Western Digital Corporation

10-Q 1 a94249e10vq.htm FORM 10-Q PERIOD END SEPTEMBER 26, 2003 Western Digital Corporation

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 1-8703

WESTERN DIGITAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		33-0956711 (I.R.S. Employer Identification No.)


20511 Lake Forest Drive Lake Forest, California (Address of principal executive offices)		92630 (Zip Code)

(949) 672-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of the close of business on October 24, 2003, 205.9 million shares of common stock, par value $.01 per share, were outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.27
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

WESTERN DIGITAL CORPORATION
INDEX


			PAGE NO.

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Condensed Consolidated Statements of Income – Three Months Ended September 26, 2003 and September 27, 2002	3
		Condensed Consolidated Balance Sheets – September 26, 2003 and June 27, 2003	4
		Condensed Consolidated Statements of Cash Flows – Three Months Ended September 26, 2003 and September 27, 2002	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4. Controls and Procedures		24
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings		25
	Item 6. Exhibits and Reports on Form 8-K		25
	Signatures		26

Western Digital Corporation (the “Company” or “Western Digital”) has a 52 or 53-week fiscal year and each fiscal month ends on the Friday nearest to the last day of the calendar month. Unless otherwise indicated, references herein to specific years and quarters are to the Company’s fiscal years and fiscal quarters, and references to financial information are on a consolidated basis.

The information in the Company’s web site referenced herein is not incorporated by reference in this Quarterly Report on Form 10-Q.

Western Digital® and the Western Digital logo are trademarks of Western Digital Technologies, Inc. and/or its affiliates. All other trademarks mentioned are the property of their respective owners.

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts; unaudited)


			THREE MONTHS ENDED

			SEP. 26,		SEP. 27,
			2003		2002

Revenue, net			$	714.2	$	582.9
Cost of revenue				618.0		499.3

	Gross margin			96.2		83.6

Operating expenses:
	Research and development			63.7		31.9
	Selling, general and administrative			27.6		26.4

		Total operating expenses		91.3		58.3

Operating income				4.9		25.3
Net interest and other income (expense)				0.3		(1.3	)

Income before income taxes				5.2		24.0
Income tax expense				0.2		1.8

Net income			$	5.0	$	22.2

Income per common share:
	Basic		$	.02	$	.12

	Diluted		$	.02	$	.11

Weighted average shares outstanding:
	Basic			204.1		192.5

	Diluted			215.9		196.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par values; unaudited)


			SEP. 26,			JUN. 27,
			2003			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	285.8		$	393.2
	Accounts receivable, net			328.7			243.9
	Inventories			122.9			97.8
	Other			12.6			9.2

		Total current assets		750.0			744.1
Property and equipment, net				213.7			122.1
Other, net				37.9			—

		Total assets	$	1,001.6		$	866.2

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	402.6		$	352.3
	Accrued expenses			181.1			153.4

		Total current liabilities		583.7			505.7
Other liabilities				23.6			33.1
Long term debt				50.0			—
Commitments and contingencies
Shareholders’ equity:
	Preferred stock, $.01 par value; shares authorized: 5.0; shares outstanding: none			—			—
	Common stock, $.01 par value; shares authorized: 450.0; shares outstanding: 206.2 and 203.6, respectively			2.1			2.0
	Additional paid-in capital			687.2			675.4
	Accumulated deficit			(329.2	)		(334.2	)
	Treasury stock, at cost 0.7 and 0.7 shares, respectively			(15.8	)		(15.8	)

		Total shareholders’ equity		344.3			327.4

		Total liabilities and shareholders’ equity	$	1,001.6		$	866.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited)


					THREE MONTHS ENDED

					SEP. 26,			SEP. 27,
					2003			2002

Cash flows from operating activities:
	Net income				$	5.0		$	22.2
	Adjustments to reconcile net income to net cash (used for) provided by operating activities:
		Depreciation and amortization				21.4			11.6
		Non-cash interest expense				—			1.2
		In-process research and development expense				25.6			—
		Changes in:
			Accounts receivable			(82.3	)		(14.2	)
			Inventories			(16.1	)		(18.1	)
			Other assets			(3.8	)		0.9
			Accounts payable			34.3			41.4
			Accrued expenses			4.8			0.7
			Other			(6.9	)		(1.7	)

				Net cash (used for) provided by operating activities		(18.0	)		44.0

Cash flows from investing activities:
	Capital expenditures, net					(19.9	)		(12.4	)
	Asset acquisition, net of cash acquired					(94.8	)		—

				Net cash used for investing activities		(114.7	)		(12.4	)

Cash flows from financing activities:
	Issuance of common stock under employee plans					11.5			3.4
	Debenture redemptions and extinguishments					—			(14.3	)
	Net proceeds from long term debt					13.8			—

				Net cash provided by (used for) financing activities		25.3			(10.9	)

Net (decrease) increase in cash and cash equivalents						(107.4	)		20.7
Cash and cash equivalents, beginning of period						393.2			223.7

Cash and cash equivalents, end of period					$	285.8		$	244.4

Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes					$	0.4		$	1.0
Supplemental disclosures of non-cash investing and financing activities:
Common stock issued for extinguishment of convertible debentures					$	—		$	0.2
Liabilities assumed in asset acquisition					$	77.2		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accounting policies followed by the Company are set forth in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K as of and for the year ended June 27, 2003. In the opinion of management, all adjustments necessary to fairly state the unaudited condensed consolidated financial statements have been made. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended June 27, 2003. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

2. Supplemental Financial Statement Data (in millions)


		SEP. 26,		JUN. 27,
		2003		2003

Inventories:
	Finished goods	$	61.7	$	66.4
	Work in process		50.7		19.6
	Raw materials and component parts		10.5		11.8

		$	122.9	$	97.8


		THREE MONTHS
		ENDED

		SEP. 26,			SEP. 27,
		2003			2002

Net Interest and Other Income (Expense):
	Interest income	$	0.7		$	0.8
	Interest and other expense		(0.4	)		(2.1	)

		$	0.3		$	(1.3	)

The Company records a provision for estimated warranty costs as products are sold to cover the cost of repair or replacement of the hard drive during the warranty period. This provision is based on estimated future returns within the warranty period and costs to repair, using historical field return rates by product type and current average repair costs. Changes in the warranty provision for the three months ended September 26, 2003 and September 27, 2002 were as follows (in millions):


		THREE MONTHS
		ENDED

		SEP. 26,			SEP. 27,
		2003			2002

Liability at beginning of period		$	52.9		$	47.4
	Charges to operations		13.3			13.0
	Utilization		(11.1	)		(13.2	)
	Changes in liability related to pre-existing warranties		(3.1	)		1.5

Liability at end of period		$	52.0		$	48.7

3. Income per Share

The following table illustrates the computation of basic and diluted income per common share (in millions, except per share data):


		THREE MONTHS
		ENDED

		SEP. 26,		SEP. 27,
		2003		2002

Net income		$	5.0	$	22.2

Weighted average shares outstanding:
	Basic		204.1		192.5
	Employee stock options and other		11.8		4.3

	Diluted		215.9		196.8

Income per share:
	Basic	$	.02	$	.12

	Diluted	$	.02	$	.11

For purposes of computing diluted income per share, antidilutive common share equivalents have been excluded from the calculation for employee stock options with an exercise price that exceeded the average fair market value of the common stock for the period. For the three months ended September 26, 2003 and September 27, 2002, options to purchase 13.4 million and 26.6 million common shares, respectively, were excluded from the computation of diluted income per share. For the three months ended September 27, 2002, the computation of diluted income per share also excludes 2.4 million common shares issuable upon conversion of the 5.25% zero coupon convertible subordinated debentures (the “Debentures”).

4. Common Stock and Convertible Debenture Transactions

During the three months ended September 26, 2003, the Company issued approximately 1.3 million shares of its common stock in connection with Employee Stock Purchase Plan (“ESPP”) purchases and approximately 1.3 million shares of its common stock in connection with common stock option exercises, for aggregate cash proceeds of $11.5 million. During the three months ended September 27, 2002, the Company issued approximately 0.8 million shares of its common stock in connection with ESPP purchases and approximately 0.2 million shares of its common stock in connection with common stock option exercises, for aggregate cash proceeds of $3.4 million.

During the three months ended September 27, 2002, the Company paid $14.3 million in cash and issued approximately 0.1 million shares of common stock to redeem a portion of its Debentures with a book value of $14.7 million and an aggregate amount at maturity of $32.6 million. In fiscal year 2003, the Company redeemed its remaining outstanding Debentures.

