##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 2002

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________ TO _________

COMMISSION FILE NUMBER: 0-19512

READ-RITE CORPORATION

(Exact name of registrant as specified in its charter)


|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|DELAWARE
(State of Incorporation)                                        |  | 94-2770690
(I.R.S. Employer Identification No.)
|                                                                         |  |                                                
|44100 OSGOOD ROAD, FREMONT, CA
(Address of Principal Executive Officers) |  | 94539
(Zip Code)                               

Registrants telephone number including area code: (510) 683-6100

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

| |     |   |  |    |   | 
| | --- | - |  | -- | - | 
| | Yes | x |  | No | o | 

On February 7, 2003, 121,116,940 shares of the registrants common stock were
issued and outstanding.



---

---





---

TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | Item 1. LEGAL PROCEEDINGS                                                                    
|                              | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 99.1                 



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

READ-RITE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except for per share data)

|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |        |         | 
|-------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------ | -------- | ------------ | ------- | ------------- | -------- | ------ | ------- | 
|                                                   |                                                                 |                                             |                                            |          | December 29, |         | September 29,
|                                                   |                                                                 |                                             |                                            |          | 2002         |         | 2002         
|                                                   |                                                                 |                                             |                                            |          |              |         |              
|ASSETS                                             |                                                                 | (unaudited)                                 |                                            | *       
|Current assets:                                    |                                                                 |                                             |                                            |          |              |         |               |         
|                                                   | Cash and cash equivalents                                       |                                             | $                                          | 13,209   |              |         | $             | 18,307   |       
|                                                   | Short-term investments                                          |                                             |                                            |         |              |         |               | 5,575    |       
|                                                   | Accounts receivable, net of allowance of $184 as of             |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 | December 2002 and $862 as of September 2002 |                                            |          | 14,053       |         |               |          | 14,057 |        
|                                                   | Inventories                                                     |                                             |                                            | 12,540   |              |         |               | 18,111   |       
|                                                   | Prepaid expenses and other current assets                       |                                             |                                            | 4,376    |              |         |               | 5,362    |       
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 |                                             | Total current assets                       |          |              | 44,178  |               |          |        | 61,412  | 
|Property, plant and equipment, net                 |                                                                 |                                             | 176,984                                    |          |              |         | 197,186       |         
|Other assets                                       |                                                                 |                                             | 6,336                                      |          |              |         | 4,557         |         
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 |                                             | Total assets                               |          | $            | 227,498 |               |          | $      | 263,155 | 
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY               |                                                                 |                                             |                                            |          |              |         |               |         
|Current liabilities:                               |                                                                 |                                             |                                            |          |              |         |               |         
|                                                   | Short-term borrowing                                            |                                             | $                                          | 6,975    |              |         | $             | 19,480   |       
|                                                   | Accounts payable                                                |                                             |                                            | 43,954   |              |         |               | 38,755   |       
|                                                   | Accrued compensation and benefits                               |                                             |                                            | 13,422   |              |         |               | 14,985   |       
|                                                   | Other accrued liabilities                                       |                                             |                                            | 18,865   |              |         |               | 21,067   |       
|                                                   | Current portion of long-term debt and capital lease obligations |                                             |                                            | 8,616    |              |         |               | 8,596    |       
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 |                                             | Total current liabilities                  |          |              | 91,832  |               |          |        | 102,883 | 
|Convertible subordinated notes                     |                                                                 |                                             | 19,151                                     |          |              |         | 19,151        |         
|Other long-term debt and capital lease obligations |                                                                 |                                             | 49,284                                     |          |              |         | 26,883        |         
|Other long-term liabilities                        |                                                                 |                                             | 13,325                                     |          |              |         | 14,264        |         
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 |                                             | Total liabilities                          |          |              | 173,592 |               |          |        | 163,181 | 
|Stockholders equity:                              |                                                                 |                                             |                                            |          |              |         |               |         
|                                                   | Preferred stock, $0.0001 par value                              |                                             |                                            |         |              |         |               |         |       
|                                                   | Common stock, $0.0001 par value                                 |                                             |                                            | 12       |              |         |               | 12       |       
|                                                   | Additional paid-in capital                                      |                                             |                                            | 707,851  |              |         |               | 707,812  |       
|                                                   | Accumulated deficit                                             |                                             |                                            | (653,957 | )            |         |               | (607,864 | )     
|                                                   | Accumulated other comprehensive income                          |                                             |                                            |         |              |         |               | 14       |       
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 |                                             | Total stockholders equity                 |          |              | 53,906  |               |          |        | 99,974  | 
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       
|                                                   |                                                                 |                                             | Total liabilities and stockholders equity |          | $            | 227,498 |               |          | $      | 263,155 | 
|                                                   |                                                                 |                                             |                                            |          |              |         |               |          |       



