Our actual
  results could differ materially from the statements made in such forward looking
  statements due to numerous risks and uncertainties. Specific factors which could
  cause the forward looking statements herein not to be achieved include, but are
  not limited to, the ability of the company to manufacture its products in
  volume, further decline of actual selling prices of our products, delay or
  failure by the parties to timely complete new definitive agreements
  incorporating the terms and concepts of the MOU, a delay in the discussed
  transfer of tools and technology to the Yokkaichi facility, other delays in the
  consolidation process, risks associated with having a single source of supply of
  NAND wafers, delay or failure to timely transfer future technologies from
  Toshiba's new technology pilot line, failure to meet customer requirements if
  customer demand increases significantly prior to completion of transfer and
  consolidation of manufacturing or failure of the parties to secure bank approval
  in connection with the transfer of equipment which could result in higher
  financing costs or require the company to undertake other means of financing,
  including self financing of the portion of the FlashVision tool-set SanDisk is
  responsible for. Other risks for SanDisk include those items described under the
  caption, "Factors That May Affect Future Results" in the company's annual report
  on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and
  Exchange Commission. The company assumes no obligation to update the information
  in this release.
  
  The restructuring of our FlashVision busines involves many risks and
  uncertainties, including the risks described below.
  
  
  <PAGE>
  
  
                                   RISK FACTORS
  
  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 or declining demand for our products;
  
     .   decline in the average selling prices of our products due to competitive
          pricing pressures;
  
     .   seasonality in sales of our products;
  
     .   natural disasters affecting the countries in which we conduct our
         business, particularly Japan, where our sole source of NAND flash memory
         wafer capacity will be located and, to a lesser extent, Taiwan and the
         United States;
  
      .  excess capacity of flash memory from our competitors and our own new
         flash wafer capacity, which may cause an acceleration in the decline in
         our average selling prices;
  
      .  difficulty of forecasting and management of inventory levels; in
         particular, building a large inventory of unsold product due to
         non-cancelable contractual obligations to purchase materials such as
         flash wafers, controllers, printed circuit boards and discrete
         components;
  
      .  expenses related to obsolescence or devaluation of unsold inventory, or
         reserves necessary to protect us against future write-offs of unsold
         inventory;
  
      .  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;
  
      .  fluctuations in our license and royalty revenue;
  
      .  fluctuations in product costs, particularly due to fluctuations in
         manufacturing yields and utilization;
  
      .  availability of sufficient silicon wafer foundry capacity to meet
         customer demand;
  
      .  shortages of components such as capacitors and printed circuit boards
         required for the manufacturing of our products;
  
      .  significant yield losses, which could affect our ability to fulfill
         customer orders and could increase our costs;
  
      .  manufacturing flaws affecting the reliability, functionality or
         performance of our products, which could increase our product costs,
         reduce demand for our products or require product recalls;
  
      .  increased research and development expenses;
  
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      .  exchange rate fluctuations, particularly the U.S. Dollar to Japanese Yen
         exchange rate;
  
      .  changes in general economic conditions, particularly in Japan and the
         European Union; and
  
      .  reduced sales to our retail customers if consumer confidence continues
         to be adversely impacted by the September 11 terrorist attacks and
         subsequent events.
  
     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 could harm our gross margins
  and operating results. On the other hand, 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 products, CompactFlash, MultiMediaCard and Secure Digital card,
  are sold into emerging consumer markets, it has been difficult to accurately
  forecast future sales. In addition, bookings visibility declined significantly
  late in the fourth quarter of 2000, and remains low due to the current economic
  uncertainty in our markets. A substantial majority of our quarterly sales are
  currently, and have historically been, from orders received and fulfilled in
  the same quarter, which makes accurate forecasting very difficult. Our product
  order backlog may fluctuate substantially from quarter to quarter.
  
     Variability of expense levels. Despite actions we have taken in 2001 to
  align expense levels with decreased revenues, we may need to hire additional
  personnel in certain business areas or otherwise increase our operating expenses
  in the future to support our sales and marketing efforts and research and
  development activities. We have significant fixed costs and we cannot readily
  reduce these expenses over the short term. If our revenues do not increase
  proportionately to our operating expenses, or if revenues decrease or do not
  meet expectations for a particular period, our business, financial condition and
  results of operations will be harmed.
  
     Variability of average selling prices and gross margins. Our product mix
  varies quarterly, which affects our overall average selling prices and gross
  margins. Our CompactFlash, MultiMediaCard and Secure Digital card 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, MultiMediaCard and
  Secure Digital card products will continue to represent a significant
  percentage of our product revenues as consumer applications, such as digital
  cameras and digital music players, become more popular. Flash data storage
  markets are intensely competitive, and price reductions for our products are
  necessary to meet consumer price points. Due to continued oversupply in flash
  memory foundry capacity throughout 2001 and the economic slow-down in 2001, the
  decline in our average selling prices has been much more severe than the 22%
  decrease in 2000 and we expect that price declines for our products in the next
  several quarters could be significant. We have already experienced a 59%
  decline in our average selling price per megabyte of memory shipped in the
  first nine months of 2001. If we cannot reduce our product manufacturing costs
  in future periods to offset further price reductions, our gross margins and net
  profitability will suffer.
  
     In the fourth quarter we commenced retail sales of Memory Stick cards
  supplied to us under an OEM supply and purchase agreement with Sony
  Corporation, or Sony. We cannot assure you that the gross margins on the sale
  of Memory Stick products will be comparable to the gross margins from the sale
  of our other products.
  
     Variability of license fees and royalties. Our intellectual property
  strategy consists of cross-licensing 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. Our income from patent licenses and
  royalties can fluctuate significantly from quarter to quarter. A substantial
  portion of this income comes from
  
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  royalties based on the actual sales by our licensees. Given the current market
  outlook for the fourth quarter of 2001 and beyond, sales of licensed flash
  products by our licensees may be substantially lower than the corresponding
  sales in recent quarters, which may cause a substantial drop in our royalty
  revenues. Because these revenues have higher gross margins than our product
  revenues, our overall gross margins and net income fluctuate significantly with
  changes in license and royalty revenues. We receive royalty revenue reports
  from certain of our licensees twice a year, and record all revenues one quarter
  in arrears. We cannot assure you that our existing licensees will renew their
  licenses upon expiration, or that we will be successful in signing new
  licensees in the future. We align estimates to actual reported royalty revenues
  when reports are received.
  
     Our selling prices may be affected by excess capacity in the market for
     flash memory products
  
     Through the first nine months of 2001, worldwide flash memory supply
  exceeded customer demand, causing excess supply in the markets for our products
  and significant declines in average selling prices. If this situation continues
  throughout the fourth quarter of 2001 and beyond, price declines for our
  products could continue to be significant. If we cannot reduce our product
  manufacturing costs to offset these reduced prices, our gross margins and net
  profitability will be adversely impacted.
  
     Our business depends significantly upon consumer products
  
     In the first nine months of 2001, we continued to receive more product
  revenue and ship more units of products for consumer electronics applications,
  including digital cameras and PDAs, compared to other applications. The
  consumer market is intensely competitive and is more price sensitive than our
  other target markets. In addition, we must spend more on marketing and
  promotion in consumer markets to establish brand name recognition and drive
  demand.
  
     A significant portion of our 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 through 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.
  
     There is seasonality in our business
  
     Sales of our products, in particular the sale of CompactFlash,
  MultiMediaCard, Secure Digital card, SmartMedia card and Memory Stick products,
  in the consumer electronics market may be subject to seasonality. As a result,
  product sales may be 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.
  
     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 have enabled us to decrease the cost per megabyte of our flash data
    storage products: 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:
  
      .  lower yields often experienced in the early production of new
         semiconductor devices;
  
      .  manufacturing flaws with new processes including manufacturing processes
         at our subcontractors which may be extremely complex;
  
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      .  problems with design and manufacturing of products that will incorporate
         these devices, which may result in delays or product recalls; 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.
  
     NAND MLC flash technology. We have developed new products based on NAND MLC
  (Multi Level Cell) flash technology, a flash architecture designed to store two
  bits in each flash memory cell. High density flash memory, such as NAND MLC
  flash, is a complex technology that requires strict manufacturing controls and
  effective test screens. Problems encountered in the shift to volume production
  for new flash products could impact both reliability and yields, and result in
  increased manufacturing costs and reduced product availability. NAND MLC
  technology is highly complex and has not previously been successfully
  commercialized. We may not be able to manufacture future generations of NAND
  MLC products with yields sufficient to result in lower costs per megabyte. If
  we are unable to bring future generations of high density flash memory into
  full production as quickly as planned or if we experience unplanned yield or
  reliability problems, our revenues and gross margins will decline.
  
     Secure Digital card products. SanDisk, along with Matsushita and Toshiba,
  jointly developed and jointly promote the Secure Digital card. The Secure
  Digital card incorporates advanced security and copyright protection features
  required by the emerging markets for the electronic distribution of music,
  video and other copyrighted works. Although the Secure Digital card is designed
  specifically to address the copy protection rights of the content providers,
  there can be no assurance that these content providers will find these measures
  sufficient or will agree to support them. Furthermore, there is no assurance
  that consumers will widely adopt Secure Digital cards, as they only operate
  with copyrighted content. Conversely, broad acceptance of our Secure Digital
  card by consumers will likely reduce demand for our MultiMediaCard and
  CompactFlash card products. See "--The success of our business depends on
  emerging markets and new products."
  
     Memory Stick products. In September 2001 we signed an agreement with Sony
  involving their Memory Stick card format. Under the agreement Sony will supply
  us a portion of their Memory Stick output for us to resell under the SanDisk
  brand name. Sony has also agreed to purchase a portion of their NAND memory
  chip requirements from us provided that we meet market competitive pricing for
  these components. In addition, the two companies agreed to co-develop and
  co-own the specifications for the next generation Memory Stick. Each company
  will have all rights to manufacture and sell this new generation Memory Stick.
  We cannot assure you that this new business will generate substantial revenues
  or gross margin contributions for us. Consumers may prefer to purchase the Sony
  brand Memory Stick over our SanDisk brand Memory Stick. Furthermore, the second
  generation Memory Stick is still in the early stages of development and is not
  expected to generate significant sales before 2003 at the earliest. We cannot
  assure you that the second generation Memory Stick will achieve commercial
  success in the marketplace when it is introduced.
  