5. Stock Based Compensation

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), establishes the financial accounting and reporting standards for stock-based compensation plans. As permitted by SFAS 123, the Company elected to continue accounting for stock-based employee compensation plans (including shares issued under the Company’s stock option plans and ESPP, collectively called “Options”) in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB Opinion No. 25”) and to follow the pro forma net income (loss), pro forma income (loss) per share, and stock-based compensation plan disclosure requirements set forth in SFAS 123. The following table sets forth the computation of basic and diluted income (loss) per share for each of the three months ended September 26, 2003 and September 27, 2002 and illustrates the effect on net income (loss) and income (loss) per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.


		THREE MONTHS
		ENDED

		SEP. 26,			SEP. 27,
		2003			2002

Net income, as reported		$	5.0		$	22.2
Add: Stock-based employee compensation included in reported net income, net of related taxes			0.5			0.5
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			(6.7	)		(6.6	)

	Pro forma net income (loss)	$	(1.2	)	$	16.1

Basic income (loss) per share:
	As reported	$	.02		$	.12

	Pro forma	$	(.01	)	$	.08

Diluted income (loss) per share:
	As reported	$	.02		$	.11

	Pro forma	$	(.01	)	$	.08

The pro forma income (loss) per share information is estimated using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including the expected stock price volatility and expected period until options are exercised. The pro forma impact of applying SFAS 123 at September 26, 2003 is not necessarily representative of future periods.

The fair value of Options granted during the three months ended September 26, 2003 and September 27, 2002 has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:


	STOCK OPTION
	PLANS						ESPP

	SEP. 26,			SEP. 27,			SEP. 26,			SEP. 27,
	2003			2002			2003			2002

Option life (in years)		4.01			3.67			1.25			1.25
Risk-free interest rate		1.66	%		3.52	%		1.09	%		2.06	%
Stock price volatility		0.77			0.88			0.77			0.88
Dividend yield		—			—			—			—
Fair value	$	6.61		$	2.38		$	4.64		$	2.28

6. Read-Rite Asset Acquisition

In June 2003, Read-Rite Corporation (“Read-Rite”), one of the Company’s suppliers of magnetic recording heads, commenced voluntary Chapter 7 bankruptcy proceedings. On July 31, 2003, in an effort to increase the Company’s operational flexibility and ensure access to future head technologies, Western Digital purchased substantially all of the assets of Read-Rite, including its wafer fabrication equipment in Fremont, California and manufacturing facility in Bang Pa-In, Thailand. The cost of the acquisition was $172.0 million and consisted of cash consideration of $94.8 million, assumed debt obligations of the Thailand operations of approximately $60.2 million and direct costs of the acquisition and other miscellaneous assumed obligations totaling $17.0 million. The Company accounted for this transaction as an asset acquisition.

The estimated fair value of the assets acquired and liabilities assumed are as follows:


Current assets	$	17.4
PP&E		90.2
Purchased technology		38.8
In-process research and development		25.6

	$	172.0

Approximately $25.6 million of the purchase price related to acquired in-process research and development projects that had not reached technological feasibility and had no alternative future use. The Company reached this conclusion based on a valuation report prepared by a third party valuation specialist and internal reviews by management. Accordingly, the Company recorded the $25.6 million as a charge to research and development expense in the three months ended September 26, 2003. Approximately $38.8 million of the purchase price related to purchased technology, which is being amortized over a weighted average period of three years.

7. Legal Proceedings

In June 1994, Papst Licensing (“Papst”) brought suit against the Company in the United States District Court for the Central District of California, alleging infringement by the Company of five disk drive motor patents owned by Papst. In December 1994, Papst dismissed its case without prejudice. In July 2002, Papst filed a new complaint against the Company and several other defendants. The suit alleges infringement by the Company of seventeen of Papst’s patents related to disk drive motors that the Company purchased from motor vendors. Papst is seeking an injunction and damages. The Company filed an answer on September 4, 2002, denying Papst’s complaint. On December 11, 2002, the lawsuit was transferred to the United States District Court for the Eastern District of Louisiana and included in the consolidated pre-trial proceedings occurring there. The lawsuit was stayed pending the outcome of certain other related litigation. A potential loss, if any, cannot presently be reasonably estimated. The Company intends to vigorously defend the suit.

On July 5, 2001, the Company’s Western Digital Technologies, Inc. subsidiary (“WDT”) and its Malaysian subsidiary (“WDM”) filed suit (the “complaint”) against Cirrus Logic, Inc. (“Cirrus”) in California Superior Court for the County of Orange for breach of contract and other claims resulting from Cirrus’ role as a strategic supplier of read channel devices for the Company’s hard drives. WDM also stopped making payments to Cirrus for past deliveries of devices and terminated all outstanding purchase orders from Cirrus for such devices. The complaint alleged that Cirrus’ unlawful conduct caused damages in excess of any amounts alleged to be owing on outstanding invoices or arising out of any alleged breach of the outstanding purchase orders. On August 20, 2001, Cirrus filed an answer and cross-complaint denying the allegations contained in the complaint and asserting counterclaims against the plaintiffs for, among other things, the amount of the outstanding invoices and the plaintiffs’ alleged breach of the outstanding purchase orders. The disputed payable was approximately $26.5 million. Cirrus claimed that the cancelled purchase orders totaled approximately $26.0 million.

In July 2003, the parties agreed to attempt to resolve their claims through mediation, and scheduled a mediation for August 22, 2003. On August 22, 2003, the Company and Cirrus reached a settlement of this litigation and subsequently executed a formal written settlement agreement. Pursuant to the terms of the agreement, on October 16, 2003, the Company made a one-time payment to Cirrus of $45.0 million in exchange for a mutual release of claims. The letter of credit previously posted by the Company also has been released. Western Digital had previously recorded an obligation totaling approximately $26.5 million related to the disputed payables. The difference of approximately $18.5 million between the settlement amount and the amount previously recorded was included in the cost of sales for the fourth quarter and year ended June 27, 2003. Formal dismissals of claims were entered with the Court in this matter on October 22, 2003.

In the normal course of business, the Company is subject to legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, beyond that provided at September 26, 2003, would not be material to the Company’s financial condition. However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from these legal proceedings, lawsuits and other claims could differ materially from those projected.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K as of and for the year ended June 27, 2003.

Unless otherwise indicated, references herein to specific years and quarters are to the Company’s fiscal years and fiscal quarters.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. The statements that are not purely historical should be considered forward-looking statements. Often they can be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecasts,” and the like. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Readers are urged to carefully review the disclosures made by the Company concerning risks and other factors that may affect the Company’s business and operating results, including those made in this report under the caption “Risk Factors That May Affect Future Results” as well as the Company’s other reports filed with the Securities and Exchange Commission (the “SEC”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Description of the Business

Western Digital designs, develops, manufactures and markets hard drives for digital information storage. The Company’s hard drives are used in desktop personal computers (“PC’s”), servers, network attached storage devices and an expanding list of consumer electronics (“CE”) products such as video game consoles, digital video recorders and satellite and cable set-top boxes. Western Digital markets its hard drives directly to PC manufacturers, including large, brand name PC manufacturers such as Dell and Hewlett-Packard; to CE manufacturers; and to distributors, resellers and retailers that serve a wide range of end users. Unless otherwise noted, all references to market share and industry data included in this discussion are according to the March 2003 report published by TrendFOCUS, Inc. (“TrendFOCUS”) and the June 2003 report published by Gartner/Dataquest, Inc. (“Gartner”).

Western Digital builds hard drives in two assembly facilities, one in Malaysia and one in Thailand and manufactures recording heads in two facilities, one in California and one in Thailand (see “Recent Developments”). The Company also builds printed circuit board assemblies in its Malaysia hard drive facility. Western Digital procures components from industry-leading technology companies, many of which work with the Company from design and development through manufacturing.

Hard-drive industry dynamics have changed significantly over the last several years. Currently, seven hard drive vendors compete in the $20 billion-a-year hard drive market, compared to 15 vendors in calendar year 2000. Western Digital believes consolidation in the industry has contributed to more efficient operations, leaner cost structures and more predictable operating results. According to TrendFOCUS quarterly reports for 2003, Western Digital, Seagate Technologies, Maxtor Corporation, and Hitachi Global Storage Technologies (including sales by IBM and Hitachi prior to their formation of this joint venture in 2003) supplied approximately 85% of the total hard drive market during 2003.

Western Digital believes that its business model allows the Company to benefit from leading-edge component technologies and cost-saving innovations while minimizing investment expenditures. The Company focuses on providing quality products, superior customer service and flexibility by intensively managing the aspects of the business it can control: technology deployment, manufacturing, cost, delivery, quality and reliability.

Western Digital’s growth will be influenced greatly by developments in the PC hard drive market. TrendFOCUS estimates that desktop PC hard drive shipments totaled approximately 155 million units in calendar year 2002 and that this market will grow by approximately 6% per year through calendar year 2006. The Company has increased its resources to address the fast-growing emerging markets of Asia, Latin America and Eastern Europe, where its revenue grew to 34% of total Company revenue in fiscal

year 2003 from 32% a year earlier. Gartner estimates that demand for desktop PC hard drives in emerging markets will increase 13% per year through calendar year 2007.

