Lori Barker Padon - Senior Director of IR Eli Harari - Chairman of the Board, and CEO Judy Bruner - Executive Vice President, and Administration & CFO Sanjay Mehrotra - President, and COO

Daniel Gelbtuch - CIBC Amit Kapur - Piper Jaffray Paul Coster - J.P. Morgan Satya Chillara - Pacific Growth Equities Gurinder Kalra - Bear Stearns Craig Ellis - Citi Jim Covello - Goldman Sachs Daniel Amir - WR Hambrecht Steven Chin - UBS Bennett Notman - Davenport

Good day, everyone and welcome to today’s Second Quarter 2007 Earnings Call. As a reminder, this call is being recorded. For opening remarks and introductions, I'd now like to turn the call over to Ms. Lori Barker Padon. Please go ahead.

Thank you. Good afternoon and welcome to the financial teleconference for SanDisk Corporation for the second quarter of 2007. I’m Lori Barker Padon, SanDisk's senior director of investor relations. 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 an update on the industry and SanDisk’s overall strategy. Sanjay will follow with operational and business updates, and Judy will end with our second quarter financial results and future guidance. We will conclude the teleconference with your questions for Eli, Sanjay, 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, sales, expenses, gross margin, megabyte growth, supply, demand, inventory, production capacity, emerging markets, investments and future products and applications. 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 in elsewhere in documents we file from time to time with the SEC, including our annual report on Form 10-K for fiscal 2006 and our Form 10-Q for Q1 2007. 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.

Thank you, Lori. This quarter was the first quarter of operations under our new organization structure that integrates the legacy businesses of SanDisk and M-Systems. Managing this more global and diverse organization of business Sanjay, our cofounder, President, and COO is leading day-to-day management of the company and that allows me to focus on strategic issues facing the company and the industry. Therefore Sanjay will be covering the operational and business update in our quarterly call. While I will address the overall strategy in our big picture outlook. Please do not view this as a signal that I plan to retire any time soon. To the contrary these are exciting times for SanDisk and I'm energized by the many strategic opportunities and challenges ahead of us. The second quarter started under very difficult market conditions but improved markedly as the quarter progressed. April and May were characterized by excess supply, but July is coming to balance and during the distinct possibility the demand for high capacity flash products may outstrip industry wide supply in the second half of this year. Investor plays out then the second quarter will turn out to have been the bottom of the current severe down cycle which in turn would signal the beginning of the next industry upturn. If that is the case then all our strategic investments in low cost captive capacity Fab 3 and Fab 4 will prove to be exceptionally well timed. I believe there are two key factors that are driving the fortunes of the flash industry. First is the storage space of product innovations where flash is an enabler for mobile products. For example, the iPhone is the industry’s first product where only two models available are cutting rise by either the 4 gigabyte or an 8 gigabyte iPhone for flash storage, this is remarkable. The iPhone switch innovative feature has the potential to be an industry transforming product in the fastest growing and most competitive mobile market for multimedia handsets. iPhone validates everything we have been saying about flash storage in multimedia handsets and it may have far greater impact on the flash market in 2008 than the launch of the iPod Nano had in 2005. Apple’s own conception of non-flash may become substantial in 2008, but also major competitors are accelerating deployment of high capacity flash in new multimedia handsets to mark a ferocious challenge to the iPhone. We believe that in the next 12 to 18 months we will see the mobile storage requirement in multimedia phones bifurcate into an OEM business if it is driven by high capacity embedded storage such as iNAND in multichip packages or even MegaSIM on the one hand and high capacity cards sold primarily through retail on the other hand with a gradual decline in the OEM bundled low capacity costs. SanDisk is uniquely positioned to gain from this expected shift, as we have built strong sales organizations that we are separately focused on mobile OEM and mobile retail worldwide. The second key factor is rapidly growing global markets in the new consumer economy which is fuelling or surging demand in consumer electronics and mobile markets. The years’ economy used to be the engine of growth for the rest of the world. Today, the world economies are charging ahead across many geographies, with Europe and Pac Rim countries expected to fuel global growth of consumer demand for a foreseeable future. SanDisk will be a benefactor for these global economic trends because we are becoming a trusted global consumer brand, and because we continue to invest aggressively in global distribution of our product and in the global logistic supply chain. In the second quarter we saw a year-to-year doubling in units sold in Europe and we are expanding our field activities to tap the huge potential for us in international markets in the coming year. NAND flash has become one of the most strategic enabling technologies for portable consumer electronics and mobile products. NAND MLC in particular has got affordable storage to the sweet spot of this market. According to Gardner, a market research firm, in 2001 NAND flash was two times more expensive to megabyte than DRAM. In 2007, DRAM is four times more expensive to megabyte than NAND MLC. This is the result of DRAM pricing declining by 5.5 times between 2001 and 2007. While NAND MLC declined by 45. I say that again 45 times, not percent, times. While non-scaling will become more difficult with smaller geometries in the coming years, NAND may indeed pull an increasingly more disruptive threat to hard disk drives used in mobile applications. On the IP front, the ITC case against STMicroelectronics went against us and given ST's announcement about spinning off their NOR and NAND, we decided not to appeal. Both we and STMicro agreed to dismiss our patent infringement cases in Texas, but still have the California cases pending. We also signed a card license with Taiwan based Ritek and we plan to aggressively pursue licensing other card manufacturers. In addition, our SD card licensing program shows continuing growth with the increasing popularity of microSDs. Concerning what the demand/supply situation is in the second half of the year, prices are firming up and there are market signs that the pendulum may have begun to swing back in our direction. The market has now had two full quarters to absorb the industry-wide transition to MLC late last year, which caused abrupt inventory bubble that had to work its way through the channel. This was a one type of crunch that should not repeat itself at the end of this year. With price elasticity in new products driving megabytes to new demand worldwide, we believe the industry would likely be tight in supply of high density MLC components, as we move into the seasonally strong back half of the year. We are fortunate that we control our destiny through our captive supplying of low cost NAND, MLC at Fab 3 this year and Fab 4 in 2008. I am optimistic that our long term strategy for market leadership should translate into improving financial in the second half of 2007 and in 2008. I will now pass it on to Sanjay.

