Dr. Eli Harari, Founder, President, and CEO Judy Bruner, Executive Vice President and CFO

Craig Ellis, Citigroup Satya Chillara, American Technology Research Jim Covello, Goldman Sachs Paul Coster, JP Morgan Krishna Shankar, JMP Securities Daniel Amir, WR Hambrecht

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. Lori Barker Padon, Investor Relations: 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. Dr. Eli Harari, Founder, President, and CEO: 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 half of the first quarter, the product exceeding demand, confirming the timeliness of our preemptive price moves early in the quarter. The current pricing environment, although challenging to our competitors, is fundamental to our industry and works in two very positive ways. First, it simulates price elastic demand and is therefore critically important to absorption of significant new capacity coming also in this year from our sales as well as competitors. Secondly, dealers and suppliers that are playing catch up to the leading-edge NAND/MLC maybe more cautious converting the new capacity to NAND as they have done in the past 18 months when NAND was much more profitable for them. Judy will provide you guidance on the new price moves that we are implementing for the second quarter, that are somewhat more modest than in the first quarter and that are designed to further stimulate consumer demand for gigabyte capacities and setting the stage of a more healthy balance between demand and supply in the second half of the year. On April 4, 2006, we announced with Toshiba our intention to commence construction of a new joint NAND Fab that will be of Yokkaichi Fab 4. Fab 4 is being planned as a highly advanced dedicated NAND mega fab with operation, financing, and output. We’ll follow closely the successful model we and Toshiba have established in our joint Fab tree. Fab 4 is expected to generate substantial new capacity selling in 2008 through 2012 and should allow us to continue to develop new markets for our products and strengthen our marketshare in current and new geographies. We’ve chosen Yokkaichi for site of our tree as the most efficient site because that is where the technology development, engineering, and manufacturing is concentrated. We believe that for future profits technology transition is critical for competitiveness in our business and with the complexity of each successive generation of NAND/MLC there are significant advantages to exploiting the knowledge and experience that we and Toshiba have dealt at Yokkaichi. In the next three to five years Yokkaichi is expected to become one of the industries largest production facilities for NAND Flash Memory and this allow us to capture powerful ___. We view this Fab 4 as a core strategic decision for SanDisk, which should afford us opportunities for potential growth in revenues and for stability in the second half of this decade. Now, let me switch gears and discuss briefly current events in our competitive landscape. In March Micron and Lexar announced their intention to merge. In the past three years, Lexar’s financial results and roughly declining marketshare have demonstrated the immense difficulties for a small player in such a hugely competitive market, and recent public filings have shown that Lexar actively solicited a large number of potential acquirers. We believe that the Lexar acquisition is currently advertised, does not alleviate Micron’s challenges of catching up with leading-edge NAND/MLC, production becoming a factor in mobile cards where Lexar today is not a player, and addressing their IT situations. As for the current rumors involving SanDisk potential interest in Lexar, our longstanding policy is not to comment on rumors, and I have no intention to deviate from that policy today. We continue to focus on protecting our IT with our recent actions, citing three patterns at ITC against ST Micron. We have other cases pending in the District Court system that we believe is the ITC venue will be a FAS extract, and we hope for a positive ITC outcome by the middle of 2007. Just a brief update on our acquisition of Matrix Semiconductor. The integration is going very well and our top priority now is on growing our new archival OTP, one-time programmable 3D memory business, for blank PDS as well as for content distribution in the coming years. We are excited about the enormous future potentials of 3D memory and are actively accelerating investments in future-generation 3D technologies. In summary, at SanDisk we are invigorated by all these opportunities and competitive challenges. Although, we’ve had to fight marginal depression in the first quarter and expect more so in the second quarter, we remain optimistic about 2006 as a whole. We continue to reduce our costs. We are executing with our partner, Toshiba, a powerful long-term capacity expansion strategy throughout leading edge Fab’s. We continue to relentlessly grow our retial store fronts, create innovative serial products, and aggressively build our IT portfolio. Our markets in the cellphones, small Flash drives, audio and video players, and gaming are very young and on the verge of rapid growth in the years ahead. Judy… Judy Bruner, Executive Vice President and CFO: 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 mix in the first quarter was 43% Americas, 34% Europe, and 23% other international regions. Compared to last quarter, this represents a 10 percentage point increase in the mix of sales from Europe, which primarily reflects an encouraging sequential increase in retail revenue in Europe and the seasonally soft retail market in the US. I want to