Special Note

Statements in these posted remarks that relate to future results and events, and other forward-looking statements in these remarks, are based on Western Digital Corporation’s current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. These risk factors include:

• supply and demand conditions in the hard drive industry;
• actions by competitors;
• unexpected advances in competing technologies such as flash memory;
• uncertainties related to the development and introduction of products based on new technologies and successful expansion into new hard drive markets;
• business conditions and growth in the desktop,
• mobile PC, enterprise, consumer electronics and external hard drive markets;
• pricing trends and fluctuations in average selling prices;
• the risk that WD’s business will suffer during the integration of its media operations;
• failure to effectively continue to integrate WD’s media and head technology;
• changes in the availability and cost of commodity materials and specialized product components that WD does not make internally;
• negative impacts of the conditions in the global credit markets on our longer-term financing plans and on our current investment portfolio; and
• other factors listed in our periodic SEC filings and on this Web site in Risk Factors.
  

Robert Blair - Investor Relations

Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning: supply and demand conditions in the hard drive industry; growth opportunities and WD’s strategies to address these opportunities; the volume ramp of our 250Gb/sq in technology; beliefs regarding our future capital expenditures as a vertically integrated hard drive manufacturer; our growth and pricing expectations; expectations regarding our bridge financing facility and future longer-term financing; and our current financial outlook for the March quarter.

These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-Q filed with the SEC on November 6, 2007, as well as the additional risk factors reported in the press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today. We undertake no obligation to update our forward-looking statements to reflect new information or events, and you should not assume later in the quarter that the comments we make today are still valid.

John Coyne - President & Chief Executive Officer

Good afternoon everyone. After my remarks, Tim Leyden will review our December quarter performance in detail and address our outlook for the March quarter.

A year ago I spoke to you for the first time as CEO, and outlined my commitment to continue the pursuit of profitable growth. I am happy to report that our December quarter results complete a calendar year of tremendous achievement by the WD team, a year in which we delivered industry-leading growth and financial performance and during which we significantly strengthened our technology position and the fundamental WD business model.

In calendar year 2007, we increased revenues by 38% and earnings per share by 56% compared with calendar 2006.  More importantly, we have built momentum throughout the year and we exit the December quarter with revenue up 54% and earnings per share up 137%, compared to the same quarter last year.  Additionally, we maintained the financial asset management discipline which is a hallmark of WD, applying our expertise to the newly acquired WD media operation cycle times and inventories, while also continuing to improve in head and drive operations, resulting in a sequential increase in inventory turns from 12.6 to 14.8.  Hard drive finished goods inventory at the end of December was down 2% year-over-year, while we still achieved 54% revenue growth with consistent and responsive customer support.  Capital spending at $332 million year to date is also disciplined and tracking in line with the previously announced reduction to our annual capital plan.

I want to take this opportunity to acknowledge the outstanding contribution of the entire WD team, the tremendous support of our supply partners and the increasing preference of our customers for WD’s value proposition. Our high quality, high reliability products, our flexible and responsive service, our efficient large-scale operations, our investments in technology, capacity and capability, and our commitment to continuous improvement, all contributed to these superb 2007 and December quarter results.

WD’s performance reflects that of a highly-motivated team operating with passion, taking appropriate and rapid action, focused on productivity, demonstrating relentless perseverance and innovation in technology, products and process and balancing the needs of our customers, suppliers, shareholders, employees and the communities in which we operate with integrity.

Opportunity is being created by a continuing surge in demand for traditional computing-related storage, further enhanced by emerging storage demand driven by rich content distributed over the Internet and personal content arising from the conversion of photography, audio and video from analog to digital technologies.  For calendar 2007, demand for hard drives grew over 15% on a unit basis and 67% in total HDD storage capacity for a total of approximately 88 billion gigabytes of HDD storage. In the December quarter alone, units grew 20% and total HDD storage capacity expanded 70% versus the year ago period. This strong growth in units and total HDD storage capacity is expected to continue for the next several years.

WD is capitalizing on growth opportunities through thoughtful strategies which we have executed very effectively in recent years.  I would like to briefly highlight a few of these key strategies:

Five years ago we identified that the market for 2.5-inch hard drives would become an increasingly important segment of the overall market.  We invested consistently and patiently in people, technology-staging, product and process development and entered the market in September 2004.  Step-by-step we began to build applications knowledge, business understanding and customer acceptance.  We maintained focus on our technology and reached a point in May of 2007 where we began volume shipments of the 250GB capacity - the industry’s highest capacity two-disk 2.5-inch drive at that time.  In late October we followed up with our 320GB capacity, again leading the industry to volume with advanced technology and capacity. This technology and product leadership is underpinned by high yielding, high quality, low cost design and manufacturing.  In the last year we have tripled our output of mobile drives, shipping 8.7 million 2.5-inch hard drives in the December quarter.  Our technology and product momentum in this space, allied to our acknowledged reputation for quality, reliability, availability and responsiveness, bodes well for continued growth in this, the fastest-growing segment of the storage industry. 