Thank you, Eli. SanDisk had a solid second quarter. Even though the overall industry climate remained challenging, we achieved positive results in driving demand and market share for our products. Managing the product supply chain, growing international sales, increasing average product capacities, diversifying product mix, reducing unit costs, and controlling expenses. First, I will highlight the key development in some of our main markets. The digital imaging market experienced surprisingly strong sequential revenue growth, which was particularly enhanced by growth in our international geographies and by sales of our high performance cards, such as Ultra and Extreme. As of May 2007, total unit shipments of digital cell cameras worldwide grew about 25% year-over-year according to the Camera and Imaging Products Association. The strong DSC market, helped drive more than 2.5-folds year-over-year increase in our best sold through the digital imaging market in the second quarter. You may have seen the announcement yesterday of our worldwide marketing campaign with Ducati. We are making a strong branding push emphasizing speed and performance as we step up customers to higher margin products. In the mobile market, we saw strong growth in retail revenue, but results were light in the OEM channel due to aggressive pricing and reduced market demand for certain handset models at one of our customers. Our mDOC revenue was also light in the quarter, with the industry beginning to shift toward more advanced multi-chip packages, MCPs that combined NAND with mobile DRAM. We believe MCPs will represent a growing segment of the embedded mobile storage market, with revenues starting in the first half of 2008. For iNAND we are also engaged in strong designing activity at tier-one mobile OEM accounts for our second generation at densities of 4GB, 8GB and 16GB. In the retail channel, sales were strong with both units and revenue increasing more than 50% sequentially. Further, average retail mobile card capacity grew about 20% sequentially reflecting continued adoption of high capacity cards for mobile applications. The unit demand for high capacity mobile cards was exceptionally strong and we launched the industry’s first high capacity 4-GBMemory Stick Micro M2 cards and the industry’s first 6-GB and 8-GB microSD cards. For the computing market, we launched our 64GB solid state drive for notebook PCs to meet the projected growth in demand for high capacity SSDs. Furthermore, we announced that our SATA 5000 2.5-inch SSD will be used by IBM for data storage within the Blade Center HS21 XM. This is the industry’s first Blade server to feature a solid state storage solution and we are proud to be part of that achievement. While the SSD market is still in its infancy and we don’t expect significant revenues this year, the continued adoption of our SSD products going forward by PC, server and other system solution providers positions us well to be a key player in that market segment. We have made substantial progress toward pursuing our strategy of increasing our market shares outside of our traditionally strong U.S. market. According to GSK, a market research firm, SanDisk’s overall revenue market shares in Europe across all product categories increased by almost 4 percentage points during May compared to March of 2007. Also unit sales of our products doubled year-over-year in both Europe and Asia. I believe that the new dedicated international sales teams we are putting in place will give us greater ability to drive our business in specific regions, and I am optimistic about continued gains in international sales of our products. Solid execution remained the hallmark of our manufacturing operations. Fab 3 continued to ramp with 56 nanometer process technology reaching cost parity with the 70 nanometer technology, early in the second quarter. Given the healthy ramp of the 56 nanometer technology and the excellent yields, we have been able to achieve in Fab 3, we are now more confident that we can meet our demand even in the seasonally strong fourth quarter with minimal reliance on non-captive supply. Fab 4 is on schedule with initial production planned for the end of the year and ramping up during 2008. In summary, the new organizational structure and the market expansion initiative that we discussed at last February’s analysts meeting are already bearing fruit, giving us what we believe to be strong momentum for continued growth. The innovation engine at SanDisk is strong and we are excited about the work we are doing to bring differentiated products to market. We are seeing good progress on unit cost and our strong execution on the 56 nanometer production should manifest itself favorably in our financial results in the second half of 2007. Let me now turn the call over to Judy.