Because CE demand for hard drives is relatively new, with many consumer applications currently employing similar hard drive technology as is found in desktop PC’s, Western Digital presently believes it can grow in this developing market without significant increases in operating expenses. However as this market develops, additional investments by the Company may be required. TrendFOCUS estimates that unit shipments of hard drives in CE markets, which totaled approximately 9 million units in calendar year 2002, will grow by approximately 57% per year through calendar year 2006.

The Company is pursuing new revenue opportunities in enterprise storage through its application of the new Serial Advanced Technology Attachment (“SATA”) interface, which, the Company believes, over the next few years will replace the present parallel Advanced Technology Attachment (“ATA”) interface in desktop PC’s. The SATA interface contains many of the same benefits of the Small Computer Systems Interface, or “SCSI” — the predominant interface currently used in most enterprise hard drive applications — at a lower cost. TrendFOCUS estimates that 36% of enterprise hard drive unit shipments will use the ATA/SATA interface by calendar year 2006. In addition, the Company has plans to enter the mobile hard drive market, specifically providing hard drives for notebook PC’s. TrendFOCUS forecasts that unit sales of hard drives to the mobile market will grow from approximately 33 million in calendar year 2002 to approximately 53 million in calendar year 2006, reflecting a compound annual growth rate of approximately 13%.

Recent Developments

In June 2003, Read-Rite Corporation (“Read-Rite”), one of the Company’s suppliers of magnetic recording heads, commenced voluntary Chapter 7 bankruptcy proceedings. On July 31, 2003, in an effort to increase the Company’s operational flexibility and ensure access to future head technologies, Western Digital purchased substantially all of the assets of Read-Rite, including its wafer fabrication equipment in Fremont, California and manufacturing facility in Bang Pa-In, Thailand. The cost of the acquisition was $172 million and consisted of cash consideration of $95 million, assumed debt obligations of the Thailand operations of approximately $60 million and direct costs of the acquisition and other miscellaneous assumed obligations totaling approximately $17 million. In addition, existing bank obligations relating to the Thailand operations were refinanced by the Company with a new term loan of approximately $50 million.

As a result of the acquisition, the Company anticipates that its average gross margin will improve during the second half of 2004 as the Company improves the efficiencies of the head manufacturing operations.

Results of Operations

In the three months ended September 26, 2003, Western Digital produced a net revenue increase of 22.5%, to $714.2 million, on unit shipments of 11.3 million. The Company’s gross margin for the quarter was 13.5%, a decrease of 0.8 percentage points from the three months ended September 27, 2002. Gross margin was negatively impacted by start-up expenses and other charges relating to the newly acquired head manufacturing operations totaling $18.1 million. Operating income also decreased by 80.6% to $4.9 million from the corresponding period in the prior year due to the $18.1 million of start-up expense and other charges recorded in cost of sales, $27.0 million of other acquisition related charges, primarily for acquired in-process research and development and $5.3 million of on-going head design research and development expenses.

Summary Comparison

The following table sets forth, for the periods indicated, summary information from the Company’s statements of income (dollars in millions):


	THREE MONTHS ENDED

	SEP. 26, 2003				SEP. 27, 2002

Revenue, net	$	714.2	100.0	%	$	582.9	100.0	%
Gross margin		96.2	13.5			83.6	14.3
Total operating expenses		91.3	12.8			58.3	10.0
Operating income		4.9	0.7			25.3	4.3
Net Income		5.0	0.7			22.2	3.8

Net Revenue

Net revenue was $714.2 million for the three months ended September 26, 2003, an increase of 22.5%, or $131.3 million, from the three months ended September 27, 2002. Total unit shipments increased to 11.3 million for the quarter as compared to 8.6 million for the corresponding period in the prior year as a result of the Company’s improved market share as well as an increase in demand for hard drives in the PC market and in emerging markets, such as gaming consoles and personal video recorders. Average selling prices (“ASP’s”) decreased to $63 per unit for the quarter from $68 in the corresponding period in the prior year. Historically, ASP’s in the desktop hard drive industry have generally declined annually in the 10-20% range. However, those price declines have moderated over the past few quarters given longer product life cycles, improved supply/demand management, industry consolidation and fewer component cost reduction opportunities.

Revenue by geographic region for the three months ended September 26, 2003 was 38% from the Americas, 30% from Europe and 32% from Asia compared to 48%, 33% and 19%, respectively, for the corresponding prior period, reflecting the Company’s continued focus on revenue growth in emerging markets.

Revenue by sales channel for the three months ended September 26, 2003 was 53% from original equipment manufacturers, 40% from distributors and 7% from the retail channel compared to 52%, 41% and 7%, respectively, for the corresponding prior period.

Gross Margin

For the three months ended September 26, 2003, gross margin percentage decreased to 13.5% from 14.3% for the corresponding period of the prior year. The decrease in gross margin percentage over the prior year period was a result of start-up expenses and other charges totaling $18.1 million relating to the Company’s newly acquired head manufacturing operations offset by a more moderate pricing environment, manufacturing efficiencies associated with higher hard drive unit volumes and continuing cost reduction efforts. These charges consisted primarily of head manufacturing employee severance costs, start-up expenses and under-absorbed overhead related to low head production volumes.

Operating Expenses

Total operating expenses, consisting of research and development (“R&D”) and selling, general and administrative (“SG&A”), increased to 12.8% of net revenue for the three months ended September 26, 2003 as compared to 10.0% of net revenue for the corresponding period of the prior year. Increases in operating expenses over the prior year are primarily related to the Company’s newly acquired head manufacturing operations, as described below.

R&D expense was $63.7 million for the three months ended September 26, 2003, an increase of 99.7%, or $31.8 million, from the three months ended September 27, 2002. The increase in R&D expense from the corresponding period of the prior year was primarily due to a charge of $25.6 million for acquired in-process research and development costs and $5.3 million of on-going head-design research and development expenses.

SG&A expense was $27.6 million for the three months ended September 26, 2003, an increase of 4.5% or $1.2 million, from the three months ended September 27, 2002. The increase in SG&A expense from the corresponding period of the prior year was primarily due to expenses associated with the newly acquired head manufacturing operations.

Income Tax Provision

Income tax provision was $0.2 million for the three months ended September 26, 2003. Differences between the effective tax rate for the three months ended September 26, 2003 of approximately 3.5%, and the U.S. federal statutory rate are primarily related to earnings of certain subsidiaries which are taxed at substantially lower tax rates as compared to U.S. statutory rates and the partial utilization of net operating loss (“NOL”) carryforwards.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $285.8 million at September 26, 2003 and $393.2 million at June 27, 2003. Net cash used for operating activities was $18.0 million during the three months ended September 26, 2003 which consists of $52.0 million in cash flow from operating activities before working capital changes, offset by $70.0 million used to fund working capital.

The increase in cash used to fund working capital requirements is primarily due to settlement of pre-existing accounts payable relating to the acquired Thailand head manufacturing operations and a higher accounts receivable balance resulting from the first quarter’s back-end loaded demand profile.

The Company’s working capital requirements depend upon the effective management of its cash conversion cycle. The cash conversion cycle, which represents the sum of the number of days sales outstanding (“DSO”) and days inventory outstanding (“DIO”) less days payable outstanding (“DPO”), was positive one day for the three months ended September 26, 2003, as compared to a negative 10 days for the three months ended September 27, 2002. The increase in the cash conversion cycle is due to higher DSO’s, as a result of the higher accounts receivable balance associated with the first quarter’s back-end loaded demand profile. The cash conversion cycle for the three months ended September 26, 2003, consists of 42 DSO, 18 DIO less 59 DPO.

Other uses of cash during the three months ended September 26, 2003 included $94.8 million for the Read-Rite asset acquisition and $19.9 million of net capital expenditures. Other sources of cash during the period included $11.5 million received in connection with stock option exercises and Employee Stock Purchase Plan purchases.

On September 19, 2003, the Company entered into a new $125 million five-year credit facility (“Senior Credit Facility”) replacing the facility that matured on September 20, 2003. The new Senior Credit Facility provides up to $75 million in revolving credit and a term loan of $50 million (subject to outstanding letters of credit and a borrowing base calculation). Both the term loan and revolving credit facility mature on September 19, 2008, and are secured by the Company’s accounts receivable, inventory, 65% of its stock in its foreign subsidiaries and other assets. At the option of the Company, borrowings bear interest at either LIBOR (with option periods of one to three months) or a base rate, plus a margin. The Senior Credit Facility requires the Company to maintain certain levels of income, prohibits the payment of cash dividends on common stock, and contains a number of other covenants. The Company was in compliance with such covenants at September 26, 2003. The $50 million term loan was funded on September 22, 2003 and requires quarterly principal payments of $3 million beginning in October 2004. The Company used the proceeds from the term loan to repay bank obligations incurred as a result of the newly acquired head manufacturing operations in Thailand. The Company had also issued a $25 million standby letter of credit under the facility to Cirrus Logic, Inc. (“Cirrus”) concerning the $26.5 million in disputed accounts payable. On August 22, 2003, the Cirrus litigation was settled and subsequent to September 26, 2003 the Company paid the settlement and the letter of credit was released. (Refer to Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 7 “Legal Proceedings” included in this Quarterly Report on Form 10-Q).

