Good day, everyone and welcome to today’s first quarter 2007 earnings call. As a reminder, this call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Ms. Lori Barker Padon. Please go ahead, Madam.

Thank you. Good afternoon and welcome to the financial teleconference for SanDisk Corporation for the first quarter of 2007. I am Lori Barker Padon, SanDisk's senior investor relations director. Joining me is Dr. Eli Harari, Chairman and CEO of SanDisk; Sanjay Mehrotra, President and COO; and Judy 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 markets; Judy will follow up with our first quarter financial results and future guidance; and we will close then the teleconference with your questions for Eli and Judy. Any non-GAAP financial measures discussed during this call as defined by the SEC in Regulation G will be reconciled to the most directly comparable GAAP financial measure. That reconciliation is now available, along with supplemental schedules on our website at SanDisk.com. After the completion of this call, an audio replay of this conference, a copy of today’s prepared comments and quarterly metrics will be made available on SanDisk's investor relations website at SanDisk.com. During our call today, we will be making forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events or circumstances is a forward-looking statement, including those related to revenue, pricing, expenses, gross margin, tax rates, inventory, production capacity, technology transitions, joint ventures and future products. Actual results may differ materially from those expressed in these forward-looking statements. Certain factors that may cause actual results to differ are detailed under the caption Risk Factors and elsewhere in the documents we file from time to time with the SEC, including our Form 10-K for fiscal 2006. We undertake no obligation to update these forward-looking statements which speak only as of the date hereof. We do not intend to update information contained in this teleconference. Now, I would like to turn our call over to our CEO, Eli Harari.

Good afternoon, everyone. I will discuss current market conditions and recent product announcements, update you on recent IP developments, provide you some interesting thoughts on the demand/supply situation, and then Judy will provide you our Q1 financial details and the Q2 business outlook with her remarks to follow. The first quarter was a down quarter for SanDisk and for the industry as a whole. Excess supply of NAND MLC, coupled with soft seasonal demand in retail precipitated sharply lower pricing. Our first quarter price reductions in retail, although quite steep, trailed the much sharper price reductions by our competitors and probably caused us a small loss of market share in U.S. retail. Notwithstanding price increases recently announced by our several NAND component suppliers, we continue to see a substantial amount of low-priced inventory of cards and flashdrives from our competitors in the channel. Accordingly, we have taken pricing actions for the second quarter to narrow the pricing gap between us and our competitors. We currently expect price reductions to moderate in the second half of the year, given the projected strong pickup in demand as we head into the holiday sales season. There were a number of bright spots in the quarter. One was the record 27 million mobile units sold; indicative of our continuing penetration into what we believe will be our largest opportunity for flash storage in the coming decade. Another was the high level of design-in activities for our newest products, including iNAND, solid-state drives, and megaSim, as well as increasing adoption of our TrustedFlash security platform. And of course our cross-license agreement with Hynix, which I will discuss a little later. This week Dell announced the immediate availability of the 32-gigabyte solid-state discs supplied by SanDisk for two of their corporate notebook models. Dell has also…

Thank you, Eli and good afternoon everyone. I’ll begin with comments on our revenue. Our product revenue increased 28% year-over-year, resulting from an increase in megabytes sold of 209%, a decline in ASP per megabyte sold of 62%, and the consolidation of the USB joint venture between former M-Systems and Toshiba. On a sequential basis, our megabytes sold were down 22% and our ASP per megabyte was down 23%, with the ASP decline much more aggressive in the retail channel. For the first quarter, the mix of our product revenue was 49% retail and 51% OEM. I’ll organize the majority of my revenue comments by retail sales and OEM sales. Our retail sales exhibited more seasonality this Q1 as compared to last Q1. Our retail units sold were down 32% sequentially compared to down 19% sequentially in the prior year. This exaggerated Q1 decline may be related to the particularly strong fourth quarter of 2006, in which we experienced 52% sequential unit growth compared to 37% growth in the previous Q4. Compounding the seasonally down unit sales was an aggressive retail pricing environment in which our retail ASP per megabyte was down 35% sequentially and relatively low growth in average capacity from Q4 to Q1. On a year-over-year basis, retail units sold grew 50% and average retail capacity increased 87%, but with ASP per megabyte down 67% year-over-year, our retail revenue was down 8% year-over-year. Looking at our retail sales by end market, we experienced strong year-over-year unit growth in all five of our key end markets, with the strongest year-over-year unit growth in mobile, MP3 and gaming. Our year-over-year unit growth in retail USB flashdrives was equal to our average retail unit growth while unit growth in the digital still camera market was below the blended average but still…