Thank you Sanjay and Eli and good afternoon everyone. Our year-over-year increase in product revenue of 13% reflected an increase in megabyte sold of 217%, and a decline in ASP per megabyte sold of 65%, as well as an increase in non-memory product revenue. On a sequential basis, our megabyte sold were up 50% and our ASP per megabyte was down 26%, adjusting for the fact that we are no longer consolidating the TwinSys joint venture, which added 53 million to Q1 and our total product revenue increased sequentially by 13%. Looking at our revenue by channel, we return to our more traditional mix with retail comprising 67% of our revenue. Our retail sales exhibited very strong seasonal recovery with retail revenue up 41% sequentially. Megabyte sold of 74% and ASP per megabyte down 18%. The 18% retail decline in ASP per megabyte compares very favorably to 35% in the first quarter, and the 74% retail megabyte growth compares to 45% in Q2 of last year. We believe the favorable Q2 retail megabyte growth reflects three factors; one, the elasticity benefit of price reductions over the last several quarters, two, the exaggerated seasonal softness in Q1, and three, the growing retail mobile market. We saw very strong sequential retail sales growth in our imaging mobile handset and MP3 products. On a year-over-year basis, our retail revenue grew 9% reflecting robust growth in megabyte sold of 236%, and a steep 68% decline in ASP per megabyte. We saw the strongest year-over-year retail growth in our mobile business followed by growth in MP3 and USB sales. Looking at OEM sales on a sequential basis and removing the effect of TwinSys in Q1, OEM revenue was down 22% with megabyte sold approximately flat to last quarter and ASP per megabyte down 27%. As Sanjay discussed, our mobile OEM revenue was down sequentially due to aggressive price declines coupled with the reduction in unit demand from one of our handset OEM customers, and a decline in mobile embedded sales. On a year-over-year basis, our OEM sales were up 23% with megabyte sold up 166% and ASP per megabyte down 57%. The year-over-year OEM revenue growth primarily reflects the addition of product lines from the M-Systems acquisition such as mobile embedded and industrial embedded products, and non memory products such as SIM cards sold in the mobile network operator channel. While OEM sales were weak this quarter, retail sales were particularly strong and our overall product revenue performance demonstrates the benefit we derive from the diversity of our product lines and customers. License and royalty revenue for the second quarter of $107 million increased 30% year-over-year and 11% sequentially, and reflects the addition of our license agreement with Hynix increased card based royalties and higher than forecasted component based royalties. The component royalty increase is primarily the result of higher royalty rates on one of our licensees Q1 sales resulting from certain sales thresholds. These higher royalty rates will not be repeated in the remaining quarters of the year resulting in annual royalty rates by product lines that are consistent with the past. Our Q2 non-GAAP product gross margin of 19%, improved slightly from 18.5% in Q1, primarily because our costs decreased slightly more than our prices on a per megabyte basis. The amount of inventory related charges in Q2, was similar to Q1 as a percentage of sales and did not contribute to the gross margin improvement. The Q2 inventory charges primarily relate to certain products where our sales forecasts are less than originally anticipated. Our Q2 shipments were made with approximately 95% captive memory consistent with the Q1 captive shipment mix. Non-GAAP operating expenses were $169 million; $8 million less than in Q1 and significantly below the forecast I had provided of $190 million to $200 million. About half of this difference is due to a shift in certain Fab 4 startup costs from Q2 to Q3. This does not reflect any delay in Fab 4, just the timing of when the expenses will be incurred. The other reasons for lower spending in Q2, included a shift in certain sales and marketing expenses from Q2 to Q3, and better than anticipated savings from our cost containment actions. Other income of $38.5 million included a $4.1 million one-time gain related to the sale of certain equity investments. Turning to the balance sheet, cash and investments decreased $267 million to $3.2 billion. We utilized $90 million of cash in operations, primarily due to an increase in product and royalty receivables. Days sales outstanding are at a favorable level of 39 days. Inventory, net of reserves, increased slightly to $601 million remaining above 90 days of inventory. We are comfortable that this inventory will service well to meet the expected demand in the second half of the year, when non-captive supply may be more costly. We provided $123 million in cash to flash partners for Fab 3 equipment in the form of a note receivable, and we received $13 million from Flash Vision in final payback of the Flash Vision note receivable. We also invested $54 million in SanDisk capital equipment, which included assembly and test equipment for our captive factory in China, as well as some captive Fab equipment that we now own at a foundry for our 3G products and processes. The last key use of cash was $55 million for repurchase of our shares. I will now turn to our outlook. Traditionally, megabyte growth in Q3 is less than in Q2 due to slower summer seasonality. And we expect a similar pattern this year. Over the last three years, our Q3 megabyte growth has ranged between 20% and 40% sequentially and we believe this is a reasonable range to expect for this Q3. At the same time the pricing environment is expected to be significantly more favorable for us, than in the first half of the year. We have few planned price reductions in retail for the summer months. However, our ASP per megabyte will still decline due to price reductions implemented in June, which will impact all of Q3. With our OEM customers, some of the expected Q3 business is locked in at prices quoted during Q2, which reflect a sequential quarterly reduction. Our expectations for megabyte growth and pricing, lead us to forecast Q3 product revenue in the range of $750 million to $825 million. Looking at the year, we now expect bid growth for 2007 of 180% to 200% up from our previous forecast of 170% plus. We expect Q3 license and royalty revenue between $105 and $115 million based upon the forecast of sales of our license fees. For 2007, we are raising our forecast of license and royalty revenue from our previous forecast of $400 million to a range of $420 million to $430 million. Turning to gross margins, we expect cost decline to exceed price decline leading to forecasted non-GAAP product gross margin of 20% to 24% in Q3. And we currently anticipate a continued gradual increase in gross margin for Q4 as we benefit from a higher mix of 56 nanometer sales. We expect Q3 GAAP product gross margin to be lower than non-GAAP by approximately 3 percentage points due to the inclusion of stock compensation and acquisition related purchase accounting charges. We forecast Q3 non-GAAP operating expenses to be in the range of $205 million to $215 million, reflecting a sequential increase of approximately $20 to $25 million in Fab 4 R&D start-up costs and increased investment in future technologies as well as in sales and marketing programs related to the demand generation and expanding our international footprint. We currently expect non-GAAP operating expenses to increase again in Q4 due to seasonal sales and marketing expenses. Well, Fab 4 start-up costs are forecasted to be at approximately the same level in Q4 as in Q3. Q3 GAAP operating expenses are expected to be higher than non-GAAP by approximately $34 million to $38 million due to stock compensation and acquisition related intangible assets. Other income for Q3 is expected to be about 10 million lower than in Q2 due to the one time investment gains in Q2, anticipated lower cash balances as a result of the fab investment and a shift in our investment portfolio towards more tax exempt securities which yield us a better after tax return. On the balance sheet, we forecast that Q3 inventory levels will likely increase in preparation for Q4, and we expect to make cash investments in Flash Partners and Flash Alliance of approximately $350 million about half of which we had originally expected to fund in Q2. In summary, we are optimistic that the improved supply-demand balance in the NAND market will continue leading to a return to a more normal price declines and a gradual improvement in our margins in the second half for this year. We will now open up the call for your questions.

