##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark one) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 28,
    2002                                             
|          
|or        
|          
|o          |  | 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: 0-14016



---

Maxtor Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0123732                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

500 McCarthy Blvd., Milpitas, California
95035

(Address of principal executive
offices)


Registrants telephone number, including
area code:

(408) 894-5000


Securities registered pursuant to
Section 12(b) of the Act:

Common Stock, par value $.01 per
share


Securities registered pursuant to
Section 12(g) of the Act:

5.75% Convertible Subordinated Debentures, due
March 1, 2012


Indicate by checkmark 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 (the Act) 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 þ         No o

Indicate by checkmark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.    o

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

The aggregate market value of the
registrants common stock, $.01 par value per share, held
by non-affiliates of the registrant on June 28, 2002, the
last business day of the registrants most recently
completed second fiscal quarter, was $678,901,256 (based on the
closing sales price of the registrants common stock on
that date). Shares of the registrants common stock held by
each officer and director and each person who owns more than 5%
or more of the outstanding common stock of the registrant have
been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of
March 24, 2003, 249,718,271 shares of the
registrants common stock, $.01 par value per share, were
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2003
Annual Meeting of Stockholders (the Proxy
Statement), to be filed within 120 days of the end of
the fiscal year ended December 28, 2002, are incorporated
by reference in Part III hereof. Except with respect to
information specifically incorporated by reference in this
Form 10-K, the Proxy Statement is not deemed to be filed as
part hereof.



---






---

TABLE OF CONTENTS



|                                                                    |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                             
|                                                                    | Item 1. Business                                                                             
|                                                                    | Item 2. Properties                                                                           
|                                                                    | Item 3. Legal Proceedings                                                                    
|                                                                    | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                            
|                                                                    | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                                    | Item 6. Selected Consolidated Financial Information                                          
|                                                                    | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE                       
|                                                                    | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                                    | Item 8. Consolidated Financial Statements and Supplementary Data                             
|MAXTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      
|REPORT OF INDEPENDENT ACCOUNTANTS                                  
|                                                                    | Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                           
|                                                                    | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                                    | Item 11. Executive Compensation                                                              
|                                                                    | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                    | Item 13. Certain Relationships and Related Transactions                                      
|                                                                    | Item 14. Controls and Procedures                                                             
|PART IV                                                            
|                                                                    | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                                         
|CERTIFICATIONS                                                     
|MAXTOR CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
|INDEX TO EXHIBITS                                                  
|EXHIBIT 10.70                                                      
|EXHIBIT 10.71                                                      
|EXHIBIT 10.72                                                      
|EXHIBIT 10.73                                                      
|EXHIBIT 10.74                                                      
|EXHIBIT 10.75                                                      
|EXHIBIT 10.76                                                      
|EXHIBIT 10.77                                                      
|EXHIBIT 21.1                                                       
|EXHIBIT 23.1                                                       
|EXHIBIT 99.1                                                       



---



##### Table of Contents






PART I






|        |         
|------- | --------
|Item 1. | Business

Maxtor®, DiamondMax® and Atlas®
are registered trademarks of Maxtor Corporation
(Maxtor or the Company).
MaXLineTM, FireballTM, Maxtor Personal
StorageTM and Maxtor OneTouchTM are
trademarks of Maxtor. All other brand names and trademarks
appearing in this report are the property of their respective
holders.

Overview

Maxtor is a leading provider of hard disk drives
for a variety of applications, including desktop computers,
high-performance Intel-based servers, near-line storage systems
and consumer electronics.

We offer a broad line of hard disk drives for
desktop computers and Intel-based servers. Our desktop products
are marketed under the DiamondMax, MaXLine and Fireball brand
names and consist of 3.5-inch disk drives with storage
capacities that range from 20 to 300 gigabytes. While these
drives are used primarily in desktop computers, there is an
emerging market for these products in a variety of consumer
electronic applications, including personal video recorders,
set-top boxes and game consoles, as well as personal storage
applications. We also provide a line of high-end 3.5-inch hard
disk drives for use in high-performance, storage-intensive
applications such as workstations, enterprise servers and
storage subsystems. These Intel-based server products are
marketed under the Atlas brand name and provide storage
capacities of 18.4 to 146.9 gigabytes at speeds of
10,000 RPM and 15,000 RPM.

Company Background

We were founded in 1982 and completed an initial
public offering of common stock in 1986. We sold 40% of our
outstanding common stock to Hyundai Electronics Industries (now
Hynix Semiconductor, Inc.  HSI) and its
affiliates in 1994. In early 1996, Hyundai Electronics America
(now Hynix Semiconductor America Inc. 
Hynix) acquired all of the remaining publicly held
shares of our common stock as well as all of our common stock
then held by Hynix Semiconductor, Inc. and its affiliates. In
July 1998, we completed a public offering of 49.7 million
shares of our common stock, receiving net proceeds of
approximately $328.8 million from the offering. In February
1999, we completed a public offering of 7.8 million shares
of common stock with net proceeds to us of approximately
$95.8 million.

In April 2001, we completed the acquisition of
Quantum Corporations Hard Disk Drive Group (Quantum
HDD). At the closing, each share of Quantum HDD common
stock was converted into 1.52 shares of our common stock.
As a result, we issued approximately 121.0 million shares
of common stock and assumed restricted stock and options to
purchase, in the aggregate, approximately 12.8 million
shares of common stock. With our acquisition of the Quantum HDD
business, we became one of the largest hard disk drive companies
in the world in terms of unit shipments and expanded our product
line to include disk drives for server products in addition to
disk drives for desktop computer systems and consumer
electronics applications.

In September 2001, we completed the acquisition
of MMC Technology, Inc. (MMC), a wholly-owned
subsidiary of Hynix. MMC, based in San Jose, California,
designed, developed and manufactured media for hard disk drives.
Prior to the acquisition, sales to Maxtor comprised 95% of
MMCs annual revenues. The primary reason for our
acquisition of MMC was to provide us with an assured source of
supply of media. MMC provided us with approximately 50% of our
media needs for the year ended December 28, 2002.

In October 2001, Hynix sold approximately
23.3 million shares (including the exercise of the
underwriters over-allotments) of Maxtor stock in a
registered public offering. In addition, at the same time and on
the same terms as Hynixs sale of Maxtors stock to
the public, Maxtor purchased an additional 5.0 million
shares from Hynix. We did not receive any of the proceeds from
Hynixs sale of Maxtor stock to the public. Following these
transactions, Hynixs ownership of our outstanding stock
was 5.17%. In February 2002, the remaining 12.5 million
shares of Maxtor stock owned by Hynix were distributed to
holders of a DECS Trust

1



---



##### Table of Contents



IV security that Hynix issued in February 1999
and which had been secured by Maxtor stock. With this
distribution, Hynix no longer held any shares of our common
stock.


In August 2002, we shut down the operations of
our Network Systems Group, except to fulfill then existing
commitments. The network attached storage (NAS)
market had fragmented since our entrance in 1999, with one
segment of the NAS market becoming more commoditized and the
other segment placing us in competition with some of our hard
disk drive customers.

Industry Background

The Hard Disk Drive Market.We offer a broad line of hard disk
drives for desktop computers and Intel-based servers. We
generate the majority of our unit shipments and revenue today
from our desktop computer business, although a growing portion
of our total revenues is from sales to the Intel-based hard disk
drive server market. We also see growing demand for hard disk
drives in emerging consumer electronics applications. In
addition, there is an emerging market for high capacity desktop
drives in enterprise near-line and related storage applications.

Demand for hard disk drives is driven by a
variety of factors, including:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continued improvements in desktop and enterprise
    computing price to performance ratios;                                                                        
|
| |  | the rapid accumulation of data resulting from the
    digitization of information previously stored in paper form;                                                 
|
| |  | larger file sizes created by multimedia-intensive
    applications;                                                                                                
|
| |  | the growth of non-branded desktop computers in
    emerging economies, specifically China and other parts of Asia,
    Russia, Eastern Europe, and Latin America;  
|
| |  | increased customer demand for emerging consumer
    electronics devices that include a hard disk drive, such as
    personal video recorders and set-top boxes; and
|
| |  | the need to store large amounts of data that are
    accessed infrequently, as in email archiving, medical images and
    videoclips.                              

Hard Disk Drive Technology.The basic operation of a hard disk
drive has not changed materially since its introduction in the
1950s. To improve the performance of hard disk drives,
hard disk drive manufacturers have concentrated their efforts on
optimizing the performance of the various components of the hard
disk drive.

The main components of the hard disk drive are
the head disk assembly and the printed circuit board. The head
disk assembly includes the head, media (disks), head positioning
mechanism (actuator) and spin motor. These components are
contained in a base plate assembly creating a contamination-free
environment. The printed circuit board includes custom
integrated circuits, an interface connector to the host computer
and a power connector.

The head disk assembly consists of one or more
disks positioned around a spindle hub that rotates the disks by
a spin motor. Disks are made of a smooth substrate to which a
thin coating of magnetic materials is applied. Each disk has a
head suspended directly above or below it, which can read data
from or write data to the spinning disk.

The integrated circuits on the printed circuit
board typically include a drive interface and a controller. The
drive interface receives instructions from the computer, while
the controller directs the flow of data to or from the disks,
and controls the heads. The location of data on each disk is
logically maintained in tracks, divided into sectors. The
computer sends instructions to read data or write data to the
disks based on track and sector locations. Industry standard
interfaces are utilized to allow the disk drive to communicate
with the computer.

A key performance metric in the hard disk drive
industry is areal density, which is the measure of
stored bits per square inch on the recording surface of a disk.
An increase in areal density allows a hard disk

2



---



##### Table of Contents



drive provider to decrease the price per megabyte
stored by increasing overall storage capacity per disk, thus
reducing product costs through reduced component requirements.


Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to
further increase hard disk drive performance and reduce product
costs. In an attempt to simplify the electronic architecture,
some hard disk drive manufacturers are combining the traditional
servo-control functions of the digital signal processor-based
electronic architecture and the error recovery and interface
management functions of traditional hard drive microprocessors
on a single integrated circuit. Moreover, to achieve timely
introduction and rapid volume production of new products
consistently, some hard disk drive providers are striving to
simplify their product design processes. This effort includes
creating extendible core technology platforms, which utilize
common firmware and mechanical designs, and the re-use of
manufacturing tooling and application specific integrated
circuits across various product generations and product lines.

Our Solution

We have established ourselves as a leading
provider of high quality, high performance hard disk drives to
major desktop computer manufacturers, distributors and
retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we
have defined and implemented the key business processes
necessary to fulfill the needs of our customers. These processes
focus on the efficient, timely and cost-effective integration of
leading-edge technology to create highly manufacturable hard
disk drives. Moreover, our senior management team monitors these
processes in an effort to ensure consistent execution and prompt
response to customer demands. We intend to continue our
leadership in the desktop hard disk drive industry by
consistently executing these fundamental business processes.

The Intel-based server market has many of the
same characteristics for success as the desktop computer market.
We have applied the same fundamentals that have allowed us to be
successful in the desktop computer market to our growing server
business. These fundamentals include strong focus on meeting
customer demands through introduction of competitive products,
consistent execution and excellent service.

We believe there is an emerging and potentially
significant market for hard disk drives in consumer electronics
applications, including devices such as personal video recorders
and set-top boxes. We are currently supplying hard disk drives
to leading consumer electronics manufacturers, including Dish
Network, JVC, Panasonic, Pioneer Corporation, Force Holding
A.S., Scientific-Atlanta Inc., SONICblue Inc. and TiVo Inc., for
use in a variety of consumer electronics devices that are being
sold today. Sales into consumer electronics applications, while
still a small percentage of our total revenue, have grown
steadily. We believe the market for consumer electronics devices
using hard disk drives is still in its early stages, and we
expect that it will expand over time as consumer acceptance and
adoption of these products grow. We intend to leverage our
position as a high quality, time-to-volume leader in hard disk
drives and pursue relationships with the leaders in consumer
electronics to capitalize on the opportunities presented by this
new market.

We also believe there is an emerging market with
enterprise customers for high capacity, high reliability ATA
hard disk drives. These hard disk drives are used in near-line
storage applications where data is generated in large volumes
and retrieved occasionally, such as e-mail archiving,
engineering drawings, medical imaging, scientific data and video
images which typically require large storage capacity, but not
the speed that high transaction applications need. In this
environment, cost per gigabyte is a primary customer
requirement, and we can provide this with our high capacity,
high reliability MaXLine hard disk drives. We are currently
working with leading storage subsystem vendors, including EMC
Corporation, Network Appliance, Inc. and StorageTek, to provide
hard disk drives for these new emerging applications. We intend
to build on these relationships as well as seek out additional
customers and applications for this emerging market.

3



---



##### Table of Contents



Our Strategy

We seek to be a major provider of hard disk
drives to leading computer and consumer electronics
manufacturers, distributors and retailers. Our strategy to
achieve this goal includes the following elements:

Strengthen Relationships with Distributors and
Retailers.We intend to further
strengthen our relationships with distributors and retailers to
capture higher margin opportunities offered in these markets. We
have had strong growth in revenues in the distribution channels
in emerging economies in China and other parts of Asia, Russia,
Eastern Europe and Latin America, attributable in large part to
the growth of non-branded desktop computer manufacturers. We
intend to further strengthen our presence in these markets
through enhanced service and support, targeted promotions and an
expanded product line. We will continue to invest in programs to
generate interest and sales through the distribution and retail
channels. We will continue to introduce higher margin storage
products, in addition to hard disk drives, that appeal to
distribution and retail channel customers. In the distribution
channel, these products include our highest capacity, high
reliability MaXLine family of hard disk drives, and in retail,
they include personal storage devices, such as our new Personal
Storage 5000 and video-editing kits.

Maintain Significant Market Share With Leading
Computer Manufacturers.We believe our
ability to achieve leading time-to-volume production of high
quality, high performance hard disk drives and to provide
excellent customer service will enable us to maintain our market
share position with leading personal computer and server
manufacturers. According to International Data Corporation
(IDC), in 2002, Maxtors share of the hard disk
drive market, the desktop hard disk drive market and the
Intel-based server market based on units shipped was 23.4%,
30.3% and 8.6%, respectively. Sales to our five largest desktop
computer OEM customers represented 23.0% of our total revenue in
2002. In addition, we intend to leverage our relationships with
leading desktop computer manufacturers to further expand our
presence in the server market. Many of the leading Intel-based
server manufacturers have been long-standing customers of
Maxtors hard disk drives for desktop computers. We intend
to build on these relationships with a continued emphasis on
quality products, time-to-volume leadership and excellent
customer service in our server product line.

Pursue Opportunities in Emerging Markets.We believe the demand for hard disk
drives in consumer applications will continue to grow. Today,
hard disk drive storage in consumer electronics applications has
been primarily incorporated into personal video records, set-top
boxes and game consoles. We are supplying Dish Network, JVC,
Panasonic, Pioneer Corporation, Force Holding A.S.,
Scientific-Atlanta Inc., SONICblue Inc., and TiVo Inc. with hard
disk drives for a variety of consumer electronic applications.
We intend to pursue this market by developing hard disk drive
products appropriate for these applications and by expanding our
relationships with leading consumer electronics manufacturers
throughout the world.

We also believe there is an emerging market in
the enterprise for high capacity, high reliability ATA drives in
near-line and related storage applications, where data is
generated in relatively large volumes and retrieved
occasionally. Specific applications include e-mail archiving,
engineering drawings, medical imaging, scientific data and video
images. In these environments, we believe high capacity, high
reliability desktop drives provide the optimal cost per gigabyte
metric that enterprise storage customers seek. We currently have
relationships with some of the leading storage subsystem
vendors, including EMC Corporation, Network Appliance, Inc. and
StorageTek, to provide hard disk drives for these applications
and we intend to pursue additional customers and applications
for this new category of hard disk drive applications.

Effectively Integrate New
Technology.We augment our traditional
product development teams with an advanced technology group. The
advanced technology groups purpose is to monitor and
evaluate advancements in hard disk drive technology for possible
integration into our future products. This group also works
closely with our product development teams and strategic
component vendors to:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | obtain early access to the latest hard disk drive
    component technology;             
|
| |  | allow for flexibility in choosing
    state-of-the-art components; and                  
|
| |  | ensure viability of new product technologies and
    components prior to product design.

4



---



##### Table of Contents



Through this process, we intend to continue to
integrate new technologies into our existing core technology
platform and to strengthen our ability to introduce high
quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a
consistent basis.

Improve Manufacturing Efficiencies and
Optimize Supply Base to Achieve Cost Savings.In the third quarter of 2002, we
transitioned 100% of our desktop hard disk drive manufacturing
from Matsushita-Kotobuki Electronics Industries, Ltd.
(MKE) to Maxtor manufacturing facilities in
Singapore. With all of the desktop manufacturing in one
location, we have achieved better economies of scale resulting
in improved absorption of our fixed costs. In 2003, we will
continue to focus on improving our manufacturing processes to
enhance operating efficiencies. In addition, we will leverage
our higher volume commitments with our supply base to further
reduce costs.

Pursue Low-Cost Manufacturing Capacity.We have begun construction of a
manufacturing facility in China that will provide us with a
low-cost facility to accommodate anticipated future growth. We
anticipate that the facility will become operational in the
second half of 2004. We have arranged financing for the facility
and expect documentation to be finalized in the next few weeks.
The China plant will produce desktop hard disk drives. Singapore
will remain the center of our manufacturing operations. To
ensure we maximize our manufacturing efficiency in China, we
will implement the flexible cell-based process that has been
successful in Singapore.

Product Development/ Technology

We enjoy strong customer relationships, which we
believe are due in large part to product quality, time-to-volume
production leadership and industry-leading performance.
Contributing to these strong relationships, we believe, is our
product development process. Our product development effort is
separated into two phases  the enabling technology
development phase and the product design phase.

Enabling Technology Development Phase.Our advanced technology group is
responsible for the enabling technology development phase, which
includes:



| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | working closely with our product design teams and
    strategic component suppliers to create a variety of
    state-of-the art technologies to be used in our future products;
|
| |  | developing early prototypes to ascertain the
    stability and manufacturability of our planned products; and                                                                  
|
| |  | analyzing the latest head, disk, channel, motor
    and application specific integrated circuit technologies and
    designs to broaden and strengthen our technology platform.

This group also focuses on leveraging our current
proven technology platform by re-using as much electronic and
mechanical technology as possible in each successive product
generation. In an effort to deliver the highest product quality
possible, the advanced technology group begins its review of
emerging technologies as early as possible, normally 12 to
18 months before such technologies might be included in our
products.

Product Design Phase.Our product design group concentrates
on achieving required product specifications improving product
performance, robustness, manufacturability, quality and
materials costs. The product design group also is responsible,
in part, for executing our new product introduction process.
This process is a highly disciplined review procedure that is
designed to ensure that new product designs meet clearly
specified criteria in terms of yield, scrap, quality,
productivity and production ramp rates prior to release into
volume production.

Products

We currently offer a broad line of hard disk
drives for desktop computers and Intel-based servers. Our
desktop products are marketed under the Fireball, DiamondMax,
and MaXLine brand names and consist of 3.5-inch hard disk drives
with storage capacities that range from 20 to 300 gigabytes per
platter and speeds of 5,400 RPM and 7,200 RPM. Our
desktop drives come in configurations ranging from 1 to
4 platters per drive, allowing us to address a wide range
of applications for desktop computers, from entry level to
mid-range to the

5



---



##### Table of Contents



high-end. In addition, there is an emerging
market for these drives in a variety of consumer electronics
applications, including set-top boxes, PVRs and game consoles.
All of these hard disk drives have a number of features
including high speed interfaces for greater data throughput, a
robust mechanical design for improved reliability, giant
magneto-resistive head technology and a digital signal
processor-based electronic architecture.


Our high performance 3.5-inch hard disk drives
are for use in storage-intensive applications such as
workstations, enterprise servers and storage subsystems. These
products are marketed under the Atlas brand name and provide
storage capacities of 18.4 to 146.9 gigabytes at
speeds of 10,000 RPM and 15,000 RPM. Our most recently
introduced high-end drive, the Atlas 10K IV, has been qualified
by or is in qualification with several Intel-based server OEMs
and is shipping into both the OEM and distribution market. The
Atlas 15K is currently in qualification with several server OEMs
with volume shipments expected in the second quarter of 2003.

The table below sets forth the key performance
characteristics of our hard disk drive products.

|                  |  |          |       |          |  |                            |  |              |        |  |  |                                               
|----------------- |  | -------- | ----- | -------- |  | -------------------------- |  | ------------ | ------ |  |  | ----------------------------------------------
|                  |  | Capacity |       | Product  |  | Rotational                 |  |             
|                  |  | Per Disk |       | Capacity |  | Speed                      |  |             
|Products          |  | (GB*)    |       | (GB*)    |  | (RPM)                      |  | Applications
|                  |  |          |       |          |  |                            |  |             
|Fireball 3        |  |          | 30/40 |          |  | 20/30/40                   |  |              | 5,400  |  |  | Entry-level Desktop PCs & Consumer Electronics
|DiamondMax 16     |  |          | 60/80 |          |  | 60/80/120/160
    /250/300 |  |              | 5,400  |  |  | Mainstream Desktop PCs & Consumer Electronics 
|DiamondMax Plus 8 |  |          | 30/40 |          |  | 20/30/40                   |  |              | 7,200  |  |  | High-performance Desktop PCs & Workstations   
|DiamondMax Plus 9 |  |          | 60/80 |          |  | 60/80/120/160
    /200/250 |  |              | 7,200  |  |  | High-performance Desktop PCs & Workstations   
|MaXLine II        |  |          | 60/80 |          |  | 250/300                    |  |              | 5,400  |  |  | Near-line storage                             
|MaXLine II Plus   |  |          | 60/80 |          |  | 250                        |  |              | 7,200  |  |  | Near-line storage                             
|Atlas 10K III     |  |          | 18.4  |          |  | 18/36/73                   |  |              | 10,000 |  |  | Servers, Workstations & Storage Subsystems    
|Atlas 10K IV      |  |          | 36.7  |          |  | 36/73/146                  |  |              | 10,000 |  |  | Servers, Workstations & Storage Subsystems    
|Atlas 15K         |  |          | 18.4  |          |  | 18/36/73                   |  |              | 15,000 |  |  | Servers, Workstations & Storage Subsystems    



---



|  |                                                                                                       
|- | ------------------------------------------------------------------------------------------------------
|* | GB = A gigabyte means 1 billion bytes. Total
    usable capacity may vary with operating environments.

We also introduced several new external storage
products in 2002. Maxtor Personal Storage devices introduced
during the year include the 5000LE, 5000XT and 5000DV, which
offer external storage solutions for a range of users from the
budget conscious to high-performance users. The devices are hot
swappable and easy to use. They connect to personal computers or
Macintosh computers through 1394 or USB ports and offer up to
250 gigabytes of storage.

Manufacturing/ Quality

To be competitive, we must manufacture high
quality high-performance hard disk drives with industry leading
time-to-volume production at competitive costs, and we must be
able to respond quickly to changes in product delivery
schedules. Our hard disk drive manufacturing operations consist
primarily of the final assembly of high-level subassemblies
built to our specifications and testing of completed products.

Manufacturing.We
currently have two sources of production for our hard disk drive
products. Our Maxtor-owned Singapore manufacturing facilities
utilize a cell-based process, enabling us to dedicate
manufacturing cells to a particular product model. We combine
our cell-based approach with a sophisticated factory information
system that collects data on various product and quality
metrics. The cell-based approach

6



---



##### Table of Contents



provides us with the flexibility to readily scale
our production in response to customer needs. The manufacturing
of all of our desktop hard disk drives and our 15,000 RPM
server drives is done at our Singapore facilities.


Our cell-based process enables us to:



| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dedicate manufacturing cells to a particular
    product model, thereby allowing us to better monitor and control
    process trends, resulting in improved product quality, faster
    time-to-volume production and improved overall customer
    satisfaction;
|
| |  | simultaneously manufacture multiple product
    configurations;                                                                                                                                                                                                  
|
| |  | quickly reconfigure the facility to respond to
    customer change requests and changes in product and customer mix;                                                                                                                                             
|
| |  | effectively adapt our inventory management model
    to build-to-order business model that many of our desktop
    computer manufacturer customers have adopted; and                                                                                             
|
| |  | add incremental capacity as needed at a
    relatively low cost, allowing for better capacity utilization.                                                                                                                                                       

This flexible cell-based process, when coupled
with our product design methodology, has enabled us to
significantly improve time-to-volume production.

We also manufacture media used in our products
through MMCs facility in San Jose, California. In 2003, we
plan to add manufacturing capacity for desktop and server
products in our Singapore facility and expand our capacity for
media manufacturing at MMC.

We also have a relationship with MKE for the
manufacture of our 10,000 RPM high-end hard disk drives for
Intel-based servers. MKEs manufacturing processes are
highly automated, employing integrated computer networks and
advanced control systems.

Maxtor has also begun construction of a
manufacturing facility in China that will provide us with a
low-cost option to accommodate anticipated future growth. We
anticipate that the facility will become operational in the
second half of 2004; the China plant will produce desktop hard
disk drives. Singapore will remain the center of our
manufacturing operations. To ensure we maximize our
manufacturing efficiency in China, we will implement the
flexible cell-based process that has been successful in
Singapore.

Quality.Both Maxtor
and MKE manufacturing operations conform to the same high
quality standards. These standards are set and measured by us,
using consistent measurement and metrics. We are committed to
maintain high rankings from our customers on our quality and
customer service and maintaining these rankings remains a high
priority within the company. To ensure that Maxtor remains a
leader in product quality and overall customer satisfaction, we
have implemented several corporate-wide quality programs, which
focus on:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | robustness of design and improved design
    tolerances;                            
|
| |  | state-of-the-art product traceability,
    statistical controls and web-based tools;
|
| |  | quality of incoming parts and factory process
    controls; and                     
|
| |  | customer feedback, data analysis and timely
    response.                           

In addition, our quality, materials, enabling
technology and product development groups work closely with
leading component vendors in an effort to ensure sufficient
tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. All of our
manufacturing facilities are ISO 9002 and
14001 certified. Finally, our executives meet regularly
with suppliers and customers to exchange product quality
information to facilitate rapid analysis of product failure and
timely implementation of corrective actions.

7



---



##### Table of Contents



Materials and Supply Chain

We have developed and continue to develop
strategic relationships with leading suppliers of many of the
key components for our hard disk drive products. These
relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and
to reduce component, inventory and overall product costs. In
addition, our strategic suppliers work closely with our advanced
technology group, enabling us to gain early access to leading
edge hard disk drive technology and to improve the overall
efficiency of our product design process. With respect to MKE,
Maxtor oversees the qualification and supply chain management of
key components, including heads, media, motors and all of the
major electronics components.

We rely on a limited number of suppliers to
provide Maxtor specific components for our products. These
components include heads, media, custom electronics, motors and
mechanical parts. Maxtor will typically qualify two or three
sources for these key components for each product in order to
meet supply assurance requirements. With our acquisition of MMC
in 2001, we have an internal source of media supply, which
provided approximately 50% of our media needs for the year ended
December 28, 2002. Custom integrated circuits are sourced
from Texas Instruments, Agere Systems, and STMicroelectronics,
where we have supply agreements and multiple manufacturing
locations qualified.

Customers and Sales Channels

We sell our products directly to leading
manufacturers of desktop computer and server systems and
consumer electronics devices, through key distributors and
through the retail channel. Desktop computer OEM customers
include Dell Computer Corporation (Dell), Fujitsu
Siemens Limited (Fujitsu), Hewlett-Packard Company
(Hewlett Packard), Hon-Hai Precision Industry Co.,
Ltd., International Business Machines Corporation
(IBM) and NEC USA, Inc. Leading distributors include
Bell Microproducts Inc. (Bell Microproducts), Ingram
Micro Inc. (Ingram Micro), SED International, Inc.,
Tech Data Corporation (Tech Data) and Xander
International. Retail chain stores that feature our products
include Best Buy, CompUSA and Staples.

Manufacturers.Revenue from our five largest desktop
computer OEM customers, represented 23.0%, 24.5% and 28.5% in
2002, 2001 and 2000, respectively. Dell represented 11.5% of our
sales in fiscal 2002, 11.3% in fiscal 2001 and 14.2% in fiscal
2000. We believe that our success depends on our ability to
maintain and further develop strong customer relationships with
desktop, storage and server computer system and consumer
electronics manufacturers and to provide products that fit their
specific needs.

Distributors.We use
a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed
customers, which tend to hold small market shares of the overall
desktop and server computer markets. These distributors include
value-added resellers, dealers, system integrators and small
desktop and server manufacturers. Distributors accounted for
47.2%, 39.3% and 21.9% of our revenue in 2002, 2001 and 2000,
respectively. Distributors generally enter into non-exclusive
agreements with us for the purchase and redistribution of
product on a quick turnover basis. Purchase orders are placed
and revised on a weekly basis. We grant certain of our
distributors price protection and limited rights to return
product on a rotation basis. Our major distributors include Bell
Microproducts, Ingram Micro, Tech Data and Xander International.

Retailers.To expand
awareness of the Maxtor brand and generate typically higher
gross profit margins, we sell our retail-packaged products,
including hard disk drives and external storage devices, into
the retail channel. We sell directly to major retailers such as
computer superstores, warehouse clubs and computer electronics
stores, and authorized sales through distributors to smaller
retailers. Retailers accounted for 4.9%, 5.3% and 8.1% of our
revenue in 2002, 2001 and 2000, respectively. During 2001, we
expanded our retail presence outside of the US and Canada into
Europe and parts of Asia. We believe the retail channel
complements other sales channels. Retailers supply the
after-market upgrade sector in which end users
purchase and install hard disk drive products to upgrade their
computers. Retail distribution is also an important channel for
the sale of our external storage products which appeal to the
end user interested in emerging consumer applications that have
extensive storage requirements, such as digital photography, MP3

8



---



##### Table of Contents



music downloads and video-editing. We grant
certain of our retailers price protection and limited rights to
return product on a rotation basis.


Sales and Marketing

We market and sell our products to leading
personal computer, Intel-based server, storage subsystem and
consumer electronics manufacturers, distributors and retailers.
Our representative offices are located throughout the U.S. and
in Australia, China, France, Germany, Great Britain, Hong Kong,
Japan, Korea, Singapore, Switzerland and Taiwan. We have formed
multi-disciplined, dedicated account and channel teams focused
on each current and targeted strategic personal computer,
Intel-based server, storage subsystem and consumer electronics
OEM, as well as regional distributor and retail accounts. These
teams generally are comprised of representatives from our sales,
marketing, engineering and quality organizations. Our senior
management also takes an active role in our sales efforts.
Dedicated field sales and technical support personnel are
located in close proximity to the manufacturing facilities of
each of our desktop computer manufacturer customers.

Our marketing and public relations functions are
performed both internally and through outside firms. Public
relations, direct marketing, worldwide packaging and marketing
materials are focused and targeted to various end-user segments.
We utilize both consumer media and trade publications. We have
programs under which qualifying resellers are reimbursed for
certain advertising expenditures. We also have invested in
direct marketing and customer satisfaction programs. We maintain
ongoing contact with end users through primary and secondary
market research, focus groups, product registrations and
technical support databases.

Backlog

We generally sell standard products according to
standard agreements or purchase order terms. Delivery dates are
specified by purchase orders. Such orders may be subject to
change, cancellation or rescheduling by the customer without
significant penalties. The quantity actually purchased and
shipment schedules are frequently revised to reflect changes in
the customers needs. In addition, orders for our products
are filled for several large customers from just-in-time
inventory warehouses, and orders are not placed ahead of time on
our order entry backlog system. Instead, we receive a periodic
forecast of requirements from the customer. Upon shipment from
the just-in-time warehouse, the customer is invoiced. In light
of these factors, backlog reporting as of any particular date
may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor
of our future revenue.

Competition

We compete primarily with manufacturers of
3.5-inch hard disk drives for desktop and server computers. Our
competitors in the hard disk drive market include Fujitsu,
Hitachi, IBM, Samsung, Seagate, and Western Digital. In 2002,
according to IDC, we were the second largest provider of hard
disk drives worldwide based on units shipped.

We believe that the most important competitive
factors in the hard disk drive market are breadth of product
lines, introduction of competitive products as measured by
storage capacity, performance, quality, price, time-to-market
introduction, time-to-volume production, desktop, storage and
server manufacturer product qualifications, reliability and
technical service and support. We believe we compete favorably
with respect to these factors.

The desktop computer market segment and the
overall hard disk drive market are intensely competitive even
during periods when demand is stable. We compete primarily with
manufacturers of 3.5 inch hard disk drives, including
Fujitsu, Hitachi, IBM, Samsung, Seagate Technology, and Western
Digital. Hitachi and IBM have recently completed the merger of
their hard disk drive businesses into a single joint venture,
Hitachi Global Storage Technologies. Many of our competitors
historically have had a number of significant advantages,
including larger market shares, a broader array of product
lines, preferred vendor status with customers, extensive name
recognition and marketing power, and significantly greater
financial, technical and

9



---



##### Table of Contents



manufacturing resources. Some of our competitors
make many of their own components, which may provide them with
benefits including lower costs. Our competitors may also:




| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | consolidate or establish strategic relationships
    among themselves to lower their product costs or to otherwise
    compete more effectively against us;
|
| |  | lower their product prices to gain market share;                                                                                                           
|
| |  | bundle their products with other products to
    increase demand for their products; or                                                                    
|
| |  | develop new technology which would significantly
    reduce the cost of their products.                                                                    

In addition, some of our competitors produce
complete computer systems that contain hard disk drives; these
competitors may price a system in a manner which results in
sales of hard disk drives at below cost. Some of our competitors
offer more products than we do and they can therefore enter into
agreements with customers to supply hard disk drives as part of
a larger supply agreement.

Increasing competition could reduce the demand
for our products and/or the prices of our products by
introducing technologically better and cheaper products, which
could reduce our revenues. In addition, new competitors could
emerge and rapidly capture market share. If we fail to compete
successfully against current or future competitors, our
business, financial condition and operating results will suffer.

Intellectual Property

We have been granted, as of February 1,
2003, 686 U.S. and 181 foreign patents related to
hard disk drive products and technologies, and have additional
patent applications pending in the United States and certain
foreign countries. We have patent protection on certain aspects
of our technology and also rely on trade secret, copyright and
trademark laws, as well as contractual provisions to protect our
proprietary rights. There can be no assurance that our
protective measures will be adequate to protect our proprietary
rights; that others, including competitors with substantially
greater resources, have not developed or will not independently
develop or otherwise acquire equivalent or superior technology;
or that we will not be required to obtain licenses requiring us
to pay royalties to the extent that our products may use the
intellectual property of others, including, without limitation,
our products that may also be subject to patents owned or
licensed by others. There can be no assurance that any patents
will be issued pursuant to our current or future patent
applications, or that patents issued pursuant to such
applications or any patents we own or have license to use will
not be invalidated, circumvented or challenged. In the case of
products offered in rapidly emerging markets, such as consumer
electronics, our competitors may file patents more rapidly or in
greater numbers, resulting in the issuance of patents that may
result in unexpected infringement assertions against us.
Moreover, there can be no assurance that the rights granted
under any such patents will provide competitive advantages to us
or be adequate to safeguard and maintain our proprietary rights.

Litigation may be necessary to enforce patents
issued or licensed to us, to protect trade secrets or know-how
owned by us or to determine the enforceability, scope and
validity of our proprietary rights or those of others. We could
incur substantial costs in seeking enforcement of our issued or
licensed patents against infringement or the unauthorized use of
our trade secrets and proprietary know-how by others or in
defending ourselves against claims of infringement by others,
which could have a material adverse effect on our business,
financial condition and results of operations. In addition, the
laws of certain countries in which our products are manufactured
and sold, including various countries in Asia, may not protect
our products and intellectual property rights to the same extent
as the laws of the United States, and there can be no assurance
that such laws will be enforced in an effective manner. Any
failure by us to enforce and protect our intellectual property
rights could have a material adverse effect on our business,
financial condition and results of operations. For further
information, see Managements Discussion and Analysis
of Financial Condition and Results of Operations 
Certain Factors Affecting Future Performance.

10



---



##### Table of Contents



Employees

As of December 28, 2002, we had
12,449 employees worldwide, including 1,682 in
engineering, research and development; 327 in marketing,
sales and customer technical support; 9,726 in
manufacturing; 397 in operational support; and 317 in
executive, general management and administration. As of
December 28, 2002, we had 8,759 employees at our
manufacturing facilities in Singapore, 1,186 employees at
our manufacturing facilities in California and
163 employees at our foreign sales offices. None of our
U.S. employees are currently represented by a labor
organization. In May 1997, our Singapore subsidiary recognized a
labor union, the United Workers of Electronic and Electrical
Industries (UWEEI), and in November 1998, signed a
three-year collective bargaining agreement with that union.
Thereafter, in September 2001, our Singapore subsidiary
concluded negotiations with the UWEEI and entered into a three
year collective bargaining agreement. We believe that our
employee relations are positive.

Executive Officers

The following table lists the names, ages,
positions and offices held by, and a brief account of the
business experience of, each executive officer of the Company as
of March 26, 2003. There are no family relationships
between any director or executive officer of the Company.
Executive officers serve at the discretion of the Board of
Directors.

|                            |  |     |    |                           |  |                                                                                       
|--------------------------- |  | --- | -- | ------------------------- |  | --------------------------------------------------------------------------------------
|Name                        |  | Age |    | Position with the Company
|                            |  |     |    |                          
|Paul J. Tufano              |  |     | 49 |                           |  | President, Chief Executive Officer and Acting
    Chief Financial Officer             
|Dr. Pantelis S. Alexopoulos |  |     | 54 |                           |  | Executive Vice President, Desktop Product
    Development and Chief Technology Officer
|Michael D. Cordano          |  |     | 38 |                           |  | Executive Vice President, Worldwide Sales and
    Corporate Marketing                 
|Phillip C. Duncan           |  |     | 52 |                           |  | Executive Vice President, Human Resources and
    Real Estate                         
|K. H. Teh                   |  |     | 48 |                           |  | Executive Vice President, Worldwide Manufacturing
    and Singapore Managing Director 
|Michael J. Wingert          |  |     | 42 |                           |  | Executive Vice President/General Manager, Server
    Products Group                   
|David L. Beaver             |  |     | 49 |                           |  | Senior Vice President, Worldwide Materials and
    Chief Procurement Officer          
|Misha Rozenberg             |  |     | 41 |                           |  | Senior Vice President, Worldwide Quality and
    Chief Quality Officer                
|Glenn H. Stevens            |  |     | 52 |                           |  | Senior Vice President, General Counsel and
    Secretary                              

Paul J. Tufanowas
appointed President and Chief Executive Officer and remained as
Acting Chief Financial Officer in February 2003. He had been our
Executive Vice President and Chief Operating Officer from April
2001 and Chief Financial Officer from July 1996. From November
1998 to his appointment as Chief Operating Officer,
Mr. Tufano served as our Senior Vice President, Finance.
From July 1996 to his appointment as Senior Vice President,
Finance, Mr. Tufano served as our Vice President, Finance.
From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM, including Manager of Worldwide Logistics for
IBMs storage systems division, Manager of Plans and
Controls for IBMs Desktop and Mobile Storage products
business unit, and Controller for IBMs San Jose,
California facility.

Dr. Pantelis S. Alexopoulosbecame the Executive Vice President,
Desktop Product Development in December 2002. He has been our
Chief Technology Officer since April 1997. He was also Executive
Vice President, Advanced Technology from November 2001 until
December 2002; and Vice President, Advanced Technology from
April 1997 until November 2001. Before joining us,
Dr. Alexopoulos was the Executive

11



---



##### Table of Contents



Director of Advanced Concepts at Seagate
Corporation, a hard disk drive company. He also spent
14 years at IBM in the research division.


Michael D. Cordanohas been our Executive Vice President,
Worldwide Sales and Corporate Marketing since August 2001. From
August 1999 until August 2001, Mr. Cordano served as our
Vice President, Worldwide Sales. From 1998 until August 1999, he
held the position of Vice President, Global Sales. Prior to
joining us in 1994, Mr. Cordano held various sales
positions at Conner Peripherals, Inc., a disk drive company.

Phillip C. Duncanhas been our Executive Vice President,
Human Resources and Real Estate since November 2001. From August
1996 until November 2001, Mr. Duncan served as our Vice
President, Human Resources and became Executive Vice President,
Human Resources and Real Estate in April 2001. From 1994 to
1996, he was Vice President, International Sales and Marketing
and Human Resources of Berkeley Systems, a software company.
From 1992 to 1994, he held senior human resources management
positions at SyQuest, a storage company and from 1990 to 1992;
he held similar positions at Cirrus Logic, a semiconductor
company.

K. H. Tehhas
been our Executive Vice President, Worldwide Manufacturing, and
Singapore Managing Director since November 2001. From May 1997
until November 2001, Mr. Teh served as our Vice President,
Worldwide Manufacturing and became Senior Vice President,
Manufacturing in April 2001. From 1996 to 1997, he was with
Iomega, a removable disk drive company, where he had been
Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was the Managing Director of Digital Equipment
Malaysia, a hard disk drive manufacturer and subsequently
Quantum Peripherals Malaysia, a hard disk drive manufacturer.
Prior to 1994, Mr. Teh held various senior management
positions in multinational corporations in Singapore.

Michael J. Wingerthas been our Executive Vice President/
General Manager, Server Products Group since November 2001. From
November 1999 until November 2001, Mr. Wingert served as
our Vice President, Desktop Engineering and became Senior Vice
President, Engineering in April 2001. Before his promotion to
Vice President, Desktop Engineering, he was our Vice President,
Engineering for five years. Prior to joining us in 1994,
Mr. Wingert held various senior management positions in
product testing and development at IBM.

David L. Beaverhas
been our Senior Vice President, Worldwide Materials and Chief
Procurement Officer since November 2001. From May 1998 until
November 2001, Mr. Beaver served as our Vice President,
Worldwide Materials and became Senior Vice President, Worldwide
Materials in April 2001. From March 1997 to May 1998,
Mr. Beaver was Vice President of Far East Materials and
Logistics in our Singapore factory. From 1994 to 1997, he was
Director of Operations and Materials at EMASS, an E-systems data
storage company. From 1991 to 1994, he was Director of Corporate
Materials Procurement at SyQuest, a storage company. He has over
20 years high tech data storage business management
experience.

Misha Rozenberghas
been our Senior Vice President, and Chief Quality Officer since
November 2001. From March 1998 until November 2001,
Mr. Rozenberg served as our Vice President, Quality and
became Senior Vice President, Worldwide Quality in April 2001.
From 1996 to 1998, he served as our Vice President, Supplier
Engineering. From 1994 to 1996, Mr. Rozenberg was a Senior
Director of Supplier Engineering with Conner Peripherals, Inc.
From 1990 to 1994, he was a Manager at Apple Computer.

Glenn H. Stevenshas
been our Vice President, General Counsel and Secretary since
June 1994 and became a Senior Vice President in April 2001. From
1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal
department of U S West, Inc., a telecommunications products
and services provider, including Chief Counsel and Secretary for
its research and development organization and Chief Intellectual
Property Counsel for the family of U S West companies.

Available Information

Our website address is http://www.maxtor.com. We
file reports with the Securities and Exchange Commission
(SEC), which we make available on our website free
of charge. These reports include annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to such

12



---



##### Table of Contents



reports, each of which is provided on our website
as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. You can also
read and copy any materials we file with the SEC at the
SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. You can obtain additional information
about the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website
(http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC, including us.







|        |           
|------- | ----------
|Item 2. | Properties

Our corporate headquarters, sales, marketing and
advanced technology operations are located in Milpitas,
California. We lease approximately 899,000 square feet in
this location. Of the 899,000 square feet,
427,000 support the previously stated ongoing operations.
Also in the 899,000 square feet is 472,000 of vacant
square feet of which 93,000 will expire in July 2003 and
31,000 is subleased for the remainder of the term. We lease
a 158,000 square foot facility in San Jose, California,
which we use for the engineering and manufacturing of disk drive
media, and we also leased an 180,000 square foot facility
in Milpitas, California, which expired in April 2002.

We also maintain 477,000 square feet of
engineering and pilot production operations as well as
administrative, marketing and materials facilities in Longmont,
Colorado. The Longmont facilities lease has a 15-year term and
is renewable for five years.

We occupy 672,000 square feet in Shrewsbury,
Massachusetts housing design and customer engineering, as well
as advanced technology. Maxtor owns the Shrewsbury facility and
a portion of that facility is currently subleased to tenants. We
also own and sublease an 180,000 square foot facility in
Louisville, Colorado. All of our other domestic facilities are
leased.