     We are transitioning our technology to NAND-based products. The transition
  to NAND-based products is very complex, and requires good execution from our
  manufacturing, technology, quality, marketing, and sales and customer support
  staffs. If the current soft market conditions continue through the fourth
  quarter of this year and beyond, or if we are unable for any reason to achieve
  customer acceptance of our card products built with these NAND flash chips, we
  will experience a significant increase in our inventory, as we are
  contractually obligated, and expect to continue to be obligated after the
  restructuring of our FlashVision business, to purchase half of FlashVision's
  NAND wafer production output. This may result in inventory write offs and have
  a material adverse effect on our business, results of operations and financial
  condition.
  
     In the third quarter of 2001, we began to purchase controller wafers from
  UMC and are continuing development of advanced flash memory technology at the
  0.15 micron technology design rules.
  
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     We depend on third party foundries for silicon wafers
  
     All of our flash memory card products require silicon wafers, the majority
  of which are currently supplied by Toshiba's wafer facility at Yokkaichi, Japan
  and through our FlashVision joint venture in Virginia, as well as UMC in
  Taiwan. After the restructuring of our FlashVision business, all of our NAND
  wafers will be supplied by Toshiba's Yokkaichi wafer facility. If Toshiba,
  FlashVision and UMC are uncompetitive or are unable to satisfy these
  requirements, our business, financial condition and operating results may
  suffer. Any disruption in supply from these sources due to natural disaster,
  power failure, labor unrest or other causes could significantly harm our
  business, financial condition and results of operations.
  
     Under the terms of our wafer supply agreements with Toshiba, FlashVision and
  UMC, we are obligated to provide a rolling forecast of anticipated purchase
  orders for the next six calendar months. 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 dissatisfied customers, lost sales and lower revenues. In
  addition, in February 2000, we entered into a capacity and reservation deposit
  agreement with UMC. To reserve additional foundry capacity under this
  agreement, we paid UMC a reservation deposit. This deposit will be refunded to
  us on a quarterly basis, over the agreement term, if we purchase the full wafer
  capacity reserved for us. We may forfeit part of our deposit if we are unable
  to utilize our reserved capacity within four quarters of the end of the
  agreement term. If we are unable to obtain scheduled quantities of wafers with
  acceptable price and yields from any foundry, our business, financial condition
  and results of operations could be harmed.
  
     Our investment in new flash memory wafer production may result in increased
  expenses and fluctuations in operating results
  
       FlashVision, L.L.C. On June 30, 2000, we closed a transaction with Toshiba
  providing for the joint development and manufacture of 512 megabit and 1 gigabit
  flash memory chips and Secure Digital card controllers. As a part of this
  transaction, we and Toshiba formed and contributed initial funding to
  FlashVision, a joint venture to equip and operate a silicon wafer manufacturing
  line at Dominion Semiconductor in Virginia. In January 2001, we invested the
  final $15.0 million of our $150.0 million cash commitment, as of November 30,
  2001 we had guaranteed $138.0 million in equipment lease lines, and as of
  January 2002, we expect to have guarantee obligations in the amount of $157.6
  million to equip Toshiba's Dominion Semiconductor manufacturing clean room with
  advanced wafer processing equipment. We will guarantee a total of up to $175.0
  million in equipment lease lines. In December 2001, we agreed with Toshiba to
  restructure our FlashVision business and to transfer its operations to Toshiba's
  Yokkaichi fabrication facility in Japan.
  
       We are using the new production capacity at Dominion to manufacture
  primarily NAND flash memory wafers with minimum lithographic feature size of
  0.16 micron initially, moving to 0.13 micron in the future. Such minimum feature
  sizes are considered today to be among the most advanced for mass production of
  silicon wafers. Therefore, it is difficult to predict how long it will take to
  achieve adequate yields, reliable operation, and economically attractive product
  costs based on our new designs. Introduction of new feature sizes and
  technologies will be subject to the same risks and uncertainties after the
  restructuring of our FlashVision business. We currently and will continue to
  rely on Toshiba to address these challenges. With our investments in the
  Dominion facility and in Toshiba's Yokkaichi facility after the restructuring of
  our FlashVision business, we are now and will continue to be exposed to the
  adverse financial impact of any delays or manufacturing problems associated with
  wafer production lines. Any problems or delays in volume production at the
  Dominion fabrication facility or the Yokkaichi fabrication facility could
  adversely impact our operating results in 2001 and beyond.
  
     We incurred substantial start up expenses related to the hiring and training
  of manufacturing personnel, facilitizing the clean room and installing
  equipment at the Dominion fabrication facility. Although as a part of
  
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  our agreement with Toshiba to restructure our FlashVision business we will
  recapture substantially all of the Dominion start up expenses, we will incur
  similar start up expenses in connection with the new Yokkaichi fabrication
  facility. In addition, under the terms of the MOU, we may not achieve the
  expected cost benefits until the second half of 2002, if at all. Until the
  transition of the Dominion tool-set is completed, we will rely solely on the
  current Yokkaichi fabrication facility for our NAND wafers. If we experience
  increased demand during this transition period, we may not be able to procure a
  sufficient number of wafers from Toshiba to meet this demand, which would harm
  our business and operating results. Under our agreement with Toshiba, we are
  committed to purchase 50% of the output from the Dominion fabrication facility
  prior to the FlashVision restructuring and from the Yokkaichi fabrication
  facility after the restructuring. Apart from our commitment to purchase our
  share of the FlashVision wafer output from Yokkaichi after the restructuring, we
  will also purchase NAND wafers from Toshiba's current Yokkaichi fabrication
  facility on a foundry relationship basis. This foundry relationship will be
  conducted under a firm purchase order commitment over rolling three-month
  periods. NAND wafers are ordered under purchase orders at market prices and
  cannot be cancelled. If we place purchase orders with Toshiba and our business
  condition deteriorates, we may end up with excess inventories of NAND wafers,
  which could harm our business and financial condition. We will incur startup
  costs and pay our share of ongoing operating activities even if we do not
  utilize our full share of the Dominion or new Yokkaichi output. Should customer
  demand for NAND flash products be less than our available supply, we may suffer
  from reduced revenues and increased expenses, and increased inventory of unsold
  NAND flash wafers, which could adversely affect our operating results. In order
  for us to sell NAND based CompactFlash, MultiMediaCards and Secure Digital
  cards, we have been developing new controllers, printed circuit boards and test
  algorithms because the architecture of NAND flash is significantly different
  from our current NOR flash designs. Any technical difficulties or delays in the
  development of these elements could prevent us from taking advantage of the
  available NAND output and could adversely affect our results of operations.
  
     Tower Semiconductor. On July 4, 2000, we entered into a share purchase
  agreement to make a $75.0 million investment in Tower Semiconductor, or Tower,
  in Israel, representing approximately 10% ownership of Tower. The investment is
  subject to the completion of certain milestones. During the first nine months
  of 2001, Tower satisfied the closing conditions of the share purchase agreement
  and completed the first two milestones. Under the terms of the agreement, we
  invested $42.0 million to purchase 1,599,931 ordinary shares and obtain wafer
  credits of $21.4 million. In September 2001, we agreed to convert 75% of our
  wafer credits to equity at a price of $12.75 per share and received an
  additional 1,284,007 ordinary shares. Due to the decline in the value of
  Tower's common stock, we recorded a loss of $5.4 million on this exchange in
  the third quarter of 2001. Additional contributions will take the form of
  mandatory warrant exercises for ordinary shares at an exercise price of $30.00
  per share if other milestones are met. The warrants will expire five years from
  the date of grant, and in the event the key milestones are not achieved, the
  exercise of these warrants will not be mandatory. We expect first wafer
  production to commence at the new fabrication facility in late 2002. Due to the
  continued weakness in the semiconductor industry, the value of our Tower
  investment and remaining wafer credits had declined to $22.6 million on
  September 30, 2001. It was determined that this decline was other than
  temporary, as defined by generally accepted accounting principles and a loss of
  $14.0 million was recorded in the third quarter of 2001.
  
     Tower's completion of the wafer foundry facility is dependent on its ability
  to obtain additional financing for the foundry construction from equity and
  other sources and the release of grants and approvals for changes in grant
  programs from the Israel government's Investment Center. If Tower is unable to
  complete foundry construction in a timely manner or is unable to successfully
  complete the development and transfer of advanced CMOS process technologies and
  ramp-up of production, the value of our investment in Tower will decline and we
  may be unable to obtain the wafers needed to manufacture our products, which
  would harm our results of operations. In addition, the value of our investment
  in Tower may be adversely affected by a further deterioration of conditions in
  the market for foundry manufacturing services and the market for semiconductor
  products generally. If the fair value of the Tower investment declines further,
  it may be necessary to record additional losses.
  
     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, the MultiMediaCard, and Secure Digital card such as
  digital cameras, portable digital music players and cellular phones, must
  develop and grow. If sales of these products do not grow, our revenues and
  profit margins could be adversely impacted.
  
                                          9
  
  <PAGE>
  
     In the second and third quarters of 2001, we experienced a substantial drop
  in demand from our MultiMediaCard customers, which we believe is attributable
  to the switch by these customers to the Secure Digital Card as well as the
  generally soft market conditions.
  
     The success of our 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 adoption by the major content providers of the copy protection
         features offered by our Secure Digital card 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.
  
     512 megabit and 1 gigabit flash memory card products. On June 30, 2000, we
  closed a transaction with Toshiba providing for the joint development of 512
  megabit and 1 gigabit flash memory chips and the manufacture of Secure Digital
  card controllers. As part of this venture, we and Toshiba plan to employ
  Toshiba's 0.16 micron and future 0.13 micron NAND flash integrated circuit
  manufacturing technology and SanDisk's multilevel cell flash and controller
  system technology. During the third quarter of 2000, we announced with Toshiba
  the completion of the joint development of the 512 megabit NAND flash chip
  employing Toshiba's 0.16 micron manufacturing process technology. We began
  employing the 512 megabit technology in the second half of 2001, and expect to
  commence shipments of cards employing the 1 gigabit technology in the first
  quarter of 2002. The development of 512 megabit and 1 gigabit flash memory
  chips and Secure Digital card controllers is expected to be complex and
  incorporates SanDisk and Toshiba technology that is still under development. We
  cannot assure you that we and Toshiba will successfully develop and bring into
  full production with acceptable yields and reliability these new products or
  the underlying technology, or that any development or production ramp will be
  completed in a timely or cost-effective manner. If we are not successful in any
  of the above, or if our cost structure is not competitive, our business,
  financial condition and results of operations could suffer.
  
     We may be unable to maintain market share
  
     During periods of excess supply in the market for our flash memory products,
  such as we have experienced in the first nine months of 2001 and continue to
  experience, we may lose market share to competitors who aggressively lower
  their prices. Conversely, under conditions of tight flash memory supply, 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 and other components to meet
  demand. If we are unable to do so in a timely manner, we may lose market share
  to our competitors. Currently we are experiencing severe price competition for
  our products which is adversely impacting our product gross margins and overall
  profitability.
  