(Operator Instructions) We will take our first question from Jim Covello of Goldman Sachs.

Good afternoon, guys. Thanks so much for taking the question. A few questions. I guess first, could you help us understand maybe a little more of the detail around the Hynix announcement? I know you talked about what the full-year royalty revenues would be but I think there is a fair amount of confusion in the marketplace about what exactly the technologies that Hynix agreed to pay licenses on. If you could give us some kind of color of the royalty rates, vis-à-vis what some of the other licensees might be paying, that would be great.

As you know, these agreements are all confidential. All we can say is that it is a long-term agreement the involves a cross-license for a NAND component, including SLC and MLC, as well as a supply agreement to SanDisk -- that is, Hynix will supply SanDisk at preferential terms. We have also said that we will work together on putting together a joint venture entity that will develop jointly, focused very much on x4, four bits per cell development and manufacturing for the two companies. Other than that, we really cannot disclose anything else.

But it definitely does include SLC and MLC?

Yes.

Okay. Another issue I just wanted to touch on, relative to --

Let me just -- I’m sorry, you know, the market is gone, is essentially now MLC, almost entirely, so any license that excludes MLC would not be very attractive to anybody.

Sure. I think there was some speculation in the marketplace after the original announcement that it was only by four, but thanks for helping to clarify that. A question I guess on the potential supply tightness in the second-half of the year. There have been some that have speculated that some of the NAND capacity that got moved over to DRAM is going to come back into the NAND market before the second-half of the year, preventing supply from getting tight. I wondered if you had a view on that.

You have heard the comments from our Korean suppliers who are the main drivers of capacity, as well as of course Toshiba and SanDisk. We are very focused on, and I just gave you what our plan for capacity increases in fab 3 as well as adding more megabytes through the 56-nanometer. I think that the pricing that we saw in first quarter very, very much in my opinion was a consequence of pricing MLC. Basically, a lot of MLC came to the market in fourth quarter from companies that were trying to move from SLC to MLC for quite some time and finally made it happen in the fourth quarter. The market was unable to absorb that MLC, in my opinion, either because of performance issues or because of controllers not being able to handle it. As a result, MLC was priced at -- you know, if you look at the Gardner and other, you know, this is all public information. MLC went from being priced about 10% below SLC to being priced at half of SLC, and that created the whole market for SLC as well as MLC because most of the sales were in MLC. What you have seen recently is corrections, significant corrections from some of these suppliers to bring the price of MLC much closer to that of SLC, within about 10%. We think that that is very healthy for the industry. Of course, it is very good for us from the point of view of royalties on MLC that were being depressed when the MLC price went down by a half. It has now gone up very close to SLC. SLC I believe -- SLC and MLC are priced approximately correctly, in my opinion, relative to the cost structure that we see. For us, we have always said a vast majority of our output is MLC, probably 98%, 99%, and therefore we have just a single price, and of course we do not sell a component, we sell an end product. So it is not only in the -- so I think that what -- we are very focused on demand/supply in balance but frankly, the good news here is that we think the pricing for MLC in the industry has been corrected and the only problem that we have now is that there was some damage done. There was a lot of inventory that was sold in the market at very low prices of MLC. Until that inventory clears the channels, we still -- that is the price in the market for cards and flash drives. Once that is flushed out, I think that we will see a much more moderate pricing environment.

