SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549





FORM 10-Q

(Mark One)

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

For the quarterly period ended September 27, 2003

OR

[  ]   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: 0-18033

EXABYTE CORPORATION(Exact name of registrant as specified in its charter)



|Delaware                 | 84-0988566                          
|------------------------ | ------------------------------------
|(State of Incorporation) | (I.R.S. Employer Identification No.)

2108 - 55th Street
Boulder, Colorado 80301(Address of principal executive offices, including zip code)(303) 442-4333(Registrant's Telephone Number, including area code)

1685 38th Street, Boulder, CO 80301

(Former Address)

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

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

As of November 7, 2003, there were 88,451,109 shares outstanding of the Registrant's Common Stock (par value $0.001 per share).





EXABYTE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS



|                                                                                                                                      | Page
|------------------------------------------------------------------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                                                                                         |     
|                                                                                                                                      |     
|Item 1. Financial Statements                                                                                                          |     
|                                                                                                                                      |     
|Consolidated Balance Sheets--December 28, 2002 and September 27, 2003 (unaudited)                                                     | 3   
|                                                                                                                                      |     
|Consolidated Statements of Operations--Three and Nine Months Ended September 28, 2002 and
             September 27, 2003 (unaudited) | 4-5 
|                                                                                                                                      |     
|Consolidated Statements of Cash Flows-- Nine Months Ended September 28, 2002 and
             September 27, 2003 (unaudited)          | 6   
|                                                                                                                                      |     
|Notes to Consolidated Financial Statements (unaudited)                                                                                | 7   
|                                                                                                                                      |     
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of 
      Operations                                  | 16  
|                                                                                                                                      |     
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                    | 25  
|                                                                                                                                      |     
|Item 4. Controls and Procedures                                                                                                       | 25  
|                                                                                                                                      |     
|PART II. OTHER INFORMATION                                                                                                            |     
|                                                                                                                                      |     
|Item 2. Changes in Securities and Use of Proceeds                                                                                     | 26  
|                                                                                                                                      |     
|Item 6. Exhibits and Reports on Form 8-K                                                                                              | 27  
|                                                                                                                                      |     
|SIGNATURE                                                                                                                             | 29  





PART I

Item 1. Financial Statements

Exabyte Corporation and Subsidiaries 
Consolidated Balance Sheets

|(In thousands, except per share data)                                                                                                                                                                                       | December 28,
2002 | September 27,
2003
(Unaudited)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------
|ASSETS                                                                                                                                                                                                                      |                   |                               
|Current assets:                                                                                                                                                                                                             |                   |                               
|Cash and cash equivalents                                                                                                                                                                                                   | $       664       | $         170                 
|Accounts receivable, less allowances for uncollectible accounts and sales
      returns and programs of $3,559 and $7,999, respectively                                                                                     | 31,873            | 17,646                        
|Inventory, net                                                                                                                                                                                                              | 24,582            | 10,755                        
|Other                                                                                                                                                                                                                       | 1,851             | 1,469                         
|Total current assets                                                                                                                                                                                                        | 58,970            | 30,040                        
|Equipment and leasehold improvements, net                                                                                                                                                                                   | 4,924             | 3,028                         
|Goodwill                                                                                                                                                                                                                    | 7,428             | 7,428                         
|Other non-current assets                                                                                                                                                                                                    | 803               | 446                           
|Total non-current assets                                                                                                                                                                                                    | 13,155            | 10,902                        
|Total assets                                                                                                                                                                                                                | $   72,125        | $   40,942                    
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                                                                                                                              |                   |                               
|Current liabilities:                                                                                                                                                                                                        |                   |                               
|Accounts payable                                                                                                                                                                                                            | 30,624            | 9,339                         
|Accrued liabilities (note 3)                                                                                                                                                                                                | 13,139            | 8,892                         
|Line of credit - Bank (note 5)                                                                                                                                                                                              | 18,560            | 13,784                        
|Current portion of notes payable - suppliers (note 5)                                                                                                                                                                       | --                | 12,642                        
|Current portion of other non-current liabilities                                                                                                                                                                            | 1,846             | 1,356                         
|Total current liabilities                                                                                                                                                                                                   | 64,169            | 46,013                        
|Notes payable, less current portions (note 5):                                                                                                                                                                              |                   |                               
|Suppliers                                                                                                                                                                                                                   | --                | 13,081                        
|Others                                                                                                                                                                                                                      | --                | 2,939                         
|Accrued warranties, less current portion                                                                                                                                                                                    | 2,585             | 1,214                         
|Other liabilities, less current portion                                                                                                                                                                                     | 839               | 594                           
|Total liabilities                                                                                                                                                                                                           | 67,593            | 63,841                        
|Stockholders' equity (deficit):                                                                                                                                                                                             |                   |                               
|Preferred stock; no series; $.001 par value; 18,350 shares
      authorized; no shares issued and outstanding                                                                                                               | --                | --                            
|Preferred stock; series A; $.001 par value; 500 shares 
      authorized; no shares issued and outstanding                                                                                                                  | --                | --                            
|Series G convertible preferred stock; $.001 par value; 1,500 shares authorized, 
      issued and outstanding; aggregate liquidation preference at September
      27, 2003 of $3,651 (note 1)                              | 1                 | 1                             
|Series H convertible preferred stock; $.001 par value; 9,650 shares 
      authorized; 9,650 and 7,296 shares issued and outstanding, 
      respectively; aggregate liquidation preference at September 27, 2003 of $7,296 | 10                | 7                             
|Series I convertible preferred stock; $.001 par value; 10,000 shares authorized; 
      8,438 shares issued and outstanding; aggregate liquidation preference at 
      September 27, 2003 of $18,230                       | 8                 | 8                             
|Common stock, $.001 par value; 100,000 shares 
      authorized; 33,600 and 88,419 shares issued, respectively                                                                                                              | 34                | 88                            
|Additional paid-in capital                                                                                                                                                                                                  | 98,476            | 106,721                       
|Treasury stock, at cost; 342 and 96 shares outstanding, respectively                                                                                                                                                        | (2,060)           | (578)                         
|Accumulated deficit                                                                                                                                                                                                         | (91,937)          | (129,146)                     
|Total stockholders' equity (deficit)                                                                                                                                                                                        | 4,532             | (22,899)                      
|Commitments and contingencies (note 7)                                                                                                                                                                                      |                   |                               
|Total liabilities and stockholder's equity (deficit)                                                                                                                                                                        | $    72,125       | $    40,942                   



See accompanying notes to the consolidated financial statements.



Exabyte Corporation and Subsidiaries 
Consolidated Statements of Operations

(Unaudited)
(In thousands, except per share data)

|                                                                                              | Three Months Ended
|--------------------------------------------------------------------------------------------- | ------------------
|                                                                                              | September 28,
2002
|                                                                                              |                   
|Net revenue (note 9)                                                                          | $ 36,904          
|Cost of goods sold                                                                            | 26,319            
|Gross profit                                                                                  | 10,585            
|                                                                                              |                   
|Operating expenses:                                                                           |                   
|Selling, general and administrative                                                           | 5,968             
|Research and development                                                                      | 5,700             
|Lease terminations and related costs (note 8)                                                 | --                
|Total operating expenses                                                                      | 11,668            
|                                                                                              |                   
|Loss from operations                                                                          | (1,083)           
|                                                                                              |                   
|Other income (expense):                                                                       |                   
|Interest expense (note 5):                                                                    |                   
|Stock-based                                                                                   | --                
|Other                                                                                         | (379)             
|Total interest expense                                                                        | (379)             
|Gain (loss) on foreign currency translation                                                   | 37                
|Other, net                                                                                    | 215               
|                                                                                              |                   
|Loss before income taxes                                                                      | (1,210)           
|                                                                                              |                   
|Income tax expense                                                                            | (28)              
|                                                                                              |                   
|Net loss                                                                                      | $ (1,238)         
|                                                                                              |                   
|Deemed dividend related to beneficial conversion feature
   of Series I preferred stock       | (1,918)           
|                                                                                              |                   
|Net loss available to common stockholders                                                     | $ (3,156)         
|                                                                                              |                   
|Basic and diluted net loss per share                                                          | $   (0.10)        
|                                                                                              |                   
|Weighted average common shares used in calculation
   of basic and diluted net loss per share | 33,058            



See accompanying notes to the consolidated financial statements.