(Operator Instructions). And we will take our first question from Daniel Gelbtuch with CIBC. Daniel Gelbtuch - CIBC: Hey congratulations on a great quarter and great guidance.

Thanks Daniel. Daniel Gelbtuch - CIBC: First of all I was wondering if you could give us some color about the Ritek deal and do you think this is going to be a model for additional deals in Asia with regards to many of the ODMs and OEMs or smaller ones out there?

Yes, we do. We have put together a -- frankly a new license contracts for a third party card reserves, a card including USB flash drive, MP3 players and so on. And well, I think is the first one that in fact have find out for that license in hand. We expect it to be -- we will certainly offer it to a wide range of other potential licensees and hopefully they will sign up. Daniel Gelbtuch - CIBC: Okay, and then just turning to SSD. Obviously with the pricing going up for a component, I guess not for you guys, but for everyone else in the world, I was wondering where do you think we should see the inflection point for SSD coming? Is it going to be function of how NAND compares in price to magnetic? Is there some trigger point that you think we will see a tipping of -- or a ramp of SSD?

Well, we set the asset several times that SSD really needs to shift to multilevel sale MLC flash even -- it did basically at any technology node. In order for the SSD to become attractive at 32 gigabyte or 64 gigabyte for the consumer space, it certainly needs to go to the 56 nanometer or 50 nanometer or so, a generation of MLC and this is what we are focused on. In the enterprise space, the service space, the pricing is substantially higher, the requirements are different, although the market there is relatively small -- I mean smaller than the notebook market, it's still a very substantial market and as you know that this type of people make all of their margins -- the majority of their margin enhance price space. So, with the announcement about IBM server design win, we're basically signaling that we are going to be addressing both the consumer SSD market and the server market. Daniel Gelbtuch - CIBC: Okay. Thank you very much and congratulations.

I would say -- really as Sanjay said, we expect this to be really marketed to be very design win intensive over the next 12 months and really start generating material revenues in 2008. Daniel Gelbtuch - CIBC: Thank you.

Thank you. We'll take our next question from Amit Kapur with Piper Jaffray. Amit Kapur - Piper Jaffray: Great, thanks a lot. I was wondering if you could provide your views what kind of -- what types of densities you expect within the mobile handset applications over the next say 12 to 24 months? Most of the phones that we see out there seemed to be capped off with 2 gigabyte memory card support. Do you see any new applications or potential iPhone impact on other OEMs breaking through that barrier soon?