The Company believes its current cash and cash equivalents will be sufficient to meet its working capital needs through the foreseeable future. There can be no assurance that the Senior Credit Facility will continue to be available to the Company. Also, the Company’s ability to sustain its working capital position is dependent upon a number of factors that are discussed below under the heading “Risk Factors That May Affect Future Results.”

Critical Accounting Policies

The Company has prepared the accompanying unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States for interim financial information. The preparation of the financial statements requires the use of judgment and estimates that affect the reported amounts of revenues, expenses, assets and liabilities. The Company has adopted accounting policies and practices that are generally accepted in the industry in which it operates. The Company believes the following are its most critical accounting policies that affect significant areas and involve management’s judgment and estimates. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material.

Revenue and Accounts Receivable

In accordance with standard industry practice, the Company has agreements with resellers that provide price protection for inventories held by resellers at the time of published list price reductions. In addition the Company may have agreements with resellers that provide for stock rotation on slow-moving items and other incentive programs. In accordance with current accounting standards, the Company recognizes revenue upon shipment or delivery to resellers and records a reduction to revenue for estimated price protection and other programs in effect until the resellers sell such inventory to their customers. Adjustments are based on anticipated price decreases during the reseller holding period, estimated amounts to be reimbursed to qualifying customers, as well as historical pricing information. If end-market demand for hard drives declines significantly, the Company may have to increase sell-through incentive payments to resellers, resulting in an increase in price protection allowances, which could adversely impact operating results.

The Company establishes an allowance for doubtful accounts by analyzing specific customer accounts and assessing the risk of loss based on insolvency, disputes or other collection issues. In addition, the Company routinely analyzes the different receivable aging categories and establishes reserves based on the length of time receivables are past due. If the financial condition of a significant customer deteriorates resulting in their inability to pay their accounts when due, an increase in our allowance for doubtful accounts would be required, which could negatively affect operating results.

The Company records provisions against revenue and cost of revenue for estimated sales returns in the same period that the related revenue is recognized. The Company bases these provisions on existing product return notifications as well as historical returns by product type (see “Warranty”). If actual sales returns exceed expectations, an increase in the sales return provision would be required, which could negatively affect operating results.

Warranty

The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty covers cost of repair or replacement of the hard drive over the warranty period, which generally ranges from one to five years. The Company has comprehensive processes with which to estimate accruals for warranty, which include specific detail on hard drives in the field by product type, historical field return rates and costs to repair. If actual product return rates or costs to repair returned products increase above expectations, an increase in the warranty provision would be required, which could negatively affect operating results.

Inventory

Inventories are valued at the lower of cost (first-in, first-out basis) or net realizable value. Inventory write-downs are recorded for the valuation of inventory at the lower of cost or net realizable value by analyzing market conditions and estimates of future sales prices as compared to inventory costs and inventory balances.

The Company evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. The Company writes down inventory balances for excess and obsolete inventory based on the analysis. Unanticipated changes in technology or customer demand could result in a decrease in demand for one or more of our products, which may require an increase in inventory write-downs, which could negatively affect operating results.

Litigation and Other Contingencies

The Company applies Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS 5”) to determine when and how much to accrue for and disclose related to legal and other contingencies. Accordingly, the Company accrues loss contingencies when management, in consultation with its legal advisors, concludes that a loss is probable and reasonably estimable. (Refer to Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 7 “Legal Proceedings” included in this Quarterly Report on Form 10-Q).

Deferred Tax Assets

The Company’s deferred tax assets, which consist primarily of net operating loss and tax credit carryforwards, are fully reserved due to management’s determination that it is “more likely than not” that these assets will not be realized. This determination is based on the weight of available evidence, the most significant of which is the Company’s loss history in the related tax jurisdictions. Should this determination change in the future, some amount of deferred tax assets could be recognized, resulting in a tax benefit or a reduction of future tax expense.

Risk Factors That May Affect Future Results

Our operating results depend on optimizing time-to-market and time-to-volume, overall quality of new technologies, and costs of new and established products.

To achieve consistent success with computer manufacturer customers, we must balance four key attributes: time-to-market, time-to-volume, quality and cost. If we fail to:

• maintain overall quality of products on new and established programs,

• maintain competitive cost structures on new and established products,

• produce sufficient quantities of products at the capacities our customers demand while managing the integration of new and established technologies,

• qualify new products that have changes in overall specifications or features that our customers may require for their business needs,

• qualify these products with key customers on a timely basis by meeting all of our customers’ needs for performance, quality and features, or

• consistently meet stated quality requirements on delivered products,

our operating results would be adversely affected.

Product life cycles in the desktop hard drive market require continuous technical innovation associated with higher areal densities.

New products in the desktop hard drive market may require higher areal densities (the gigabyte of storage per disk) than previous product generations, posing formidable technical and manufacturing challenges. Higher areal densities require fewer heads and disks to achieve a given drive capacity, which means that existing head technology must be improved or new technology developed to accommodate more data on a single disk. In addition, our introduction of new products during a technology transition increases the likelihood of unexpected quality concerns. Our failure to bring high quality new products to market on time and at acceptable costs would put us at a competitive disadvantage to companies that achieve these results.

Increases in areal density may outpace customers’ demand for storage capacity.

The rate of increase in areal density may be greater than the increase in our customers’ demand for aggregate storage capacity. This could lead to our customers’ storage capacity needs being satisfied with more lower-cost single-surface drives, thereby decreasing our revenue. As a result, even with increasing aggregate demand for storage capacity, our ASP’s could decline, which could adversely affect our results of operations.

Short product life cycles make it difficult to recover the cost of development.

Product life cycles have extended during the past twelve months due to a decrease in the rate of hard drive areal density growth. However, there can be no assurance that this trend will continue. Historically, more rapid increases in areal density resulted in shorter product life cycles, with each generation of hard drives being more cost efficient than the previous one. Shorter product life cycles make it more difficult to recover the cost of product development before the product becomes obsolete. Although we believe that the current rate of growth in areal density is lower than in the past several years and will continue to decrease in the near term, we expect that areal density will continue to increase. Our failure to recover the cost of product development in the future could adversely affect our operating results.

Increasing product life cycles may require us to reduce our costs to remain competitive.

Longer product life cycles have resulted from a decrease in the rate of areal density growth in the past twelve months. If longer product life cycles continue, we may need to develop new technologies or programs to reduce our costs on any particular product in

order to maintain competitive pricing for such product. This may result in an increase in our overall expenses and a decrease in our gross margins, both of which could adversely affect our operating results.

If we fail to qualify our products with our customers, they may not purchase any units of a particular product line, which would have a significant adverse impact on our sales.

We regularly engage in new product qualification with our customers. To be considered for qualification, we must be among the leaders in time-to-market with our new products. Once a product is accepted for qualification testing, failures or delays in the qualification process can result in our losing sales to that customer until the next generation of products is introduced. The effect of missing a product qualification opportunity is magnified by the limited number of high volume computer manufacturers, most of which continue to consolidate their share of the PC market. If product life cycles continue to be extended due to a decrease in the rate of areal density growth, we may have a significantly longer period to wait before we have an opportunity to qualify a new product with a customer, which could harm our competitive position. These risks are increased because we expect cost improvements and competitive pressures to result in declining gross margins on our current generation products.

Unexpected technology advances in the hard drive industry could harm our competitive position.

If one of our competitors were able to implement a significant advance in head or disk drive technology that enables a “step-change” increase in areal density that permits greater storage of data on a disk, it could put us at a competitive disadvantage and harm our operating results.

Advances in magnetic, optical, semiconductor or other data storage technologies could result in competitive products that have better performance or lower cost per unit of capacity than our products. If these products prove to be superior in performance or cost per unit of capacity, we could be at a competitive disadvantage to the companies offering those products.

A fundamental change in recording technology could result in significant increases in our operating expenses and could put us at a competitive disadvantage.

Currently the hard drive industry uses giant magnetoresistive head technology, which allows significantly higher storage capacities than the previously utilized thin-film head technology. However, some of our competitors are developing new recording technologies that may enable greater recording densities than currently available using magnetoresistive head technology, including perpendicular, current perpendicular-to-plane, and tunneling junction technology. If the industry experiences a fundamental shift in recording technology, hard drive manufacturers would need to adjust their designs and processes to accommodate the new technology. As a result, we could incur substantial costs in developing new technologies, media, and tools, in order to remain competitive. We may also become more dependent on suppliers to ensure our access to components that accommodate the new technology. Either of these results would increase our operating costs, which may negatively impact our operating results.