Operations outside of the United States primarily
consists of two manufacturing plants in Singapore that produce
subassemblies and final assemblies for the Companys hard
disk drive products. The manufacturing facilities are located in
two owned buildings in Singapore totaling approximately
560,000 square feet, which are located on two parcels of
leased land with leases terminating in 2016 and 2018, both with
an option to renew for 30 years. In February 2003, we
announced that we would build a new manufacturing facility in
the Suzhou Industrial Park in Suzhou, China. Construction began
in March 2003, and the approximately 800,000 square feet
facility is expected to be completed in the second half of 2004.
We have arranged financing for the facility and expect
documentation to be finalized in the next few weeks.

We also lease various sales and support
facilities in Australia, Canada, the Peoples Republic of
China, France, Germany, Hong Kong, Ireland, Japan, the Republic
of Korea, Scotland, Singapore, Switzerland, Taiwan, United
Kingdom and the United States. The aggregate rent under all of
our worldwide leases is currently $31.3 million per annum.
There can be no assurance that we will be able to obtain
additional space to accommodate our future needs or dispose of
excess space as required on reasonable terms.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Prior to our acquisition of the Quantum HDD
business, we, on the one hand, and Quantum and MKE, on the other
hand, were sued by Papst Licensing, GmbH, a German corporation,
for infringement of a number of patents that relate to hard disk
drives. Papsts complaint against Quantum and MKE was filed
on July 30, 1998, and Papsts complaint against Maxtor
was filed on March 18, 1999. Both lawsuits, filed in the
United States District Court for the Northern District of
California, were transferred by the Judicial Panel on
Multidistrict Litigation to the United States District Court for
the Eastern District of Louisiana for coordinated pre-trial
proceedings with other pending litigations involving the Papst
patents (the MDL Proceeding). The matters will be
transferred back to the District Court for the Northern District
of California for trial. Papsts infringement allegations
are based on spindle motors that Maxtor and Quantum purchased
from third party motor vendors, including MKE, and the use of
such spindle motors in hard disk drives. We purchased the
overwhelming majority of the spindle motors used in our hard
disk drives from vendors that were licensed under the Papst
patents. Quantum purchased many spindle motors used in its hard

13



---



##### Table of Contents



disk drives from vendors that were not licensed
under the Papst patents, including MKE. As a result of our
acquisition of the Quantum HDD business, we assumed
Quantums potential liabilities to Papst arising from the
patent infringement allegations Papst asserted against Quantum.
We filed a motion to substitute the Company for Quantum in this
litigation. The motion was denied by the Court presiding over
the MDL Proceeding, without prejudice to being filed again in
the future.


In February, 2002, Papst and MKE entered into an
agreement to settle Papsts pending patent infringement
claims against MKE. That agreement includes a license of certain
Papst patents to MKE which might provide Quantum, and thus us,
with additional defenses to Papsts patent infringement
claims.

On April 15, 2002, the Judicial Panel on
Multidistrict Litigation ordered a separation of claims and
remand to the District of Columbia of certain claims between
Papst and another party involved in the MDL Proceeding. By order
entered June 4, 2002, the court stayed the MDL Proceeding
pending resolution by the District of Columbia court of the
remanded claims. These separated claims relating to the other
party are currently proceeding in the District Court for the
District of Columbia.

The results of any litigation are inherently
uncertain and Papst may assert other infringement claims
relating to current patents, pending patent applications, and/or
future patent applications or issued patents. Additionally, we
cannot assure you we will be able to successfully defend
ourselves against this or any other Papst lawsuit. Because the
Papst complaints assert claims to an unspecified dollar amount
of damages, and because we were at an early stage of discovery
when the litigation was stayed, we are unable to determine the
possible loss, if any, that we may incur as a result of an
adverse judgment or a negotiated settlement with respect to the
claims against Maxtor. We have made an estimate of the potential
liabilities which might arise from the Papst claims against
Quantum at the time of the acquisition of the Quantum HDD
business. Our estimate will be revised as additional information
becomes available. A favorable outcome for Papst in these
lawsuits could result in the issuance of an injunction against
us and our products and/or the payment of monetary damages equal
to a reasonable royalty. In the case of a finding of a willful
infringement, we also could be required to pay treble damages
and Papsts attorneys fees. The litigation could
result in significant diversion of time by our technical
personnel, as well as substantial expenditures for future legal
fees. Accordingly, although we cannot currently estimate whether
there will be a loss, or the size of any loss, a litigation
outcome favorable to Papst could have a material adverse effect
on our business, financial condition and operating results.
Management believes that it has valid defenses to the claims of
Papst and is defending this matter vigorously.

In addition to the Papst lawsuit, on
June 13, 2002, we filed suit against Koninklijke Philips
Electronics N.V. and several other Philips-related companies in
the Superior Court of California, County of Santa Clara. On
June 26, 2002, we filed a First Amended Complaint. The
lawsuit alleges that an integrated circuit chip supplied by
Philips was defective and caused significant levels of failure
of the Quantum HDD Corona Plus, Eagle, and Eagle Plus products,
each of which is a product line we acquired as part of our
acquisition of the Quantum HDD business. Philips
subsequent motions to dismiss were withdrawn or denied. Philips
answered the complaint on March 13, 2003. Discovery is
ongoing. In the lawsuit, we are claiming damages of at least
$77 million, however, the results of litigation are
inherently uncertain and we cannot assure you that we will
achieve a favorable outcome.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of our
security holders during the fourth quarter of our fiscal year
ended December 28, 2002.

14



---



##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Since April 30, 2001, our common stock has
been traded on the New York Stock Exchange under the symbol
MXO. From July 31, 1998 to April 30, 2001,
our stock had been traded on the Nasdaq National Market under
the symbol MXTR. The table below sets forth the
range of quarterly high and low sales prices for our common
stock as reported by the New York Stock Exchange and the Nasdaq
National Market. Our fiscal year end is the last Saturday of
December, conforming to a 52/ 53-week year methodology.

|                                                       |  |      |      |     |  |   |      | 
|------------------------------------------------------ |  | ---- | ---- | --- |  | - | ---- | 
|                                                       |  | High |      | Low
|                                                       |  |      |      |    
|Fiscal 2003 First Quarter (through March 24,
    2003) |  | $    | 6.90 |     |  | $ | 4.71 | 
|Fiscal 2002 Fourth Quarter                             |  |      | 6.16 |     |  |   | 1.77 | 
|Fiscal 2002 Third Quarter                              |  |      | 5.95 |     |  |   | 2.61 | 
|Fiscal 2002 Second Quarter                             |  |      | 7.58 |     |  |   | 3.95 | 
|Fiscal 2002 First Quarter                              |  |      | 7.90 |     |  |   | 5.75 | 
|Fiscal 2001 Fourth Quarter                             |  |      | 7.20 |     |  |   | 3.54 | 
|Fiscal 2001 Third Quarter                              |  |      | 7.33 |     |  |   | 3.30 | 
|Fiscal 2001 Second Quarter                             |  |      | 8.38 |     |  |   | 5.25 | 
|Fiscal 2001 First Quarter                              |  |      | 8.50 |     |  |   | 5.09 | 

As of March 1, 2003, there were
approximately 1,140 stockholders of record of our common stock
including The Depository Trust Company, which holds shares of
Maxtor common stock on behalf of an indeterminate number of
beneficial owners.

Dividend Policy

We have never paid cash dividends on our stock
and do not anticipate paying cash dividends in the foreseeable
future.

15



---



##### Table of Contents






Item 6.     Selected
Consolidated Financial Information

The following table presents the consolidated
financial information for the periods indicated:

|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |         |       | 
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------- | ------- | ----------- | ----- | ------------ | ------- | ------------ | ----- | ------------ | ------- | ------- | ----- | - | ------- | ------- | ----- | - | ------- | ------- | ----- | 
|                                                                 |                                                          | Fiscal Year                                       |         | Fiscal Year |       | Fiscal Year  |         | Fiscal Year  |       | Fiscal Year 
|                                                                 |                                                          | Ended                                             |         | Ended       |       | Ended        |         | Ended        |       | Ended       
|                                                                 |                                                          | December 26,                                      |         | January 1,  |       | December 30, |         | December 29, |       | December 28,
|                                                                 |                                                          | 1998                                              |         | 2000        |       | 2000         |         | 2001(2)      |       | 2002(3)     
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |             
|                                                                 |                                                          |                                                  
|                                                                 |                                                          | (In millions, except share and per share amounts)
|Consolidated Statements of Operations
    Data:                  |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Revenues                                                         |                                                          | $                                                 | 2,408.5 |             |       | $            | 2,485.6 |              |       | $            | 2,690.9 |         |       | $ | 3,765.5 |         |       | $ | 3,779.5 |        
|Cost of revenues                                                 |                                                          |                                                   | 2,108.1 |             |       |              | 2,286.7 |              |       |              | 2,317.7 |         |       |   | 3,403.0 |         |       |   | 3,382.1 |        
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|                                                                 | Gross profit                                             |                                                   |         | 300.4       |       |              |         | 198.9        |       |              |         | 373.2   |       |   |         | 362.5   |       |   |         | 397.4   |      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Operating expenses:                                              |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|                                                                 | Research and development                                 |                                                   |         | 158.4       | (1)   |              |         | 189.0        |       |              |         | 211.8   |       |   |         | 411.2   |       |   |         | 401.0   |      
|                                                                 | Selling, general and administrative                      |                                                   |         | 81.9        | (1)   |              |         | 90.2         |       |              |         | 99.7    |       |   |         | 232.0   |       |   |         | 148.5   |      
|                                                                 | Amortization of goodwill and other intangible
    assets |                                                   |         |            |       |              |         |             |       |              |         |        |       |   |         | 207.8   |       |   |         | 82.2    |      
|                                                                 | Purchased in-process research and development            |                                                   |         |            |       |              |         |             |       |              |         |        |       |   |         | 95.2    |       |   |         |        |      
|                                                                 | Restructuring charge                                     |                                                   |         |            |       |              |         |             |       |              |         |        |       |   |         |        |       |   |         | 9.5     |      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|                                                                 |                                                          | Total operating expenses                          |         |             | 240.3 | (1)          |         |              | 279.2 |              |         |         | 311.5 |   |         |         | 946.2 |   |         |         | 641.2 | 
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Income (loss) from operations                                    |                                                          |                                                   | 60.1    | (1)         |       |              | (80.3   | )            |       |              | 61.7    |         |       |   | (583.7  | )       |       |   | (243.8  | )      
|Interest expense                                                 |                                                          |                                                   | (28.8   | )           |       |              | (13.6   | )            |       |              | (13.7   | )       |       |   | (25.2   | )       |       |   | (27.0   | )      
|Interest and other income                                        |                                                          |                                                   | 7.4     |             |       |              | 15.6    |              |       |              | 24.3    |         |       |   | 21.5    |         |       |   | 10.1    |        
|Gain (loss) on sale of investment                                |                                                          |                                                   |        |             |       |              | 44.1    |              |       |              | 1.8     |         |       |   | (7.4    | )       |       |   | 2.3     |        
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Income (loss) from continuing operations
    before income taxes |                                                          |                                                   | 38.7    | (1)         |       |              | (34.2   | )            |       |              | 74.1    |         |       |   | (594.8  | )       |       |   | (258.4  | )      
|Provision for income taxes                                       |                                                          |                                                   | 7.5     |             |       |              | 1.5     |              |       |              | 1.7     |         |       |   | 3.4     |         |       |   | 2.2     |        
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Income (loss) from continuing operations                         |                                                          |                                                   | 31.2    |             |       |              | (35.7   | )            |       |              | 72.4    |         |       |   | (598.2  | )       |       |   | (260.6  | )      
|Loss from discontinued operations                                |                                                          |                                                   |        |             |       |              | (14.4   | )            |       |              | (40.6   | )       |       |   | (48.2   | )       |       |   | (73.5   | )      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Net income (loss)                                                |                                                          | $                                                 | 31.2    | (1)         |       | $            | (50.1   | )            |       | $            | 31.8    |         |       | $ | (646.4  | )       |       | $ | (334.1  | )      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Net income (loss) per share  basic                              |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Continuing operations                                            |                                                          | $                                                 | 0.81    |             |       | $            | (0.34   | )            |       | $            | 0.64    |         |       | $ | (2.89   | )       |       | $ | (1.09   | )      
|Discontinued operations                                          |                                                          |                                                   |        |             |       |              | (0.14   | )            |       |              | (0.36   | )       |       |   | (0.23   | )       |       |   | (0.31   | )      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Total                                                            |                                                          | $                                                 | 0.81    |             |       | $            | (0.48   | )            |       | $            | 0.28    |         |       | $ | (3.12   | )       |       | $ | (1.40   | )      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Net income (loss) per share 
    diluted                        |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Continuing operations                                            |                                                          | $                                                 | 0.47    |             |       | $            | (0.34   | )            |       | $            | 0.61    |         |       | $ | (2.89   | )       |       | $ | (1.09   | )      
|Discontinued operations                                          |                                                          |                                                   |        |             |       |              | (0.14   | )            |       |              | (0.34   | )       |       |   | (0.23   | )       |       |   | (0.31   | )      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Total                                                            |                                                          | $                                                 | 0.47    |             |       | $            | (0.48   | )            |       | $            | 0.27    |         |       | $ | (3.12   | )       |       | $ | (1.40   | )      
|                                                                 |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|Shares used in per share calculation (in
    thousands):         |                                                          |                                                   |         |             |       |              |         |              |       |              |         |         |       |   |         |         |       |   |         |        
|                                                                 | Basic                                                    |                                                   |         | 38,295      |       |              |         | 105,503      |       |              |         | 113,433 |       |   |         | 206,912 |       |   |         | 239,474 |      
|                                                                 | Diluted                                                  |                                                   |         | 65,814      |       |              |         | 105,503      |       |              |         | 119,116 |       |   |         | 206,912 |       |   |         | 239,474 |      

16



---



##### Table of Contents



|                           |  |                                                   |       |             |  |              |       |              |  |              |         |  |  |   |         |  |  |   |         | 
|-------------------------- |  | ------------------------------------------------- | ----- | ----------- |  | ------------ | ----- | ------------ |  | ------------ | ------- |  |  | - | ------- |  |  | - | ------- | 
|                           |  | Fiscal Year                                       |       | Fiscal Year |  | Fiscal Year  |       | Fiscal Year  |  | Fiscal Year 
|                           |  | Ended                                             |       | Ended       |  | Ended        |       | Ended        |  | Ended       
|                           |  | December 26,                                      |       | January 1,  |  | December 30, |       | December 29, |  | December 28,
|                           |  | 1998                                              |       | 2000        |  | 2000         |       | 2001(2)      |  | 2002(3)     
|                           |  |                                                   |       |             |  |              |       |              |  |             
|                           |  |                                                  
|                           |  | (In millions, except share and per share amounts)
|Balance Sheet Data:        |  |                                                   |       |             |  |              |       |              |  |              |         |  |  |   |         |  |  |   |         | 
|Total assets               |  | $                                                 | 863.4 |             |  | $            | 906.3 |              |  | $            | 1,024.9 |  |  | $ | 2,715.5 |  |  | $ | 2,360.8 | 
|Total current liabilities  |  |                                                   | 548.9 |             |  |              | 537.2 |              |  |              | 628.9   |  |  |   | 1,169.8 |  |  |   | 1,166.6 | 
|Long-term debt             |  |                                                   | 145.0 |             |  |              | 113.8 |              |  |              | 92.3    |  |  |   | 244.5   |  |  |   | 206.3   | 
|Total stockholders equity |  |                                                   | 169.4 |             |  |              | 255.3 |              |  |              | 303.7   |  |  |   | 900.2   |  |  |   | 592.3   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Total operating expenses, income from operations,
    income before income taxes and net income for the year ended
    December 26, 1998 includes a $12.1 million
    compensation charge related to certain variable accounting
    features of our option plan. See note 13 of Notes to
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Includes operations of Quantum HDD since
    April 2, 2001 and of MMC since September 2, 2001. See
    note 7 of Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | Commencing in fiscal 2002, the Company adopted
    Statement of Financial Accounting Standards No. 142,
    Goodwill and Other Intangible Assets
    (SFAS 142). SFAS 142 requires, among other
    things, the discontinuance of goodwill amortization. In
    addition, the standard included provisions upon adoption for the
    reclassification of certain existing recognized intangibles as
    goodwill, reassessment of the useful lives of existing
    recognized intangibles, reclassification of certain intangibles
    out of previously reported goodwill and the testing for
    impairment of existing goodwill and other intangibles. As a
    result, the Company reclassified its existing acquired assembled
    workforce balance to goodwill, as it does not meet the separate
    recognition criterion according to SFAS 142. See
    note 12 of Notes to Consolidated Financial Statements.

17



---



##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in
conjunction with Item 1: Business, Item 6: Selected
Financial Information and Item 8: Consolidated Financial
Statements and Supplementary Data.

This report contains forward-looking
statements within the meaning of the U.S. federal securities
laws that involve risks and uncertainties. The statements
contained in this report that are not purely historical,
including, without limitation, statements regarding our
expectations, beliefs, intentions or strategies regarding the
future, are forward-looking statements. Examples of
forward-looking statements in this report include statements
regarding our expectations as to average selling prices, demand
for our products, capital expenditures, improved profitability,
improved working capital position, liquidity, litigation, and
our relationships with vendors. In this report, the words
anticipates, believe,
expect, intend, may,
will, should, plan,
estimate, predict,
potential, future, continue,
or similar expressions also identify forward-looking statements.
These statements are only predictions. We make these
forward-looking statements based upon information available on
the date hereof, and we have no obligation (and expressly
disclaim any such obligation) to update or alter any such
forward-looking statements, whether as a result of new
information, future events, or otherwise. Our actual results
could differ materially from those anticipated in this report as
a result of certain factors including, but not limited to, those
set forth in the following section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Certain Factors
Affecting Future Performance and elsewhere in this
report.

Overview

Maxtor Corporation (Maxtor or the
Company) was founded in 1982 and completed an
initial public offering of common stock in 1986. In 1994, we
sold 40% of our outstanding common stock to Hyundai Electronics
Industries (now Hynix Semiconductors
Inc.  HSI) and its affiliates. In
early 1996, Hyundai Electronics America (now Hynix Semiconductor
America Inc.  Hynix) acquired all of the
remaining publicly held shares of our common stock as well as
all of our common stock, then held by Hynix Semiconductor, Inc.
and its affiliates. In February 1999, we completed a public
offering of 7.8 million shares of our common stock with net
proceeds to us of approximately $95.8 million.

On April 2, 2001, we acquired Quantum
Corporations Hard Disk Drive Group (Quantum
HDD). The primary reason for our acquisition of Quantum
HDD was to create a stronger, more competitive company, with
enhanced prospects for continued viability in the storage
industry. For additional information regarding the Quantum HDD
acquisition, see note 7 of the Notes to Consolidated
Financial Statements.

On September 2, 2001, we completed the
acquisition of MMC Technology, Inc. (MMC), a
wholly-owned subsidiary of Hynix. MMC, based in San Jose,
California, designs, develops and manufactures media for hard
disk drives. Prior to the acquisition, sales to Maxtor comprised
95% of MMCs annual revenues. The primary reason for our
acquisition of MMC was to provide us with a reliable source of
supply of media. For additional information regarding the MMC
acquisition, see note 7 of the Notes to Consolidated
Financial Statements.

On October 9, 2001, Hynix sold 23,329,843
shares (including exercise of the underwriters
over-allotment) of Maxtor common stock in a registered public
offering. Maxtor did not receive any proceeds from Hynixs
sale of Maxtor stock to the public. In addition, at the same
time and on the same terms as Hynixs sale of Maxtor stock
to the public, we repurchased 5.0 million shares from Hynix
for an aggregate purchase price of $20.0 million. These
repurchased shares are being held as treasury shares.

On August 15, 2002 we announced our decision
to shut down the manufacturing and sale of our
MaxAttachTM branded network attached storage products
of our Network Systems Group (NSG). We worked with
NSG customers for an orderly wind down of the business. The
network attached storage market had fragmented since our
entrance in 1999, with one segment of the NAS market becoming
more commoditized and the other segment placing us in
competition with some of our hard disk drive customers. We
believe the shut down of the operations of our NSG business will
allow us to focus on our core hard disk drive market and further
reduce expenses. The NSG business was accounted for as a
discontinued operation

18



---



##### Table of Contents



and therefore, results of operations and cash
flows have been removed from our results of continuing
operations for all periods presented in this report. For
additional information regarding the NSG discontinued
operations, see note 5 of the Notes to Consolidated
Financial Statements.


Critical Accounting Policies

Our discussion and analysis of the companys
financial condition and results of operations are based upon
Maxtors consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires management to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we
evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.

We believe the following critical accounting
policies represent our significant judgments and estimates used
in the preparation of the companys consolidated financial
statements:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | revenue recognition;                                                              
|
| |  | sales returns, other sales allowances and the
    allowance for doubtful accounts;
|
| |  | valuation of intangibles, long-lived assets and
    goodwill;                     
|
| |  | warranty;                                                                         
|
| |  | inventory reserves;                                                               
|
| |  | income taxes; and                                                                 
|
| |  | restructuring liabilities, litigation and other
    contingencies.                



| |                    
| | -------------------
| | Revenue Recognition

We derive our revenue from the sale of our
products. As described below, significant management judgments
and estimates must be made and used in connection with the
revenue recognized in any accounting period with respect to the
amount of reserves for sales returns, allowances and doubtful
accounts. Material differences may result in the amount and
timing of our revenue for any period if our management made
different judgments or utilized different estimates.

In recognizing revenue in any period, we apply
the provisions of Staff Accounting Bulletin 101 Revenue
Recognition.

We recognize revenue from the sale of our
products when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed and determinable
and collection of the resulting receivable is reasonably
assured; this generally occurs upon shipment.

For all sales we use either a binding purchase
order or signed purchase agreement as evidence of an
arrangement. Sales through our distributors are evidenced by a
master agreement governing the relationship together with
binding purchase orders on a transaction-by-transaction basis.
Our arrangements generally do not include acceptance clauses.

We assess collection based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. We do not request
collateral from our customers.

Delivery generally occurs when product is
delivered to a common carrier. Certain of our products are
delivered on an FOB destination basis. We defer our revenue
associated with these transactions until the delivery has
occurred to the customers premises.

19



---



##### Table of Contents



Sales to original equipment manufacturers
(OEMs) are subject to agreements allowing limited
rights of return and sales incentive programs. Sales incentive
programs are typically related to an OEMs level of
purchases. Estimated reductions to revenue for sales incentive
programs are provided at the time the revenue is recorded.
Returns from OEMs have not been material in any period as the
Companys principal OEM customers have adopted
build-to-order manufacturing model or just-in-time inventory
management processes.

Sales to distributors and retailers
(resellers) are subject to agreements allowing
limited rights of return, price protection, sales incentive
programs and advertising. These programs are generally related
to a resellers level of sales, order size or point of sale
activity. The Company provides for these programs as deductions
from revenues at the time the revenue is recorded based on
estimated requirements. These estimates are based primarily on
estimated future price erosion, customer sell-through levels and
program participation. Such estimates are adjusted periodically
to reflect actual and anticipated experience.

Estimated product returns are provided in
accordance with SFAS No. 48, Revenue Recognition When
Right of Return Exists. Resellers have limited rights of
return which allow them to return a percentage of the prior
quarters purchases by these resellers. Accordingly,
revenue is not recognized with respect to those shipments which
management estimates will be returned. The Company believes that
these estimates are reasonably accurate due to the short time
period during which the Companys resellers can return
products, the limitations placed on their right to make returns,
the Companys long history of conducting business with
resellers on a sell-in basis, the nature of the Companys
historical relationships with resellers and the weekly reporting
procedures through which the Company monitors inventory levels
at resellers and sales to end-users.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Sales Returns, Other Sales Allowances and
    Allowance for Doubtful Accounts

Our management must make estimates of potential
future product returns related to current period product
revenue. Management analyzes historical returns, current
economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales
returns and other allowances. Significant management judgments
and estimates must be made and used in connection with
establishing the sales returns and other allowances in any
accounting period. The Company believes that these estimates are
reasonably accurate due to the short time period during which
the Companys resellers can return products, the
limitations placed on their right to make returns, the
Companys long history of conducting business with
resellers on a sell-in basis, the nature of the Companys
historical relationships with resellers and the weekly reporting
procedures through which the Company monitors inventory levels
at resellers and sales to end-users. Nonetheless, material
differences may result in the amount and timing of our revenue
for any period if management made different judgments or
utilized different estimates. The provision for sales returns
and other allowances amounted to $82.9 million as of
December 28, 2002. Similarly, our management must make
estimates of the uncollectability of our accounts receivables.
Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Our allowance for doubtful
accounts was $18.3 million as of December 28, 2002. If
the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances would be required.



| |                                                             
| | ------------------------------------------------------------
| | Valuation of Intangibles, Long-Lived Assets
    and Goodwill

We assess the impairment of identifiable
intangibles, long-lived assets and goodwill whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | significant under-performance relative to
    expected historical or projected future operating results;         
|
| |  | significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                                

20



---



##### Table of Contents





| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | significant decline in our stock price for a
    sustained period; and
|
| |  | our market capitalization relative to net book
    value.             

When we determine that the carrying value of
intangibles, long-lived assets and goodwill may not be
recoverable based upon the existence of one or more of the above
indicators of impairment, we measure the potential impairment
based on a projected cash flow method. Net intangible assets,
long-lived assets, and goodwill amounted to
$1,337.5 million as of December 28, 2002.

As required by SFAS No. 142, we completed
our impairment analysis as of January 1, 2002, upon our
adoption of SFAS 142, and our annual review as of
December 28, 2002. We found no instances of impairment of
our recorded goodwill on both dates and accordingly no
impairment was recorded.



| |         
| | --------
| | Warranty

We provide for the estimated cost of product
warranties at the time revenue is recognized. We generally
warrant our products for a period of one to five years. While we
engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our
component suppliers, our warranty obligation is affected by
product failure rates, material usage and service delivery costs
incurred in correcting a product failure. We use proprietary
statistical modeling software to help estimate the future
failure rates by product. As new products are sold to the
market, we must exercise considerable judgment in estimating the
expected failure rates. This estimating process is based on
historical experience of similar products as well as various
other assumptions, such as design or assembly complexities, that
are believed to be reasonable under the circumstances. We also
apply the same estimating techniques to product warranty
liabilities assumed from acquisitions. Should actual product
failure rates, material usage or service delivery costs differ
from our estimates, revisions to the estimated warranty
liability would be required and could materially affect our
future results of operations.

From time to time, we may be subject to
additional costs related to warranty claims from our customers.
If and when this occurs, we generally must make significant
judgments and estimates in establishing the related warranty
liability. This estimating process is based on historical
experience, communication with our customers and various
assumptions that are believed to be reasonable under the
circumstances. This additional warranty reserve would be
recorded in the determination of net income in the period in
which the additional cost was identified.



| |                   
| | ------------------
| | Inventory Reserves

We establish reserves to state our inventory at
the lower of cost (computed on a first-in, first-out basis) or
market. We write down our inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the
cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by
management, additional inventory write-downs may be required
which could materially affect our future results of operations.



| |             
| | ------------
| | Income Taxes

We account for income taxes in accordance with
Statement of Financial Accounting Standard No. 109
(SFAS 109), Accounting for Income
Taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate
our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current
tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not
likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in
a period, we must include an expense within the tax provision in
the statement of operations.

21



---



##### Table of Contents



In accordance with Emerging Issues Task Force
(EITF) 93-7 Uncertainties Related to
Income Taxes in a Purchase Business Combination, we have
recorded approximately $196.4 million of deferred tax
liabilities in connection with the acquisition of Quantum HDD.
We recorded this amount principally to reflect the taxes which
would become payable upon repatriation of the cash which was
invested abroad for Quantum HDD as of April 2, 2001.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a
valuation allowance of $384.4 million as of
December 28, 2002, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. The valuation allowance
is based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results
differ from these estimates or we adjust these estimates in
future periods we may need to establish an additional valuation
allowance which could materially impact our financial position
and results of operations.



| |                                                                  
| | -----------------------------------------------------------------
| | Restructuring Liabilities, Litigation and
    Other Contingencies

We account for our restructuring liabilities in
connection with business combination in accordance with
EITF 95-3 Recognition of Liabilities in Connection
with a Purchase Business Combination. EITF 95-3
requires that we record an estimated liability if the estimated
costs are not associated with or are not incurred to generate
revenues of the combined entity after the consummation date and
they meet certain criteria defined within EITF 95-3. We
accounted for restructuring liabilities initiated in 2002 in
accordance with EITF 94-3 Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring), which requires us to record the liability
resulting from estimated costs that are not associated with or
do not benefit activities that will be continued. We account for
litigation and contingencies in accordance with SFAS No. 5,
Accounting for Contingencies. SFAS No. 5
requires that we record an estimated loss from a loss
contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset
has been impaired or a liability has been incurred at the date
of the financial statements and the amount of loss can be
reasonably estimated. While we believe that our accruals for
these matters are adequate, if the actual losses from loss
contingencies or restructuring liabilities are significantly
different than the estimated loss, our results of operations may
be materially affected.

22



---



##### Table of Contents



|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |       |       | 
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------- | ------------ | ----- | ------------ | ------- | ----- | ----- | - | ------- | ----- | ----- | 
|                                                                 |                                                          |                         
|                                                                 |                                                          | Years Ended             
|                                                                 |                                                          |                         
|                                                                 |                                                          | December 30,             |         | December 29, |       | December 28,
|                                                                 |                                                          | 2000                     |         | 2001         |       | 2002        
|                                                                 |                                                          |                          |         |              |       |             
|                                                                 |                                                          |                         
|                                                                 |                                                          | (In millions)           
|Consolidated Statement of Operations
    Data:                   |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|Revenues                                                         |                                                          | $                        | 2,690.9 |              |       | $            | 3,765.5 |       |       | $ | 3,779.5 |      
|Cost of revenues                                                 |                                                          |                          | 2,317.7 |              |       |              | 3,403.0 |       |       |   | 3,382.1 |      
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|                                                                 | Gross profit                                             |                          |         | 373.2        |       |              |         | 362.5 |       |   |         | 397.4 |      
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|Operating expenses:                                              |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|                                                                 | Research and development                                 |                          |         | 211.8        |       |              |         | 411.2 |       |   |         | 401.0 |      
|                                                                 | Selling, general and administrative                      |                          |         | 99.7         |       |              |         | 232.0 |       |   |         | 148.5 |      
|                                                                 | Amortization of goodwill and other intangible
    assets |                          |         |             |       |              |         | 207.8 |       |   |         | 82.2  |      
|                                                                 | Purchased in-process research and development            |                          |         |             |       |              |         | 95.2  |       |   |         |      |      
|                                                                 | Restructuring charge                                     |                          |         |             |       |              |         |      |       |   |         | 9.5   |      
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|                                                                 |                                                          | Total operating expenses |         |              | 311.5 |              |         |       | 946.2 |   |         |       | 641.2 | 
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|Income (loss) from operations                                    |                                                          |                          | 61.7    |              |       |              | (583.7  | )     |       |   | (243.8  | )    
|Interest expense                                                 |                                                          |                          | (13.7   | )            |       |              | (25.2   | )     |       |   | (27.0   | )    
|Interest and other income                                        |                                                          |                          | 24.3    |              |       |              | 21.5    |       |       |   | 10.1    |      
|Gain (loss) on sale of investment                                |                                                          |                          | 1.8     |              |       |              | (7.4    | )     |       |   | 2.3     |      
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|Income (loss) from continuing operations
    before income taxes |                                                          |                          | 74.1    |              |       |              | (594.8  | )     |       |   | (258.4  | )    
|Provision for income taxes                                       |                                                          |                          | 1.7     |              |       |              | 3.4     |       |       |   | 2.2     |      
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|Income (loss) from continuing operations                         |                                                          |                          | 72.4    |              |       |              | (598.2  | )     |       |   | (260.6  | )    
|Loss from discontinued operations                                |                                                          |                          | (40.6   | )            |       |              | (48.2   | )     |       |   | (73.5   | )    
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      
|Net income (loss)                                                |                                                          | $                        | 31.8    |              |       | $            | (646.4  | )     |       | $ | (334.1  | )    
|                                                                 |                                                          |                          |         |              |       |              |         |       |       |   |         |      

|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |      |      | 
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ----- | ------------ | ---- | ------------ | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                                                 |                                                          |                         
|                                                                 |                                                          | Years Ended             
|                                                                 |                                                          |                         
|                                                                 |                                                          | December 30,             |       | December 29, |      | December 28,
|                                                                 |                                                          | 2000                     |       | 2001         |      | 2002        
|                                                                 |                                                          |                          |       |              |      |             
|As a Percentage of Revenue:                                      |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|Revenue                                                          |                                                          |                          | 100.0 | %            |      |              | 100.0 | %    |      |  | 100.0 | %   
|Cost of revenue                                                  |                                                          |                          | 86.1  |              |      |              | 90.4  |      |      |  | 89.5  |     
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|                                                                 | Gross profit                                             |                          |       | 13.9         |      |              |       | 9.6  |      |  |       | 10.5 |     
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|Operating expenses:                                              |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|                                                                 | Research and development                                 |                          |       | 7.9          |      |              |       | 10.9 |      |  |       | 10.6 |     
|                                                                 | Selling, general and administrative                      |                          |       | 3.7          |      |              |       | 6.2  |      |  |       | 3.9  |     
|                                                                 | Amortization of goodwill and other intangible
    assets |                          |       |             |      |              |       | 5.5  |      |  |       | 2.2  |     
|                                                                 | Purchased in-process research and development            |                          |       |             |      |              |       | 2.5  |      |  |       |     |     
|                                                                 | Restructuring charge                                     |                          |       |             |      |              |       |     |      |  |       | 0.3  |     
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|                                                                 |                                                          | Total operating expenses |       |              | 11.6 |              |       |      | 25.1 |  |       |      | 17.0 | 
|Income (loss) from operations                                    |                                                          |                          | 2.3   |              |      |              | (15.5 | )    |      |  | (6.5  | )   
|Interest expense                                                 |                                                          |                          | (0.5  | )            |      |              | (0.7  | )    |      |  | (0.7  | )   
|Interest and other income                                        |                                                          |                          | 0.9   |              |      |              | 0.6   |      |      |  | 0.3   |     
|Gain (loss) on sale of investment                                |                                                          |                          | 0.1   |              |      |              | (0.2  | )    |      |  | 0.1   |     
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|Income (loss) from continuing operations
    before income taxes |                                                          |                          | 2.8   |              |      |              | (15.8 | )    |      |  | (6.8  | )   
|Provision for income taxes                                       |                                                          |                          | 0.1   |              |      |              | 0.1   |      |      |  | 0.1   |     
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|Income (loss) from continuing operations                         |                                                          |                          | 2.7   |              |      |              | (15.9 | )    |      |  | (6.9  | )   
|Loss from discontinued operations                                |                                                          |                          | (1.5  | )            |      |              | (1.3  | )    |      |  | (1.9  | )   
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     
|Net income (loss)                                                |                                                          |                          | 1.2   | %            |      |              | (17.2 | )%   |      |  | (8.8  | )%  
|                                                                 |                                                          |                          |       |              |      |              |       |      |      |  |       |     

23



---



##### Table of Contents



Fiscal Year 2002 Compared With Fiscal Year
2001

Revenues.In fiscal
year 2002, we generated revenue of $3,779.5 million
compared to $3,765.5 million in fiscal year 2001, an
increase of 0.4%. Total shipments in fiscal year 2002 were
51.3 million units compared to 45.1 million units in
fiscal year 2001, a 13.7% increase. The increase in unit volume
in fiscal year 2002 compared to fiscal year 2001 was primarily
due to the acquisition of the Quantum HDD business occurring in
April 2001, which resulted in fiscal 2001 having one less
quarter of contribution from the Quantum HDD business than
fiscal 2002. We also successfully introduced several next
generation products during fiscal year 2002, which contributed
to the overall increase in unit sales and the slight increase in
revenue. The positive effect of the Quantum HDD business on
fiscal 2002 unit volume was offset by the slowdown in demand for
PCs and servers and the resulting reduced demand for hard disk
drives and difficulties in ramping up production of next
generation products in the third quarter of 2002. The slight
increase in revenue was primarily due to the full year
contribution from the Quantum HDD business in 2002 compared to
nine months contribution in 2001. This increase was offset
by declining average selling prices in the PC and server markets
during the first three fiscal quarters of 2002 as a result of
the economic slowdown, and our difficulties in ramping up
production of our new products in the third quarter of 2002.

Revenue did not increase at the same rate
compared to unit shipments in 2002. This was primarily the
result of the decline in average selling prices in the first
three fiscal quarters of 2002 due to pricing pressures in the
desktop computer market. We have historically experienced
seasonal fluctuation in sales volume with a decline typically
occurring in the second quarter of the year.

Revenue on a proforma basis (that is, calculating
revenue as if we had acquired Quantum HDD on January 1,
2001) was $3,779.5 million in fiscal year 2002, compared to
$4,418.6 million in fiscal year 2001, representing a
decline of 14.5% on a proforma basis. Although this pro forma
presentation does not purport to be indicative of what would
have occurred, we believe the decline on a proforma basis was
primarily due to the overall slowdown in demand for hard disk
drives and the pricing pressures in the desktop computer market
in the first three fiscal quarters of 2002.

Sales to the top five customers represented 31.8%
and 34.1% of revenue in fiscal years 2002 and 2001,
respectively. Sales to one customer were 11.5% and 11.3% of
revenue in fiscal years 2002 and 2001; only one customer
represented more than 10% of our sales in those years.

Revenue from sales to computer equipment
manufacturers represented 48.0% and 55.4% of revenue in fiscal
years 2002 and 2001, respectively. The decrease in 2002 was
primarily due to increased sales to our distribution channel and
retail customers that represented 52.0% and 44.6% of revenue in
fiscal years 2002 and 2001, respectively. Revenue from sales to
computer equipment manufacturers decreased in absolute dollars
by 15.2% in fiscal year 2002 from fiscal year 2001, while
revenue from sales to distribution channel and retail customers
increased by 17.3% in fiscal year 2002 from fiscal year 2001.
The significant increase in revenue from sales to the
distribution channel is attributable primarily to our Quantum
HDD acquisition and the growth of non-branded PC customers
market share of the overall current desktop PC market and our
effort to accommodate this growth.

Domestic revenue represented 36.3% and 42.0% of
total sales in fiscal year 2002 and 2001, respectively.
International revenue represented 63.7% and 58.0% of total sales
in fiscal year 2002 and 2001, respectively. Our revenue from
international sales increased primarily due to our acquisition
of the Quantum HDD business and the growth of non-branded PC
customers market share of overall current desktop PC
market and our effort to accommodate this growth. Sales to
Europe represented 32.6% and 28.7% of total revenue for fiscal
years 2002 and 2001, respectively. In absolute terms, Europe
sales increased 13.8% compared to the corresponding period in
2001. Sales to Asia Pacific represented 30.4% and 24.3% of total
revenue for fiscal years 2002 and 2001, respectively. Sales to
Asia Pacific increased in absolute dollars by 13.3% from fiscal
year 2002 to fiscal year 2001. The increase in absolute dollars
and as a percentage of total revenue represented by sales in
Europe and Asia Pacific were primarily due to the growth in
sales to non-branded PC customers who are primarily located
outside of the United States and Canada. We plan to continue
building our sales efforts in Europe and Asia Pacific over the
course of 2003.

24



---



##### Table of Contents



Cost of Revenues; Gross
Profit.Gross profit increased to
$397.4 million in fiscal year 2002 from $362.5 million
in fiscal year 2001. Gross profit as a percentage of revenue
increased to 10.5% in fiscal year 2002 from 9.6% in fiscal year
2001 as a result of the benefits from our manufacturing
transition of our desktop products to our Singapore facility by
the end of our third quarter of 2002 and improved yields on our
new higher density drives in the fourth quarter of 2002. Our
cost of goods sold includes depreciation and amortization of
property, plant and equipment.

Operating Expenses

Research and Development Expense.Research and development
(R&D) expense in fiscal year 2002 was
$401.0 million, or 10.6% of revenue, compared to
$411.2 million, or 10.9% of revenue, in fiscal year 2001.
The decrease in R&D expense in fiscal year 2002 was
primarily due to merger-related costs, such as transitional
services and non-recurring merger-related expenses of
$10.1 million, as well as amortization of stock-based
compensation, associated with our acquisition of the Quantum HDD
business incurred during the corresponding period in 2001 and
lower compensation expenses resulting from reduced headcount in
2002. This decrease was offset by the inclusion of Quantum HDD
and MMC expenses and our on-going effort to maintain leadership
products to address the requirements of the PC desktop and
Intel-based server markets.

As a result of the Quantum HDD acquisition,
R&D expense includes stock compensation charges of
$1.8 million and $2.0 million in 2002 and 2001,
respectively, resulting from options we issued to Quantum
employees who joined Maxtor in connection with the merger on
April 2, 2001. Additionally, R&D expense in fiscal
years 2002 and 2001 includes $2.8 million and
$25.0 million, respectively of stock compensation
amortization for Quantum DSS shares issued to Quantum employees
who joined Maxtor in connection with the merger.

The following table summarizes the effect of
these merger related charges:

|                                                                             |  |               |       |              |  |   |       |  
|---------------------------------------------------------------------------- |  | ------------- | ----- | ------------ |  | - | ----- | -
|                                                                             |  |              
|                                                                             |  | Years Ended  
|                                                                             |  |              
|                                                                             |  | December 29,  |       | December 28,
|                                                                             |  | 2001          |       | 2002        
|                                                                             |  |               |       |             
|                                                                             |  |              
|                                                                             |  | (In millions)
|R&D expense                                                                  |  | $             | 411.2 |              |  | $ | 401.0 |  
|Stock compensation expense                                                   |  |               | (2.0  | )            |  |   | (1.8  | )
|Amortization related to DSS restricted shares                                |  |               | (25.0 | )            |  |   | (2.8  | )
|Costs of transitional services and non-recurring
    merger-related expenses |  |               | (10.1 | )            |  |   |      |  
|                                                                             |  |               |       |              |  |   |       |  
|                                                                             |  | $             | 374.1 |              |  | $ | 396.4 |  
|                                                                             |  |               |       |              |  |   |       |  

Selling, General and Administrative Expense.Selling, general and administrative
(SG&A) expense as a percentage of revenue was
3.9% and 6.2% in fiscal years 2002 and 2001, respectively. The
absolute dollar level of SG&A expense decreased to
$148.5 million in fiscal year 2002 from $232.0 million
in fiscal year 2001. The decreases in SG&A expense were
primarily due to $69.8 million in payments associated with
the Quantum HDD business incurred subsequent to the acquisition
and reduced compensation expenses.

As a result of the Quantum HDD acquisition,
SG&A expense includes stock compensation charges of
$0.6 million and $0.7 million in fiscal years 2002 and
2001, respectively, resulting from options we issued to Quantum
employees who joined Maxtor in connection with the merger on
April 2, 2001. Additionally, SG&A expense in fiscal
year 2002 includes $1.0 million and $8.9 million,
respectively, of stock compensation amortization for Quantum DSS
shares issued to Quantum employees who joined Maxtor in
connection with the merger.

25



---



##### Table of Contents



The following table summarizes the effect of
these merger related charges:

|                                                                             |  |               |       |              |  |   |       |  
|---------------------------------------------------------------------------- |  | ------------- | ----- | ------------ |  | - | ----- | -
|                                                                             |  |              
|                                                                             |  | Years Ended  
|                                                                             |  |              
|                                                                             |  | December 29,  |       | December 28,
|                                                                             |  | 2001          |       | 2002        
|                                                                             |  |               |       |             
|                                                                             |  |              
|                                                                             |  | (In millions)
|SG&A expense                                                                 |  | $             | 232.0 |              |  | $ | 148.5 |  
|Stock compensation expense                                                   |  |               | (0.7  | )            |  |   | (0.6  | )
|Amortization related to DSS restricted shares                                |  |               | (8.9  | )            |  |   | (1.0  | )
|Costs of transitional services and non-recurring
    merger-related expenses |  |               | (69.8 | )            |  |   |      |  
|                                                                             |  |               |       |              |  |   |       |  
|                                                                             |  | $             | 152.6 |              |  | $ | 146.9 |  
|                                                                             |  |               |       |              |  |   |       |  



| |                     
| | --------------------
| | Restructuring Charge

During the year ended December 28, 2002, we
recorded a restructuring charge of $9.5 million associated
with closure of one of our facilities located in California. The
amount comprised $8.9 million of future non-cancelable
lease payments which are expected to be paid over several years
based on the underlying lease agreement and the write-off of
$0.6 million in leasehold improvements.



| |                   
| | ------------------
| | Stock Compensation

On April 2, 2001, as part of the acquisition
of Quantum HDD, we assumed the following options and restricted
stock:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All Quantum HDD options and Quantum HDD
    restricted stock held by employees who accepted our offers of
    employment, or transferred employees, whether or not
    options or restricted stock had vested;                
|
| |  | Vested Quantum HDD options and vested Quantum HDD
    restricted stock held by Quantum Corporation
    (Quantum) employees whose employment was terminated
    prior to the separation, or former service
    providers; and
|
| |  | Vested Quantum HDD restricted stock held by any
    other individual.                                                                                                                                                           

In addition, we assumed vested Quantum HDD
options held by Quantum employees who continued to provide
services during a transitional period, or transitional
employees. We assumed the outstanding options to purchase
Quantum HDD common stock held by transferred employees and
vested options to purchase Quantum HDD common stock held by
former Quantum employees, consultants and transition employees
and these options converted into options to purchase Maxtor
common stock based on an exchange ratio of 1.52 shares of
Maxtor common stock for each share of Quantum HDD common stock.
Vested and unvested options for Quantum HDD common stock assumed
in the merger represented options for 7,650,965 shares and
4,655,236 shares of Maxtor common stock, respectively.