For many years Branded Products was a successful but small element of our total product mix, consisting mostly of internal drive-upgrade kits for desktop computers. About three years ago demand in this category began to expand dramatically driven by Internet content and the conversion of audio, video and photography from analog to digital, allowing consumers to process and store this content on computers and similar devices.  Again, we made timely and appropriate investments in people to understand the emerging market, to design appropriate products, to establish the right channels and partners and to lead and inspire our teams.  Two years ago, Branded accounted for just 5% of sales. Today Branded represents 18% of our hard drive revenues and WD is the leading storage appliance brand. 

Adding to our presence in the Enterprise SATA market, we launched our
Green Power™ line of drives mid-year and this product concept is finding significant acceptance in the enterprise customer base, addressing the need to reduce the power demands of large commercial storage farms.

During 2007 we made three very important, long-term, strategic investments.  The first, with the acquisition of Komag, provides the ability to design and manufacture our own media.  Just like our head acquisition in 2003, WD Media is playing a key role in driving our future technologies, as well as further improving our cost model and our supply security and flexibility.  The second was an asset purchase of Senvid, a software company, to enable the further broadening and enhancement of our Branded product offerings.  The third involved the opening of a design center in Longmont, Colorado adding a significant new talent pool to the WD engineering team to fuel future growth.

We enter 2008 with strong positions and momentum in all our served business segments.  We are ramping production of our industry-leading 250Gb/sq. inch technology, first deployed on our 2.5-inch products last October, and now on our 3.5-inch product platforms, creating a common, highly leveraged, efficient, high-volume technology platform for our component and drive operations for the year ahead.  We will also see the full impact of our internal media operations as we move through the year.

We continue to explore opportunities to broaden our product portfolio in existing markets and to enter new and adjacent market segments as it makes business sense. We are making appropriate investments to stage for these opportunities.  Consistent with WD tradition, we will make specific product announcements only when these products are available and shipping in volume.

The future for our industry looks bright.  Demand for storage capacity is forecast to continue growing at some 60% annually, which when addressed with areal density growth of 40% plus, translates into HDD unit growth in the high teens. This demand is strong and broad based, with many new applications for our technology.  With an appropriate business model, good execution, aggressive cost management, great products and a rational approach to pricing, tremendous value can be created by addressing this surging demand for high capacity storage. 

While there may be concern about the impact of macro economic conditions on demand for storage, we have yet to see any effect on actual usage or order rates or on forecasts from our customers.  The availability of weekly industry information on inventories, sell-in and sell-thru to all channels enables us and the other industry participants to act swiftly whenever we see an imbalance between demand and supply. With WD’s high velocity, low inventory, supply chain and manufacturing model, we have historically demonstrated an ability to react to both upside opportunities and downside challenges.  With our lean, efficient OPEX model and our low cost operations we have the lowest relative breakeven point among major players in the industry. 

As an efficient, vertically integrated company, WD has been able to consistently attain high levels of profitability and return on capital, which has allowed substantial investment in future technologies, products and capacity.  We expect to continue to grow profitably and we will continue to price our products with all customers and in all market segments so as to enable continued investment and the long-term sustainability of our business.  

We have the passion, the people, technology, product breadth, manufacturing scale, quality, reliability and customer relationships in place and 2008 offers an unprecedented opportunity for profitable growth in all the business segments which we address.  WD’s positioning has never been better.  However, as in the past, our success depends largely on our own execution against the opportunities and challenges that emerge in an ever-changing market.

Tim will now provide details of our December quarter performance and our outlook for the March quarter.

Closing
In closing, I want to thank you all again for joining us and I also want to again thank our employees, our suppliers and our customers for an outstanding December quarter.  We look forward to updating you on our progress as we execute our strategies and address the vast opportunities we see ahead of us in the storage market.

Tim Leyden - Executive Vice President & Chief Financial Officer

We are very pleased with the results for our December quarter.  They reflect crisp and timely execution by the WD team, strong demand for hard drives and a rational competitive pricing environment.  Our operational flexibility enabled us to quickly react to a number of attractive market and product mix opportunities throughout the quarter.  These opportunities continued to arise after our revised guidance in early December, resulting in additional upside.  Coupled with continued progress on the integration of our media operations and our ongoing focus on asset efficiency and cash management, these factors led to exceptionally strong revenue, earnings and cash flows in the December quarter. 
 