We certainly see the average capacities in mobile handsets continuing to increase. If you look at last year to this year, average capacities for retail have doubled in the mobile handset business. We certainly continue to see the same trend forward. By end of the year in retail we would expect the average capacities to be about 2 gigabyte. On the embedded side as well with our iNAND we are seeing strong design wins and these are iNAND design wins of high capacity 4 gigabyte and 8 gigabyte. And on the card side for mobile handsets, the support for high capacity cards is certainly coming through and then in near future we will see, we will begin to ship 8 gigabyte cards as well later on in the years. And we will have the handset support for high capacity microSD and other high capacity cards as well. So all in all, we continue to see strong trend both on the embedded as well as usage of cards for high capacity, in the handset market.

I would add that in the retail market, on the high capacity, that is 4 and 8 gigabytes, the key issue that is being resolved as we speak has been designing the new handsets to accommodate the high capacity, the SDHC standard and that is helping right now. So moving forward, I think certainly in this quarterly sale season and certainly next year, the aftermarket will move very much to 4 and 8 gigabytes to basically meet the iPhone phone 8 gigabyte capacity points. Amit Kapur - Piper Jaffray: Okay. Great. Maybe one quick follow-up. Mobile TV seems to be gaining support with some of the wireless carriers out there. But the ability to store content seems kind a limited. What are some of the barriers do you see in mobile video storage and when do you expect those to be resolved?

The issue there is very much infrastructure to deliver content, both mobile TV as well as movies in reasonable time because of bandwidth allocation. The wireless bandwidth allocations are still very severe. So this is slightly [changing]. But then there is also the protection DRAM schemes for protecting valuable video content, movies and so on. We think that the industry on the TV side is, they need to move very much away from selling you TV episodes for $1.99 or so to add supported three downloads of TV programs. We think that that's a great move for the industry and of course for us, because, this would definitely simplify the whole infrastructure for delivery of this TV program. In terms of downloads, we believe that TV programming will far, far exceed downloading of movies at least for the next 12 months or so. This is a very exciting situation right now, and definitely the entire content providers are looking now very eagerly at how to move in a big way to download content, not just to standalone players, PMP players, video players, and music players, but also to handsets. Handsets is eventually going to be the biggest application for video and in fact iPhone has demonstrated or will be demonstrating, what a great platform, the handset, the multimedia handset could be for video programs. So we are very early, but this is going to be a very-very large market. Amit Kapur - Piper Jaffray: Great, thanks a lot guys.

Thank you. We'll go next to Paul Coster with J.P. Morgan. Paul Coster - J.P. Morgan: Thank you. Eli you seem quite positive about the outlook for the beginning of next year. This time around we are not going to get that one-time effects of the MLC RAM, but is there anything in the new products that also gives you confidence that you will see kind of overflow of demand, and I'm thinking here will the SSD, which is presumably not a seasonal sale have any impact in the first half of next year, or for that matter the aftermarket sale of cards in these new multimedia handsets?

Yeah I don't think that SSD can absorb, can make a big difference frankly in Q1, Q2 next year in terms of the demand supply balance, but I do think that the two key factors that will influence the demand supply balance in Q1 will be Vista on the one side which is really been directed through the DRAM market. If Vista finally really drives demand for DRAM that will definitely impact the supply of NAND through non-conversion of DRAM capacity to NAND. And the second one is what we said the market’s reaction to the iPhone that brought in the first quarter next year should start kicking in our first quarter next year, the 3GSM Conference and everybody is seriously working on products that will be very attractive, significantly less expensive than $600 and we’ll definitely use a lot of flash. And this is where we see the biggest possibility for creating a demand supply balance or in fact an imbalance in favor of demand. Paul Coster - J.P. Morgan: And the second question, Judy the Fab 4 ramp at what point do the start-up cost get rolled into gross margins? And how should we be thinking about the gross margin impact from the event when it happens, timing its etcetera and magnitude?

Sure. We currently expect the impact of the Fab 4 start-up cost to begin rolling into cost of sales in the fourth quarter. We expect they will continue to be start-up costs in R&D in the fourth quarter at approximately a similar level to that of the third quarter, but then additional start-up costs beginning to hit cost of sales in the fourth quarter. So that would have some muting affect on their gross margins in the fourth quarter. But as I said we're optimistic in terms of the pricing environment for the second half and the effect that by the fourth quarter of this year we’ll begin to have much more contribution from 56-nanometer in our sales. Paul Coster - J.P. Morgan: Thank you.

Thank you we're going next to Satya Chillara with Pacific Growth Equities. Satya Chillara - Pacific Growth Equities: Hi, good afternoon. So Eli at this point are you in a position to talk about cell phone revenues for the year now that it seems you have locked in lot of OEM as well as you’ll see some retail sales. What is the prediction by the end of the year, cell phone would be for SanDisk?

What do you mean? Satya Chillara - Pacific Growth Equities: The cell phone revenue as percentage of your total product sales from cell phones.?