The decline in ASP’s in the hard drive industry could adversely affect our operating results.

The hard drive industry has experienced declining ASP’s in recent years. Although the rate of decline has decreased in recent quarters, there can be no assurance that this trend will continue. Increases in areal density mean that the average drive we sell has fewer heads and disks for the same capacity, and therefore a lower component cost. Because of the competitiveness of the hard drive industry, lower costs generally mean lower prices. This is true even for those products that are competitive and introduced into the market in a timely manner. Our ASP’s decline even further when competitors lower prices as a result of decreased costs or to absorb excess capacity, liquidate excess inventories, restructure or attempt to gain market share. A continued decline in ASP’s could cause our operating results to suffer.

The hard drive industry is highly competitive and characterized by rapid shifts in market share among the major competitors.

The price of hard drives has fallen over time due to increases in supply, cost reductions, technological advances and price reductions by competitors seeking to liquidate excess inventories or attempting to gain market share. In addition, rapid technological changes often reduce the volume and profitability of sales of existing products and increase the risk of inventory obsolescence. These factors, taken together, result in significant and rapid shifts in market share among the industry’s major participants. In addition, product recalls can lead to a loss of market share, which could adversely affect our operating results.

Our prices and margins are subject to declines due to unpredictable end-user demand and oversupply of hard drives.

Demand for our hard drives depends on the demand for systems manufactured by our customers and on storage upgrades to existing systems. The demand for systems has been volatile in the past and often has had an exaggerated effect on the demand for hard drives in any given period. As a result, the hard drive market has experienced periods of excess capacity, which has led to intense price competition. If intense price competition occurs as a result of weak demand, we may be forced to lower prices sooner and more than expected, which could result in lower revenue and gross margins.

Changes in the markets for hard drives require us to develop new products.

Over the past few years the consumer market for desktop computers has shifted significantly towards lower priced systems. According to data released by International Data Corporation Tracker in December 2002, systems priced below $600 comprised the fastest growing segment of the consumer market for desktop computers. Although we were late to market with a value line hard drive to serve the low-cost PC market, we are now offering such value line products at prices that we view as competitive. However, if we are not able to continue to offer a competitively priced value line hard drive for the low-cost PC market, our share of that market will likely fall, which could harm our operating results.

In addition, the PC market is fragmenting into a variety of computing devices and products. Some of these products may not contain a hard drive. On the other hand, many industry analysts expect, as do we, that as communications are increasingly converted to digital technology from the older, analog technology, the technology of computers and consumer electronics will continue to converge, and hard drives will be found in many consumer products other than computers. For example, although general market acceptance remains in its early stages, the use of hard drives has expanded into the game console market. Currently, Microsoft’s Xbox® video game system is the only game console available that incorporates a hard drive. In May 2003, Sony announced plans to release the PSX™ product combining their PlayStation® 2 architecture with a 120 GB hard drive. We anticipate that other game console manufacturers will incorporate hard drives into their products. However, there can be no assurance that they will, or that the market for these products will grow. In addition, some consumer electronics, such as personal video recorders and digital video recorders, may require attributes not currently offered in our products, which may result in a need to expend capital, increasing our overall operational expense. If we are not successful in using our hard drive technology and expertise to develop new products for the emerging consumer electronics market, or if we are required to incur significant costs in developing such products, it may harm our operating results.

If we do not successfully expand into new hard drive market segments, our business may suffer.

To remain a significant supplier of hard drives, we will need to offer a broad range of disk drive products to our customers. We currently offer a variety of 3.5-inch form factor hard drives for the desktop computer market. However, demand for hard drives may shift to products in smaller form factors, which we do not currently offer, but which some of our competitors offer. In addition, the desktop PC industry is transitioning to higher speed interfaces such as SATA to handle higher data transfer rates and 80 GB per platter technology for increased capacity. We currently offer SATA and 80 GB per platter products, however, the transition of technology and the introduction of new products is challenging and creates risks. While we continue to develop new products and look to expand into non-desktop applications such as consumer electronics and mobile products, the success of our new product introductions is dependent on a number of factors, including difficulties faced in manufacturing ramp, market acceptance, effective management of inventory levels in line with anticipated product demand, and the risk that our new products will have quality problems or other defects in the early stages of introduction that were not anticipated in the design of those products. If we fail to successfully develop and manufacture new products, customers may decrease the amount of our products that they purchase, and we may lose business to our competitors who offer these products or who use their dominance in the enterprise or mobile market to encourage sales of desktop hard drives.

We depend on our key personnel and skilled employees.

Our success depends upon the continued contributions of our key personnel and skilled employees, many of whom would be extremely difficult to replace. Worldwide competition for skilled employees in the hard drive industry is intense. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key personnel or skilled employees who have been granted stock options. If we are unable to retain our existing key personnel or skilled employees or hire and integrate new key personnel or skilled employees, our operating results would likely be harmed.

Loss of market share with a key customer could harm our operating results.

A majority of our revenue comes from a few customers. For example, during 2003, sales to our top 10 customers accounted for approximately 55% of revenue. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us. Even if we successfully qualify a product with a customer, the customer generally is not obligated to purchase any minimum volume of products from us and is able to terminate its relationship with us at any time. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a key customer, or if any of our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce costs, our operating results would likely be harmed. For example, this occurred with our SCSI enterprise hard drive product line early in the third quarter of 2000 and is one of the factors which led to our decision to exit the SCSI enterprise hard drive market.

Dependence on a limited number of qualified suppliers of components could lead to delays, lost revenue or increased costs.

Because we depend on a limited number of suppliers for certain hard drive components, an extended shortage of required components or the failure of key suppliers to remain in business, adjust to market conditions, or to meet our quality, yield or production requirements could significantly harm our operating results. A number of the components used by us are available from only a single or limited number of qualified outside suppliers, and there is continued attrition and consolidation in our supplier base. If a component is in short supply, or a supplier fails to qualify or has a quality issue with a component, we may experience delays or increased costs in obtaining that component. In addition, if a component becomes unavailable, we could suffer significant loss of revenue.

To reduce the risk of component shortages, we attempt to provide significant lead times when buying these components. As a result, we may have to pay significant cancellation charges to suppliers if we cancel orders, as we did in 2000 as a result of our decision to exit the SCSI enterprise hard drive market.

In some cases, not only are we dependent on a limited number of suppliers, but we also have entered into contractual commitments that require us to buy a substantial number of components from certain suppliers. For example in April 1999, we entered into a three-year volume purchase agreement with Komag under which we buy a substantial portion of our media components from Komag. In October 2001, we amended the Komag volume purchase agreement to extend the initial term to six years. Similarly, in February 2001, we entered into a volume purchase agreement with IBM under which we buy a portion of our read channel devices from IBM. Effective October 2003, we amended the IBM volume purchase agreement to extend the term through December 31, 2004. In addition, in June 2002, we entered into a five-year volume purchase agreement with Marvell under which we buy a portion of our read channel devices from Marvell. These relationships have increased our dependence on each of Komag, IBM and Marvell as a supplier. Our future operating results may depend substantially on Komag’s ability to timely qualify its media components in our new development programs, and each of Komag’s, IBM’s and Marvell’s ability to supply us with these components in sufficient volume to meet our production requirements. A significant disruption in Komag’s ability to manufacture and supply us with media components or IBM’s or Marvell’s ability to manufacture and supply us with read channel devices could harm our operating results.

If we are unable to timely and cost effectively develop heads with leading technology, our ability to sell our products may be significantly diminished, which could materially and adversely affect our business and financial results.

As a result of our acquisition of the assets of Read-Rite, we are developing and manufacturing heads for use in the hard drives we manufacture. Consequently, we will be more dependent upon our own development and execution efforts and less able to take advantage of head technologies developed by other head manufacturers. In November 2002, Read-Rite announced that it had achieved an areal density of 146 gigabits per square inch using perpendicular recording technology. There can be no assurance, however, that we will be successful in timely and cost effectively developing and manufacturing heads for products using perpendicular recording technology, or other future technologies. We also may not achieve acceptable manufacturing yields using such technologies necessary to satisfy our customers’ product needs. In addition, we may not have access to external sources of supply without incurring substantial costs. If we fail to develop new technologies in a timely manner, and if we do not have access to external sources of supply that incorporate new technologies, we would have a competitive disadvantage to companies that are successful in this regard, and our business and financial results could suffer.

In connection with our acquisition of the assets of Read-Rite Corporation, we will experience additional costs and risks.

