Bob Blair – Investor Relations John Coyne – President, Chief Executive Officer Timothy Leydon – Chief Financial Officer

Arun Sharma – UBS Richard Kugele – Needham & Company Steven Fox – Calyon Securities (USA) Robert Cihra – Caris & Company Sherri Scribner – Deutsche Bank Mark Moskowitz – JP Morgan [Ben Rightsez – Barclays Capital] Kevin Hunt – Hapoalim Securities David Bailey – Goldman Sachs Kaushik Roy – Wedbush Securities Aaron Rakers – Stifel Nicolaus Kathryn Huberty – Morgan Stanley Jayson Nolan – Robert W. Baird Douglas Reid – Thomas Weisel Partners Ananda Baruah – Brean Murray Robert Walker – FTN Equity Capital Markets

Welcome to Western Digital’s second quarter financial results for fiscal year 2010. (Operator Instructions) Now I will turn the call over to Mr. Bob Blair.

I want to mention as we begin that we’ll be making forward-looking statements in our comments and in response to your questions concerning industry pricing and demand, the impact of our entry into the traditional enterprise market, our immediate and long term growth opportunities, our response to customer needs and existing new markets, our expected capital expenditures, depreciation and amortization and tax rate all for fiscal 2010, our investments in product line expansion, our share repurchase plans and our financial results, expectations for the March quarter including revenue gross margin, expenses, tax rate, share count and earnings per share. 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 October 29, 2009. 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. I also want to note that copies of remarks from today’s call will be available on the investor section of Western Digital’s website immediately following the conclusion of this call. I’d like to now turn the call over President and Chief Executive Officer, John Coyne.

Good afternoon and thank you for joining us. For the third consecutive quarter, demand for hard drives was at the high end of expectations as the positive industry conditions that first materialized in the June quarter continued throughout the second half of the calendar year. The demand strength continues to be primarily consumer driven though we are now also seeing some signs of recovery in the commercial sector. We believe that overall hard drive shipments in the December quarter totaled 160 million units, up 29% on the year ago quarter and 5% sequentially. Industry inventory, OEM and distribution combined remains extremely lean at approximately two weeks of sales reflecting the strong demand in the quarter, constraints in the industry supply chain particularly in media and sub strait, and continued industry discipline in managing the supply demand dynamic in those segments where supply constraints are not dominant. We are very pleased with WD’s continued progress in pursuit of our primary objective of sustained profitable growth as we continue to respond to strength in customer demand. For the third consecutive quarter we significantly increased output in a supply constrained environment providing strong support of our customer’s growth opportunities. Strength in overall market demand, continued customer preference for WD products, our timely investments in capital, the support of our supply partners and strong execution by the WD team generated record revenue and profits on record unit shipments. A moderate pricing environment combined with our passionate focus on cost and efficiency enabled gross margins well above the high end of our model range. We contained operating expenses under the low end of our model, yet we continued to grow our R&D investments by 8% sequentially. Asset management remained crisp resulting in record cash generation. I’m particularly pleased that our management through the difficulties of the recession and our subsequent response to improving market conditions since April have increased our calendar year 2009 revenues and net income by 4% and 34% respectively, compared with calendar year 2008. Our compound annual growth rate over the last three calendar years which included the dampening effect of the recession was 19% for revenue, 25% for units and 29% for net income. We continue to realize tangible benefit from the substantial investments we’ve made in technology, products, processes and capacity over the last few years with several notable product achievements in the last quarter. Most significant, as part of our sustained portfolio diversification and expansion strategy is our entry into the traditional enterprise market with the shipment of our 2.5 inch 10K SAS product line beginning in early November. This new product family complements a range of enterprise SAS drives which we have been shipping for some years now and will allow us to both expand our business with many existing customers and add new customers in the enterprise storage arena. In the December quarter driven by strong customer adoption of our newest products, we led the industry in volume shipments of the market’s largest capacity points in the industry’s fastest growing segment; one terabyte, 750 gigabyte and 640 gigabyte 2.5 inch drives in the branded products and notebooks markets and two terabyte 3.5 inch drives in the branded and enterprise SATA sectors. In the branded product area, we continue to innovate. Our new WD Smartware which is now available across our refreshed My Passport and My Book external storage product lines has received very positive reviews for its highly intuitive, easy to use visual representation of the back up and synchronization process providing a highly differentiated and superior user experience. Further developing the theme of convenience and ease of use, we also introduce E-label display features on our premium external storage product lines. In media players, we expanded our popular WD TV range with the successful of our WD TV live product which adds network connectivity enabling home content aggregation as well as direct access to stream external content. Additionally this month we launched the industries first certified USB 3.0 external drive with the My Book 3.0, an industry leading, high performance solution for power users. Entering calendar 2010 we are very excited about the immediate and the long term growth opportunities for WD in both the consumer and commercial storage segments. Over the last nine months, despite the backdrop of a world wide recession, we have seen increasing levels of demand for high capacity, cost effective storage. We believe this demand is driven by the ubiquitous role of digital content in every day life and spurred in the consumer segment by increasing versatile and powerful devices and PC’s with new attractive price points. In support of this thesis, yesterday’s New York Times cited a recent study from the Kaiser Family Foundation that determined the average young American now spends practically every waking minute except for time at school using a smart phone, computer, television or other electronic device, amount to more than 7.5 hours a day. This compares with less than 6.5 hours a year ago, and this does not count the hour and half that youth spend texting or the half hour they talk on their phones. And because so many of them are multi-tasking, the pack an average of nearly 11 hours of media content into that 7.5 hours. Meanwhile, in the commercial sector, the prospects for a recovery and corporate IT spending, the demand for green IT infrastructure solutions and a PC refresh cycle provide more optimistic indicators than a year ago at this time. We are addressing what we believe is a secular shift to increase usage of mass volume storage in all walks of life. To do so, we are focusing on enhancing the advantaged business model we have developed over the last several years. In responding to our customer’s needs and earning their business in the fastest growing markets, we provide a critical combination of quality and reliability, portfolio breadth, technology and product availability underpinned by our low cost model, our vertical integration, the industry’s fastest asset turns and strongest balance sheet. We believe this WD focus represents a sustainable advantage as we continue to respond to customer needs in our existing markets and as we move into new markets for WD such as the traditional enterprise. However, our enthusiasm is tempered by current macro economic uncertainties and we continually monitor the actual demand data and remain on guard against excessive optimism about the 2010 outlook. We are maintaining our flexibility and agility and are willing to apply the brakes if conditions warrant. Before I pass the call to Tim Leydon, I want to thank the WD team and our supply partners for outstanding execution in seizing the opportunities that emerged throughout the quarter, and our customers for providing those opportunities. Once again, we have further strengthened WD and our long term mission of generating sustained, profitable growth.