Included in cost of revenue, SG&A expense and
R&D expense are charges for amortization of stock
compensation resulting from both Maxtor options and options we
issued to Quantum employees who joined Maxtor in connection with
the merger on April 2, 2001. Stock compensation charges
were as follows:

|                                    |  |               |     |              |  |   |     | 
|----------------------------------- |  | ------------- | --- | ------------ |  | - | --- | 
|                                    |  |              
|                                    |  | Years Ended  
|                                    |  |              
|                                    |  | December 29,  |     | December 28,
|                                    |  | 2001          |     | 2002        
|                                    |  |               |     |             
|                                    |  |              
|                                    |  | (In millions)
|Cost of revenue                     |  | $             | 0.5 |              |  | $ | 0.3 | 
|Research and development            |  |               | 2.9 |              |  |   | 2.4 | 
|Selling, general and administrative |  |               | 2.7 |              |  |   | 1.5 | 
|                                    |  |               |     |              |  |   |     | 
|Total stock compensation expense    |  | $             | 6.1 |              |  | $ | 4.2 | 
|                                    |  |               |     |              |  |   |     | 

26



---



##### Table of Contents



In addition, Quantum Corporation issued
restricted Quantum DSS shares to Quantum employees who joined
Maxtor in connection with the merger in exchange for the fair
value of Quantum DSS options held by such employees. A portion
of the acquisition purchase price has been allocated to this
deferred compensation, recorded as prepaid expense, and is
amortized to expenses over the vesting period as the vesting of
the shares are subject to continued employment with Maxtor.
Amortization as of December 28, 2002 was as follows:

|                                                        |  |               |      |              |  |   |     | 
|------------------------------------------------------- |  | ------------- | ---- | ------------ |  | - | --- | 
|                                                        |  |              
|                                                        |  | Years Ended  
|                                                        |  |              
|                                                        |  | December 29,  |      | December 28,
|                                                        |  | 2001          |      | 2002        
|                                                        |  |               |      |             
|                                                        |  |              
|                                                        |  | (In millions)
|Cost of revenue                                         |  | $             | 3.0  |              |  | $ | 0.3 | 
|Research and development                                |  |               | 25.0 |              |  |   | 2.8 | 
|Selling, general and administrative                     |  |               | 8.9  |              |  |   | 1.0 | 
|                                                        |  |               |      |              |  |   |     | 
|Total amortization related to DSS restricted
    shares |  | $             | 36.9 |              |  | $ | 4.1 | 
|                                                        |  |               |      |              |  |   |     | 

Amortization of Goodwill and Other Intangible
Assets.Amortization of other
intangible assets represents the amortization of customer list
and other current products and technology, arising from our
acquisitions of the Quantum HDD business in April 2001 and MMC
in September 2001. The net book value of these intangibles at
December 28, 2002 was $146.9 million. Amortization of
other intangible assets was $82.2 million for the year
ended December 28, 2002, compared to $207.8 million in
the corresponding period in fiscal year 2001. The decrease was
due to the cessation of the amortization of goodwill and
workforce in 2002, as a consequence of adopting Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142).

On December 30, 2001, the Company adopted
SFAS 142, which requires goodwill to be tested for
impairment under certain circumstances, written down when
impaired, and requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. In compliance with SFAS
No. 142, we reclassified $31.1 million, net of
accumulated amortization, in workforce assets to goodwill and we
ceased amortizing the resulting net goodwill balance of
$846.0 million. Accordingly, there are no charges for the
amortization of goodwill in 2002 or thereafter. Subsequent to
the decision to shut down the manufacture and sales of NSG
products, the Company wrote off goodwill related to the NSG
operations of $32.3 million. As of December 28, 2002,
goodwill amounted to $814.0 million.

As required by SFAS No. 142, we completed
our impairment analysis as of January 1, 2002, upon our
adoption of SFAS 142, and as of December 28, 2002 for
the purpose of the annual review. We found no instances of
impairment of our recorded goodwill on both dates and
accordingly no impairment was recorded.

The net book value of goodwill will be reviewed
for impairment annually and whenever there is indication that
the value of the goodwill may be impaired. Any resulting
impairment will be recorded in the income statement in the
period it is identified and quantified.

Amortization of other intangible assets is
computed over the estimated useful lives of the respective
assets, generally three to five years. The Company expects
amortization expense on intangible assets to be
$82.2 million in fiscal 2003, $37.0 million in fiscal
2004, $21.9 million in fiscal 2005, and $5.8 million
in fiscal 2006, at which time the intangible assets will be
fully amortized.

27



---



##### Table of Contents



The following tables present the impact of SFAS
142 on net loss and net loss per share had we ceased
amortization of goodwill beginning the year ended
December 29, 2001 (in thousands, except per share amounts):

|                                                                              |                                                                                                         |              |          |              |  |   |          |   | 
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | -------- | ------------ |  | - | -------- | - | 
|                                                                              |                                                                                                         |             
|                                                                              |                                                                                                         | Years Ended 
|                                                                              |                                                                                                         |             
|                                                                              |                                                                                                         | December 29, |          | December 28,
|                                                                              |                                                                                                         | 2001         |          | 2002        
|                                                                              |                                                                                                         |              |          |             
|Loss from continuing operations  as
    reported                             |                                                                                                         | $            | (598,179 | )            |  | $ | (260,566 | )
|Adjustments:                                                                  |                                                                                                         |              |          |              |  |   |          |  
|                                                                              | Amortization of goodwill                                                                                |              |          | 134,042      |  |   |          |  | 
|                                                                              | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |              |          | 12,472       |  |   |          |  | 
|                                                                              |                                                                                                         |              |          |              |  |   |          |  
|                                                                              | Net adjustments                                                                                         |              |          | 146,514      |  |   |          |  | 
|                                                                              |                                                                                                         |              |          |              |  |   |          |  
|Loss from continuing operations 
    adjusted                                |                                                                                                         | $            | (451,665 | )            |  | $ | (260,566 | )
|                                                                              |                                                                                                         |              |          |              |  |   |          |  
|Basic and diluted loss per share from continuing
    operations  as reported |                                                                                                         | $            | (2.89    | )            |  | $ | (1.09    | )
|Basic and diluted loss per share from continuing
    operations  adjusted    |                                                                                                         | $            | (2.18    | )            |  | $ | (1.09    | )

|                                                       |                                                                                                         |              |          |              |  |   |          |   | 
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------ | -------- | ------------ |  | - | -------- | - | 
|                                                       |                                                                                                         |             
|                                                       |                                                                                                         | Years Ended 
|                                                       |                                                                                                         |             
|                                                       |                                                                                                         | December 29, |          | December 28,
|                                                       |                                                                                                         | 2001         |          | 2002        
|                                                       |                                                                                                         |              |          |             
|Net loss  as reported                                 |                                                                                                         | $            | (646,398 | )            |  | $ | (334,067 | )
|Adjustments:                                           |                                                                                                         |              |          |              |  |   |          |  
|                                                       | Amortization of goodwill                                                                                |              |          | 140,779      |  |   |          |  | 
|                                                       | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |              |          | 12,616       |  |   |          |  | 
|                                                       |                                                                                                         |              |          |              |  |   |          |  
|Net adjustments                                        |                                                                                                         |              | 153,395  |              |  |   |         |  
|                                                       |                                                                                                         |              |          |              |  |   |          |  
|Net loss  adjusted                                    |                                                                                                         | $            | (493,003 | )            |  | $ | (334,067 | )
|                                                       |                                                                                                         |              |          |              |  |   |          |  
|Basic and diluted net loss per share 
    as reported |                                                                                                         | $            | (3.12    | )            |  | $ | (1.40    | )
|Basic and diluted net loss per share 
    adjusted    |                                                                                                         | $            | (2.38    | )            |  | $ | (1.40    | )

Purchased In-process Research and Development
(IPR&D).During fiscal
year 2001, we expensed IPR&D costs of $94.7 million as
a result of our acquisition of Quantum HDD. Additionally, in
connection with the acquisition of MMC in September 2001, we
expensed IPR&D costs of $0.5 million. We expensed these
amounts because the acquired technology had not yet reached
technological feasibility and had no future alternative uses.
For additional information regarding the Quantum HDD and MMC
acquisitions and the costs associated with purchased
in-processed research and development, see note 7 of the
Notes to Consolidated Financial Statements.

Interest Expense.Interest expense was
$27.0 million and $25.2 million in fiscal years 2002
and 2001, respectively, or an increase of 7.1%. The increase was
primarily due to the debt we assumed in conjunction with the
acquisitions of MMC and Quantum HDD and our obligation to
reimburse Quantum Corporation for interest due on the Quantum
HDD pro rata portion of Quantums convertible subordinated
notes in connection with the acquisition of Quantum HDD.

As of December 28, 2002 and
December 29, 2001, short-term borrowings were
$41.0 million and $44.2 million, respectively, and
long-term indebtedness outstanding was $206.3 million and
$244.5 million, respectively.

Interest and Other Income.Interest and other income was
$10.1 million and $21.5 million in fiscal years 2002
and 2001, respectively. The decrease is primarily reduced
interest income from our investment portfolios

28



---



##### Table of Contents



as a result of lower short-term interest rates,
and due to a reduction in the size of our investment portfolios
during fiscal year 2002. Total cash and cash equivalents,
restricted cash and marketable securities were
$450.7 million as of December 28, 2002 compared to
$645.8 million as of December 29, 2001.


Gain (Loss) on Sale of Investments.During fiscal year 2002, we recorded a
$2.3 million gain on the sale of investments. This gain was
due to $1.0 million of realized gains on the sale of
securities in our investment portfolio and a $1.3 million
gain on a previously impaired security in our investment
portfolio. During fiscal year 2001, in accordance with our
investment policy, we recorded a $7.4 million loss on an
investment primarily due to a $6.7 million write-off of a
Quantum HDD acquired investment in a high-tech start-up company
and a net loss of $0.7 million that includes a
$1.3 million impairment charge in other fixed income
portfolio investments.

Provision for Income Taxes.During 2002 and 2001, we recorded
income tax provisions of $2.2 million and
$3.4 million, respectively. The provision for income taxes
consists primarily of state and foreign taxes. Due to our net
operating losses (NOL), NOL carryforwards and
favorable tax status in Singapore and Switzerland, we have not
incurred any significant foreign, U.S. federal, state or
local income taxes for the current or prior fiscal periods. We
have not recorded a tax benefit associated with our loss
carry-forward because of the uncertainty of realization.

We were part of the HEA consolidated group for
federal income tax returns for periods from early 1996 to August
1998 (the Affiliation Period). As a member of the
HEA consolidated group, the Company was subject to a tax
allocation agreement. During the Affiliation Period, for
financial reporting purposes, our tax loss was computed on a
separate tax return basis and, as such, we did not record any
tax benefit in our financial statements for the amount of the
net operating loss included in the HEA consolidated income tax
return.

We ceased to be a member of the HEA consolidated
group as of August 1998. We remain liable for our share of the
total consolidated or combined tax return liability of the HEA
consolidated group prior to August 1998. We have agreed to
indemnify or reimburse HEA if there is any increase in our share
of the HEA consolidated or combined tax return liability
resulting from revisions to our taxable income.

Pursuant to a Tax Sharing and Indemnity
Agreement entered into in connection with the
Companys merger with Quantum HDD, Maxtor, as successor to
Quantum HDD, and Quantum are allocated their share of
Quantums income tax liability for periods before the
split-off, consistent with past practices and as if the Quantum
HDD and Quantum DSS business divisions had been separate and
independent corporations. To the extent that the income tax
liability attributable to one business division is reduced by
using NOLs and other tax attributes of the other business
division, the business division utilizing the attributes must
pay the other for the use of those attributes. We must also
indemnify Quantum for additional taxes related to the Quantum
DSS business for all periods before Quantums issuance of
tracking stock and additional taxes related to the Quantum HDD
business for all periods before the split-off, limited in the
aggregate to $142.0 million plus 50% of any excess over
$142.0 million, excluding any required gross-up payment.
Management has determined that, based on the facts available at
this time, the likelihood that the payment will exceed
$142.0 million is remote. As of December 28, 2002, the
Company has reimbursed $3.5 million to Quantum Corporation
leaving a balance of $138.5 million on the original
indemnity.

We purchased a $340 million insurance policy
covering the risk that the split-off of Quantum HDD from Quantum
DSS could be determined to be subject to federal income tax or
state income or franchise tax. Under the Tax Sharing and
Indemnity Agreement, the Company agreed to indemnify
Quantum for the amount of any tax payable by Quantum as a result
of the split-off to the extent such tax is not covered by such
insurance policy, unless imposition of the tax is the result of
Quantums actions, or acquisitions of Quantum stock, after
the split-off. The amount of the tax not covered by insurance
could be substantial. In addition, if it is determined that
Quantum owes federal or state tax as a result of the split-off
and the circumstances giving rise to the tax are covered by our
indemnification obligations, the Company will be required to pay
Quantum the amount of the tax at that time, whether or not
reimbursement may be allowed under our tax insurance policy.

29



---



##### Table of Contents



We recorded approximately $196.4 million of
deferred tax liabilities in connection with the acquisition of
Quantum HDD in April 2001. The deferred taxes were recorded
principally to reflect the taxes which would become payable upon
the repatriation of the cash which was invested abroad by
Quantum HDD as of April 1, 2001.

Loss from Discontinued Operations.On August 15, 2002, we announced
our decision to shut down the manufacturing and sales of our
MaxAttachTM branded network attached storage products
(NSG). The discontinuance of our NSG operations
represents the disposal of a component of an entity as defined
in Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, our financial statements have been
presented to reflect NSG as a discontinued operations for all
periods presented. Our liabilities (no remaining assets) have
been segregated from continuing operations in the accompanying
consolidated balance sheet as of December 28, 2002 and our
operating results have been segregated and reported as
discontinued operations in the accompanying consolidated
statement of operations.

Operating results of the NSG discontinued
operations for years ended December 30, 2000,
December 29, 2001 and December 28, 2002 are as follows
(in millions):

|                                     |  |              |         |              |  |              |         |   |  |   |         |  
|------------------------------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | - |  | - | ------- | -
|                                     |  |             
|                                     |  | Years Ended 
|                                     |  |             
|                                     |  | December 30, |         | December 29, |  | December 28,
|                                     |  | 2000         |         | 2001         |  | 2002        
|                                     |  |              |         |              |  |             
|Revenue from discontinued operations |  | $            | 14,016  |              |  | $            | 31,472  |   |  | $ | 20,384  |  
|Loss from discontinued operations    |  | $            | (40,605 | )            |  | $            | (48,219 | ) |  | $ | (73,501 | )

The increase in loss in 2002 was due to the
inclusion of the following charges upon the decision to shut
down the NSG operations (in millions):

|                                          |  |   |      | 
|----------------------------------------- |  | - | ---- | 
|Personnel related                         |  | $ | 13.0 | 
|Goodwill and other intangibles write-offs |  |   | 32.5 | 
|Non-cancelable purchase commitments       |  |   | 4.2  | 

Fiscal Year 2001 Compared With Fiscal Year
2000

Revenue.In fiscal
year 2001, we generated revenue of $3,765.5 million
compared to $2,690.9 million in fiscal year 2000, an
increase of 39.9%. Total shipments in fiscal year 2001 were
45.1 million units compared to 27.0 million units in
fiscal year 2000, a 67.0% increase. The increase in revenue
primarily reflected the acquisition of Quantum HDD in April
2001. We also successfully introduced several next generation
products during fiscal year 2001, which contributed to the
overall increase in unit sales. Revenue did not increase at the
same rate compared to unit shipments in 2001. This was primarily
the result of the continued decline in average selling prices
due to pricing pressures in the desktop computer market.

Revenue on a proforma basis (that is, calculating
revenue as if we had acquired Quantum HDD on January 1,
2000) was $4,418.6 million in fiscal year 2001, compared to
$5,800.6 million in fiscal year 2000, representing a
decline of 23.8% on a proforma basis. Although proforma does not
purport to be indicative of what would have occurred, we believe
the decline on a proforma basis was primarily due to the overall
slowdown in demand for hard disk drives, the continued pricing
pressures in the desktop computer market and customers
efforts to diversify their suppliers in anticipation of our
acquisition of Quantum HDD.

Sales to the top five customers represented 34.1%
and 34.5% of revenue in fiscal years 2001 and 2000,
respectively. Sales to one customer were 11.3% and 14.2% of
revenue in fiscal years 2001 and 2000, respectively. There was
the only customer with over 10% of revenue during fiscal years
2001 and 2000.

Revenue from sales to computer equipment
manufacturers represented 55.4% and 70.0% of revenue in fiscal
years 2001 and 2000, respectively. This decrease in 2001 was
primarily due to increased sales to our distribution channel and
retail customers, which represented 44.6% and 30.0% of revenue
in fiscal years 2001 and 2000, respectively. Revenue from sales
to computer equipment manufacturers increased by 10.8% in fiscal
year 2001 from fiscal year 2000, while revenue from sales to
distribution channel and retail customers

30



---



##### Table of Contents



increased by 107.8% in fiscal year 2001 from
fiscal year 2000. The significant increase in revenue from sales
to the distribution channel is attributable primarily to our
Quantum HDD acquisition and to a lesser extent, our continued
expansion of sales to the distribution channel.


Domestic revenue represented 42.0% and 46.1% of
total sales in fiscal year 2001 and 2000, respectively.
International revenue represented 58.0% and 53.9% of total sales
in fiscal year 2001 and 2000, respectively. Our revenue from
international sales increased primarily as a result of our
stronger presence in Europes expanding PC desktop market.
Sales to Europe represented 28.7% and 24.0% of total revenue for
fiscal years 2001 and 2000, respectively. The increased Europe
sales in absolute terms was 67.6% in 2001, compared to 2000.
Sales to Asia Pacific increased in absolute dollars by 28.4%
from fiscal year 2001 to fiscal year 2000, however, as a
percentage of revenue, decreased from 24.3% to 26.5%. We
continued building our sales efforts in Europe and Asia Pacific
in 2002.

Cost of Revenue; Gross Profit.Gross profit decreased to
$362.5 million in fiscal year 2001 from $373.2 million
in fiscal year 2000. Gross profit as a percentage of revenue
decreased to 9.6% in fiscal year 2001 from 13.9% in fiscal year
2000. The decrease in gross margin primarily reflected a
decrease in average selling price compared to the average unit
cost and the acceleration of end-of-life sales. Competitive
pricing pressures contributed to the overall decrease in gross
margins. Our decline in gross margin was partially offset by our
transition to lower cost, higher margin product, increased sales
to the distribution channel and well-managed inventory levels.
Our cost of goods sold includes depreciation and amortization of
property, plant and equipment.

Operating Expenses

Research and Development Expense.Research and development
(R&D) expense in fiscal year 2001 was
$411.2 million, or 10.9% of revenue, compared to
$211.8 million, or 7.9% of revenue, in fiscal year 2000.
The increase in R&D expense in fiscal year 2001 was
primarily the result of the inclusion of Quantum HDDs
R&D expenses. The increase in R&D expense also reflects
the inclusion of MMCs expenses, our on-going effort to
maintain leadership products and our investments to expand our
Network Systems Groups product portfolio.

As a result of the Quantum HDD acquisition,
R&D expense includes stock compensation charges of
$2.0 million in 2001, resulting from options we issued to
Quantum employees who joined Maxtor in connection with the
merger on April 2, 2001. Additionally, R&D expense in
2001 includes $25.0 million of stock compensation
amortization for Quantum DSS shares issued to Quantum employees
who joined Maxtor in connection with the merger. R&D expense
also includes costs of transitional services and non-recurring
merger related expenses related to the Quantum HDD acquisition
of $10.1 million.

The following table summarizes the effect of
these merger related charges:

|                                                                             |  |               |       |              |  |   |       |  
|---------------------------------------------------------------------------- |  | ------------- | ----- | ------------ |  | - | ----- | -
|                                                                             |  |              
|                                                                             |  | Years Ended  
|                                                                             |  |              
|                                                                             |  | December 30,  |       | December 29,
|                                                                             |  | 2000          |       | 2001        
|                                                                             |  |               |       |             
|                                                                             |  |              
|                                                                             |  | (In millions)
|R&D expense                                                                  |  | $             | 211.8 |              |  | $ | 411.2 |  
|Stock compensation expense                                                   |  |               |      |              |  |   | (2.0  | )
|Amortization related to DSS restricted shares                                |  |               |      |              |  |   | (25.0 | )
|Costs of transitional services and non-recurring
    merger-related expenses |  |               |      |              |  |   | (10.1 | )
|                                                                             |  |               |       |              |  |   |       |  
|                                                                             |  | $             | 211.8 |              |  | $ | 374.1 |  
|                                                                             |  |               |       |              |  |   |       |  

Selling, General and Administrative Expense.Selling, general and administrative
(SG&A) expense as a percentage of revenue was
6.2% and 3.7% in fiscal years 2001 and 2000, respectively. The
absolute dollar level of SG&A expense increased to
$232.0 million in fiscal year 2001 from $99.6 million
in fiscal year 2000. The increases in SG&A expense were
primarily due to the inclusion of Quantum HDDs SG&A
expenses, MMCs SG&A expenses and other post-merger
related expenses, including costs of transitional services.

31



---



##### Table of Contents



Included in the transitional services costs was
$30.5 million of severance expense for approximately
600 Quantum Corporation transitional employees.
Furthermore, increased spending reflected increased sales and
marketing costs associated with supporting our higher sales
volume and increased emphasis in the distribution market.


As a result of the Quantum HDD acquisition,
SG&A expense includes stock compensation charges of
$0.7 million in 2001, resulting from options we issued to
Quantum employees who joined Maxtor in connection with the
merger on April 2, 2001. Additionally, SG&A expense in
2001 includes $8.9 million of stock compensation
amortization for Quantum DSS shares issued to Quantum employees
who joined Maxtor in connection with the merger. SG&A
expense also includes costs of transitional services and
non-recurring merger related expenses related to the Quantum HDD
acquisition of $69.8 million.

The following table summarizes the effect of
these merger related charges:

|                                                                             |  |               |      |              |  |   |       |  
|---------------------------------------------------------------------------- |  | ------------- | ---- | ------------ |  | - | ----- | -
|                                                                             |  |              
|                                                                             |  | Years Ended  
|                                                                             |  |              
|                                                                             |  | December 30,  |      | December 29,
|                                                                             |  | 2000          |      | 2001        
|                                                                             |  |               |      |             
|                                                                             |  |              
|                                                                             |  | (In millions)
|SG&A expense                                                                 |  | $             | 99.6 |              |  | $ | 232.0 |  
|Stock compensation expense                                                   |  |               |     |              |  |   | (0.7  | )
|Amortization related to DSS restricted shares                                |  |               |     |              |  |   | (8.9  | )
|Costs of transitional services and non-recurring
    merger-related expenses |  |               |     |              |  |   | (69.8 | )
|                                                                             |  |               |      |              |  |   |       |  
|                                                                             |  | $             | 99.6 |              |  | $ | 152.6 |  
|                                                                             |  |               |      |              |  |   |       |  



| |                   
| | ------------------
| | Stock Compensation

On April 2, 2001, as part of the acquisition
of Quantum HDD, we assumed the following options and restricted
stock:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All Quantum HDD options and Quantum HDD
    restricted stock held by employees who accepted our offers of
    employment, or transferred employees, whether or not
    options or restricted stock had vested;                
|
| |  | Vested Quantum HDD options and vested Quantum HDD
    restricted stock held by Quantum Corporation
    (Quantum) employees whose employment was terminated
    prior to the separation, or former service
    providers; and
|
| |  | Vested Quantum HDD restricted stock held by any
    other individual.                                                                                                                                                           

In addition, we assumed vested Quantum HDD
options held by Quantum employees who continued to provide
services during a transitional period, or transitional
employees. We assumed the outstanding options to purchase
Quantum HDD common stock held by transferred employees and
vested options to purchase Quantum HDD common stock held by
former Quantum employees, consultants and transition employees
and these options converted into options to purchase Maxtor
common stock based on an exchange ratio of 1.52 shares of Maxtor
common stock for each share of Quantum HDD common stock. Vested
and unvested options for Quantum HDD common stock assumed in the
merger represented options for 7,650,965 shares and 4,655,236
shares of Maxtor common stock, respectively.

32



---



##### Table of Contents



Included in cost of revenue, SG&A expense and
R&D expense are charges for amortization of stock
compensation resulting from both Maxtor options and options we
issued to Quantum employees who joined Maxtor in connection with
the merger on April 2, 2001. Stock compensation charges
were as follows:

|                                    |  |               |     |              |  |   |     | 
|----------------------------------- |  | ------------- | --- | ------------ |  | - | --- | 
|                                    |  |              
|                                    |  | Years Ended  
|                                    |  |              
|                                    |  | December 30,  |     | December 29,
|                                    |  | 2000          |     | 2001        
|                                    |  |               |     |             
|                                    |  |              
|                                    |  | (In millions)
|Cost of revenue                     |  | $             | 0.2 |              |  | $ | 0.5 | 
|Research and development            |  |               | 1.3 |              |  |   | 2.9 | 
|Selling, general and administrative |  |               | 2.6 |              |  |   | 2.7 | 
|                                    |  |               |     |              |  |   |     | 
|Total stock compensation expense    |  | $             | 4.1 |              |  | $ | 6.1 | 
|                                    |  |               |     |              |  |   |     | 

In addition, Quantum Corporation issued
restricted Quantum DSS shares to Quantum employees who joined
Maxtor in connection with the merger in exchange for the fair
value of Quantum DSS options held by such employees. A portion
of the acquisition purchase price has been allocated to this
deferred compensation, recorded as prepaid expense, and is
amortized to expenses over the vesting period as the vesting of
the shares are subject to continued employment with Maxtor.
Amortization as of December 29, 2001 was as follows:

|                                                        |  |               |   |              |  |   |      | 
|------------------------------------------------------- |  | ------------- | - | ------------ |  | - | ---- | 
|                                                        |  |              
|                                                        |  | Years Ended  
|                                                        |  |              
|                                                        |  | December 30,  |   | December 29,
|                                                        |  | 2000          |   | 2001        
|                                                        |  |               |   |             
|                                                        |  |              
|                                                        |  | (In millions)
|Cost of revenue                                         |  | $             |  |              |  | $ | 3.0  | 
|Research and development                                |  |               |  |              |  |   | 25.0 | 
|Selling, general and administrative                     |  |               |  |              |  |   | 8.9  | 
|                                                        |  |               |   |              |  |   |      | 
|Total amortization related to DSS restricted
    shares |  | $             |  |              |  | $ | 36.9 | 
|                                                        |  |               |   |              |  |   |      | 

Amortization of Goodwill and Other Intangible
Assets.Amortization of goodwill and
other intangible assets represents the amortization of goodwill,
workforce, customer list and other current products and
technology, arising from our acquisitions of Quantum HDD in
April 2001 and MMC in September 2001. In accordance with SFAS
142, we have not amortized any goodwill associated with the MMC
acquisition. Upon adoption of SFAS 142, effective
December 30, 2001, we have discontinued amortizing our
goodwill and acquired assembled workforce associated with
Quantum HDD. Amortization of goodwill and other intangible
assets amounted to $207.8 million and $0 million in
fiscal years 2001 and 2000, respectively.

Purchased In-process Research and Development
(IPR&D).During fiscal
year 2001, we expensed IPR&D costs of $94.7 million as
a result of our acquisition of Quantum HDD. Additionally, in
connection with the acquisition of MMC in September 2001, we
expensed IPR&D costs of $0.5 million. We expensed these
amounts because the acquired technology had not yet reached
technological feasibility and had no future alternative uses.
For additional information regarding the Quantum HDD and MMC
acquisitions and the costs associated with purchased
in-processed research and development, see note 7 of the
Notes to Consolidated Financial Statements.

Interest Expense.Interest expense was
$25.2 million and $13.7 million in fiscal years 2001
and 2000, respectively, or an increase of 83.5%. The increase
was primarily due to the debt we assumed in conjunction with the
acquisitions of MMC and Quantum HDD and our obligation to
reimburse Quantum Corporation for interest due on the Quantum
HDD pro rata portion of Quantums convertible subordinated
notes in connection with the acquisition of Quantum HDD.

As of December 29, 2001 and
December 30, 2000, short-term borrowings were
$44.2 million and $15.4 million, respectively, and
long-term indebtedness outstanding were $244.5 million and
$92.3 million, respectively.

Interest and Other Income.Interest and other income was
$21.5 million and $24.3 million in fiscal years 2001
and 2000, respectively. The decrease primarily reflected
one-time gains in fiscal year 2000 pertaining to

33



---



##### Table of Contents



the repayment of notes and retirement of bonds.
Total cash and cash equivalents, restricted cash and marketable
securities were $645.8 million as of December 29, 2001
compared to $376.2 million as of December 30, 2000.


Gain (Loss) on Sale of Investments.During fiscal year 2001, in accordance
with our investment policy, we recorded a $7.4 million loss
on an investment, primarily due to a $6.7 million write-off
of a Quantum HDD acquired investment in a high-tech start-up
company and a net loss of $1.3 million impairment charge in
other fixed income portfolio investments. During fiscal year
2000, we sold our investment in Headway Technologies, Inc.,
resulting in a gain on sale of investment of $1.8 million.

Provision for Income Taxes.During 2001 and 2000, we recorded
income tax provisions of $3.4 million and
$1.7 million, respectively. The provision for income taxes
consists primarily of state and foreign taxes. Due to our net
operating losses (NOL), NOL carryforwards and
favorable tax status in Singapore and Switzerland, we have not
incurred any significant foreign, U.S. federal, state or
local income taxes for the current or prior fiscal periods. We
have not recorded a tax benefit associated with our loss
carry-forward because of the uncertainty of realization.

We were part of the HEA consolidated group for
federal income tax returns for periods from early 1996 to August
1998 (the Affiliation Period). As a member of the
HEA consolidated group, the Company was subject to a tax
allocation agreement. During the Affiliation Period, for
financial reporting purposes, our tax loss was computed on a
separate tax return basis and, as such, we did not record any
tax benefit in our financial statements for the amount of the
net operating loss included in the HEA consolidated income tax
return.

We ceased to be a member of the HEA consolidated
group as of August 1998. We remain liable for our share of the
total consolidated or combined tax return liability of the HEA
consolidated group prior to August 1998. We have agreed to
indemnify or reimburse HEA if there is any increase in our share
of the HEA consolidated or combined tax return liability
resulting from revisions to our taxable income.

Pursuant to a Tax Sharing and Indemnity
Agreement entered into in connection with the
Companys merger with Quantum HDD, Maxtor, as successor to
Quantum HDD, and Quantum are allocated their share of
Quantums income tax liability for periods before the
split-off, consistent with past practices and as if the Quantum
HDD and Quantum DSS business divisions had been separate and
independent corporations. To the extent that the income tax
liability attributable to one business division is reduced by
using NOLs and other tax attributes of the other business
division, the business division utilizing the attributes must
pay the other for the use of those attributes. We must also
indemnify Quantum for additional taxes related to the Quantum
DSS business for all periods before Quantums issuance of
tracking stock and additional taxes related to the Quantum HDD
business for all periods before the split-off, limited in the
aggregate to $142.0 million plus 50% of any excess over
$142.0 million, excluding any required gross-up payment. As
of December 29, 2001, $138.5 million remained on the
original indemnity. Management determined that, based on the
facts available at the time, likelihood that the payment would
exceed $142.0 million was remote.

We purchased a $340 million insurance policy
covering the risk that the split-off of Quantum HDD from Quantum
DSS could be determined to be subject to federal income tax or
state income or franchise tax. Under the Tax Sharing and
Indemnity Agreement, the Company agreed to indemnify
Quantum for the amount of any tax payable by Quantum as a result
of the split-off to the extent such tax is not covered by such
insurance policy, unless imposition of the tax is the result of
Quantums actions, or acquisitions of Quantum stock, after
the split-off. The amount of the tax not covered by insurance
could be substantial. In addition, if it is determined that
Quantum owes federal or state tax as a result of the split-off
and the circumstances giving rise to the tax are covered by our
indemnification obligations, the Company will be required to pay
Quantum the amount of the tax at that time, whether or not
reimbursement may be allowed under our tax insurance policy.

We recorded approximately $196.4 million of
deferred tax liabilities in connection with the acquisition of
Quantum HDD in April 2001. The deferred taxes were recorded
principally to reflect the taxes which would become payable upon
the repatriation of the cash which was invested abroad by
Quantum HDD.

34



---



##### Table of Contents



Liquidity and Capital
Resources

Cash and Cash Equivalents

At December 28, 2002, we had
$306.5 million in cash and cash equivalents,
$56.7 million in restricted cash and $87.5 million in
marketable securities, for a combined total of
$450.7 million. In comparison, at December 29, 2001 we
had $380.0 million in cash and cash equivalents,
$98.6 million in restricted cash and $167.2 million in
marketable securities, for a combined total of
$645.8 million. The restricted cash balance was pledged as
collateral for certain stand-by letters of credit issued by
commercial banks. We have a net deferred tax liability amounting
to $196.5 million, which could become payable upon
repatriation of the earnings invested abroad.

The decrease in working capital was due to
investments in property, plant and equipment, losses from
operations and satisfaction of principal payments due under our
long-term debt obligations. Operating activities from continuing
operations provided cash of $2.8 million in the twelve
months ended December 28, 2002. Sources of cash from
operating activities reflect our net loss from continuing
operations of $260.6 million offset by non-cash adjustments
for depreciation and amortization of $155.8 million,
amortization of other intangible assets of $82.2 million,
amortization of deferred compensation related to the Quantum HDD
acquisition of $4.1 million, stock compensation expense of
$5.6 million, a restructuring charge of $9.5 million
related to the closure of one of our facilities, offset by
$1.6 million of other non-cash items. Sources of cash from
operating activities also include a decrease in accounts
receivable of $17.4 million due to the decline in revenues
of the fourth fiscal quarter of 2002 compared to the fourth
fiscal quarter of 2001, a decrease in inventory of
$5.6 million due primarily to improved inventory
management, a decrease in prepaid expenses and other assets of
$10.1 million primarily due to a reduction in prepaid
assets of $8.0 million, an increase in accounts payable of
$45.3 million primarily due to longer payment terms with
our vendors. This was offset by a decrease in accrued expenses
and other liabilities of $70.7 million, due to a change in
the accrued warranty balance of $34.9 million primarily
resulting from the satisfaction of warranty obligations, offset
by accruals for warranties issued during the year, a reduction
in the balance of accrued expenses of $13.2 million, a
reduction in other long-term liabilities of $12.4 million,
and $10.2 million in income taxes payable and satisfaction
of other liabilities.

Cash used in investing activities was
$17.5 million for the twelve months ended December 28,
2002, reflecting investments in property, plant and equipment of
$139.1 million, of which approximately 75% was used to
support production, 20% used to support product development and
5% used for infrastructure, which was offset by the sale (net of
purchases) of marketable securities of $79.4 million and a
decrease in restricted cash of $41.9 million due to the
reduction of cash secured letters of credit during the third
quarter. We expect that our investments in property, plant and
equipment in 2003 will range between $150 million and
$175 million, primarily to fund our manufacturing
operations and product development.

Cash used in financing activities was
$27.1 million for the twelve months ended December 28,
2002, primarily due to the repayment of debt and lease
obligations of $49.6 million, offset by proceeds of
$22.5 million issuance of common stock through the
Companys employee stock purchase plan and stock option
exercises.

35



---



##### Table of Contents



Certain Financing Activities

Future payments due under debt and lease
obligations as of December 28, 2002 are reflected in the
following table (in thousands):

|                   |  |              |        |               |  |                     |       |              |  |           |        |                      |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 
|------------------ |  | ------------ | ------ | ------------- |  | ------------------- | ----- | ------------ |  | --------- | ------ | -------------------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                   |  |              |        | Economic      |  | Pro rata Portion of |       |              |  |           |        |                      |  |      
|                   |  |              |        | Development   |  | Quantum             |       |              |  |           |        | Principal Facilities |  |      
|                   |  | 5.75%        |        | Board of      |  | Corporations 7%    |       |              |  | Equipment |        | and Machinery &      |  |      
|                   |  | Subordinated |        | Singapore     |  | Subordinated        |       |              |  | Loans and |        | Equipment Under      |  |      
|                   |  | Debentures   |        | Loan due      |  | Convertible Notes   |       |              |  | Capital   |        | Operating Lease      |  |      
|                   |  | due 2012(1)  |        | March 2004(2) |  | due 2004(3)         |       | Mortgages(4) |  | Leases(5) |        | Arrangements         |  | Total
|                   |  |              |        |               |  |                     |       |              |  |           |        |                      |  |      
|Fiscal Year Ending |  |              |        |               |  |                     |       |              |  |           |        |                      |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 
|2003               |  | $            | 5,000  |               |  | $                   | 6,606 |              |  | $         |       |                      |  | $     | 1,445  |  |  | $ | 27,991 |  |  | $ | 34,119  |  |  | $ | 75,161  | 
|2004               |  |              | 5,000  |               |  |                     | 3,303 |              |  |           | 95,833 |                      |  |       | 1,583  |  |  |   | 13,167 |  |  |   | 29,036  |  |  |   | 147,922 | 
|2005               |  |              | 5,000  |               |  |                     |      |              |  |           |       |                      |  |       | 1,734  |  |  |   | 4,414  |  |  |   | 26,406  |  |  |   | 37,554  | 
|2006               |  |              | 5,000  |               |  |                     |      |              |  |           |       |                      |  |       | 30,847 |  |  |   | 35     |  |  |   | 24,348  |  |  |   | 60,230  | 
|2007               |  |              | 5,000  |               |  |                     |      |              |  |           |       |                      |  |       |       |  |  |   |       |  |  |   | 23,969  |  |  |   | 28,969  | 
|Thereafter         |  |              | 35,427 |               |  |                     |      |              |  |           |       |                      |  |       |       |  |  |   |       |  |  |   | 134,778 |  |  |   | 170,205 | 
|                   |  |              |        |               |  |                     |       |              |  |           |        |                      |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 
|Total              |  | $            | 60,427 |               |  | $                   | 9,909 |              |  | $         | 95,833 |                      |  | $     | 35,609 |  |  | $ | 45,607 |  |  | $ | 272,656 |  |  | $ | 520,041 | 
|                   |  |              |        |               |  |                     |       |              |  |           |        |                      |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | In the fiscal years beginning in 2003 through
    2012, we will make interest payments of $26.6 million.
|   
|(2) | In the fiscal years 2003 and 2004, we will make
    interest payments of $0.3 million.                  
|   
|(3) | In fiscal years 2003 and 2004, we will make
    interest payments of $10.6 million.                     
|   
|(4) | In the fiscal years beginning 2003 through 2006,
    we will make interest payments of $11.5 million.   
|   
|(5) | In the fiscal years 2003 through 2006, we will
    make interest payments of $1.4 million.              

In July 1998, we entered into an accounts
receivable securitization program (the Program) with
a group of commercial banks (the Banks). On
November 15, 2001, we amended and restated the Program,
extending the Program for another three years and increasing the
available size of the Program from $200 million to
$300 million. On December 30, 2002, following the
close of fiscal 2002, we terminated the Program.

Under the Program, the Company sold U.S. and
Canadian accounts receivable in securitization transactions and
retains a subordinated interest and servicing rights to those
receivables. The eligible receivables, net of estimated credit
losses, were sold to third party conduits through a wholly owned
bankruptcy-remote entity, Maxtor Receivables Corporation
(MRC) that is consolidated for financial reporting
purposes.

The investors in the securitized receivables had
no recourse to the Companys assets as a result of
debtors defaults except for the retained interests in the
securitized accounts receivable. The third party conduits
typically issued securities that are structured into several
classes with senior classes having priority of payment over
subordinated classes. The Company retained the portion of the
sold receivables that is in excess of the minimum receivables
level required to support the securities issued by the third
party conduits, referred to as retained. The
carrying amount of the Companys retained interest, which
approximated fair value because of the short-term nature of
receivables, was recorded in accounts receivable. We serviced
the sold receivables and charged the third party conduits a
monthly servicing fee at market rates; accordingly, no servicing
asset or liability was recorded.

As of December 28, 2002 and
December 29, 2001, the outstanding balance of securitized
accounts receivable held by the third party conduits totaled
$140.3 million and $124.3 million, respectively, of
which the Companys subordinated retained interest was
$95.3 million and $79.1 million, respectively.
Accordingly, $45.0 million and $45.2 million of
accounts receivable balances, net of applicable allowances, were
removed from the consolidated balance sheets at
December 28, 2002 and December 29, 2001, respectively.

36



---



##### Table of Contents



Under this Program we were subject to a minimum
tangible net worth test and a requirement to maintain a
specified minimum unrestricted cash balance. During 2002, we
revised the tangible net worth test in order to remain in
compliance. On December 30, 2002 we elected to terminate
the Program.

We are in discussions with financial institutions
to establish a new program. There can be no assurance that we
will be able to negotiate acceptable terms or receive
commitments from financial institutions. If we are not able to
establish a new financing program, however, we do not believe
that the lack of such a program will have a material adverse
effect on our liquidity.

We believe the existing cash and cash
equivalents, short term investment and capital resources,
together with cash generated from operations and available
borrowing capacity will be sufficient to fund our operations
through at least the next twelve months. We have improved our
cost structure by consolidating desktop manufacturing in
Singapore and reducing our operating expenses, actions which we
believe will result in improved profitability and an improved
working capital position during 2003. We require substantial
working capital to fund our business, particularly to finance
accounts receivable and inventory, and to invest in property,
plant and equipment. During 2003, capital expenditures are
expected to range between $150 million and
$175 million, primarily used to finance expansion of our
manufacturing operations in Singapore and development of a new
facility in China, and product development. We intend to seek
financing arrangements to fund our future capacity expansion and
working capital, as necessary. However, our ability to generate
cash will depend on, among other things, demand in the desktop
hard disk drive market and pricing conditions. If we need
additional capital, there can be no assurance that such
additional financing can be obtained, or, if obtained, that it
will be available on satisfactory terms.



| |                         
| | ------------------------
| | New Accounting Standards

In July 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). This Statement
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
This Statement requires that a liability for costs associated
with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The
Company has adopted this statement, which is effective for exit
or disposal activities that are initiated after
December 31, 2002.

In December 2002, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that
disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the
pro-forma effect in interim financial statements. The transition
and annual disclosure requirements of SFAS No. 148 are
effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim
periods beginning after December 15, 2002. The Company
believes that the adoption of this standard will have no
material impact on its financial statements.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. The
Interpretation expands on the accounting guidance of FAS 5,
Accounting for Contingencies, FAS 57, Related Party
Disclosures, and FAS 107, Disclosures about Fair Value of
Financial Instruments, and incorporates without change the
provisions of FIN 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statement
No. 5, which is being superseded. FIN 45 elaborates on
the existing disclosure requirements for most guarantees,
including loan guarantees, such as standby letters of credit. It
also clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and
annual financial statements. FIN 45 will be effective to
the Company on a

37



---



##### Table of Contents



prospective basis to guarantees issued or
modified after December 31, 2002. The Company is currently
evaluating the impact of this statement on its results of
operations and financial position. The Company has adopted the
disclosure requirements in this Interpretation, which are
effective for financial statements of periods ending after
December 15, 2002.


In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46). Under that interpretation, certain
entities known as Variable Interest
Entities (VIE) must be consolidated by
the primary beneficiary of the entity. The primary
beneficiary is generally defined as having the majority of the
risks and rewards arising from the VIE. For VIEs in which
a significant (but not majority) variable interest is held,
certain disclosures are required. FIN 46 requires
disclosure of Variable Interest Entities in financial statements
issued after January 31, 2003, if it is reasonably possible
that as of the transition date: (1) the Company will be the
primary beneficiary of an existing VIE that will require
consolidation or, (2) the Company will hold a significant
variable interest in, or have significant involvement with, an
existing VIE. Any VIEs created after January 31, 2003, are
immediately subject to the consolidation guidance in
FIN 46. The measurement principles of this interpretation
will be effective for the Companys 2003 financial
statements. The Company does not have any entities that require
disclosure or new consolidation as a result of adopting the
provisions of FIN 46.