Our acquisition of Read-Rite’s assets represents a fundamental change in our operating structure, as we are now manufacturing heads for use in the hard drives we manufacture. Due to the vertical integration of part of our supply chain, we carry a higher percentage of fixed costs than traditionally assumed in our overall business model. If the overall level of production decreases for any reason, the acquired assets may face under-utilization that may impact our results of operations. We are therefore subject to additional risks related to overall asset utilization, including:

• the need to operate at high levels of utilization to drive competitive costs;

• the greater need for predictability of quarterly production to ensure best utilization of assets to drive competitive costs; and

• the need for assured supply of components, especially hard drive media, that is optimized to work with our heads.

Moreover, capital expenditures and working capital investments required to operate the purchased assets will utilize additional cash. We expect significant investment in research and development and investigation of new recording technologies to extend recording technology will be required. We expect its capital expenditures, viewed as an average over several years, to increase by approximately $70 million to $90 million to support the acquired manufacturing operations of Read-Rite.

In addition, we may incur additional costs, expenses and risks, including:

• we may not have sufficient head sources in the event that we are unable to manufacture a sufficient supply of heads to satisfy our needs;

• third party head suppliers may not deal with us or may not deal with us on the same terms and conditions we have previously enjoyed;

• component suppliers of Read-Rite may not deal with us on favorable terms;

• the operation of the acquired Read-Rite assets may divert our attention from other business operations;

• the costs of operating Read-Rite’s assets may exceed the prices we have historically paid for heads or the prices that might be otherwise available to us from other vendors;

• we may be subject to claims that our manufacturing of heads may infringe certain intellectual property rights of other companies;

• we could incur substantial costs, including clean up costs, fines and civil or criminal sanctions, as a result of violations of or liabilities under environmental laws applicable to our new Fremont, California facility, including those governing the discharge of pollutants into the air and water; and

• it may be difficult and time-consuming for us to locate suitable manufacturing equipment for our head manufacturing processes and replacement parts for such equipment.

If we do not adequately address the challenges related to the acquisition, our ongoing operations could be disrupted, resulting in a decrease in our revenue or profit margins, and negatively impacting our operating results.

To develop new products we must maintain effective partner relationships with our strategic component suppliers.

Under our business model, we do not manufacture any of the component parts used in our hard drives, other than heads as a result of our acquisition of the assets of Read-Rite. As a result, the success of our products depends on our ability to gain access to and integrate parts that are “best in class” from reliable component suppliers. To do so we must effectively manage our relationships with our strategic component suppliers. We must also effectively integrate different products from a variety of suppliers, each of which employs variations on technology, which can impact, for example, feasible combinations of heads and media components. Until recently, we were engaged in litigation with Cirrus, a supplier who previously was the sole source of read channel devices for our

hard drives. We settled this litigation in August 2003. As a result of the disputes that gave rise to the litigation, our business operations were at risk until another supplier’s read channel devices could be designed into our products. Similar disputes with other strategic component suppliers could adversely affect our operating results.

Some of our customers have adopted a subcontractor model that increases our credit risk and could result in an increase in our operating costs.

Some of our computer manufacturer customers (also referred to as original equipment manufacturers or “OEMs”) have adopted a subcontractor model that requires us to contract directly with companies that provide manufacturing services to our OEM customers. Because these subcontractors are generally not as well capitalized as our direct OEM customers, this subcontractor model exposes us to increased credit risks. Our agreements with our OEM customers may not permit us to increase our product prices to alleviate this increased credit risk. Any credit losses we may suffer as a result of this increased risk would increase our operating costs, which may negatively impact our operating results.

We have only two high-volume hard-drive manufacturing facilities and two head manufacturing facilities, which subjects us to the risk of damage or loss of any of these facilities.

Our hard drives are manufactured in two facilities, one in Malaysia and one in Thailand. We acquired the Thailand manufacturing facility in 2002. In addition, following our acquisition of the assets of Read-Rite in July 2003, we are operating a wafer fabrication facility in Fremont, California and a slider fabrication facility in Thailand. A fire, flood, earthquake or other disaster, condition or event that adversely affects any of these facilities or our ability to manufacture could result in a loss of sales and revenue and harm our operating results.

Terrorist attacks may adversely affect our business and operating results.

The terrorist attacks on the United States on September 11, 2001, the United States-led military response to counter terrorism and the continued threat of terrorist activity and other acts of war or hostility have created uncertainty in the financial and insurance markets and have significantly increased the political, economic and social instability in some of the geographic areas in which we operate. Further acts of terrorism, either domestically or abroad, could create further uncertainties and instability. To the extent this results in disruption or delays of our manufacturing capabilities or shipments of our products, our business, operating results and financial condition could be adversely affected.

Manufacturing our products abroad subjects us to numerous risks.

We are subject to risks associated with our foreign manufacturing operations, including:

• obtaining requisite United States and foreign governmental permits and approvals;

• currency exchange rate fluctuations or restrictions;

• political instability and civil unrest;

• transportation delays or higher freight rates;

• labor problems;

• trade restrictions or higher tariffs;

• exchange, currency and tax controls and reallocations;

• increasing labor and overhead costs; and

• loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.

Because we manufacture our products abroad, our operating costs are subject to fluctuations in foreign currency exchange rates. Further fluctuations in the exchange rate of the Thai Baht, a floating currency, or a determination by the Malaysian government to

repeg the Malaysian Ringgit or convert it to a floating currency, could result in an increase in our operating costs, which may negatively impact our operating results.

We have attempted to manage the impact of foreign currency exchange rate changes by, among other things, entering into short-term, forward exchange contracts. However, those contracts do not cover our full exposure and can be canceled by the issuer if currency controls are put in place, which occurred in Malaysia during the first quarter of 1999. As a result of the Malaysian currency controls, we are no longer hedging the Malaysian currency risk. Currently, we hedge the Thai Baht, British Pound Sterling and the Euro.

The nature of our business and our reliance on intellectual property and other proprietary information subjects us to the risk of significant litigation.

The hard drive industry has been characterized by significant litigation. This includes litigation relating to patent and other intellectual property rights, product liability claims and other types of litigation. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of litigation are inherently uncertain and may result in adverse rulings or decisions. We may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations.

We are currently evaluating notices of alleged patent infringement or notices of patents from patent holders. We also are a party to several judicial and other proceedings relating to patent and other intellectual property rights. If claims or actions are asserted against us, we may be required to obtain a license or cross-license, modify our existing technology or design a new non-infringing technology. Such licenses or design modifications can be extremely costly. We may also be liable for any past infringement. If there is an adverse ruling against us in an infringement lawsuit, an injunction could be issued barring production or sale of any infringing product. It could also result in a damage award equal to a reasonable royalty or lost profits or, if there is a finding of willful infringement, treble damages. Any of these results would likely increase our costs and harm our operating results.

Our reliance on intellectual property and other proprietary information subjects us to the risk that these key ingredients of our business could be copied by competitors.

Our success depends, in significant part, on the proprietary nature of our technology, including non-patentable intellectual property such as our process technology. Despite safeguards, to the extent that a competitor is able to reproduce or otherwise capitalize on our technology, it may be difficult, expensive or impossible for us to obtain necessary legal protection. Also, the laws of some foreign countries may not protect our intellectual property to the same extent as do the laws of the United States. In addition to patent protection of intellectual property rights, we consider elements of our product designs and processes to be proprietary and confidential. We rely upon employee, consultant and vendor non-disclosure agreements and contractual provisions and a system of internal safeguards to protect our proprietary information. However, any of our registered or unregistered intellectual property rights may be challenged or exploited by others in the industry, which might harm our operating results.

We are subject to risks related to product defect, which could subject us to warranty claims in excess of our warranty provisions or which are greater than anticipated due to the unenforceability of liability limitations.

We generally warrant our products for one to five years. The standard warranties used by us contain limits on damages and exclusions of liability for consequential damages and for negligent or improper use of the products. We record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional operating expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our products. If these additional expenses are significant, it could adversely affect our business, financial condition and results of operations.

Inaccurate projections of demand for our product can cause large fluctuations in our quarterly results.

We often book and ship a high percentage (at times in excess of 50%) of our total quarterly sales in the third month of the quarter, which makes it difficult for us to forecast our financial results prior to the end of the quarter. In addition, our quarterly projections and results may be subject to significant fluctuations as a result of a number of other factors including:

• the timing of orders from and shipment of products to major customers;

• our product mix;

• changes in the prices of our products;

• manufacturing delays or interruptions;

• acceptance by customers of competing products in lieu of our products;

• variations in the cost of components for our products;

• limited access to components that we obtain from a single or a limited number of suppliers, such as Komag, IBM and Marvell;

• competition and consolidation in the data storage industry;

• seasonal and other fluctuations in demand for PC’s often due to technological advances; and

• availability and rates of transportation.

Rapidly changing market conditions in the hard drive industry make it difficult to estimate actual results.