Exabyte Corporation and Subsidiaries 
Consolidated Statements of Operations

(Unaudited)
(In thousands, except per share data)

|                                                                                           | Nine Months Ended 
|------------------------------------------------------------------------------------------ | ------------------
|                                                                                           | September 28,
2002
|                                                                                           |                   
|Net revenue (note 9)                                                                       | $ 109,159         
|Cost of goods sold                                                                         | 89,412            
|Gross profit                                                                               | 19,747            
|                                                                                           |                   
|Operating expenses:                                                                        |                   
|Selling, general and administrative                                                        | 21,835            
|Research and development                                                                   | 19,341            
|Lease terminations and related costs (note 8)                                              | --                
|Total operating expenses                                                                   | 41,176            
|                                                                                           |                   
|Loss from operations                                                                       | (21,429)          
|                                                                                           |                   
|Other income (expense):                                                                    |                   
|Gain from sale of investment                                                               | 1,500             
|Sale of technology                                                                         | 1,200             
|Interest expense (note 5):                                                                 |                   
|Stock-based                                                                                | (466)             
|Other                                                                                      | (1,228)           
|Total interest expense                                                                     | (1,694)           
|Loss on foreign currency translation                                                       | (739)             
|Other, net                                                                                 | (222)             
|                                                                                           |                   
|Loss before income taxes                                                                   | (21,384)          
|                                                                                           |                   
|Income tax benefit (expense)                                                               | 419               
|                                                                                           |                   
|Net loss                                                                                   | $   (20,965)      
|                                                                                           |                   
|Deemed dividend related to beneficial conversion feature
   of Series I preferred stock    | (4,557)           
|                                                                                           |                   
|Net loss available to common stockholders                                                  | $  (25,522)       
|                                                                                           |                   
|Basic and diluted net loss per share                                                       | $      (0.77)     
|                                                                                           |                   
|Weighted average common shares used in calculation 
   of basic and diluted loss per share | 32,960            



See accompanying notes to the consolidated financial statements.



Exabyte Corporation and Subsidiaries 
Consolidated Statements of Cash Flows

(Unaudited)
(In thousands)

|                                                                                              | Nine Months Ended 
|--------------------------------------------------------------------------------------------- | ------------------
|                                                                                              | September 28, 2002
|Cash flows from operating activities:                                                         |                   
|Net loss                                                                                      | $ (20,965)        
|Adjustments to reconcile net loss to net cash provided (used) by 
      operating activities: |                   
|Depreciation and amortization                                                                 | 5,479             
|Provision for uncollectible accounts receivable and sales 
         returns and programs      | 3,447             
|Stock-based interest expense                                                                  | 541               
|Lease termination expense                                                                     | --                
|Stock-based compensation expense                                                              | 177               
|Gain on sale of investment                                                                    | (1,500)           
|Loss on foreign currency translation of long-term obligation                                  | --                
|Write-down of assets                                                                          | 4,075             
|Changes in assets and liabilities:                                                            |                   
|Accounts receivable, net                                                                      | (13,030)          
|Inventory, net                                                                                | 10,217            
|Other current assets                                                                          | (2,679)           
|Other non-current assets                                                                      | 42                
|Accounts payable                                                                              | 8,182             
|Accrued liabilities                                                                           | (181)             
|Other non-current liabilities                                                                 | (4,648)           
|Net cash provided (used) by operating activities                                              | (10,843)          
|Cash flows from investing activities:                                                         |                   
|Purchase of equipment and leasehold improvements, net                                         | (3,156)           
|Proceeds from sale of investments                                                             | 1,590             
|Net cash used by investing activities                                                         | (1,566)           
|Cash flows from financing activities:                                                         |                   
|Proceeds from issuance of stock                                                               | 7,132             
|Borrowings under bridge loan                                                                  | 1,000             
|Borrowings under line of credit - Bank                                                        | 118,195           
|Payments on line of credit - Bank                                                             | (112,586)         
|Principal payments on notes payable and other 
      non-current liabilities                  | (941)             
|Decrease in restricted cash                                                                   | 451               
|Net cash provided (used) by financing activities                                              | 13,251            
|Net increase (decrease) in cash and cash equivalents                                          | 842               
|Cash and cash equivalents at beginning of period                                              | 2,197             
|Cash and cash equivalents at end of period                                                    | 3,039             
|Supplemental disclosure of non-cash financing activities:                                     |                   
|Conversion of accounts payable to notes payable                                               | --                
|Conversion of accrued liabilities to notes payable                                            | --                
|Acquisition of inventory with note payable                                                    | --                
|Common stock issued as dividends                                                              | $         56      
|Treasury stock issued for services                                                            | $       100       
|Conversion of bridge loan plus accrued interest to Series I preferred stock                   | $     1,051       
|Settlement of accrued liability recorded as goodwill                                          | $     2,721       



See accompanying notes to the consolidated financial statements.



Exabyte Corporation and Subsidiaries 
Notes to Consolidated Financial Statements 
(Unaudited)

Note 1-BASIS OF PRESENTATION AND SUBSEQUENT EVENTS

Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements of Exabyte Corporation (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United State of America ("GAAP"), have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements, and reflect all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation in accordance with GAAP. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year. These unaudited interim consolidated financial statements and related notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2002.

Liquidity and Basis of Presentation

The Company's financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred operating losses for the last five fiscal years, negative cash flows from operations for the last three fiscal years, and had a stockholders' deficit and working capital deficit of $22,899,000 and $15,973,000, respectively, as of September 27, 2003.

The above factors raised substantial doubt about the Company's ability to continue as a going concern. Accordingly, the Company continues to reassess its current business plan and investigate various strategic alternatives to increase working capital and liquidity. These alternatives may include one or more of the following:

- strategic partnership or business combination;
- restructuring of maturities of debt, including notes payable to suppliers;
- obtaining additional debt or equity capital;
- restructuring of current operations or reductions in workforce; or
- sale of all or a portion of operating assets.

The Company will continue to evaluate these and other alternatives to obtain additional capital and funds to support its operations. The Company's primary sources of funds for operations have been cash generated from operations and the Company's revolving line of credit with a bank. As discussed below in "Subsequent Events," on November 7, 2003 the Company entered into a Media Distribution Agreement and sold preferred stock providing for combined total proceeds of $20,000,000.

In May 2003, one of the Company's major customers filed bankruptcy, and, during the first quarter of 2003, the Company fully reserved the amount of $5,962,000 on its accounts receivable with this customer. The related bad debt expense is included in selling, general and administrative expenses in the accompanying unaudited interim consolidated financial statements for the nine months ended September 27, 2003.

As discussed in note 5, during the first and third quarters of 2003, the Company converted certain accounts payable and accrued liability balances due suppliers to notes payable, in order to maintain an adequate level of liquidity and funds for operations.

During the nine months ended September 27, 2003, the Company terminated employment of 170 full- and part-time employees. These terminations affected employees in all areas of the Company including the sales, engineering and administrative functions. The Company had paid substantially all severance related to these terminations as of October 31, 2003. As of September 27, 2003, the Company had 246 employees as compared to 404 employees on December 28, 2002 and 422 employees on September 28, 2002.

Subsequent Events

On November 6, 2003, the sole shareholder of the Company's Series G Preferred Stock exchanged its preferred shares for approximately 2,515,000 shares of common stock. In addition, in October 2003, a preferred shareholder converted 616,500 shares of Series I Preferred Stock into approximately 1,034,000 shares of common stock.

On November 7, 2003, the Company entered into a Media Distribution Agreement ("MDA") with Imation Corp. ("Imation") whereby the Company granted Imation the exclusive worldwide marketing and distribution rights for the Company's proprietary removable data storage media. . In exchange for such rights, Imation will pay the Company a one-time distribution fee of $18,500,000, payable $10,000,000 upon execution of the MDA and $8,500,000 upon the achievement of a specified level of media sales by Imation subsequent to the effective date of the agreement. The Company expects to receive the $8,500,000 payment no later than December 31, 2003. Under the MDA, the Company agreed to grant Imation a second security interest in its intellectual property to secure the Company's obligations under the MDA and a seat as an observer on the Company's Board of Directors. The MDA has an indefinite term, but provides for termination by Imation upon 180 days prior written notice to the Company, or upon a material default by either party. If Imation terminates the MDA because of a material default by Exabyte, the Company must pay Imation a prorated portion of the distribution fee In addition, on November 7, 2003, Imation also purchased 1,500,000 shares of the Company's Series I Preferred Stock for $1,500,000.

Reclassifications

Certain reclassifications have been made to prior periods' balances to conform with the current periods' presentation.