     Our international operations make us vulnerable to changing conditions and
  currency fluctuations
  
     Political risks. Currently, a significant portion of our flash memory wafers
  is produced by Toshiba in Japan and UMC in Taiwan. After the restructuring of
  our FlashVision business, all of our flash memory wafers will be produced
  overseas by Toshiba and UMC. We also use third-party subcontractors in Taiwan
  and China for the assembly and testing of some of our card and component
  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 in the past both countries have conducted military exercises in
  or near the other's territorial
  
                                         10
  
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  airspace. The Taiwanese and Chinese governments may 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 card products by our
  Taiwanese foundries and subcontractor. See "--We depend on our suppliers and
  third party subcontractors."
  
     We use 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.
  
     Although we do not believe the current political unrest in Israel represents
  a major security problem for Tower since Migdal Haemek, Israel is in a
  relatively secure geographic location, the unrest may expand and even if it
  remains at current levels, could cause scheduling delays, as well as economic
  uncertainty, which could cause potential foundry customers to go elsewhere for
  their foundry business. Moreover, if U.S. military actions in Afghanistan
  result in retaliation against Israel, Tower's fabrication facility and our
  engineering design center in Israel may be adversely impacted. We cannot assure
  you that the Tower facility will be completed or will begin production as
  scheduled, or that the processes needed to fabricate our wafers will be
  qualified at the new facility. Moreover, we cannot assure you that this new
  facility will be able to achieve acceptable yields or deliver sufficient
  quantities of wafers on a timely basis at a competitive price. Furthermore, if
  the current depressed business conditions for semiconductor wafers persists
  beyond 2002, Tower may be unable to operate their new fabrication facility at
  an optimum capacity utilization, which would cause them to operate at a loss.
  In addition, while the political unrest has not yet posed a direct security
  risk to our engineering design center in Israel, it may cause unforeseen delays
  in the development of our products.
  
     Economic risks. We price our products primarily in U.S. Dollars. Given the
  recent economic conditions in Asia and the European Union and the weakness of
  the Euro, Yen and other currencies relative to the U.S. Dollar, our products
  may be relatively more expensive in these regions, which could result in a
  decrease in our sales. 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, which could harm our
  business, 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;
  
      .  natural disasters affecting the countries in which we conduct our
         business, particularly Japan, such as the earthquakes experienced in
         Taiwan in 1999 and in Japan in previous years;
  
      .  imposition of regulatory requirements, tariffs, import and export
         restrictions and other barriers and restrictions;
  
      .  longer payment cycles and greater difficulty in accounts receivable
         collection, particularly as we increase our sales through the retail
         distribution channel, and general business conditions deteriorate;
  
      .  adverse tax rules and regulations;
  
                                         11
  
  <PAGE>
  
      .  weak 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 significantly harmed by delays or reductions in shipments if we
  are unable to develop alternative sources or obtain sufficient quantities of
  these components. For example, after the restructuring of our FlashVision
  business, we will rely on Toshiba's Yokkaichi fabrication facility for all of
  our flash memory wafers. Any disruption in the supply of waters from the
  Yokkaichi fabrication facility would severely adversely impact our business.
  Until the transition of the Dominion tool-set is completed, we will rely solely
  on the current Yokkaichi fabrication facility for our NAND wafers. If we
  experience increased demand during this transition period, we may not be able to
  procure a sufficient number of wafers from Toshiba to meet this demand, which
  would harm our business and operating results.
  
     We also rely on third-party subcontractors for a substantial portion of
  wafer testing, packaged memory final testing, card assembly and card testing,
  including Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc.
  in China. These subcontractors will also be assembling and testing a majority
  of our mature, high-volume products. We began transferring portions of our
  testing and assembly operations to these subcontractors in the second half of
  1999. In the fourth quarter of 2001, we transferred all of our card assembly
  and test manufacturing operations from our Sunnyvale location to offshore
  subcontractors. Any problems in this complex transition may result in a
  disruption of production and a shortage of product to meet customer demand. We
  have no long-term contracts with these subcontractors and cannot directly
  control product delivery schedules. Any significant problems that occur at our
  subcontractors, or their failure to perform at the level we expect could lead
  to product shortages or quality assurance problems, which could increase the
  manufacturing costs of our products and have adverse effects on our operating
  results. Furthermore, we are moving to turnkey manufacturing with some of our
  subcontract suppliers, which may reduce our visibility and control of their
  inventories of purchased parts necessary to build our products.
  
     Our markets are highly competitive
  
     Flash memory manufacturers and memory card assemblers. 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 companies that develop and manufacture
  storage flash chips, such as Hitachi, Samsung, Micron Technology and Toshiba.
  In addition, we compete with companies that manufacture other forms of flash
  memory and companies that purchase flash memory components and assemble memory
  cards. Companies that manufacture socket flash, linear flash and components
  include Advanced Micro Devices, Atmel, Fujitsu, Intel, Macronix, Mitsubishi,
  Sharp Electronics and ST Microelectronics. Companies that combine controllers
  and flash memory chips developed by others into flash storage cards include
  Dane-Elec Manufacturing, Delkin Devices, Inc., Feiya Technology Corporation,
  Infineon Technologies, Kingston Technology, Lexar Media, M-Systems, Matsushita
  Battery, PNY, Panasonic, Pretec, Silicon Storage Technology, Silicon Tek,
  Simple Technology, Sony Corporation, TDK Corporation and Viking Components.
  
     In addition, many 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.
  
                                         12
  
  <PAGE>
  
     We have entered into an agreement with Matsushita and Toshiba, forming the
  Secure Digital Association, or SD Association, to jointly develop and promote a
  next generation flash memory card called the Secure Digital card. Under this
  agreement, royalty-bearing Secure Digital card licenses will be available to
  other flash memory card manufacturers, which will increase the competition for
  our Secure Digital card, CompactFlash and MultiMediaCard products. In addition,
  Matsushita and Toshiba have commenced selling Secure Digital cards that will
  compete directly with our products. While other flash card manufacturers will
  be required to pay the SD Association license fees and royalties, which will be
  shared among Matsushita, Toshiba and us, there will be no royalties or license
  fees payable among the three companies for their respective sales of the Secure
  Digital card. Thus, we will forfeit potential royalty income from Secure
  Digital card sales by Matsushita and Toshiba.
  
     In addition, we and Toshiba will each separately market and sell any 512
  megabit and 1 gigabit flash memory chips developed and manufactured under our
  relationship. Accordingly, we will compete directly with Toshiba for sales of
  these advanced chips.
  
     We have entered into patent cross-license agreements with several of our
  leading competitors including Hitachi, Intel, Lexar, SST, Samsung, Sharp, Sony,
  Toshiba and TDK. 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 of our competitors, competition will increase and may harm our
  business, financial condition and results of operations. Currently, we are
  engaged in licensing discussions with several of our competitors. There can be
  no assurance that we will be successful in concluding licensing agreements
  under terms which are favorable to us, or at all.
  
     Alternative storage media. Competing products have been introduced that
  promote industry standards that are different from our 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, M-Systems' DiskOnKey, a USB-based memory device, and the Secure
  MultiMediaCard from Hitachi and Infineon. Each competing standard may not be
  mechanically and electronically compatible with CompactFlash, MultiMediaCard
  and Secure Digital card. If a manufacturer of digital cameras or other consumer
  electronic devices designs in one of these alternative competing standards,
  CompactFlash, MultiMediaCard, or Secure Digital card will be eliminated from
  use in that product.
  
     IBM's microdrive, a rotating disk drive in a Type II CompactFlash format
  competes directly with our larger capacity memory cards. M-Systems' DiskOnChip
  2000 Millennium product competes against our Flash chipset products in embedded
  storage applications such as set top boxes and networking appliances.
  
       The adoption of consumer electronics products that use the Memory Stick may
  erode the overall market share for other card formats. Sony has licensed its
  proprietary Memory Stick to other companies and Sony has agreed to supply us a
  portion of their Memory Stick output for resale under our brand name. If
  consumer electronics products using the Memory Stick achieve widespread use,
  sales of our MultiMediaCard, Secure Digital card and CompactFlash products may
  decline. Our MultiMediaCard products also have faced significant competition
  from Toshiba's SmartMedia flash cards. Recently, Hitachi, Infineon, Sanyo and
  Fujitsu have proposed their Secure MultiMediaCard which provides the copy
  protection function that is included in our Secure Digital card. Should this
  initiative gain industry wide acceptance, it may reduce the widespread adoption
  of the Secure Digital card.
  
     In addition, other companies, such as Sanyo, DataPlay and Matrix
  Semiconductor have announced products or technologies that may potentially
  compete with our products.
  
     Alternative flash technologies. We also face competition from products based
  on multilevel cell flash technology from Intel and Hitachi. These products
  currently compete with our NAND MLC products. 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 conventional flash technology.
  
                                         13
  
  <PAGE>
  
     Furthermore, we expect to face competition both 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. For example, Infineon has formed a joint venture
  with Saifun, an Israeli startup company, to develop a proprietary flash memory
  technology which will be targeted at low cost data storage applications. 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.
  
     Sales to a small number of customers represent a significant portion of our
  revenues
  
     Sales to our top 10 customers accounted for approximately 52% and 54% of our
  product revenues in the third quarter and first nine months of 2001, compared
  to 56% and 49% in the same periods of 2000. In the first nine months of 2001,
  sales to one customer totaled 12% of product sales, while there was no customer
  that represented more than 10% of product sales in the first nine months of
  2000. If we were to lose one of our major customers or experience any material
  reduction in orders from any of 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 changes.
  
     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 traditional
  distribution channels and may dramatically change the way our consumer products
  are purchased in future years. We cannot assure you that we will successfully
  develop the Internet sales channel or successfully manage the inherent conflict
  between the Internet and our traditional sales channels.
  
     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 will rely exclusively 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
  planned yields, we will experience higher costs and reduced product
  availability, which could harm our business, financial condition and results of
  operations.
  
     In addition, we cannot assure you that the Dominion fabrication facility or
  the Yokkaichi fabrication facilities will produce satisfactory quantities of
  wafers with acceptable prices, reliability and yields. Any failure in this
  regard could materially harm our business, financial condition and results of
  operations. During the transition from the Dominion fabrication facility to the
  new Yokkaichi fabrication facility, when we will be solely reliant on the
  current Yokkaichi fabrication facility, any such failure will be particularly
  harmful to us as we will not have an alternate source of supply. In addition,
  we have no experience in operating a wafer manufacturing line and we intend to
  rely on the existing manufacturing organizations at the Yokkaichi fabrication
  facilities. The new Yokkaichi fabrication facility will be tasked to "copy
  exactly" the same manufacturing flow employed by Toshiba in its existing
  Yokkaichi fabrication facility but we cannot assure you that they will be
  successful in manufacturing these advanced NAND flash products on a
  cost-effective basis or at all.
  
