SanDisk 2005 Annual Report Download - page 83

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also developed an architecture that can leverage advances in process technology designed for scaleable, high-
yielding, cost-effective and highly reliable manufacturing processes. We design our products to be compatible with
industry-standard interfaces used in standard operating systems for personal computers, mobile phones, gaming
devices, music players and other consumer and industrial products.
Our patented intelligent controller technology with its advanced defect management system permits our flash
storage card products to achieve a high level of reliability and longevity. Each one of our flash cards contains many
millions of flash memory cells. For example, our 4 gigabyte cards may contain as many as 35 billion storage cells. A
failure in any one of these cells or in a group or block of cells can result in loss of data such as picture files, and this
can occur several years into the life of a flash storage card. The controller chip inside our cards is designed to detect
such defects and recover data under most standard conditions.
Our research and development expenses were $194.8 million, $125.0 million and $84.2 million in 2005, 2004
and 2003, respectively.
Patents and Licenses. We rely on a combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect our intellectual property rights. See Item 1A,
“Risk Factors.”
In 1988, we developed the concept of emulation of a hard disk drive with flash solid-state memory. The first
related patents were filed by our president and chief executive officer Dr. Eli Harari and exclusively licensed to us.
As of the end of 2005, we owned or had rights to 349 United States patents, 212 foreign patents, 450 patent
applications pending in the United States, and have foreign counterparts pending on many of the applications in
multiple jurisdictions. We intend to seek additional international and United States patents on our technology.
On January 13, 2006, we completed the acquisition of Matrix Semiconductor, Inc., or Matrix. Matrix is a
pioneer in the design and development of three dimensional semiconductor memory technology. Patents transferred
to us upon completion of the acquisition included 124 United States patents, approximately 14 foreign patents, and
approximately 141 patent applications pending in the United States, and have foreign counterparts pending on many
of the applications in multiple jurisdictions.
We have various patent licenses with several companies including, among others, Intel Corporation, or Intel,
Lexar Media, Inc., or Lexar, Matsushita, Renesas, Samsung, Sharp Electronics KK, or Sharp, Sony and Toshiba.
From time to time, we have also entered into discussions with other companies regarding potential license
agreements for our patents.
Trade secrets and other confidential information are also important to our business. We protect our trade
secrets through confidentiality and invention assignment agreements.
Supply Chain. Our supply chain is an important competitive advantage.
•Silicon Sourcing. All of our flash memory card products require silicon chips for the memory components
and controller components. The majority of our memory is supplied from our ventures with Toshiba and our
Toshiba foundry relationship. This represents captive memory supply and we are obligated to take the output
from the ventures with Toshiba. See “— Ventures With Toshiba.” We purchase non-captive memory supply
primarily from Renesas and Samsung. We are guaranteed a percentage of the total output of each of Renesas
and Samsung, but are not obligated to use the guaranteed supply until we give them an order for future
purchases. We also source memory products from Fuji and Olympus. Our controller wafers are currently
supplied by Tower Semiconductor Ltd., or Tower, and United Microelectronics Corporation, or UMC. We
have a foundry agreement with Tower on a purchase order basis. See Item 1A, “Risk Factors.”
•Testing and Assembly. We sort and test our wafers at Toshiba in Yokkaichi, Japan, and Ardentec Corp. in
Taiwan. Our tested wafers are then shipped to our third-party memory assembly subcontractors, including
StatsChipPAC Ltd., or StatsChipPAC, in China, Silicon Precision Industries Co., Ltd., or SPIL, in Taiwan,
and Sharp and Mitsui & Co., Ltd., both in Japan. Our packaged memory final test, card assembly and card
test is performed at ASE Group, DataFab Systems, Inc., or DataFab, SPIL and United Test and Assembly
Center, in Taiwan, and Beautiful Enterprise Co., Ltd., DataFab, Flextronics International, Ltd., or
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