Note 2-INVENTORY

Inventory, net of reserves for excess quantities and obsolescence, consists of the following:

|(In thousands)                    | December 28,
2002 | September 27,
2003
|--------------------------------- | ----------------- | ------------------
|                                  |                   |                   
|Raw materials and component parts | $ 11,038          | $   6,308         
|Work-in-process                   | 834               | --                
|Finished goods                    | 12,710            | 4,447             
|                                  | $24,582           | $10,755           

During the first quarter of 2003, the Company recorded a reserve of $6,849,000 for excess and obsolete inventory due to changes in sales forecasts and planned discontinuance of older tape drive and automation products.

Note 3-ACCRUED LIABILITIES

Accrued liabilities consist of the following:

|(In thousands)                       | December 28,
2002 | September 27,
2003
|------------------------------------ | ----------------- | ------------------
|                                     |                   |                   
|Compensation and benefits            | $   3,164         | $  2,301          
|Purchase commitments                 | 5,211             | 1,305             
|Warranty and other related costs     | 2,464             | 1,496             
|Lease terminations and related costs | --                | 1,796             
|Other                                | 2,300             | 1,994             
|                                     | $13,139           | $8,892            



Note 4-EARNINGS PER COMMON SHARE AND STOCK-BASED COMPENSATION

Earnings Per Share

Basic earnings (loss) per share is based on the weighted average of all common shares issued and outstanding, and is calculated by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares used in the basic earnings (loss) per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. For loss periods, the basic and diluted shares are equal, as the inclusion of potentially dilutive common shares would be anti-dilutive. The Company has incurred net losses for all periods presented in its Statements of Operations and, accordingly, basic and diluted shares are equal for all periods presented.

Options to purchase 13,366,000 and 14,617,000 shares of common stock were excluded from dilutive stock option calculations for the three-month periods ended September 28, 2002 and September 27, 2003, respectively, because their exercise prices were greater than the average fair market value of the Company's stock for the period, and as such were anti-dilutive. Additionally, options to purchase 6,305,000 and 11,293,000 shares of common stock were excluded from dilutive stock option calculations for the three-month periods ended September 28, 2002 and September 27, 2003, as these options were anti-dilutive as a result of the net loss incurred.

Options to purchase 13,335,000 and 14,617,000 shares of common stock were excluded from dilutive stock option calculations for the nine-month periods ended September 28, 2002 and September 27, 2003, respectively, because their exercise prices were greater than the average fair market value of the Company's stock for the period, and as such were anti-dilutive. Additionally, options to purchase 6,274,000 and 11,293,000 shares of common stock were excluded from dilutive stock option calculations for the nine-month periods ended September 28, 2002 and September 27, 2003, respectively, as these options were anti-dilutive as a result of the net losses incurred.

At September 27, 2003, the Company had three series of outstanding preferred stock, all of which were convertible into the Company's common stock. The assumed conversion of the preferred shares into common stock for the three- and nine-month periods ended September 28, 2002 and September 27, 2003, has been excluded from diluted share calculations, as the effect of the conversion features is anti-dilutive.

In addition, as a result of their anti-dilutive effect, accumulated preferred dividends of 581,000 and 2,598,000 shares of common stock have been excluded from diluted share calculations for the three-month and nine-month periods ended September 28, 2002 and September 27, 2003, respectively.

Stock-Based Compensation

As permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation expense has been recognized for options granted to employees with an exercise price equal to the market value at the date of grant or in connection with the employee stock purchase plan. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and related interpretations.

In accordance with the interim disclosure provisions of SFAS No. 148, "Accounting for Stock Based Compensation Transition and Disclosure-an Amendment of SFAS No. 123," the following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value based method of SFAS No. 123 to stock-based compensation.

|                                                                                                                                            | Three Months Ended | Nine Months Ended 
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------
|(In thousands, except per share data)                                                                                                       | September 28, 2002 | September 27, 2003
|                                                                                                                                            |                    |                   
|Net loss available to common stockholders, as reported                                                                                      | $ (3,156)          | $ (12,576)        
|                                                                                                                                            |                    |                   
|Add:  Stock-based compensation expense included in 
    reported net loss, net of related tax effects                                       | 99                 | --                
|                                                                                                                                            |                    |                   
|Deduct:  Total stock-based compensation expense
    determined under fair-value based method for
    all awards, net of related tax effects | (1,078)            | (656)             
|                                                                                                                                            |                    |                   
|Pro forma net loss available to common stockholders                                                                                         | $ (4,135)          | $ (13,232)        
|                                                                                                                                            |                    |                   
|Basic and diluted net loss per share:                                                                                                       |                    |                   
|As reported                                                                                                                                 | $      (0.10)      | $      (0.17)     
|Pro forma                                                                                                                                   | $      (0.13)      | $      (0.18)     



Note 5-DEBT

Line of Credit

On April 17, 2003, the Company entered into a Third Modification Agreement ("Third Modification") of its Loan and Security Agreement dated June 18, 2002 ("Loan Agreement") with Silicon Valley Bank ("SVB"). Pursuant to this Third Modification, SVB agreed to advance the Company up to $2,500,000 in excess of its specified borrowing availability up to a maximum of $20,000,000, waive all defaults existing as of April 17, 2003, increase the Company's current credit limit and change the maturity date of the Loan Agreement to September 30, 2003. As a condition of the Third Modification, SVB required guaranties ("Guaranties") up to a maximum of $2,500,000 from the Company's CEO and a significant investor ("Guarantors") for advances in excess of the Company's credit limit. In addition, SVB required that each of the Guarantors enter into a subordination agreement ("Subordination Agreement"), whereby each Guarantor agreed to subordinate to SVB: (1) all of the Company's present and future indebtedness and obligations to the Guarantor; and (2) all of the Guarantor's present and future security interests in the Company's assets and property. Also, the Guarantors may not demand any payment, exercise any remedy or participate in any action with respect to the subordinated debt until Exabyte's debts to SVB have been satisfied. On October 10, 2003, the Company entered into the Fifth Modification Agreement ("Fifth Modification") which extended the Loan Agreement through September 30, 2005, under similar terms and conditions, including the continued maintenance of the Guaranties. The Fifth Modification provides for interest at 5.25% over the prime rate (4% at October 10, 2003), subject to a decrease upon the occurrence of specified "fundraising events," as defined. The Fifth Modification also includes certain financial covenants relating to operating results and limits on inventory levels with product distributors. Borrowings under the Fifth Modification continue to be based on eligible accounts receivable and inventory balances, as defined in the Loan Agreement. As a result of entering the Media Distribution Agreement and the sale of preferred stock discussed in note 1, the Company expects that the Guaranties will be terminated in November 2003.

As consideration for the Guaranties, the Company issued to the Guarantors (pro-rata) 25,000,000 shares of its common stock on April 21, 2003, 12,500,000 shares on July 15, 2003 and 12,500,000 shares effective September 15, 2003. During July, 2003, the Company entered into agreements with two additional shareholders to guarantee an additional $250,000 of borrowings from SVB in exchange for up to 2,500,000 common shares to be issued in July, and an additional 2,500,000 shares to be issued in October and December 2003. The Company determined the fair value of the issued shares based on the market price of the Company's stock on the date of issuance, and recorded $7,025,000 and $2,571,000 of stock-based interest-expense during the third and second quarters of 2003, respectively. The value of the total shares to be issued under the Guaranties is being recorded as interest expense over the anticipated period that such Guaranties will remain in effect.

In connection with the Third Modification, the Company issued SVB a fully vested, immediately exercisable and non-forfeitable warrant to purchase 2,000,000 shares of common stock at an exercise price of $0.105 per share pursuant to the Modification Agreement. The warrant expires on April 17, 2010. The Company determined the value of the warrants to be $159,000 based on the Black-Scholes option-pricing model with the following assumptions: no dividend yield, expected life - 7 years, volatility - 135%, and risk free interest rate - 3.5%. The fair value of the warrant was recognized as interest expense over the term of the Third Modification, which expired on September 30, 2003.