                                         14
  
  <PAGE>
  
     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;
  
      .  our patents will be issued in the primary countries where our products
         are sold in order to protect our rights and potential commercial
         advantage; or
  
      .  any of our products do not infringe on the patents of other companies.
  
     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.
  
     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, Lexar, Samsung, Sharp, SST, Sony,
  TDK 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, or that our existing licensees will
  renew their licences upon expiration, or that we will be successful in signing
  new licensees in the future.
  
     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. Litigation is
  subject to inherent risks and uncertainties that may cause actual results to
  differ materially from our expectations. Factors that could cause litigation
  results to differ include, but are not limited to, the discovery of previously
  unknown facts, changes in the law or in the interpretation of laws, and
  uncertainties associated with the judicial decision-making process. Furthermore,
  parties that we have sued and that we may sue for patent infringement may
  countersue us for infringing their patents.
  
                                         15
  
  <PAGE>
  
     On or about August 3, 2001, the Lemelson Medical, Education & Research
  Foundation, or Lemelson Foundation, filed a complaint for patent infringement
  against us. The suit, captioned Lemelson Medical, Education, & Research
  Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case
  No. CIV01 1440PHX MS, was filed in the United States District Court, District
  of Arizona. The complaint alleges that we, and four other defendants, have
  infringed certain patents held by the Lemelson Foundation pertaining to bar
  code scanning technology. By its complaint, the Lemelson Foundation requests
  that we be enjoined from its allegedly infringing activities and seeks
  unspecified damages.
  
     On October 15, 2001, we filed a complaint for patent infringement in the
  United States District Court for the Northern District of California against
  Micron Technology, Inc., or Micron. The complaint seeks damages and an
  injunction against Micron for making, selling, importing or using flash memory
  cards that infringe our U.S. patent No. 6,149,316.
  
     On October 31, 2001, we filed a complaint for patent infringement in the
  United States District Court for the Northern District of California against
  Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation and
  Power Quotient International Co., Ltd. The complaint seeks damages and
  injunctions against these companies from making, selling, importing or using
  flash memory cards that infringe our U.S. patent No. 5,602,987.
  
     Rapid growth may strain our operations
  
     Despite actions by us in 2001 to align expense levels with decreased
  revenues, to accommodate future growth, we must continue to hire, train,
  motivate and manage our employees. In the past, we have experienced 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 rapid growth, which could
  in turn harm our business, financial condition and results of operations.
  
     Terrorist attacks and threats, and government responses thereto, may
  negatively impact all aspects of our operations, revenues, costs and stock price
  
     The recent terrorist attacks in the United States,the U.S. retaliation for
  these attacks and the related decline in consumer confidence and continued
  economic weakness have had a substantial adverse impact on our retail sales. If
  consumer confidence does not recover, our revenues and profitability may be
  adversely impacted in the fourth quarter of 2001 and beyond.
  
     In addition, any similar future events may disrupt our operations or those
  of our customers and suppliers and may affect the availability of materials
  needed to manufacture our products or the means to transport those materials to
  manufacturing facilities and finished products to customers. In addition, these
  events have had and may continue to have an adverse impact on the U.S. and
  world economy in general and consumer confidence and spending in particular,
  which could harm our sales. Any of these events could increase volatility in
  the U.S. and world financial markets which could harm our stock price and may
  limit the capital resources available to us and our customers or suppliers.
  This could have a significant impact on our operating results, revenues and
  costs and may result in increased volatility in the market price of our common
  stock.
  
     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
  
                                        16
  
  <PAGE>
  
  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.
  
     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, and substantially increase
  the cost paid by a stockholder, who attempts to acquire us on terms not
  approved by our board of directors. This could prevent us from being acquired.
  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 our
  common stock that could have a material adverse effect on the market value of
  our common stock. In addition, we are subject to the anti-takeover provisions
  of Section 203 of the Delaware General Corporation Law. This section provides
  that a corporation 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.
  
     Our stock price has been, and may continue to be, volatile
  
     The market price of our stock has fluctuated significantly in the past and
  is likely to continue to fluctuate in the future. For example, in the 12 months
  ending September 30, 2001 our stock price fluctuated significantly from a low
  of $8.61 to a high of $74.75. 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 and semiconductor companies have been especially
  volatile, often for reasons outside the control of the particular companies.
  These fluctuations as well as general economic, political and market conditions
  may have an adverse affect on the market price of our common stock.
  Furthermore, the market price for the notes may be adversely affected by
  declines in the market price of our common stock or deterioration of our
  financial performance, declines in the overall market for similar securities
  and the actual or perceived performance or prospects for companies in our
  industry.
  
     Our Digital Portal Inc., or DPI, joint venture has an unproven product and
  an untested market
  
     The Digital Photo Kiosk currently under development for DPI has experienced
  delays in its U.S. market rollout, due primarily to modifications to improve
  its operation as a standalone, reliable, user-friendly photo printing kiosk. We
  cannot assure you that these kiosks, once introduced will function reliably as
  intended, or that they will receive favorable acceptance from consumers in a
  reasonable period of time. If DPI is unsuccessful our financial results may be
  harmed.
  
                                         17
  
  <PAGE>
  
  
  B. On December 19, 2001, we issued the following press release regarding our
  Convertible Note Offering:
  
  SANDISK CORPORATION TO OFFER $100 MILLION OF CONVERTIBLE SUBORDINATED NOTES
  
       SUNNYVALE, CA, Dec. 19, 2001 - SanDisk Corporation (Nasdaq: SNDK) announced
  today that it intends to offer in a private placement, subject to market and
  other conditions, $100 million in convertible subordinated notes due 2006 in an
  offering to qualified institutional buyers. The interest rate, conversion rate
  and offering price are to be determined by negotiations between SanDisk and the
  initial purchasers of the notes. The offering is expected to close in December
  2001. The company intends to grant the initial purchasers a 30-day option to
  purchase an additional $20 million of notes.
  
       The net proceeds of the offering will be used for general corporate
  purposes, including the development of new technologies and fabrication
  facilities, general working capital and capital expenditures. We may also use a
  portion of the net proceeds to fund acquisitions of products, technologies or
  complementary businesses. However, we currently have no commitments or
  agreements for any specific acquisitions.
  
                                         18
  
  <PAGE>
  
       This announcement is neither an offer to sell nor a solicitation to buy any
  of these securities. The securities will not be registered under the Securities
  Act of 1933, as amended (the "Securities Act"), or any state securities laws,
  and unless so registered, may not be offered or sold except pursuant to an
  exemption from the registration requirements of the Securities Act and
  applicable state laws.
  
       SanDisk, the world's largest supplier of flash data storage products,
  designs, manufactures and markets industry-standard, solid-state data, digital
  imaging and audio storage products using its patented, high density flash memory
  and controller technology. SanDisk is based in Sunnyvale, CA.
  
                                         19
  
  <PAGE>
  
                                   SIGNATURES
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned hereunto duly authorized.
  
                                        SANDISK CORPORATION
  
  
  
  Date:  December 19, 2001              By: /s/ Frank A. Calderoni
                                           ------------------------
                                           Name:  Frank A. Calderoni
                                           Title: Senior Vice President, Finance
                                                  and Administration, and Chief
                                                  Financial Officer
  
  
                                         20
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metadata_filer: {"company-data": {"conformed-name": "SANDISK CORP", "cik": "0001000180", "assigned-sic": "3572", "irs-number": "770191793", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "000-26734", "film-number": "1818006"}, "business-address": {"street1": "140 CASPIAN COURT", "city": "SUNNYVALE", "state": "CA", "zip": "94089", "phone": "4085620500"}, "mail-address": {"street1": "140 CASPIAN COURT", "city": "SUNNYVALE", "state": "CA", "zip": "94089"}}
text: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 8-K
  
                  Current Report Pursuant to Section 13 or 15(d) of
  
                         The Securities Exchange Act of 1934
  
  Date of Report (Date of earliest event reported)  December 17, 2001
                                                  --------------------------------
  
                                 SanDisk Corporation
  --------------------------------------------------------------------------------
               (Exact name of registrant as specified in its charter)
  
             Delaware                   000-26734                77-0191793
  ----------------------------------------------------------------------- --------
  (State or other jurisdiction         (Commission             (IRS Employer
       of incorporation)               File Number)          Identification No.)
  
         140 Caspian Court, Sunnyvale, California                 94089
  --------------------------------------------------------------------------------
         (Address of principal executive offices)              (Zip Code)
  
  Registrant's telephone number, including area code  (408) 542-0500
                                                    ------------------------------
                                        None
  --------------------------------------------------------------------------------
            (Former name or former address, if changed since last report)
  ITEM 5.  OTHER EVENTS
  
  A. On December 18, 2001, we issued the following press release regarding our
  Memorandum of Understanding with Toshiba Corporation:
  
       TOSHIBA AND SANDISK SIGN MEMORANDUM OF UNDERSTANDING TO CONSOLIDATE THEIR
  FLASHVISION MANUFACTURING AT TOSHIBA'S YOKKAICHI, JAPAN MEMORY FAB
  
       Move Expected To Realize  Significantly More Cost Competitive Manufacturing
       ---------------------------------------------------------------------------
  
       Of Advanced NAND  Flash Memory And Accelerate The Volume Production
       --------------------------------------------------------------------
  
       Of Next Generation .13-Micron NAND Flash
       ----------------------------------------
  
       Currently Under Joint Development
       ---------------------------------
  
       SUNNYVALE, CA, Dec. 18, 2001 - SanDisk Corporation (NASDAQ:SNDK) and
  Toshiba Corporation announced today that they have signed a binding Memorandum
  Of Understanding (MOU) under which the two companies will consolidate their
  FlashVision advanced NAND flash wafer fab manufacturing operations at Toshiba's
  memory fab at Yokkaichi, Japan. The two companies believe that they can achieve
  significantly more cost competitive NAND wafer manufacturing by consolidating
  all NAND wafer fab operations at Yokkaichi Toshiba currently manufactures
   .16-micron NAND flash wafers for the FlashVision joint venture at both Yokkaichi
  and at the Dominion Semiconductor facility in Manassas, Virginia. Yokkaichi is
  Toshiba's most advanced memory fab and has approximately twice the wafer fab
  capacity of the Dominion fab. Through this consolidation, Yokkaichi can provide
  significantly more cost-competitive NAND flash wafers than is possible at
  Dominion.
  