Revenue for our second fiscal quarter was $26 million up 44% from the prior year and 19% sequentially. Hard drive shipments total 49.5 million units, up 39% from the prior year period and 12% sequentially. Non hard drive revenue including sales of WD TV, HD media sales and solid state drives totaled approximately $47 million compared to $12 million in the prior year and $36 million in the September quarter. Average hard drive selling price was approximately $52.00 per unit, up $1.00 from the year ago quarter and up $3.00 from the September quarter. Industry demand was strong, coming in at the high end of our anticipated range of 152 to 160 million units. Within that environment, demand for WD’s products was stronger than expected. We satisfied a disproportionate share of the overall market growth which is a validation of the benefits of having a large scale vertically integrated and agile business model. Our low cost focus combined with a favorable product and segment mix, moderate price declines, enabled us to service that demand at margins that exceeded our business model parameters. Desk top demand was stronger than expected due in part to the re-emerging commercial market and growth in China. The market size was constrained by supply and pricing remained stable. We see unfulfilled demand rolling over into the third quarter. We shipped 21.2 million mobile drives in the December quarter compared to 13.8 million in the year ago quarter and 19.2 million in the September quarter. This above market growth was driven primarily by ability to meet customer appetite for high capacity drives at 640 gigabytes and above. During the December quarter, we shipped 4.1 million drives into the DVR market, flat with the year ago quarter and up from 3.1 million in the September quarter. This improvement in sequential quarterly volume was driven by improved market demand and adoption of our WD Greenpower drive platform. Revenue from sales of our branded products including WD TV was $569 million up 41% from $4403 million in the year ago quarter and 49% sequentially from $382 million in the September quarter. The increase in branded revenue is partly due to increasing demand for external storage, the refresh of our branded product line and continued consumer preference for WD products in this space. On the enterprise front, demand for near line storage once again exceeded expectations and our SATA product portfolio was well positioned to avail of this market expansion particularly at the high capacity points. The traditional enterprise market continues to recover. In the space, we are pleased with the acceptance of our new SAS products. Moving on to our sales channel and geographic results; revenue by channel was 48% OEM, 30% distribution and 22% branded products in the December quarter compared with 57%, 21% and 22% in the year ago quarter and 52%, 31`,% and 17% in the September quarter respectively. The geographic space of our revenue was 25% America’s, 25% Europe and 50% Asia as compared to 23%, 29% and 48% in the year ago quarter and 22%, 22% and 56% in the September quarter. The increases in the percentages for America’s and Europe from the September quarter reflects strength in branded products and in component distribution. There was one customer, HP that comprised more that 10% of our total revenue. Our gross margin percentage for the quarter was 26.2% up from 15.9% in the year ago quarter and 23.3% in the September quarter. As mentioned earlier, our low cost focus, our favorable product and segment mix and moderate price declines contributed to gross margin favorability. Total R&D and SG&A spending was $214 million or 8.2% of revenue. This compares with $161 million or 8.8% of revenue in the year ago quarter and $195 million or 8.8% of revenue in the September quarter. Our spending reflects our confidence in the strong future opportunities for storage in an environment of expanding digital content. Operating income was $473 million or 85.1% of revenue. This compares with $16 million or 1% of revenue in the year ago quarter and $319 million or 14.4% of revenue in the September quarter. Interest and other non operating expenses were approximately $2 million. Tax expense for the December quarter was $42 million or 8.9% of pre tax income, and that’s within our model range of 7% to 10%. Our cash tax rate is expected to be between 1% and 2% for the fiscal year. Our net income totaled $429 million or $1.85 per share. This compares with $14 million or $0.06 per share and $288 million or $1.25 per share in the year ago and September quarters respectively. Turning to the balance sheet, for the December quarter our cash conversion cycle was a negative three days. This consisted of 47 days of receivables outstanding, 21 days of inventory or 17 turn and 71 days of payables. We generated $557 million in cash flow from operation. Capital expenditures were $199 million and depreciation and amortization totaled $126 million. We also make our third quarterly debt repayment installment of $19 million thus reducing our debt balance to $444 million. Cash and cash equivalents increased by $379 million ending at $2.435 billion. The 49.5 million hard drives we shipped in the December quarter represent a new record for the company. We believe that 2010 will be a strong year for the proliferation of digital storage and continued customer preference for WD product. Consequently, we’re increasing our capital expenditures forecast for fiscal 2010 to be between $650 million and $750 million compared with our previous projection of $650 million. Depreciation and amortization for fiscal 2010 is now expected to be about $550 million as compared to our previous estimate of $540 million. We are ever mindful of the potential for a dip in demand that may be caused by economic circumstances beyond our control and we remain focused on supply/demand equilibrium and poised to use our flexible and agile business model to respond quickly to demand changes. Over the medium term, we continue to have strong growth potential in the existing markets we serve and currently unaddressed markets, given our market position and broad portfolio, willingness to invest in R&D and production assets and our strong balance sheet. Nevertheless we are actively seeking to augment this strength by selective investments in product line expansion both internally and externally. We have $466 million remaining in our stock repurchase authorization as we evaluate the merits of further repurchases against internal and external investment alternatives. Now I will discuss our expectations for the third quarter of our fiscal year 2010. First let me outline the market situation as we see it. We believe that continued demand for storage of digital content will drive positive growth for the storage industry as a whole despite the global macro economic conditions continuing to be challenging. In this robust storage demand environment, we believe that WD is well positioned within the industry to benefit from this growing market because of our agility, flexibility, product line up, technology and financial resources. Historically March quarter demand has been down sequentially in a range from 5% to 7%. However that true demand in the December quarter was not entirely satisfied and this coupled with an expectation of continuing strong demand for digital storage leads us to margin the market size of between 152 to 158 million units, a sequential decline of 1% to 5%. We anticipate that pricing will be flat to down but will be rational based on supply demand balance in all markets. Consequently, we expect revenue for WD to be in a range from $2.45 billion to $2.6 billion. R&D and SG&A are expected to total approximately $220 million. Our net interest expense is projected to be about $2 million. We expect our tax rate to be about 9%. We anticipate our share count to be approximately 235 million. Accordingly, we estimate earnings per share of between $1.45 and $1.55 for the March quarter. Operator, we are now ready to open the call to questions.