Notes Payable - Suppliers

During the first quarter of 2003, the Company entered into note payable agreements with four of its largest suppliers that converted certain accounts payable and accrued liability amounts outstanding at December 28, 2002 to notes payable. In September 2003, the Company entered into a note payable agreement with a fifth supplier for $5,970,000 which converted accounts payable and inventory purchase commitments to a note payable. The note is unsecured and is due monthly through 2007 with interest at 9.0%. In addition, the Company renegotiated the payment schedule for the largest of the four notes payable described above to extend payments originally due in 2003 and 2004 to 2005. As of September 27, 2003, the total amount due under all notes payable - suppliers is $25,723,000, of which $12,642,000 is due within one year. The notes require full payment of all amounts due through December 2007, bear interest at rates ranging from zero to 9.0%, paid monthly, and are payable as follows: 2003 - $2,734,000; 2004 - $12,429,000; 2005 - $7,639,000; 2006 - $1,753,000; 2007 - $1,168,000. The Company accounted for the modification of the liabilities under EITF 96-19, 'Debtors Accounting for a Modification or Exchange of Debt Instruments ("EITF 96-19"). In accordance with the provisions of EITF 96-19, the terms of the notes are not considered to be substantially different than the terms of the original liabilities. Accordingly, the notes are recorded at their principal amounts and the related interest expense is accounted for using the effective interest rate on each note.

Note Payable - Lessor

In September 2003, the Company entered into a note payable in the amount of $3,060,000 with the lessor of certain of its office and manufacturing facilities, in settlement of all past and future amounts due under the lease for such facilities. The note is unsecured, is payable interest only through September 2008, at which time the entire principal amount is due, and bears interest at the prime rate for the first year (4.0% at September 27, 2003), 6.0% for years two through four and 10.0% for year five. Interest on the note was imputed at a rate of 9.0% over the term of the note and, accordingly, the note was recorded net of discount of $359,000. The 9.0% rate was considered to be a market interest rate based on other borrowings of the Company. The discount will be recognized over the term of the note as additional interest expense using the effective interest method.

Note 6-SEGMENT, GEOGRAPHIC AND SALES INFORMATION

All operations of the Company are considered to be in one operating segment and, accordingly, no segment disclosures have been presented. The Company will continue to review the internal reporting structure for future changes that could result in disclosure of additional segments.

The following table details revenues from external customers by geographic area (foreign revenue is based on the country in which the customer is located):

|                   | Three Months Ended | Nine Months Ended 
|------------------ | ------------------ | ------------------
|(In thousands)     | September 28,
2002 | September 27,
2003
|United States      | $  28,170          | $  17,773         
|Europe/Middle East | 6,245              | 5,051             
|Asia Pacific       | 2,425              | 1,703             
|Other              | 64                 | 28                
|                   | $36,904            | $24,555           



The following table presents revenue by product line:

|                           | Three Months Ended | Nine Months Ended 
|-------------------------- | ------------------ | ------------------
|(In thousands)             | September 28,
2002 | September 27,
2003
|Drives                     | $  8,633           | $  7,049          
|Libraries                  | 7,037              | 2,921             
|Media                      | 20,461             | 10,922            
|Service, spares, and other | 1,849              | 3,684             
|Sales allowances           | (1,076)            | (21)              
|                           | $36,904            | $24,555           



The following tables summarize revenue to major customers:

|               | Net Revenue        | % of Total Net Revenue
|-------------- | ------------------ | ----------------------
|               | Three Months Ended | Three Months Ended    
|(In thousands) | September 28,
2002 | September 27,
2003    
|Customer A     | $6,735             | $4,995                
|Customer B     | $5,618             | $4,161                
|Customer C     | $9,406             | --                    

|               | Net Revenue        | % of Total Net Revenue
|-------------- | ------------------ | ----------------------
|               | Nine Months Ended  | Nine Months Ended     
|(In thousands) | September 28,
2002 | September 27,
2003    
|Customer A     | $21,257            | $12,549               
|Customer B     | $16,591            | $12,130               
|Customer C     | $21,755            | --                    



No other customers accounted for 10% or more of net revenue in any of the above periods.



The following table details long-lived asset information by geographic area:

|(In thousands) | December 28,
2002 | September 27,
2003
|-------------- | ----------------- | ------------------
|               |                   |                   
|United States  | $12,861           | $10,798           
|Europe         | 38                | 27                
|Asia Pacific   | 256               | 77                
|               | $13,155           | $10,902           



Note 7-COMMITMENTS AND CONTINGENCIES

Litigation

The Company is, from time to time, subjected to certain claims, assertions or litigation by outside parties as part of its ongoing business operations. The outcomes of any such contingencies are not expected to have a material adverse impact on the consolidated financial condition, results of operations or cash flows of the Company. Outstanding litigation as of June 28, 2003, related to a lease default, was settled in October 2003, as discussed in note 8.

Indemnities, Commitments and Guarantees

During the normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to the Company's customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has contractual commitments to various customers, which could require it to incur costs to repair an endemic defect with respect to its products outside of the normal warranty period if such defect were to occur. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable.

Warranty Costs

The Company establishes a warranty liability for the estimated cost of warranty-related claims at the time revenue is recognized. The following table summarizes information related to the Company's warranty reserve as of and for the nine-months ended September 27, 2003:

(In thousands)

|Balance at December 28, 2002   | $  5,049
|------------------------------ | --------
|Accruals for warranties issued | 1,259   
|Adjustments to warranties      | (1,113) 
|Settlements made               | (2,485) 
|Balance at September 27, 2003  | $ 2,656 



Note 8-LEASE TERMINATIONS

During the third quarter of 2003, the Company was in default under three lease agreements for facilities due to delinquent rental payments. For the first property, which included the Company's headquarters, the lessor terminated the original lease and subsequent short-term lease on June 30, 2003, and the Company ceased use of the building on that date. Remaining lease payments under the original lease totaled approximately $1,600,000. The lessor under this lease had commenced litigation against the Company and claimed damages relating to the rental default and an alleged failure to maintain the leased premises.

In October 2003, the Company reached a settlement with the lessor for the payment of the remaining lease payments over a one-year period commencing in November 2003. As discussed in note 5, the Company settled the default under a second lease for facilities through the issuance of a note payable, and the Company remains in default under a lease for its former San Diego, California sales office space, with a total obligation of approximately $170,000.

As a result of the lease terminations and settlements and the Company ceasing to use the leased facilities as of September 27, 2003, the Company recorded lease termination expense and related costs totaling $4,707,000 in the third quarter of 2003. Included in this amount is $4,498,000 of past and future rental payments (net of discount) and $972,000 of accelerated amortization of leasehold improvements, less $763,000 of related deferred rent concessions.

Note 9-REPAIR AND SERVICE ACTIVITIES

In July 2003, the Company entered into an agreement to outsource its repair and service functions to an outside third party, Teleplan Service Logistics, Inc. ("Teleplan"). The agreement provided for the Company to sell parts and service inventory to Teleplan and provides for the payment of future royalties to the Company by Teleplan for certain out-of-warranty repair services. In addition, the Company will reimburse Teleplan for specified product warranty related services. The Company recognized revenue and gross profit of approximately $1,600,000 and $950,000, respectively, related to the sale of parts and inventory to Teleplan during the third quarter of 2003.

Note 10-INCOME TAXES

The Company has recorded a deferred tax valuation allowance equal to 100% of total deferred tax assets. In recording this allowance, management has considered a number of factors, but primarily, the Company's cumulative operating losses over the prior four years. Management has concluded that a valuation allowance is required for 100% of the total deferred tax assets as it is more likely than not that the deferred tax assets will not be realized.

At December 28, 2002, the Company had incurred domestic net operating loss carryforwards of approximately $172,000,000, which expire between 2005 and 2022. Under the Tax Reform Act of 1986, the amount of, and the benefit from, net operating losses that can be carried forward is limited due to a cumulative ownership change of more than 50% over a three-year period, which occurred in November 2001 in connection with the Ecrix merger. The portion of Exabyte's and Ecrix's pre-business combination tax carryovers, totaling $153,000,000, that can be utilized in any one taxable year for federal tax purposes is limited to approximately $1.2 million per year through 2021. Ownership changes after December 28, 2002 could further limit the utilization of the Company's remaining net operating loss carryforward of $19,000,000, in addition to any losses incurred subsequent to December 28, 2002.

Note 11-RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 provides guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, and results of operations of a VIE need to be included in a company's consolidated financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE. The provisions of FIN 46 are effective immediately for all VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the provisions of FIN 46 must be adopted at the beginning of the first interim or annual reporting period beginning after June 15, 2003. While the Company is currently evaluating the potential impact of the adoption of FIN 46, the Company believes that it will not be subject to the consolidation or disclosure requirements of FIN 46.



ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains forward-looking statements that involve future risks and uncertainties. We may achieve different results than those anticipated in these forward-looking statements. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. Words such as 'believes,' 'anticipates,' 'expects,' 'intends,' 'plans' and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. You should take into account the risks described in our Annual Report on Form 10-K for the year ended December 28, 2002 and other factors described below when considering such forward-looking statements. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

We are a leading provider of information storage products, including tape drive products, automated tape libraries and recording media. Our strategic focus is data retrieval, backup and archival applications for workstations, midrange computer systems and networks. Computer manufacturers and resellers require a variety of storage products, which vary in price, performance, capacity and form-factor characteristics as their needs for reliable data backup and archival storage increase. Our strategy is to offer a number of products to address a broad range of these requirements.

Our tape drive products are based on VXA® and MammothTapeTM technologies and our tape library products are based upon VXA®, MammothTapeÔ , LTOÔ (UltriumÔ ) technologies.

We market our products worldwide to distributors, resellers and original equipment manufacturers ("OEMs"). We have also provided repair services directly to OEMs and to our distributors' and resellers' customers, and in the future our outsourcing partner, as discussed below, will provide such services.

Our distributor and reseller channel customers purchase products for resale and they may provide services to their customers, such as:

- distribution;
- financial terms and conditions;
- pre-sales, sales and/or post-sales system upgrades; or
- other value-added products and/or services.

Even though we have no obligation, we support some of these customers by providing marketing and technical support directly to them or their consumers. As a result, we may incur certain additional costs for these sales. Other costs and risks associated with our distributor or reseller customers may include:

- inventory price protections;
- stock rotation obligations;
- short term marketing promotions; and
- customer and consumer rebates.

OEM customers incorporate our products as part of their own systems, which they then sell to their customers under their own brand name. We work closely with our OEM customers during early product development stages to help ensure our products will readily integrate into the OEM's systems.

The sales cycle for an OEM typically covers many months. During this time, the OEM may:

- evaluate the technology;
- qualify the product specifications;
- verify our compliance with product specifications;
- integrate the product into its system; and
- publicly announce the integration. This step typically occurs toward the end of the sales cycle before volume shipments of our products are made to the OEM.

Recent Developments

On November 7, 2003, the Company entered into a Media Distribution Agreement and sold preferred stock for a combined total of $20,000,000 in proceeds.

On November 6, 2003, the sole shareholder of the Company's Series G Preferred Stock exchanged its preferred shares for approximately 2,515,000 shares of common stock.

In September 2003, the Company converted certain accounts payable amounts and inventory purchase commitments due to a supplier into long-term debt.

During the third quarter and in October 2003, the Company settled and recorded its obligations under certain lease agreements for facilities.

In July 2003, we entered into an agreement to outsource our repair and service functions to an outside third party, Teleplan Service Logistics, Inc.

During the first quarter of 2003, we recorded additional inventory reserves of $6,849,000 for excess and obsolete inventory due to changes in sales forecasts and planned discontinuance of older tape drive and automation products.

In May 2003, one of our major customers filed bankruptcy. As of March 29, 2003, we had totally reserved the amount of $5,962,000 on our accounts receivable with this customer.

Results of Operations

The following table sets forth our operating results as a percentage of revenue for each period presented.

|                                                                                         | Three Months Ended | Nine Months Ended 
|---------------------------------------------------------------------------------------- | ------------------ | ------------------
|                                                                                         | September 28,
2002 | September 27,
2003
|                                                                                         |                    |                   
|Net revenue                                                                              | 100.0%             | 100.0%            
|Cost of goods sold                                                                       | 71.3               | 63.9              
|                                                                                         |                    |                   
|Gross profit                                                                             | 28.7               | 36.1              
|Operating expenses:                                                                      |                    |                   
|Selling, general and administrative                                                      | 16.2               | 22.6              
|Research and development                                                                 | 15.4               | 8.1               
|Lease terminations and related costs                                                     | --                 | 19.1              
|Total operating expenses                                                                 | 31.6               | 49.8              
|                                                                                         |                    |                   
|Loss from operations                                                                     | (2.9)              | (13.7)            
|                                                                                         |                    |                   
|Other income (expense):                                                                  |                    |                   
|Interest expense                                                                         | (1.0)              | (32.4)            
|Gain (loss) on foreign currency
        translation                                      | 0.1                | (5.0)             
|Gain from sale of investment                                                             | --                 | --                
|Sale of technology                                                                       | --                 | --                
|Other                                                                                    | 0.5                | --                
|                                                                                         |                    |                   
|Loss before income taxes                                                                 | (3.3)              | (51.1)            
|                                                                                         |                    |                   
|Income tax (expense) benefit                                                             | (0.1)              | (0.1)             
|                                                                                         |                    |                   
|Net loss                                                                                 | (3.4)%             | (51.2)%           
|                                                                                         |                    |                   
|Deemed dividend related to beneficial conversion feature of Series I preferred 
   stock | (5.2)              | --                
|                                                                                         |                    |                   
|Net loss available to common stockholders                                                | (8.6)%             | (51.2)%           



Net Revenue

The following tables present our revenue by product in absolute dollars and as a percentage of revenue for each period presented.

|(In thousands)            | Three Months Ended | Nine Months Ended 
|------------------------- | ------------------ | ------------------
|                          | September 28,
2002 | September 27,
2003
|                          |                    |                   
|Drives                    | $  8,633           | $  7,049          
|Libraries                 | 7,037              | 2,921             
|Media                     | 20,461             | 10,922            
|Service, spares and other | 1,849              | 3,684             
|Sales allowances          | (1,076)            | (21)              
|                          | $36,904            | $24,555           

As a percentage of net revenue:

|                          | Three Months Ended | Nine Months Ended 
|------------------------- | ------------------ | ------------------
|                          | September 28,
2002 | September 27,
2003
|                          |                    |                   
|Drives:                   | 23.4%              | 28.7%             
|Libraries                 | 19.1               | 11.9              
|Media                     | 55.4               | 44.5              
|Service, spares and other | 5.0                | 15.0              
|Sales allowances          | (2.9)              | (0.1)             
|                          | 100.0%             | 100.0%            



Our net revenue decreased by 33.5% from $36,904,000 in the third quarter of 2002 to $24,555,000 in the third quarter of 2003. Our revenue decreased by 36.0% from $109,159,000 in the first nine months of 2002 to $69,884,000 in the first nine months of 2003. Both decreases are principally due to the continued downturn in business spending, the bankruptcy of a significant customer, the delay in achieving increased revenue from OEM customers due to longer than anticipated sales lead times with these customers, and continued liquidity constraints, which resulted in reduced inventory shipments to us. As percentages of total net revenue, revenue from drives increased for the third quarter and the first nine months of 2003 over the same periods in 2002. For 2003, revenue from VXA®-1 and VXA®-2 drives continued to replace declining sales of M2Ô drives. We began shipping VXA®-2 drives to the OEM channel in May 2003. Media revenue decreased as a percentage of total revenue in both the third quarter and the first nine months of 2003, as compared to the same periods in 2002, primarily due to increases in drive revenue as a percentage of total revenue and decreased media shipments to distributors at the end of the third quarter of 2003 compared to 2002. Total revenue, and revenue as a percentage of total revenue from service, spares and other increased in 2003 primarily as a result of the sales of parts and service inventory to Teleplan. Total service revenue, and related costs, may decrease significantly in the future as a result of the outsourcing of this function to Teleplan.

As a percentage of total net revenue, revenue from libraries decreased from 19.1% in the third quarter of 2002 to 11.9% in the third quarter of 2003. For the first nine months of 2002, library revenue as percentage of total net revenue decreased from 22.7% to 13.7% in the first six months of 2003. Both decreases are primarily the result of our inability to fulfill sales orders due to reduced library shipments from our supplier.

The following table details our revenue from different customer types as a percentage of total net revenue for the periods presented:

|                     | Three Months Ended | Nine Months Ended 
|-------------------- | ------------------ | ------------------
|                     | September 28,
2002 | September 27,
2003
|                     |                    |                   
|Distributor/Reseller | 80.6%              | 64.1%             
|OEM                  | 15.7               | 20.2              
|End-users and other  | 3.7                | 15.7              
|                     | 100.0%             | 100.0%            

Revenue from distributor/reseller customers decreased as a percentage of net revenue from the third quarter and the first nine months of 2002, as compared to the same periods in 2003, while revenue from OEM and end-user customers (primarily service, repair and sales of spare parts) increased for the comparable periods. Our ongoing effort to sell VXA® products to OEMs is an important part of our business plan and return to profitability and such sales, as well as sales of Mammoth products, continued to increase throughout 2003. Revenue from end-users and other increased for both the three- and nine-month periods in 2003 due to the sale of parts and service inventory to Teleplan.