       Under the terms of the MOU, Toshiba will equip a portion of the Yokkaichi
  Fab which is currently not being utilized with the more advanced,
  FlashVision-owned NAND production tool-set from Dominion. Toshiba has agreed to
  undertake full responsibility for the NAND production transition from Dominion
  to Yokkaichi which is expected to be completed in 2002. The companies expect to
  be able to meet 100% of their customers' NAND requirements during the transition
  through increasing the current NAND manufacturing output at Yokkaichi. Once the
  consolidation is completed, Yokkaichi's total NAND wafer output will match the
  combined current NAND capacity of Yokkaichi and Dominion. The parties
  contemplate that the FlashVision operation at Yokkaichi will continue in
  essentially the same 50-50 joint venture form as it has done at the Dominion
  facility in Virginia.
  
       Yokkaichi is the site of Toshiba's advanced NAND development pilot line,
  and currently all new NAND products first enter volume production at Yokkaichi.
  This consolidation will streamline the transfer of new technology and thereby
  accelerate the volume transition in 2002 from .16-micron NAND to the more cost
  competitive NAND/MLC (multi-level cell), as well as the .13-micron NAND.
  
       Takeshi Nakagawa, President of Toshiba Semiconductor Company, said, "The
  centralization of flash memory production at Yokkaichi from Dominion will
  reinforce cost competitiveness and support smooth mass production at the initial
  stage of new products. We position NAND flash memory as the most important
  pillar of our memory business and we will try our best to expand its business.
  In line with this move, Toshiba will solidify relations with SanDisk, including
  product development with multi-level cell technology and advanced process
  technology. Under this alliance, we are very confident that we are leading and
  enjoy an advantageous position over our competitors."
  
       Eli Harari, SanDisk President and CEO, said, "Our NAND flash partnership
  with Toshiba is coming out stronger as a result of this consolidation. Toshiba's
  senior management shares our vision that the NAND flash partnership between our
  two companies has a great future and Toshiba has agreed to forego any NAND
  participation from a third partner. Although we are pleased with Dominion's
  performance, we feel that the consolidation opportunity with Toshiba at
  Yokkaichi affords us a unique opportunity to accelerate our access to one of the
  world's lowest cost sources for our NAND wafers. We believe the combination of
  the highly cost-efficient Yokkaichi facility and the FlashVision advanced
  equipment tool-set from Dominion will provide us with materially lower wafer
  costs over the long-term while preserving our near-term access to wafer supply.
  We plan to negotiate with our current lenders for the leasing of the FlashVision
  tool-set that will permit the transfer of these tools by FlashVision to the
  Yokkaichi facility. Assuming that the consolidation proceeds as planned, we do
  not expect to see any adverse financial impact in 2002, nor do we expect any
  reduction to our NAND supply relative to the current FlashVision plan at
  Dominion. We expect to begin to see a substantial positive impact to our NAND
  memory cost structure starting in the second half of 2002 and improving further
  in 2003 and beyond."
  
       SanDisk, the world's largest supplier of flash data storage products,
  designs, manufactures and markets industry-standard, solid-state data, digital
  imaging and audio storage products using its patented, high density flash memory
  and controller technology. SanDisk is based in Sunnyvale, CA.
  
       The matters discussed in this news release contain forward looking
  statements that are subject to risks and uncertainties including but not limited
  to statements relating to more competitive manufacturing costs, meeting customer
  product demands, accelerated transition of future technologies, margin
  improvements and successful re-negotiation of our lease commitments. Our actual
  results could differ materially from the statements made in such forward looking
  statements due to numerous risks and uncertainties. Specific factors which could
  cause the forward looking statements herein not to be achieved include, but are
  not limited to, the ability of the company to manufacture its products in
  volume, further decline of actual selling prices of our products, delay or
  failure by the parties to timely complete new definitive agreements
  incorporating the terms and concepts of the MOU, a delay in the discussed
  transfer of tools and technology to the Yokkaichi facility, other delays in the
  consolidation process, risks associated with having a single source of supply of
  NAND wafers, delay or failure to timely transfer future technologies from
  Toshiba's new technology pilot line, failure to meet customer requirements if
  customer demand increases significantly prior to completion of transfer and
  consolidation of manufacturing or failure of the parties to secure bank approval
  in connection with the transfer of equipment which could result in higher
  financing costs or require the company to undertake other means of financing,
  including self financing of the portion of the FlashVision tool-set SanDisk is
  responsible for. Other risks for SanDisk include those items described under the
  caption, "Factors That May Affect Future Results" in the company's annual report
  on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and
  Exchange Commission. The company assumes no obligation to update the information
  in this release.
  
  The restructuring of our FlashVision busines involves many risks and
  uncertainties, including the risks described below.
  RISK FACTORS
  
  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 or declining demand for our products;
  
     .   decline in the average selling prices of our products due to competitive
          pricing pressures;
  
     .   seasonality in sales of our products;
  
     .   natural disasters affecting the countries in which we conduct our
         business, particularly Japan, where our sole source of NAND flash memory
         wafer capacity will be located and, to a lesser extent, Taiwan and the
         United States;
  
      .  excess capacity of flash memory from our competitors and our own new
         flash wafer capacity, which may cause an acceleration in the decline in
         our average selling prices;
  
      .  difficulty of forecasting and management of inventory levels; in
         particular, building a large inventory of unsold product due to
         non-cancelable contractual obligations to purchase materials such as
         flash wafers, controllers, printed circuit boards and discrete
         components;
  
      .  expenses related to obsolescence or devaluation of unsold inventory, or
         reserves necessary to protect us against future write-offs of unsold
         inventory;
  
      .  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;
  
      .  fluctuations in our license and royalty revenue;
  
      .  fluctuations in product costs, particularly due to fluctuations in
         manufacturing yields and utilization;
  
      .  availability of sufficient silicon wafer foundry capacity to meet
         customer demand;
  
      .  shortages of components such as capacitors and printed circuit boards
         required for the manufacturing of our products;
  
      .  significant yield losses, which could affect our ability to fulfill
         customer orders and could increase our costs;
  
      .  manufacturing flaws affecting the reliability, functionality or
         performance of our products, which could increase our product costs,
         reduce demand for our products or require product recalls;
  
      .  increased research and development expenses;
  
                                          4
  .  exchange rate fluctuations, particularly the U.S. Dollar to Japanese Yen
         exchange rate;
  
      .  changes in general economic conditions, particularly in Japan and the
         European Union; and
  
      .  reduced sales to our retail customers if consumer confidence continues
         to be adversely impacted by the September 11 terrorist attacks and
         subsequent events.
  
     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 could harm our gross margins
  and operating results. On the other hand, 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 products, CompactFlash, MultiMediaCard and Secure Digital card,
  are sold into emerging consumer markets, it has been difficult to accurately
  forecast future sales. In addition, bookings visibility declined significantly
  late in the fourth quarter of 2000, and remains low due to the current economic
  uncertainty in our markets. A substantial majority of our quarterly sales are
  currently, and have historically been, from orders received and fulfilled in
  the same quarter, which makes accurate forecasting very difficult. Our product
  order backlog may fluctuate substantially from quarter to quarter.
  
     Variability of expense levels. Despite actions we have taken in 2001 to
  align expense levels with decreased revenues, we may need to hire additional
  personnel in certain business areas or otherwise increase our operating expenses
  in the future to support our sales and marketing efforts and research and
  development activities. We have significant fixed costs and we cannot readily
  reduce these expenses over the short term. If our revenues do not increase
  proportionately to our operating expenses, or if revenues decrease or do not
  meet expectations for a particular period, our business, financial condition and
  results of operations will be harmed.
  
     Variability of average selling prices and gross margins. Our product mix
  varies quarterly, which affects our overall average selling prices and gross
  margins. Our CompactFlash, MultiMediaCard and Secure Digital card 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, MultiMediaCard and
  Secure Digital card products will continue to represent a significant
  percentage of our product revenues as consumer applications, such as digital
  cameras and digital music players, become more popular. Flash data storage
  markets are intensely competitive, and price reductions for our products are
  necessary to meet consumer price points. Due to continued oversupply in flash
  memory foundry capacity throughout 2001 and the economic slow-down in 2001, the
  decline in our average selling prices has been much more severe than the 22%
  decrease in 2000 and we expect that price declines for our products in the next
  several quarters could be significant. We have already experienced a 59%
  decline in our average selling price per megabyte of memory shipped in the
  first nine months of 2001. If we cannot reduce our product manufacturing costs
  in future periods to offset further price reductions, our gross margins and net
  profitability will suffer.
  
     In the fourth quarter we commenced retail sales of Memory Stick cards
  supplied to us under an OEM supply and purchase agreement with Sony
  Corporation, or Sony. We cannot assure you that the gross margins on the sale
  of Memory Stick products will be comparable to the gross margins from the sale
  of our other products.
  
     Variability of license fees and royalties. Our intellectual property
  strategy consists of cross-licensing 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. Our income from patent licenses and
  royalties can fluctuate significantly from quarter to quarter. A substantial
  portion of this income comes from
  
                                          5
  royalties based on the actual sales by our licensees. Given the current market
  outlook for the fourth quarter of 2001 and beyond, sales of licensed flash
  products by our licensees may be substantially lower than the corresponding
  sales in recent quarters, which may cause a substantial drop in our royalty
  revenues. Because these revenues have higher gross margins than our product
  revenues, our overall gross margins and net income fluctuate significantly with
  changes in license and royalty revenues. We receive royalty revenue reports
  from certain of our licensees twice a year, and record all revenues one quarter
  in arrears. We cannot assure you that our existing licensees will renew their
  licenses upon expiration, or that we will be successful in signing new
  licensees in the future. We align estimates to actual reported royalty revenues
  when reports are received.
  
     Our selling prices may be affected by excess capacity in the market for
     flash memory products
  
     Through the first nine months of 2001, worldwide flash memory supply
  exceeded customer demand, causing excess supply in the markets for our products
  and significant declines in average selling prices. If this situation continues
  throughout the fourth quarter of 2001 and beyond, price declines for our
  products could continue to be significant. If we cannot reduce our product
  manufacturing costs to offset these reduced prices, our gross margins and net
  profitability will be adversely impacted.
  
     Our business depends significantly upon consumer products
  
     In the first nine months of 2001, we continued to receive more product
  revenue and ship more units of products for consumer electronics applications,
  including digital cameras and PDAs, compared to other applications. The
  consumer market is intensely competitive and is more price sensitive than our
  other target markets. In addition, we must spend more on marketing and
  promotion in consumer markets to establish brand name recognition and drive
  demand.
  
