Good day everyone and welcome to the SanDisk First Quarter 2006 Earnings Release Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Lori Barker Padon, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to the financial teleconference for SanDisk Corporation for the first quarter of 2006. I’m Lori Barker Padon, SanDisk’s Director of Investor Relations. Today with me is Eli Harari, Chief Executive Officer of SanDisk, and Judie Bruner, Executive Vice President of Administration and CFO. The agenda for today’s teleconference is as follows: Eli will start with remarks about SanDisk and trends in our market. Judy will follow up with our first quarter financial results and future guidance. We will conclude the teleconference with your questions. Any non-GAAP financial measures discussed during this call as defined by SEC in Reg-G, will reconciled to the most directly comparable GAAP financial measures. That reconciliation along with an audio replay of this conference today, copies of today’s prepared comments and quarterly metrics will be made available on SanDisk Investor Relations website at sandisk.com. By now all of you have seen our press release and the associated Form 8-K filed this afternoon. We’d like to remind everyone that today’s comments include our question and answer sessions, will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended in Section 21E of the Securities Exchange Act of 1934 as amended that are based on our current expectations. Forward-looking statements in this teleconference are generally identified by words such as believe, anticipate, expect, intends, may, well, and other similar expressions. In addition, any statement that refers to expectations, projections or other characterizations of future investment circumstances are forward-looking statements. There are significant risks and uncertainties that could cause the actual results to differ materially from those expressed in these forward-looking statements. These risks and uncertainties are detailed under the caption “Risk Factors” and elsewhere in our Form 10-K for fiscal 2005 and our Form 10-Q as well as our press release and Form 8-K. Participants are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the day hereof. We do not intend to update information contained in this teleconference. Now, I’d like to turn our call over to our CEO, Eli Harari.

Thank you Lori. I’m Eli Harari. I’ll talk today on just a few of our first quarter events and I’ll discuss general developments in our markets. In the first quarter, we sold a record of just under $13 million mobile handset cards. To give you an idea of what’s going on here, in the first quarter of 2006, our mobile card revenues grew to 30% of total product revenues out from just 7% in the first quarter of 2005 and 21% in the prior quarter. Within our mobile sales, we are particularly encouraged by growth in the retail market, which approached 2 million units sold, accounting for 25% of the mobile card revenues in the first quarter. This suggests a very positive consumer usage pattern that we have been patiently nuturing over the past three years. In this space, we continue to develop excellent relationships with virtually all major handset manufacturers, network operators on a global basis, and content owners. In April, we began shipping to retailers the new products that we announced in the first quarter at the Consumer Electronic Show, EBIT, PMA, and CTIA. Particularly, we are excited about our new Sansa e200 audio player that has received a number of excellent reviews and which we believe will help us solidify our number two market position this year in audio players. Switching to operations, in the first quarter, Fab 3 achieved average wafer ramp of 30,000 wafers per month with mature yields on 90 nanometer technology, 4 gigabit 300 mm wafers. In March, we commenced the Fab 3 conversion to 70 nanometer, which we expect to complete over the next two quarters. By next March, we expect Fab 3 capacity to reach 70,000 wafers per month, hopefully including first production out of 55 nanometer NAND/MLC. In the second…

Thank you Eli. Our first quarter product revenue was up 35% year-over-year and seasonally down 21% sequentially. In comparison, our product revenue in the first quarter of 2005 was also down 21% sequentially, although with a very different change in megabytes and prices. This first quarter our megabyte sold increased 4% sequentially as we began to see capacities respond to our the first quarter price decreases, which resulted in an average decrease in ASP per megabyte of 24%. In the first quarter a year ago, megabyte sold were down 13% sequentially with a much more modest 10% decline in ASP per megabyte. Our retail revenue in the first quarter was up 18% year-over-year and down 29% sequentially. Retail megabytes sold were down very slightly on a sequential basis as the 19% growth in average retail capacity largely offset the seasonal decline in retail units. Looking at our retail business by end market, we experienced sequential growth in terms of units and dollars in USB products and in mobile phone cards. With supply constraints over, we were able to gain share in the USB market. In the mobile market, we experienced strong retail growth in both the miniSD and the microSD cards. Our OEM revenue was up 100% year-over-year and up 6% sequentially with a strong sequential increase in units overcoming the decline in ASP per megabyte. Our OEM revenue continues to be dominated by the mobile card business that now also includes sale of 3D product, which we acquired via the Matrix acquisition in January. The 3D products are currently concentrated in the gaming market. Our OEM business represented 31% of our product revenues for the first quarter, up from 23% in the fourth quarter 2005 and 21% in the first quarter 2005. On a geographic basis, our product revenue…

Thank you. At this time, if you’d like to register your site for a question, you may do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you’re using a speaker phone please make sure that your mute function is turned on so that your signal can reach our equipment. Once again, if you would like to ask a question, please press “*” on your touchtone telephone at this time. We’ll pause for just a moment to give everyone an opportunity to signal. We’ll take our first question from the site of Craig Ellis with Citigroup, please go ahead.