In November 2002, the EITF reached a consensus on
EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF 00-21 establishes
criteria for whether revenue on a deliverable can be recognized
separately from other deliverables in a multiple deliverable
arrangement. The criteria consider whether the delivered item
has stand-alone value to the customer, whether the fair value of
the delivered item can be reliably determined and the rights of
returns for the delivered item. EITF 00-21 is effective for
revenue agreements entered into in fiscal years beginning after
June 15, 2003 with early adoption permitted. The Company is
currently evaluating the impact of EITF 00-21 on its
financial position, results of operations and cash flows.

38



---



##### Table of Contents



SUPPLEMENTAL FINANCIAL INFORMATION

Unaudited Quarterly Results of
Operations

|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |             | 
|----------------------------------------- | ----------------------- | -------------------------------------------------- | ------- | ----------- | - | ------------- | --------- | ------------ | - | --------- | --------- | ----------- | - | ------------- | --------- | ------------ | - | - | --------- | ----------- | - | - | -------- | ----------- | - | - | -------- | ----------- | - | - | --------- | ----------- | 
|                                          |                         |                                                   
|                                          |                         | Three Months Ended                                
|                                          |                         |                                                   
|                                          |                         | March 31,                                          |         | June 30,    |   | September 29, |           | December 29, |   | March 30, |           | June 29,    |   | September 28, |           | December 28,
|                                          |                         | 2001                                               |         | 2001        |   | 2001          |           | 2001         |   | 2002      |           | 2002        |   | 2002          |           | 2002        
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |             
|                                          |                         |                                                   
|                                          |                         | (In thousands, except share and per share amounts)
|Revenue                                   |                         | $                                                  | 626,563 |             |   | $             | 1,032,612 |              |   | $         | 1,035,193 |             |   | $             | 1,071,191 |              |   | $ | 1,036,100 |             |   | $ | 885,350  |             |   | $ | 819,716  |             |   | $ | 1,038,348 |            
|Gross profit                              |                         |                                                    | 87,778  |             |   |               | 75,823    |              |   |           | 79,629    |             |   |               | 119,278   |              |   |   | 113,766   |             |   |   | 59,390   |             |   |   | 57,529   |             |   |   | 166,730   |            
|Income (loss) from continuing operations  |                         |                                                    | 12,843  |             |   |               | (308,574  | )            |   |           | (153,177  | )           |   |               | (149,271  | )            |   |   | (55,377   | )           |   |   | (103,303 | )           |   |   | (105,470 | )           |   |   | 3,584     |            
|Loss from discontinued operations         |                         |                                                    | (11,504 | )           |   |               | (11,194   | )            |   |           | (12,550   | )           |   |               | (12,971   | )            |   |   | (9,661    | )           |   |   | (5,699   | )           |   |   | (58,141  | )           |   |   |          |            
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|Net income (loss)                         |                         | $                                                  | 1,339   |             |   | $             | (319,768  | )            |   | $         | (165,727  | )           |   | $             | (162,242  | )            |   | $ | (65,038   | )           |   | $ | (109,002 | )           |   | $ | (163,611 | )           |   | $ | 3,584     |            
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|Net income (loss) per share  basic       |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|                                          | Continuing operations   |                                                    | $       | 0.11        |   |               | $         | (1.30        | ) |           | $         | (0.64       | ) |               | $         | (0.63        | ) |   | $         | (0.23       | ) |   | $        | (0.43       | ) |   | $        | (0.44       | ) |   | $         | 0.01        | 
|                                          | Discontinued operations |                                                    |         | (0.10       | ) |               |           | (0.05        | ) |           |           | (0.05       | ) |               |           | (0.06        | ) |   |           | (0.04       | ) |   |          | (0.03       | ) |   |          | (0.24       | ) |   |           |            | 
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|                                          | Total                   |                                                    | $       | 0.01        |   |               | $         | (1.35        | ) |           | $         | (0.69       | ) |               | $         | (0.69        | ) |   | $         | (0.27       | ) |   | $        | (0.46       | ) |   | $        | (0.68       | ) |   | $         | 0.01        | 
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|Net income (loss) per share 
    diluted |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|                                          | Continuing operations   |                                                    | $       | 0.11        |   |               | $         | (1.30        | ) |           | $         | (0.64       | ) |               | $         | (0.63        | ) |   | $         | (0.23       | ) |   | $        | (0.43       | ) |   | $        | (0.44       | ) |   | $         | 0.01        | 
|                                          | Discontinued operations |                                                    |         | (0.10       | ) |               |           | (0.05        | ) |           |           | (0.05       | ) |               |           | (0.06        | ) |   |           | (0.04       | ) |   |          | (0.03       | ) |   |          | (0.24       | ) |   |           |            | 
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|                                          | Total                   |                                                    | $       | 0.01        |   |               | $         | (1.35        | ) |           | $         | (0.69       | ) |               | $         | (0.69        | ) |   | $         | (0.27       | ) |   | $        | (0.46       | ) |   | $        | (0.68       | ) |   | $         | 0.01        | 
|                                          |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|Shares used in per share calculation:     |                         |                                                    |         |             |   |               |           |              |   |           |           |             |   |               |           |              |   |   |           |             |   |   |          |             |   |   |          |             |   |   |           |            
|                                          | Basic                   |                                                    |         | 114,865,211 |   |               |           | 236,680,543  |   |           |           | 238,629,903 |   |               |           | 235,980,815  |   |   |           | 236,956,653 |   |   |          | 238,803,423 |   |   |          | 240,177,574 |   |   |           | 241,344,157 | 
|                                          | Diluted                 |                                                    |         | 118,901,084 |   |               |           | 236,680,543  |   |           |           | 238,629,903 |   |               |           | 235,980,815  |   |   |           | 236,956,653 |   |   |          | 238,803,423 |   |   |          | 240,177,574 |   |   |           | 243,166,368 | 

The unaudited quarterly results of operations
reflect NSG as discontinued operations for all periods presented.

39



---



##### Table of Contents






CERTAIN FACTORS AFFECTING FUTURE
PERFORMANCE

We have a history of losses and may not
achieve profitability.

We have a history of significant losses and may
not achieve profitability. In the last five fiscal years, we
were profitable in only fiscal years 1998 and 2000. In the year
ended December 28, 2002, our net loss was
$334.1 million, which included $82.2 million for the
amortization of intangible assets, charges of $7.0 million
for stock-based compensation related to our acquisition of the
Quantum HDD business, severance charges of $12.3 million,
restructuring charges related to facilities closures of
$9.5 million and losses of $73.5 million related to
the discontinuation of our network attached storage business in
the quarter ended September 28, 2002. We have an
accumulated deficit of $1,740.6 million.

The decline of average selling prices in the
hard disk drive industry could cause our operating results to
suffer and make it difficult for us to achieve
profitability.

It is very difficult to achieve and maintain
profitability and revenue growth in the hard disk drive industry
because the average selling price of a hard disk drive rapidly
declines over its commercial life as a result of technological
enhancement, productivity improvement and increase in the
industry supply. End-user demand for the computer systems that
contain our hard disk drives has historically been subject to
rapid and unpredictable fluctuations. In addition, intense price
competition among personal computer manufacturers and
Intel-based server manufacturers may cause the price of hard
disk drives to decline. As a result, the hard disk drive market
tends to experience periods of excess capacity and intense price
competition. Competitors attempts to liquidate excess
inventories, restructure, or gain market share also tend to
cause average selling prices to decline. This excess capacity
and intense price competition caused us in the first three
quarters of fiscal 2002, and will likely continue to cause us in
future quarters, to lower prices, which has the effect of
reducing margins, causing operating results to suffer and making
it difficult for us to achieve or maintain profitability. If we
are unable to lower the cost of our hard disk drives to be
consistent with the decline of average selling prices, we will
not be able to compete effectively and our operating results
will suffer.

Intense competition in the hard disk drive
segment could reduce the demand for our products or the prices
of our products, which could adversely affect our operating
results.

The desktop computer market segment and the
overall hard disk drive market are intensely competitive even
during periods when demand is stable. We compete primarily with
manufacturers of 3.5 inch hard disk drives, including
Fujitsu, Hitachi, IBM, Samsung, Seagate Technology, and Western
Digital. Hitachi and IBM have recently completed the merger of
their hard disk drive businesses into a single joint venture,
Hitachi Global Storage Technologies. Many of our competitors
historically have had a number of significant advantages,
including larger market shares, a broader array of product
lines, preferred vendor status with customers, extensive name
recognition and marketing power, and significantly greater
financial, technical and manufacturing resources. Some of our
competitors make many of their own components, which may provide
them with benefits including lower costs. Our competitors may
also:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | consolidate or establish strategic relationships
    among themselves to lower their product costs or to otherwise
    compete more effectively against us;
|
| |  | lower their product prices to gain market share;                                                                                                           
|
| |  | bundle their products with other products to
    increase demand for their products;                                                                       
|
| |  | develop new technology which would significantly
    reduce the cost of their products; or                                                                 
|
| |  | offer more products than we do and therefore
    enter into agreements with customers to supply hard disk drives
    as part of a larger supply agreement. 

Increasing competition could reduce the demand
for our products and/or the prices of our products by
introducing technologically better and cheaper products, which
could reduce our revenues. In addition, new

40



---



##### Table of Contents



competitors could emerge and rapidly capture
market share. If we fail to compete successfully against current
or future competitors, our business, financial condition and
operating results will suffer.


Our quarterly operating results have
fluctuated significantly in the past and are likely to fluctuate
in the future.

Our quarterly operating results have fluctuated
significantly in the past and may fluctuate significantly in the
future. Our future performance will depend on many factors,
including:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the average selling price of our products;                                                                                                                                                                           
|
| |  | fluctuations in the demand for our products as a
    result of the seasonal nature of the desktop computer industry
    and the markets for our customers products, as well as the
    overall economic environment;
|
| |  | market acceptance of our products;                                                                                                                                                                                   
|
| |  | our ability to qualify our products successfully
    with our customers;                                                                                                                                             
|
| |  | changes in purchases from period-to-period by our
    primary customers, including actions by our customers canceling,
    rescheduling or deferring orders;                                                         
|
| |  | changes in product and customer mix;                                                                                                                                                                                 
|
| |  | actions by our competitors, including
    announcements of new products or technological innovations;                                                                                                                
|
| |  | our ability to execute future development and
    production ramps effectively;                                                                                                                                      
|
| |  | the availability, and efficient use, of
    manufacturing capacity;                                                                                                                                                  
|
| |  | our inability to reduce a significant portion of
    our fixed costs due, in part, to our ongoing capital expenditure
    requirements; and                                                                          
|
| |  | our ability to procure and purchase critical
    components at competitive prices.                                                                                                                                   

Many of our expenses are relatively fixed and
difficult to reduce or modify. As a result, the fixed nature of
our operating expenses will magnify any adverse effect of a
decrease in revenue on our operating results. Because of these
and other factors, period to period comparisons of our
historical results of operations are not a good predictor of our
future performance. If our future operating results are below
the expectations of stock market analysts, our stock price may
decline. Due to current economic conditions and their impact on
IT spending, particularly personal computer sales, our
ability to predict demand for our products and our financial
results for current and future periods may be severely
diminished. This may adversely affect both our ability to adjust
production volumes and expenses and our ability to provide the
financial markets with forward-looking information.

If we fail to qualify as a supplier to
computer manufacturers or their subcontractors for a future
generation of hard disk drives, then these manufacturers or
subcontractors may not purchase any units of an entire product
line, which will have a significant adverse impact on our
sales.

Most of our products are sold to desktop computer
and Intel-based server manufacturers or to their subcontractors.
These manufacturers select or qualify their hard disk drive
suppliers, either directly or through their subcontractors,
based on quality, storage capacity, performance and price.
Manufacturers typically seek to qualify two or more suppliers
for each hard disk drive product generation. To qualify
consistently, and thus succeed in the desktop and Intel-based
server hard disk drive industry, we must consistently be among
the first-to-market introduction and first-to-volume production
at leading storage capacity per disk, offering competitive
prices and high quality. Once a manufacturer or subcontractor
has chosen its hard disk drive suppliers for a given desktop
computer or Intel-based server product, it often will purchase
hard disk drives from those suppliers for the commercial
lifetime of that product line. If we miss a qualification
opportunity, we may not have another opportunity to do business
with that manufacturer or subcontractor until it introduces its
next generation of products. The effect of missing a product
qualification opportunity is magnified by the limited number of
high-volume manufacturers of personal computers and Intel-based
servers. If we do not

41



---



##### Table of Contents



reach the market or deliver volume production in
a timely manner, we may lose opportunities to qualify our
products and may need to deliver lower margin, older products
than required in order to meet our customers demands. In
such case, our business, financial condition and operating
results would be adversely affected.


Because we are substantially dependent on
desktop computer drive sales, a decrease in the demand for
desktop computers could reduce demand for our
products.

Our revenue growth and profitability depend
significantly on the overall demand for desktop computers and
related products and services. In recent quarters, demand for
desktop computers has been adversely affected by unfavorable
economic conditions. If the economic conditions in the United
States and globally do not improve, or if we experience a
worsening in the global economic slowdown, we may experience a
further decrease in demand for desktop computers. Because we
sell a significant portion of our products to the desktop
segment of the personal computer industry, we will be affected
more by changes in market conditions for desktop computers than
a company with a broader range of products. Any decrease in the
demand for desktop computers could reduce the demand for our
products, harming our business, financial condition and
operating results.

The loss of one or more significant customers
or a decrease in their orders of products would cause our
revenues to decline.

We sell most of our products to a limited number
of customers. For the fiscal year ended December 28, 2002,
one customer, Dell Computer Corporation, accounted for
approximately 11.5% of our total revenue, and our top five
customers accounted for approximately 31.8% of our revenue. We
expect that a relatively small number of customers will continue
to account for a significant portion of our revenue, and the
proportion of our revenue from these customers could continue to
increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial
demands on us. Even if we successfully qualify a product for a
given customer, the customer generally will not be obligated to
purchase any minimum volume of product from us and generally
will be 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 business, financial condition and
operating results could suffer. Mergers, acquisitions,
consolidations or other significant transactions involving our
significant customers may adversely affect our business and
operating results.

If we fail to develop and maintain
relationships with our key distributors, if we experience
problems associated with distribution channels, or if our key
distributors favor our competitors products over ours, our
operating results could suffer.

We sell a significant amount of our hard disk
drive products through a limited number of key distributors. If
we fail to develop, cultivate and maintain relationships with
our key distributors, or if these distributors are not
successful in their sales efforts, sales of our products may
decrease and our operating results could suffer. As our sales
through distribution channels continue to increase, we may
experience problems typically associated with distribution
channels such as unstable pricing, increased return rates and
other logistical difficulties. Our distributors also sell
products manufactured by our competitors. If our distributors
favor our competitors products over our products for any
reason, they may fail to market our products effectively or
continue to devote the resources necessary to provide us with
effective sales and, as a result, our operating results could
suffer.

If we do not expand into new hard drive market
segments, or continue to maintain our presence in the hard drive
market, our revenues will suffer.

To remain a significant supplier of hard disk
drives to major manufacturers of personal computers and
Intel-based servers, we will need to offer a broad range of hard
disk drive products to our customers. Although almost all of our
current products are designed for the desktop computer and the
Intel-based server markets, demand in these segments may shift
to products we do not offer or volume demand may shift to other

42



---



##### Table of Contents



segments. Such segments may include laptop
computers or handheld consumer products which none of our
products currently serves. Products using alternative
technologies, such as optical storage, semiconductor memory and
other storage technologies, may also compete with our hard disk
drive products. While we continually develop new products, the
success of our new product introductions is dependent on a
number of factors, including market acceptance, our ability to
manage the risks associated with product transitions, the
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. We will need to successfully develop and manufacture
new products that address additional hard disk drive market
segments or competitors technology or feature development
to remain competitive in the hard disk drive industry. We cannot
assure you that we will successfully or timely develop or market
any new hard disk drives in response to technological changes or
evolving industry standards. We also cannot assure you that we
will avoid technical or other difficulties that could delay or
prevent the successful development, introduction or marketing of
new hard disk drives. Any failure to successfully develop and
introduce new products for our existing customers or to address
additional market segments could result in loss of customer
business or require us to deliver product not targeted
effectively to customer requirements, which in turn could
adversely affect our business, financial condition and operating
results.


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

Our significant OEM customers have adopted a
subcontractor model that requires us to contract directly with
companies that provide manufacturing services for the personal
computer manufacturers. This exposes us to increased credit risk
because these subcontractors are generally less capitalized than
the personal computer manufacturers themselves, and our
agreements with our customers may not permit us to increase our
prices to compensate for this increased credit risk. Any credit
losses would increase our operating costs, which could cause our
operating results to suffer.

If we fail to match production with product
demand or to manage inventory, we may incur additional
costs.

We base our inventory purchases and commitments
on forecasts from our customers, who are not obligated to
purchase the forecast amounts. If actual orders do not match our
forecasts, or if any products become obsolete between order and
delivery time, we may have excess or inadequate inventory of our
products. In addition, our significant OEM customers have
adopted build-to-order manufacturing models or just-in-time
inventory management processes that require component suppliers
to maintain inventory at or near the customers production
facility. These policies, combined with continued compression of
product life cycles, have complicated inventory management
strategies that make it more difficult to match manufacturing
plans with projected customer demand and cause us to carry
inventory for more time and to incur additional costs to manage
inventory which could cause our operating results to suffer. If
we fail to manage inventory of older products as we or our
competitors introduce new products with higher aerial density,
we may have excess inventory. Excess inventory could materially
adversely affect our operating results and cause our operating
results to suffer.

Because we purchase a significant portion of
our parts from a limited number of third party suppliers, we are
subject to the risk that we may be unable to acquire quality
components in a timely manner, or effectively integrate parts
from different suppliers, and these component shortages or
integration problems could result in delays of product shipments
and damage our business and operating results.

Unlike some of our competitors, we do not
manufacture any of the parts used in our products, other than
media as a result of our acquisition of MMC. Instead, our
products incorporate parts and components designed by and
purchased from third party suppliers. Both we and MKE depend on
a limited number of qualified suppliers for components and
subassemblies, including recording heads, media and integrated
circuits. Currently, we purchase recording heads from three
sources, digital signal processor/controllers from

43



---



##### Table of Contents



one source and spin/servo integrated circuits
from two sources. Although our acquisition of our primary media
supplier, MMC, has reduced our dependence on outside suppliers
for this component, MMC cannot supply all of our media needs,
and therefore we are still required to purchase media from two
outside sources. As we have experienced in the past, some
required parts may be periodically in short supply. As a result,
we will have to allow for significant ordering lead times for
some components. In addition, we may have to pay significant
cancellation charges to suppliers if we cancel orders for
components because we reduce production due to market
oversupply, reduced demand, transition to new products or
technologies or for other reasons. We order the majority of our
components on a purchase order basis and we have limited
long-term volume purchase agreements with only some of our
existing suppliers. In the event that these suppliers cannot
qualify to new leading-edge technology specifications, our ramp
up of production for the new products will be delayed, and our
business, operating results and financial condition will be
adversely affected.


If we cannot obtain sufficient quantities of
high-quality parts when needed, product shipments would be
delayed and our business, financial condition and operating
results could suffer. We cannot assure you that we will be able
to obtain adequate supplies of critical components in a timely
and economic manner, or at all.

The success of our products also depends on our
ability to effectively integrate parts and components that use
leading-edge technology. If we are unable to successfully manage
the integration of parts obtained from third party suppliers,
our business, financial condition and operating results could
suffer.

If we are unable to acquire needed additional
manufacturing capacity, or MKE does not meet our manufacturing
requirements, or if a disaster occurs at one of our or
MKEs plants, our growth will be adversely impacted and our
business, financial condition and operating results could
suffer.

Our Maxtor-owned facilities in Singapore and our
relationship with MKE for the manufacture of 10,000 RPM
hard disk drives for the enterprise market are currently our
only sources of production for our hard disk drive products. MKE
manufactures a substantial portion of our enterprise hard disk
drives pursuant to a master agreement and a purchase agreement
that has been extended through March 31, 2004. If, for any
reason, we are unable in some quarters to make purchases in
adequate volumes or on terms advantageous to us, our revenue may
be lower or our costs may be higher than projected and our
operating results would suffer.

We negotiate pricing arrangements with MKE on a
quarterly basis. Any failure to reach an agreement on
competitive pricing arrangements would also negatively impact
our operating results.

If, at the time of termination of our current
agreement with MKE we are unable to extend further the agreement
on mutually acceptable terms for the manufacture of enterprise
hard disk drives, we will need to arrange for alternative
manufacturing capacity for our enterprise products. If we fail
to make such arrangements in a timely manner, in adequate
volumes or on acceptable terms, our revenue might be lower than
projected and our business, financial condition and operating
results would suffer. In addition, we will need to acquire
additional manufacturing capacity in the future. Our inability
to add capacity to allow us to meet customers demands in a
timely manner may limit our future growth and could harm our
business, financial condition and operating results. We have
begun construction of a manufacturing facility in China that
will provide us with a low-cost facility to accommodate
anticipated future growth. We anticipate that the facility will
become operational in the second half of 2004. We have arranged
financing for the facility and expect documentation to be
finalized in the next few weeks. A failure to obtain financing
on terms acceptable to us could delay the time at which the
facility could come on-line, which could in turn result in harm
to our business, financial condition and operating results.

In addition, our entire volume manufacturing
operations are based in Singapore. Our MKE manufactured server
products are manufactured in Japan. A flood, earthquake,
political instability, act of terrorism or other disaster or
condition in Singapore or Japan that adversely affects our
facilities or ability to manufacture our hard disk drive
products could significantly harm our business, financial
condition and operating results.

44



---



##### Table of Contents



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

Our products may contain defects. We generally
warrant our products for one to five years and prior to the
acquisition, Quantum HDD generally warranted its products for
one to five years. We assumed Quantum HDDs warranty
obligations as a result of the acquisition. The standard
warranties used by us and Quantum HDD contain limits on damages
and exclusions of liability for consequential damages and for
negligent or improper use of the products. We generally
establish and, prior to the acquisition, Quantum HDD
established, a warranty provision at the time of product
shipment in an amount equal to estimated warranty expenses. We
determined that there were issues with certain Quantum HDD
products that we acquired in the acquisition, and which are no
longer being manufactured. We have established a warranty
provision for these products and have increased goodwill
associated with the acquisition to reflect pre-acquisition
contingencies related to these issues. We may incur additional
operating expenses if these steps do not reflect the actual cost
of resolving such issues; and if these expenses are significant,
our business, financial condition and results of operations will
suffer.

We have asserted claims against Quantum, and
Quantum has asserted claims against us, for payment under
agreements entered into in connection with our acquisition of
the Quantum HDD business. In the event these claims are not
resolved favorably in the aggregate, our business, financial
condition and operating results could be harmed.

We have asserted multiple claims against Quantum,
and Quantum has asserted multiple claims against us, for payment
under agreements entered into in connection with our acquisition
of the Quantum HDD business, including a tax sharing and
indemnity agreement, which provides for the allocation of
certain liabilities related to taxes. We disagree with Quantum
about the amounts owed by each party under the agreements and we
are in negotiations with Quantum to resolve the claims. The
parties have commenced dispute resolution procedures under the
tax sharing and indemnity agreement. Although we believe that we
will be successful in asserting or defending these claims, an
unfavorable resolution of such claims in the aggregate could
harm our business, financial condition and operating results.

If Quantum incurs non-insured tax as a result
of its split-off of Quantum HDD, our financial condition and
operating results could be negatively affected.

In connection with our acquisition of the Quantum
HDD business, we agreed to indemnify Quantum for the amount of
any tax payable by Quantum as a result of the separation of the
Quantum HDD business from Quantum Corporation (referred to as a
split-off) to the extent such tax is not covered by insurance,
unless imposition of the tax is the result of Quantums
actions, or acquisitions of Quantum stock, after the split-off.
The amount of the tax not covered by insurance could be
substantial. In addition, if it is determined that Quantum owes
federal or state tax as a result of the split-off and the
circumstances giving rise to the tax are covered by our
indemnification obligations, we will be required to pay Quantum
the amount of the tax at that time, whether or not reimbursement
may be allowed under the insurance policy. Even if a claim is
available, made and pending under the tax opinion insurance
policy, there may be a substantial period after we pay Quantum
for the tax before the outcome of the insurance claim is finally
known, particularly if the claim is denied by the insurance
company and the denial is disputed by us and/or Quantum.
Moreover, the insurance company could prevail in a coverage
dispute. In any of these circumstances, we would have to either
use our existing cash resources or borrow money to cover our
obligations to Quantum. In either case, our payment of the tax,
whether covered by insurance or not, could harm our business,
financial condition, operating results and cash flows.

Any failure to adequately protect and enforce
our intellectual property rights could harm our
business.

Our protection of our intellectual property is
limited. For example, we have patent protection on only some of
our technologies. We may not receive patents for our pending or
future patent applications, and any patents that we own or that
are issued to us may be invalidated, circumvented or challenged.
In the case of

45



---



##### Table of Contents



products offered in rapidly emerging markets,
such as consumer electronics, our competitors may file patents
more rapidly or in greater numbers resulting in the issuance of
patents that may result in unexpected infringement assertions
against us. Moreover, the rights granted under any such patents
may not provide us with any competitive advantages. Finally, our
competitors may develop or otherwise acquire equivalent or
superior technology. We also rely on trade secret, copyright and
trademark laws as well as the terms of our contracts to protect
our proprietary rights. We may have to litigate to enforce
patents issued or licensed to us, to protect trade secrets or
know-how owned by us or to determine the enforceability, scope
and validity of our proprietary rights and the proprietary
rights of others. Enforcing or defending our proprietary rights
could be expensive and might not bring us timely and effective
relief. We may have to obtain licenses of other parties
intellectual property and pay royalties. If we are unable to
obtain such licenses, we may have to stop production of our
products or alter our products. In addition, the laws of certain
countries in which we sell and manufacture our products,
including various countries in Asia, may not protect our
products and intellectual property rights to the same extent as
the laws of the United States. Our remedies in these countries
may be inadequate to protect our proprietary rights. Any failure
to enforce and protect our intellectual property rights could
harm our business, financial condition and operating results.


We are subject to existing infringement claims
which are costly to defend and may harm our business.

Prior to our acquisition of the Quantum HDD
business, we, on the one hand, and Quantum and MKE, on the other
hand, were sued by Papst Licensing, GmbH, a German corporation,
for infringement of a number of patents that relate to hard disk
drives. Papsts complaint against Quantum and MKE was filed
on July 30, 1998, and Papsts complaint against Maxtor
was filed on March 18, 1999. Both lawsuits, filed in the
United States District Court for the Northern District of
California, were transferred by the Judicial Panel on
Multidistrict Litigation to the United States District Court for
the Eastern District of Louisiana for coordinated pre-trial
proceedings with other pending litigations involving the Papst
patents (the MDL Proceeding). The matters will be
transferred back to the District Court for the Northern District
of California for trial. Papsts infringement allegations
are based on spindle motors that Maxtor and Quantum purchased
from third party motor vendors, including MKE, and the use of
such spindle motors in hard disk drives. We purchased the
overwhelming majority of the spindle motors used in our hard
disk drives from vendors that were licensed under the Papst
patents. Quantum purchased many spindle motors used in its hard
disk drives from vendors that were not licensed under the Papst
patents, including MKE. As a result of our acquisition of the
Quantum HDD business, we assumed Quantums potential
liabilities to Papst arising from the patent infringement
allegations Papst asserted against Quantum. We filed a motion to
substitute the Company for Quantum in this litigation. The
motion was denied by the Court presiding over the MDL
Proceeding, without prejudice to being filed again in the future.

In February 2002, Papst and MKE entered into an
agreement to settle Papsts pending patent infringement
claims against MKE. That agreement includes a license of certain
Papst patents to MKE which might provide Quantum, and thus us,
with additional defenses to Papsts patent infringement
claims.

On April 15, 2002, the Judicial Panel on
Multidistrict Litigation ordered a separation of claims and
remand to the District of Columbia of certain claims between
Papst and another party involved in the MDL Proceeding. By order
entered June 4, 2002, the court stayed the MDL Proceeding
pending resolution by the District of Columbia court of the
remanded claims. These separated claims relating to the other
party are currently proceeding in the District Court for the
District of Columbia.

The results of any litigation are inherently
uncertain and Papst may assert other infringement claims
relating to current patents, pending patent applications, and/or
future patent applications or issued patents. Additionally, we
cannot assure you we will be able to successfully defend
ourselves against this or any other Papst lawsuit. Because the
Papst complaints assert claims to an unspecified dollar amount
of damages, and because we were at an early stage of discovery
when the litigation was stayed, we are unable to determine the
possible loss, if any, that we may incur as a result of an
adverse judgment or a negotiated settlement. A favorable outcome
for Papst in these lawsuits could result in the issuance of an
injunction against us and our products and/or the payment of
monetary damages equal to a reasonable royalty. In the case of a
finding of a willful infringement, we also could be required to
pay treble damages and Papsts attorneys fees. The
litigation

46



---



##### Table of Contents



could result in significant diversion of time by
our technical personnel, as well as substantial expenditures for
future legal fees. Accordingly, although we cannot currently
estimate whether there will be a loss, or the size of any loss,
a litigation outcome favorable to Papst could have a material
adverse effect on our business, financial condition and
operating results. Management believes that it has valid
defenses to the claims of Papst and is defending this matter
vigorously.


We face risks from our substantial
international operations and sales.

We conduct most of our manufacturing and testing
operations and purchase a substantial portion of our key parts
outside the United States. In particular, manufacturing
operations for our products are concentrated in Singapore, where
our principal manufacturing operations are located, and in
Japan, where MKEs manufacturing operations are located.
Such concentration of operations in Singapore and Japan will
likely magnify the effects on us of any disruptions or disasters
relating to Singapore and Japan. In addition, we also sell a
significant portion of our products to foreign distributors and
retailers. As a result, we will be dependent on revenue from
international sales. Inherent risks relating to our overseas
operations include:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties with staffing and managing
    international operations;                                                                                 
|
| |  | transportation and supply chain disruptions as a
    result of terrorist activity, acts of war or hostility;                                          
|
| |  | economic slowdown and/or downturn in the foreign
    markets;                                                                                         
|
| |  | international currency fluctuations;                                                                                                                  
|
| |  | political and economic uncertainty caused by
    terrorism or acts of war or hostility;                                                               
|
| |  | legislative and regulatory responses to terrorist
    activity such as increased restrictions on cross-border movement
    of products and technology;
|
| |  | general strikes or other disruptions in working
    conditions;                                                                                       
|
| |  | labor shortages;                                                                                                                                      
|
| |  | political instability;                                                                                                                                
|
| |  | trade restrictions;                                                                                                                                   
|
| |  | changes in tariffs;                                                                                                                                   
|
| |  | generally longer periods to collect receivables;                                                                                                      
|
| |  | unexpected legislative or regulatory requirements;                                                                                                    
|
| |  | reduced protection for intellectual property
    rights in some countries;                                                                            
|
| |  | significant unexpected duties or taxes or other
    adverse tax consequences;                                                                         
|
| |  | difficulty in obtaining export licenses and other
    trade barriers;                                                                                 
|
| |  | seasonality;                                                                                                                                          
|
| |  | increased transportation/shipping costs; and                                                                                                          
|
| |  | credit and access to capital issues faced by our
    international customers.                                                                         

The specific economic conditions in each country
impact our international sales. For example, our international
contracts are denominated primarily in U.S. dollars. Significant
downward fluctuations in currency exchange rates against the
U.S. dollar could result in higher product prices and/or
declining margins and increased manufacturing costs. In
addition, we attempt to manage the impact of foreign currency
exchange rate changes by entering into short-term, foreign
exchange contracts. If we do not effectively manage the risks
associated with international operations and sales, our
business, financial condition and operating results could suffer.

47



---



##### Table of Contents



The loss of key personnel could harm our
business.

Our success depends upon the continued
contributions of key employees, many of whom would be extremely
difficult to replace. Like many other technology companies, we
have implemented workforce reductions that have in some cases
resulted in the termination of key employees who have
substantial knowledge of our business. These and any future
workforce reductions may also adversely affect the morale of,
and our ability to retain, employees who have not been
terminated, which may result in the further loss of key
employees. We do not have key person life insurance on any of
our personnel. Worldwide competition for skilled employees in
the hard disk drive industry is extremely intense. If we are
unable to retain existing employees or to hire and integrate new
employees, our business, financial condition and operating
results could suffer. In addition, companies in the hard disk
drive industry whose employees accept positions with competitors
often claim that the competitors have engaged in unfair hiring
practices. We may be the subject of such claims in the future as
we seek to hire qualified personnel and we could incur
substantial costs defending ourselves against those claims.

We could be subject to environmental
liabilities which could increase our expenses and harm our
business, financial condition and results of
operations.

Because of the chemicals we use in our
manufacturing and research operations, we are subject to a wide
range of environmental protection regulations in the United
States and Singapore. While we do not believe our operations to
date have been harmed as a result of such laws, future
regulations may increase our expenses and harm our business,
financial condition and results of operations. Even if we are in
compliance in all material respects with all present
environmental regulations, in the United States environmental
regulations often require parties to fund remedial action
regardless of fault. As a consequence, it is often difficult to
estimate the future impact of environmental matters, including
potential liabilities. Moreover, we may be subject to liability
in connection with our acquisition of the Quantum HDD and MMC
businesses to the extent that contamination requiring
remediation at our expense is present on properties currently or
formerly occupied by those businesses, or those businesses sent
wastes to sites at which remediation is required. If we have to
make significant capital expenditures or pay significant expense
in connection with future remedial actions or to continue to
comply with applicable environmental laws, our business,
financial condition and operating results could suffer.

The market price of our common stock
fluctuated substantially in the past and is likely to fluctuate
in the future as a result of a number of factors, including the
release of new products by us or our competitors, the loss or
gain of significant customers or changes in stock market
analysts estimates.

The market price of our common stock and the
number of shares traded each day have varied greatly. Such
fluctuations may continue due to numerous factors, including:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly fluctuations in operating results;                                                                                     
|
| |  | announcements of new products by us or our
    competitors such as products that address additional hard disk
    drive segments;
|
| |  | gains or losses of significant customers;                                                                                        
|
| |  | changes in stock market analysts estimates;                                                                                     
|
| |  | the presence of short-selling of our common stock;                                                                               
|
| |  | sales of a high volume of shares of our common
    stock by our large stockholders;                                              
|
| |  | events affecting other companies that the market
    deems comparable to us;                                                     
|
| |  | general conditions in the semiconductor and
    electronic systems industries; and                                               
|
| |  | general economic conditions in the United States
    and abroad.                                                                 

48



---



##### Table of Contents



Anti-takeover provisions in our certificate of
incorporation could discourage potential acquisition proposals
or delay or prevent a change of control.

We have a number of protective provisions in
place designed to provide our board of directors with time to
consider whether a hostile takeover is in our best interests and
that of our stockholders. These provisions could discourage
potential acquisition proposals and could delay or prevent a
change in control of the company and also could diminish the
opportunities for a holder of our common stock to participate in
tender offers, including offers at a price above the
then-current market price for our common stock. These provisions
also may inhibit fluctuations in our stock price that could
result from takeover attempts.

49



---



##### Table of Contents








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Derivatives

We enter into foreign exchange forward contracts
to manage foreign currency exchange risk associated with our
operations primarily in Singapore, Switzerland and Japan. The
foreign exchange forward contracts we enter into generally have
original maturities ranging from one to three months. We do not
enter into foreign exchange forward contracts for trading
purposes. We do not expect gains or losses on these contracts to
have a material impact on our financial results.

Investments

We maintain an investment portfolio of various
holdings, types and maturities. These marketable securities are
generally classified as available for sale and, consequently,
are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of accumulated
other comprehensive income. Part of this portfolio includes
investments in bank issues, corporate bonds and commercial
papers. For additional information regarding our impairment
policy, see note 1 of the Notes to Consolidated Financial
Statements.

The following table presents the hypothetical
changes in fair values in the financial instruments held at
December 28, 2002 that are sensitive to changes in interest
rates. These instruments are not leveraged and are held for
purposes other than trading. The hypothetical changes assume
immediate shifts in the U.S. Treasury yield curve of plus or
minus 50 basis points (bps), 100 bps, and
150 bps.

|                      |  |          |        |          |  |         |        |              |  |         |        |          |  |          |        |  |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------- |  | -------- | ------ | -------- |  | ------- | ------ | ------------ |  | ------- | ------ | -------- |  | -------- | ------ |  |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                      |  |          |        |          |  |         |        | Fair Value   |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | as of        |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | December 28, |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | 2002         |  |         |        |          |  |         
|                      |  | +150 bps |        | +100 bps |  | +50 bps |        | ($000)       |  | -50 bps |        | -100 bps |  | -150 bps
|                      |  |          |        |          |  |         |        |              |  |         |        |          |  |         
|Financial Instruments |  | $        | 86,257 |          |  | $       | 86,670 |              |  | $       | 87,086 |          |  | $        | 87,507 |  |  | $ | 87,931 |   |  | $ | 88,357 |   |  | $ | 88,766 |  
|% Change              |  |          | (1.43  | )%       |  |         | (0.96  | )%           |  |         | (0.48  | )%       |  |          |        |  |  |   | 0.48   | % |  |   | 0.97   | % |  |   | 1.44   | %

We are exposed to certain equity price risks on
our investments in common stock. These equity securities are
held for purposes other than trading. The following table
presents the hypothetical changes in fair values of the public
equity investments that are sensitive to changes in the stock
market. The modeling technique used measures the hypothetical
change in fair value arising from selected hypothetical changes
in the stock price. Stock price fluctuations of plus or minus
15 percent, plus or minus 25 percent, and plus or
minus 50 percent were selected based on the probability of
their occurrence.

|                             |  |                          |       |              |  |                          |       |            |  |   |       |    |  |   |       |  |  |   |       |   |  |   |       |   |  |   |       |  
|---------------------------- |  | ------------------------ | ----- | ------------ |  | ------------------------ | ----- | ---------- |  | - | ----- | -- |  | - | ----- |  |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                             |  |                          |       |              |  |                          |       | Fair Value |  |   |       |    |  |  
|                             |  |                          |       | as of        |  |                         
|                             |  | Valuation of Security    |       | December 28, |  | Valuation of Security   
|                             |  | Given X% Decrease in the |       | 2002         |  | Given X% Increase in the
|                             |  | Security Price           |       | ($000)       |  | Security Price          
|                             |  |                          |       |              |  |                         
|                             |  |                          |       |              |  |                          |       |            |  |  
|Corporate equity investments |  | $                        | 3,295 |              |  | $                        | 4,942 |            |  | $ | 5,601 |    |  | $ | 6,589 |  |  | $ | 7,577 |   |  | $ | 8,236 |   |  | $ | 9,884 |  
|% Change                     |  |                          | (50   | )%           |  |                          | (25   | )%         |  |   | (15   | )% |  |   |       |  |  |   | 15    | % |  |   | 25    | % |  |   | 50    | %

50



---



##### Table of Contents








|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                                                                                                |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                                                                                                |  | Page
|                                                                                                                                                                                                                                |  |     
|Consolidated Financial Statements of Maxtor
    Corporation                                                                                                                                                                     |  |      |    | 
|Consolidated Balance Sheets 
    December 29, 2001 and December 28, 2002                                                                                                                                                       |  |      | 52 | 
|Consolidated Statements of Operations 
    Fiscal years ended December 30, 2000, December 29,
    2001 and December 28, 2002                                                                                                   |  |      | 53 | 
|Consolidated Statements of Stockholders
    Equity  Fiscal years ended December 30, 2000,
    December 29, 2001 and December 28, 2002                                                                                         |  |      | 54 | 
|Consolidated Statements of Cash Flows 
    Fiscal years ended December 30, 2000, December 29,
    2001 and December 28, 2002                                                                                                   |  |      | 55 | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                      |  |      | 56 | 
|Report of Independent Accountants                                                                                                                                                                                               |  |      | 93 | 
|Financial Statement Schedules:                                                                                                                                                                                                  |  |      |    | 
|The following consolidated financial statement
    schedule of Maxtor Corporation is filed as part of this Report
    and should be read in conjunction with the Consolidated
    Financial Statements of Maxtor Corporation:   |  |      |    | 
|Schedule II Valuation and Qualifying Accounts                                                                                                                                                                                   |  |      | 97 | 
|                                                                                                                                                                                                                               
|Schedules not listed above have been omitted
    since they are not applicable or are not required or the
    information required to be set therein is included in the
    Consolidated Financial Statements or notes thereto. |  |      |    | 

51



---



##### Table of Contents



MAXTOR CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |         |           | 
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------ | --------- |  | ---------- | ------- | --------- | 
|                                                                             |                                                                                                                                                                                                                                                       | December 29,                               |            | December 28,
|                                                                             |                                                                                                                                                                                                                                                       | 2001                                       |            | 2002        
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |             
|                                                                             |                                                                                                                                                                                                                                                       |                                           
|                                                                             |                                                                                                                                                                                                                                                       | (In thousands, except share and           
|                                                                             |                                                                                                                                                                                                                                                       | per share amounts)                        
|ASSETS                                                                      
|Current assets:                                                              |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             | Cash and cash equivalents                                                                                                                                                                                                                             |                                            | $          | 379,927      |           |  | $          | 306,444 |          
|                                                                             | Restricted cash                                                                                                                                                                                                                                       |                                            |            | 98,629       |           |  |            | 56,747  |          
|                                                                             | Marketable securities                                                                                                                                                                                                                                 |                                            |            | 167,217      |           |  |            | 87,507  |          
|                                                                             | Accounts receivable, net of allowance of doubtful
    accounts of $21,638 at December 29, 2001 and $18,320 at
    December 28, 2002                                                                                                                   |                                            |            | 379,918      |           |  |            | 363,664 |          
|                                                                             | Inventories                                                                                                                                                                                                                                           |                                            |            | 185,556      |           |  |            | 175,545 |          
|                                                                             | Prepaid expenses and other                                                                                                                                                                                                                            |                                            |            | 45,606       |           |  |            | 33,438  |          
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             |                                                                                                                                                                                                                                                       | Total current assets                       |            |              | 1,256,853 |  |            |         | 1,023,345 | 
|Property, plant and equipment, net                                           |                                                                                                                                                                                                                                                       |                                            | 366,786    |              |           |  | 364,842    |        
|Goodwill                                                                     |                                                                                                                                                                                                                                                       |                                            | 814,863    |              |           |  | 813,951    |        
|Other intangible assets, net                                                 |                                                                                                                                                                                                                                                       |                                            | 262,552    |              |           |  | 146,898    |        
|Other assets                                                                 |                                                                                                                                                                                                                                                       |                                            | 14,410     |              |           |  | 11,798     |        
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             |                                                                                                                                                                                                                                                       | Total assets                               |            | $            | 2,715,464 |  |            | $       | 2,360,834 | 
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                    
|Current liabilities:                                                         |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             | Short-term borrowings, including current portion
    of long-term debt                                                                                                                                                                                |                                            | $          | 44,160       |           |  | $          | 41,042  |          
|                                                                             | Accounts payable                                                                                                                                                                                                                                      |                                            |            | 593,263      |           |  |            | 642,206 |          
|                                                                             | Accrued and other liabilities                                                                                                                                                                                                                         |                                            |            | 532,358      |           |  |            | 471,750 |          
|                                                                             | Liabilities of discontinued operations                                                                                                                                                                                                                |                                            |            |             |           |  |            | 11,646  |          
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             |                                                                                                                                                                                                                                                       | Total current liabilities                  |            |              | 1,169,781 |  |            |         | 1,166,644 | 
|Deferred taxes                                                               |                                                                                                                                                                                                                                                       |                                            | 196,455    |              |           |  | 196,455    |        
|Long-term debt, net of current portion                                       |                                                                                                                                                                                                                                                       |                                            | 244,458    |              |           |  | 206,343    |        
|Other liabilities                                                            |                                                                                                                                                                                                                                                       |                                            | 204,587    |              |           |  | 199,071    |        
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             |                                                                                                                                                                                                                                                       | Total liabilities                          |            |              | 1,815,281 |  |            |         | 1,768,513 | 
|Commitments and contingencies (Note 10)                                      |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|Stockholders equity:                                                        |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             | Preferred stock, $0.01 par value, 95,000,000
    shares authorized; no shares issued or outstanding                                                                                                                                                   |                                            |            |             |           |  |            |        |          
|                                                                             | Common stock, $0.01 par value, 525,000,000 shares
    authorized; 241,977,795 shares issued and
    236,977,795 shares outstanding at December 29, 2001
    and 247,507,244 shares issued and 242,507,244 shares outstanding
    at December 28, 2002 |                                            |            | 2,420        |           |  |            | 2,475   |          
|Additional paid-in capital                                                   |                                                                                                                                                                                                                                                       |                                            | 2,323,885  |              |           |  | 2,349,253  |        
|Deferred stock-based compensation                                            |                                                                                                                                                                                                                                                       |                                            | (3,809     | )            |           |  | (1,193     | )      
|Accumulated deficit                                                          |                                                                                                                                                                                                                                                       |                                            | (1,406,524 | )            |           |  | (1,740,591 | )      
|Cumulative other comprehensive income                                        |                                                                                                                                                                                                                                                       |                                            | 4,211      |              |           |  | 2,377      |        
|Treasury stock (5,000,000 shares in 2001 and
    2002, respectively) at cost |                                                                                                                                                                                                                                                       |                                            | (20,000    | )            |           |  | (20,000    | )      
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             |                                                                                                                                                                                                                                                       | Total stockholders equity                 |            |              | 900,183   |  |            |         | 592,321   | 
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        
|                                                                             |                                                                                                                                                                                                                                                       | Total liabilities and stockholders equity |            | $            | 2,715,464 |  |            | $       | 2,360,834 | 
|                                                                             |                                                                                                                                                                                                                                                       |                                            |            |              |           |  |            |        