     A significant portion of our 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 through 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.
  
     There is seasonality in our business
  
     Sales of our products, in particular the sale of CompactFlash,
  MultiMediaCard, Secure Digital card, SmartMedia card and Memory Stick products,
  in the consumer electronics market may be subject to seasonality. As a result,
  product sales may be 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.
  
     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 have enabled us to decrease the cost per megabyte of our flash data
    storage products: 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:
  
      .  lower yields often experienced in the early production of new
         semiconductor devices;
  
      .  manufacturing flaws with new processes including manufacturing processes
         at our subcontractors which may be extremely complex;
  
                                          6
  .  problems with design and manufacturing of products that will incorporate
         these devices, which may result in delays or product recalls; 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.
  
     NAND MLC flash technology. We have developed new products based on NAND MLC
  (Multi Level Cell) flash technology, a flash architecture designed to store two
  bits in each flash memory cell. High density flash memory, such as NAND MLC
  flash, is a complex technology that requires strict manufacturing controls and
  effective test screens. Problems encountered in the shift to volume production
  for new flash products could impact both reliability and yields, and result in
  increased manufacturing costs and reduced product availability. NAND MLC
  technology is highly complex and has not previously been successfully
  commercialized. We may not be able to manufacture future generations of NAND
  MLC products with yields sufficient to result in lower costs per megabyte. If
  we are unable to bring future generations of high density flash memory into
  full production as quickly as planned or if we experience unplanned yield or
  reliability problems, our revenues and gross margins will decline.
  
     Secure Digital card products. SanDisk, along with Matsushita and Toshiba,
  jointly developed and jointly promote the Secure Digital card. The Secure
  Digital card incorporates advanced security and copyright protection features
  required by the emerging markets for the electronic distribution of music,
  video and other copyrighted works. Although the Secure Digital card is designed
  specifically to address the copy protection rights of the content providers,
  there can be no assurance that these content providers will find these measures
  sufficient or will agree to support them. Furthermore, there is no assurance
  that consumers will widely adopt Secure Digital cards, as they only operate
  with copyrighted content. Conversely, broad acceptance of our Secure Digital
  card by consumers will likely reduce demand for our MultiMediaCard and
  CompactFlash card products. See "--The success of our business depends on
  emerging markets and new products."
  
     Memory Stick products. In September 2001 we signed an agreement with Sony
  involving their Memory Stick card format. Under the agreement Sony will supply
  us a portion of their Memory Stick output for us to resell under the SanDisk
  brand name. Sony has also agreed to purchase a portion of their NAND memory
  chip requirements from us provided that we meet market competitive pricing for
  these components. In addition, the two companies agreed to co-develop and
  co-own the specifications for the next generation Memory Stick. Each company
  will have all rights to manufacture and sell this new generation Memory Stick.
  We cannot assure you that this new business will generate substantial revenues
  or gross margin contributions for us. Consumers may prefer to purchase the Sony
  brand Memory Stick over our SanDisk brand Memory Stick. Furthermore, the second
  generation Memory Stick is still in the early stages of development and is not
  expected to generate significant sales before 2003 at the earliest. We cannot
  assure you that the second generation Memory Stick will achieve commercial
  success in the marketplace when it is introduced.
  
     We are transitioning our technology to NAND-based products. The transition
  to NAND-based products is very complex, and requires good execution from our
  manufacturing, technology, quality, marketing, and sales and customer support
  staffs. If the current soft market conditions continue through the fourth
  quarter of this year and beyond, or if we are unable for any reason to achieve
  customer acceptance of our card products built with these NAND flash chips, we
  will experience a significant increase in our inventory, as we are
  contractually obligated, and expect to continue to be obligated after the
  restructuring of our FlashVision business, to purchase half of FlashVision's
  NAND wafer production output. This may result in inventory write offs and have
  a material adverse effect on our business, results of operations and financial
  condition.
  
     In the third quarter of 2001, we began to purchase controller wafers from
  UMC and are continuing development of advanced flash memory technology at the
  0.15 micron technology design rules.
  
                                          7
  We depend on third party foundries for silicon wafers
  
     All of our flash memory card products require silicon wafers, the majority
  of which are currently supplied by Toshiba's wafer facility at Yokkaichi, Japan
  and through our FlashVision joint venture in Virginia, as well as UMC in
  Taiwan. After the restructuring of our FlashVision business, all of our NAND
  wafers will be supplied by Toshiba's Yokkaichi wafer facility. If Toshiba,
  FlashVision and UMC are uncompetitive or are unable to satisfy these
  requirements, our business, financial condition and operating results may
  suffer. Any disruption in supply from these sources due to natural disaster,
  power failure, labor unrest or other causes could significantly harm our
  business, financial condition and results of operations.
  
     Under the terms of our wafer supply agreements with Toshiba, FlashVision and
  UMC, we are obligated to provide a rolling forecast of anticipated purchase
  orders for the next six calendar months. 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 dissatisfied customers, lost sales and lower revenues. In
  addition, in February 2000, we entered into a capacity and reservation deposit
  agreement with UMC. To reserve additional foundry capacity under this
  agreement, we paid UMC a reservation deposit. This deposit will be refunded to
  us on a quarterly basis, over the agreement term, if we purchase the full wafer
  capacity reserved for us. We may forfeit part of our deposit if we are unable
  to utilize our reserved capacity within four quarters of the end of the
  agreement term. If we are unable to obtain scheduled quantities of wafers with
  acceptable price and yields from any foundry, our business, financial condition
  and results of operations could be harmed.
  
     Our investment in new flash memory wafer production may result in increased
  expenses and fluctuations in operating results
  
       FlashVision, L.L.C. On June 30, 2000, we closed a transaction with Toshiba
  providing for the joint development and manufacture of 512 megabit and 1 gigabit
  flash memory chips and Secure Digital card controllers. As a part of this
  transaction, we and Toshiba formed and contributed initial funding to
  FlashVision, a joint venture to equip and operate a silicon wafer manufacturing
  line at Dominion Semiconductor in Virginia. In January 2001, we invested the
  final $15.0 million of our $150.0 million cash commitment, as of November 30,
  2001 we had guaranteed $138.0 million in equipment lease lines, and as of
  January 2002, we expect to have guarantee obligations in the amount of $157.6
  million to equip Toshiba's Dominion Semiconductor manufacturing clean room with
  advanced wafer processing equipment. We will guarantee a total of up to $175.0
  million in equipment lease lines. In December 2001, we agreed with Toshiba to
  restructure our FlashVision business and to transfer its operations to Toshiba's
  Yokkaichi fabrication facility in Japan.
  
       We are using the new production capacity at Dominion to manufacture
  primarily NAND flash memory wafers with minimum lithographic feature size of
  0.16 micron initially, moving to 0.13 micron in the future. Such minimum feature
  sizes are considered today to be among the most advanced for mass production of
  silicon wafers. Therefore, it is difficult to predict how long it will take to
  achieve adequate yields, reliable operation, and economically attractive product
  costs based on our new designs. Introduction of new feature sizes and
  technologies will be subject to the same risks and uncertainties after the
  restructuring of our FlashVision business. We currently and will continue to
  rely on Toshiba to address these challenges. With our investments in the
  Dominion facility and in Toshiba's Yokkaichi facility after the restructuring of
  our FlashVision business, we are now and will continue to be exposed to the
  adverse financial impact of any delays or manufacturing problems associated with
  wafer production lines. Any problems or delays in volume production at the
  Dominion fabrication facility or the Yokkaichi fabrication facility could
  adversely impact our operating results in 2001 and beyond.
  
     We incurred substantial start up expenses related to the hiring and training
  of manufacturing personnel, facilitizing the clean room and installing
  equipment at the Dominion fabrication facility. Although as a part of
  
                                          8
  our agreement with Toshiba to restructure our FlashVision business we will
  recapture substantially all of the Dominion start up expenses, we will incur
  similar start up expenses in connection with the new Yokkaichi fabrication
  facility. In addition, under the terms of the MOU, we may not achieve the
  expected cost benefits until the second half of 2002, if at all. Until the
  transition of the Dominion tool-set is completed, we will rely solely on the
  current Yokkaichi fabrication facility for our NAND wafers. If we experience
  increased demand during this transition period, we may not be able to procure a
  sufficient number of wafers from Toshiba to meet this demand, which would harm
  our business and operating results. Under our agreement with Toshiba, we are
  committed to purchase 50% of the output from the Dominion fabrication facility
  prior to the FlashVision restructuring and from the Yokkaichi fabrication
  facility after the restructuring. Apart from our commitment to purchase our
  share of the FlashVision wafer output from Yokkaichi after the restructuring, we
  will also purchase NAND wafers from Toshiba's current Yokkaichi fabrication
  facility on a foundry relationship basis. This foundry relationship will be
  conducted under a firm purchase order commitment over rolling three-month
  periods. NAND wafers are ordered under purchase orders at market prices and
  cannot be cancelled. If we place purchase orders with Toshiba and our business
  condition deteriorates, we may end up with excess inventories of NAND wafers,
  which could harm our business and financial condition. We will incur startup
  costs and pay our share of ongoing operating activities even if we do not
  utilize our full share of the Dominion or new Yokkaichi output. Should customer
  demand for NAND flash products be less than our available supply, we may suffer
  from reduced revenues and increased expenses, and increased inventory of unsold
  NAND flash wafers, which could adversely affect our operating results. In order
  for us to sell NAND based CompactFlash, MultiMediaCards and Secure Digital
  cards, we have been developing new controllers, printed circuit boards and test
  algorithms because the architecture of NAND flash is significantly different
  from our current NOR flash designs. Any technical difficulties or delays in the
  development of these elements could prevent us from taking advantage of the
  available NAND output and could adversely affect our results of operations.
  
     Tower Semiconductor. On July 4, 2000, we entered into a share purchase
  agreement to make a $75.0 million investment in Tower Semiconductor, or Tower,
  in Israel, representing approximately 10% ownership of Tower. The investment is
  subject to the completion of certain milestones. During the first nine months
  of 2001, Tower satisfied the closing conditions of the share purchase agreement
  and completed the first two milestones. Under the terms of the agreement, we
  invested $42.0 million to purchase 1,599,931 ordinary shares and obtain wafer
  credits of $21.4 million. In September 2001, we agreed to convert 75% of our
  wafer credits to equity at a price of $12.75 per share and received an
  additional 1,284,007 ordinary shares. Due to the decline in the value of
  Tower's common stock, we recorded a loss of $5.4 million on this exchange in
  the third quarter of 2001. Additional contributions will take the form of
  mandatory warrant exercises for ordinary shares at an exercise price of $30.00
  per share if other milestones are met. The warrants will expire five years from
  the date of grant, and in the event the key milestones are not achieved, the
  exercise of these warrants will not be mandatory. We expect first wafer
  production to commence at the new fabrication facility in late 2002. Due to the
  continued weakness in the semiconductor industry, the value of our Tower
  investment and remaining wafer credits had declined to $22.6 million on
  September 30, 2001. It was determined that this decline was other than
  temporary, as defined by generally accepted accounting principles and a loss of
  $14.0 million was recorded in the third quarter of 2001.
  