Revenue for our second fiscal quarter was $2.2 billion.  This includes $120 million from external sales of media and substrates.  Hard drive revenue was up 46% from the prior year, and hard drive shipments totaled 34.2 million units, up 40% from the prior year.  

Average hard drive selling prices were approximately $61 per unit, up $2 from the September quarter and up $3 from the year-ago quarter as a result of firmer pricing, due to the strong demand for hard drives coupled with an improved segment and product mix.  The percentage of our hard drive revenue coming from non-desktop PC applications increased to 54% in the December quarter, as compared to 53% in the September quarter and 42% for the year-ago quarter.

We shipped 8.7 million 2.5-inch mobile drives in the December quarter, as compared to 5.9 million in the September quarter and 2.7 million in the year-ago quarter.  Demand for mobile storage continues to increase, and our quality, technology leadership, product offerings, operational flexibility and responsiveness have solidified our position as a valued partner to PC manufacturers, major distributors and retailers. 

In consumer electronics, we shipped 4.1 million 3.5-inch drives for use in digital video recorders (DVR) in the December quarter versus 3.7 million in the September quarter and 2.7 million in the year-ago quarter. This market continues to offer long-term growth opportunities, and demonstrates the potential of non-PC based consumer electronics systems incorporating hard drives.  However, pricing in the DVR market does not currently provide adequate returns to justify incremental capacity expansion to fully support these growth opportunities. 

Desktop product shipments were better than expected.  Unit shipments were up 10% from the September quarter as compared to 5% for the market as a whole.  During the quarter, while we honored our pre-existing OEM commitments, we focused on satisfying upside demand from the distribution channel first, as desktop OEM margins, like DVR, are less attractive than other market areas.  Sales into the enterprise market, our highest margin segment, were in line with our expectations.

Continued growth in shipments of hard drives for non-desktop PC applications has led to a substantial improvement in the diversification of our revenue and customer base.  

Hard drive channel revenue was 48% OEM, 34% distribution and 18% branded products versus 50% OEM, 31% distribution and 19% branded in the September quarter; and it was 46% OEM, 37% distribution and 17% branded in the year-ago quarter.  These percentages exclude external sales of media and substrates, which totaled $120 million in the December quarter, or 5% of revenue, and $40 million in the September quarter, or 2% of revenue.  Revenue for each of our top five customers increased from the September quarter.  However, because of the increased diversification of our revenue base, again, no single customer comprised more than 10% of the total.

The Q2 geographic split of our hard drive revenue was 32% Americas, 32% Europe and 36% Asia, as compared to 34% Americas, 33% Europe and 33% Asia in the September quarter; and it was 38% Americas, 32% Europe and 30% Asia in the year-ago quarter. These percentages also exclude external sales of media and substrates.

Our gross margin percentage for the quarter was 23.3% versus 18.3% in the September quarter and 17.9% in the year-ago quarter.  This increase was a function of the favorable industry conditions I referred to earlier and our ability to quickly react to the opportunities for volume increase, pricing and mix optimization presented by this stronger demand.  Our manufacturing throughput and costs also improved through operational efficiencies, higher utilization and a higher mix of products based on newer, more cost-effective technologies and the contribution of media operations. 

I am pleased to report that the media acquisition was accretive to the December quarter, our first full quarter of operations.  This is two quarters earlier than we originally forecast, and is due to higher internal usage, higher external sales and more rapid progress in yield and utilization than originally contemplated. 
 
Operating expenses totaled $181 million, or 8.2% of revenue.  This includes a full quarter of media operating expenses, continued investments in product and technology improvements and higher incentive compensation associated with the more favorable financial results for the quarter.

Operating income was $332 million, or 15% of revenue.

Net interest and other non-operating costs netted to an expense of approximately $16 million.  This includes about $8 million of losses on our investments in auction-rate securities, which I will discuss later. 

Income tax expense was $11 million for the December quarter, or approximately 3.5% of income before taxes.  This includes the benefit of adjusting our year-to-date rate down to approximately 4.5%, excluding the Q1 non-recurring items.  We now expect our rate for the full year will be in the 4% to 6% range. 

Net income totaled $305 million, or $1.35 per share.

Turning to the balance sheet, our cash, cash equivalents and short-term investments at the end of the quarter totaled $967 million as compared to $851 million at the end of September. 

Cash generated from operations during the quarter totaled $519 million. 