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

52



---



##### Table of Contents



MAXTOR CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |             |         | 
|---------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------- | --------- | ------------ | ------- | ------------ | --------- | ----------- | ------- | - | --------- | ----------- | ------- | 
|                                                                 |                                                          |                                                   
|                                                                 |                                                          | Years Ended                                       
|                                                                 |                                                          |                                                   
|                                                                 |                                                          | December 30,                                       |           | December 29, |         | December 28,
|                                                                 |                                                          | 2000                                               |           | 2001         |         | 2002        
|                                                                 |                                                          |                                                    |           |              |         |             
|                                                                 |                                                          |                                                   
|                                                                 |                                                          | (In thousands, except share and per share amounts)
|Net revenues                                                     |                                                          | $                                                  | 2,690,843 |              |         | $            | 3,765,559 |             |         | $ | 3,779,514 |            
|Cost of revenues                                                 |                                                          |                                                    | 2,317,660 |              |         |              | 3,403,051 |             |         |   | 3,382,099 |            
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|                                                                 |                                                          | Gross profit                                       |           |              | 373,183 |              |           |             | 362,508 |   |           |             | 397,415 | 
|Operating expenses:                                              |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|                                                                 | Research and development                                 |                                                    |           | 211,831      |         |              |           | 411,189     |         |   |           | 401,014     |        
|                                                                 | Selling, general and administrative                      |                                                    |           | 99,627       |         |              |           | 232,028     |         |   |           | 148,486     |        
|                                                                 | Amortization of goodwill and other intangible
    assets |                                                    |           |             |         |              |           | 207,827     |         |   |           | 82,248      |        
|                                                                 | Purchased in-process research and development            |                                                    |           |             |         |              |           | 95,190      |         |   |           |            |        
|                                                                 | Restructuring charge                                     |                                                    |           |             |         |              |           |            |         |   |           | 9,495       |        
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|                                                                 |                                                          | Total operating expenses                           |           |              | 311,458 |              |           |             | 946,234 |   |           |             | 641,243 | 
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Income (loss) from operations                                    |                                                          |                                                    | 61,725    |              |         |              | (583,726  | )           |         |   | (243,828  | )          
|Interest expense                                                 |                                                          |                                                    | (13,752   | )            |         |              | (25,190   | )           |         |   | (26,945   | )          
|Interest and other income                                        |                                                          |                                                    | 24,287    |              |         |              | 21,472    |             |         |   | 10,053    |            
|Gain (loss) on sale of investments                               |                                                          |                                                    | 1,820     |              |         |              | (7,353    | )           |         |   | 2,329     |            
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Income (loss) from continuing operations
    before income taxes |                                                          |                                                    | 74,080    |              |         |              | (594,797  | )           |         |   | (258,391  | )          
|Provision for income taxes                                       |                                                          |                                                    | 1,673     |              |         |              | 3,382     |             |         |   | 2,175     |            
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Income (loss) from continuing operations                         |                                                          |                                                    | 72,407    |              |         |              | (598,179  | )           |         |   | (260,566  | )          
|Loss from discontinued operations                                |                                                          |                                                    | (40,605   | )            |         |              | (48,219   | )           |         |   | (73,501   | )          
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Net income (loss)                                                |                                                          | $                                                  | 31,802    |              |         | $            | (646,398  | )           |         | $ | (334,067  | )          
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Net income (loss) per share  basic                              |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Continuing operations                                            |                                                          | $                                                  | 0.64      |              |         | $            | (2.89     | )           |         | $ | (1.09     | )          
|Discontinued operations                                          |                                                          | $                                                  | (0.36     | )            |         | $            | (0.23     | )           |         | $ | (0.31     | )          
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Total                                                            |                                                          | $                                                  | 0.28      |              |         | $            | (3.12     | )           |         | $ | (1.40     | )          
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Net income (loss) per share 
    diluted                        |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Continuing operations                                            |                                                          | $                                                  | 0.61      |              |         | $            | (2.89     | )           |         | $ | (1.09     | )          
|Discontinued operations                                          |                                                          | $                                                  | (0.34     | )            |         | $            | (0.23     | )           |         | $ | (0.31     | )          
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Total                                                            |                                                          | $                                                  | 0.27      |              |         | $            | (3.12     | )           |         | $ | (1.40     | )          
|                                                                 |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|Shares used in per share calculation                             |                                                          |                                                    |           |              |         |              |           |             |         |   |           |            
|                                                                 | -basic                                                   |                                                    |           | 113,432,679  |         |              |           | 206,911,952 |         |   |           | 239,474,179 |        
|                                                                 | -diluted                                                 |                                                    |           | 119,115,982  |         |              |           | 206,911,952 |         |   |           | 239,474,179 |        

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

53



---



##### Table of Contents



MAXTOR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

AND COMPREHENSIVE INCOME


(In thousands, except share amounts)


|                                                                        |                                                         |              |             |            |  |             |       |              |  |               |           |          |  |               |        |        |  |   |            |          |   |   |       |        |   |   |         |   |  |   |           |          |  
|----------------------------------------------------------------------- | ------------------------------------------------------- | ------------ | ----------- | ---------- |  | ----------- | ----- | ------------ |  | ------------- | --------- | -------- |  | ------------- | ------ | ------ |  | - | ---------- | -------- | - | - | ----- | ------ | - | - | ------- | - |  | - | --------- | -------- | -
|                                                                        |                                                         |              |             |            |  |             |       |              |  | Cumulative    |           |          |  |              
|                                                                        |                                                         | Common Stock |             | Additional |  | Deferred    |       |              |  | Other         |           |          |  | Total        
|                                                                        |                                                         |              |             | Paid-in    |  | Stock-based |       | Accumulated  |  | Comprehensive |           | Treasury |  | Stockholders
|                                                                        |                                                         | Shares       |             | Amount     |  | Capital     |       | Compensation |  | Deficit       |           | Income   |  | Stock         |        | Equity
|                                                                        |                                                         |              |             |            |  |             |       |              |  |               |           |          |  |               |        |       
|Balance, January 1, 2000                                                |                                                         |              | 113,428,924 |            |  | $           | 1,119 |              |  | $             | 1,043,964 |          |  | $             |       |        |  | $ | (791,928   | )        |   | $ | 2,215 |        |   | $ |        |   |  | $ | 255,370   |         
|                                                                        | Net income                                              |              |             |           |  |             |       |             |  |               |           |         |  |               |        |       |  |   |            | 31,802   |   |   |       |       |   |   |         |  |  |   |           | 31,802   |  
|                                                                        | Unrealized gain on investments in equity
    securities |              |             |           |  |             |       |             |  |               |           |         |  |               |        |       |  |   |            |         |   |   |       | 588    |   |   |         |  |  |   |           | 588      |  
|Issuance of stock under stock option plan and
    related benefit plans |                                                         |              | 2,776,346   |            |  |             | 43    |              |  |               | 11,763    |          |  |               |       |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 11,806    |         
|Stock-based compensation                                                |                                                         |              |            |            |  |             |      |              |  |               | 4,172     |          |  |               |       |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 4,172     |         
|                                                                        |                                                         |              |             |            |  |             |       |              |  |               |           |          |  |               |        |        |  |   |            |          |   |   |       |        |   |   |         |   |  |   |           |         
|Balance, December 30, 2000                                              |                                                         |              | 116,205,270 |            |  |             | 1,162 |              |  |               | 1,059,899 |          |  |               |       |        |  |   | (760,126   | )        |   |   | 2,803 |        |   |   |        |   |  |   | 303,738   |         
|                                                                        | Net loss                                                |              |             |           |  |             |       |             |  |               |           |         |  |               |        |       |  |   |            | (646,398 | ) |   |       |       |   |   |         |  |  |   |           | (646,398 | )
|                                                                        | Unrealized gain on investments in equity
    securities |              |             |           |  |             |       |             |  |               |           |         |  |               |        |       |  |   |            |         |   |   |       | 1,408  |   |   |         |  |  |   |           | 1,408    |  
|Issuance of stock under stock option plan and
    related benefit plans |                                                         |              | 4,742,053   |            |  |             | 47    |              |  |               | 21,510    |          |  |               |       |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 21,557    |         
|Issuance of stock relating to Quantum HDD
    acquisition               |                                                         |              | 121,030,472 |            |  |             | 1,211 |              |  |               | 1,232,601 |          |  |               |       |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 1,233,812 |         
|Deferred compensation relating to Quantum HDD
    acquisition           |                                                         |              |            |            |  |             |      |              |  |               | 6,785     |          |  |               | (6,785 | )      |  |   |           |          |   |   |      |        |   |   |        |   |  |   |          |         
|Stock-based compensation                                                |                                                         |              |            |            |  |             |      |              |  |               | 3,090     |          |  |               | 2,976  |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 6,066     |         
|Treasury shares repurchased at cost                                     |                                                         |              |            |            |  |             |      |              |  |               |          |          |  |               |       |        |  |   |           |          |   |   |      |        |   |   | (20,000 | ) |  |   | (20,000   | )       
|                                                                        |                                                         |              |             |            |  |             |       |              |  |               |           |          |  |               |        |        |  |   |            |          |   |   |       |        |   |   |         |   |  |   |           |         
|Balance, December 29, 2001                                              |                                                         |              | 241,977,795 |            |  |             | 2,420 |              |  |               | 2,323,885 |          |  |               | (3,809 | )      |  |   | (1,406,524 | )        |   |   | 4,211 |        |   |   | (20,000 | ) |  |   | 900,183   |         
|                                                                        | Net loss                                                |              |             |           |  |             |       |             |  |               |           |         |  |               |        |       |  |   |            | (334,067 | ) |   |       |       |   |   |         |  |  |   |           | (334,067 | )
|                                                                        | Unrealized loss on investments in equity
    securities |              |             |           |  |             |       |             |  |               |           |         |  |               |        |       |  |   |            |         |   |   |       | (1,834 | ) |   |         |  |  |   |           | (1,834   | )
|Issuance of stock under stock option plan and
    related benefit plans |                                                         |              | 5,529,449   |            |  |             | 55    |              |  |               | 22,422    |          |  |               |       |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 22,477    |         
|Stock-based compensation                                                |                                                         |              |            |            |  |             |      |              |  |               | 2,946     |          |  |               | 2,616  |        |  |   |           |          |   |   |      |        |   |   |        |   |  |   | 5,562     |         
|                                                                        |                                                         |              |             |            |  |             |       |              |  |               |           |          |  |               |        |        |  |   |            |          |   |   |       |        |   |   |         |   |  |   |           |         
|Balance, December 28, 2002                                              |                                                         |              | 247,507,244 |            |  | $           | 2,475 |              |  | $             | 2,349,253 |          |  | $             | (1,193 | )      |  | $ | (1,740,591 | )        |   | $ | 2,377 |        |   | $ | (20,000 | ) |  | $ | 592,321   |         
|                                                                        |                                                         |              |             |            |  |             |       |              |  |               |           |          |  |               |        |        |  |   |            |          |   |   |       |        |   |   |         |   |  |   |           |         

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

54



---



##### Table of Contents



MAXTOR CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |         |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------------------------ | ------------ | ------- | ------------ | -------- | --------- | ------- | ------- | -------- | ------- | ------- | ------- | -
|                                                                                                                                      |                                                                                     |                                  
|                                                                                                                                      |                                                                                     | Years Ended                      
|                                                                                                                                      |                                                                                     |                                  
|                                                                                                                                      |                                                                                     | December 30,                      |                                                                          | December 29, |         | December 28,
|                                                                                                                                      |                                                                                     | 2000                              |                                                                          | 2001         |         | 2002        
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |             
|                                                                                                                                      |                                                                                     |                                  
|                                                                                                                                      |                                                                                     | (In thousands)                   
|Cash Flows from Operating
    Activities:                                                                                             |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Net income (loss) from continuing operations                                                                                          |                                                                                     | $                                 | 72,407                                                                   |              |         | $            | (598,179 | )         |         | $       | (260,566 | )      
|Adjustments to reconcile net income
    (loss) from continuing operations to net cash provided by
    (used in) operating activities: |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      | Depreciation and amortization                                                       |                                   |                                                                          | 82,136       |         |              |          | 125,610   |         |         |          | 155,829 |        
|                                                                                                                                      | Amortization of goodwill and other intangible
    assets                            |                                   |                                                                          |             |         |              |          | 207,827   |         |         |          | 82,248  |        
|                                                                                                                                      | Amortization of deferred compensation related to
    restricted Quantum DSS shares  |                                   |                                                                          |             |         |              |          | 36,901    |         |         |          | 4,103   |        
|                                                                                                                                      | Purchased in-process research and development                                       |                                   |                                                                          |             |         |              |          | 95,190    |         |         |          |        |        
|                                                                                                                                      | Stock compensation expense                                                          |                                   |                                                                          | 4,172        |         |              |          | 6,066     |         |         |          | 5,562   |        
|                                                                                                                                      | Restructuring charge                                                                |                                   |                                                                          |             |         |              |          |          |         |         |          | 9,495   |        
|                                                                                                                                      | Loss on sale of property, plant and equipment and
    other assets                  |                                   |                                                                          | 2,144        |         |              |          | 2,478     |         |         |          | 2,568   |        
|                                                                                                                                      | Gain on retirement of bond                                                          |                                   |                                                                          |             |         |              |          | (1,280    | )       |         |          | (2,832  | )      
|                                                                                                                                      | Loss (gain) on investment                                                           |                                   |                                                                          | (1,820       | )       |              |          | 6,667     |         |         |          | (1,307  | )      
|                                                                                                                                      | Change in assets and liabilities:                                                   |                                   |                                                                          |              |         |              |          |           |         |         |          |         |        
|                                                                                                                                      |                                                                                     | Accounts receivable               |                                                                          |              | (53,328 | )            |          |           | 153,927 |         |          |         | 17,383  |        
|                                                                                                                                      |                                                                                     | Inventories                       |                                                                          |              | (2,018  | )            |          |           | 121,281 |         |          |         | 5,587   |        
|                                                                                                                                      |                                                                                     | Prepaid expenses and other assets |                                                                          |              | (21,179 | )            |          |           | 76,626  |         |          |         | 10,093  |        
|                                                                                                                                      |                                                                                     | Accounts payable                  |                                                                          |              | 11,953  |              |          |           | (94,046 | )       |          |         | 45,336  |        
|                                                                                                                                      |                                                                                     | Accrued and other liabilities     |                                                                          |              | 58,419  |              |          |           | (60,745 | )       |          |         | (70,711 | )      
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by operating activities from
    continuing operations |              |         | 152,886      |          |           |         | 78,323  |          |         |         | 2,788   |  
|                                                                                                                                      |                                                                                     |                                   | Net cash flow used in discontinued operations                            |              |         | (24,992      | )        |           |         | (42,679 | )        |         |         | (31,578 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by (used in) operating
    activities                  |              |         | 127,894      |          |           |         | 35,644  |          |         |         | (28,790 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Cash Flows from Investing
    Activities:                                                                                             |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Proceeds from sale of property, plant and
    equipment                                                                               |                                                                                     |                                   | 1,930                                                                    |              |         |              | 289      |           |         |         | 277      |        
|Purchase of property, plant and equipment                                                                                             |                                                                                     |                                   | (116,442                                                                 | )            |         |              | (115,067 | )         |         |         | (139,080 | )      
|Cash acquired from acquisition, net of merger
    related expenses                                                                    |                                                                                     |                                   |                                                                         |              |         |              | 374,692  |           |         |         |         |        
|Restricted cash acquired from acquisition                                                                                             |                                                                                     |                                   |                                                                         |              |         |              | (98,629  | )         |         |         |         |        
|Decrease in restricted cash                                                                                                           |                                                                                     |                                   |                                                                         |              |         |              |         |           |         |         | 41,882   |        
|Proceeds from sale of marketable securities                                                                                           |                                                                                     |                                   | 188,389                                                                  |              |         |              | 175,401  |           |         |         | 171,447  |        
|Purchase of marketable securities                                                                                                     |                                                                                     |                                   | (257,773                                                                 | )            |         |              | (156,265 | )         |         |         | (92,063  | )      
|Proceeds from sale of investment                                                                                                      |                                                                                     |                                   | 1,820                                                                    |              |         |              |         |           |         |         |         |        
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by (used in) investing
    activities                  |              |         | (182,076     | )        |           |         | 180,421 |          |         |         | (17,537 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Cash Flows from Financing
    Activities:                                                                                             |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Principal payments of debt including short-term
    borrowings                                                                        |                                                                                     |                                   | (5,036                                                                   | )            |         |              | (17,765  | )         |         |         | (25,595  | )      
|Principal payments under capital lease obligations                                                                                    |                                                                                     |                                   |                                                                         |              |         |              | (5,927   | )         |         |         | (24,038  | )      
|Purchase of treasury stock at cost                                                                                                    |                                                                                     |                                   |                                                                         |              |         |              | (20,000  | )         |         |         |         |        
|Proceeds from issuance of common stock from
    employee stock purchase plan and stock options exercised                              |                                                                                     |                                   | 12,089                                                                   |              |         |              | 14,326   |           |         |         | 22,477   |        
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by (used in) financing
    activities                  |              |         | 7,053        |          |           |         | (29,366 | )        |         |         | (27,156 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Net change in cash and cash equivalents                                                                                               |                                                                                     |                                   | (47,129                                                                  | )            |         |              | 186,699  |           |         |         | (73,483  | )      
|Cash and cash equivalents at beginning of year                                                                                        |                                                                                     |                                   | 240,357                                                                  |              |         |              | 193,228  |           |         |         | 379,927  |        
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Cash and cash equivalents at end of year                                                                                              |                                                                                     | $                                 | 193,228                                                                  |              |         | $            | 379,927  |           |         | $       | 306,444  |        
|                                                                                                                                      |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|Supplemental Disclosures of Cash Flow
    Information:                                                                                |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      | Cash paid during the period for:                                                    |                                   |                                                                          |              |         |              |          |           |         |         |          |         |        
|                                                                                                                                      |                                                                                     | Interest                          |                                                                          | $            | 14,440  |              |          | $         | 21,525  |         |          | $       | 21,839  |        
|                                                                                                                                      |                                                                                     | Income taxes                      |                                                                          | $            | 875     |              |          | $         | 936     |         |          | $       | 5,840   |        
|Schedule of Non-Cash Investing and Financing
    Activities:                                                                          |                                                                                     |                                   |                                                                          |              |         |              |          |           |         |         |          |        
|                                                                                                                                      | Purchase of property, plant and equipment
    financed by accounts payable          |                                   | $                                                                        | 2,606        |         |              | $        | 21,525    |         |         | $        | 7,058   |        
|                                                                                                                                      | Retirement of debt in exchange for bond redemption                                  |                                   | $                                                                        | 5,000        |         |              | $        | 5,000     |         |         | $        | 5,000   |        
|                                                                                                                                      | Change in unrealized loss on investments                                            |                                   | $                                                                        | 588          |         |              | $        | 1,408     |         |         | $        | (1,834  | )      
|                                                                                                                                      | Purchase of property, plant and equipment
    financed by capital lease obligations |                                   | $                                                                        |             |         |              | $        |          |         |         | $        | 11,232  |        
|                                                                                                                                      | Value of shares issued in Quantum HDD acquisition                                   |                                   | $                                                                        |             |         |              | $        | 1,240,597 |         |         | $        |        |        
|                                                                                                                                      | Net receivables forgiven for MMC Technology Inc.
    acquisition                    |                                   | $                                                                        |             |         |              | $        | 16,001    |         |         | $        |        |        

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

55



---



##### Table of Contents






MAXTOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Summary of
Significant Accounting Policies

Basis of
Presentation

The accompanying consolidated financial
statements include the accounts of Maxtor Corporation and its
wholly-owned subsidiaries (Maxtor or the
Company). All significant inter-company accounts and
transactions have been eliminated.

The Company operates and reports financial
results on a fiscal year of 52 or 53 weeks ending on the
Saturday closest to December 31. Accordingly, fiscal year
2002 ended on December 28, 2002, fiscal year 2001 ended on
December 29, 2001 and fiscal year 2000 ended on
December 30, 2000. Fiscal years 2002, 2001 and 2000
comprised 52 weeks, respectively. All references to years
in these notes to consolidated financial statements represent
fiscal years unless otherwise noted.

Business

Maxtor develops, manufactures and markets hard
disk drives for a variety of applications, including desktop
computers, high-performance Intel-based servers and consumer
electronics. Customers include original equipment manufacturers
(OEMs), distributors and retailers.

Use of
Estimates

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the
financial statements and reported amounts of revenues and
expenses during the reporting periods. Actual results could
differ from those estimates.

Material differences may result in the amount and
timing of the Companys revenue for any period, if the
Companys management made different judgments or utilized
different estimates.

The actual results with regard to warranty
expenditures could have a material impact on Maxtor if the
actual rate of unit failure or the cost to repair a unit varies
significantly from what the Company has used in estimating its
warranty expense accrual.

Given the volatility of the market for disk
drives and for the Companys products, the Company makes
adjustments to the value of inventories based on estimates of
potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted
average selling prices. However, forecasts are always subject to
revisions, cancellations, and rescheduling. Actual demand will
inevitably differ from such anticipated demand and such
differences may have a material impact on the financial
statements.

The actual results with regard to the useful
lives of property, plant and equipment may vary from their
estimated useful lives, which could have a material impact on
the Companys results of operations.

Certain Risks
and Concentrations

The Companys revenues are derived from the
sale of its hard disk drive products. The markets in which the
Company competes are highly competitive and rapidly changing.
Significant technological changes, changes in customer
requirements, or the emergence of competitive products with new
capabilities or technologies could adversely affect operating
results. The Company has historically derived substantially all
of its net revenues from the hard disk drive products. As a
result of this revenue concentration, the Companys
business could be harmed by a decline in demand for, or in the
prices of, these products as a result of, among other factors,
any change in pricing model, a maturation in the markets for
these products, increased price competition or a failure by the
Company to keep up with technological change.

56



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company sells a significant amount of its
products through intermediaries such as distributors. Revenue
from sales to distributors represented 47.6% of total revenues
in the year ended December 28, 2002. The Companys
distributor agreements may be terminated by either party without
cause. If one of the Companys significant distributors
terminates its distribution agreement, the Company could
experience a significant interruption in the distribution of its
products.

The Companys distributors may sell other
vendors products that are complementary to, or compete
with, its products. While the Company encourages its
distributors to focus on the Companys products through
market and support programs, these distributors may give greater
priority to products of other suppliers, including competitors.

Financial instruments which potentially subject
Maxtor to concentrations of credit risk consist primarily of
accounts receivable, cash equivalents, restricted cash and
marketable securities. The Company has cash equivalents and
marketable securities policies that limit the amount of credit
exposure to any one financial institution and restricts
placement of these funds to financial institutions evaluated as
highly credit-worthy. Maxtors products are sold worldwide
to OEMs, distributors, and retailers. Concentration of credit
risk with respect to the Companys trade receivables is
limited by an ongoing credit evaluation process and the
geographical dispersion of sales transactions. Therefore,
collateral is generally not required from the Companys
customers. The allowance for doubtful accounts is based upon the
expected collectibility of all accounts receivable. As of
December 28, 2002, the Company had no customer who
accounted for more than 10% of the outstanding trade
receivables. If the customers fail to perform their obligations
to us, such failures would have adverse effects upon
Maxtors financial position, results of operations, cash
flows and liquidity.

The Company purchases a majority of its server
hard disk drive finished goods from Matsushita Kotobuki
Electronics, Ltd. (MKE). If MKE were unable to
produce according to the Companys product delivery
schedules, the Companys operating results could be
adversely affected.

For the year ended December 28, 2002, the
Company incurred a loss from operations of $243.8 million.
As of December 28, 2002, the Company had an accumulated
deficit of $1,740.6 million. The Company operates in a
highly competitive market characterized by rapidly changing
technology. The Company intends to incur significant expenses to
continue to develop and promote new products as well as to
support existing product sales. Failure to generate sufficient
revenues from new and existing products may require the Company
to delay, scale back or eliminate certain research and
development or marketing programs.

The Company believes that cash, cash equivalents,
restricted cash and marketable securities will be sufficient to
meet its needs for operations and working capital requirements
for the next twelve months through December 27, 2003. To
the extent that the Company does not generate sufficient
revenues from new and existing products or reduce discretionary
expenditures and, as a result, cash generated from operations is
insufficient to satisfy liquidity requirements, additional cash
may be needed to finance operating and investing needs. However,
depending on market conditions, any additional financing needed
may not be available on acceptable terms, or at all.

Cash and Cash
Equivalents

The Company considers all highly liquid
investments with a maturity of three months or less at time of
purchase to be cash equivalents except restricted cash. Cash and
cash equivalents include money market accounts, commercial paper
and various deposit accounts. The carrying amount of cash and
cash equivalents approximates fair value due to the short-term
maturity of those assets.

Restricted
Cash

The Companys restricted cash balance was
$56.7 million at December 28, 2002. The restricted
cash balance was pledged as collateral for certain stand-by
letters of credit issued by commercial banks.

57



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Marketable
and Equity Securities

The Companys marketable securities comprise
U.S. obligations; U.S. government debt agencies; corporate
debt securities; bank issues; and mortgage and asset backed
securities. These marketable securities are carried at fair
value, in accordance with Statement of Financial Accounting
Standards No. 115 Accounting for Certain Investments
in Debt and Equity Securities. All marketable securities
are held in the Companys name and are managed primarily
under custodial agreements with financial institutions. All of
the Companys marketable securities were classified as
available-for-sale. Unrealized gains and losses on these
investments are included in other comprehensive income (loss)
and disclosed as a separate component of shareholders
equity. Realized gains and losses on sales of all such
investments are reported in results of operations and computed
using the specific identification method.

All equity securities are classified as
available-for-sale and are carried at fair value. Unrealized
gains and losses on securities classified as available-for-sale
are included in other comprehensive income (loss) and are
reported as a separate component of stockholders equity.
Realized gains and losses on sales of all such investments are
included in the results of operations computed using the
specific identification cost method.

The Companys investments in equity and
marketable securities are monitored on a periodic basis for
impairment. In the event that the carrying value of an
investment exceeds its fair value and the decline in value is
determined to be other-than-temporary, an impairment charge is
recorded and a new cost basis for the investment is established.
Fair values for investments in public companies are determined
using quoted market prices. Fair values for investments in
privately-held companies are estimated based upon one or more of
the following: pricing models using historical and forecasted
financial information and current market rates, liquidation
values, the values of recent rounds of financing, or quoted
market prices of comparable public companies. Marketable and
equity securities, which are classified as available-for-sale,
are summarized as follows, as of December 28, 2002 and
December 29, 2001:

|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|----------------------------- |  | -------------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                              |  |                |         | Gross      |  | Gross      |       |           
|                              |  | Purchase       |         | Unrealized |  | Unrealized |       | Aggregate 
|                              |  | Amortized Cost |         | Gains      |  | Losses     |       | Fair Value
|                              |  |                |         |            |  |            |       |           
|                              |  |               
|                              |  | (In thousands)
|2002                          |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|US Government debt securities |  | $              | 56,050  |            |  | $          | 618   |            |  | $ |     |   |  | $ | 56,668  | 
|Asset backed securities       |  |                | 10,182  |            |  |            | 54    |            |  |   |     |   |  |   | 10,236  | 
|Corporate debt securities     |  |                | 12,308  |            |  |            | 96    |            |  |   |     |   |  |   | 12,404  | 
|Certificate of deposits       |  |                | 8,199   |            |  |            |      |            |  |   |     |   |  |   | 8,199   | 
|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|Total marketable securities   |  | $              | 86,739  |            |  | $          | 768   |            |  | $ |     |   |  | $ | 87,507  | 
|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|Equity securities             |  | $              | 4,980   |            |  | $          | 1,783 |            |  | $ | (174 | ) |  | $ | 6,589   | 
|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|2001                          |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|US Government debt securities |  | $              | 91,165  |            |  | $          | 754   |            |  | $ |     |   |  | $ | 91,919  | 
|Asset backed securities       |  |                | 13,280  |            |  |            | 167   |            |  |   |     |   |  |   | 13,447  | 
|Corporate debt securities     |  |                | 49,424  |            |  |            | 527   |            |  |   |     |   |  |   | 49,951  | 
|Certificate of deposits       |  |                | 11,899  |            |  |            | 1     |            |  |   |     |   |  |   | 11,900  | 
|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|Total marketable securities   |  | $              | 165,768 |            |  | $          | 1,449 |            |  | $ |     |   |  | $ | 167,217 | 
|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|Equity securities             |  | $              | 4,980   |            |  | $          | 1,671 |            |  | $ |     |   |  | $ | 6,651   | 
|                              |  |                |         |            |  |            |       |            |  |   |      |   |  |   |         | 

58



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories

Inventories include material and related
manufacturing overhead, and are stated at the lower of cost
(computed on a first-in, first-out basis) or market. The Company
writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon
assumptions about future demand and market conditions.

Property,
Plant and Equipment

Property, plant and equipment are stated at cost
and are depreciated on a straight-line basis over the estimated
useful lives of the assets, which generally range from three to
five years, except for buildings, which are depreciated over
thirty years. Assets under leasehold improvements are amortized
over the shorter of the asset life or the remaining lease term.
Upon disposal, the Company removes the asset and accumulated
depreciation from its records and recognizes the related gain or
loss in results of operations.

Repair and maintenance expenditures, which are
not considered improvements and do not extend the useful life of
property, plants and equipment, are expensed as incurred.

Goodwill and
Other Intangible Assets

Goodwill represents the excess of purchase price
and acquisition costs over the fair value of net assets of
businesses acquired. Other intangible assets represents existing
technology, being amortized over the estimated useful lives
ranging from three to five years. The Company evaluates the
periods of amortization continually to determine whether later
events and circumstances warrant renewed estimates of useful
lives.

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets, which is
effective for fiscal years beginning after December 15,
2001. SFAS 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard included
provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing
goodwill and other intangibles. As a result, the Company
reclassified its existing acquired assembled workforce balance
to goodwill, as it does not meet the separate recognition
criterion according to SFAS 142. Commencing in fiscal 2002, the
Company adopted SFAS 142.

Impairment of
Long-lived Assets, Including Goodwill and Other
Intangibles

The Company assesses the impairment of its
long-lived assets, other identifiable intangibles and related
goodwill periodically in accordance with the provisions of
Statement of Financial Accounting Standards No. 144
(SFAS No. 144), Accounting for the
Impairment and Disposal of Long-Lived Assets. The Company
also assesses the impairment of enterprise level goodwill
periodically in accordance with the provision of SFAS
No. 142 Goodwill and Other Intangible Assets.

SFAS No. 142 prescribes a two-phase process
for impairment testing of goodwill. The first phase, used to
identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. An
impairment review is performed annually or whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors considered important which could
result in an impairment review include but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, undiscounted cash flows are
less than the carrying value, significant changes in the manner
of use of the acquired assets or the strategy for the
Companys overall business, significant negative industry
or economic trends, a significant decline in our stock price for
a sustained period, and the Companys market capitalization
relative to net book value. The second phase (if necessary),
measures the amount of impairment loss by comparing the implied
fair value of reporting unit goodwill with

59



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the carrying amount of that goodwill. If the
Company determines that the carrying value of goodwill may not
be recoverable based upon the existence of one or more of the
above indicators of impairment, the Company will measure any
impairment based on the projected discounted cash flow method
using a discount rate commensurate with the risk inherent to the
Companys current business model.

We completed our first phase impairment analysis
and found no instances of impairment of our recorded goodwill;
accordingly, the second testing phase, absent future indicators
of impairment, was not necessary during 2002.

Restructuring
Liabilities, Litigation and Other Contingencies

The Company accounts for its restructuring
liabilities in connection with business combinations in
accordance with Emerging Issues Task Force No. 95-3
(EITF 95-3), Recognition of Liabilities in
Connection with a Purchase Business Combination.
EITF 95-3 requires that the Company record an estimated
liability if the estimated costs are not associated with or are
not incurred to generate revenues of the combined entity after
the consummation date and they meet certain criteria defined
within EITF 95-3. The Company accounted for restructuring
liabilities initiated in 2002 in accordance with EITF 94-3
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), which requires the
Company to record the liability resulting from estimated costs
that are not associated with or do not benefit activities that
will be continued. The Company accounts for litigation and
contingencies in accordance with Statement of Financial
Accounting Standard No. 5 (SFAS 5),
Accounting for Contingencies. SFAS 5 requires
that the Company record an estimated loss from a loss
contingency when information available prior to issuance of the
Companys financial statements indicates that it is
probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount
of loss can be reasonably estimated.

Revenue
Recognition

The Company derives its revenue from the sale of
products. As described below, significant management judgments
and estimates must be made and used in connection with the
revenue recognized in any accounting period with respect to the
amount of reserves for sales returns, allowances and doubtful
accounts. Material differences may result in the amount and
timing of the Companys revenue for any period if its
management made different judgments or utilized different
estimates.

In recognizing revenue in any period, the Company
applies the provisions of Staff Accounting Bulletin 101
Revenue Recognition.

Revenue from sales of products is recognized when
persuasive evidence of an arrangement exists, including a fixed
price to the buyer, delivery has occurred and collectibility is
reasonably assured; this generally occurs upon shipment.

For all sales the Company uses either a binding
purchase order or signed purchase agreement as evidence of an
arrangement. Sales through its distributors are evidenced by a
master agreement governing the relationship together with
binding purchase orders on a transaction-by-transaction basis.
The Companys arrangements generally do not include
acceptance clauses.

The Company assesses collection based on a number
of factors, including past transaction history with the customer
and the credit-worthiness of the customer. The Company does not
request collateral from its customers.

Delivery generally occurs when product is
delivered to a common carrier. Certain of the Companys
products are delivered on an FOB destination basis. The Company
defers its revenue associated with these transactions until the
delivery has occurred to the customers premises.

60



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Sales to original equipment manufacturers
(OEMs) are subject to agreements allowing limited
rights of return and sales incentive programs. Sales incentive
programs are typically related to an OEMs level of
purchases. Estimated reductions to revenue for sales incentive
programs are provided at the time the revenue is recorded.
Returns from OEMs have not been material in any period as the
Companys principal OEM customers have adopted
build-to-order manufacturing model or just-in-time inventory
management processes.

Sales to distributors and retailers
(resellers) are subject to agreements allowing
limited rights of return, price protection, sales incentive
programs and advertising. These programs are generally related
to a resellers level of sales, order size or point of sale
activity. The Company provides for these programs as deductions
from revenues at the time the revenue is recorded based on
estimated requirements. These estimates are based primarily on
estimated future price erosion, customer sell-through levels and
program participation. Such estimates are adjusted periodically
to reflect actual and anticipated experience.

Estimated product returns are provided in
accordance with Statement of Financial Accounting Standard
No. 48 (SFAS 48), Revenue
Recognition When Right of Return Exists. Resellers have
limited rights of return which allow them to return a percentage
of the prior quarters purchases by these resellers.
Accordingly, revenue is not recognized with respect to those
shipments which management estimates will be returned. The
Company believes that these estimates are reasonably accurate
due to the short time period during which the Companys
resellers can return products, the limitations placed on their
right to make returns, the Companys long history of
conducting business with resellers on a sell-in basis, the
nature of the Companys historical relationships with
resellers and the weekly reporting procedures through which the
Company monitors inventory levels at resellers and sales to
end-users.

Product
Warranty

The Company records an accrual for estimated
warranty costs when revenue is recognized. Warranty covers cost
of repair of the hard drive and the warranty periods generally
range from one to five years. The Company has comprehensive
processes that it uses to estimate accruals for warranty
exposure. The processes include specific detail on hard drives
in the field by product type, estimated failure rates and costs
to repair. Although the Company believes it has the continued
ability to reasonably estimate warranty expenses, unforeseeable
changes in factors used to estimate the accrual for warranty
could occur. These unforeseeable changes could cause a material
change in the Companys warranty accrual estimate. Such a
change would be recorded in the period in which the change was
identified. Changes in the Companys product warranty
liability during the year ended December 28, 2002 were as
follows (in thousands):

|                                       |                                                             |                   |          |          |  
|-------------------------------------- | ----------------------------------------------------------- | ----------------- | -------- | -------- | -
|                                       |                                                             | Year Ended       
|                                       |                                                             | December 28, 2002
|                                       |                                                             |                  
|Balance at the beginning of the period |                                                             | $                 | (313,894 | )       
|                                       | Accruals for warranties issued during the period            |                   |          | (173,517 | )
|                                       | Settlements made (in cash or in kind) during the
    period |                   |          | 208,698  |  
|                                       |                                                             |                   |          |         
|Balance at the end of the period       |                                                             | $                 | (278,713 | )       
|                                       |                                                             |                   |          |         

Advertising
Expense

The cost of advertising is expensed as incurred.
For the years ended December 28, 2002, December 29,
2001 and December 30, 2000, advertising costs totaled
$5.8 million, $8.0 million and $4.2 million,
respectively. Advertising and other marketing development costs
incurred by the Companys customers and funded by the
Company through purchase volume rebates are accounted for as a
reduction of the revenue associated with such customers.

61



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accounting
for Income Taxes

The Company accounts for income taxes under the
liability method. Under the liability method, deferred tax
assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. The Company is required to adjust its deferred tax
assets and liabilities in the period when tax rates or the
provisions of the income tax laws change. Valuation allowances
are established to reduce deferred tax assets to the amounts
expected to be realized.

Foreign
Currency Translation

The functional currency for all foreign
operations is the U.S. dollar. As such, all material foreign
exchange gains or losses are included in the determination of
net income (loss). Net foreign exchange losses included in net
income (loss) for the fiscal years ended December 30,
2000, December 29, 2001 and December 28, 2002 were
immaterial.

Foreign
Exchange Contracts

Although the majority of the Companys
transactions are in U.S. Dollars, the Company enters into
currency forward contracts to manage foreign currency exchange
risk associated with its operations primarily in Singapore,
Switzerland and Japan. From time to time, 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 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. A majority of the
increase or decreases in the Companys local currency
operating expenses are offset by gains and losses on the hedges.
The contracts generally have maturity dates that do not exceed
three months. The Company does not purchase short-term forward
exchange contracts for trading purposes.

The Company accounts for derivative instruments
and for hedging activities in accordance with Statement of
Financial Accounting Standard No. 133
(SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. Since the adoption of
SFAS 133, the Company has elected not to designate these
forward exchange contracts as accounting hedges and any changes
in fair value have been recorded through the results of
operations for the year ended December 28, 2002.

There were no outstanding forward exchange
contracts as of December 28, 2002. The Company had
outstanding forward exchange contracts with commercial banks
with notional values of $4.6 million as of
December 29, 2001.

Stock-Based
Compensation

The Company accounts for non-cash stock-based
employee compensation in accordance with APB Opinion No. 25
(APB 25), Accounting for Stock Issued to
Employees and related Interpretations, and complies with
the disclosure provisions of Statement of Financial Accounting
Standards No. 123 (SFAS No. 123),
Accounting for Stock-Based Compensation and
Statement of Financial Accounting Standard No. 148
(SFAS 148), Accounting for Stock-Based
Compensation, Transition and Disclosures. The Company
adopted FASB Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB 25 as of
July 1, 2000. FIN 44 provides guidance on the
application of APB 25 for non-cash stock-based compensation
to employees. For fixed grants, under APB 25, compensation
expense is based on the excess of the fair value of the
Companys stock over the exercise price, if any, on the
date of the grant and is recorded on a straight-line basis over
the vesting period of the options, which is generally four
years. For variable grants, compensation expense is based on
changes in the fair value of the Companys stock and is
recorded using the methodology set out in FASB Interpretation

62



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

No. 28 (FIN 28),
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, an interpretation of
APB 15 and APB 25.

The Company accounts for non-cash stock-based
compensation issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18, Accounting for Equity Investments That Are
Issued to Non-Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.

The following proforma net income
(loss) information for Maxtors stock options and
employee stock purchase plan has been prepared following the
provisions of SFAS No. 123 (in thousands, except per share
data):

|                                                                                                              |                             |              |        |              |  |              |          |          |   |   |          |          |  
|------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------ | ------ | ------------ |  | ------------ | -------- | -------- | - | - | -------- | -------- | -
|                                                                                                              |                             |             
|                                                                                                              |                             | Years Ended 
|                                                                                                              |                             |             
|                                                                                                              |                             | December 30, |        | December 29, |  | December 28,
|                                                                                                              |                             | 2000         |        | 2001         |  | 2002        
|                                                                                                              |                             |              |        |              |  |             
|Net income (loss) applicable to common
    stockholders, as reported                                          |                             | $            | 31,802 |              |  | $            | (646,398 | )        |   | $ | (334,067 | )       
|Add: Stock-based employee compensation expense
    included in reported net income (loss)                     |                             |              | 4,172  |              |  |              | 6,066    |          |   |   | 5,562    |         
|Deduct: Total stock-based employee compensation
    expense determined under fair value method for all awards |                             |              | 21,823 |              |  |              | 38,251   |          |   |   | 40,013   |         
|                                                                                                              |                             |              |        |              |  |              |          |          |   |   |          |         
|                                                                                                              | Pro forma net income (loss) |              | $      | 14,151       |  |              | $        | (678,583 | ) |   | $        | (368,518 | )
|                                                                                                              |                             |              |        |              |  |              |          |          |   |   |          |         
|Net income (loss) per share                                                                                   |                             |              |        |              |  |              |          |          |   |   |          |         
|                                                                                                              | As reported  basic         |              | $      | 0.28         |  |              | $        | (3.12    | ) |   | $        | (1.40    | )
|                                                                                                              | Pro forma  basic           |              | $      | 0.12         |  |              | $        | (3.28    | ) |   | $        | (1.54    | )
|                                                                                                              | As reported  diluted       |              | $      | 0.27         |  |              | $        | (3.12    | ) |   | $        | (1.40    | )
|                                                                                                              | Pro forma  diluted         |              | $      | 0.12         |  |              | $        | (3.28    | ) |   | $        | (1.54    | )

For further information on assumptions used in
determining the fair value stock option grants, see note 13
of the Notes to Consolidated Financial Statements.

The proforma net income (loss) disclosures made
above are not necessarily representative of the effects on pro
forma net income (loss) for future years as options granted
typically vest over several years and additional option grants
are expected to be made in future years. Had we adopted the
recognition and measurement provisions of SFAS No. 123 for
the years ended December 30, 2000, December 29, 2001
and December 28, 2002, the stock-based employee
compensation expense would have been $21.8 million,
$38.3 million and $40.0 million, respectively,
compared to $4.2 million, $6.1 million and
$5.6 million recorded in the Companys income
statement, respectively.

Net Income
(Loss) Per Share

Net income (loss) per share has been
computed in accordance with Statement of Financial Accounting
Standards No. 128 (SFAS No. 128),
Earnings per Share. Basic net income (loss) per
share is computed using the weighted average common shares
outstanding during the year, which is exclusive of stock subject
to future vesting. Diluted net income (loss) per share is
computed using the weighted average common shares and
potentially dilutive securities outstanding during the year.
Potentially dilutive securities are excluded from the
computation of diluted net loss per share for those presented
years in which their effect would be anti-dilutive due to the
Companys net losses.