(Operator Instructions) Your first question comes from Arun Sharma – UBS. Arun Sharma – UBS: I was wondering if you could talk about the degree of corporate PC refresh and the level of Windows 7 benefits you’re embedding into your outlook and has there been any change in your views in these two areas for the past few months?

I think we’ve seen a modest awakening in the commercial sector and we continue to map that to be relatively modest in the current quarter and probably through mid year with a continuing uptick as we head into the back half of the year. Arun Sharma – UBS: Given your outperformance on the margin side in the last two quarters are you reevaluating? How are you looking at your 18% to 23% target going forward? Are you still comfortable with that range or should we see it as fairly conservative over the next year or so and what are the puts and takes in terms of margin expansion going forward?

It’s at 23% margin model range and it is, we’re comfortable with it the current product and segment mix. We have indicated that as we gain more traction in the traditional enterprise market that we would get to a 10% market share. It would add about 7.5% or so to the margin model. But it’s our long term margin model. We’re comfortable with it at the moment, but there is opportunity for us to be able to expand that and we are forecasting for Q3 that we will be above the top of the margin model range. So it is possible given behavior of competitors, the supply demand balance, the industry conditions and the segment mix to actually to above the upper end of that model range.

Your next question comes from Richard Kugele – Needham & Company. Richard Kugele – Needham & Company: First on the head procurement, obviously there’s the external supply chain for heads has dwindled. You do a fair amount of internally, but of all the components that one seems to be the one where the vendors seem most unwilling to expand capacity. Are you comfortable with the external supply of heads in particular or have you compensated for that in this new CapEx numbers so that you can do more yourself?