Thanks, good afternoon everybody. First on the qualification, Judy, with the two items that you identified impacting product gross margins in the first quarter that had been forecasted period costs in the Fab 3 power outage, was that a combined impact of 150 or 250 basis points?

That was a combined impact of about 250 basis points, so that 150 related to the inventory reserves and about 100 related to the power outage.

So, with the absence of those factors in the second quarter, would we be seeing a more significant uptake in margins sequentially?

Well, as I indicated, there will still be costs in the second quarter relating to the power aspect…there’s a plan, so in particular Fab 3 was brought down in early April in order to make power modifications to ensure that an unplanned outage is less likely to happen in the future and also to add capacity. So there are costs related to that planned shutdown in the second quarter, so the impact of the power situation really impacted both quarters.

Okay great, and then switching gears on the product side, can you just identify the MP3 product category as one where you’re really playing quite seriously this year with a broad product line, can you identify for us how that product rollout is going to proceed geographically and across the various channels that you plan consumer big box office, etc.?

The e200 which we are beginning to ship, as we speak in volumes, basically runs up our MP3 offering. What our retailers are telling us is that they very much like to have an attractive high-end offering so that they can cover…in fact as we’ve said in the past we see our strength really in the mid pricing and the lower pricing where we can move a lot of units, so the e200 really runs up the product offering. We expect to start rolling out in a pretty strong drive this month in the US, and this quarter also we’ll go overseas to Europe.

Okay, and then lastly you mentioned the significance you’re having on the hard drive with your handset offers, can you just mention what you’re seeing with respect to I-NAND designs, whether it be in handsets or other applications?

I-NAND is basically a system on the chip. It was shown in the past quarter with the Sony Walkman videophone that has received rave reviews. It’s basically replacing a microdrive functionality and that product has generated tremendous amount of interest from other handset manufacturers. So, we expect this will be a nice product for the embedded side. It will take some time for designing the Sony Ericsson phone and represents the designer tilt last year.

Okay, and if could ask just one more, Eli you talked a lot about the potential for geographic expansion of getting the capacity now, as you look at your opportunity with MP3 players, handsets, and geographic expansion, how would you rate those growth factors this year?

Well, we think that we’re just starting with the MP3 product. We have not actually covered even the US distribution for MP3 players and we’re pretty confident that we can make significant inroads with MP3 player sales in Europe, in Asia-Pacific and so on, so this is really just the beginning of the road for us. And of course at the end of the day we do believe that the biggest market opportunities for MP3 players, audio players, is in the handset market and this is really where very, very strong penetration is positioning us, very, very well in the handset MP3 market.

Okay, Judy and Eli, thanks, and I guess given all that, 35-45% dip was pretty much of a distraction in the second quarter.

Thank you Craig.

Again it is the site of Satya Chillara with American Technology Research, please go ahead.

Yeah, hi, good afternoon. Eli, can you walk us through the mobile cards that you talked about, 2 million units sold in the first quarter, if you can hit which region you’re seeing this retail uptake against your assumption, what is that you see for retail mobile cost in the second quarter?

Satya, the 2 million cards that I mentioned were to be sold in retail. We sold a total of approximately 13 million mobile cards, of course the vast majority was bundled, but this was very, very good for us as I mentioned in my script, because as you well know the model that we’re seeing with digital cameras is that you start to bundle and eventually the market needs to retail, and we’ve been working really very, very hard, particularly in Europe, Japan, and the United States. The United States really lags the rest of the world. So, I would say the strongest retail sales for mobile cards has been in Europe, very, very strong reception in sales, but it’s picking up in the United States and we have very good agreements relationships to launch in retail in the United States, I’d say all the major MNOs, not for corporates.

Eli on that note, can you quantify the retail mobile card density?