63



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Comprehensive income (loss) as defined includes
all changes in equity (net assets) during a period from
non-owner sources. Cumulative other comprehensive income (loss),
as presented in the accompanying consolidated balance sheets,
consists of the net unrealized gains on available-for-sale
securities, net of tax, if any. Total comprehensive income
(loss) for each of the three years is presented in the following
table (in thousands):

|                                                                                             |  |              |        |              |  |              |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------ |  | ------------ | -------- | - |  | - | -------- | -
|                                                                                             |  |             
|                                                                                             |  | Years Ended 
|                                                                                             |  |             
|                                                                                             |  | December 30, |        | December 29, |  | December 28,
|                                                                                             |  | 2000         |        | 2001         |  | 2002        
|                                                                                             |  |              |        |              |  |             
|Net income (loss)                                                                            |  | $            | 31,802 |              |  | $            | (646,398 | ) |  | $ | (334,067 | )
|Unrealized gain (loss) on investments in equity
    securities                               |  |              | 2,408  |              |  |              | (5,945   | ) |  |   | 495      |  
|Less: reclassification adjustment for realized
    gain (loss) included in net income (loss) |  |              | 1,820  |              |  |              | (7,353   | ) |  |   | 2,329    |  
|                                                                                             |  |              |        |              |  |              |          |   |  |   |          |  
|Comprehensive income (loss)                                                                  |  | $            | 32,390 |              |  | $            | (644,990 | ) |  | $ | (335,901 | )
|                                                                                             |  |              |        |              |  |              |          |   |  |   |          |  



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to prior
year balances to conform to current year classifications. These
reclassifications had no impact on prior year stockholders
equity or results of operations.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). This Statement
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
This Statement requires that a liability for costs associated
with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.
This pronouncement is effective for exit or disposal activities
that are initiated after December 31, 2002.

In December 2002, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS
No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro-forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended after
December 15, 2002. The interim disclosure requirements are
effective for interim periods beginning after December 15,
2002. The Company believes that the adoption of this standard
will have no material impact on its financial statements.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation expands
on the accounting guidance of FAS 5, Accounting for
Contingencies, FAS 57, Related Party Disclosures, and
FAS 107, Disclosures about Fair Value of Financial
Instruments, and incorporates without change the provisions of
FIN 34, Disclosure of Indirect Guarantees of Indebtedness
of Others, an interpretation of FASB Statement No. 5, which
is being superseded. FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan
guarantees, such as standby letters of credit. It

64



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

also clarifies that at the time a company issues
a guarantee, the company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes
under that guarantee and must disclose that information in its
interim and annual financial statements. FIN 45 will be
effective to the Company on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company is
currently evaluating the impact of this statement on its results
of operations and financial position. The Company has adopted
the disclosure requirements in this Interpretation, which are
effective for financial statements of periods ending after
December 15, 2002.

In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46). Under that interpretation, certain
entities known as Variable Interest Entities
(VIE) must be consolidated by the primary
beneficiary of the entity. The primary beneficiary is
generally defined as having the majority of the risks and
rewards arising from the VIE. For VIEs in which a
significant (but not majority) variable interest is held,
certain disclosures are required. FIN 46 requires
disclosure of Variable Interest Entities in financial statements
issued after January 31, 2003, if it is reasonably possible
that as of the transition date: (1) the Company will be the
primary beneficiary of an existing VIE that will require
consolidation or, (2) the Company will hold a significant
variable interest in, or have significant involvement with, an
existing VIE. Any VIEs created after January 31, 2003, are
immediately subject to the consolidation guidance in
FIN 46. The measurement principles of this interpretation
will be effective for the Companys 2003 financial
statements. The Company does not have any entities that require
disclosure or new consolidation as a result of adopting the
provisions of FIN 46.

In November 2002, the EITF reached a
consensus on EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. EITF 00-21
establishes criteria for whether revenue on a deliverable can be
recognized separately from other deliverables in a multiple
deliverable arrangement. The criteria consider whether the
delivered item has stand-alone value to the customer, whether
the fair value of the delivered item can be reliably determined
and the rights of returns for the delivered item.
EITF 00-21 is effective for revenue agreements entered into
in fiscal years beginning after June 15, 2003 with early
adoption permitted. The Company is currently evaluating the
impact of EITF 00-21 on its financial position, results of
operations and cash flows.



|   |                                                         
|-- | --------------------------------------------------------
|2. | Supplemental Financial Statement Data (in
    thousands)

|                            |                                                            |              |         |              |  |   |         |         | 
|--------------------------- | ---------------------------------------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------- | 
|                            |                                                            | December 29, |         | December 28,
|                            |                                                            | 2001         |         | 2002        
|                            |                                                            |              |         |             
|Inventories:                |                                                            |              |         |              |  |   |         |        
|                            | Raw materials                                              |              | $       | 36,914       |  |   | $       | 40,209  | 
|                            | Work-in-process                                            |              |         | 9,087        |  |   |         | 25,523  | 
|                            | Finished goods                                             |              |         | 139,555      |  |   |         | 109,813 | 
|                            |                                                            |              |         |              |  |   |         |        
|                            |                                                            | $            | 185,556 |              |  | $ | 175,545 |        
|                            |                                                            |              |         |              |  |   |         |        
|Prepaid expenses and other: |                                                            |              |         |              |  |   |         |        
|                            | Investments in equity securities, at fair value            |              | $       | 6,651        |  |   | $       | 6,589   | 
|                            | Quantum DSS deferred compensation, net of
    amortization |              |         | 4,103        |  |   |         |        | 
|                            | Prepaid expenses and other                                 |              |         | 34,852       |  |   |         | 26,849  | 
|                            |                                                            |              |         |              |  |   |         |        
|                            |                                                            | $            | 45,606  |              |  | $ | 33,438  |        
|                            |                                                            |              |         |              |  |   |         |        

65



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                               |                                              |              |          |              |  |   |          |         | 
|---------------------------------------------- | -------------------------------------------- | ------------ | -------- | ------------ |  | - | -------- | ------- | 
|                                               |                                              | December 29, |          | December 28,
|                                               |                                              | 2001         |          | 2002        
|                                               |                                              |              |          |             
|Property, plant and equipment, at cost:        |                                              |              |          |              |  |   |          |        
|                                               | Buildings                                    |              | $        | 130,703      |  |   | $        | 137,467 | 
|                                               | Machinery and equipment                      |              |          | 454,302      |  |   |          | 548,149 | 
|                                               | Software                                     |              |          | 68,234       |  |   |          | 75,284  | 
|                                               | Furniture and fixtures                       |              |          | 24,962       |  |   |          | 23,962  | 
|                                               | Leasehold improvements                       |              |          | 72,407       |  |   |          | 77,925  | 
|                                               |                                              |              |          |              |  |   |          |        
|                                               |                                              |              | 750,608  |              |  |   | 862,787  |        
|Less accumulated depreciation and amortization |                                              |              | (383,822 | )            |  |   | (497,945 | )      
|                                               |                                              |              |          |              |  |   |          |        
|Net property, plant and equipment              |                                              | $            | 366,786  |              |  | $ | 364,842  |        
|                                               |                                              |              |          |              |  |   |          |        
|Accrued and other liabilities:                 |                                              |              |          |              |  |   |          |        
|                                               | Income taxes payable                         |              | $        | 27,740       |  |   | $        | 22,183  | 
|                                               | Accrued payroll and payroll-related expenses |              |          | 82,828       |  |   |          | 76,876  | 
|                                               | Accrued warranty                             |              |          | 313,894      |  |   |          | 278,713 | 
|                                               | Restructuring liabilities, short-term        |              |          | 11,845       |  |   |          | 11,589  | 
|                                               | Accrued expenses                             |              |          | 96,051       |  |   |          | 82,389  | 
|                                               |                                              |              |          |              |  |   |          |        
|                                               |                                              | $            | 532,358  |              |  | $ | 471,750  |        
|                                               |                                              |              |          |              |  |   |          |        
|Other liabilities:                             |                                              |              |          |              |  |   |          |        
|                                               | Payable to Quantum Corporation               |              | $        | 138,567      |  |   | $        | 138,567 | 
|                                               | Restructuring liabilities, long-term         |              |          | 46,383       |  |   |          | 50,921  | 
|                                               | Other                                        |              |          | 19,637       |  |   |          | 9,583   | 
|                                               |                                              |              |          |              |  |   |          |        
|                                               |                                              | $            | 204,587  |              |  | $ | 199,071  |        
|                                               |                                              |              |          |              |  |   |          |        

Depreciation and amortization expense of
property, plant and equipment for the years ended
December 28, 2002, December 29, 2001 and
December 30, 2000 was $155.8 million,
$125.6 million and $82.1 million, respectively. Total
property, plant and equipment recorded under capital leases was
$58.5 million, as of December 28, 2002. Total
accumulated depreciation under capital leases was
$11.7 million, as of December 28, 2002.



|   |                      
|-- | ---------------------
|3. | Financial Instruments



| |                       
| | ----------------------
| | Fair value disclosures

The fair values of cash and cash equivalents
approximate carrying values because of their short maturities.
The Companys marketable and equity securities are carried
at current market values. The fair values of the Companys
5.75% subordinated debentures are based on the bid price of the
last trade for the fiscal years ended December 29, 2001 and
December 28, 2002. The fair value of the Companys
mortgages was based on the estimated present value of the
remaining payments, utilizing risk-adjusted market interest
rates of similar instruments at the balance sheet date.

66



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The carrying values and estimated fair values of
the Companys financial instruments are as follows (in
thousands):

|                                             |                                |                   |        |                   |  |          |        |            |  |   |        |        |  |   |        |        | 
|-------------------------------------------- | ------------------------------ | ----------------- | ------ | ----------------- |  | -------- | ------ | ---------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                             |                                |                   |        |                  
|                                             |                                | December 29, 2001 |        | December 28, 2002
|                                             |                                |                   |        |                  
|                                             |                                | Carrying          |        | Estimated         |  | Carrying |        | Estimated 
|                                             |                                | Amount            |        | Fair Value        |  | Amount   |        | Fair Value
|                                             |                                |                   |        |                   |  |          |        |           
|Pro rata portion of Quantum Corporations 7% |                                |                   |        |                   |  |          |        |            |  |   |        |        |  |   |        |       
|                                             | Subordinated Convertible Notes |                   |        | 95,833            |  |          |        | 95,833     |  |   |        | 95,833 |  |   |        | 95,833 | 
|5.75% Subordinated debentures                |                                |                   | 74,262 |                   |  |          | 52,726 |            |  |   | 60,427 |        |  |   | 49,550 |       
|Mortgages                                    |                                |                   | 36,926 |                   |  |          | 39,093 |            |  |   | 35,609 |        |  |   | 35,657 |       
|Economic Development Board of Singapore Loan |                                | $                 | 16,313 |                   |  | $        | 16,313 |            |  | $ | 9,909  |        |  | $ | 9,909  |       



| |                              
| | -----------------------------
| | Sales of Accounts Receivables

In July 1998, the Company entered into an
accounts receivable securitization program (the
Program) with a group of commercial banks (the
Banks). On November 15, 2001, the Company
amended and restated the Program, extending the Program for
another three years and increasing the available size of the
Program from $200 million to $300 million. After the
year ended December 28, 2002, the Company elected to
terminate the Program. Under the Program, the Company sold U.S.
and Canadian accounts receivable in securitization transactions
and retains a subordinated interest and servicing rights to
those receivables. The eligible receivables, net of estimated
credit losses, were sold to third party conduits through a
wholly owned bankruptcy-remote entity, Maxtor Receivables
Corporation (MRC) that was consolidated for
financial reporting purposes. The investors in the securitized
receivables had no recourse to the Companys assets as a
result of debtors defaults except for the retained
interests in the securitized accounts receivable. The third
party conduits typically issued securities that are structured
into several classes with senior classes having priority of
payment over subordinated classes. The Company retained the
portion of the sold receivables that was in excess of the
minimum receivables level required to support the securities
issued by the third party conduits, referred to as retained. The
carrying amount of the Companys retained interest, which
approximated fair value because of the short-term nature of
receivables, was recorded in accounts receivable. The Company
serviced the sold receivables and charged the third party
conduits a monthly servicing fee at market rates; accordingly,
no servicing asset or liability was recorded.

The Company accounted for the Program under the
FASBs Statement of Financial Accounting Standards
No. 140 (SFAS 140), Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities. The Program qualifies for treatment as a
sale under SFAS 140. As of December 28, 2002 and
December 29, 2001, the outstanding balance of securitized
accounts receivable held by the third party conduits totaled
$140.3 million and $124.3 million, respectively, of
which the Companys subordinated retained interest was
$95.3 million and $79.1 million, respectively.
Accordingly, $45.0 million and $45.2 million of
accounts receivable balances, net of applicable allowances,
respectively, were removed from the consolidated balance sheets
at December 28, 2002 and December 29, 2001,
respectively. Delinquent amounts and credit losses related to
these receivables were not material as of December 28, 2002
and December 29, 2001. Expenses associated with the Program
totaled $4.0 million, $7.0 million, and
$7.6 million in the years ended December 28, 2002,
December 29, 2001, December 30, 2000, respectively, and
were included within the interest expense caption of the results
of operations statement. In fiscal years ended 2002 and 2001,
$1.0 million and $4.5 million of these expenses,
respectively, related primarily to the loss on sale of
receivables, net of related servicing revenues, with the
remainder representing program and facility fees. Net cash flows
from sales (repayments) under the Program were $(0.2) million
$(29.8) million, and $25.0 million for the years ended
December 28, 2002, December 29, 2001, and
December 30, 2000, respectively. On December 30, 2002,
the Company elected to terminate the Program.

67



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                   
|-- | ----------------------------------
|4. | Gain (Loss) on Sale of Investments

During fiscal year 2002, the Company recorded a
$2.3 million gain on the sale of investments. This gain was
due to $1.0 million of realized gains on the sale of
securities in our investment portfolio and a $1.3 million
gain on a security for which the Company had recorded a
$1.3 million impairment charge in fiscal year 2001. During
fiscal year 2001, in accordance with the Companys
impairment policy, the Company recorded a $7.4 million loss
on investments, reflecting a $6.7 million write-off of a
Quantum HDD acquired investment in a high-tech start-up company
and a net loss of $0.7 million that includes a
$1.3 million impairment charge in other fixed income
portfolio investments.



|   |                        
|-- | -----------------------
|5. | Discontinued Operations

On August 15, 2002, the Company announced
its decision to shut down the manufacturing and sales of its
MaxAttachTM branded network attached storage products
of the Companys Network Systems Group (NSG).
The discontinuance of the NSG operations represents the
abandonment of a component of an entity as defined in
paragraph 47 of Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Accordingly, the Companys
financial statements have been presented to reflect NSG as a
discontinued operation for all periods presented. Its
liabilities (no remaining assets) have been segregated from
continuing operations in the accompanying consolidated balance
sheet as of December 28, 2002 and its operating results
have been segregated and reported as discontinued operations in
the accompanying consolidated statements of operations.

Operating results of NSG are presented in the
following table (in thousands):

|                                     |  |              |         |              |  |              |         |   |  |   |         |  
|------------------------------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | - |  | - | ------- | -
|                                     |  |             
|                                     |  | Years Ended 
|                                     |  |             
|                                     |  | December 30, |         | December 29, |  | December 28,
|                                     |  | 2000         |         | 2001         |  | 2002        
|                                     |  |              |         |              |  |             
|Revenue from discontinued operations |  | $            | 14,016  |              |  | $            | 31,472  |   |  | $ | 20,384  |  
|Loss from discontinued operations    |  | $            | (40,605 | )            |  | $            | (48,219 | ) |  | $ | (73,501 | )

Included in the 2002 loss from the NSG
discontinued operations are the following significant charges
(in millions):

|                                          |  |   |      | 
|----------------------------------------- |  | - | ---- | 
|Personnel related                         |  | $ | 13.0 | 
|Goodwill and other intangibles write-offs |  |   | 32.5 | 
|Non-cancelable purchase commitments       |  |   | 4.2  | 

The following is a summary of the liabilities of
the NSG discontinued operations as of December 28, 2002 (in
millions):

|                                   |  |   |      | 
|---------------------------------- |  | - | ---- | 
|Accounts payable                   |  | $ | 1.4  | 
|Payroll and other accrued expenses |  |   | 4.7  | 
|Warranty, returns and other        |  |   | 5.5  | 
|                                   |  |   |      | 
|Total                              |  | $ | 11.6 | 
|                                   |  |   |      | 



|   |              
|-- | -------------
|6. | Restructuring

During year ended December 28, 2002, the
Company recorded a restructuring charge of $9.5 million
associated with closure of one of its facilities located in
California. The amount comprised $8.9 million of future
non-cancelable lease payments which are expected to be paid over
several years based on the underlying lease agreement, and the
write-off of $0.6 million in leasehold improvements. The
restructuring accrual is

68



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

included on the balance sheet within accrued and
other liabilities. As of December 28, 2002, no payments
were made against the original accrual of $8.9 million.



|   |             
|-- | ------------
|7. | Acquisitions



|   |            
|-- | -----------
|a. | Quantum HDD

On April 2, 2001, Maxtor acquired the hard
disk drive business of Quantum Corporation (Quantum
HDD). The acquisition was approved by the stockholders of
both companies on March 30, 2001 and was accounted for as a
purchase. As of the effective time of the merger, each share of
Quantum HDD common stock was converted into 1.52 shares of
Maxtor common stock, and each outstanding Quantum HDD option
assumed by Maxtor was converted into an option to purchase
Maxtor common stock, with appropriate adjustment to the exercise
price and share numbers in accordance with the exchange ratio.
The total purchase price of $1,269.4 million included
consideration of 121.0 million shares of our common stock
valued at an average of $9.40 per common share. The average
market price was based on the average closing price for two
trading days prior and two trading days subsequent to
October 4, 2000, the announcement date of the terms of the
merger.

The total purchase price was determined as
follows (in millions):

|                                                                  |                      |   |         |         | 
|----------------------------------------------------------------- | -------------------- | - | ------- | ------- | 
|Value of securities issued                                        |                      | $ | 1,133.5 |        
|Assumption of Quantum HDD options, including
    restricted stock |                      |   | 107.1   |        
|                                                                  |                      |   |         |        
|                                                                  |                      |   | 1,240.6 |        
|Transaction costs                                                 |                      |   | 28.8    |        
|                                                                  |                      |   |         |        
|                                                                  | Total purchase price |   | $       | 1,269.4 | 
|                                                                  |                      |   |         |        

The purchase price allocation was as follows (in
millions):

|                                    |                                           |                       |   |       |  |  |       |       |         | 
|----------------------------------- | ----------------------------------------- | --------------------- | - | ----- |  |  | ----- | ----- | ------- | 
|Tangible assets:                    |                                           |                       |   |       |  |  |       |      
|                                    | Cash and cash equivalents                 |                       | $ | 315.3 |  |  |       |       |        
|                                    | Restricted cash                           |                       |   | 93.9  |  |  |       |       |        
|                                    | Accounts receivable                       |                       |   | 249.1 |  |  |       |       |        
|                                    | Inventories                               |                       |   | 181.7 |  |  |       |       |        
|                                    | Prepaid expenses and other current assets |                       |   | 120.9 |  |  |       |       |        
|                                    | Property, plant and equipment             |                       |   | 126.4 |  |  |       |       |        
|                                    | Other noncurrent assets                   |                       |   | 21.1  |  |  |       |       |        
|                                    |                                           |                       |   |       |  |  |       |      
|                                    |                                           | Total tangible assets |   |       |  |  |       | $     | 1,108.4 | 
|                                    |                                           |                       |   |       |  |  |       |      
|Intangible assets acquired:         |                                           |                       |   |       |  |  |       |      
|                                    | Core and other existing technology        |                       |   |       |  |  |       | 286.1 |        
|                                    | Assembled workforce                       |                       |   |       |  |  |       | 43.0  |        
|Deferred compensation               |                                           |                       |   |       |  |  | 6.8   |      
|Goodwill                            |                                           |                       |   |       |  |  | 896.3 |      
|In-process research and development |                                           |                       |   |       |  |  | 94.7  |      

69



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                   |                                |                           |       |       |  |  |  |   |          |  
|---------------------------------- | ------------------------------ | ------------------------- | ----- | ----- |  |  |  | - | -------- | -
|Liabilities assumed:               |                                |                           |       |       |  |  |  |  
|                                   | Accounts payable               |                           |       | 230.0 |  |  |  |   |         
|                                   | Accruals and other liabilities |                           |       | 364.3 |  |  |  |   |         
|                                   | Deferred taxes                 |                           |       | 196.2 |  |  |  |   |         
|Long-term debt                     |                                |                           | 132.4 |       |  |  |  |  
|Other long-term liabilities        |                                |                           | 142.0 |       |  |  |  |  
|Merger-related restructuring costs |                                |                           | 101.0 |       |  |  |  |  
|                                   |                                |                           |       |       |  |  |  |  
|                                   |                                | Total liabilities assumed |       |       |  |  |  |   | (1,165.9 | )
|                                   |                                |                           |       |       |  |  |  |  
|                                   |                                | Total purchase price      |       |       |  |  |  | $ | 1,269.4  |  
|                                   |                                |                           |       |       |  |  |  |  

In connection with the acquisition, the Company
assumed all vested and nonvested Quantum HDD options and
restricted stock held by employees who accepted offers of
employment with Maxtor, whether or not options or restricted
stock have vested. The Company also assumed all vested Quantum
HDD options held by Quantum employees whose employment was
terminated prior to separation. In addition, Maxtor assumed
vested Quantum HDD options held by Quantum employees who
continued to provide services during a transitional period.

Vested and unvested options for Quantum HDD
common stock assumed in the merger represented options for
7,650,965 shares and 4,655,236 shares of Maxtor common stock,
respectively. The fair value of the options was determined to be
$102.6 million. This was determined in accordance with APB
Opinion No. 16, Business Combinations and
EITF 99-12 Accounting for Formula Arrangements under
Issue 95-19, using the Black Scholes methodology.

The restricted stock assumed represent 479,127
shares of Maxtor stock. Fair value of the unvested restricted
shares was $4.5 million. This was determined in accordance
with APB Opinion No. 16 Business Combinations,
by multiplying the number of restricted shares granted with the
average stock price of $9.40, which in turn was determined based
on the average closing market prices of Maxtors common
stock as of October 4, 2000 (announcement date) and as of
the two trading days prior and two trading days subsequent to
October 4, 2000.

In addition, Quantum Corporation issued
restricted Quantum DSS shares to Quantum employees who joined
Maxtor in connection with the merger in exchange for the fair
value of Quantum DSS options held by such employees. A portion
of the acquisition purchase price has been allocated to this
deferred compensation, recorded as prepaid expense, and is
amortized to expenses over the vesting period as the vesting of
the shares are subject to continued employment with Maxtor. As
of December 28, 2002, the amount was fully amortized.

Under purchase accounting rules, the Company
recorded $29.2 million for estimated severance pay
associated with termination of approximately 700 employees in
the United States. In addition, the Company paid and expensed
$30.5 million for severance pay associated with termination
of approximately 600 Quantum Corporation (Quantum)
employees. As a result, total severance related costs amounted
to $59.7 million and the total number of terminated
employees, including Quantum transitional employees was
approximately 1,300. The Company also recorded a
$59.1 million liability for estimated facility exit costs
for the closure of three Quantum HDD offices and research and
development facilities located in Milpitas, California, and two
Quantum HDD office facilities located in Singapore. The Company
also recorded a $12.7 million liability for certain
non-cancelable adverse inventory and other purchase commitments.

70



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activity
related to the merger-related restructuring costs as of
December 28, 2002 (in millions):

|                             |  |          |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|---------------------------- |  | -------- | ---- | --------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                             |  |          |      | Severance |  |       |       |      
|                             |  | Facility |      | and       |  | Other |       |      
|                             |  | Costs    |      | Benefits  |  | Costs |       | Total
|                             |  |          |      |           |  |       |       |      
|Provision at April 2, 2001.  |  | $        | 59.1 |           |  | $     | 29.2  |       |  | $ | 12.7  |   |  | $ | 101.0 |  
|Amounts paid                 |  |          | (0.9 | )         |  |       | (15.5 | )     |  |   | (12.7 | ) |  |   | (29.1 | )
|                             |  |          |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at December 29, 2001 |  |          | 58.2 |           |  |       | 13.7  |       |  |   |      |   |  |   | 71.9  |  
|Amounts paid                 |  |          | (4.5 | )         |  |       | (13.7 | )     |  |   |      |   |  |   | (18.2 | )
|                             |  |          |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at December 28, 2002 |  | $        | 53.7 |           |  | $     |      |       |  | $ |      |   |  | $ | 53.7  |  
|                             |  |          |      |           |  |       |       |       |  |   |       |   |  |   |       |  

The balance remaining in the facilities exit
accrual is expected to be paid over several years based on the
underlying lease agreements. The merger-related restructuring
accrual is included on the balance sheet within the captions of
accrued and other liabilities, and other liabilities.

A portion of the purchase price has been
allocated to developed technology and acquired in-process
research and development. Developed technology and in-process
research and development were identified and valued through
analysis of data provided by Quantum HDD concerning
developmental products, their stage of development, the time and
resources needed to complete them, if applicable, their expected
income generating ability, target markets and associated risks.
The income approach, which includes an analysis of the markets,
cash flows and risks associated with achieving such cash flows,
was the primary technique utilized in valuing the developed
technology and in-process research and development. Where
developmental projects had reached technological feasibility,
they were classified as developed technology, and the value
assigned to developed technology was capitalized. Where the
developmental projects had not reached technological feasibility
and had no future alternative uses, they were classified as
in-process research and development and were charged to expense
upon closing of the merger.

At the time of the merger, Quantum HDD was
developing new products that qualify as in-process research and
development in multiple product areas. For the purposes of
determining which projects qualified as in-process research and
development, technological feasibility is defined as being
equivalent to completion of design verification testing, when
the design is finalized and ready for pilot manufacturing. The
following is a general description of in-process research and
development efforts: current engineering efforts are focused on
developing new products, integrating new technologies, improving
designs to enable manufacturing efficiencies, improving product
performance and integrating multiple functions into single
components and multiple components into modules. The principal
products to which research and development efforts are as
follows: Self-Servo Writer Technology, Desktop, High-end, Core
Technology and other identified projects. There is a risk that
these developments will not be competitive with other products
using alternative technologies that offer comparable
functionality. The analysis of research and development projects
was conducted as of April 2, 2001.

Self-Servo Writer Technology:Quantum HDDs Self-Servo Writer
technology was being developed to write servo tracks onto the
disk media during the manufacturing process, replacing the need
to purchase and use servo writer equipment. Quantum HDD expected
the development cycle for the current research and development
project with respect to the Self-Servo Writer technology to
continue for another 6 months, with expected completion
dates in the fourth quarter of the calendar year 2001. The
development cycle was approximately 85% complete with estimated
cost to complete to be incurred ratably over the remainder of
the development cycles.

High End:Quantum
HDDs High-End development efforts supported future
generation high-end hard disk drives. Quantum HDD expected the
development cycle for the current research and development
project

71



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with respect to the High-end technology to
continue for another 21 months, with expected completion
dates in the first quarter of the calendar year 2003. The
development cycle was approximately 40% complete with estimated
cost to complete to be incurred ratably over the remainder of
the development cycles.

Core Technology:Quantum HDDs Core technology
development efforts supported future generation hard disk
drives. Quantum HDD expected the development cycle for the
current research and development project with respect to these
products to continue for another 21 months with expected
completion dates in the first quarter of the calendar year 2003.
The development cycle was approximately 44% complete with
estimated cost to complete to be incurred ratably over the
remainder of the development cycle.

Desktop:Quantum
HDDs core technology development efforts supported the
development of 3.5 inch hard disk drives. Quantum HDD expected
the development cycle for the current research and development
project with respect to the Desktop technology to continue for
another 5 months, with expected completion dates in the
third quarter of the calendar year 2001. The development cycle
was approximately 75% complete with estimated cost to complete
to be incurred ratably over the remainder of the development
cycles.

The value assigned to in-process research and
development was determined by considering the importance of each
project to the overall development plan, estimating costs to
develop the purchased in-process research and development into
commercially viable products, estimating the resulting net cash
flows from the projects when completed and discounting the net
cash flows to their present value. The revenue estimates used to
value the purchased in-process research and development were
based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing
of new product introductions by Quantum HDD and its competitors.
The rates utilized to discount the net cash flows to their
present value are based on Quantum HDD weighted average cost of
capital. Given the nature of the risks associated with the
difficulties and uncertainties in completing each project and
thereby achieving technological feasibility, anticipated market
acceptance and penetration, market growth rates and risks
related to the impact of potential changes in future target
markets, the weighted average cost of capital was adjusted.
Based on these factors, a discount rate of 23% for High-end and
Desktop and other identified projects and a discount rate of 28%
for Core Technology and Self Servo-Writer Technology were deemed
appropriate. The estimates used in valuing in-process research
and development were based upon assumptions believed to be
reasonable but which are inherently uncertain and unpredictable.
The assumptions may be incomplete or inaccurate, and no
assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may
vary from the projected results. Following were the estimated
completion percentages with respect to the research and
development efforts and technology lives at the close of the
Quantum HDD acquisition:

|                          |  |           |       |                 |  |  |         | 
|------------------------- |  | --------- | ----- | --------------- |  |  | ------- | 
|                          |  | Percent   |       | Expected       
|                          |  | Completed |       | Technology Life
|                          |  |           |       |                
|Self-servo Writer         |  |           | 85    | %               |  |  | 3 years | 
|High-end                  |  |           | 40    | %               |  |  | 4 years | 
|Core Technology           |  |           | 44    | %               |  |  | 6 years | 
|Desktop                   |  |           | 75    | %               |  |  | 4 years | 
|Other identified projects |  |           | 55-80 | %               |  |  | 4 years | 

72



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The values assigned to each acquired in-process
research and development project are as follows (in millions):

|                          |  |   |      | 
|------------------------- |  | - | ---- | 
|Self-servo Writer         |  | $ | 47.7 | 
|High-end                  |  |   | 18.2 | 
|Core Technology           |  |   | 16.0 | 
|Desktop                   |  |   | 8.9  | 
|Other identified projects |  |   | 3.9  | 
|                          |  |   |      | 
|                          |  | $ | 94.7 | 
|                          |  |   |      | 

The acquired existing technology, which comprises
products that are already technologically feasible, includes
products in most of Quantum HDDs product lines. The
Company is amortizing the acquired core and existing technology
of $286.1 million on a straight-line basis over an
estimated remaining useful lives of three to five years. For
additional information regarding the acquired Quantum HDD
existing technology amortization, see note 12 of the Notes to
Consolidated Financial Statements.

The acquired assembled workforce was composed of
approximately 1,650 skilled employees across Quantum HDDs
Executive, Research and Development, Manufacturing, Supervisor/
Manager, and Sales and Marketing groups. The fair value assigned
to the assembled workforce was $43.0 million and was
amortized on a straight-line basis over an estimated remaining
useful life of three years. Subsequent to the adoption of
Statements of Financial Accounting Standards No. 142
(SFAS 142) on December 30, 2001, the
Company no longer amortize its existing acquired assembled
workforce and reclassified the balance to goodwill.

Goodwill, which represents the excess of the
purchase price of an investment in an acquired business over the
fair value of the underlying net identifiable assets was being
amortized on a straight-line basis over an estimated remaining
useful life of five years. The Company adopted SFAS 142
effective December 30, 2001, and no longer amortizes its
remaining goodwill.



|   |                     
|-- | --------------------
|b. | MMC Technology, Inc.

On September 2, 2001, Maxtor completed the
acquisition of MMC Technology, Inc. (MMC), a
wholly-owned subsidiary of Hynix Semiconductor America Inc.
(Hynix). MMC, based in San Jose, California,
designed, developed and manufactured media for hard disk drives.
Prior to the acquisition, sales to Maxtor comprised 95% of
MMCs annual revenues. The primary reason for Maxtor
acquiring MMC was to provide the Company with a reliable source
of supply of media. The acquisition was accounted for as a
purchase with a total cost of $17.9 million, which
consisted of cash consideration of $1 million,
$16 million of loan forgiveness and $0.9 million of
estimated direct transaction costs. In connection with the
acquisition, the Company had also assumed liabilities of
$105.7 million. Included in this amount was
$7.3 million owed by MMC to Hynix. On April 5, 2002,
the Company paid off this amount. MMCs results of
operations are included in the financial statements from the
date of acquisition, and the assets and liabilities acquired
were recorded based on their fair values as of the date of
acquisition.

The total purchase price and the purchase price
allocation of the MMC acquisition were as follows (in millions):

|                                  |                      |   |      |      | 
|--------------------------------- | -------------------- | - | ---- | ---- | 
|Cash paid                         |                      | $ | 1.0  |     
|Forgiveness of loan consideration |                      |   | 16.0 |     
|                                  |                      |   |      |     
|                                  |                      |   | 17.0 |     
|Transaction costs                 |                      |   | 0.9  |     
|                                  |                      |   |      |     
|                                  | Total purchase price |   | $    | 17.9 | 
|                                  |                      |   |      |     

73



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Purchase Price Allocation:

|                                    |                                    |                           |  |      |  |   |      |   |        |  
|----------------------------------- | ---------------------------------- | ------------------------- |  | ---- |  | - | ---- | - | ------ | -
|Total tangible assets               |                                    |                           |  |      |  | $ | 97.7 |  
|Existing technology                 |                                    |                           |  |      |  |   | 4.4  |  
|Goodwill                            |                                    |                           |  |      |  |   | 21.1 |  
|In-process research and development |                                    |                           |  |      |  |   | 0.5  |  
|Liabilities assumed:                |                                    |                           |  |      |  |   |      |  
|                                    | Accruals and other liabilities     |                           |  | 30.6 |  |   |      |   |       
|                                    | Capital lease obligations and debt |                           |  | 75.1 |  |   |      |   |       
|                                    |                                    |                           |  |      |  |   |      |  
|                                    |                                    | Total liabilities assumed |  |      |  |   |      |   | (105.7 | )
|                                    |                                    |                           |  |      |  |   |      |  
|                                    |                                    | Total purchase price      |  |      |  |   |      | $ | 17.9   |  
|                                    |                                    |                           |  |      |  |   |      |  

A portion of the purchase price has been
allocated to developed technology and acquired in-process
research and development. Developed technology and in-process
research and development were identified and valued through
analysis of data concerning developmental products, their stage
of development, the time and resources needed to complete them,
if applicable, their expected income-generating ability, target
markets and associated risks. The income approach, which
includes an analysis of the markets, cash flows and risks
associated with achieving such cash flows, was the primary
technique utilized in valuing the developed technology and
in-process research and development. Where developmental
products had reached technological feasibility, they were
classified as developed technology, and the value assigned to
developed technology was capitalized. Where the developmental
projects had not reached technological feasibility and had no
future alternative uses, they were classified as in-process
research and development and were charged to expense upon
closing of the acquisition.

The value assigned to in-process research and
development was determined by considering the importance of each
project to the overall development plan, estimating costs to
develop the purchased in-process research and development into
commercially viable products, estimating the resulting net cash
flows from the projects when completed and discounting the net
cash flows to their present value. The revenue estimates used to
value the purchased in-process research and development were
based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing
of new product introductions by MMC and its competitors. The
rates utilized to discount the net cash flows to their present
value were based on an average cost of capital of publicly
traded companies comparable to MMC. Given the nature of the
risks associated with the difficulties and uncertainties in
completing each project and thereby achieving technological
feasibility, anticipated market acceptance and penetration,
market growth rates and risks related to the impact of potential
changes in future target markets, the weighted average cost of
capital was adjusted. Based on these factors, an average
discount rate of 28.5% for the 80GB Project and the 120GB
Project was deemed appropriate. The estimates used in valuing
in-process research and development were based upon assumptions
believed to be reasonable but which are inherently uncertain and
unpredictable. The assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may
vary from the projected results.

The allocation of revenue to existing and
in-process technology was based on the obsolescence rate for
mechanical and magnetic technology. MMCs acquired existing
technology and in-process research and development consisted of
magnetic, mechanical and process technology related primarily to
its 80GB and 120GB products. The development cycle for the
current research and development with respect to the 80GB
Program will continue, with the expected completion dates in the
third quarter of calendar year 2002. The development cycle for
the current research and development with respect to the 120GB
Program will

74



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

continue, with expected completion dates by the
fourth quarter of calendar year 2003. Following are the
estimated completion percentages with respect to the research
and development efforts and technology lives:

|              |  |           |    |                 |  |  |         | 
|------------- |  | --------- | -- | --------------- |  |  | ------- | 
|              |  | Percent   |    | Expected       
|              |  | Completed |    | Technology Life
|              |  |           |    |                
|80GB Program  |  |           | 30 | %               |  |  | 5 years | 
|120GB Program |  |           | 5  | %               |  |  | 5 years | 

The Company is amortizing the acquired existing
technology of $4.4 million on a straight-line basis over an
estimated remaining useful life of five years. For additional
information regarding the acquired MMC existing technology
amortization, see note 12 of the Notes to Consolidated Financial
Statements.

Goodwill, which represents the excess of the
purchase price of an investment in an acquired business over the
fair value of the underlying net identifiable assets, is
reflected in the financial statements of the Company. In
accordance with SFAS 142, the Company is not amortizing the
amount of goodwill associated with the MMC acquisition. The
Company expects that none of the goodwill amount will be
deductible for tax purposes.



|   |                     
|-- | --------------------
|c. | Pro forma disclosure

The following unaudited proforma consolidated
amounts for continued operations give effect to the acquisitions
of Quantum HDD and MMC, excluding the charges for acquired
in-process research and development, as if the acquisitions had
occurred on December 31, 1999 and January 1, 2001. On
a proforma basis, the results of operations of Quantum HDD and
MMC are consolidated with the Companys results of
continued operations for the year ended December 30, 2000
and December 29, 2001. The proforma amounts do not purport
to be indicative of what would have occurred had the
acquisitions been made as of the beginning of each period or of
results which may occur in the future.

|                                       |                       |                      |         |              |   |   |         |             |  
|-------------------------------------- | --------------------- | -------------------- | ------- | ------------ | - | - | ------- | ----------- | -
|                                       |                       |                     
|                                       |                       | Years Ended         
|                                       |                       |                     
|                                       |                       | December 30,         |         | December 29,
|                                       |                       | 2000                 |         | 2001        
|                                       |                       |                      |         |             
|                                       |                       |                     
|                                       |                       | (In millions, except
|                                       |                       | per share data)     
|Revenue from continuing operations     |                       | $                    | 5,800.6 |              |   | $ | 4,418.6 |            
|Loss from continued operations         |                       | $                    | (235.3  | )            |   | $ | (614.7  | )          
|Loss per share  basic and diluted     |                       |                      |         |              |   |   |         |            
|                                       | Continuing operations |                      | $       | (1.01        | ) |   | $       | (2.59       | )
|Shares used in per share calculations: |                       |                      |         |              |   |   |         |            
|                                       | Basic                 |                      |         | 232,530,759  |   |   |         | 237,097,087 |  
|                                       | Diluted               |                      |         | 232,530,759  |   |   |         | 237,097,087 |  



|   |                                            
|-- | -------------------------------------------
|8. | Segment and Major Customers
    Information

Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise
and Related Information, establishes annual and interim
reporting standards for an enterprises business segments
and related disclosures about its products, services, geographic
areas and major customers. The method for determining what
information to report is based upon the way management organizes
the operating segments within the Company for making operating
decisions and assessing financial performance. The
Companys chief operating decision-maker is considered to
be the Chief Executive Officer (CEO). The CEO
reviews financial information for purposes of making operational
decisions and assessing financial performance.

75



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Subsequent to the decision to shut down its NSG
operations, the Company determined that it operates in one
reportable segment.

The Company has a worldwide sales, service and
distribution network. Products are marketed and sold through a
direct sales force to computer equipment manufacturers,
distributors and retailers in the United States, Europe, Latin
America and Asia Pacific. Maxtor operations outside the United
States primarily consist of its manufacturing facilities in
Singapore that produce subassemblies and final assemblies for
the Companys disk drive products. Revenue by destination
and long-lived asset information by geographic area for each of
the three years is presented in the following table:

|                        |  |                   |           |                   |  |                   |         |            |  |         |           |            |  |   |           |  |  |   |           |  |  |   |           | 
|----------------------- |  | ----------------- | --------- | ----------------- |  | ----------------- | ------- | ---------- |  | ------- | --------- | ---------- |  | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                        |  |                   |           |                   |  |                  
|                        |  | Year Ended        |           | Year Ended        |  | Year Ended       
|                        |  | December 30, 2000 |           | December 29, 2001 |  | December 28, 2002
|                        |  |                   |           |                   |  |                  
|                        |  |                   |           | Long-lived        |  |                   |         | Long-lived |  |         |           | Long-lived
|                        |  | Revenue           |           | Assets            |  | Revenue           |         | Assets     |  | Revenue |           | Assets    
|                        |  |                   |           |                   |  |                   |         |            |  |         |           |           
|                        |  |                  
|                        |  | (In thousands)   
|United States           |  | $                 | 1,241,596 |                   |  | $                 | 110,284 |            |  | $       | 1,580,502 |            |  | $ | 1,334,122 |  |  | $ | 1,370,075 |  |  | $ | 1,207,738 | 
|Asia Pacific            |  |                   | 713,732   |                   |  |                   | 112,354 |            |  |         | 916,538   |            |  |   | 122,901   |  |  |   | 1,038,787 |  |  |   | 128,860   | 
|Europe                  |  |                   | 645,599   |                   |  |                   | 869     |            |  |         | 1,082,261 |            |  |   | 1,588     |  |  |   | 1,231,794 |  |  |   | 891       | 
|Latin America and other |  |                   | 89,916    |                   |  |                   |        |            |  |         | 186,258   |            |  |   |          |  |  |   | 138,858   |  |  |   |          | 
|                        |  |                   |           |                   |  |                   |         |            |  |         |           |            |  |   |           |  |  |   |           |  |  |   |           | 
|Total                   |  | $                 | 2,690,843 |                   |  | $                 | 223,507 |            |  | $       | 3,765,559 |            |  | $ | 1,458,611 |  |  | $ | 3,779,514 |  |  | $ | 1,337,489 | 
|                        |  |                   |           |                   |  |                   |         |            |  |         |           |            |  |   |           |  |  |   |           |  |  |   |           | 

Long-lived assets located within the United
States consist primarily of goodwill and other intangible
assets, which amounted to $1,458.6 million and
$1,337.5 million as of December 29, 2001 and
December 28, 2002, respectively. Long-lived assets located
outside the United States consist primarily of the
Companys manufacturing operations located in Singapore,
which amounted to $111.5 million, $121.1 million and
$127.6 million as of December 30, 2000,
December 29, 2001 and December 28, 2002, respectively.

Sales to computer equipment manufacturers
represented 70.0%, 55.4% and 48.0% of total revenue for the
fiscal years 2000, 2001 and 2002, respectively. Sales to
distribution channel and retail customers represented 30.0%,
44.6% and 52.0% in fiscal years 2000, 2001 and 2002,
respectively. Sales to one customer were 14.2%, 11.3% and 11.5%
of revenue in fiscal years 2000, 2001 and 2002, respectively.
There was the only customer with over 10% of revenue during
fiscal years 2000, 2001 and 2002.



|   |                                             
|-- | --------------------------------------------
|9. | Short-term Borrowings and Long-term
    Debt

Short-term borrowings and long-term debt consist
of the following (in thousands):

|                                                                                                    |  |              |         |              |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                                                                                    |  | December 29, |         | December 28,
|                                                                                                    |  | 2001         |         | 2002        
|                                                                                                    |  |              |         |             
|5.75% Subordinated Debentures due March 1,
    2012.                                                |  | $            | 74,262  |              |  | $ | 60,427  |  
|Economic Development Board of Singapore Loan due
    March 2004                                     |  |              | 16,313  |              |  |   | 9,909   |  
|Pro rata portion of Quantum Corporations 7%
    Subordinated Convertible Notes due August 1, 2004. |  |              | 95,833  |              |  |   | 95,833  |  
|Mortgages                                                                                           |  |              | 36,926  |              |  |   | 35,609  |  
|Hynix Semiconductor America Inc. Note                                                               |  |              | 5,095   |              |  |   |        |  
|Equipment Loans and Capital Leases                                                                  |  |              | 60,189  |              |  |   | 45,607  |  
|                                                                                                    |  |              |         |              |  |   |         |  
|                                                                                                    |  |              | 288,618 |              |  |   | 247,385 |  
|Less amounts due within one year                                                                    |  |              | (44,160 | )            |  |   | (41,042 | )
|                                                                                                    |  |              |         |              |  |   |         |  
|                                                                                                    |  | $            | 244,458 |              |  | $ | 206,343 |  
|                                                                                                    |  |              |         |              |  |   |         |  

76



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future aggregate maturities as of
December 28, 2002 are as follows:

|                   |  |                |         | 
|------------------ |  | -------------- | ------- | 
|Fiscal Year Ending |  |               
|                   |  | (In thousands)
|2003               |  | $              | 41,042  | 
|2004               |  |                | 118,886 | 
|2005               |  |                | 11,148  | 
|2006               |  |                | 35,882  | 
|2007               |  |                | 5,000   | 
|Thereafter         |  |                | 35,427  | 
|                   |  |                |         | 
|Total              |  | $              | 247,385 | 
|                   |  |                |         | 

The future minimum annual lease payments on
capital leases as of December 29, 2001 and
December 28, 2002 are as follows:

|                                                      |  |              |         |              |  |   |         |  
|----------------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                                      |  |             
|                                                      |  | Years Ended 
|                                                      |  |             
|                                                      |  | December 29, |         | December 28,
|Fiscal Year Ending                                    |  | 2001         |         | 2002        
|                                                      |  |              |         |             
|2003                                                  |  | $            | 29,539  |              |  | $ | 28,875  |  
|2004                                                  |  |              | 23,604  |              |  |   | 12,659  |  
|2005                                                  |  |              | 8,654   |              |  |   | 4,552   |  
|2006                                                  |  |              |        |              |  |   | 36      |  
|Thereafter                                            |  |              |        |              |  |   |        |  
|                                                      |  |              |         |              |  |   |         |  
|Total minimum lease payments & estimated
    residual |  | $            | 61,797  |              |  | $ | 46,122  |  
|Imputed interest                                      |  |              | (6,493  | )            |  |   | (3,625  | )
|                                                      |  |              |         |              |  |   |         |  
|Present value of minimum of lease payments            |  |              | 55,304  |              |  |   | 42,497  |  
|Current portion                                       |  |              | (24,038 | )            |  |   | (26,215 | )
|                                                      |  |              |         |              |  |   |         |  
|Long-term capitalized lease obligations               |  | $            | 31,266  |              |  | $ | 16,282  |  
|                                                      |  |              |         |              |  |   |         |  

The 5.75% Subordinated Debentures due
March 1, 2012 require semi-annual interest payments and
annual sinking fund payments of $5.0 million, which
commenced March 1, 1998. The Debentures are subordinated in
right to payment to all senior indebtedness. The Company has
fulfilled its sinking fund obligation until March 1, 2005.
During the year ended December 28, 2002, the Company
repurchased $13.8 million of debentures for
$11.0 million. Accordingly, a gain of $2.8 million was
recognized on the Companys income statement within the
caption of interest and other income.