Consistently since we acquired the internal head capability we have maintained a consistent model of roughly 80 internal 20 external and that continues to be our model. We’re working closely with our external partner to share our views not only of overall market opportunity but specifically Western Digital opportunity within the market and I believe we are very well aligned together in pursuing the model that we’ve consistently pursued over the last number of years since we acquired head capability and we see that continuing into the future with very solid support from our external partner. Richard Kugele – Needham & Company: In terms of the unmet demand in the December quarter, is there a way of at least ball parking just how much demand may have been left on the table? And then in that vein, the inventory numbers you talked about are extremely lean and I can’t recall actually seeing that type of a number before. Do you foresee an ability to go and get to even contractual levels for hubs and such or are the OEM’s okay as long as you continue to replenish as quickly as they need it?

I think you’re correct that inventory levels have been extremely lean since April, since the recovery in demand surprised all of us and has continued to move along at a good clip. If you look at our estimates for demand, the 152 to 158 number that Tim just gave, that is reflecting some spillover of unfulfilled demand from the December quarter. If you look at total industry demonstrated capability last quarter, and I certainly don’t think anybody was holding back product, then potentially we could rebuild a couple of million units into inventory through the quarter running full out which wouldn’t move the needle very much off of a very lean inventory environment. So I expect if there’s any real inventory replenishment to get things into a more traditional sustainable model, that will occur in the June quarter and that will be required to occur in the June quarter in order to support what we expect a very robust back half of the year. And again, I believe industry supply chain investments are lagging opportunity and will constrain total availability through the entire calendar year.

Your next question comes from Steven Fox – Calyon Securities (USA). Steven Fox – Calyon Securities (USA): First of all on pricing, can you be just a little more specific? You said pricing flat to down. Were you talking about like to like or mix adjusted and is there any differences by product segments we could be aware of? And then when you look at the retail market, the rebound in external drives, how much of that would you tie into bundling of externals with PC’s and how much was that just sales of externals on their own?

On the flat to down pricing, it’s the average pricing I’m referring to. We don’t give out like to like pricing. The reason that we’re modeling that is because the demand is down. We’re anticipating that demand be down from 160 to 158 or at least that’s the high end of the range we’re modeling. There is also, we have strength, we have the strongest competitive position in 2.5 inch and as you know in the September and December quarters, some of our competitors turned their attention towards small form factor and gaming and in the March quarter they’ve come back into the market and address the more mainstream product. So consequently with that as a backdrop, that’s why we’re modeling it to be down.

Relative to strength in the external storage market, the branded product market, the vast majority of that is for independently purchase external attach as distinct from bundling with initial sales of PC’s. Steven Fox – Calyon Securities (USA): Is there any other color around what drove the acceleration besides obviously better economic trending? Anything else that you would add whether it’s retail promotion? I don’t know what else.

The underlying them there I believe is the increasing proliferation of devices which only have capacity for transient storage and so those devices are interacting with tons of storage of content that people want to capture and store for extended periods. They’re generating content. If you look at the number of devices today that have high resolution cameras and high resolution video capability so the amount of content being generated by the small devices with small capacity, solid state storage on board is generating huge demand for transfer to max storage capability that the best of which is the externally attached hard drive. So we think that’s the fundamental underlying driver. Relative to WD’s success in this area, I think we’ve talked before and we’re continuing to focus on the ease of use, the style, the convenience of product and delivering leading capacity points to the market and I think all of these things combined with our consistent interaction with our channel partners and consistent positioning of our product line makes that a very attractive line for our partners and results in a very high level of access for consumers for the WD brand.

Your next question comes from Robert Cihra – Caris & Company. Robert Cihra – Caris & Company: I wanted to ask a couple of product questions. First within notebook you made mention of the 320 gig per platter. So on a 320 gig per platter just wondering where you are in terms of that ramp. Are qualifications done? Are you shipping volume and with the type of things that’s actually meaningful as a percentage of units relative to the 250. And similarly, I’m wondering is you’re willing to give us any view on the SAS product, what kind of units. Are they meaningful units yet? How is that going? What kind of acceptance, that sort of thing.

Certainly our shipments of 640 gig capacity point into both the notebook marketplace and our through our branded products channel were significant and meaningful and we’re by far the largest shipper of that technology and capacity point into the market. In relation to our SAS entry, it was planned to be modest. It is modestly ahead both in volume and mix of what we expected and has been well received but we’re not breaking out units at this time. Robert Cihra – Caris & Company: And when do you think you would break out units?

When it become meaningful to the overall business.