The density is basically bimodal. You have the 64 and 128 megabytes on the low end and the 512 megabytes and 1 gigabytes on the high end. The 1 gigabyte and 512 megabyte is going to be the sweet spot for MP3 functionality and for video, and the 64 megabyte and 128 is basically just for midrange handsets where it’s just really the minimum capacity to get the phone up. I think the average capacity that we’ve seen for all OEM cards, which is dominated by mobile cards, and the 206 megabytes compared to 660 megabytes in retail…so I would expect in time for this to increase as these phones become 3 megapixel and video enabled and more importantly audio enabled, that density for mobile cards will increase particularly in retail. Retail sales of course are mostly 512 megabytes, I believe.

So based on all these, Eli, have you changed your views on your cellphone demand for the entire year, based on the uptake that you’re seeing in the retail which is 15% off, your OEM on the handset cards, have you changed your opinion, do you feel more bullish, if you can talk about that?

Satya, you know, we are very bullish. We are certainly not as bullish as you are because I know you are very bullish. We are very bullish on this thing, but we think it’ll take time. You know, in the United States it is taking time to get the V Plus programs out for people to really take advantage. The tax rate in mobile phone, in retail, is still very, very low, it’s under 10% tax rate, but the numbers are very large. So every percentage point increasing our tax rate is very highly leveraged, our market share as you know in mobile cards is in the mid 90s; I mean it’s very, very high. So, there’s tremendous upside potential. We’re still impacting, I believe, a very small portion of opportunities really just touching the surface, very well positioned, but I want to caution that it does take time for consumers to…buy cards in this handset.

Okay, thank you.

We’ll go next to the site of Jim Covello with Goldman Sachs, please go ahead.

Thanks so much. Judy, quick question first on the pricing, if we aggregate the first quarter and second quarter pricing, down 44-45%, full year down 50-55%, you had previously said that ASPs would be down every quarter. Do you think differently about that now, do you think pricing will be up sequentially in the second half, in one of the quarters?

I doubt that pricing would ever be up in one of the quarters, so we expect our ASP per megabyte to always go down, and that we believe the same in the second half, although we’re optimistic that the price decline in the second half will be somewhat moderated from the first half.

Price increases are…

But I guess the point is there’s not really any dip in 45 for the first half and 50-55% for the full year, really to me implies very little.

Yeah, we do believe that by being preemptive hopefully that will do the trick for the second half.

But actually Jim you need to look at the pricing on a year-over-year basis. So, for example, in the first quarter the pricing was down about 49% percent year-over-year, so you need to look through the math each quarter to get an estimate in the third quarter and fourth quarter, and the third quarter and the fourth quarter can continue to move down to reach the 50-55% average 2006 over average 2005.

The important thing for us, our focus is on cost reduction of course, and in the first quarter getting our 70 nanometer to really impact Fab 3 we believe is going to make a very, very big impact on our cost structure for the second half of the year. We’re not going to leave money on the table, we’re not going to unnecessarily drive pricing down, there’s no benefit whatsoever in that. On the other hand, with the industry projecting 180% increase in megabyte for the year, there needs to be a similar demand to fill the supply or else we will all suffer. So the preemptive nature of this is, I believe, quite healthy.

Can you also help us understand a little bit about how this spot or the contract market and how your pricing kind of ties? I know that there’s a lag and your pricing doesn’t go down as much as the spot, can you help give us some color around how we should think about those two tying together?

The spot pricing as you know in last two weeks of March were atrocious and some people dumping inventory at our cost, which I think was really not a good idea. We do not of course engage in any such activity. We see it as very, very counterproductive and we believe it’s very important to have steady, stable, and well-understood pricing directions as best we can. We of course don’t control pricing, but we do the best we can to avoid supplies as far as what we think needs to be done. Spot pricing has now recovered as you know. So, we think in terms of quantity, specifically it’s a very small percentage of the market and I think retailers have gotten smart to understand that long-term relationships are very, very important, more important than opportunistic purchases. And I can’t say that…sometimes do have an impact. When there is excess supply, they do have temporary impact and it’s very important not to over react to them.

Terrific, one more question from me, then I’ll go away. As Micron and Hynix ramped up their production of NAND, at what point does it make sense for you guys to start to enforce your patterns against some of the newer players in the industry? Thanks very much.