Geographically, revenue is attributed to the customer's location. The following table summarizes our revenue in different geographic locations as a percentage of total net revenue for the periods presented:

|                   | Three Months Ended | Nine Months Ended 
|------------------ | ------------------ | ------------------
|                   | September 28,
2002 | September 27,
2003
|                   |                    |                   
|United Sates       | 76.3%              | 72.4%             
|Europe/Middle East | 16.9               | 20.6              
|Asia Pacific       | 6.6                | 6.9               
|Other              | 0.2                | 0.1               
|                   | 100.0%             | 100.0%            



The following table summarizes customers who accounted for 10% or more of our revenue in the periods presented:

|           | Three Months Ended | Nine Months Ended 
|---------- | ------------------ | ------------------
|           | September 28,
2002 | September 27,
2003
|           |                    |                   
|Customer A | 18.3%              | 20.3%             
|Customer B | 15.2%              | 16.9%             
|Customer C | 25.5%              | --                

No other customers accounted for 10% or more of revenue in any of these periods. We cannot guarantee that revenue from these or any other customers will continue to represent the same percentage of our revenue in future periods. Our customers also sell competing products and customers continually review new technologies which causes our revenue to vary from period to period.

Cost of Goods Sold and Gross Margin

Our cost of goods sold includes the actual cost of all materials, labor and overhead incurred in the manufacturing and service processes, as well as certain other related costs, which include primarily provisions for warranty repairs and inventory reserves. Our cost of goods sold decreased from $26,319,000 for the third quarter of 2002 to $15,700,000 for the third quarter of 2003; and our cost of goods sold for the first nine months of 2002 and 2003 decreased from $89,412,000 to $58,102,000, respectively, due to decreased revenue. Our gross margin percentage increased from 28.7% in the third quarter of 2002 to 36.1% in the third quarter of 2003 and decreased from 18.1% for the first nine months of 2002 to 16.9% for the first nine months of 2003. During the third quarter of 2003 and the first nine months of 2003, cost of goods sold included approximately $650,000 of net costs associated with the approximately $1,600,000 of parts and service inventory sold to Teleplan, which represents a higher than normal gross margin. In the first nine months of 2002, cost of goods sold included restructuring charges of $3,857,000, and in the first nine months of 2003, cost of goods sold included additional inventory reserves of $6,849,000. Excluding the restructuring charges in 2002, and the additional inventory reserves and the increased gross margin on the goods sold to Teleplan in 2003, our cost of goods sold for the first nine months of 2002 and 2003 decreased from $85,555,000 to $50,455,000, respectively, and our gross margin percentage increased from 21.6% to 27.8%, respectively. For the third quarter and first nine months of 2003, gross margins were positively impacted by decreases in fixed costs, due to headcount reductions in 2002 and early 2003; decreased warranty reserves, primarily resulting from the decrease in the number of units under warranty for Mammoth and M2TM products; an overall decrease in standard warranty cost per unit and lower freight costs in 2003. Gross profit for the first nine months of 2002 was negatively impacted by increased inventory reserves, the write-off of an in-process capital asset project and additional reserves recorded for vacated excess facilities.

Operating Expenses

Selling, general and administrative ("SG&A") expenses include salaries, sales commissions, advertising expenses and marketing programs. These expenses decreased from $5,968,000 in the third quarter of 2002 to $5,540,000 for the same period in 2003. The decrease is the result of headcount reductions in 2002 and 2003, the impact of which was primarily realized in the second and third quarters of 2003, and overall cost control measures implemented in 2003, which included limitations on expense increases and new hiring. For the first nine months of 2002 and 2003, SG&A expenses increased from $21,835,000 to $23,664,000, respectively. For the first nine months of 2002, SG&A expenses included restructuring charges of $688,000, and for the first nine months of 2003, SG&A expenses included $5,962,000 for bad debt expense related to a major customer. Excluding these charges for the respective nine-month periods of 2002 and 2003, SG&A expenses were $21,147,000 and $17,702,000, respectively. As noted above, this decrease is the result of headcount reductions and cost reductions in substantially all areas.

Research and development expenses decreased from $5,700,000 in the third quarter of 2002 to $1,979,000 for the same period in 2003. For the first nine months of 2002 and 2003, these expenses decreased from $19,341,000 to $7,567,000, respectively. The decreases in both the third quarter and nine-month periods of 2003 are the result of significant headcount reductions, lower costs for external engineering, and a decrease in costs incurred in developing VXA and related automation products. Management believes that the Company continues to have the necessary resources in place to meet all technology related milestones.

During the third quarter of 2003, the Company was in default under three lease agreements for facilities due to delinquent rental payments. For the first property, which included the Company's headquarters, the lessor terminated the original lease and subsequent short-term lease on June 30, 2003, and the Company ceased use of the building on that date. Remaining lease payments under the original lease total approximately $1,600,000. The lessor under this lease commenced litigation against the Company and claimed damages relating to the rental default and an alleged failure to maintain the leased premises. In October 2003, the Company reached a settlement with the lessor for the payment of the remaining lease payments over a one-year period commencing in November 2003.

In September 2003, the Company entered into a note payable in the amount of $3,060,000 with the lessor of certain of its office and manufacturing facilities, in settlement of all past and future amounts due under the lease for such facilities. The note is unsecured, is payable interest only through September 2008, at which time the entire principal amount is due, and bears interest at the prime rate for the first year (4.0% at September 27, 2003), 6.0% for years two through four and 10.0% for year five. Interest on the note was imputed at a rate of 9.0% over the term of the note and, accordingly, the note was recorded net of discount of $359,000. The 9.0% rate was considered to be a market interest rate based on other borrowings of the Company. The discount will be recognized over the term of the note as additional interest expense using the effective interest method. The Company remains in default under the third lease for its former San Diego, California sales office space, with a total obligation of approximately $170,000.

As a result of the lease terminations and the Company's ceasing to use the leased facilities, the Company recorded lease termination expense and related costs totaling $4,707,000 in the third quarter of 2003. Included in this amount is $4,498,000 of past and future rental payments (net of discount) and $972,000 of accelerated amortization of leasehold improvements, less $763,000 of related deferred rent concessions.

Other Income (Expense), Net

Other income (expense), net consists primarily of income from the sales of our ownership interests in other companies, a one-time sale of technology, interest expense, foreign currency fluctuation gains and losses and other miscellaneous items. For the third quarter of 2003, other income (expense) includes interest expense of $7,933,000, of which $7,025,000 was stock-based interest related to the issuance of common stock in exchange for investor guaranties on our bank line of credit. The remaining interest expense was cash interest and fees incurred on our bank line of credit. For the first nine months of 2003, interest expense includes stock-based interest totaling $9,596,000 and $2,036,000 of cash interest and fees incurred on our bank line of credit. For the third quarter and first nine months of 2002, we recognized interest expense of $379,000 and $1,694,000, respectively, of which $541,000 related to the beneficial conversion feature of a bridge loan and the value of related stock warrants. Interest incurred on our bank line of credit was higher in 2003 compared to 2002 due to an interest rate of 9.5% for 2003 as compared to 5.5% for 2002.

During the second quarter of 2002, we sold our remaining ownership interest in CreekPath Systems, Inc., resulting in a gain of $1,500,000. Also, during the first quarter of 2002, we recognized income of $1,200,000 related to the sale of a manufacturing license agreement. Both of these items are included in other income for first nine months of 2002.

The result of foreign currency translations fluctuated from a gain of $37,000 to a loss of $1,228,000 for the third quarter of 2002 and 2003, respectively. The loss from foreign currency translation increased from a loss of $739,000 to a loss of $1,440,000 for the first nine months of 2002 and 2003, respectively. These fluctuations resulted primarily from a significant strengthening of the Japanese Yen and the Euro against the U.S. dollar in 2002 versus 2003, particularly in September 2003.

Taxes

The provision for income taxes for the third quarter and first nine months of 2003 represents foreign taxes. During the first quarter of 2002, we recorded the benefit of a federal tax refund in the amount of $453,000 offset by a provision of $111,000 related to state and foreign taxes. Based on cumulative operating losses over the prior five years and future profitability uncertainty, we continue to reserve 100% of our deferred tax assets. We believe a 100% valuation allowance will be required until we attain a consistent and predictable level of profitability.