point out that I started last quarter providing regional revenue based upon the territory from which we received the PO rather than the territory to which we ship. As our OEM sales for the mobile business has been growing, we believe the PO territory is more relevant than the shipped territory, which often reflects the location of the contract manufacturers of the handset company. License and royalty revenue of $85.5 million was up 67% year-over-year and 27% sequentially, with growth driven primarily by MLC royalties and seasonal growth in our licensee sales in the fourth quarter, which we recognized as royalty revenue in the first quarter. Product gross margin in the first quarter of 28.4% was below the 30-32% range we had estimated for two primary reasons, higher than forecasted period costs related to higher inventory levels and a power outage experienced in Fab 3 in the first quarter. Incremental inventory reserves recorded in the first quarter represented approximately 1.5 points of product gross margin. In the latter part of February, Fab 3 experienced a power interruption caused by a transformer failure. While the power interruption was brief, some of the end process lots were scrapped and significant costs were incurred to bring the tools back online. This impacted the first quarter by approximately 1 point of gross margins. The mix of our shipments from non-captive supply was approximately 32% in the range we previously forecasted. Looking at purchases rather than shipments, non-captives was approximately 19% of our first quarter purchases, and we will temporarily further reduce our non-captive purchase mix in the second quarter to allow us to align total inventory with market demand given our growing captive supply. This lower mix of non-captive supply should begin to have a positive impact on the second quarter costs, but because the majority of our revenue is recognized based on sell through from the channel, the lower non-captive purchases in the first quarter and the second quarter will primarily benefit our gross margins in the third quarter. The current environment is a good example of why we believe a 70/30 captive non-captive mix is the right long-term strategy as it provides us significant flexibility to adjust our supply in response to fluctuating market demand. GAAP operating expenses for the first quarter was $180 million included a one-time charge of $40 million for the value technology in process at the time of our acquisition of Matrix. Operating expenses also included $3.7 million for amortization of intangible assets, primarily related to the Matrix acquisition. These assets are being amortized over periods of three to seven years. Through 2008, the amortization expense will be at a rate of approximately $4.5 million per quarter. With the implementation of FAS 123R, the first quarter operating expenses include approximately $19 million for the estimated value of stock incentives during the quarter. There was no stock compensation expense in cost of sales during the first quarter as the value of stock incentives for supply chain personnel of approximately $2.5 million was recorded in inventory. In future quarters, cost of sales will include stock compensation expense. Non-GAAP operating expenses excluding stock compensation and acquisition-related charges were approximately $118 million, up from $104 million last quarter with the increase coming primarily from increase to R&D for our new 3D business from 55 nanometer NAND technology development and from legal costs related to protecting our intellectual property. Excluding stock compensation and acquisition-related accounting charges, operating income was $120 million or 19.4% of revenue, compared to $114 million or 25.2% in the first quarter of last year. While operating margin of 19.3% is slightly below our annual target model of 20-24%, it is still robust profitability in a quarter with steep price declines and seasonally soft demand. GAAP operating income was $58 million or 9.3% of revenue. Other income of $18 million increased by $4 million from the prior quarters to the higher interest rates on our higher cash investments as well as certain non-recurring gains. Our non-GAAP tax rate decreased to 35% from the previous level of 37%. On a GAAP basis, our tax rate was approximately 54% with the primary difference being that the non-cash book charge of $40 million for in-process technology is a discrete item that is not tax deductible. In addition, there is no tax benefit for book purposes from the vesting of incentive stock options since the tax impact of those options cannot be determined until they are exercised in full. While we are currently only granting non-qualified stock options, we do have incentive stock options that are still vesting and contributing to our stock compensation expense. Our diluted shares now include the 3.7 million shares issued in January for the Matrix acquisition. On a non-GAAP basis, which is comparable to GAAP results last year, our net income was $90 million, up 21% from the year ago quarter or $0.44 per share, up 13% from the year ago quarter. Turning to the balance sheet, we ended the quarter with $1.75 billion of cash and short-term investments, up $54 million from last quarter. The implementation of FAS 123R has resulted in a change in the presentation of the cash flow statement. The cash tax benefit received by the company from the exercise of stock options was previously part of cash flow from operations but is now shown in cash flow from financing. For the first quarter, our cash flow from operations was a positive $52 million, and we generated $46 million in cash