Capital expenditures for the quarter were $169 million, and non-cash charges for depreciation and amortization expense totaled $111 million.  For the first six months of 2008, our capital expenditures totaled $332 million, approximately $100 million of which relates to our 8-inch wafer fab conversion.

We still expect capital expenditures for fiscal 2008 to be around $700 million, which is consistent with the reduced capital plan that we communicated to you during our first quarter earnings call on November 1st despite significant increases in our volume.  As previously indicated, this includes about $200 million for conversion of our head wafer fabrication facility and $100 million to upgrade our media technology. Depreciation and amortization expense for fiscal 2008 is expected to be about $400 million, including about $100 million for media operations.

During the quarter, we retired the $250 million convertible debt assumed in the Komag acquisition through cash payments of $240 million and a further draw on our bridge financing facility of $10 million.  As of the end of December, we had $760 million outstanding under our bridge financing facility.  We are in the process of obtaining longer-term, unsecured financing that we expect will consist of a 5-year term loan and a revolving line of credit totaling $500 million to $750 million.  As of today, we have received non-binding commitments totaling in excess of $700 million. We expect to pay off the $760 million outstanding under the bridge financing facility through a combination of these loan proceeds and existing cash balances.  This refinancing transaction is being led by JP Morgan and Citibank.

Our cash and cash equivalents of $917 million are invested primarily in readily accessible, AAA rated institutional money-market funds, the majority of which are backed by the U.S. government.  As of the end of December, our short-term investments of $50 million included $43 million of AAA rated auction-rate securities.  During the December quarter, the market values of some of the auction-rate securities we owned as of the beginning of the quarter were impacted by the macro-economic credit market conditions.  We reduced our investments in auction-rate securities from $197 million at the beginning of the quarter to $43 million as of the end of the quarter.  As a result of these market value changes, we realized $3 million in losses on sales and $5 million of unrealized losses to mark the remaining investments to market.  Since quarter-end, we have sold an additional $10 million at par, bringing our current net balance of auction-rate securities down to $33 million.  These securities will likely be held for some period of time, until secondary markets become available.  These investments are currently accounted for as available-for-sale securities.  The market values of these investments are subject to fluctuation.  At the end of each quarter, we will evaluate any changes in value to determine if they are temporary or permanent.  Temporary changes are recorded in equity, while changes believed to be permanent are booked to the income statement.

We did not repurchase any common stock during the December quarter.  Since May 2004, we have repurchased 15.1 million shares at a total cost of $204 million, for an average price of $13.53 per share; $46 million remains under our existing stock repurchase authorization. 

Our cash conversion cycle was a positive 4 days, consisting of 45 days of receivables, 25 days of inventory, or 15 turns, and 66 days of payables outstanding. 

Now, I will move on to our expectations for the third quarter of 2008. 

We expect total revenues of between $1.925 billion and $2.0 billion.  This represents an increase of between 37% and 42% over the prior year period.  This revenue range includes $50 million from sales of media and substrates to external customers, down from $120 million in the December quarter as we complete our obligations to supply external customers.  Historically, drive demand goes down sequentially from December to March by from 3% to 5%.  However, demand for the December quarter was unusually strong for the industry.  We grew volume, mix and pricing as a result of our ability to quickly react to this demand strength, our leadership position in certain markets, and significant productivity improvements achieved in the quarter.  We view this combination of circumstances as extraordinary and unlikely to fully repeat in the March quarter.  Accordingly, we are currently modeling a sequential decrease in the range of 6% to 10% in our HDD revenue for the March quarter.

As a consequence of the strength of demand and rational behavior in the second half of calendar 2007, the hard drive industry appears to have achieved an overall uplift in margins by all major participants.  Our results demonstrate the profit potential for those companies with an effective cost structure who execute well, where all industry participants focus on profitability, cash generation and demand/supply management.  Also, we continue to believe that our blended internal and external media supply model will deliver cost improvements at the gross margin line of up to 300 basis points by the end of calendar 2008.  

The accelerated progress of our media integration, our changing segment mix, and an expectation of continued rational market behavior, now enables us to reset our gross margin model from our historical 15% to 20% range up to the 18% to 23% range.

Gross margin for the March quarter is anticipated to be in the middle of our revised model, at approximately 20%.  While this is down from the December quarter, it is up significantly from the 15.8% gross margin we reported for the March quarter of 2007. 

Operating expenses are projected to be approximately $175 million as we continue to invest in expanding our product and technology portfolio.

Net interest expense is projected to be about $8 million, assuming no further investment losses.  We anticipate our tax rate to be in the range of 4% to 6% of pretax income, and our share count will be about 227 million.

Accordingly, we estimate earnings per share of between $0.85 and $0.91 for the March quarter.

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