At December 28, 2002, we had incurred domestic net operating loss carryforwards of approximately $172,000,000, which expire between 2005 and 2022. Under the Tax Reform Act of 1986, the amount of, and the benefit from, net operating losses that can be carried forward is limited due to a cumulative ownership change of more than 50% over a three-year period, which occurred in November 2001 in connection with the Ecrix merger. The portion of Exabyte's and Ecrix's pre-business combination tax carryovers, totaling $153,000,000, that can be utilized in any one taxable year for federal tax purposes is limited to approximately $1.2 million per year through 2021. Ownership changes after December 28, 2002 could further limit the utilization of our remaining net operating loss carryforward of $19,000,000, in addition to any losses incurred subsequent to December 28, 2002.

Liquidity and Capital Resources

Financial Condition

We have incurred operating losses for the last five fiscal years, negative cash flows from operations for the last three fiscal years, and had a stockholders' deficit and working capital deficit of $22,899,000 and $15,973,000, respectively as of September 27, 2003. In addition, as of September 27, 2003, we had limited cash and cash equivalents and limited available borrowings under our line of credit.

The above factors raised substantial doubt about whether we can continue as a going concern. Accordingly, we have continued to reassess our business and investigate various strategic alternatives to increase liquidity. These alternatives may include one or more of the following:

- strategic partnership or business combination;
- restructuring of maturities of debt, including notes payable to suppliers;
- obtaining additional debt or equity capital;
- restructuring of current operations or reduction in workforce; or
- sale of all or a portion of our operating assets.

During the second and third quarters of 2003, we have been actively negotiating with certain of our trade creditors to reduce amounts owed to them and to establish deferred payment plans. We have entered into revised arrangements with certain vendors. In addition, we have negotiated extended payment plans with certain major suppliers, as discussed below. We will continue to evaluate alternatives to obtain funds to support our operations.

On November 7, 2003, we entered into a Media Distribution Agreement ("MDA") with Imation Corp. ("Imation") whereby the Company granted Imation the exclusive worldwide marketing and distribution rights for our proprietary removable data storage media. In exchange for such rights, Imation will pay the Company a one-time distribution fee of $18,500,000, payable $10,000,000 upon execution of the MDA and $8,500,000 upon the achievement of a specified level of media sales by Imation subsequent to the effective date of the agreement. We expect to receive the $8,500,000 payment no later than December 31, 2003. Under the MDA, we agreed to grant to Imation a second security interest in the Company's intellectual property to secure our obligations under the MDA and a seat as an observer on the Company's Board of Directors. The MDA has an indefinite term, but provides for termination by Imation upon 180 days prior written notice to the Company, or upon a material default by either party. If Imation terminates the MDA because of a material default by the Company, we must pay Imation a prorated portion of the distribution fee. In addition, on November 7, 2003, Imation also purchased 1,500,000 shares of the Company's Series I Preferred Stock for $1,500,000.

Commercial Obligations

On April 17, 2003, we entered into a Third Modification Agreement ("Third Modification") of its Loan and Security Agreement dated June 18, 2002 ("Loan Agreement") with Silicon Valley Bank ("SVB"). Pursuant to this Third Modification, SVB agreed to advance the Company up to $2,500,000 in excess of its specified borrowing availability up to a maximum of $20,000,000, waive all defaults existing as of April 17, 2003, increase the Company's current credit limit and change the maturity date of the Loan Agreement to September 30, 2003. As a condition of the Third Modification, SVB required guaranties ("Guaranties") up to a maximum of $2,500,000 from our CEO and a significant investor ("Guarantors") for advances in excess of the Company's credit limit. In addition, SVB required that each of the Guarantors enter into a subordination agreement ("Subordination Agreement"), whereby each Guarantor agreed to subordinate to SVB: (1) all of the Company's present and future indebtedness and obligations to the Guarantor; and (2) all of the Guarantor's present and future security interests in the Company's assets and property. Also, the Guarantors may not demand any payment, exercise any remedy or participate in any action with respect to the subordinated debt until Exabyte's debts to SVB have been satisfied. On October 10, 2003, we entered into the Fifth Modification Agreement ("Fifth Modification") which extended the Loan Agreement through September 30, 2005, under similar terms and conditions, including the continued maintenance of the Guaranties. The Fifth Modification provides for interest at 5.25% over the prime rate, subject to a decrease upon the occurrence of specified "fundraising events," as defined. The Fifth Modification also includes certain financial covenants relating to operating results and limits on inventory levels with product distributors. Borrowings under the Fifth Modification continue to be based on eligible accounts receivable and inventory balances, as defined in the Loan Agreement. As a result of entering the Media Distribution Agreement and the sale of preferred stock discussed in note 1, we expect that the Guaranties will be terminated in November 2003.

As consideration for the Guaranties, we issued to the Guarantors (pro-rata) 25,000,000 shares of its common stock on April 21, 2003, 12,500,000 shares on July 15, 2003 and 12,500,000 shares effective September 15, 2003. During July, 2003, we entered into agreements with two additional shareholders to guarantee an additional $250,000 of borrowings from SVB in exchange for up to 2,500,000 common shares to be issued in July and an additional 2,500,000 shares to be issued in October and December 2003. The Company determined the fair value of the issued shares based on the market price of our stock on the date of issuance, and recorded $7,025,000 and $2,571,000 of stock-based interest-expense during the third and second quarters of 2003, respectively. The value of the total shares to be issued under the Guaranties is being recorded as interest expense over the anticipated period that such Guaranties will remain in effect.

In connection with the Third Modification, we issued SVB a fully vested, immediately exercisable and non-forfeitable warrant to purchase 2,000,000 shares of common stock at an exercise price of $0.105 per share pursuant to the Modification Agreement. The warrant expires on April 17, 2010. We determined the value of the warrants to be $159,000 based on the Black-Scholes option-pricing model with the following assumptions: no dividend yield, expected life - 7 years, volatility - 135%, and risk free interest rate - 3.5%. The fair value of the warrant was recognized as interest expense over the term of the Third Modification, which expired on September 30, 2003.

Notes Payable - Suppliers

During the first quarter of 2003, we entered into note payable agreements with four of our largest suppliers that converted certain accounts payable and accrued liability amounts outstanding at December 28, 2002 to notes payable. In September 2003, we entered into a note payable agreement with a fifth supplier for $5,970,000 which converted accounts payable and inventory purchase commitments to a note payable. The note is unsecured and is due monthly through 2007 with interest at 9.0%. In addition, we renegotiated the payment schedule for the largest of the four notes payable described above to extend payments originally due in 2003 and 2004 to 2005. As of September 27, 2003, the total amount due under all notes payable - suppliers is $25,723,000, of which $12,642,000 is due within one year. The notes require full payment of all amounts due through December 2007, bear interest at rates ranging from zero to 9.0%, paid monthly, and are payable as follows: 2003 - $2,734,000; 2004 - $12,429,000; 2005 - $7,639,000; 2006 - $1,753,000; 2007 - $1,168,000. We accounted for the modification of the liabilities under EITF 96-19, 'Debtors Accounting for a Modification or Exchange of Debt Instruments ("EITF 96-19"). In accordance with the provisions of EITF 96-19, the terms of the notes are not considered to be substantially different than the terms of the original liabilities. Accordingly, the notes are recorded at their principal amounts and the related interest expense is accounted for using the effective interest rate on each note.

Note Payable - Lessor

In September 2003, we entered into a note payable in the amount of $3,060,000 with the lessor of certain of our office and manufacturing facilities, in settlement of all past and future amounts due under the lease for such facilities. The note is unsecured, is payable interest only through September 2008, at which time the entire principal amount is due, and bears interest at the prime rate for the first year (4.0% at September 27, 2003), 6.0% for years two through four and 10.0% for year five. Interest on the note was imputed at a rate of 9.0% over the term of the note and, accordingly, the note was recorded net of discount of $359,000. The 9.0% rate was considered to be a market interest rate based on other borrowings of the Company. The discount will be recognized over the term of the note as additional interest expense using the effective interest method.

Commitments and Contractual Obligations

We are committed to make certain payments under long-term and other obligations. Our cash payments due under contractual obligations as of September 27, 2003 are as follows (in thousands):

|(In thousands)                     | Less than 
1 year | 1 - 3 
years | Total   
|---------------------------------- | ----------------- | ------------ | --------
|Operating leases                   | $  1,178          | $  3,174     | $  4,352
|Unconditional purchase obligations | 1,305             | --           | 1,305   
|Long-term debt obligations:        |                   |              |         
|Suppliers                          | 13,365            | 14,062       | 27,427  
|Other                              | 178               | 4,033        | 4,211   
|Capital lease obligations          | 92                | 128          | 220     
|                                   | $16,118           | $21,397      | $37,515 

We expect to fund these obligations through alternatives discussed above including amounts to be received from Imation as discussed in "Liquidity and Capital Resources."