Terrific. One more last one and then I promise I will go away; just in terms of the non-captive supply. Judy, I think you said it was only 5% this quarter?

Correct.

And then you would expect it to remain roughly at that low level in the next couple of quarters? I am just trying to gauge the impact of the higher margin captive supply on the model going forward.

Currently we expect the non-captive to remain at low levels.

Terrific. Thanks so much.

Next question.

Your next question comes from Craig Ellis of Citigroup.

Thanks. Good afternoon, everybody. Cycling back on the inventory issue, just to understand how that dynamic is playing out, are you saying that in retail or at OEM that inventories have peaked and they are starting to work down, or are they still building a bit? How is that playing out in both sides of your business?

Craig, I would tell you that channel inventory is at a very comfortable level. We ended the first quarter with channel inventory of about nine weeks, which is measured based on backward-looking sell-through, so that is a good level. In fact, it is a little less in terms of weeks than we had at the end of Q1 of last year. So where the inventory is a little heavier than we would like is the inventory on our balance sheet.

Okay, and then just understanding the pricing dynamic that is related to that, are you talking about pricing in the second quarter that looks like last year and the prior year in the second quarter? Or are you talking about something that would be much greater than seasonal?

Well, we have not given a specific guidance on a pricing range for the second quarter but we would be hopeful that the pricing is less in Q2 than it was in the first quarter in the retail environment, but we have moved a number of prices lower in all geographies this quarter, as Eli said, to try to close the gap with our competitors in retail.

Craig, basically what we said is that price reductions that were projected for 2007 over the whole year are back-end loaded. The first-half of the year is taking the brunt of that and we think that once that takes place, it will slow down very significantly because frankly, the pay level will be very, very difficult for all the suppliers, even the best local supplier.

Is it just broad elasticity off of that that’s giving you the confidence to raise your output for the year for fab 3, or is it a particular product program that you see, whether it be the MP3 products or cards or something else?

As you know, if you look at the last six years, we have a very clear trend heading into the fourth quarter, and we have given some guidance for the year of our expected growth in terms of megabytes, so we do -- we are very enthusiastic and very optimistic about the demand for our output in the fourth quarter.

Lastly, if I may, Judy, this is the first time I have heard you call out a card contribution on the royalty line. Can you give us some sense of some of the relative contribution that cards your new royalty has and the traditional royalty payer as we exit the year, and maybe something about how those different levers can grow over time?

The increase in the card-based royalty that I referred to was a portion, explained a portion of the increase in royalty revenue that we had over the guidance that we had previously given. The majority of our royalty revenue still remains based upon the sale of NAND flash components. In terms of the new royalty payer, as I mentioned, this is actually license revenue that is impacting us today, which is being amortized on a straight-line basis over the life of the agreement. As I said, the increase from that license revenue approximately offsets the decrease that we expect to receive this quarter based on component-based royalties, which as you can estimate, would come down given the very significant price decline in Q1 in the NAND component pricing, which impacts our royalties in Q2. Clearly for confidentiality reasons, I cannot give you any specifics, but hopefully those comments help you try to estimate some of these numbers.

But let me add on the card license, this is not from any specific one license fee. Most of the increase in card license revenue comes from the success of SD, and most importantly micro-SD, SD, mini-SD, micro-SD are now growing at a very fast pace. We, together with Matsushita and Toshiba, collect a royalty on every one of these cards that are sold, so our share of that has grown.

Anything further, Mr. Ellis?

That’s it. Thank you for taking the questions.

Thank you. Next we will here from Amit Kapur of Piper Jaffray.

Thank you very much. I was wondering if you could update us on the expansion of your international retail distribution points and maybe talk about some of the key geographies that you are targeting.