You know, clearly Hynix is a very strong comer and number three player and you know that Toshiba has taken action against them. We have said with regards to Micron that we believe they do need to take a license for our patent. We have an overall strategy that we don’t want to try and take over ____. We want to go after the major infringes at the right time and you will hear about it when and if it happens.

Thank you.

We’ll go next to the site of Paul Coster with JP Morgan

Thank you, a few quick questions. Judy, can I just make sure that I’ve understood this that the product mix was a neutral factor from a gross margin perspective?

Yes, product mix was not a big factor in our gross margins in the first quarter.

The inventory that you have on hand now, can you give us some sense of how that breaks up, in the sense of finished product versus working progress, raw materials?

Yeah, what I would say is that the increase we saw in inventory from the fourth quarter to the first quarter about half of that increase is in raw material and working process and about half of that increase is in finished goods, and there’s not any significant issue in the inventory in terms of mix of products. It is generally just more quantity, more volume than we would like to see.

I mean it seems to be a record level actually, is that correct?

Yes, that’s correct, although with a growing business you would over time expect the inventory to continue to grow. So, it being a record level is not necessarily surprising, but overall we would like to see the inventory lower, the inventory both on our balance sheet as well as the inventory in the channel.

Let me add, Paul. We saw focus and increase in megabyte shift relative to the fourth quarter, which was clearly a record quarter for megabyte shift, but internally we got a 0-10% increase in megabytes for the first quarter and quite honestly, internally we were more bullish than that. The whole of last year being on allocation, not having enough capacity and we did plan…I mean internally our plan was more aggressive than the guidance of course. Basically U.S. retail particularly in March was softer than we expected even though seasonally it was no different than the first quarter last year. So, just maybe bullion and we are not perfect, sometimes we overshoot it, but it’s okay. I think we need to bring it down and we are taking the right options to do so.

I’m amazed to hear you say you’re not perfect…just one last question then, generally the holiday season sees the influx of some new applications and I guess that many of us are expecting portable media players and of course even some solid state laptops, perhaps hybrid to come to market, how significant are those two products for this year’s holiday season?

I think the portable media player you hear a lot. Apparently it’s becoming quite popular and I would expect to see the first attractive products from several suppliers this holiday season. I think it maybe a year or so before you get toward MP3 players this year or maybe next Christmas, but I would not be surprised if in this business you’re going to see some of these products.

Okay, one last question to Judy, it sounds like gross margins are going to spring back quite sharply in the third quarter owing to this shift to captive production, will it be above the sort of normal 30-34% kind of level that we’ve seen in the past, do you think it can spring up to the mid 30s or higher?

You know, Paul, we’re not prepared to give gross margin guidance yet on the second path of the year, but we do expect gross margins to be better in the second half of the year both because of the reduced non-captive purchases that we’re making now which will largely impact the second half and because our current expectation is that price movement will be less in the second half than in the first half and we’re continuing to achieve cost reduction, in particular in Fab 3 as we’ve really just begun the move to 70 nanometer in Fab 3.

Okay, thank you.

We’ll go next to the site of Krishna Shankar with JMP Securities, please go ahead.

Yes, as you look at some of the competitive capacity coming on, Eli, can you give us the overall assessment of industry supply and demand here in the second quarter and going into the second half as you sort of aggregate industry capital spending and then Flash on your earlier comments on the ___ guys becoming a little more cautious on conversion?

I think that they are moving as fast as they can to bring up new capacity, but I think that Hynix, for example, is I believe exhausted most of the capacity that they can allocate…and if you listen to some of these guys quarterly, see more sensors, where towards the end of the first quarter more profitable or more revenues for wafers for these guys because they’re not on the most advanced leading edge technology. In order to get to be on leading edge, they need to put in 70 nanometer capacity with that, and until they do so their output, 204 gigabit chips, may not be very attractive as far as revenues for wafer. But that said, putting the paranoia hat, we have to assume that the industry will increase their output by close to 200%, triple the megabyte shift this year, most of it coming in the second half, and it is critical that we get consumers to shift to higher densities and create the new markets and the applications. This is not just for the benefit of all of us, but of course it would be nice if these newcomers…

And my second question is in the mobile card market, what is the typical density of phone and mobile cards and you said you have 90-95% of that market, with that retail market emerging, do you see consumers also looking at non-grinded alternatives to the basic bundles that they buy?