Your next question comes from Sherri Scribner – Deutsche Bank. Sherri Scribner – Deutsche Bank: I wanted to get a sense of your view of the first quarter. Your guidance for the industry is a little bit more conservative than Seagate’s guidance that they gave last night. They said units would be about flat to down at about 3% in the quarter so I wanted to get a sense of why you’re a bit more conservative than Seagate. And then as a follow up, in terms of the capital expansion that you’re planning for this year, what kind of assumptions have you made about unit growth for 2010 and would you be comfortable with the numbers that Seagate gave last night of units growing about 17% to 20% in 2010?

Conservatism, I’m not sure. I think we’re really looking at what we see and interpreting the market. I can’t speak for Seagate. We did our own analysis and came up with those numbers and those are the numbers we’re comfortable with. In terms of the total growth for the market for calendar 2010, we don’t have any significant difference between ourselves and Seagate for those totals. Our different view of the current quarter is within 1.5%.

Your next question comes from Mark Moskowitz – JP Morgan. Mark Moskowitz – JP Morgan: The first question is kind of loaded so I do apologize but I assume that you’re pretty darn close to 100% capacity utilization and I know sometimes when you go above 95% when you’re running full tilt there can be some inefficiencies. I just want to get a sense, if we don’t really see any pull back in this gradual recovery that appears to be in earnest here right now, as you bring on the extra capacity, could you actually optimize your utilization and your yield to even drive greater margins than you’re seeing right now or maybe you should bring down capacity utilization closer to 95%? Do you get some optimization benefits there?

Two pieces in my response to that; the first relating to utilization, once again last quarter, the opportunity provided by our customers exceeded our expectation and consequently our desire to get utilizations down into the mid 90’s we didn’t achieve that. We ran at higher than 95% utilization all through the quarter. The second part of the question is correct. When you’re running at close to 100% utilization we lose some of the key value that we like to bring to customers which is the flexibility and availability equation to satisfy their needs for change. That’s number one. Number two, when you’re running very full there do tend to be some inefficiencies related to meeting the customer needs while running very full. So there is some sub optimized situations. [audio break]

Please continue to hold. You may resume. Your next question comes from [Ben Rightsez – Barclays Capital] [Ben Rightsez – Barclays Capital]: The question is about the longer term. As you now when you have gross margins like this and then you still keep your long term range where it is, you run into the problem that you’ve got earnings potentially next year, depending on quickly you want to get back down to target range. So I guess my question is how are you thinking about the longer term given the conditions in the short term with that predicament? Are you targeting, maybe you don’t want to go into FY11 but knowing that we have the difficulty, do you think that the industry and what you’re hearing into the next fiscal year supports earnings growth given what we have to model with gross margins?

Let me try to tackle that and I apologize for the dropped line. I’m not sure what happened. We are looking at the industry as I mentioned, we’re looking at we think a fundamental change in the demand for storage and an increase in that demand. And to some extend, the delinking of that demand from the underlying GDP growth rates or at least a multiplication of demand relative to GDP growth rates. So that’s a very, very positive thing. We believe that our drive technology is going to offer the most compelling solution for those increasing storage demands going forward for the foreseeable future. We believe you’ve seen in our performance and Seagate’s performance in the past quarter, I think you’re beginning to see the power of the large scale, vertically integrated companies when executing effectively and the consequent ability to continue to invest substantially in the technology to drive future solutions to that storage demand. So I think all of those things point towards a very positive environment. We’re not yet at the point where we’re altering our model, but I believe the vectors for storage needs, the consolidation in the industry, the consolidation in the supply chain, I think are all pointing towards an ability to up that model in the future. [Ben Rightsez – Barclays Capital]: With regard to the enterprise in terms of, you mentioned it’s not big enough to break out yet, your SAS product and you’re happy with it. What do you see as your pace of new product introductions? What should we expect? And what should we also expect on the FSD side in that vein?

Clearly a single product is not going to support the needs of our customers in the traditional enterprise space and we have a developed road map which we have discussed with customers and which we believe addresses a significant amount of their needs. I think on the previous call I indicated our expectation that within three years the enterprise, traditional enterprise space would be serviced over 90% by 2.5 inch 10K and that our solution for higher performance than that would be addressed with solid state. I also indicated we expect to have an enterprise ready solid state product line offering in 2011 and so we’ll continue to expand the current drive base 2.5 inch 10K SAS, continue to expand that product line over the course of this year and follow up with an extension to the product line with higher performance products in 2011.

Your next question comes from Mark Moskowitz – JP Morgan. Mark Moskowitz – JP Morgan: I was wondering first if you could maybe help us in terms of understanding the second part of the answer you were providing to my question earlier in terms of when can you restore that flexibility to address your customer needs and maybe reallocate to optimize the business proposition. And then the follow up I wanted to ask earlier was just if you could talk a little more about the structural change we could be seeing in terms of desk top resurgence and the emerging markets. Do you see more of the power of computers coming back and is it something that can stick around for more than just a few quarters?