from employee stock programs and $42 million from the related tax benefits. Investing activities for the first quarter included $43 million of equity investment in Flash Partners for Fab 3 equipment and $53 million of investment in SanDisk capital equipment, primarily for manufacturing, assembly, and test equipment. In addition to our equity investment in Flash Partners, we also guaranteed additional operating leases of approximately $150 million, which does not appear on the balance sheet but will be reported in our 10-Q. Accounts receivables decreased $83 million, reflecting seasonality as well as the impact of price protection credits given for inventory in the channel at the time of our first quarter price reduction. DSO was 42 days at the end of the first quarter. Inventory increased $82 million due to the combination of ramping Fab 3 output and the first quarter seasonally soft shipments. As I mentioned earlier, we are significantly reducing non-captive purchases in the second quarter given our current inventory level. Channel inventory at the end of the quarter stood at about 10.5 weeks based on the last four weeks of sell through, which was faster in March than we had expected. Channel inventory as of the higher end of the range we typically see, and this is one factor which leads us to plan price reductions in the second quarter at a higher rate than we expected as we entered the year. A final comment on the balance sheet is that it reflects several changes resulting from the Matrix acquisition. Intangible assets increased by $98 million and goodwill increased by $162 million due to the purchase accounting for the Matrix acquisition. As is normal with purchase accounting, the goodwill balance will be adjusted over the next few quarters as we fine tune certain matrix related assets and liabilities, primarily tax related. I’ll now turn to our outlook for the second quarter and certain comments on the year. Let me remind you that the forward-looking comments I am about to make are subject to risks and uncertainties as described at the beginning of this call and in our periodic SEC filings, and we do not intend to update these comments or forecasts prior to the next quarterly conference call. We expect our ASP per megabyte to decline approximately 20% sequentially in the second quarter. This forecasted reduction in ASP per megabyte reflects price mix and promotions as well as the impact of increasing card capacities, which are priced at a lower price per megabyte. We expect our average capacities to continue upward stimulated by our first quarter and second quarter mix. We expect our megabyte sod to increase approximately 35-45% sequentially in the second quarter. For the full year 2006, we continue to expect megabyte sold to increase between 180% and 190% and our ASP per megabyte to decline 50-55%. We expect the second quarter license and royalty revenue to be between $75 million and $80 million, down from the first quarter since our second quarter royalty revenue reflects sales of our licensees and the seasonally softer first quarter. We continue to estimate approximately $350 million in license and royalty revenue for 2006. We expect product gross margin for the second quarter, excluding the impact of stock compensation, to be in the range of 28-30%. Our forecast of 20% price decline for the second quarter is higher than we anticipated at the start of the year as we are continuing to proactively reduce prices to stimulate demand and move channel inventory and new production output. In addition, there will be some cost in the second quarter related to a plan shutdown of Fab 3 that was implemented in early April in order to make power modifications that are expected to significantly reduce the chances of an unplanned outage in the future. Our lower non-captive purchases will begin to have a positive impact on the second quarter but will primarily affect third quarter cost of sales. On a GAAP basis, we expect product gross margin to be approximately 0.5 percentage point lower than our non-GAAP guidance due to the inclusion of stock compensation which was recorded in inventory in the first quarter. We expect non-GAAP operating expenses in the second quarter of approximately $130 million up from the first quarter to primarily new product development and 55 nanometer technology development as well as investments in our retail branding campaign and that we believe will have a positive return over the long term and a positive impact on sales and marketshare in the second half of this year. We expect stock compensation to be approximately $25 million in the second quarter, including the impact of our annual stock option grant which were made in March. Amortization of intangibles should be approximately $4.5 million. We expect the non-GAAP tax rate to remain at 35% for the second quarter and the GAAP tax rate to be approximately 37% for the second quarter. We expect to make cash investments in Flash Partners in the second quarter of approximately $200 million. Given the investments ahead for Fab 3 and also Fab 4, which will begin in the second half of 2007, we are pursuing additional re-financing as well as exploring other financing alternatives. We expect inventory levels to remain approximately flat from the first quarter to the second quarter as we reduce non-captive purchases and continue to ramp Fab 3. In summary, the supply-demand balance in the first half of this year is somewhat challenging; however, we remain focused on our strategies for the long term and continue to forecast attractive growth in sales and non-GAAP profits for 2006. We’ll now open the call for your questions.