In terms of expansion on the international, we are very much focused on expanding the distribution network as well as having more feet on the ground in Europe and Asia. In that regard, after the M-Systems acquisition, as part of our integration we have really leveraged the M-Systems team to help us manage and grow our retail sales footprint in Europe and Asia. We have just put all that in place in the first quarter. We are making good progress there and we would expect increased share gains and increasing retail storefront presence in Europe and Asia in the future.

Maybe turning to the mobile handset market, when you talk with the handset OEMs, how do you see the mobile market playing out? Do you think it is still primarily a memory card opportunity, or are you starting to see embedded flash ramp pretty aggressively in devices?

Actually, we are seeing embedded flash ramp nicely but the largest part of portion we believe in the future remains on the card side. But as you know, on the embedded side, we have strong solutions with iNAND as well as the acquisition of M-Systems, NDog, and continuing to have high-capacity products. Now, with this week’s announcement of Qimonda, our ability to improve our offerings on the MCP side we believe will give us a very good leading position on the embedded as well as card solutions. And you see a good mix of opportunities on both sides.

Thank you very much.

We will take our next question from Daniel Amir from WR Hambrecht. Daniel Amir - WR Hambrecht+Co: Thanks a lot, a couple of questions here. First of all, it seems like the demand supply environment in the second-half of the year, maybe into early ’08 is impacted by probably two major market, the solid state drive market and the video market as well. Can you comment a bit about how SanDisk views the market, how you think that plays out for you guys here in the next 12 to 18 months?

We think that the second-half of this year as well as the next year is still mostly driven by the handset market. That is the biggest opportunity. We have said in fact the first quarter was the first quarter that mobile revenues exceeded card revenues for digital cameras, which is a very significant milestone and we expect that to grow. The biggest opportunity is -- catalyst are much more like iPhone than solid state disks. Not to take anything away from solid state disks, but as I have indicated we see that as really a 2008 significant contributor. In the second-half of this year, it is still going to be iPhone, iPhone like devices from their competitors that required 4- and 8-gigabytes of storage, as well as audio players, MP3 players that go through this stage -- and video will be there but relatively still small because the content for video is not yet what -- the infrastructure for video delivery in small devices and handset devices is still going to take some time. But we do see, once you get -- even on the card side once you get cameras that can take the HDSD -- that is the SD cards with the 4-gigabyte and higher capacity, which is basically the entire market is moving to that, then we are going to see the card business also move past this 2-gigabyte capacity and go to 4- and 8-gigabyte. So it is a very broad spectrum of markets and applications, not any one of those, but definitely the handset market is where we see our very strong position, both on the OEM and on the retail, both on the embedded and the removable. In the future, also the MegaSIM. Daniel Amir - WR Hambrecht+Co: The second question is in your comments you prepared that you are planning to do some retail price cuts here, or you started doing them as well. Is the strategy here basically to come back and gain market share after losing market share in Q1? If that is the strategy, should we see that going into the second-half of the year, the company is largely more focused on market share rather than necessarily maintaining a certain gross margin level?

Market share is very important to us and to a large extent -- frankly, in this particular case, we are not driving pricing in the market. We are really following the consequences of these very steep 50% price declines that were not initiated by us. Frankly, we were trying to hold back and we got [pegged] for that and we are not happy with that. We are always trying to balance market share with profitability, maximizing profitability. At the end of the day it is all about profitability, but 2007 is a tough year. There is no denying that. We believe we do have today the best cost structure out there, that we do have the ability to go and take market share and yes, we will do so. Daniel Amir - WR Hambrecht+Co: Final question is where do we stand on the x4 development now falling Hynix agreement? When should we expect production and what applications are you focusing it on?

x4 has been under development by legacy M-System for the last more than five years. I cannot get into details of how it is being developed but there has been ongoing development that we believe is on technology that is not leading edge, and basically we are -- it is very similar to what we have done frankly with the 3D technology that was running on, you know, two generations behind and we are moving them as quickly as possible to leading edge. We are doing the same thing with x4. That means that the initial expectations for product maybe later this year will not happen, simply because even with x4 with four bits per cell on an older generation technology competing with two bits per cell on the generation that we expect to be in volume production in the second-half of this year will just not be competitive. So this is really I would say probably the second-half of 2008 type of product introduction for x4 on a much more leading edge technology. Daniel Amir - WR Hambrecht+Co: Thanks a lot.