I’m not sure exactly where we dropped you and I apologize for that. What our objective is, is to get back to the low to mid 90’s in terms of utilization so that we have ongoing day to day flexibility to move with the market. I don’t see accomplishing that in the current quarter. I’m hoping we’ll be able to achieve that in the June quarter, so that’s about the timing. And that’s driven just by our ability to bring in and commission and install and qualify the capital to accomplish that from an overall capacity perspective. In relation to desktop, I think that the primary driver there, there’s a healthy resurgence in desktop commercial desktop demand. That continues to be a price sensitive business and the difference between replacing a desktop system which potentially can reuse a lot of accessories and so on versus going to mobile, combine that with CIO concerns about security and mobility of data and so on, I think there’s good life ahead of us in the desktop PC arena. On the consumer side of the desktop, it’s really the high end machines there that offer the geeks and freaks ability to configure systems out as they desire with very high performance, high capacity solutions. And then of course the 3.5 inch drives going into external solutions where increasingly we’re seeing adoption of home network systems; things like the WD World edition and WD Sharespace which provide whole home solutions for multiple network computers that are very simple to operate. These also have a healthy appetite for very high capacity 3.5 inch drives. So I think they’re the fundamental drivers of demand there.

Your next question comes from Kevin Hunt – Hapoalim Securities. Kevin Hunt – Hapoalim Securities: I had a question on the R&D. It’s been ramping up over the last quarter or two and based on the guidance you gave it looks like it will continue so I wanted to understand is that something you expect will continue to ramp up going forward and maybe you could help us understand what sort of target that is?

I think the R&D spending with ramp. The percentage as a percent of revenue will be relatively static. You can see our total OpEx actually is down. Our range is 9% to 10%. We’re down at 8.2%. If we continue, which I certainly hope we can, to grow revenue at a similar pace on a long term basis that we’ve achieved over the past number of years, then you can anticipate that our dollar spending in R&D will continue to increase. And back to my earlier comment about the ability of the large scale fully integrated companies to invest in the future of this technology, those investments are not trivial. They are over the next three to five years some very significant technical hurdles to be over come, new technologies to be introduced and we are currently spending heavily in those areas to ensure that our current ability to delivery industry leading capacities, ramp them into stable higher reliability products, that ability to lead the industry is maintained as we move through the significant technology changes in the future.

Your next question comes from David Bailey – Goldman Sachs. David Bailey – Goldman Sachs: Since the December quarter you’ve seen a steady shift in your business towards distributors and away from the OEM’s. Can you talk about the strategy behind this and the impact that it’s had on ASP’s?

I have to re-characterize that a little. There has been no shift away from OEM’s. In fact we’ve increase our OEM business and we continue to provide very strong support of our OEM opportunities for growth. We are also mindful of the opportunities in distribution and in branded and we’re continuing to apply resource and product allocation to those areas also. So we’re growing all across the board. If you look at the numbers for last quarter, the market grew by eight million units. We grew by 5.4 million units and a piece of those 5.4 million units went to each of the markets that we serve. David Bailey – Goldman Sachs: Your head count has come up a decent amount since June. I think it’s around 9,000. How should we expect this to trend going forward and where have you been allocating the resources?

Head count primarily the head count increases are related to production personnel in our Asia facilities, heads, media and drives. If you run the numbers back over the last couple of years you’ll see that our productivity continues to improve as we ramp. But as we ramp substantial volumes we will also substantial people. We have increased our technical head count also and our professional head count and in those areas we’re now back at levels that are higher than pre recession levels. The good news about that process where we reduced some head count across the board last December through March has allowed us to rebuild with more current and future oriented skill sets and we have a significantly stronger professional and technical employee base today than we had a year ago.

Your next question comes from Kaushik Roy – Wedbush Securities. Kaushik Roy – Wedbush Securities: 2010 seems like it’s going to be a good year. What could go wrong? Let’s say when all the capacity comes on line for two or three quarters, what’s your sense for calendar ’10?