We have made and continue to make a number of estimates and assumptions relating to our consolidated financial reporting. The rapidly changing market conditions with which we deal means that actual results may differ significantly from our estimates and assumptions. Key estimates and assumptions for us include:

• accruals for warranty costs related to product defects;

• price protection adjustments and other sales promotions and allowances on products sold to retailers, resellers and distributors;

• inventory adjustments for write-down of inventories to lower of cost or market value (net realizable value);

• reserves for doubtful accounts;

• accruals for product returns;

• accruals for litigation and other contingencies; and

• reserves for deferred tax assets.

The market price of our common stock is volatile.

The market price of our common stock has been, and may continue to be, extremely volatile. Factors such as the following may significantly affect the market price of our common stock:

• actual or anticipated fluctuations in our operating results;

• announcements of technological innovations by us or our competitors which may decrease the volume and profitability of sales of our existing products and increase the risk of inventory obsolescence;

• new products introduced by us or our competitors;

• periods of severe pricing pressures due to oversupply or price erosion resulting from competitive pressures;

• developments with respect to patents or proprietary rights;

• conditions and trends in the hard drive, data and content management, storage and communication industries; and

• changes in financial estimates by securities analysts relating specifically to us or the hard drive industry in general.

In addition, general economic conditions may cause the stock market to experience extreme price and volume fluctuations from time to time that particularly affect the stock prices of many high technology companies. These fluctuations often appear to be unrelated to the operating performance of the companies.

Securities class action lawsuits are often brought against companies after periods of volatility in the market price of their securities. A number of such suits have been filed against us in the past, and should any new lawsuits be filed, such matters could result in substantial costs and a diversion of resources and management’s attention.

We may be unable to raise future capital through debt or equity financing.

Due to the risks described herein, in the future we may be unable to maintain adequate financial resources for capital expenditures, expansion or acquisition activity, working capital and research and development. We have a credit facility, which matures on September 19, 2008. If we decide to increase or accelerate our capital expenditures or research and development efforts, or if results of operations do not meet our expectations, we could require additional debt or equity financing. However, we cannot ensure that additional financing will be available to us or available on acceptable terms. An equity financing could also be dilutive to our existing stockholders.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosure About Foreign Currency Risk

Although the majority of the Company’s transactions are in U.S. Dollars, some transactions are based in various foreign currencies. The Company purchases short-term, forward exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the impact of foreign currency fluctuations on the results of operations. The resulting impact from these hedge contracts is to offset a majority of the currency gains and losses in the Company’s local currency operating expenses. The contract maturity dates do not exceed three months. The Company does not purchase short-term forward exchange contracts for trading purposes. Currently, the Company focuses on hedging its foreign currency risk related to the Thai Baht, British Pound Sterling and the Euro.

As of September 26, 2003, the Company had outstanding the following purchased foreign currency forward exchange contracts (in millions, except weighted average contract rate):


		September 26, 2003

		Contract		Weighted Average		Unrealized
		Amount		Contract Rate		Gain (Loss)

FOREIGN CURRENCY FORWARD CONTRACTS:
	Thai Baht (USD/THB)	$	20.4		40.05		—
	British Pound Sterling	$	2.5		1.65		—
	Euro	$	1.1		1.14		—

During the three months ended September 26, 2003 and September 27, 2002, respectively, total realized transaction and forward exchange contract currency gains and losses were not material to the condensed consolidated financial statements. Based on historical experience, the Company does not expect that a significant change in foreign exchange rates would materially affect the Company’s condensed consolidated financial statements.

Disclosure About Other Market Risks

Variable Interest Rate Risk

At the option of the Company, borrowings under the Senior Credit Facility would bear interest at either LIBOR (with option periods of one to three months) or a base rate, plus a margin. At September 26, 2003, the Company had a $50 million term loan outstanding under the Senior Credit Facility.

Item 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the Company would meet its disclosure obligations.

There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Refer to Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 7 “Legal Proceedings” included in this Quarterly Report on Form 10-Q which is hereby incorporated by reference. Reference is also made to Part II, Item 8, Notes to Consolidated Financial Statements, Note 5, “Legal Proceedings,” in our Annual Report on Form 10-K for the fiscal year ended June 27, 2003, for previous descriptions of these matters.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:


2.2		Asset Purchase Agreement between Chapter 7 Trustee for the Bankruptcy Estate of Read-Rite Corporation and RR (US) Acquisition Corporation, dated July 24, 2003, including Option Agreements to purchase all of the outstanding capital stock of Read-Rite International, Sunward Technologies International, and Read-Rite Holding Company (incorporated by reference to the Company’s Current Report on Form 8-K (File No. 1-08703), as filed with the Securities and Exchange Commission on August 15, 2003)

10.27		Amended and Restated Credit Agreement, dated as of September 19, 2003, among Western Digital Technologies, Inc., the other credit parties identified therein, General Electric Capital Corporation and Bank of America, N.A.†§

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†

† New exhibit filed with this Report.

§ Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed separately with the Securities and Exchange Commission.

(b) Reports on form 8-K:

On July 24, 2003, the Company filed a current report on Form 8-K to file its press release dated July 24, 2003, announcing financial information for the fourth fiscal quarter and fiscal year ended June 27, 2003, and including unaudited Condensed Consolidated Statements of Income and Balance Sheets for the year ended June 27, 2003.

On August 15, 2003, the Company filed a current report on Form 8-K to announce the acquisition of substantially all of the assets of Read-Rite Corporation.

On August 26, 2003, the Company filed a current report on Form 8-K to file its press release dated August 25, 2003, announcing the settlement of litigation and financial results for the fourth fiscal quarter and fiscal year ended June 27, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	WESTERN DIGITAL CORPORATION Registrant

	/s/	Scott Mercer

	D. Scott Mercer
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

	/s/	Joseph R. Carrillo

	Joseph R. Carrillo
	Vice President and Corporate Controller
	(Principal Accounting Officer)
Date: November 7, 2003

EXHIBIT INDEX


2.2		Asset Purchase Agreement between Chapter 7 Trustee for the Bankruptcy Estate of Read-Rite Corporation and RR (US) Acquisition Corporation, dated July 24, 2003, including Option Agreements to purchase all of the outstanding capital stock of Read-Rite International, Sunward Technologies International, and Read-Rite Holding Company (incorporated by reference to the Company’s Current Report on Form 8-K (File No. 1-08703), as filed with the Securities and Exchange Commission on August 15, 2003)

10.27		Amended and Restated Credit Agreement, dated as of September 19, 2003, among Western Digital Technologies, Inc., the other credit parties identified therein, General Electric Capital Corporation and Bank of America, N.A.†§

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†

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1.		Basis of Presentation

		The accounting policies followed by the Company are set forth in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K as of and for the year ended June 27, 2003. In the opinion of management, all adjustments necessary to fairly state the unaudited condensed consolidated financial statements have been made. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended June 27, 2003. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

2.		Supplemental Financial Statement Data (in millions)

3.		Income per Share

		The following table illustrates the computation of basic and diluted income per common share (in millions, except per share data):

		For purposes of computing diluted income per share, antidilutive common share equivalents have been excluded from the calculation for employee stock options with an exercise price that exceeded the average fair market value of the common stock for the period. For the three months ended September 26, 2003 and September 27, 2002, options to purchase 13.4 million and 26.6 million common shares, respectively, were excluded from the computation of diluted income per share. For the three months ended September 27, 2002, the computation of diluted income per share also excludes 2.4 million common shares issuable upon conversion of the 5.25% zero coupon convertible subordinated debentures (the “Debentures”).

4.		Common Stock and Convertible Debenture Transactions

		During the three months ended September 26, 2003, the Company issued approximately 1.3 million shares of its common stock in connection with Employee Stock Purchase Plan (“ESPP”) purchases and approximately 1.3 million shares of its common stock in connection with common stock option exercises, for aggregate cash proceeds of $11.5 million. During the three months ended September 27, 2002, the Company issued approximately 0.8 million shares of its common stock in connection with ESPP purchases and approximately 0.2 million shares of its common stock in connection with common stock option exercises, for aggregate cash proceeds of $3.4 million.

		During the three months ended September 27, 2002, the Company paid $14.3 million in cash and issued approximately 0.1 million shares of common stock to redeem a portion of its Debentures with a book value of $14.7 million and an aggregate amount at maturity of $32.6 million. In fiscal year 2003, the Company redeemed its remaining outstanding Debentures.

5.		Stock Based Compensation

		Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), establishes the financial accounting and reporting standards for stock-based compensation plans. As permitted by SFAS 123, the Company elected to continue accounting for stock-based employee compensation plans (including shares issued under the Company’s stock option plans and ESPP, collectively called “Options”) in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB Opinion No. 25”) and to follow the pro forma net income (loss), pro forma income (loss) per share, and stock-based compensation plan disclosure requirements set forth in SFAS 123. The following table sets forth the computation of basic and diluted income (loss) per share for each of the three months ended September 26, 2003 and September 27, 2002 and illustrates the effect on net income (loss) and income (loss) per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

		The pro forma income (loss) per share information is estimated using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including the expected stock price volatility and expected period until options are exercised. The pro forma impact of applying SFAS 123 at September 26, 2003 is not necessarily representative of future periods.