Let me answer the first question. The 90% of marketshare is NPD data that was published I think yesterday just for the US retail. I’m not saying that we have that kind of market share in mobile cards worldwide. This is a brand new market and it’s actually a quite slow market…we sold 2 million cards in retail and I’m sure that much more than 2 million cards were sold worldwide. In that situation, that market share will not be sustainable going forward. As far as the capacity, we do expect retail mobile card capacity to be absolutely in the 512 megabytes/1 gigabyte sweet spot as opposed to bundles, which often is 64 and 128 megabytes, and I’m not sure I answered all your questions.

I think the final piece was the C&A, as consumers augment the basic bundled capacity that they buy, do you see any trend that consumers can look at non-branded alternatives for adding mobile cards similar to what we’ve seen in digital cameras.

Non-branded, you mean…

Non-SanDisk…brand preference…mobile cards.

Right, we’ve made TransFlash into an industry standard by making it available through industry wide licensing through the ____microSD and we clearly see the benefits of having other suppliers coming into the market. As much as we would like to have very large market share, we at other times do create new opportunities in the market and establish standards. That’s the best way to combat…try to establish different standards such as, for example, MMCmicro. So, it’s a double-edged sword. I mean it’s really important to create competition in the free market, I don’t mean royalty free, I mean free market.

Thank you.

We’ll go next to ____, please go ahead.

Thanks. Maybe you didn’t give this, but could you tell us how much do you expect non-captive portion to be in the second half of the year?

I don’t think we would be prepared to talk about non-captive purchases yet for the second half of the year. However, I will say that over the long-term we remain convinced that the 70-30 mix is about the right mix and you can see the flexibility that it affords us in different market environments. So, clearly we are bringing our non-captive purchases down pretty significantly this quarter. It’s too early to say what that mix will be for the second half.

And you have to understand of course that we have a very strong obligation to our suppliers to not jerk them around anymore than is absolutely necessary.

And how much of planning or I guess leap time do you need to give your non-captive supplier in order…

Typically, two to three months.

Two to three months, okay.

You don’t want to jerk them after they’ve already started their wafers. Eventually, it’s going to come, it’s best that way if it isn’t started, if you don’t need it.

Okay, great thanks. I just have one follow-on question. In terms of embedded versus removable in handsets, what are the trends you saw in first quarter and are you seeing that embedded as hoarding gets placed as far as the second quarter is concerned?

Yes, I think embedded…this is a long-term…you’ve seen embedded and removable, semi-removable, the lower end that doesn’t need a lot of storage, you can’t afford a lot of storage…embedded or multi-chip packages, MCP, and multimedia applications, audio and video I believe will gravitate to removable or semi-removable cards as we get to 1, 2, and 4 gigabytes cards. In the embedded space, we don’t think we have much to offer, in MCP, so we’re not in that market. We’re not in the 1 NAND, but I-NAND is primarily targeted to higher densities and system solution that’s very easy to integrate including onboard security.

Okay, thank you.

We have time for one more question.

We will take our final question from the site of Daniel Amir with WR Hambrecht, please go ahead.

Thanks a lot. Most of my questions have been answered, but I have one question on the USB market, Eli, I think you commented that you guys have been gaining marketshare and kind of how do you believe the 2006 will play out as basically you start to ramp up the whole U3 platform for your USB drives in the second half of the year?

Hi Daniel, yeah, the USB, in particular the U3 market is one of the most spreading markets. It is the most competitive markets, in terms of pricing it is the most aggressive, but also the one that provides the greatest ability to differentiate and segment the markets. We as well as N-Systems, our partners have viewed the U3 platform as having absolutely enormous potential very, very early on. It is taking it’s time to develop. This is normal to all new platforms, but we are very pleased with the overall progress as far as developers, and I expect the majority of our USB products will be U3 enabled. Every meeting that I attend with our marketing people, the ideas that are being developed are just really very exciting.

And will this command better margins or same margins?

Better margins, maybe better marketshare. You get better margins in my opinion by having a lower cost and better distribution and more efficient operations. It’s very, very important to segment the market and to build your margins, but you got to provide better value for the same cost, for the same price or for the same value lower price if you want to be a major player. Consumer electronics is all about value to the consumer and this is our religion.

Okay, thanks a lot.

Thank you. Thank you all for joining us today. As you can see, we’re pretty excited about the opportunities ahead of us and we look forward to seeing you all in the coming meetings and investor conferences. Thank you very much.

Ladies and gentlemen, this does conclude today’s conference call. At this time, I’d like to thank you for your participation. At this time, you may disconnect, and have a great day.