We believe that the underlying digital content creation, the underlying life style changes and dependencies on the internet and the delivery and consumption of content, we believe these are very strong secular moves that are offering a growth path that is layered on top of the modest recovery that we’re seeing in worldwide economic activity today. Frankly we think the worldwide economic recovery is a lot more fragile that the growth in demand for digital content distribution and storage of all kinds. So what could go wrong would be I think the primary concern would be a macro economic event, a macro economic deterioration and where we’re watching actual demand very closely and events in the world around us to track that and what we can do in that environment if it were to occur would be similar to what we did when it occurred last year. On the other front, I think concerns that seem to swirl around about capacity investments being made in the industry are way over blown. If you look at our capital investment behavior over the past several years and recognize that the activities in which we’re investing haven’t significantly changed. If you go back to 2003 we were a pure play drive assembly company with very low CapEx requirements. We added heads which engendered a significant increase in CapEx requirements. We then added media in 2007 which adds a further level of CapEx requirement. But in all cases, we have been very close coupled in terms of our investment decisions relative to, all made on a back off the day we think they’re needed by the lead time of the equipment. We work very hard with our capital equipment supply base to limit those lead times and continually shorten those lead times. So we’re very focused on just in time investment to support what we believe is real demand. We’ve also shown in the last year, a willingness and ability to tune our utilization of the assets that we have in invested in to the actual market requirements, and we’ve demonstrated that doing that, that behavior generates far more reward for us than any other behavior. I think most of our colleagues in the industry similar learning and similar behavior. So I’m very positive about the industry’s ability to see what’s going on in terms of real demand and take appropriate actions to match supply to that demand. The biggest concern I have right now is that the level of investment being put into capital by the extended supply chain is inadequate to support the opportunities that we believe are there through the end of the calendar year. Kaushik Roy – Wedbush Securities: Going to the gross margin question, do you think December was the peak gross margin or you could possible see better margins sometime during this calendar year?

We always seek to improve.

Your next question comes from Aaron Rakers – Stifel Nicolaus. Aaron Rakers – Stifel Nicolaus: Looking at the gross margin for this current quarter, taking the mid point of your guidance it appears that it looks like it’s assuming somewhere around a 25% or so gross margin. Is that the way to think about it? Are you conservatively guiding for that or why would we see some type of contraction if so?

I think it’s closer to 24% on the midpoint and we’re guiding to that because we believe that as I’ve indicated previously, we talked about the market size. We indicated that we think it will be in the 152 to 158 million range. We also have got strength in 2.5 inch. We’ve got the strongest position there, the strongest market position and that’s got the most competition. As well, we’re servicing gaming and small form factor turn their attention to servicing that market in the March time frame after the Christmas rush. So consequently those are the reason why we’re looking at the decline in margin. And it’s pretty similar to the decline that we heard yesterday from Seagate. Aaron Rakers – Stifel Nicolaus: With that said, relative to that it sounds like the potential upside would be more or less just driven by volume or it seems like everything else is remaining fairly stable through the quarter so is that a fair assumption?

We seek to optimize everywhere we can improving costs, improving mix, taking advantage of the market demand and assuming inventory stays in balance and the rest of the folks in the industry are rational. Aaron Rakers – Stifel Nicolaus: I know it’s a small revenue contribution but it is growing here over the last couple of quarters, your non hard drive business, and I would assume that’s a lot of the industrial, military stuff, how should we think about that from a model perspective here as we move forward because if we take what we’ve seen, if that starts to become somewhat meaningful here as we move out over the next 12 to 18 months.

I expect it will. You’ll observe from the numbers that the combination of media players and solid state drives taken together are the fastest growing component of our business and they’re both growing and we anticipate they will both continue to grow. Again, I think we’ll break them out somewhat more as they become individually larger and significant to the overall business results. I’m not quite sure when that will be. The sooner the better as far as I’m concerned. Aaron Rakers – Stifel Nicolaus: Is it fair to assume that that carries a much better gross margin structure relative to the high end of your 18 to 23?

What we’ve given before from a stratification view point on gross margin we’ve got the engineering products which is enterprise and SSD has the highest margin. The next tier margin comes from the consumer type products which is DDR, branded and WD TV and the lower tier is the OEM heavy products which is desktop and notebook.

Your next question comes from Kathryn Huberty – Morgan Stanley. Kathryn Huberty – Morgan Stanley: Earlier this week EMC refreshed its mid range storage systems with SATA only drive. Is that indicative of end user demand for cheaper and lower power consumption storage this year?

Yes, we believe it is and some two years ago now we introduced the WD Greenpower drive technology to the market and we’re seeing increasing adoption of that technology both in external storage, in DVR’s in notebooks, in desktops and in the enterprise SATA environment. We think that technology provides a significant value where we’re seeing customers acknowledge that. Certainly there’s a lot of work going on in the enterprise environment that is developing the management tools to come up with more effective tiered storage solutions that are using I think the system that EMC announced last week if I’m not mistaken, had an SSD layer and high capacity ATA for the bulk storage providing a complete high performance, high capacity storage system. We believe that’s a significant trend as we look out into the future and we’re aiming to have products to support that trend. Kathryn Huberty – Morgan Stanley: You talked about bringing channel inventory up a little bit between now and June but what would you expect to do with your own inventory levels between now and June as you prepare to serve the seasonal demand in the back half of the year?

Assuming seasonality in the June quarter likely we would seek to level load our capital investment by increasing inventory exiting the June quarter to support what is typically a significant ramp requirement at the end of the September quarter.

Your next question comes from Jayson Nolan – Robert W. Baird. Jayson Nolan – Robert W. Baird: The trajectory of CapEx is declining a little bit into the second half of the fiscal year, maybe some thoughts there and is it in part a function of just external supply is not keeping pace?