We are not providing this kind of prediction. I could tell you that in terms of unit revenues for Q2, we saw approximately 30 million units combined and we certainly expect the unit count and megabytes’ count to increase in the second half of the year. And as we've indicated this consists of a decline in bundled cost and then increase in retail cost as well as a decline in low capacity units and increase in high capacity units. So it's moving in the right direction flow. But I would expect that this year mobile will be our biggest revenue generated for the year with one for (inaudible) is that as we've said for this second quarter the digital still camera market was significantly strong in retail and if that trend continues and that too will be a very strong market for the rest of the year. Satya Chillara - Pacific Growth Equities: Okay, Eli, one other question on the licensing side. In terms of STMicro, you've gone with STMicro even though you said you are dropping it right now in terms of appeal, you have lost the case two times and contrast that with Samsung back in 1997. What’s the message I think will be, we are struggling here, why did you loose the STK's at ITC and basically in future, how airtight is your intellectual property?

We think we have very, very strong intellectual property. We lost the case, frankly the same partner has contested three times at the ITC with three different judges. The outcome in the three cases was in the first case we won on infringement and validity. In the second case, we won on validity but not on infringement. I guess we lost on validity and non-infringement. In the third, we won on infringement and non-validity. So this is the part of the frustration that you have when you are dealing with a patent case. I would say if there was one error that we made, a strategic error is that we tried to go for a very quick resolution and therefore relied on a single patent which we thought was definitely a very strong, a pretty fundamental patent that we create. And if I had to do it all over again I would definitely bring significantly more patents to play in here. When you bring the same patent, what happens is that the other side learns all the arguments and all the counter arguments and that was the mistake that we made. We will learn from that mistake. Satya Chillara - Pacific Growth Equities: Okay, thank you.

Thank you.

Thank you. We'll go next to Gurinder Kalra with Bear Stearns. Gurinder Kalra - Bear Stearns: Thanks. Just a couple of question from my end. Now Eli, you talked about the potential of demand exceeding supply in second half of this year. Now, it looks like both Samsung and Hynix are having some yield issues with their current process transition, and it will be resolved at some point in time. How does that influence your supply projections and your potential forecast?

We are not counting on them to fail. We are counting on them to succeed and they have been very good in the past at delivering whatever the market needs within limits. More importantly is how much big capacity do they allocate between NAND and DRAM in nothing that’s more important than yield issues. I think that they will -- my assumption is that they will all become those yield issues. Gurinder Kalra - Bear Stearns: Okay, thanks. Secondly, can you update us on when you plan to go into volume production on three bits per cell x4, and also any progress on the Matrix side?

So, on the three bits per cell as we said before, we will have initial product shipments of three bit based technology early in 2008. On the four bits per cell technology, we will have samples in second half of 2008, and the three bit technology we are working on -- and the 3D technology, we are working on transitioning that to the next generation technology note and we are continuing to make good progress there. On the OTP side as well as working on developing the read-write version of that technology which Eli had mentioned is the R&D efforts that will take two to three years to really fully materialize. Gurinder Kalra - Bear Stearns: So, on the four bits per cell line, you are talking about samples in the second half of the year or for next year?

Excuse me. Gurinder Kalra - Bear Stearns: So on the XFER you said you are having samples in the second half of next year?

Yes. Gurinder Kalra - Bear Stearns: So that would be a slight delay from your previous statement?

I feel last time that we had decide to apply XFER on a more advanced, the leading edge foundry node rather on an existing or trailing edge node and that basically means that we scrapped products on the 70 nanometers foundry, which we actually have and are focusing on a more advanced, on really the leading edge foundry in that time frame. Gurinder Kalra - Bear Stearns: Okay. Thanks very much.

Thank you. We will take our next question from Craig Ellis with Citi. Craig Ellis - Citi: Thanks for taking the question. Just first a question for Eli. Eli, you have talked about the number of supply/demand factors into early next year. How much of your competence in an upturn in NAND is predicated on the challenge that industry will pace as it moves up at 200 millimeter capacity in the first half of next year and the dampening effect that will happen over other group?

I think as I have said and I think now lot of people are saying, in fact, I think I believe the Koreans are saying the same thing now, that they plan to not drive advanced technology transitions in NAND under 200 millimeters. So that will have an impact on reduced supply under one hand, on the 200 millimeter. On the other hand, they are investing aggressively in 300 millimeter. So I think that, I am looking more frankly at this point to the surging demand we talked about, this global increase in demand that we -- it's a real phenomenon, and the fact that we have such a relatively small market share in many of these geographic markets is their stuffed optimism, that once they are put in place, the kind of resources that we have, we build in the United States that we can do significantly better and that will drive at least for us, we believe continued growth and demand and account for a 100% of assets from our captive supply. Craig Ellis - Citi: Okay. Thanks for that Eli. And then Judy, just a couple of quick ones. First on royalties. For a couple of quarters we are in the low teens as a percent of revenue. The long-term model is really high single digits at 10%. Is there anything unusual other than the one-time item you mentioned in the second quarter royalty that's going to impact how we think about the longer term model?