     Tower's completion of the wafer foundry facility is dependent on its ability
  to obtain additional financing for the foundry construction from equity and
  other sources and the release of grants and approvals for changes in grant
  programs from the Israel government's Investment Center. If Tower is unable to
  complete foundry construction in a timely manner or is unable to successfully
  complete the development and transfer of advanced CMOS process technologies and
  ramp-up of production, the value of our investment in Tower will decline and we
  may be unable to obtain the wafers needed to manufacture our products, which
  would harm our results of operations. In addition, the value of our investment
  in Tower may be adversely affected by a further deterioration of conditions in
  the market for foundry manufacturing services and the market for semiconductor
  products generally. If the fair value of the Tower investment declines further,
  it may be necessary to record additional losses.
  
     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, the MultiMediaCard, and Secure Digital card such as
  digital cameras, portable digital music players and cellular phones, must
  develop and grow. If sales of these products do not grow, our revenues and
  profit margins could be adversely impacted.
  
                                          9
  In the second and third quarters of 2001, we experienced a substantial drop
  in demand from our MultiMediaCard customers, which we believe is attributable
  to the switch by these customers to the Secure Digital Card as well as the
  generally soft market conditions.
  
     The success of our 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 adoption by the major content providers of the copy protection
         features offered by our Secure Digital card 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.
  
     512 megabit and 1 gigabit flash memory card products. On June 30, 2000, we
  closed a transaction with Toshiba providing for the joint development of 512
  megabit and 1 gigabit flash memory chips and the manufacture of Secure Digital
  card controllers. As part of this venture, we and Toshiba plan to employ
  Toshiba's 0.16 micron and future 0.13 micron NAND flash integrated circuit
  manufacturing technology and SanDisk's multilevel cell flash and controller
  system technology. During the third quarter of 2000, we announced with Toshiba
  the completion of the joint development of the 512 megabit NAND flash chip
  employing Toshiba's 0.16 micron manufacturing process technology. We began
  employing the 512 megabit technology in the second half of 2001, and expect to
  commence shipments of cards employing the 1 gigabit technology in the first
  quarter of 2002. The development of 512 megabit and 1 gigabit flash memory
  chips and Secure Digital card controllers is expected to be complex and
  incorporates SanDisk and Toshiba technology that is still under development. We
  cannot assure you that we and Toshiba will successfully develop and bring into
  full production with acceptable yields and reliability these new products or
  the underlying technology, or that any development or production ramp will be
  completed in a timely or cost-effective manner. If we are not successful in any
  of the above, or if our cost structure is not competitive, our business,
  financial condition and results of operations could suffer.
  
     We may be unable to maintain market share
  
     During periods of excess supply in the market for our flash memory products,
  such as we have experienced in the first nine months of 2001 and continue to
  experience, we may lose market share to competitors who aggressively lower
  their prices. Conversely, under conditions of tight flash memory supply, 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 and other components to meet
  demand. If we are unable to do so in a timely manner, we may lose market share
  to our competitors. Currently we are experiencing severe price competition for
  our products which is adversely impacting our product gross margins and overall
  profitability.
  
     Our international operations make us vulnerable to changing conditions and
  currency fluctuations
  
     Political risks. Currently, a significant portion of our flash memory wafers
  is produced by Toshiba in Japan and UMC in Taiwan. After the restructuring of
  our FlashVision business, all of our flash memory wafers will be produced
  overseas by Toshiba and UMC. We also use third-party subcontractors in Taiwan
  and China for the assembly and testing of some of our card and component
  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 in the past both countries have conducted military exercises in
  or near the other's territorial
  
                                         10
  airspace. The Taiwanese and Chinese governments may 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 card products by our
  Taiwanese foundries and subcontractor. See "--We depend on our suppliers and
  third party subcontractors."
  
     We use 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.
  
     Although we do not believe the current political unrest in Israel represents
  a major security problem for Tower since Migdal Haemek, Israel is in a
  relatively secure geographic location, the unrest may expand and even if it
  remains at current levels, could cause scheduling delays, as well as economic
  uncertainty, which could cause potential foundry customers to go elsewhere for
  their foundry business. Moreover, if U.S. military actions in Afghanistan
  result in retaliation against Israel, Tower's fabrication facility and our
  engineering design center in Israel may be adversely impacted. We cannot assure
  you that the Tower facility will be completed or will begin production as
  scheduled, or that the processes needed to fabricate our wafers will be
  qualified at the new facility. Moreover, we cannot assure you that this new
  facility will be able to achieve acceptable yields or deliver sufficient
  quantities of wafers on a timely basis at a competitive price. Furthermore, if
  the current depressed business conditions for semiconductor wafers persists
  beyond 2002, Tower may be unable to operate their new fabrication facility at
  an optimum capacity utilization, which would cause them to operate at a loss.
  In addition, while the political unrest has not yet posed a direct security
  risk to our engineering design center in Israel, it may cause unforeseen delays
  in the development of our products.
  
     Economic risks. We price our products primarily in U.S. Dollars. Given the
  recent economic conditions in Asia and the European Union and the weakness of
  the Euro, Yen and other currencies relative to the U.S. Dollar, our products
  may be relatively more expensive in these regions, which could result in a
  decrease in our sales. 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, which could harm our
  business, 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;
  
      .  natural disasters affecting the countries in which we conduct our
         business, particularly Japan, such as the earthquakes experienced in
         Taiwan in 1999 and in Japan in previous years;
  
      .  imposition of regulatory requirements, tariffs, import and export
         restrictions and other barriers and restrictions;
  
      .  longer payment cycles and greater difficulty in accounts receivable
         collection, particularly as we increase our sales through the retail
         distribution channel, and general business conditions deteriorate;
  
      .  adverse tax rules and regulations;
  
                                         11
  .  weak 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 significantly harmed by delays or reductions in shipments if we
  are unable to develop alternative sources or obtain sufficient quantities of
  these components. For example, after the restructuring of our FlashVision
  business, we will rely on Toshiba's Yokkaichi fabrication facility for all of
  our flash memory wafers. Any disruption in the supply of waters from the
  Yokkaichi fabrication facility would severely adversely impact our business.
  Until the transition of the Dominion tool-set is completed, we will rely solely
  on the current Yokkaichi fabrication facility for our NAND wafers. If we
  experience increased demand during this transition period, we may not be able to
  procure a sufficient number of wafers from Toshiba to meet this demand, which
  would harm our business and operating results.
  
     We also rely on third-party subcontractors for a substantial portion of
  wafer testing, packaged memory final testing, card assembly and card testing,
  including Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc.
  in China. These subcontractors will also be assembling and testing a majority
  of our mature, high-volume products. We began transferring portions of our
  testing and assembly operations to these subcontractors in the second half of
  1999. In the fourth quarter of 2001, we transferred all of our card assembly
  and test manufacturing operations from our Sunnyvale location to offshore
  subcontractors. Any problems in this complex transition may result in a
  disruption of production and a shortage of product to meet customer demand. We
  have no long-term contracts with these subcontractors and cannot directly
  control product delivery schedules. Any significant problems that occur at our
  subcontractors, or their failure to perform at the level we expect could lead
  to product shortages or quality assurance problems, which could increase the
  manufacturing costs of our products and have adverse effects on our operating
  results. Furthermore, we are moving to turnkey manufacturing with some of our
  subcontract suppliers, which may reduce our visibility and control of their
  inventories of purchased parts necessary to build our products.
  
     Our markets are highly competitive
  
     Flash memory manufacturers and memory card assemblers. 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 companies that develop and manufacture
  storage flash chips, such as Hitachi, Samsung, Micron Technology and Toshiba.
  In addition, we compete with companies that manufacture other forms of flash
  memory and companies that purchase flash memory components and assemble memory
  cards. Companies that manufacture socket flash, linear flash and components
  include Advanced Micro Devices, Atmel, Fujitsu, Intel, Macronix, Mitsubishi,
  Sharp Electronics and ST Microelectronics. Companies that combine controllers
  and flash memory chips developed by others into flash storage cards include
  Dane-Elec Manufacturing, Delkin Devices, Inc., Feiya Technology Corporation,
  Infineon Technologies, Kingston Technology, Lexar Media, M-Systems, Matsushita
  Battery, PNY, Panasonic, Pretec, Silicon Storage Technology, Silicon Tek,
  Simple Technology, Sony Corporation, TDK Corporation and Viking Components.
  
     In addition, many 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.
  
                                         12
  We have entered into an agreement with Matsushita and Toshiba, forming the
  Secure Digital Association, or SD Association, to jointly develop and promote a
  next generation flash memory card called the Secure Digital card. Under this
  agreement, royalty-bearing Secure Digital card licenses will be available to
  other flash memory card manufacturers, which will increase the competition for
  our Secure Digital card, CompactFlash and MultiMediaCard products. In addition,
  Matsushita and Toshiba have commenced selling Secure Digital cards that will
  compete directly with our products. While other flash card manufacturers will
  be required to pay the SD Association license fees and royalties, which will be
  shared among Matsushita, Toshiba and us, there will be no royalties or license
  fees payable among the three companies for their respective sales of the Secure
  Digital card. Thus, we will forfeit potential royalty income from Secure
  Digital card sales by Matsushita and Toshiba.
  
     In addition, we and Toshiba will each separately market and sell any 512
  megabit and 1 gigabit flash memory chips developed and manufactured under our
  relationship. Accordingly, we will compete directly with Toshiba for sales of
  these advanced chips.
  
     We have entered into patent cross-license agreements with several of our
  leading competitors including Hitachi, Intel, Lexar, SST, Samsung, Sharp, Sony,
  Toshiba and TDK. 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 of our competitors, competition will increase and may harm our
  business, financial condition and results of operations. Currently, we are
  engaged in licensing discussions with several of our competitors. There can be
  no assurance that we will be successful in concluding licensing agreements
  under terms which are favorable to us, or at all.
  