Moving on, we will here from Satya Chillara of Pacific Growth Equities.

Good afternoon. Eli, this question is for you regarding the Hynix agreement. I wanted to dig a little more, see if you can answer any of them. How long is this agreement for? Hynix did NAND production of $5 billion so far cumulative revenues. Did you guys receive any catch-up payments? Lastly, if you can talk about is it at least similar to what you are getting from your other licensee? That would be appreciated.

Of course, we cannot discuss that, as you well expect. I think Hynix will be very upset and everybody else that is listening there, our competitors would also be wanting to know -- anyway, I can’t comment.

On all three questions, or -- on the agreement, how long is the agreement? At least can you talk about that?

Even the length of the agreement is confidential.

Okay, got it.

But it is a long-term agreement.

Okay, understood. So in terms of, Judy, your guidance seems to be pretty soft compared to what Eli was calling on the TV today, 625 to 725 product. Can you give us the assumptions, what you are thinking here in terms of bit growth and pricing?

What I can tell you is that it does reflect significant growth in units and bits in our ongoing business, but remember that that is partially offset by the continued decline of the white label USB business, as well as the elimination of the consolidation of Twinsys, and I pointed out that Twinsys added $53 million of revenue in the first quarter. So there definitely is what we believe is good growth in units and bits, offset by the two items I just mentioned, and also offset by the pricing decline in the second quarter.

Lastly, Eli for you on x3, three bits per cell. How long have you been working on this program and what is the confidence level at this point going into -- before you start the production, do you feel pretty comfortable on x3? What is the timeframe we are talking about here?

x3, as I said on February 26th, is going to be very important technology. Our target there is to introduce x3 with no compromise in performance, whereas x4 is much more limited in scope of applicability. We think that x3 has got to be basically just a lower cost version of x2 or MLC. We are making good progress on that. There are some joint development activities that are going on and we are on plan to introduce the first product. I am not sure that we -- okay, so we said beginning of 2008, so I think that is -- let’s put it like this; in early 2008 is when we hope to introduce the first x3 product.

Okay, but how long are you putting the R&D? Can you answer that, please? How long have you been working on this?

For over -- between one to two years.

Great. Thank you.

Let me say that everything that you need to know in x3 you need to develop first in x2. You need to have very fast x2 in order to be able to deliver a cost-effective but high-performance x3, so you could say that we have been developing the foundation for x3 for probably over the last 10 years.

Thank you. We have time for two more callers.

Thank you. Our next question comes from Sam Doctor of J.P. Morgan.

Thank you. I have a couple of questions. First of all, on the OEM pricing, how should we see that in the second quarter? Is there some kind of a catch-up on the ASP declines in the second quarter, given that your first quarter declines were lower than you expected?

You know, let me say a couple of things on the pricing front. We are not going to provide specific price guidance, in part because this is competitive data in the marketplace. But over time, the net price of our products between retail and OEM are not that different in terms of the net price but there can be pretty significant timing differences from quarter to quarter in the different products. So we have taken into account the overall blended price decline in our revenue guidance for next quarter.

When you are talking about low-capacity NAND for Vista or Robson PCs or hybrid hard disks, is a 200-millimeter fab competitive for those kinds of applications? That would be mostly --

When I say low-capacity, I mean more 1-gigabit, 2-gigabits type of chips that are used in multi-chip packages. Vista, Robson and these guys are going to go to a gigabyte and that takes an 8-gigabit -- it is very difficult to compete against an 8-gigabit chip with four 2-gigabit chips. It is impossible to compete with a 16-gigabit chip -- against a 16-gigabit chip cost structure with four 4-gigabit chips, even if you are running them on a totally depreciated fab.