I'd always say really the only other factor is that we are seeing success in terms of growing our card based royalties. But at this point, I would not change our long-term model. Craig Ellis - Citi: Okay. And then secondly, I wasn't there on the gross margin commentary in the outlook. It sounded like there was a similar degree of inventory write-down pressure in the second quarter, as you saw in the first quarter. What is assumed in the third quarter guidance with regards to inventory write-down?

Well of course it's difficult to predict what inventory write-downs might be in any future quarter. But, we are optimistic that inventory write-downs in the second half will not be at the level they were in the first half. And that could be a factor and in gross margin improvement. But the primary factor that we are looking at is the pricing environment, and then as we get further into the second half, the higher contribution of 565 nanometer product. Craig Ellis - Citi: Okay. Thanks to everybody and congratulations on the quarter.

Thank you.

Next we'll go to Jim Covello with Goldman Sachs. Jim Covello - Goldman Sachs: Hi guys, good afternoon thanks so much for taking my question. Couple of quick things some of what you alluded a little bit too on the remarks up until now. But I guess first you have the advantage now where you have the capital supply as your competitors your card competitors costs are going higher, how do you strategically think about the decision of increasing market share versus increasing margin?

I think we should try to maximize our margin of course but keep our output at a 100% utilization. And at this stage it's a little bit academic, it's very difficult to frankly – the list is like this, non-captive supply today is very, very expensive and were definitely at this stage a bit difficult to justify to bring additional captive capacity overall to gain market share at the crest or close to zero or may be even negative margin, it's not what we would want to do this time. Jim Covello - Goldman Sachs: And I mean I guess another way to ask it would be with your captive supply that you have, how do you just make the decision between being price aggressive to try to go out to gain share with your captive supply versus just trying to have higher margins because, your supply is cheaper than your competitor's supply?

Well, first and foremost, we make sure that we address our strategic customers and don't behave opportunistically. On the other hand we as well as the industry, the supply side have really suffered through this price decline and we do think I have said many times that the kind of profit we've seen in the last two years are really unsustainable and that to justify future investments you really needed to get to significantly better gross margins than what we have experienced in the last two quarters. So you can improve your gross margins primarily by holding costs, by bringing cost down faster than your pricing comes down. And in some cases you want to bring your prices up because they were forced upon you to be way too low because of crazy competitive situation. We will definitely try to regain some pricing whatever we can, but not opportunistically not point of abandoning or offsetting low trend on strategic customers. Jim Covello - Goldman Sachs: Okay that’s helpful and that kind of leads into my second question which is, we are now in a very good position in the industry but in large part because supply got cut so much, our new supply growth got cut so much because of the move to from NAND to DRAM and because of the decrease in NAND orders from some of your competitors to the equipment suppliers. How do we get comfortable with now that pricing is looking better, that everything is not just going to come flying back on line, that your competitors aren’t going to just turn on this, pick it again and that you guys along with Toshiba aren’t just going to increase the CapEx again because that could be what brings all this to a faster halt than we would have hope for? How are you thinking about it and how can you help us to get comfortable with the continued discipline on the supply side?

It’s a good point, good question and definitely it seems to go south in the future and there will definitely be periods where we have these kind of situations, where industry as you know go through these cycles. But what's working for us is price elasticity, and demand elasticity is very strong right now. It finally caught up with the pricing and its much -- I mean we are talking about 220% increase in megabyte trickling our megabyte shipments year after year, so we have the large number of -- the theory of large number is actually now in our favor and that it's becoming more and more difficult to double the megabytes output because the basic numbers are now becoming very large. It's very difficult for new players to come in and make a dent. So, I think that the industry -- and everybody had suffered frankly through this experience of the last two quarters, but frankly we've had six quarters lost pretty severe quarter-to-quarter ASP declines, and I would say the sixth quarter is the longest down cycle the demand industry has had. And I think that the industry -- all the supplies would like to see this trend kind of turn around and much more moderate first declines, but of course the key to that is to get the demand [throughout our 50], through new products, through existing markets and new markets investment we are working on. Jim Covello - Goldman Sachs: That’s helpful, thanks. And then my final question and then I’ll go away. In terms about the royalty stream, you've referenced earlier like at the analyst meeting that Samsung, you would continue to negotiate with them as they contract, that’s called the current contract, it gets closer to expiring at the end of 2009 and you had said that that would be a difficult negotiation but you thought it would ultimately be successful. And then -- so, any update there, and then on Micron, Micron seems pretty automate that they're never going to have to pay you guys a license -- a royalty fee and I'm curious as to your opinion about that? Thank you.

Yes, I repeat what I said, I have no need to repeat this basically what I said about Samsung. We still believe that that would have been the best expense of Samsung and send it to a -- come to an agreement before the expiration of the current agreement. With regards to Micron, nothing has changed as far as our thinking which is of course not the same as their thinking and we will continue to work on that one. Jim Covello - Goldman Sachs: Thanks very much. Congratulations.

Thank you.