In September 1999, Maxtor Peripherals
(S) Pte Ltd entered into a four-year Singapore dollar
denominated loan agreement with the Economic Development Board
of Singapore (the Board), which is being amortized
in seven equal semi-annual installments ending September 2003.
As of December 28, 2002, the balance was equivalent to
$9.9 million. The Board charges interest at 1% above the
prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year (3.5% as of December 28, 2002).
This loan is supported by a two-year guaranty from a bank. Cash
is currently provided as collateral for this guaranty but the
Company may, at its option, substitute other assets as security.
As part of this arrangement, the Company had been subject to two
financial covenants, the maintenance of minimum unrestricted
cash and a tangible net worth test. On January 29, 2003,
the loan was amended to remove the tangible net worth covenant.
As of December 28, 2002, the Company was in compliance with
the covenant regarding maintenance of minimum restricted cash.

77



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Maxtor agreed to indemnify Quantum for the
Quantum HDD pro rata portion of Quantums outstanding
$287.5 million 7% convertible subordinated notes due
August 1, 2004, and accordingly the principal amount of
$95.8 million has been included in the Companys long
term debt. Quantum is required to pay interest semi-annually on
February 1 and August 1, and principal is payable on
maturity. The Company is required to reimburse Quantum for
interest or principal payments relating to the
$95.8 million representing Quantum HDDs pro rata
portion of such notes.

In connection with the merger with Quantum HDD,
the Company acquired real estate and related mortgage
obligations. The term of the mortgages is ten years, at an
interest rate of 9.2%, with monthly payments based on a
twenty-year amortization schedule, and a balloon payment at the
end of the 10-year term, which is September 2006. The
outstanding balance at December 28, 2002 was
$35.6 million.

As of December 28, 2002, the Company had
equipment loans and capital leases totaling $45.6 million.
These obligations include certain capital equipment loans and
leases assumed in connection with the acquisition of MMC, which
as of December 28, 2002 amounted to $34.3 million had
maturity dates through October 2004 and interest rates averaging
9.9%.

In connection with the acquisition of MMC, the
Company assumed a note for $7.3 million owing to Hynix,
which bears no interest through March 31, 2002; thereafter,
unpaid principal amounts bear interest at 9% per annum (the
Maxtor Note). On January 5, 2001, Hynix issued
a promissory note to Maxtor for $2 million in principal
amount, the note bears interest at 9% per annum, with the
payment of principal and interest due on December 31, 2001
(the Hynix Note). Hynix and Maxtor have agreed that
the principal and accrued interest on the Hynix Note as of
December 28, 2001 will be offset against the principal
amount of the Maxtor Note, such that the Hynix Note shall be
fully paid and the Maxtor Note shall have a principal amount of
approximately $5.1 million. On April 5, 2002, the
Company paid the net amount of the Maxtor Note and Hynix Note
due to Hynix.



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



| |       
| | ------
| | Leases

The Company leases certain of its principal
facilities and certain machinery and equipment under operating
lease arrangements. The future minimum annual rental
commitments, including amounts accrued in restructuring
liabilities as of December 28, 2002 are as follows:

|                   |  |                |         | 
|------------------ |  | -------------- | ------- | 
|Fiscal Year Ending |  |               
|                   |  | (In thousands)
|2003               |  | $              | 34,119  | 
|2004               |  |                | 29,036  | 
|2005               |  |                | 26,406  | 
|2006               |  |                | 24,348  | 
|2007               |  |                | 23,969  | 
|Thereafter         |  |                | 134,778 | 
|                   |  |                |         | 
|Total              |  | $              | 272,656 | 
|                   |  |                |         | 

The above commitments extend through fiscal year
2018. Rental expense was approximately $12.7 million,
$25.0 million and $29.6 million for fiscal years 2000,
2001 and 2002, respectively.

Third Party
Vendor

Following the acquisition of Quantum HDD, the
Company entered into a master agreement and a purchase agreement
with MKE which provided for MKE to supply certain levels of hard
disk drive products according to rolling forecasts and purchase
orders provided by the Company. The term of this purchase

78



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

agreement has been extended through
March 31, 2004. The Company guarantees a minimum production
commitment based on this rolling forecast. The Company is liable
for the purchase price of products scheduled to be delivered
within 30 days of the date of cancellation. In addition,
the Company is liable for the actual cost of materials plus a
handling fee for orders cancelled within 31-90 days of the
date of scheduled delivery. The Company may cancel orders with
scheduled delivery more than 120 days from the date of
cancellation without liability. To date, the Company has not
cancelled any orders pursuant to this purchase agreement since
the commencement of the relationship. Had the Company cancelled
any such orders, its maximum liability at December 28, 2002
under the cancellation provisions of this purchase agreement
would have approximated $40.9 million.

Legal
Proceedings

From time to time, the Company has been subject
to litigation including the pending litigations described below.
Because of the uncertainties related to both the amount and
range of loss on the remaining pending litigation, the Company
is unable to make a reasonable estimate of the liability that
could result from an unfavorable outcome. As additional
information becomes available, the Company will assess its
potential liability and revise its estimates. Pending or future
litigation could be costly, could cause the diversion of
managements attention and could upon resolution, have a
material adverse effect on its business, results of operations,
financial condition and cash flow.

In addition, the Company is engaged in certain
legal and administrative proceedings incidental to our normal
business activities and believes that these matters will not
have a material adverse effect on our financial position,
results of operations or cash flow.

Prior to the Companys acquisition of the
Quantum HDD business, the Company, on the one hand, and Quantum
and MKE, on the other hand, were sued by Papst Licensing, GmbH,
a German corporation, for infringement of a number of patents
that relate to hard disk drives. Papsts complaint against
Quantum and MKE was filed on July 30, 1998, and
Papsts complaint against Maxtor was filed on
March 18, 1999. Both lawsuits, filed in the United States
District Court for the Northern District of California, were
transferred by the Judicial Panel on Multidistrict Litigation to
the United States District Court for the Eastern District of
Louisiana for coordinated pre-trial proceedings with other
pending litigations involving the Papst patents (the MDL
Proceeding). The matters will be transferred back to the
District Court for the Northern District of California for
trial. Papsts infringement allegations are based on
spindle motors that Maxtor and Quantum purchased from third
party motor vendors, including MKE, and the use of such spindle
motors in hard disk drives. The Company purchased the
overwhelming majority of the spindle motors used in its hard
disk drives from vendors that were licensed under the Papst
patents. Quantum purchased many spindle motors used in its hard
disk drives from vendors that were not licensed under the Papst
patents, including MKE. As a result of the Companys
acquisition of the Quantum HDD business, the Company assumed
Quantums potential liabilities to Papst arising from the
patent infringement allegations Papst asserted against Quantum.
The Company filed a motion to substitute the Company for Quantum
in this litigation. The motion was denied by the Court presiding
over the MDL Proceeding, without prejudice to being filed again
in the future.

In February 2002, Papst and MKE entered into an
agreement to settle Papsts pending patent infringement
claims against MKE. That agreement includes a license of certain
Papst patents to MKE which might provide Quantum, and thus the
Company, with additional defenses to Papsts patent
infringement claims.

On April 15, 2002, the Judicial Panel on
Multidistrict Litigation ordered a separation of claims and
remand to the District of Columbia of certain claims between
Papst and another party involved in the MDL Proceeding. By order
entered June 4, 2002, the court stayed the MDL Proceeding
pending resolution by the District of Columbia court of the
remanded claims. These separated claims relating to the other
party are currently proceeding in the District Court for the
District of Columbia.

79



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The results of any litigation are inherently
uncertain and Papst may assert other infringement claims
relating to current patents, pending patent applications, and/or
future patent applications or issued patents. Additionally,
there are no assurances that the Company will be able to
successfully defend itself against this or any other Papst
lawsuit. Because the Papst complaints assert claims to an
unspecified dollar amount of damages, and because the Company
was at an early stage of discovery when the litigation was
stayed, the Company is unable to determine the possible loss, if
any, that it may incur as a result of an adverse judgment or a
negotiated settlement with respect to the claims against Maxtor.
Management made an estimate of the potential liabilities which
might arise from the Papst claims against Quantum at the time of
the acquisition of the Quantum HDD business. This estimate will
be revised as additional information becomes available. A
favorable outcome for Papst in these lawsuits could result in
the issuance of an injunction against the Company and its
products and/or the payment of monetary damages equal to a
reasonable royalty. In the case of a finding of a willful
infringement, the Company also could be required to pay treble
damages and Papsts attorneys fees. The litigation
could result in significant diversion of time by the
Companys technical personnel, as well as substantial
expenditures for future legal fees. Accordingly, although the
Company cannot currently estimate whether there will be a loss,
or the size of any loss, a litigation outcome favorable to Papst
could have a material adverse effect on the Companys
business, financial condition and operating results. Management
believes that it has valid defenses to the claims of Papst and
is defending this matter vigorously.

11.     Related Party
Transactions

In 1994, Hyundai Electronics Industries,
HEI, and certain of its affiliates purchased 40% of
Maxtors outstanding common stock for $150.0 million
in cash. In early 1996, Hynix, formerly Hyundai Electronics
America, or HEA, acquired all of the remaining shares of common
stock of Maxtor in a tender offer and merger for
$215.0 million in cash and also acquired all of
Maxtors common stock held by HEI and its affiliates.
Maxtor operated as a wholly-owned subsidiary of Hynix until
completion of its initial public offering on July 31, 1998,
which reduced the ownership interest of Hynix to below 50%. In
April 2001 as a result of Maxtors acquisition of the
Quantum HDD business, Hynixs ownership in Maxtor was
reduced to approximately 17% of the outstanding common stock. As
described below, Hynix sold Maxtor shares to the public and to
Maxtor in October 2001, reducing Hynixs ownership to 5.17%
at December 29, 2001, and in February 2002, Hynix
distributed the balance of its Maxtor shares to the beneficial
owners of a trust and is no longer a stockholder of Maxtor.

On September 2, 2001, Maxtor completed its
acquisition of MMC which had previously been a wholly-owned
subsidiary of Hynix. MMC, based in San Jose, California,
designs, develops and manufactures media for hard disk drives.
Prior to the acquisition, sales to Maxtor constituted 95% of
MMCs annual revenues. The primary business reason for
Maxtors acquisition of MMC was to provide Maxtor with a
reliable source of supply of media for hard disk drives. A
fairness opinion was delivered to Maxtors Board of
Directors by a nationally recognized investment banking firm in
connection with the MMC acquisition. The fairness opinion
concluded that the consideration to be paid by Maxtor for MMC
was fair to Maxtor, from a financial point of view. The
acquisition of MMC was approved by the Maxtor Boards
Affiliated Transactions Committee and was determined by the
Committee to be in the best interests of Maxtor and its
stockholders. The Affiliated Transactions Committee was
comprised entirely of directors with no relationship with Hynix
and its affiliates. The acquisition was accounted for as a
purchase with a total cost of $17.9 million, which
consisted of cash consideration of $1.0 million,
$16.0 million of loan forgiveness, and $0.9 million of
direct transaction costs. In connection with the acquisition,
Maxtor also assumed liabilities of $105.7 million.

In connection with the acquisition of MMC
Technology, Inc., Maxtor assumed a note for $7.3 million
owing to Hynix, which bore no interest through March 31,
2002; thereafter, unpaid principal amounts bore interest at 9%
per annum (the Maxtor Note). On January 5,
2001, Hynix issued a promissory note to Maxtor for
$2 million in principal amount representing Hynixs
share of a settlement relating to litigation between Maxtor and
Hynix and Stormedia. This note bore interest at 9% per annum,
with the payment of

80



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

principal and interest due on December 31,
2001 (the Hynix Note). Hynix and Maxtor agreed that
the principal and accrued interest on the Hynix Note as of
December 28, 2001 was offset against the principal amount
of the Maxtor Note, such that the Hynix Note was fully paid and
the Maxtor Note had a principal amount of approximately
$5.1 million as of December 29, 2001. On April 5,
2002, the outstanding balance under the Maxtor Note was fully
paid.

Maxtors cost of revenue includes certain
component parts Maxtor purchased from MMC. These purchases
amounted to $99 million for the eight months ended
September 1, 2001, respectively. In August 1998, Maxtor
entered into an agreement with MMC with respect to the pricing
of future purchases that provided for pricing discounts in
return for a purchase volume commitment based on a percentage of
our total media purchases through September 30, 2001. The
pricing discounts generally ranged from 2% to 4% off of
competitive prices. As described above, Maxtor completed its
acquisition of MMC on September 2, 2001.

Maxtors cost of revenue also includes
certain DRAM chip purchases from Hynix Semiconductor, Inc.,
HSI, formerly HEI. HSI is treated identically to its
competitors in the process by which commodity electronics,
principally DRAMs, are selected, qualified, and purchased;
pricing is negotiated with selected suppliers on the basis of
suppliers bids and market information. Maxtors
purchases from HSI totaled $41.6 million in fiscal year
2000, $19.3 million in fiscal year 2001 and
$15.5 million from January 1, 2002 through February
2002, the month in which Hynix, HSIs affiliate, ceased to
be a stockholder of Maxtor.

In October 2001, Hynix sold approximately
23.3 million shares of Maxtor common stock in a registered
public offering. At the same time as Hynixs sale of Maxtor
common stock to the public, Maxtor purchased an additional
5.0 million shares of its common stock from Hynix.
Maxtors purchase of its shares from Hynix was on the same
terms as Hynixs sale of shares to the public at
$4 per share for an aggregate purchase price of
$20.0 million. The repurchase of its shares was intended to
improve Maxtors capital structure, increase shareholder
returns, and increase the price of Maxtors stock. The
repurchase of the shares from Hynix was approved by the Maxtor
Boards Affiliated Transaction Committee and determined to
be in the best interest of the Company and its stockholders. As
a result of Hynixs sale of its Maxtor shares to the public
and to Maxtor, in October 2001, and Hynixs distribution of
its remaining shares to the beneficial owners of a trust in
February 2002, Hynix is no longer a stockholder of Maxtor.

Pursuant to a sublicense agreement with HSI,
Maxtor is obligated to pay a portion of an IBM license royalty
fee otherwise due from HSI. Such payments are due in annual
installments through 2007, and are based upon the license fee
separately negotiated on an arms length basis between HSI
and IBM. For the years ended December 30, 2000,
December 29, 2001 and December 28, 2002, Maxtor
recorded $1.9 million, $1.9 million and
$1.6 million, of expenses, respectively, in connection with
this obligation.

Hynix was an unconditional guarantor of one of
Maxtors facilities lease in Milpitas, California. The
aggregate rent under the lease was $3.24 million per annum
in each of the years ended December 30, 2000 and
December 29, 2001. The lease rate was established by
arms length negotiations with the lessor based on
applicable market rates. The lease expired on March 31,
2002 and was not extended.

12.     Goodwill and
Other Intangible Assets

Commencing in fiscal 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires goodwill to
be tested for impairment under certain circumstances, written
down when impaired, and requires purchased intangible assets
other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. Goodwill and
indefinite lived intangible assets will be subject to an
impairment test at least annually.

The Company ceased amortizing goodwill totaling
$846.0 million as of the adoption date, including
$31.1 million, net of accumulated amortization, of acquired
workforce intangibles previously classified as purchased
intangible assets. Subsequent to the decision to shut down the
manufacture and sales of NSG

81



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

products, the Company wrote off goodwill related
to the NSG operations of $32.0 million. As of
December 28, 2002, goodwill amounted to $814.0 million.

Purchased intangible assets are carried at cost
less accumulated amortization. The Company evaluated its
intangible assets and determined that all such assets have
determinable lives. Amortization is computed over the estimated
useful lives of the respective assets, generally three to five
years. The Company expects amortization expense on purchased
intangible assets to be $82.2 million in fiscal 2003,
$37.0 million in fiscal 2004, $21.9 million in fiscal
2005, and $5.8 million in fiscal 2006, at which time
purchased intangible assets will be fully amortized.

|                                |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |        | 
|------------------------------- | -------------------- | ------- | - | ----------------- |  | ----------------- | ------- | ------- |  | -------- | -------- | ------------ | - | --- | ------- | ------ |  | - | ------- | ------- |  | - | -------- | ------- | - | - | ------- | ------ | 
|                                |                      |         |   |                   |  |                  
|                                |                      |         |   | December 29, 2001 |  | December 28, 2002
|                                |                      |         |   |                   |  |                  
|                                |                      |         |   | Gross             |  |                   |         | Gross   |  |         
|                                |                      | Useful  |   | Carrying          |  | Accumulated       |         |         |  | Carrying |          | Accumulated  |   |    
|                                |                      | Life    |   | Amount            |  | Amortization      |         | Net     |  | Amount   |          | Amortization |   | Net
|                                |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |    
|                                |                      | (Years) |   |                   |  |                  
|                                |                      |         |   | (In thousands)    |  | (In thousands)   
|Goodwill                        |                      |         |   |                   |  | $                 | 964,629 |         |  | $        | (149,766 | )            |   | $   | 814,863 |        |  | $ | 813,951 |         |  | $ |         |         |   | $ | 813,951 |       
|                                |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       
|Quantum HDD                     |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       
|Existing technology             |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       
|                                | Core technology      |         |   | 5                 |  |                   | $       | 105,000 |  |          | $        | (15,750      | ) |     | $       | 89,250 |  |   | $       | 105,000 |  |   | $        | (36,750 | ) |   | $       | 68,250 | 
|                                | Consumer electronics |         |   | 3                 |  |                   |         | 8,900   |  |          |          | (2,225       | ) |     |         | 6,675  |  |   |         | 8,900   |  |   |          | (5,192  | ) |   |         | 3,708  | 
|                                | High-end             |         |   | 3                 |  |                   |         | 75,500  |  |          |          | (18,875      | ) |     |         | 56,625 |  |   |         | 75,500  |  |   |          | (44,042 | ) |   |         | 31,458 | 
|                                | Desktop              |         |   | 3                 |  |                   |         | 96,700  |  |          |          | (24,175      | ) |     |         | 72,525 |  |   |         | 96,700  |  |   |          | (56,408 | ) |   |         | 40,292 | 
|Acquired workforce              |                      |         |   |                   |  |                   | 43,048  |         |  |          | (12,472  | )            |   |     | 30,576  |        |  |   |        |         |  |   |         |         |   |   |        |       
|MMC Technology                  |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       
|Existing technology             |                      |         | 5 |                   |  |                   | 4,350   |         |  |          | (290     | )            |   |     | 4,060   |        |  |   | 4,350   |         |  |   | (1,160   | )       |   |   | 3,190   |       
|Creative Design Solutions, Inc. |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       
|Existing technology             |                      |         | 7 |                   |  |                   | 8,624   |         |  |          | (6,840   | )            |   |     | 1,784   |        |  |   |        |         |  |   |         |         |   |   |        |       
|Acquired workforce              |                      |         |   |                   |  |                   | 866     |         |  |          | (333     | )            |   |     | 533     |        |  |   |        |         |  |   |         |         |   |   |        |       
|Customer list                   |                      |         |   |                   |  |                   | 780     |         |  |          | (256     | )            |   |     | 524     |        |  |   |        |         |  |   |         |         |   |   |        |       
|                                |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       
|Total other intangible assets   |                      |         |   |                   |  | $                 | 343,768 |         |  | $        | (81,216  | )            |   | $   | 262,552 |        |  | $ | 290,450 |         |  | $ | (143,552 | )       |   | $ | 146,898 |       
|                                |                      |         |   |                   |  |                   |         |         |  |          |          |              |   |     |         |        |  |   |         |         |  |   |          |         |   |   |         |       

In accordance with SFAS No. 142, the Company
completed its impairment analysis as of January 1, 2002,
upon the adoption of SFAS 142, and as of December 28,
2002 for the purpose of the annual review. The Company found no
instances of impairment of the recorded goodwill on both dates
and accordingly no impairment was recorded.

The following tables present the impact of
SFAS 142 on net income (loss) and net income
(loss) per share had the Company ceased to amortize
goodwill for the year ended December 30, 2000 (in
thousands, except per share amounts):

|                                                           |                                                                                                         |              |        |              |  |              |          |         |  |   |          |   | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | ------ | ------------ |  | ------------ | -------- | ------- |  | - | -------- | - | 
|                                                           |                                                                                                         |             
|                                                           |                                                                                                         | Years Ended 
|                                                           |                                                                                                         |             
|                                                           |                                                                                                         | December 30, |        | December 29, |  | December 28,
|                                                           |                                                                                                         | 2000         |        | 2001         |  | 2002        
|                                                           |                                                                                                         |              |        |              |  |             
|Income (loss) from continuing
    operations  as reported |                                                                                                         | $            | 72,407 |              |  | $            | (598,179 | )       |  | $ | (260,566 | )
|Adjustments:                                               |                                                                                                         |              |        |              |  |              |          |         |  |   |          |  
|                                                           | Amortization of goodwill                                                                                |              |        |             |  |              |          | 134,042 |  |   |          |  | 
|                                                           | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |              |        |             |  |              |          | 12,472  |  |   |          |  | 
|                                                           |                                                                                                         |              |        |              |  |              |          |         |  |   |          |  
|                                                           | Net adjustments                                                                                         |              |        |             |  |              |          | 146,514 |  |   |          |  | 
|                                                           |                                                                                                         |              |        |              |  |              |          |         |  |   |          |  
|Income (loss) from continuing
    operations  adjusted    |                                                                                                         | $            | 72,407 |              |  | $            | (451,665 | )       |  | $ | (260,566 | )

82



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                     |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |       |       |  
|-------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------- | ---- | ------------ | ---- | ------------ | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                                                     |                                                                      |                                                                     
|                                                                     |                                                                      | Years Ended                                                         
|                                                                     |                                                                      |                                                                     
|                                                                     |                                                                      | December 30,                                                         |      | December 29, |      | December 28,
|                                                                     |                                                                      | 2000                                                                 |      | 2001         |      | 2002        
|                                                                     |                                                                      |                                                                      |      |              |      |             
|Basic earnings per share from continuing
    operations:             |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |      
|                                                                     | Income (loss) per share from continuing
    operations  as reported |                                                                      | $    | 0.64         |      |              | $     | (2.89 | )     |   | $     | (1.09 | )    
|                                                                     |                                                                      | Amortization of goodwill                                             |      |              |     |              |       |       | 0.65  |   |       |       |      |  
|                                                                     |                                                                      | Amortization of workforce                                            |      |              |     |              |       |       | 0.06  |   |       |       |      |  
|                                                                     |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |      
|                                                                     |                                                                      | Basic earnings per share from continuing
    operations  adjusted   |      | $            | 0.64 |              |       | $     | (2.18 | ) |       | $     | (1.09 | )
|                                                                     |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |      
|Diluted earnings per share from continuing
    operations:           |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |      
|Income (loss) per share from continuing
    operations  as reported |                                                                      | $                                                                    | 0.61 |              |      | $            | (2.89 | )     |       | $ | (1.09 | )    
|                                                                     |                                                                      | Amortization of goodwill                                             |      |              |     |              |       |       | 0.65  |   |       |       |      |  
|                                                                     |                                                                      | Amortization of workforce                                            |      |              |     |              |       |       | 0.06  |   |       |       |      |  
|                                                                     |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |      
|                                                                     |                                                                      | Diluted earnings per share from continuing
    operations  adjusted |      | $            | 0.61 |              |       | $     | (2.18 | ) |       | $     | (1.09 | )
|                                                                     |                                                                      |                                                                      |      |              |      |              |       |       |       |   |       |      

|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |       |  
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | ------ | ------------ |  | ------------ | -------- | ------- | - | - | -------- | ----- | -
|                                              |                                                                                                         |             
|                                              |                                                                                                         | Years Ended 
|                                              |                                                                                                         |             
|                                              |                                                                                                         | December 30, |        | December 29, |  | December 28,
|                                              |                                                                                                         | 2000         |        | 2001         |  | 2002        
|                                              |                                                                                                         |              |        |              |  |             
|Net income (loss)  as reported               |                                                                                                         | $            | 31,802 |              |  | $            | (646,398 | )       |   | $ | (334,067 | )    
|Adjustments:                                  |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|                                              | Amortization of goodwill                                                                                |              |        | 6,692        |  |              |          | 140,779 |   |   |          |      |  
|                                              | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |              |        | 144          |  |              |          | 12,616  |   |   |          |      |  
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|Net adjustments                               |                                                                                                         |              | 6,836  |              |  |              | 153,395  |         |   |   |         |      
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|Net income (loss)  adjusted                  |                                                                                                         | $            | 38,638 |              |  | $            | (493,003 | )       |   | $ | (334,067 | )    
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|Basic earnings per share:                     |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|Net income (loss) per share  as
    reported |                                                                                                         | $            | 0.28   |              |  | $            | (3.12    | )       |   | $ | (1.40    | )    
|                                              | Amortization of goodwill                                                                                |              |        | 0.06         |  |              |          | 0.68    |   |   |          |      |  
|                                              | Amortization of workforce                                                                               |              |        |             |  |              |          | 0.06    |   |   |          |      |  
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|                                              | Basic earnings per share  adjusted                                                                     |              | $      | 0.34         |  |              | $        | (2.38   | ) |   | $        | (1.40 | )
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|Diluted earnings per share:                   |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|Net income (loss) per share  as
    reported |                                                                                                         | $            | 0.27   |              |  | $            | (3.12    | )       |   | $ | (1.40    | )    
|                                              | Amortization of goodwill                                                                                |              |        | 0.05         |  |              |          | 0.68    |   |   |          |      |  
|                                              | Amortization of workforce                                                                               |              |        |             |  |              |          | 0.06    |   |   |          |      |  
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      
|                                              | Diluted earnings per share  adjusted                                                                   |              | $      | 0.32         |  |              | $        | (2.38   | ) |   | $        | (1.40 | )
|                                              |                                                                                                         |              |        |              |  |              |          |         |   |   |          |      

83



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Stockholders
Equity

Common
Stock

In March 2001, the Board of Directors approved
the increase of the Companys authorized common stock to
525,000,000 shares.

On April 2, 2001, Maxtor completed with the
acquisition of Quantum HDD. Maxtor issued 121.0 million
shares of Maxtor common stock and assumed options to purchase
12.8 million shares of Maxtor common stock to effect the
acquisition.

On October 9, 2001, Hynix sold 23,329,843
shares (including exercise of the underwriters
over-allotment) of Maxtor common stock in a registered public
offering. Maxtor did not receive any proceeds from Hynixs
sale of Maxtor stock to the public. In addition, at the same
time and on the same terms as Hynixs sale of Maxtor stock
to the public, Maxtor repurchased 5.0 million shares from
Hynix an aggregate purchase price of $20.0 million. These
repurchased shares are being held as treasury shares.

Restricted
Stock Plan

On May 29, 1998, the Company adopted the
1998 Restricted Stock Plan, which provides for awards of shares
of common stock to certain executive employees. Restricted stock
awarded under this plan vests three years from the date of grant
and is subject to forfeiture in the event of termination of
employment with the Company prior to vesting. The Company
granted 390,000 shares of common stock in June 1998 under
this plan. Compensation cost based on fair market value of the
Companys stock at the date of grant is reported as
compensation expense on a ratable basis over the vesting
periods. For the years ended December 30, 2000,
December 29, 2001 and December 28, 2002, compensation
expense recorded in connection with the Restricted Stock Plan
amounted to $1.8 million, $0.4 million and $0,
respectively.

The Company also grants awards of restricted
stock pursuant to the Amended and Restated 1996 Stock Option
Plan. See Stock Option Plan below for further
information.

On April 2, 2001, in connection with the
Quantum HDD acquisition, the Company assumed 479,127 shares
of Quantum HDD restricted stock held by employees who accepted
offers of employment with Maxtor, or transferred
employees, whether or not restricted stock have vested.
The intrinsic value of the unvested restricted shares was
$3.4 million, determined in accordance with APB Opinion
No. 25, by multiplying the number of shares with the
closing market price of Maxtor shares of $7.375 on April 1,
2001 (consummation date of the merger).

Employee
Stock Purchase Plan

The Company has adopted the 1998 Employee Stock
Purchase Plan (the Purchase Plan) and in 1999
reserved 2.4 million shares for issuance under the Purchase
Plan. During 2001 and 2000, the Company reserved an additional
3.5 million shares and 2.1 million shares for
issuance, respectively. During 2002, the Company reserved an
additional 9.0 million shares for issuance. The Company
issued 3.7 million, 2.1 million and 1.2 million
shares pursuant to the Purchase Plan for the years ended
December 28, 2002, December 29, 2001 and
December 30, 2000, respectively. The Purchase Plan permits
eligible employees to purchase Maxtors common stock at a
discount, but only through accumulated payroll deductions,
during sequential six-month offering periods. Participants
purchase shares on the last day of each offering period. In
general, the price at which shares are purchased under the
Purchase Plan is equal to 85% of the lower of the fair market
value of a share of common stock on (a) the first day of
the offering period, or (b) the purchase date. Offering
periods of the Purchase Plan generally begin on February 16
and August 16 of each year, although the initial offering
period under the Purchase Plan commenced on July 30, 1998.

84



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock Option
Plan

The Company grants options and awards of
restricted stock pursuant to the Amended and Restated 1996 Stock
Option Plan (the Option Plan), which was approved by
the Board of Directors in May 1996, and amended by Maxtors
stockholders at the 1999 Annual Meeting of Stockholders. Options
under the Amended Plan expire ten years from the date of grant.
Restricted stock vests in one or more installments over a number
of years.

In June 1999, the Company granted
1,765,000 shares of restricted common stock under this
plan. During 2002 and 2001, the Company granted 30,000 and
140,000 of restricted common stock, respectively. During the
years ended December 28, 2002 and December 29, 2001,
the number of shares that had been cancelled were none and
213,133, respectively. The Company recorded compensation expense
of $2.3 million, $2.4 million and $2.9 million in
2000, 2001 and 2002, respectively, related to this plan.

The Option Plan generally provides for the grant
of non-qualified stock options and incentive stock options to
eligible employees, consultants, affiliates and directors, as
determined by the board of directors, and incentive stock
options to Maxtor employees at a price not less than the fair
market value at the date of grant. The Option Plan also provides
for the grant of restricted stock to eligible employees. The
Board of Directors or an executive committee appointed by the
Board also approves other terms such as number of shares granted
and exercisability thereof. Options granted under the Amended
Plan vest over a four-year period with 25% vesting at the first
anniversary date of the vest date and 6.25% each quarter
thereafter. Restricted stock grants vest in one or more
installments over a period of years, and are subject to
forfeiture if employment is terminated prior to the time the
shares become fully vested and non-forfeitable. During 2000,
2001 and 2002, the Company reserved 5.5 million,
17.0 million and zero shares for issuance, respectively.

In connection with Maxtors acquisition of
CDS in September 1999, the Company established a separate
reserve of 674,477 shares of its common stock for issuance upon
the exercise of stock options (the Assumed Options)
granted under the CDS Incentive Stock Option Plan (the CDS
Plan). As of December 28, 2002 and December 29,
2001, 18,403 and 72,337 options were outstanding under the CDS
Plan, respectively. The Assumed Options are incentive stock
options which vest over four years subject to the terms and
conditions of the Assumed Options agreement.

The Option Plan was amended in February 1998 to
remove certain provisions which had given rise to variable
accounting, and offered and modified employee option agreements
in the second quarter of 1998 for the majority of employees who
had previously held variable options to achieve fixed-award
accounting. To comply with the variable plan accounting required
prior to these amendments, the Company recorded compensation
expense related to the difference between the estimated fair
market value of its stock and the stated exercise price of its
options. Compensation cost was reflected in accordance with
Financial Accounting Standards Board Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.

On April 2, 2001, as part of the Quantum HDD
acquisition, the Company assumed all vested and nonvested
Quantum HDD options held by employees who accepted offers of
employment with Maxtor, whether or not options or restricted
stock have vested. The Company also assumed all vested Quantum
HDD options held by Quantum employees whose employment was
terminated prior to separation. In addition, Maxtor assumed
vested Quantum HDD options held by Quantum employees who
continued to provide services during a transitional period. The
outstanding options to purchase Quantum HDD common stock held by
transferred employees and vested options to purchase Quantum HDD
common stock held by former Quantum employees, consultants and
transition employees were assumed by Maxtor and converted into
options to purchase Maxtor common stock according to the
exchange ratio of 1.52 shares of Maxtor common stock for each
share of Quantum HDD common stock. In connection with the
Quantum HDD acquisition, the Company established a reserve of
12,785,328 shares of common stock for the assumption of Quantum

85



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

HDD options to purchase Maxtor common stock.
Vested and unvested options for Quantum HDD common stock assumed
in the merger represented options for 7,650,965 shares and
4,655,236 shares of Maxtor common stock, respectively. The
intrinsic value of the 4,655,236 unvested options was determined
to be $3.4 million, using the intrinsic value methodology
in accordance with EITF 00-23 Issues Related to the
Accounting for Stock Based Compensation under APB Opinion
No. 25 and FASB Interpretation No. 44. As of
December 28, 2002, 4,522,105 options were outstanding under
the Quantum HDD Merger Plan.

Stock options are granted to employees and
directors at an exercise price equal to the fair market value of
the Companys stock at the date of grant. Generally,
options vest 25 percent per year, are fully vested four
years from the grant date and have a term of ten years. The
following table summarizes option activity through
December 28, 2002:

|                                               |  |           |             |                     |  |                |            |                |  |   |      |  |  |   |         |  
|---------------------------------------------- |  | --------- | ----------- | ------------------- |  | -------------- | ---------- | -------------- |  | - | ---- |  |  | - | ------- | -
|                                               |  |           |             |                    
|                                               |  |           |             | Options Outstanding
|                                               |  |           |             |                    
|                                               |  | Shares    |             |                     |  | Wtd Average    |            |               
|                                               |  | Available |             |                     |  | Exercise Price |            | Aggregate     
|                                               |  | For Grant |             | Shares              |  | Per Share      |            | Value         
|                                               |  |           |             |                     |  |                |            |               
|                                               |  |           |             |                     |  |                |            | (In thousands)
|Balance as of January 1, 2000                  |  |           | 4,613,615   |                     |  |                | 11,385,252 |                |  | $ | 7.47 |  |  | $ | 85,047  |  
|Options reserved                               |  |           | 5,500,000   |                     |  |                |           |                |  |   |     |  |  |   |        |  
|Options granted                                |  |           | (5,737,687  | )                   |  |                | 5,737,687  |                |  |   | 8.15 |  |  |   | 46,772  |  
|Restricted stock granted                       |  |           | (165,000    | )                   |  |                |           |                |  |   |     |  |  |   |        |  
|Options exercised                              |  |           |            |                     |  |                | (1,156,785 | )              |  |   | 5.61 |  |  |   | (6,493  | )
|Options canceled                               |  |           | 1,177,148   |                     |  |                | (1,177,148 | )              |  |   | 6.07 |  |  |   | (7,143  | )
|Restricted stock canceled                      |  |           | 90,000      |                     |  |                |           |                |  |   |     |  |  |   |        |  
|                                               |  |           |             |                     |  |                |            |                |  |   |      |  |  |   |         |  
|Balance as of December 30, 2000                |  |           | 5,478,076   |                     |  |                | 14,789,006 |                |  |   | 7.96 |  |  |   | 118,183 |  
|Shares reserved  1996 stock option plan       |  |           | 17,000,000  |                     |  |                |           |                |  |   |     |  |  |   |        |  
|Shares reserved  Quantum assumed
    options  |  |           | 12,785,328  |                     |  |                |           |                |  |   |     |  |  |   |        |  
|Options assumed from acquisition               |  |           | (12,306,201 | )                   |  |                | 12,306,201 |                |  |   | 5.05 |  |  |   | 62,146  |  
|RSP Options assumed from acquisition           |  |           | (479,127    | )                   |  |                |           |                |  |   |     |  |  |   |        |  
|Options granted                                |  |           | (13,329,365 | )                   |  |                | 13,329,365 |                |  |   | 5.36 |  |  |   | 71,747  |  
|Restricted stock granted                       |  |           | (140,000    | )                   |  |                |           |                |  |   |     |  |  |   |        |  
|Options exercised                              |  |           |            |                     |  |                | (2,938,608 | )              |  |   | 3.95 |  |  |   | (11,607 | )
|Options canceled  1996 stock option
    plan  |  |           | 788,732     |                     |  |                | (788,732   | )              |  |   | 6.51 |  |  |   | (17,758 | )
|Options canceled  Quantum assumed
    options |  |           |            |                     |  |                | (2,166,150 | )              |  |   |     |  |  |   |        |  
|Restricted stock canceled                      |  |           | 49,000      |                     |  |                |           |                |  |   |     |  |  |   |        |  
|                                               |  |           |             |                     |  |                |            |                |  |   |      |  |  |   |         |  
|Balance as of December 29, 2001                |  |           | 9,846,443   |                     |  |                | 34,531,082 |                |  |   | 6.41 |  |  |   | 222,711 |  
|Options granted                                |  |           | (4,089,058  | )                   |  |                | 4,089,058  |                |  |   | 4.98 |  |  |   | 20,380  |  
|Restricted stock granted                       |  |           | (30,000     | )                   |  |                |           |                |  |   |     |  |  |   |        |  
|Options exercised                              |  |           |            |                     |  |                | (1,987,555 | )              |  |   | 4.13 |  |  |   | (8,214  | )
|Options canceled  1996 stock option
    plan  |  |           | 3,759,844   |                     |  |                | (3,759,844 | )              |  |   | 7.00 |  |  |   | (26,314 | )
|Options canceled  Quantum assumed
    options |  |           |            |                     |  |                | (1,297,687 | )              |  |   | 6.25 |  |  |   | (8,108  | )
|                                               |  |           |             |                     |  |                |            |                |  |   |      |  |  |   |         |  
|Balance as of December 28, 2002                |  |           | 9,487,229   |                     |  |                | 31,575,054 |                |  | $ | 6.35 |  |  | $ | 200,455 |  
|                                               |  |           |             |                     |  |                |            |                |  |   |      |  |  |   |         |  

There were 5,921,018 shares vested but
unexercised as of, December 30, 2000 at a weighted average
exercise price of $7.56, and no shares exercised subject to
repurchase. There were 14,383,421 shares vested but unexercised
as of December 29, 2001 at a weighted average exercise
price of $6.78, and no shares exercised subject to repurchase.
There were 17,718,564 shares vested but unexercised as of
December 28, 2002 at a weighted average exercise price of
$7.00, and no shares exercised subject to repurchase.

86



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information for
stock options outstanding as of December 28, 2002:

|                    |  |                     |            |                     |  |          |      |             |  |          |       |  |  |  |            |  |  |   |       | 
|------------------- |  | ------------------- | ---------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                    |  |                     |            |                     |  |         
|                    |  | Options Outstanding |            |                    
|                    |  |                     |            | Options Exercisable
|                    |  |                     |            | Weighted            |  |          |      |            
|                    |  |                     |            | Average             |  | Weighted |      |             |  | Weighted
|                    |  |                     |            | Remaining           |  | Average  |      |             |  | Average 
|Range of            |  | Number              |            | Contractual         |  | Exercise |      | Number      |  | Exercise
|Exercise Price      |  | Outstanding         |            | Life                |  | Price    |      | Outstanding |  | Price   
|                    |  |                     |            |                     |  |          |      |             |  |         
|$0.575   $5.875    |  |                     | 12,436,503 |                     |  |          | 7.95 |             |  | $        | 4.16  |  |  |  | 5,032,853  |  |  | $ | 4.15  | 
|$5.9375   $7.75    |  |                     | 12,442,374 |                     |  |          | 7.08 |             |  |          | 6.63  |  |  |  | 7,396,532  |  |  |   | 6.56  | 
|$7.8125  $13.125   |  |                     | 4,441,865  |                     |  |          | 7.08 |             |  |          | 8.16  |  |  |  | 3,041,180  |  |  |   | 8.17  | 
|$13.1875  $19.3113 |  |                     | 2,254,312  |                     |  |          | 5.89 |             |  |          | 13.29 |  |  |  | 2,247,999  |  |  |   | 13.28 | 
|                    |  |                     |            |                     |  |          |      |             |  |          |       |  |  |  |            |  |  |   |       | 
|                    |  |                     | 31,575,054 |                     |  |          |      |             |  | $        | 6.35  |  |  |  | 17,718,564 |  |  | $ | 7.00  | 
|                    |  |                     |            |                     |  |          |      |             |  |          |       |  |  |  |            |  |  |   |       | 

During 1997, the Company also granted options to
the employees of MMC, a wholly owned subsidiary of HEA. As of
December 30, 2000, there were 274,032 options outstanding,
which are now fully vested, pursuant to these grants which are
included in the table above. Prior to the acquisition of MMC in
September 2001, 246,115 options were outstanding as of
September 1, 2001. Compensation cost for options granted to
non-employees is measured at their fair value in accordance with
Emerging Issues Task Force No. 96-18. MMC reimbursed Maxtor
for any compensation expense arising from these grants.

For information on the proforma net income (loss)
for Maxtors stock options and employee stock purchase
plan, see note 1 of the Notes to Consolidated Financial
Statements.

The fair value of option grants has been
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:

|                               |  |              |           |              |  |              |           |   |  |  |           |  
|------------------------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- | - |  |  | --------- | -
|                               |  |             
|                               |  | Years Ended 
|                               |  |             
|                               |  | December 30, |           | December 30, |  | December 28,
|                               |  | 2000         |           | 2001         |  | 2002        
|                               |  |              |           |              |  |             
|Risk-free interest rate        |  |              | 6.25      | %            |  |              | 4.37      | % |  |  | 4.26      | %
|Weighted average expected life |  |              | 4.5 years |              |  |              | 4.5 years |   |  |  | 4.5 years |  
|Volatility                     |  |              | 105       | %            |  |              | 81        | % |  |  | 90        | %
|Dividend yield                 |  |              |          |              |  |              |          |   |  |  |          |  

The fair value of employee stock purchase plan
option grants has been estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:

|                               |  |              |           |              |  |              |           |   |  |  |           |  
|------------------------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- | - |  |  | --------- | -
|                               |  |             
|                               |  | Years Ended 
|                               |  |             
|                               |  | December 30, |           | December 30, |  | December 28,
|                               |  | 2000         |           | 2001         |  | 2002        
|                               |  |              |           |              |  |             
|Risk-free interest rate        |  |              | 6.25      | %            |  |              | 3.34      | % |  |  | 1.73      | %
|Weighted average expected life |  |              | 0.5 years |              |  |              | 0.5 years |   |  |  | 0.5 years |  
|Volatility                     |  |              | 105       | %            |  |              | 81        | % |  |  | 90        | %
|Dividend yield                 |  |              |          |              |  |              |          |   |  |  |          |  

No dividend yield is assumed as the Company has
not paid dividends and has no plans to do so.

The weighted average expected life was calculated
based on the respective vesting periods and the expected lives
at the date of the option and restricted stock grants. The
risk-free interest rates were calculated based on rates
prevailing during grant periods and the expected lives of the
respective options and restricted stock options at the date of
grants. The weighted average fair values of options granted to
employees during the years ended December 30, 2000,
December 29, 2001 and December 28, 2002 were $6.26,
$3.51 and $3.41

87



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

respectively. The weighted average fair values of
restricted stock options granted to employees during the years
ended December 30, 2000, December 29, 2001 and
December 28, 2002 were $10.11, $6.32 and $6.58 respectively.

Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, the Company
also estimates the fair value of employees purchase rights
under the Employee Stock Purchase Plan using the Black-Scholes
option pricing model. The fair value of purchase rights under
the Employee Stock Purchase Plan for the years ended
December 30, 2000, December 29, 2001 and
December 28, 2002 was $2.74, $2.53 and $1.19, respectively.

14.     Income
Taxes

The provision for income taxes consists of the
following:

|         |         |                |   |              |       |              |   |       |       |  |   |       |       | 
|-------- | ------- | -------------- | - | ------------ | ----- | ------------ | - | ----- | ----- |  | - | ----- | ----- | 
|         |         |               
|         |         | Years Ended   
|         |         |               
|         |         | December 30,   |   | December 29, |       | December 28,
|         |         | 2000           |   | 2001         |       | 2002        
|         |         |                |   |              |       |             
|         |         |               
|         |         | (In thousands)
|Current: |         |                |   |              |       |              |   |       |       |  |   |      
|         | U.S.    |                | $ | 865          |       |              | $ | 76    |       |  | $ | 700   |      
|         | Foreign |                |   | 808          |       |              |   | 3,306 |       |  |   | 1,475 |      
|         |         |                |   |              |       |              |   |       |       |  |   |      
|         |         | Total          |   | $            | 1,673 |              |   | $     | 3,382 |  |   | $     | 2,175 | 
|         |         |                |   |              |       |              |   |       |       |  |   |      

Income (loss) before provision for income
taxes consists of the following:

|        |       |                |          |              |  |              |          |          |   |   |          |          |  
|------- | ----- | -------------- | -------- | ------------ |  | ------------ | -------- | -------- | - | - | -------- | -------- | -
|        |       |               
|        |       | Years Ended   
|        |       |               
|        |       | December 30,   |          | December 29, |  | December 28,
|        |       | 2000           |          | 2001         |  | 2002        
|        |       |                |          |              |  |             
|        |       |               
|        |       | (In thousands)
|U.S.    |       | $              | (115,331 | )            |  | $            | (592,540 | )        |   | $ | (320,176 | )       
|Foreign |       |                | 148,806  |              |  |              | (50,476  | )        |   |   | (11,716  | )       
|        |       |                |          |              |  |              |          |          |   |   |          |         
|        | Total |                | $        | 33,475       |  |              | $        | (643,016 | ) |   | $        | (331,892 | )
|        |       |                |          |              |  |              |          |          |   |   |          |         

Subject to the Companys continued
compliance with certain legal requirements, the Company
currently has a tax holiday for its operations in Singapore that
has been extended to June 30, 2005.

88



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision for income taxes differs from the
amount computed by applying the U.S. statutory rate of 35% to
the income (loss) before income taxes for the years ended
December 30, 2000, December 29, 2001 and
December 28, 2002. The principal reasons for this
difference are as follows:

|                                                        |       |                |         |              |  |              |          |       |  |   |          |       | 
|------------------------------------------------------- | ----- | -------------- | ------- | ------------ |  | ------------ | -------- | ----- |  | - | -------- | ----- | 
|                                                        |       |               
|                                                        |       | Years Ended   
|                                                        |       |               
|                                                        |       | December 30,   |         | December 29, |  | December 28,
|                                                        |       | 2000           |         | 2001         |  | 2002        
|                                                        |       |                |         |              |  |             
|                                                        |       |               
|                                                        |       | (In thousands)
|Income tax expense (benefit) at U.S.
    statutory rate |       | $              | 11,716  |              |  | $            | (225,056 | )     |  | $ | (116,162 | )    
|Rate differential on foreign operations                 |       |                | (6,510  | )            |  |              | (30,046  | )     |  |   | (33,003  | )    
|Repatriated foreign earnings                            |       |                | 4,206   |              |  |              | 48,258   |       |  |   | 52,499   |      
|Losses not providing current tax benefit                |       |                |        |              |  |              | 100,360  |       |  |   | 56,559   |      
|Benefit of prior years U.S. losses                      |       |                | (11,664 | )            |  |              |         |       |  |   |         |      
|Valuation of temporary differences                      |       |                | (1,931  | )            |  |              |         |       |  |   |         |      
|Stock compensation expense                              |       |                | 1,323   |              |  |              | 74       |       |  |   | 537      |      
|Alternative minimum tax                                 |       |                | 687     |              |  |              |         |       |  |   |         |      
|Nondeductible purchased research and development        |       |                | 3,529   |              |  |              | 109,541  |       |  |   | 40,802   |      
|Other                                                   |       |                | 317     |              |  |              | 251      |       |  |   | 943      |      
|                                                        |       |                |         |              |  |              |          |       |  |   |          |      
|                                                        | Total |                | $       | 1,673        |  |              | $        | 3,382 |  |   | $        | 2,175 | 
|                                                        |       |                |         |              |  |              |          |       |  |   |          |      

Deferred income taxes reflect the tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The significant components of the
Companys deferred tax assets and liabilities are as
follows (in thousands):

|                                            |                                                                |                                |          |              |         |   |          |         |         | 
|------------------------------------------- | -------------------------------------------------------------- | ------------------------------ | -------- | ------------ | ------- | - | -------- | ------- | ------- | 
|                                            |                                                                |                               
|                                            |                                                                | As of                         
|                                            |                                                                |                               
|                                            |                                                                | December 29,                   |          | December 28,
|                                            |                                                                | 2001                           |          | 2002        
|                                            |                                                                |                                |          |             
|Deferred tax assets:                        |                                                                |                                |          |              |         |   |          |        
|                                            | Inventory reserves and accruals                                |                                | $        | 6,410        |         |   | $        | 6,298   |        
|                                            | Depreciation                                                   |                                |          | 14,566       |         |   |          | 24,388  |        
|                                            | Sales related reserves                                         |                                |          | 32,235       |         |   |          | 30,729  |        
|                                            | Net operating loss carry-forwards                              |                                |          | 263,770      |         |   |          | 301,559 |        
|                                            | Tax credit carry-forwards                                      |                                |          | 25,046       |         |   |          | 27,550  |        
|                                            | Capitalized research and development                           |                                |          | 53,881       |         |   |          | 41,086  |        
|                                            | Other                                                          |                                |          | 30,267       |         |   |          | 26,391  |        
|                                            |                                                                |                                |          |              |         |   |          |        
|                                            |                                                                | Total deferred tax assets      |          |              | 426,175 |   |          |         | 458,001 | 
|Valuation allowance for deferred tax assets |                                                                |                                | (372,063 | )            |         |   | (384,353 | )      
|                                            |                                                                |                                |          |              |         |   |          |        
|Net deferred tax assets                     |                                                                | $                              | 54,112   |              |         | $ | 73,648   |        
|                                            |                                                                |                                |          |              |         |   |          |        
|Deferred tax liabilities:                   |                                                                |                                |          |              |         |   |          |        
|                                            | Unremitted earnings of certain foreign entities                |                                |          | 251,668      |         |   |          | 269,271 |        
|                                            | Unrealized gain (loss) on investments in
    equity securities |                                |          | (1,101       | )       |   |          | 832     |        
|                                            |                                                                |                                |          |              |         |   |          |        
|                                            |                                                                | Total deferred tax liabilities |          |              | 250,567 |   |          |         | 270,103 | 
|                                            |                                                                |                                |          |              |         |   |          |        
|Net deferred tax liabilities                |                                                                | $                              | 196,455  |              |         | $ | 196,455  |        
|                                            |                                                                |                                |          |              |         |   |          |        

89



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the years ended December 30, 2000,
December 29, 2001 and December 28, 2002 the valuation
allowance for deferred tax assets decreased by $72.6 million,
increased by $141.3 million and $12.3 million
respectively.

As of December 28, 2002, for federal income
tax purposes, the Company had net operating loss carry-forwards
of $848.9 million and tax credit carry-forwards of
approximately $22.9 million, which will expire beginning in
fiscal years 2008 and 2003, respectively. To the extent that net
operating loss carry-forward when realized relate to stock
option deductions, the resulting benefits will be credited to
stockholders equity. Certain changes in stock ownership
can result in a limitation on the amount of net operating loss
and tax credit carry-overs that can be utilized each year. The
Company determined it had undergone such an ownership change
during 2001. Consequently, utilization of approximately
$351.2 million of net operating loss carry-forward and the
deduction equivalent of approximately $17.4 million of tax
credit carry-forward will be limited to approximately
$16.0 million per year from prior ownership change in 1998.
Also, approximately $244.3 million of net operating loss
carry-forward and the deduction equivalent of approximately
$2.9 million of tax credit carryforward will be limited to
approximately $42.0 million per year from the change of
ownership resulting from the Quantum HDD acquisition.

The Company was part of the HEA consolidated
group for federal income tax returns for periods from early 1996
to August 1998 (the Affiliation Period). As a member
of the HEA consolidated group, the Company was subject to a tax
allocation agreement. During the Affiliation Period, for
financial reporting purposes, the Companys tax loss was
computed on a separate tax return basis and, as such, the
Company did not record any tax benefit in its financial
statements for the amount of the net operating loss included in
the HEA consolidated income tax return.

The Company ceased to be a member of the HEA
consolidated group as of August 1998. The Company remains liable
for its share of the total consolidated or combined tax return
liability of the HEA consolidated group prior to August 1998.
The Company has agreed to indemnify or reimburse HEA if there is
any increase in the Companys share of the HEA consolidated
or combined tax return liability resulting from revisions to the
Companys taxable income.

Pursuant to a Tax Sharing and Indemnity
Agreement entered into in connection with the
Companys merger with Quantum HDD, Maxtor, as successor to
Quantum HDD, and Quantum are allocated their share of
Quantums income tax liability for periods before the
split-off, consistent with past practices and as if the Quantum
HDD and Quantum DSS business divisions had been separate and
independent corporations. To the extent that the income tax
liability attributable to one business division is reduced by
using NOLs and other tax attributes of the other business
division, the business division utilizing the attributes must
pay the other for the use of those attributes. The Company must
also indemnify Quantum for additional taxes related to the
Quantum DSS business for all periods before Quantums
issuance of tracking stock and additional taxes related to the
Quantum HDD business for all periods before the split-off,
limited in the aggregate to $142.0 million plus 50% of any
excess over $142.0 million, excluding any required gross-up
payment. Currently, $138.5 million remains on the original
indemnity. Management has determined that, based on the facts
available at this time, the likelihood that the payment will
exceed $138.5 million is remote. As of December 28,
2002, the Company has reimbursed $3.5 million to Quantum
Corporation leaving a balance of $138.5 million on the
original indemnity.

The Company purchased a $340 million
insurance policy covering the risk that the split-off of Quantum
HDD from Quantum DSS could be determined to be subject to
federal income tax or state income or franchise tax. Under the
Tax Sharing and Indemnity Agreement, the Company
agreed to indemnify Quantum for the amount of any tax payable by
Quantum as a result of the split-off to the extent such tax is
not covered by such insurance policy, unless imposition of the
tax is the result of Quantums actions, or acquisitions of
Quantum stock, after the split-off. The amount of the tax not
covered by insurance could be substantial. In addition, if it is
determined that Quantum owes federal or state tax as a result of
the split-off

90



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and the circumstances giving rise to the tax are
covered by the Companys indemnification obligations, the
Company will be required to pay Quantum the amount of the tax at
that time, whether or not reimbursement may be allowed under the
Companys tax insurance policy.

In accordance with Emerging Issues Task
Force 93-7 Uncertainties Related to Income Taxes in a
Purchase Business Combination, the Company recorded
approximately $196.4 million of deferred tax liabilities in
connection with the acquisition of Quantum HDD on April 2,
2001. The deferred taxes were recorded principally to reflect
the taxes which would become payable upon the repatriation of
the cash which was invested abroad by Quantum HDD.



|    |                            
|--- | ---------------------------
|15. | Net Income (Loss) Per Share

In accordance with the disclosure requirements of
SFAS No. 128, Earnings per Share, a
reconciliation of the numerator and denominator of the basic and
diluted net income (loss) per share calculations is provided as
follows (in thousands, except share and per share amounts):

|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |   | 
|-------------------------------------------------- | --------------------------------------- | ------------ | ----------- | ------------ |  | ------------ | ----------- | - |  | - | ----------- | - | 
|                                                   |                                         |             
|                                                   |                                         | Years Ended 
|                                                   |                                         |             
|                                                   |                                         | December 30, |             | December 29, |  | December 28,
|                                                   |                                         | 2000         |             | 2001         |  | 2002        
|                                                   |                                         |              |             |              |  |             
|Numerator  Basic and
    Diluted                  |                                         |              |             |              |  |              |             |   |  |   |             |  
|Income (Loss) from continuing operations           |                                         | $            | 72,407      |              |  | $            | (598,179    | ) |  | $ | (260,566    | )
|Loss from discontinued operations                  |                                         | $            | (40,605     | )            |  | $            | (48,219     | ) |  | $ | (73,501     | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Net income (loss)                                  |                                         | $            | 31,802      |              |  | $            | (646,398    | ) |  | $ | (334,067    | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Net income (loss) available to common stockholders |                                         | $            | 31,802      |              |  | $            | (646,398    | ) |  | $ | (334,067    | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Denominator                                        |                                         |              |             |              |  |              |             |   |  |   |             |  
|Basic weighted average common shares outstanding   |                                         |              | 113,432,679 |              |  |              | 206,911,952 |   |  |   | 239,474,179 |  
|Effect of dilutive securities:                     |                                         |              |             |              |  |              |             |   |  |   |             |  
|                                                   | Common stock options                    |              |             | 3,890,803    |  |              |             |  |  |   |             |  | 
|                                                   | Restricted shares subject to repurchase |              |             | 1,792,500    |  |              |             |  |  |   |             |  | 
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Diluted weighted average common shares             |                                         |              | 119,115,982 |              |  |              | 206,911,952 |   |  |   | 239,474,179 |  
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Net income (loss) per share  basic                |                                         |              |             |              |  |              |             |   |  |   |             |  
|Continuing operations                              |                                         | $            | 0.64        |              |  | $            | (2.89       | ) |  | $ | (1.09       | )
|Discontinued operations                            |                                         | $            | (0.36       | )            |  | $            | (0.23       | ) |  | $ | (0.31       | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Total                                              |                                         | $            | 0.28        |              |  | $            | (3.12       | ) |  | $ | (1.40       | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Net income (loss) per share 
    diluted          |                                         |              |             |              |  |              |             |   |  |   |             |  
|Continuing operations                              |                                         | $            | 0.61        |              |  | $            | (2.89       | ) |  | $ | (1.09       | )
|Discontinued operations                            |                                         | $            | (0.34       | )            |  | $            | (0.23       | ) |  | $ | (0.31       | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  
|Total                                              |                                         | $            | 0.27        |              |  | $            | (3.12       | ) |  | $ | (1.40       | )
|                                                   |                                         |              |             |              |  |              |             |   |  |   |             |  

91



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following securities and restricted shares
subject to repurchase are excluded in the calculation of diluted
shares outstanding as their effects would be antidilutive:

|                                        |  |              |   |              |  |              |            |  |  |  |            | 
|--------------------------------------- |  | ------------ | - | ------------ |  | ------------ | ---------- |  |  |  | ---------- | 
|                                        |  |             
|                                        |  | Years Ended 
|                                        |  |             
|                                        |  | December 30, |   | December 29, |  | December 28,
|                                        |  | 2000         |   | 2001         |  | 2002        
|                                        |  |              |   |              |  |             
|Common stock options                    |  |              |  |              |  |              | 34,531,082 |  |  |  | 31,575,054 | 
|Restricted shares subject to repurchase |  |              |  |              |  |              | 1,505,891  |  |  |  | 1,012,752  | 



|    |                      
|--- | ---------------------
|16. | Employee Benefit Plan



| |            
| | -----------
| | 401(k) Plan

The Company maintains a retirement and deferred
savings plan for its employees (the 401(k) Plan)
which is intended to qualify as a tax-qualified plan under the
Code. The 401(k) Plan is a profit sharing plan which is intended
to qualify under section 401(a) of the Internal Revenue Code of
1986, as amended, which includes a cash or deferred arrangement
intended to satisfy the requirements of Code section 401(k). The
401(k) Plan has been amended from time to time to comply with
applicable laws and regulations. Under the 401(k) Plan, in
addition to the Company match, the Company may make
discretionary contributions. The Companys contributions to
the 401(k) Plan, for the years ended December 30, 2000,
December 29, 2001 and December 28, 2002 were
$3.1 million, $6.3 million and $6.9 million,
respectively. All amounts contributed by participants and the
Company, along with earnings on such contributions are fully
vested at all times.

92



---



##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of Maxtor Corporation:


In our opinion, the consolidated financial
statements listed in the index appearing under Item 8 of
this Form 10-K present fairly, in all material respects,
the financial position of Maxtor Corporation and its
subsidiaries at December 29, 2001 and December 28,
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 28, 2002, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in such
index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 12 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 142 Goodwill and Other
Intangible Assets effective December 30, 2001.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 29, 2003


93



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this item with
respect to identification of directors is incorporated by
reference to the information contained in the section captioned
Election of Directors in the Proxy Statement. For
information with respect to our executive officers, see
Executive Officers at the end of Item 1,
Part I of this report. Information with respect to
Item 405 of Regulation S-K is incorporated by
reference to the information contained in the section captioned
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated herein by reference to the information contained in
the section captioned Executive Compensation and Other
Matters in the Proxy Statement.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this Item is
incorporated herein by reference to the information contained in
the sections captioned Stock Ownership of Management and
Certain Beneficial Owners and Equity Compensation
Plans in the Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item is
incorporated herein by reference to the information contained in
the section captioned Executive Compensation and Other
Matters in the Proxy Statement.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Under the supervision and with the
participation of our management, including our President, Chief
Executive Officer and Acting Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended, within the 90 day period
prior to the filing date of this report. Based on this
evaluation, our President, Chief Executive Officer and Acting
Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of that date.

(b) There have been no significant changes
(including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in
paragraph (a) above.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) The following documents are filed as
part of this report:

(1)-(2) Financial Statements and
Financial Statement Schedules  See Index to
Consolidated Financial Statements under Item 8 on
page 51 of this report.

(3) Exhibits.See Index to Exhibits
on pages 98 to 102 hereof.

(b) Reports on Form 8-K.

None.

94



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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, in the City of Milpitas,
State of California, on the 26th day of March, 2003.



| |                   
| | ------------------
| | MAXTOR CORPORATION
| | (Registrant)      



| |    |                   
| | -- | ------------------
| | By | /s/ PAUL J. TUFANO

| |                                                
| | -----------------------------------------------
| |                                                
| | Paul J. Tufano                                 
| | President, Chief Executive Officer,            
| | Director and Acting Chief Financial
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                                                                                                                                         |  |                |  | 
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                                                                                                                                                         |  |               
|Signature                                      |  | Title                                                                                                                                                                                   |  | Date          
|                                               |  |                                                                                                                                                                                         |  |               
|                                              
|/s/ PAUL J. TUFANOPaul J. Tufano               |  | President, Chief Executive Officer, Director and
    Acting Chief Financial Officer (Principal Executive
    Officer, Principal Financial Officer and Principal Accounting
    Officer) |  | March 26, 2003
|                                              
|/s/ CHONG SUP PARKDr. Chong Sup Park           |  | Chairman of the Board                                                                                                                                                                   |  | March 26, 2003
|                                              
|/s/ CHARLES M. BOESENBERGCharles M. Boesenberg |  | Director                                                                                                                                                                                |  | March 26, 2003
|                                              
|/s/ MICHAEL R. CANNONMichael R. Cannon         |  | Director                                                                                                                                                                                |  | March 26, 2003
|                                              
|/s/ CHARLES F. CHRISTCharles F. Christ         |  | Director                                                                                                                                                                                |  | March 26, 2003
|                                              
|/s/ THOMAS L. CHUNThomas L. Chun               |  | Director                                                                                                                                                                                |  | March 26, 2003
|                                              
|/s/ CHARLES HILLCharles Hill                   |  | Director                                                                                                                                                                                |  | March 26, 2003
|                                              
|/s/ ROGER W. JOHNSONRoger W. Johnson           |  | Director                                                                                                                                                                                |  | March 26, 2003

95



---



##### Table of Contents






CERTIFICATIONS

I, Paul J. Tufano, certify that:

1.     I have reviewed
this annual report on Form 10-K of Maxtor Corporation;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | /s/ PAUL J. TUFANO 
     _______________________________________ 
     Paul J. Tufano
| | President, Chief Executive Officer                                                   
| | and Acting Chief Financial Officer                                                   

Date:     March 28,
2003

96



---



##### Table of Contents






MAXTOR CORPORATION

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

|                  |                                             |                |   |            |  |            |   |         |   |            |   |         |     |  |   |        |     |  |   |         | 
|----------------- | ------------------------------------------- | -------------- | - | ---------- |  | ---------- | - | ------- | - | ---------- | - | ------- | --- |  | - | ------ | --- |  | - | ------- | 
|                  |                                             |                |   | Additions  |  |            |   |         |   |           
|                  |                                             |                |   | Charged to |  |            |   |         |   |           
|                  |                                             |                |   | Cost,      |  |            |   |         |   |           
|                  |                                             | Balance at     |   | Expenses   |  |            |   |         |   | Balance at
|                  |                                             | Beginning      |   | and Other  |  |            |   |         |   | End of    
|Fiscal Year Ended |                                             | of Period      |   | Accounts   |  | Deductions |   | Other   |   | Period    
|                  |                                             |                |   |            |  |            |   |         |   |           
|                  |                                             |               
|                  |                                             | (In thousands)
|2002              |                                             |                |   |            |  |            |   |         |   |            |   |         |     |  |   |        |     |  |   |        
|                  | Allowance for doubtful accounts             |                | $ | 21,638     |  |            | $ | (1,000  | ) |            | $ | 2,318   | (1) |  | $ |       |     |  | $ | 18,320  | 
|                  | Revenue reserves                            |                | $ | 102,332    |  |            | $ | 339,266 |   |            | $ | 358,720 |     |  | $ |       |     |  | $ | 82,878  | 
|                  | Valuation allowance for deferred tax assets |                | $ | 372,063    |  |            | $ | 12,290  |   |            | $ |        |     |  | $ |       |     |  | $ | 384,353 | 
|2001              |                                             |                |   |            |  |            |   |         |   |            |   |         |     |  |   |        |     |  |   |        
|                  | Allowance for doubtful accounts             |                | $ | 15,148     |  |            | $ | 7,200   |   |            | $ | 710     | (1) |  | $ |       |     |  | $ | 21,638  | 
|                  | Revenue reserves                            |                | $ | 44,254     |  |            | $ | 301,641 |   |            | $ | 303,823 |     |  | $ | 60,260 | (2) |  | $ | 102,332 | 
|                  | Valuation allowance for deferred tax assets |                | $ | 230,746    |  |            | $ | 141,317 |   |            | $ |        |     |  | $ |       |     |  | $ | 372,063 | 
|2000              |                                             |                |   |            |  |            |   |         |   |            |   |         |     |  |   |        |     |  |   |        
|                  | Allowance for doubtful accounts             |                | $ | 15,459     |  |            | $ | 8,100   |   |            | $ | 8,411   | (1) |  | $ |       |     |  | $ | 15,148  | 
|                  | Revenue reserves                            |                | $ | 35,927     |  |            | $ | 110,518 |   |            | $ | 102,191 |     |  | $ |       |     |  | $ | 44,254  | 
|                  | Valuation allowance for deferred tax assets |                | $ | 303,368    |  |            | $ |        |   |            | $ | 72,622  |     |  | $ |       |     |  | $ | 230,746 | 



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Deductions represent recoveries of previously
    reserved balances and write-offs of fully reserved balances for
    which collection efforts have been exhausted.
|   
|(2) | Reflects reserves acquired from the acquisition
    of Quantum HDD in 2001.                                                                                        

Allowance for Doubtful
Accounts.The provision for doubtful
accounts consists of the Companys estimates with respect
to the uncollectability of our receivables, net of recoveries of
amounts previously written off. The Company must make estimates
of the uncollectability of its accounts receivables. The Company
specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in its
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts.

Revenue Reserves.The provision for sales returns and allowances consists of the
Companys estimates of potential future product returns
related to current period product revenue, and specific
provisions for original equipment manufacturer, distributor and
retailer sales incentives (allowances) that are
reductions in the revenue to be realized. The Company analyzes
historical returns, current economic trends, and changes in
customer demand and acceptance of its products when evaluating
the adequacy of the sales returns and allowances. Significant
management judgments and estimates must be made and used in
connection with establishing the sales returns and allowances in
any accounting period. Material differences may result in the
amount and timing of our revenue for any period if management
made different judgments or utilized different estimates.

97



---



##### Table of Contents






INDEX TO EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(9)       |  | Restated Certificate of Incorporation of
    Registrant.                                                                                                                                                                                                                                                                                       
|        | 3  | .2(10)      |  | Certificate of Correction to the Restated
    Certificate of Incorporation of Registrant.                                                                                                                                                                                                                                                      
|        | 3  | .3(11)      |  | Amended and Restated Bylaws of Registrant, dated
    March 12, 2001.                                                                                                                                                                                                                                                                           
|        | 3  | .4(12)      |  | Certificate of Merger as filed with the Secretary
    of State of State of Delaware on April 2, 2001.                                                                                                                                                                                                                                          
|        | 4  | .1(4)       |  | Stockholder Agreement dated June 25, 1998.                                                                                                                                                                                                                                                                                                     
|        | 4  | .2(13)      |  | Reimbursement Agreement between Maxtor and
    Quantum Corporation, dated April 2, 2001, together with the
    Third Supplemental Trust Indenture dated April 2, 2001, the
    Second Supplemental Trust Indenture dated August 4, 1999,
    the Supplemental Trust Indenture dated August 1, 1997, and
    the Indenture dated August 1, 1997.
|        | 10 | .1(6)       |  | Form of Indemnification Agreement between
    Registrant and Registrants directors and officers.**                                                                                                                                                                                                                                            
|        | 10 | .2(4)       |  | Indenture dated as of March 1, 1987 between
    Registrant and Security Pacific National Bank, as Trustee.                                                                                                                                                                                                                                     
|        | 10 | .3(1)       |  | Amendment to the Financing Agreement among
    Registrant and the CIT Group/ Business Credit, Inc., dated
    October 17, 1995.                                                                                                                                                                                                                
|        | 10 | .4(3)       |  | Employment Agreement between Michael R. Cannon
    and Registrant, dated June 17, 1996.**                                                                                                                                                                                                                                                      
|        | 10 | .5(3)       |  | Employment Agreement between Paul J. Tufano and
    Registrant, dated July 12, 1996.**                                                                                                                                                                                                                                                         
|        | 10 | .6(4)       |  | Employment Agreement between Philip Duncan and
    Registrant dated July 15, 1996.**                                                                                                                                                                                                                                                           
|        | 10 | .7(4)       |  | Employment Agreement between K.H. Teh and
    Registrant, dated March 23, 1997.**                                                                                                                                                                                                                                                              
|        | 10 | .8(4)       |  | Lease Agreement between Milpitas Oak Creek
    Delaware, Inc. and Registrant dated as of February 23, 1998.                                                                                                                                                                                                                                    
|        | 10 | .9(4)       |  | Land Lease between Housing Development Board and
    Maxtor Singapore Limited dated as of March 8, 1991.                                                                                                                                                                                                                                       
|        | 10 | .10(4)      |  | Sublicense Agreement between Hyundai Electronics
    Industries Co., Ltd., and Registrant dated as of January 1,
    1996.                                                                                                                                                                                                                     
|        | 10 | .11(4)      |  | Tax Allocation Agreement dated as of
    July 21, 1995 among Hyundai Electronics America (n/k/a
    Hynix Semiconductor America Inc.), Registrant and certain other
    subsidiaries.                                                                                                                                                          
|        | 10 | .12(4)      |  | Tax Indemnification Agreement and Amendment to
    Tax Allocation Agreement dated June 26, 1998.                                                                                                                                                                                                                                               
|        | 10 | .13(4)      |  | Indemnity Agreement between Hyundai Electronics
    Industries Co., Ltd. and Registrant dated June 25, 1998.                                                                                                                                                                                                                                   
|        | 10 | .14(4)      |  | License Agreement between Registrant and Hyundai
    Electronics Industries Co., Ltd. dated June 25, 1998.                                                                                                                                                                                                                                     
|        | 10 | .15(4)      |  | 1998 Restricted Stock Plan.**                                                                                                                                                                                                                                                                                                                  
|        | 10 | .16(4)      |  | Form of Restricted Stock Grant Agreement.**                                                                                                                                                                                                                                                                                                    
|        | 10 | .17(4)      |  | Chief Executive Officer Retention Agreement dated
    as of May 29, 1998 between Registrant and Michael R.
    Cannon.**                                                                                                                                                                                                                       
|        | 10 | .18(4)      |  | Retention Agreement dated as of May 29, 1998
    between Registrant and Paul J. Tufano.**                                                                                                                                                                                                                                                      
|        | 10 | .19(4)      |  | Form of Retention Agreement between Registrant
    and Executive Officers.**                                                                                                                                                                                                                                                                   
|        | 10 | .20(4)      |  | Letter Agreement between Victor B. Jipson and
    Registrant dated as of June 10, 1998.**                                                                                                                                                                                                                                                      
|        | 10 | .21(5)      |  | Purchase and Sale Agreement, dated as of
    July 31, 1998, between Registrant and Maxtor Receivables
    Corporation.                                                                                                                                                                                                                         
|        | 10 | .22(5)      |  | Receivables Purchase Agreement, dated as of
    July 31, 1998, among Maxtor Receivables Corporation, the
    Registrant, BlueKeel Funding LLC and Fleet National Bank.                                                                                                                                                                         



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .23(9)      |  | Form of Tax Opinion Insurance Policy.                                                                                                                                                                                                                                       
|        | 10 | .24(7)      |  | Executive Retention Incentive Agreement between
    Michael R. Cannon and Registrant dated June 25, 1999.**                                                                                                                                                                 
|        | 10 | .25(7)      |  | Promissory Note between Michael R. Cannon and
    Registrant dated June 23, 1999.**                                                                                                                                                                                         
|        | 10 | .26(8)      |  | Executive Retention Incentive Agreement and
    Promissory Note between Registrant and Victor B. Jipson,
    dated October 18, 1999.**                                                                                                                                      
|        | 10 | .27(8)      |  | Executive Retention Incentive Agreement and
    Promissory Note between Registrant and Paul J. Tufano,
    dated October 18, 1999.**                                                                                                                                        
|        | 10 | .28(7)      |  | Capital Assistant Scheme Loan Agreement between
    Maxtor Peripherals (S) Pte Ltd. and the Economic
    Development Board of Singapore dated September 9, 1999.                                                                                                            
|        | 10 | .29(7)      |  | Guarantee Facility Agreement between Maxtor
    Peripherals (S) Pte Ltd. and the Bank of Nova Scotia,
    Singapore branch dated August 31, 1999.                                                                                                                           
|        | 10 | .30(8)      |  | Lease Agreement for Premises Located at
    2452 Clover Basin Drive, Longmont, Colorado, between
    Registrant, as Tenant, and Pratt Land Limited Liability Company,
    as Landlord, dated October 28, 1999.                                                              
|        | 10 | .31(8)      |  | Forms of Executive Retention Incentive Agreement
    and Promissory Note Between Registrant and Pantelis Alexopoulos,
    Michael D. Cordano, Phillip C. Duncan, Misha
    Rozenberg, Glenn H. Stevens, K.H. Teh and
    Michael J. Wingert, each dated November 19, 1999.**
|        | 10 | .32(11)     |  | 1998 Employee Stock Purchase Plan.**                                                                                                                                                                                                                                        
|        | 10 | .33(9)      |  | Form of Tax Opinion Insurance Policy.                                                                                                                                                                                                                                       
|        | 10 | .34(13)     |  | Form of Tax Opinion Insurance Policy Rider.                                                                                                                                                                                                                                 
|        | 10 | .35(13)     |  | Option to Purchase Shares of Stock by and between
    Hynix Semiconductor America, Inc. and Maxtor.                                                                                                                                                                         
|        | 10 | .36(14)     |  | Master Agreement between Matsushita Kotobuki
    Electronics Industries, Ltd., and Registrant dated April 2,
    2001.*                                                                                                                                                     
|        | 10 | .37(14)     |  | Purchase Agreement between Matsushita Kotobuki
    Electronics Industries, Ltd., and Registrant dated April 2,
    2001.*                                                                                                                                                   
|        | 10 | .38(12)     |  | Separation and Redemption Agreement dated as of
    April 2, 2001 among Quantum Corporation, Insula Corporation
    and Maxtor Corporation.                                                                                                                                 
|        | 10 | .39(12)     |  | Tax Sharing and Indemnity Agreement dated as of
    April 2, 2001 among Quantum Corporation, Insula Corporation
    and Maxtor Corporation.                                                                                                                                 
|        | 10 | .40(12)     |  | Transitional Services Agreement dated as of
    April 2, 2001 among Quantum Corporation, Insula Corporation
    and Maxtor Corporation.                                                                                                                                     
|        | 10 | .41(12)     |  | Intellectual Property Agreement dated as of
    April 2, 2001 by and between Quantum Corporation and Insula
    Corporation.                                                                                                                                                
|        | 10 | .42(12)     |  | Indemnification Agreement dated as of
    April 2, 2001 among Quantum Corporation, Insula Corporation
    and Maxtor Corporation.                                                                                                                                           
|        | 10 | .43(12)     |  | Real Estate Matters Agreement dated as of
    April 2, 2001 among Quantum Corporation, Insula Corporation
    and Maxtor Corporation.                                                                                                                                       
|        | 10 | .44(12)     |  | General Assignment and Assumption Agreement dated
    as of April 2, 2001 among Quantum Corporation, Insula
    Corporation and Registrant.                                                                                                                                 
|        | 10 | .45(14)     |  | Amendment to Liquidity Agreement dated
    June 30, 2001, among the Registrant, Blue Keel Funding,
    LLC, the Liquidity Institutions and Fleet National Bank.                                                                                                             
|        | 10 | .46(15)     |  | Lease Amendment and Novation Agreement made as of
    August 31, 2001, by and between FortuneFirst, LLC, Hynix
    Semiconductor America Inc., and MMC Technology, Inc.                                                                                                     
|        | 10 | .47(15)     |  | Termination of Lease Agreement made effective as
    of September 20, 2001, by and between Pratt Land Limited
    Liability Company and Registrant.                                                                                                                         



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .48(15)     |  | Guaranty made as of September 2, 2001, by
    Registrant to and for the benefit of CIT Technologies
    Corporation.                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .49(15)     |  | $12,273,650.11 Promissory Note of MMC Technology,
    Inc. in favor of Hynix Semiconductor America Inc. and assumed by
    Registrant dated September 2, 2001.                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .50(15)     |  | $2,000,000 Promissory Note of Hyundai Electronics
    America (n/k/a Hynix Semiconductor America Inc.) in favor of
    Registrant dated January 5, 2001.                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .51(11)     |  | Employment Offer Letter from Registrant to
    Michael J. Wingert dated October 31, 2001.**                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .52(11)     |  | Forms of First Amendment to Executive Retention
    Incentive Agreement and Amended Restated Promissory Note Between
    Registrant and Pantelis Alexopoulos, Michael D. Cordano,
    Phillip C. Duncan, Misha Rozenberg, Glenn H. Stevens,
    K.H. Teh, Paul J. Tufano, Michael J. Wingert,
    David Beaver and Michael R. Cannon, each dated as of
    November 1, 2001.**                                                                                                                       
|        | 10 | .53(11)     |  | First Amendment to Purchase Agreement between
    Matshushita Kotobuki Electronics Industries, Ltd. And Registrant
    dated as of November 2, 2001.                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .54(11)     |  | Amended and Restated Receivables Purchase
    Agreement, dated as of November 15, 2001, among Maxtor
    Receivables Corporation, Registrant, the Purchasers, the
    Committed Purchasers, the Agents and Fleet National Bank.                                                                                                                                                                                                                                                                      
|        | 10 | .55(11)     |  | Long-term Incentive Plan Offer Letter from
    Registrant to Gerald Schenkkan dated December 5, 2001.**                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .56(11)     |  | First Amendment to Amended and Restated
    Receivables Purchase Agreement, dated as of February 15,
    2002, among Maxtor Receivables Corporation, Registrant, the
    Purchasers, the Committed Purchasers, the Agents and Fleet
    National Bank.                                                                                                                                                                                                                                               
|        | 10 | .57(11)     |  | Second Amendment to Amended and Restated
    Receivables Purchase Agreement dated as of March 15, 2002,
    among Maxtor Receivables Corporation, Registrant, the Conduit
    Purchasers, the Committed Purchasers, the Agents and Fleet
    National Bank.                                                                                                                                                                                                                                          
|        | 10 | .58(16)     |  | Form of Second Amendment to Executive Retention
    Agreement between Registrant and Pantelis S. Alexopoulos,
    Michael D. Cordano, Phillip C. Duncan, Michael J.
    Wingert, David L. Beaver, Misha Rozenberg and Glenn H.
    Stevens, each dated as of May 24, 2002.**                                                                                                                                                                                                                         
|        | 10 | .59(16)     |  | Third Amendment to Amended and Restated
    Receivables Purchase Agreement, dated as of May 28, 2002 by
    and among Registrant, Maxtor Receivables Corporation, the
    Conduit Purchasers, the Committed Purchasers, the Agents and
    Fleet National Bank.                                                                                                                                                                                                                                      
|        | 10 | .60(16)     |  | Bank Guarantee Facility of SGD 23,000,000,
    Amendments to Covenants on Tangible Networth and Consolidated
    Cash Balance, dated as of June 20, 2002, between the Bank
    of Nova Scotia, Singapore Branch, and Maxtor
    Peripherals(s) Pte Ltd.                                                                                                                                                                                                                                              
|        | 10 | .61(16)     |  | Revolving Bank Guarantee Facility of
    SGD 666,000, Amendments to Covenants on Tangible Networth
    and Consolidated Cash Balance, dated as of June 20, 2002,
    between the Bank of Nova Scotia, Singapore Branch and Maxtor
    Peripherals(s) Pte Ltd.                                                                                                                                                                                                                                        
|        | 10 | .62(17)     |  | Maxtor Corporation Amended and Restated Executive
    Deferred Compensation Plan effective April 2, 2001.**                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .63(17)     |  | Maxtor Corporation Restricted Stock Unit Plan.**                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .64(17)     |  | Form of Restricted Stock Unit Award Agreement
    between the Registrant and Michael R. Cannon
    (200,000 shares), Paul J. Tufano
    (140,000 shares), Victor B. Jipson
    (100,000 shares), Michael Cordano (70,000 shares),
    K.H. Teh (70,000 shares), Pantelis S. Alexopoulos
    (70,000 shares), Phillip C. Duncan
    (50,000 shares), Glenn H. Stevens
    (50,000 shares), David L. Beaver (50,000 shares),
    Misha Rozenberg (50,000 shares), each dated as of
    June 10, 2002.**
|        | 10 | .65(17)     |  | Bank Guarantee Facility of SGD 17,250,000,
    Waiver of the Consolidated Tangible Net Worth Covenant for 3rd
    Quarter Ended 28 September 2002, dated as of
    October 22, 2002, by and among the Bank of Nova Scotia and
    Maxtor Peripherals(s) Pte Ltd.                                                                                                                                                                                                                                     



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                               
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .66(17)     |  | Revolving Bank Guarantee Facility of
    SGD 666,000, Waiver of the Consolidated Tangible Net Worth
    Covenant for 3rd Quarter Ended 28 September 2002, dated as
    of October 22, 2002, by and among the Bank of Nova Scotia
    and Maxtor Peripherals(s) Pte Ltd.                                       
|        | 10 | .67(17)     |  | Fourth Amendment to Amended and Restated
    Receivables Purchase Agreement and Amendment to Fee Letter,
    dated as of November 5, 2002, by and among Maxtor
    Receivables Corporation, Maxtor Corporation, the Committed
    Purchasers, the Conduit Purchasers, the Agents, and Fleet
    National Bank.
|        | 10 | .68(17)     |  | Amendment to Liquidity Agreement, dated as of
    November 5, 2002 by and among Blue Keel Funding, LLC, the
    Liquidity Institutions, and Fleet National Bank.                                                                                                                                              
|        | 10 | .69(17)     |  | Waiver, dated as of October 21, 2002, by and
    among Registrant, Maxtor Receivables Corporation, the Conduit
    Purchasers, the Committed Purchasers, the Agents, and Fleet
    National Bank.                                                                                                             
|        | 10 | .70         |  | Maxtor Corporation Amended and Restated 1996
    Stock Option Plan.**                                                                                                                                                                                                                                         
|        | 10 | .71         |  | Fifth Amendment to Amended and Restated
    Receivables Purchase Agreement, dated as of December 13,
    2002 by and among Registrant, Maxtor Receivables Corporation,
    the Committed Purchasers, and Fleet National Bank.                                                                                 
|        | 10 | .72         |  | Repurchase Agreement dated as of
    December 31, 2002 by and among Registrant, Maxtor
    Receivables Corporation, the Purchasers, and Fleet National Bank.                                                                                                                                                  
|        | 10 | .73         |  | Bank Guarantee Facility of SGD 17,250,000,
    Deletion of Consolidated Tangible Net Worth Covenant dated as of
    January 29, 2003, by and among the Bank of Nova Scotia and
    Maxtor Peripherals(s) Pte Ltd.                                                                                             
|        | 10 | .74         |  | Revolving Bank Guarantee Facility, Increase in
    limit from SGD 660,000 to SGD 1,200,000, and Deletion
    of Consolidated Tangible Net Worth Covenant dated as of
    January 29, 2003, by and among the Bank of Nova Scotia and
    Maxtor Peripherals(s) Pte Ltd.                                        
|        | 10 | .75         |  | Extension of Master Business Agreement Dated
    April 30, 1998, between Registrant and Texas Instruments
    Incorporated, as accepted and agreed to on December 13,
    2002.                                                                                                                               
|        | 10 | .76         |  | Standard Volume Purchase Agreement between
    Registrant, Agere Systems, Inc., and Agere Systems Singapore
    Pte. Ltd., effective as of January 1, 2002.*                                                                                                                                                  
|        | 10 | .77         |  | Second Amendment to Purchase Agreement between
    Matsushita Kotobuki Electronics Industries, Ltd. and Registrant,
    dated February 5, 2003.                                                                                                                                                               
|        | 21 | .1          |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                         
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                                                                                                                           
|        | 99 | .1          |  | Certification of Paul J. Tufano, President, Chief
    Executive Officer, and Acting Chief Financial Officer of the
    Registrant pursuant to 18 U.S.C. 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       






| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | This exhibit (or portions thereof) has been filed
    separately with the Commission pursuant to an application for
    confidential treatment. The confidential portions of this
    Exhibit have been omitted and are marked by an asterisk.



| |    |                                                              
| | -- | -------------------------------------------------------------
| | ** | Management contract, or compensatory plan or
    arrangement.



| |     |                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to exhibits of
    Form 10-Q filed February 14, 1996.                                                         
|
| | (2) | Incorporated by reference to exhibits of
    Form 8-K filed June 28, 1996.                                                              
|
| | (3) | Incorporated by reference to exhibits of
    Form 10-K filed March 27, 1997.                                                            
|
| | (4) | Incorporated by reference to exhibits to
    registration statement on Form S-1, File
    No. 333-56099, filed June 5, 1998, as amended.
|
| | (5) | Incorporated by reference to exhibits of
    Form 10-Q filed November 10, 1998.                                                         



---



##### Table of Contents





| |     |                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | Incorporated by reference to exhibits of
    registration statement on Form S-3, File
    No. 333-69307, filed December 21, 1998, as amended.
|
| | (7) | Incorporated by reference to exhibits of
    Form 10-Q filed November 16, 1999.                                                              
|
| | (8) | Incorporated by reference to exhibits of
    Form 10-K filed March 29, 2000.                                                                 
|
| | (9) | Incorporated by reference to exhibits of
    registration statement on Form S-4, File
    No. 333-51592, filed December 11, 2000, as amended.



|     |                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to exhibit of
    Form 8-K filed March 2, 2001.                                                               
|    
|(11) | Incorporated by reference to exhibits of
    Form 10-K filed March 30, 2001, as amended.                                                
|    
|(12) | Incorporated by reference to exhibits of
    Form 8-K filed April 17, 2001.                                                             
|    
|(13) | Incorporated by reference to exhibits to
    registration statement on Form S-3, File
    No. 333-61770, filed May 29, 2001, as amended.
|    
|(14) | Incorporated by reference to exhibits of
    Form 10-Q filed August 14, 2001, as amended.                                               
|    
|(15) | Incorporated by reference to exhibits of
    Form 10-Q filed November 13, 2001.                                                         
|    
|(16) | Incorporated by reference to exhibits of
    Form 10-Q filed August 13, 2002.                                                           
|    
|(17) | Incorporated by reference to exhibits of
    Form 10-Q filed November 12, 2002.