But for hybrid hard disks that have seen mostly you have 256-megabyte and 512-megabyte as the standard right now.

Right, and if you calculate, even if they are very successful, if you calculate the amount of flash it is actually not very large. These fabs, these mega fabs really require applications that are driving 4-, 8-, and 16-gigabytes type of applications. This is really what we are very, very focused on.

Thank you.

Thank you. We will take our final question from Eric Gomberg from Thomas Weisel Partners.

Thanks. A couple of questions. One, I was just wondering on the receivables, that is as low as I have ever seen relative to the revenue. Just wondering if you could just briefly comment on what is going on there. Do OEMs pay slower?

Sure, Eric. So there are some anomalies this quarter in terms of the receivables and it partly has to do with the fact that, as you know, we recognize our revenue for the retail business based upon sell-through, so there can be anomalies when, for example, we had high shipments and thus receivables at the end of Q4 and that gets collected in Q1. But we are recognizing revenue in Q1 based upon sell-through and accruing price protection and promotions for that sell-through, which can often be inventory that was sold and already collected from the customers. So you should not look at the DSO as being a meaningful statistic this quarter.

Okay, fair enough. A question on Hynix, realizing you are very limited in what you can say. You said royalty is straight-lined over the life of the agreement. I am just wondering; as far as x4 or any development there, is that included in the payments? Or, should that be developed successfully, is that potentially incremental? And then just wondering if you could talk about expectations on additional licensees, royalties from others or renewals over the course of ’07.

x4 is separate from the current cross-license agreement and the supply agreement. It is a separate -- it is an MOU, memorandum of understanding that we have with Hynix to explore joint development and manufacturing joint venture for x4. So this is actually a work in process but it is not -- no, it does not -- it is not part of a payment that we are receiving for the cross-license. It is something that is going to stand on its own two feet and is a good business proposition for both Hynix and SanDisk. Your second question?

That’s very helpful; expectations on additional royalties or renewals from others over the course of ’07.

Well, on the NAND side, on the NAND supply side, we have today by our estimate somewhere between 90% and 95% of the NAND supply is licensed. Really, other than Micron, there is no other major supplier out there. I had indicated on February 26th that we will be more aggressive on enforcing our IP on the system side, system and card side and we see there is an upside over there, but on the NAND side it is pretty well covered with the exception that I said.

Fair enough, and just one last question; is it fair to assume that the white label, which is trending lower and the Twinsys is lower than corporate average gross margin, and also just in terms of thinking about cost structure with 300-millimeter fab 3 ramping as well as it is, would we expect that internal costs are declining at a faster pace in the second-half than in the first-half?

In terms of gross margin, I would say yes, the white label business has a lower gross margin than the corporate average. But that is different than Twinsys. Twinsys, I think you should think about that, as that comes out, it is neutral to the bottom line because remember revenue, gross margin comes out but also this minority interest, which is negative currently to the bottom line. That comes out as well. I’m sorry, your second question?

It was just that given the trajectory of the ramp on 300-millimeter and with the 8- and 16-gig monolithic at 56-nanometer, should we assume that internal costs are accelerating, that cost declines are accelerating in the back-half of the year versus what you are experiencing in the first-half?

Yes, the second-half of the year will definitely have more benefit from the 56-nanometer ramp than does the first-half of the year. Remember, as you know there is always a lag based upon the fact that we recognize a significant portion of our revenue based on sell-through, which can often be one to two quarters after we ship it.

Okay, great. Thanks a lot.

Thanks, Eric. I think it is time to wrap it up. I really want to thank everyone here for listening today. We are definitely in a challenging year, 2007 we have said it will be a challenging year, first and second quarter, but we are very enthusiastic and quite optimistic about improving conditions later on in the year. We are very focused on getting our costs and our innovation engine totally focused on end of this year and 2008. We are looking forward to seeing a number of you this quarter during investment conferences. Thank you very much.

This concludes today’s call. We thank you for your participation and have a wonderful day.