Thank you. We'll take our next question from Daniel Amir with WR Hambrecht. Daniel Amir - WR Hambrecht: Thanks a lot. A couple of questions here. First, what's the percent of production where you have a 56 nanometer by year end?

As we have said before, by end of the year we will have majority of our bit production in terms of output from the fabs in 56 nanometer. And that the 56 nanometer ramp is going extremely well, we feel pretty confident in our ability to meet that previous guidance. Daniel Amir - WR Hambrecht: Okay. And then the question -- a bit about your OEM mobile business as it relates I guess to the mDOC's/the iNAND. Can you a bit think about how does this compare with your previous expectations, I guess before the M-Systems acquisition? And is there a following against the iPhone trend here? I mean is there a change I guess in the mindset which direction it's going here in terms of embedded NAND in handsets.

So, embedded NAND on the handset as we said in the prepared statement, really the trend is in two directions. One primary trend is toward multi-chip packages and with our partnership with Qimonda, in the joint venture with Qimonda, we plan to have multi-chip packaged solutions in the first half of next year. Also on the embedded side, we are seeing the trend is moving toward the iNAND type of solution. A high capacity iNAND design wins, and with that we will see increase in our revenues later on in the year because iNAND embedded solutions design wins in terms of production take somewhat longer. By end of the year we will be seeing increases in embedded revenue coming in from the iNAND. So, the mDOC part is really shifting towards multi-chip packages, as well as, toward iNAND design wins. Daniel Amir - WR Hambrecht: And where does the MegaSIM kind of fit into the strategy here?

The MegaSIM also is an attractive semi-removable solution and that is also something that we are offering to the customers and we are seeing increasing design wins in that area as well.

On the MegaSIM, of course, the target customers for MegaSIM are not the handset manufacturers, but the mobile network operators, because they sell the SIM today. They own that and in their endeavor to increase their ARPUs, they are moving to more services than they could handle. The services could be much richer, if they were able to store a lot of content on the MegaSIM. Daniel Amir - WR Hambrecht: Okay. Thanks a lot.

Thank you.

Thank you. We will go next to Alex Guana with UBS. Steven Chin - UBS: Thanks. This is Steven Chin calling behalf of Alex. I just had a couple of more questions related to the iNAND and mDOC product lines. So as far as relative positioning going forward, it sounds like iNAND and other MCP type products will have more preference or usage in embedded cell phone application. Just given that, does that mean mDOC sales would begin to decline at a certain point and then you would have a crossover between iNAND sales and mDOC sales? And secondly, for iNAND MCP type products, would you guys typically be a single source for those sockets, or would it be dual source or and more because of the standardized footprints for some of these products?

So, really you have the point on the second point which is the standardization. So, what that means, in the mobile space for embedded is that there is rule among the main suppliers towards [JDC 64] which in itself is not just one product, but assembly of products that migrates towards eventually a bootable NAND working with a mobile DRAM and that is a direction that we are moving with iNAND and Samsung is moving with moviNAND, Toshiba has the GB NAND and its trying to satisfy the handset manufacturers that perhaps are tired of dealing with very large number of proprietary solutions that are not really the way to go for very high volumes.

There is time for one more caller please.

Thank you. We'll take our last question from Bennett Notman with Davenport. Bennett Notman - Davenport: Thank you for getting me in at the buzzer here. It seems like since you've locked up the bulk of the NAND manufacturing marketplace in terms of the licensing opportunity, you are now diversifying and going into sort of ancillary and related opportunities. And could you just talk a little bit about the potential for licensing outside of the manufacturers and into the other NAND market areas and how you look at that opportunity versus the magnitude of the opportunity you've got with the manufacturers?

We've said that we think we have most of the NAND manufacturers and NAND, NOC manufacturers covered and we of course have by virtue of SD, many of the microSD being a very large part of the card business. We have that covered through the SD association. We don't have the other card manufacturers and USB flash drive covered in this. This is a target area that we are pursuing through this licensing program. It will be significantly smaller, than the component business, but let's say in the next one to two years; however we've said that eventually we think that most flash memory will be sold as a card or as a system solution as opposed to a component and at that point, we'd like to capture both aspects of the product. Bennett Notman - Davenport: And do you have incremental opportunities in controller -- in the area of controllers or just other portions of in the enabling technology within the system or would it be just be sort of one license for the end card make?

You would rather license the card makers than the controller makers. The controller maker's patent law, it says that we cannot license to controller and also separately double it if you will. If you license the controller manufacturer, and license to flash manufacturer, you basically have licensed -- you've licensed the card. We'd rather go after the card and separately from the memory, and not license the controller manufacturer. Bennett Notman - Davenport: Thank you.

Thank you again. And that is all the time we have for questions. I would like to turn the program back over to today’s presenters for any additional or closing comments.

Okay. So, I would like to thank everyone here for listening today and we are looking forward to seeing a number of you during our upcoming conferences. Thank you very much. Goodbye.

That does conclude today’s conference. You may disconnect your line at any time.