Cash Flows

As of September 27, 2003, we had limited cash and cash equivalents and negative working capital of $15,973,000. Cash and cash equivalents decreased from December 28, 2002 by $494,000 due to the net of $8,740,000 of cash provided by operating activities, $2,261,000 used by investing activities and $6,973,000 used by financing activities. Cash provided by operating activities is primarily attributable to the net reductions in inventory of $15,221,000 and accounts receivable of $7,404,000, less the net loss of $37,209,000 reduced by stock-based interest expense of $9,596,000, lease termination expense and related costs of $4,707,000 and loss on foreign currency translation of $1,045,000. Inventory decreased as a result of both reduced inventory quantities and the sale of parts and service repair inventory to Teleplan. The reduction in accounts receivable is a combination of an increase in the allowance for doubtful accounts of $5,962,000 as a result of a major customer filing bankruptcy, and a decrease in gross accounts receivable, primarily due to improved cash collections and decreased revenue during the first nine months of 2003. Cash used by investing activities is due to capital expenditures, primarily incurred on product tooling for the VXA tape drives. Cash used by financing activities is primarily due to net payments of $4,776,000 on our bank line of credit and $2,209,000 on our long-term obligations.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 provides guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, and results of operations of a VIE need to be included in a company's consolidated financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE. The provisions of FIN 46 are effective immediately for all VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the provisions of FIN 46 must be adopted at the beginning of the first interim or annual reporting period beginning after June 15, 2003. While the Company is currently evaluating the potential impact of the adoption of FIN 46, we believe that we will not be subject to the consolidation or disclosure requirements of FIN 46.

Market Risk

In the ordinary course of our operations, we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates. Uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax, other regulatory or credit risks are not included in the following assessment of our market risks. We are primarily impacted by fluctuations in the dollar/yen exchange rate as a result of outsourcing of certain manufacturing to Hitachi and others. Our borrowings under our line of credit agreement expose us to changes in interest rates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information concerning the Company's market risk is incorporated by reference from Item 2 above, 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' under the caption, 'Market Risk.'

Item 4. Controls and Procedures

Evaluation of the Disclosure Controls and Procedures

The Company's management, with the participation of the Company's principal executive and principal financial officers, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 27, 2003. Based upon this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of that date for purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports that the Company files under the Securities Exchange Act of 1934.

Changes in Internal Controls

There were no changes in the Company's internal control over financial reporting that occurred during the Company's quarter ended September 27, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Limitations on the Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

CEO and CFO Certifications

Attached as exhibits to this Quarterly Report are certifications of the CEO and CFO. These certifications are required by Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly Report contains information regarding the disclosure controls and procedures referred to in certifications. These certifications should be read in conjunction with this section for a more complete understanding of the topics presented.

PART II.

Item 2. Changes in Securities and Use of Proceeds

During the third quarter of 2003, the Company issued 27,500,000 shares of its common stock to four guarantors for guaranties in the amount of $2,750,000 under the Company's revolving line of credit with Silicon Valley Bank. The common stock was issued in exchange for such guarantees to a significant investor in the Company and the Company's President who is also a stockholder of the Company. The Company believes that these parties met the standards for purchasers in a non-public offering, and the Company relied upon an exemption from securities registration for a non-public offering in selling those shares.



Item 6. Exhibits and Reports on Form 8-K

(a)     Exhibit Index

|Exhibit Number | Description                                                                                                                                                                                                                                       
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            | Agreement and Plan of Merger among Exabyte Corporation, Bronco Acquisition, Inc., Ecrix Corporation, Certain Lenders, and Certain Investors, Dated as of August 22, 2001 (5)                                                                      
|3.1            | Restated Certificate of Incorporation. (1)                                                                                                                                                                                                        
|3.2            | Amendment to Restated Certificate of Incorporation. (2)                                                                                                                                                                                           
|3.3            | By-laws of the Company, as amended. (3)                                                                                                                                                                                                           
|3.4            | Certificate of Designation of Series G Convertible Preferred Stock (4)                                                                                                                                                                            
|3.5            | Certificate of Designation of Series H Convertible Preferred Stock (5)                                                                                                                                                                            
|3.6            | Certificate of Designation of Series I Convertible Preferred Stock (6)                                                                                                                                                                            
|4.1            | Article 4 of the Restated Certificate of Incorporation (included in Exhibit 3.1)                                                                                                                                                                  
|4.2            | Article 1 of the By-laws of Exabyte Corporation, as amended (included in Exhibit 3.3)                                                                                                                                                             
|4.3            | Specimen stock certificate of Exabyte (5)                                                                                                                                                                                                         
|31             | Rule 13a-14(a) Certifications.                                                                                                                                                                                                                    
|32             | Section 1350 Certification.                                                                                                                                                                                                                       
|10.1           | Fifth Modification Agreement dated as of October 10, 2003, by and between Silicon Valley Bank and the Company. (7)                                                                                                                                
|10.2           | Form of Overadvance Guarantor Consent with Builder Investment Partnership, Meritage Private Equity Fund, L.P., Tom Ward and Crestview Capital Fund II, L.P., which is attached to the Fifth Modification Agreement referenced in Exhibit 10.1. (7)
|*10.3          | Exabyte Payment and Repayment Plan, among the Company, Nihon Exabyte Corporation and Hitachi, Ltd., dated August 25, 2003.                                                                                                                        
|*10.4          | Agreement for Debt Restructuring and Modification of Manufacturing Terms, among the Company, Solectron Corporation and Shinei International Pte. Ltd., dated September 1, 2003.                                                                   
|*10.5          | Depot Repair Services Agreement, among the Company and Teleplan Holding USA, Inc., dated June 2003.                                                                                                                                               
|*10.6          | Settlement Agreement, among the Company and 1685-1775 38th St, LLC, dated November 4, 2003.                                                                                                                                                       
|10.7           | Lease Termination Agreement, among the Company and Eastpark, LLC f/k/a Eastpark Associates, Ltd., dated September 26, 2003.                                                                                                                       
|10.8           | Promissory Note among the Company and Eastpark, LLC f/k/a Eastpark Associates, Ltd., dated September 1, 2003.                                                                                                                                     

*  Certain portions of this exhibit have been omitted as confidential.

|(1) | Filed as an Exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-30941) filed with the Securities and Exchange Commission (the "SEC") on September 8, 1989 or Amendments Nos. 1 and 2 thereto (filed on October 12, 1989 and October 16, 1989 respectively), and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Filed as an Exhibit to the Company's Registration Statement on Form 8-A/A filed with the SEC on June 7, 2002 and incorporated herein by reference.                                                                                                                                                                            
|(3) | Filed as an Exhibit to the Company's Registration Statement on Form 8-A/A filed with the SEC on June 7, 2002 and incorporated herein by reference.                                                                                                                                                                            
|(4) | Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with the SEC on April 27, 2001, and incorporated herein by reference.                                                                                                                                                                                  
|(5) | Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-4, filed with the SEC on September 21, 2001, as amended by Amendment Nos. 1 and 2 filed with the SEC on October 5, 2001 and October 9, 2001, respectively, and incorporated herein by reference.                                     
|(6) | Filed as an Exhibit to the Company's Current Report on Form 8-K, as filed with the SEC on May 20, 2002, and incorporated herein by reference.                                                                                                                                                                                 
|(7) | Filed as an Exhibit to the Company's Current Report on Form 8-K, as filed with the SEC on October 17, 2003, and incorporated herein by reference.                                                                                                                                                                             



(b)     Reports on Form 8-K

The Company filed two Reports on Form 8-K for the third quarter of 2003:

- Current report filed August 21, 2003, regarding Items 12 and 7.
- Current report filed October 17, 2003, regarding Items 5 and 7.



SIGNATURES

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

|     |                   |  |    | EXABYTE CORPORATION                                                                     
|---- | ----------------- |  | -- | ----------------------------------------------------------------------------------------
|     |                   |  |    | Registrant                                                                              
|Date | November 11, 2003 |  | By | /s/ Carroll A. Wallace                                                                  
|     |                   |  |    | Carroll A. Wallace 
Chief Financial Officer
(Principal Financial and Accounting Officer)