     Alternative storage media. Competing products have been introduced that
  promote industry standards that are different from our 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, M-Systems' DiskOnKey, a USB-based memory device, and the Secure
  MultiMediaCard from Hitachi and Infineon. Each competing standard may not be
  mechanically and electronically compatible with CompactFlash, MultiMediaCard
  and Secure Digital card. If a manufacturer of digital cameras or other consumer
  electronic devices designs in one of these alternative competing standards,
  CompactFlash, MultiMediaCard, or Secure Digital card will be eliminated from
  use in that product.
  
     IBM's microdrive, a rotating disk drive in a Type II CompactFlash format
  competes directly with our larger capacity memory cards. M-Systems' DiskOnChip
  2000 Millennium product competes against our Flash chipset products in embedded
  storage applications such as set top boxes and networking appliances.
  
       The adoption of consumer electronics products that use the Memory Stick may
  erode the overall market share for other card formats. Sony has licensed its
  proprietary Memory Stick to other companies and Sony has agreed to supply us a
  portion of their Memory Stick output for resale under our brand name. If
  consumer electronics products using the Memory Stick achieve widespread use,
  sales of our MultiMediaCard, Secure Digital card and CompactFlash products may
  decline. Our MultiMediaCard products also have faced significant competition
  from Toshiba's SmartMedia flash cards. Recently, Hitachi, Infineon, Sanyo and
  Fujitsu have proposed their Secure MultiMediaCard which provides the copy
  protection function that is included in our Secure Digital card. Should this
  initiative gain industry wide acceptance, it may reduce the widespread adoption
  of the Secure Digital card.
  
     In addition, other companies, such as Sanyo, DataPlay and Matrix
  Semiconductor have announced products or technologies that may potentially
  compete with our products.
  
     Alternative flash technologies. We also face competition from products based
  on multilevel cell flash technology from Intel and Hitachi. These products
  currently compete with our NAND MLC products. 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 conventional flash technology.
  
                                         13
  Furthermore, we expect to face competition both 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. For example, Infineon has formed a joint venture
  with Saifun, an Israeli startup company, to develop a proprietary flash memory
  technology which will be targeted at low cost data storage applications. 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.
  
     Sales to a small number of customers represent a significant portion of our
  revenues
  
     Sales to our top 10 customers accounted for approximately 52% and 54% of our
  product revenues in the third quarter and first nine months of 2001, compared
  to 56% and 49% in the same periods of 2000. In the first nine months of 2001,
  sales to one customer totaled 12% of product sales, while there was no customer
  that represented more than 10% of product sales in the first nine months of
  2000. If we were to lose one of our major customers or experience any material
  reduction in orders from any of 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 changes.
  
     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 traditional
  distribution channels and may dramatically change the way our consumer products
  are purchased in future years. We cannot assure you that we will successfully
  develop the Internet sales channel or successfully manage the inherent conflict
  between the Internet and our traditional sales channels.
  
     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 will rely exclusively 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
  planned yields, we will experience higher costs and reduced product
  availability, which could harm our business, financial condition and results of
  operations.
  
     In addition, we cannot assure you that the Dominion fabrication facility or
  the Yokkaichi fabrication facilities will produce satisfactory quantities of
  wafers with acceptable prices, reliability and yields. Any failure in this
  regard could materially harm our business, financial condition and results of
  operations. During the transition from the Dominion fabrication facility to the
  new Yokkaichi fabrication facility, when we will be solely reliant on the
  current Yokkaichi fabrication facility, any such failure will be particularly
  harmful to us as we will not have an alternate source of supply. In addition,
  we have no experience in operating a wafer manufacturing line and we intend to
  rely on the existing manufacturing organizations at the Yokkaichi fabrication
  facilities. The new Yokkaichi fabrication facility will be tasked to "copy
  exactly" the same manufacturing flow employed by Toshiba in its existing
  Yokkaichi fabrication facility but we cannot assure you that they will be
  successful in manufacturing these advanced NAND flash products on a
  cost-effective basis or at all.
  
                                         14
  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;
  
      .  our patents will be issued in the primary countries where our products
         are sold in order to protect our rights and potential commercial
         advantage; or
  
      .  any of our products do not infringe on the patents of other companies.
  
     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.
  
     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, Lexar, Samsung, Sharp, SST, Sony,
  TDK 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, or that our existing licensees will
  renew their licences upon expiration, or that we will be successful in signing
  new licensees in the future.
  
     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. Litigation is
  subject to inherent risks and uncertainties that may cause actual results to
  differ materially from our expectations. Factors that could cause litigation
  results to differ include, but are not limited to, the discovery of previously
  unknown facts, changes in the law or in the interpretation of laws, and
  uncertainties associated with the judicial decision-making process. Furthermore,
  parties that we have sued and that we may sue for patent infringement may
  countersue us for infringing their patents.
  
                                         15
  On or about August 3, 2001, the Lemelson Medical, Education & Research
  Foundation, or Lemelson Foundation, filed a complaint for patent infringement
  against us. The suit, captioned Lemelson Medical, Education, & Research
  Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case
  No. CIV01 1440PHX MS, was filed in the United States District Court, District
  of Arizona. The complaint alleges that we, and four other defendants, have
  infringed certain patents held by the Lemelson Foundation pertaining to bar
  code scanning technology. By its complaint, the Lemelson Foundation requests
  that we be enjoined from its allegedly infringing activities and seeks
  unspecified damages.
  
     On October 15, 2001, we filed a complaint for patent infringement in the
  United States District Court for the Northern District of California against
  Micron Technology, Inc., or Micron. The complaint seeks damages and an
  injunction against Micron for making, selling, importing or using flash memory
  cards that infringe our U.S. patent No. 6,149,316.
  
     On October 31, 2001, we filed a complaint for patent infringement in the
  United States District Court for the Northern District of California against
  Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation and
  Power Quotient International Co., Ltd. The complaint seeks damages and
  injunctions against these companies from making, selling, importing or using
  flash memory cards that infringe our U.S. patent No. 5,602,987.
  
     Rapid growth may strain our operations
  
     Despite actions by us in 2001 to align expense levels with decreased
  revenues, to accommodate future growth, we must continue to hire, train,
  motivate and manage our employees. In the past, we have experienced 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 rapid growth, which could
  in turn harm our business, financial condition and results of operations.
  
     Terrorist attacks and threats, and government responses thereto, may
  negatively impact all aspects of our operations, revenues, costs and stock price
  
     The recent terrorist attacks in the United States,the U.S. retaliation for
  these attacks and the related decline in consumer confidence and continued
  economic weakness have had a substantial adverse impact on our retail sales. If
  consumer confidence does not recover, our revenues and profitability may be
  adversely impacted in the fourth quarter of 2001 and beyond.
  
     In addition, any similar future events may disrupt our operations or those
  of our customers and suppliers and may affect the availability of materials
  needed to manufacture our products or the means to transport those materials to
  manufacturing facilities and finished products to customers. In addition, these
  events have had and may continue to have an adverse impact on the U.S. and
  world economy in general and consumer confidence and spending in particular,
  which could harm our sales. Any of these events could increase volatility in
  the U.S. and world financial markets which could harm our stock price and may
  limit the capital resources available to us and our customers or suppliers.
  This could have a significant impact on our operating results, revenues and
  costs and may result in increased volatility in the market price of our common
  stock.
  
     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
  
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  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.
  
     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, and substantially increase
  the cost paid by a stockholder, who attempts to acquire us on terms not
  approved by our board of directors. This could prevent us from being acquired.
  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 our
  common stock that could have a material adverse effect on the market value of
  our common stock. In addition, we are subject to the anti-takeover provisions
  of Section 203 of the Delaware General Corporation Law. This section provides
  that a corporation 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.
  
     Our stock price has been, and may continue to be, volatile
  
     The market price of our stock has fluctuated significantly in the past and
  is likely to continue to fluctuate in the future. For example, in the 12 months
  ending September 30, 2001 our stock price fluctuated significantly from a low
  of $8.61 to a high of $74.75. 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 and semiconductor companies have been especially
  volatile, often for reasons outside the control of the particular companies.
  These fluctuations as well as general economic, political and market conditions
  may have an adverse affect on the market price of our common stock.
  Furthermore, the market price for the notes may be adversely affected by
  declines in the market price of our common stock or deterioration of our
  financial performance, declines in the overall market for similar securities
  and the actual or perceived performance or prospects for companies in our
  industry.
  
     Our Digital Portal Inc., or DPI, joint venture has an unproven product and
  an untested market
  
     The Digital Photo Kiosk currently under development for DPI has experienced
  delays in its U.S. market rollout, due primarily to modifications to improve
  its operation as a standalone, reliable, user-friendly photo printing kiosk. We
  cannot assure you that these kiosks, once introduced will function reliably as
  intended, or that they will receive favorable acceptance from consumers in a
  reasonable period of time. If DPI is unsuccessful our financial results may be
  harmed.
  
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  B. On December 19, 2001, we issued the following press release regarding our
  Convertible Note Offering:
  
  SANDISK CORPORATION TO OFFER $100 MILLION OF CONVERTIBLE SUBORDINATED NOTES
  
       SUNNYVALE, CA, Dec. 19, 2001 - SanDisk Corporation (Nasdaq: SNDK) announced
  today that it intends to offer in a private placement, subject to market and
  other conditions, $100 million in convertible subordinated notes due 2006 in an
  offering to qualified institutional buyers. The interest rate, conversion rate
  and offering price are to be determined by negotiations between SanDisk and the
  initial purchasers of the notes. The offering is expected to close in December
  2001. The company intends to grant the initial purchasers a 30-day option to
  purchase an additional $20 million of notes.
  
       The net proceeds of the offering will be used for general corporate
  purposes, including the development of new technologies and fabrication
  facilities, general working capital and capital expenditures. We may also use a
  portion of the net proceeds to fund acquisitions of products, technologies or
  complementary businesses. However, we currently have no commitments or
  agreements for any specific acquisitions.
  
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  This announcement is neither an offer to sell nor a solicitation to buy any
  of these securities. The securities will not be registered under the Securities
  Act of 1933, as amended (the "Securities Act"), or any state securities laws,
  and unless so registered, may not be offered or sold except pursuant to an
  exemption from the registration requirements of the Securities Act and
  applicable state laws.
  
       SanDisk, the world's largest supplier of flash data storage products,
  designs, manufactures and markets industry-standard, solid-state data, digital
  imaging and audio storage products using its patented, high density flash memory
  and controller technology. SanDisk is based in Sunnyvale, CA.
  
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  SIGNATURES
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned hereunto duly authorized.
  
                                        SANDISK CORPORATION
  
  Date:  December 19, 2001              By: /s/ Frank A. Calderoni
                                           ------------------------
                                           Name:  Frank A. Calderoni
                                           Title: Senior Vice President, Finance
                                                  and Administration, and Chief
                                                  Financial Officer
  
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