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. Craig Ellis, Citigroup: 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? Judy Bruner, Executive Vice President and CFO: 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. Craig Ellis, Citigroup: So, with the absence of those factors in the second quarter, would we be seeing a more significant uptake in margins sequentially? Judy Bruner, Executive Vice President and CFO: 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. Craig Ellis, Citigroup: 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.? Dr. Eli Harari, Founder, President, and CEO: 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. Craig Ellis, Citigroup: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Craig Ellis, Citigroup: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Craig Ellis, Citigroup: Okay, Judy and Eli, thanks, and I guess given all that, 35-45% dip was pretty much of a distraction in the second quarter. Dr. Eli Harari, Founder, President, and CEO: Thank you Craig.

Again it is the site of Satya Chillara with American Technology Research, please go ahead. Satya Chillara, American Technology Research: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Satya Chillara, American Technology Research: Eli on that note, can you quantify the retail mobile card density? Dr. Eli Harari, Founder, President, and CEO: 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. Satya Chillara, American Technology Research: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Satya Chillara, American Technology Research: Okay, thank you.

We’ll go next to the site of Jim Covello with Goldman Sachs, please go ahead. Jim Covello, Goldman Sachs: 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? Judy Bruner, Executive Vice President and CFO: 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. Dr. Eli Harari, Founder, President, and CEO: Price increases are… Jim Covello, Goldman Sachs: 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. Dr. Eli Harari, Founder, President, and CEO: Yeah, we do believe that by being preemptive hopefully that will do the trick for the second half. Judy Bruner, Executive Vice President and CFO: 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. Dr. Eli Harari, Founder, President, and CEO: 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. Jim Covello, Goldman Sachs: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Jim Covello, Goldman Sachs: 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. Dr. Eli Harari, Founder, President, and CEO: 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. Jim Covello, Goldman Sachs: Thank you.

We’ll go next to the site of Paul Coster with JP Morgan Paul Coster, 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? Judy Bruner, Executive Vice President and CFO: Yes, product mix was not a big factor in our gross margins in the first quarter. Paul Coster, JP Morgan: 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? Judy Bruner, Executive Vice President and CFO: 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. Paul Coster, JP Morgan: I mean it seems to be a record level actually, is that correct? Judy Bruner, Executive Vice President and CFO: 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. Dr. Eli Harari, Founder, President, and CEO: 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. Paul Coster, JP Morgan: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Paul Coster, JP Morgan: 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? Judy Bruner, Executive Vice President and CFO: 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. Paul Coster, JP Morgan: Okay, thank you.

We’ll go next to the site of Krishna Shankar with JMP Securities, please go ahead. Krishna Shankar, JMP Securities: 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? Dr. Eli Harari, Founder, President, and CEO: 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… Krishna Shankar, JMP Securities: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Krishna Shankar, JMP Securities: 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. Dr. Eli Harari, Founder, President, and CEO: Non-branded, you mean… Krishna Shankar, JMP Securities: Non-SanDisk…brand preference…mobile cards. Dr. Eli Harari, Founder, President, and CEO: 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. Krishna Shankar, JMP Securities: 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? Judy Bruner, Executive Vice President and CFO: 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. Dr. Eli Harari, Founder, President, and CEO: 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… Dr. Eli Harari, Founder, President, and CEO: Typically, two to three months.

Two to three months, okay. Dr. Eli Harari, Founder, President, and CEO: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Lori Barker Padon, Investor Relations: 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. Daniel Amir, WR Hambrecht: 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? Dr. Eli Harari, Founder, President, and CEO: 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. Daniel Amir, WR Hambrecht: And will this command better margins or same margins? Dr. Eli Harari, Founder, President, and CEO: 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. Daniel Amir, WR Hambrecht: Okay, thanks a lot. Dr. Eli Harari, Founder, President, and CEO: 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.