I’m not so sure. It’s only minor. We expect $176 million and $200 million so that’s $376 million. So it’s effectively exactly 50% of the upper part of our range of our $650 million to $750 million range. Jayson Nolan – Robert W. Baird: Is there a reason why there wouldn’t be upward pressure to it in the second half?

We started off originally with our CapEx forecast at the beginning of the year we had $600 million and at that stage we were actually front end loading that $600 million in order to deal with the strong demand that we foresaw in the September and December quarters and as we have seen the unexpectedly strong demand from then on, we’ve been turning to add capacity on a just in time basis and that’s really what we’re aiming to do. So we would like if we really had our choice we would really like to book capacity in the weaker quarters in order to be ready for the stronger quarters, but we try to do things on a just in time basis because we’re trying to respond to customer needs. So I think our capital position is adequate to address what we see as the strong demand. If it comes out stronger we’ll make provisions to increase it if necessary. Jayson Nolan – Robert W. Baird: If you could just talk to use of cash in general as it builds up here on your balance sheet.

We kept our cash during the downturn mainly because at the time, lots of things have been forgotten now, but at the time we were wondering whether we had enough cash and with the macro economic situation being the way it was. We still remain cautious but we’re using it for operational and strategic purposes as opposed to using it for capital restructuring or whatever. Our goal is to find and extend product lines and to spend money operationally because we believe that in the long them that that provides the best value and the best return for our shareholders.

Your next question comes from Douglas Reid – Thomas Weisel Partners. Douglas Reid – Thomas Weisel Partners: I wondered if you could break out CapEx into a maintenance level for given output and incremental. Just looking over the past year over long range to be able to see that difference in what is maintenance level versus growth.

From a CapEx viewpoint our model is to stay within 7% to 8% of revenue and in the past when we were not vertically integrated we had a lesser percentage. Then as we added heads and more lately media, it went from about 6.5% prior to media up to 7% to 8% that we have right now. When we look at the capital you have to look at over a long term. If you look at it in shorter terms it can appear lumpy but over the longer term, we’ve pretty much been almost three way between heads, media and assembly and test, pretty much split evenly. We don’t have a number to tell you about the replenishment number.

Your next question comes from Ananda Baruah – Brean Murray. Ananda Baruah – Brean Murray: I guess a philosophical question, is there anything taking the capacity down to the low to mid 90’s, that’s still a pretty healthy level, the if you take the capacity down there is there anything on the pricing side that says that pricing as a rule would decline at more typical levels again. And then if that’s the case could there also be an argument to be made to say maybe it’s healthier to keep it at mid 90’s to high 90’s if we can keep pricing a little bit more stable.

Actually it’s to the contrary. By operating at 93% to 95% on a planned basis against our anticipation of overall demand volume it allows us the flexibility to respond to opportunity to go after mix opportunities that are outside the scope of our pre-planned production. Traditionally, WD has done very well in building customer satisfaction on the one hand which tends to be sticky and on the other hand building profitability by jumping into opportunities presented by missteps by competition or by changed market conditions that are recognized late and where customers are seeking to respond quickly to that. So having that flexibility to respond in short order to upside opportunities or to mix changes is actually a benefit when it comes to overall financial performance. Ananda Baruah – Brean Murray: Is there any way to at least order of magnitude separate out how much of the gross margin upside to the sort of normalized model range is due to the high capacity utilization levels versus mix versus what’s been pretty stable pricing on like for like.

On the gross margin, we know those numbers. We actually have if we look at it for last quarter from a ranking viewpoint, cost improvement was number one. Mix was number two. Utilization was number three and then we had benign pricing percentage.

Your next question comes from Robert Walker – FTN Equity Capital Markets. Robert Walker – FTN Equity Capital Markets: You mentioned the industry supply chain investments, you’ve seen those lagging the opportunity you see which is a constrained demand for the whole year. Do you think OEM’s might order in calendar Q2 in anticipation of a third quarter, fourth quarter demand?

That’s a possibility that there will be some modest activity of that kind. Certainly our discussions with our large OEM customers are much more focused on availability and our commitment to support their plans through the back half of the year so that potential would be part of those discussions Robert Walker – FTN Equity Capital Markets: Last night Seagate mentioned a 170 to 180 range for a quarter would be difficult for the industry to hit. Do you see that as well and I guess when do you see capacity finally kind of catching up with demand? Is that not until early 2011?

I think yes to both. That’s my concern about industry supply chain investments, that the timeline relative to those investments even if made today, it’s going to be a push to get significant output from those investments in the back half of 2010. So I believe we’re going to run constrained all the way through the back half of the year and into ’11. Thank you all for joining us today. I apologize about the brief interruption in service during the call. We look forward to keeping you informed of progress in the quarters ahead. Thank you.