		The fair value of Options granted during the three months ended September 26, 2003 and September 27, 2002 has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

6.		Read-Rite Asset Acquisition

		In June 2003, Read-Rite Corporation (“Read-Rite”), one of the Company’s suppliers of magnetic recording heads, commenced voluntary Chapter 7 bankruptcy proceedings. On July 31, 2003, in an effort to increase the Company’s operational flexibility and ensure access to future head technologies, Western Digital purchased substantially all of the assets of Read-Rite, including its wafer fabrication equipment in Fremont, California and manufacturing facility in Bang Pa-In, Thailand. The cost of the acquisition was $172.0 million and consisted of cash consideration of $94.8 million, assumed debt obligations of the Thailand operations of approximately $60.2 million and direct costs of the acquisition and other miscellaneous assumed obligations totaling $17.0 million. The Company accounted for this transaction as an asset acquisition.

		The estimated fair value of the assets acquired and liabilities assumed are as follows:

		Approximately $25.6 million of the purchase price related to acquired in-process research and development projects that had not reached technological feasibility and had no alternative future use. The Company reached this conclusion based on a valuation report prepared by a third party valuation specialist and internal reviews by management. Accordingly, the Company recorded the $25.6 million as a charge to research and development expense in the three months ended September 26, 2003. Approximately $38.8 million of the purchase price related to purchased technology, which is being amortized over a weighted average period of three years.

7.		Legal Proceedings

		In June 1994, Papst Licensing (“Papst”) brought suit against the Company in the United States District Court for the Central District of California, alleging infringement by the Company of five disk drive motor patents owned by Papst. In December 1994, Papst dismissed its case without prejudice. In July 2002, Papst filed a new complaint against the Company and several other defendants. The suit alleges infringement by the Company of seventeen of Papst’s patents related to disk drive motors that the Company purchased from motor vendors. Papst is seeking an injunction and damages. The Company filed an answer on September 4, 2002, denying Papst’s complaint. On December 11, 2002, the lawsuit was transferred to the United States District Court for the Eastern District of Louisiana and included in the consolidated pre-trial proceedings occurring there. The lawsuit was stayed pending the outcome of certain other related litigation. A potential loss, if any, cannot presently be reasonably estimated. The Company intends to vigorously defend the suit.

		On July 5, 2001, the Company’s Western Digital Technologies, Inc. subsidiary (“WDT”) and its Malaysian subsidiary (“WDM”) filed suit (the “complaint”) against Cirrus Logic, Inc. (“Cirrus”) in California Superior Court for the County of Orange for breach of contract and other claims resulting from Cirrus’ role as a strategic supplier of read channel devices for the Company’s hard drives. WDM also stopped making payments to Cirrus for past deliveries of devices and terminated all outstanding purchase orders from Cirrus for such devices. The complaint alleged that Cirrus’ unlawful conduct caused damages in excess of any amounts alleged to be owing on outstanding invoices or arising out of any alleged breach of the outstanding purchase orders. On August 20, 2001, Cirrus filed an answer and cross-complaint denying the allegations contained in the complaint and asserting counterclaims against the plaintiffs for, among other things, the amount of the outstanding invoices and the plaintiffs’ alleged breach of the outstanding purchase orders. The disputed payable was approximately $26.5 million. Cirrus claimed that the cancelled purchase orders totaled approximately $26.0 million.

		In July 2003, the parties agreed to attempt to resolve their claims through mediation, and scheduled a mediation for August 22, 2003. On August 22, 2003, the Company and Cirrus reached a settlement of this litigation and subsequently executed a formal written settlement agreement. Pursuant to the terms of the agreement, on October 16, 2003, the Company made a one-time payment to Cirrus of $45.0 million in exchange for a mutual release of claims. The letter of credit previously posted by the Company also has been released. Western Digital had previously recorded an obligation totaling approximately $26.5 million related to the disputed payables. The difference of approximately $18.5 million between the settlement amount and the amount previously recorded was included in the cost of sales for the fourth quarter and year ended June 27, 2003. Formal dismissals of claims were entered with the Court in this matter on October 22, 2003.

		In the normal course of business, the Company is subject to legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, beyond that provided at September 26, 2003, would not be material to the Company’s financial condition. However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from these legal proceedings, lawsuits and other claims could differ materially from those projected.

	•		maintain overall quality of products on new and established programs,

	•		maintain competitive cost structures on new and established products,

	•		produce sufficient quantities of products at the capacities our customers demand while managing the integration of new and established technologies,

	•		qualify new products that have changes in overall specifications or features that our customers may require for their business needs,

	•		qualify these products with key customers on a timely basis by meeting all of our customers’ needs for performance, quality and features, or

	•		consistently meet stated quality requirements on delivered products,

	•		the need to operate at high levels of utilization to drive competitive costs;

	•		the greater need for predictability of quarterly production to ensure best utilization of assets to drive competitive costs; and

	•		the need for assured supply of components, especially hard drive media, that is optimized to work with our heads.

	•		we may not have sufficient head sources in the event that we are unable to manufacture a sufficient supply of heads to satisfy our needs;

	•		third party head suppliers may not deal with us or may not deal with us on the same terms and conditions we have previously enjoyed;

	•		component suppliers of Read-Rite may not deal with us on favorable terms;

	•		the operation of the acquired Read-Rite assets may divert our attention from other business operations;

	•		the costs of operating Read-Rite’s assets may exceed the prices we have historically paid for heads or the prices that might be otherwise available to us from other vendors;

	•		we may be subject to claims that our manufacturing of heads may infringe certain intellectual property rights of other companies;

	•		we could incur substantial costs, including clean up costs, fines and civil or criminal sanctions, as a result of violations of or liabilities under environmental laws applicable to our new Fremont, California facility, including those governing the discharge of pollutants into the air and water; and

	•		it may be difficult and time-consuming for us to locate suitable manufacturing equipment for our head manufacturing processes and replacement parts for such equipment.

	•		obtaining requisite United States and foreign governmental permits and approvals;

	•		currency exchange rate fluctuations or restrictions;

	•		political instability and civil unrest;

	•		transportation delays or higher freight rates;

	•		labor problems;

	•		trade restrictions or higher tariffs;

	•		exchange, currency and tax controls and reallocations;

	•		increasing labor and overhead costs; and

	•		loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.

	•		the timing of orders from and shipment of products to major customers;

	•		our product mix;

	•		changes in the prices of our products;

	•		manufacturing delays or interruptions;

	•		acceptance by customers of competing products in lieu of our products;

	•		variations in the cost of components for our products;

	•		limited access to components that we obtain from a single or a limited number of suppliers, such as Komag, IBM and Marvell;

	•		competition and consolidation in the data storage industry;

	•		seasonal and other fluctuations in demand for PC’s often due to technological advances; and

	•		availability and rates of transportation.

	•		accruals for warranty costs related to product defects;

	•		price protection adjustments and other sales promotions and allowances on products sold to retailers, resellers and distributors;

	•		inventory adjustments for write-down of inventories to lower of cost or market value (net realizable value);

	•		reserves for doubtful accounts;

	•		accruals for product returns;

	•		accruals for litigation and other contingencies; and

	•		reserves for deferred tax assets.

	•		actual or anticipated fluctuations in our operating results;

	•		announcements of technological innovations by us or our competitors which may decrease the volume and profitability of sales of our existing products and increase the risk of inventory obsolescence;

	•		new products introduced by us or our competitors;

	•		periods of severe pricing pressures due to oversupply or price erosion resulting from competitive pressures;

	•		developments with respect to patents or proprietary rights;

	•		conditions and trends in the hard drive, data and content management, storage and communication industries; and

	•		changes in financial estimates by securities analysts relating specifically to us or the hard drive industry in general.

†		New exhibit filed with this Report.

§		Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed separately with the Securities and Exchange Commission.


(b)		*Reports on form 8-K:*

		On July 24, 2003, the Company filed a current report on Form 8-K to file its press release dated July 24, 2003, announcing financial information for the fourth fiscal quarter and fiscal year ended June 27, 2003, and including unaudited Condensed Consolidated Statements of Income and Balance Sheets for the year ended June 27, 2003.

		On August 15, 2003, the Company filed a current report on Form 8-K to announce the acquisition of substantially all of the assets of Read-Rite Corporation.

		On August 26, 2003, the Company filed a current report on Form 8-K to file its press release dated August 25, 2003, announcing the settlement of litigation and financial results for the fourth fiscal quarter and fiscal year ended June 27, 2003.