---

|* |  | derived from audited financial statements
|- |  | -----------------------------------------

See accompanying notes to the consolidated condensed financial statements.

2



---



##### Table of Contents



READ-RITE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

|                                                                                   |                                                              |   |                    |         |              |   |         |        |  
|---------------------------------------------------------------------------------- | ------------------------------------------------------------ | - | ------------------ | ------- | ------------ | - | ------- | ------ | -
|                                                                                   |                                                              |   | Three Months Ended
|                                                                                   |                                                              |   |                   
|                                                                                   |                                                              |   | December 29,       |         | December 30,
|                                                                                   |                                                              |   | 2002               |         | 2001        
|                                                                                   |                                                              |   |                    |         |             
|Net sales                                                                          |                                                              | $ | 49,056             |         |              | $ | 135,913 |       
|Cost of sales                                                                      |                                                              |   | 78,779             |         |              |   | 114,235 |       
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|                                                                                   | Gross margin (loss)                                          |   |                    | (29,723 | )            |   |         | 21,678 |  
|Operating expenses:                                                                |                                                              |   |                    |         |              |   |         |       
|                                                                                   | Research and development                                     |   |                    | 9,564   |              |   |         | 12,365 |  
|                                                                                   | Selling, general and administrative                          |   |                    | 3,681   |              |   |         | 6,027  |  
|                                                                                   | Restructuring costs                                          |   |                    | (285    | )            |   |         |       |  
|                                                                                   | Impairment of property, plant and equipment                  |   |                    | 3,284   |              |   |         |       |  
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|                                                                                   | Total operating expenses                                     |   |                    | 16,244  |              |   |         | 18,392 |  
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|                                                                                   | Operating income (loss)                                      |   |                    | (45,967 | )            |   |         | 3,286  |  
|Interest expense                                                                   |                                                              |   | 1,039              |         |              |   | 1,109   |       
|Interest income (expense) and other, net                                           |                                                              |   | (487               | )       |              |   | 2,652   |       
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|                                                                                   | Income (loss) from continuing operations
before income taxes |   |                    | (47,493 | )            |   |         | 4,829  |  
|Provision for income taxes                                                         |                                                              |   |                   |         |              |   | 48      |       
|Loss from discontinued operations                                                  |                                                              |   |                   |         |              |   | (9,273  | )     
|Gain on disposal of discontinued operations, net of tax                            |                                                              |   | 1,400              |         |              |   |        |       
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|                                                                                   | Net loss                                                     |   | $                  | (46,093 | )            |   | $       | (4,492 | )
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|Basic and diluted income (loss) per share from
continuing operations               |                                                              | $ | (0.39              | )       |              | $ | 0.04    |       
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|Basic and diluted income (loss) per share from
disposal of discontinued operations |                                                              | $ | 0.01               |         |              | $ | (0.08   | )     
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|Basic and diluted net loss per share                                               |                                                              | $ | (0.38              | )       |              | $ | (0.04   | )     
|                                                                                   |                                                              |   |                    |         |              |   |         |       
|Shares used in per share computations
basic and diluted                            |                                                              |   | 121,117            |         |              |   | 119,414 |       

See accompanying notes to the consolidated condensed financial statements.

3



---



##### Table of Contents



READ-RITE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                                  |                                                              |                                                          |         |                    |        |              |         |         |        |  
|----------------------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------------------- | ------- | ------------------ | ------ | ------------ | ------- | ------- | ------ | -
|                                                                  |                                                              |                                                          |         | Three Months Ended
|                                                                  |                                                              |                                                          |         |                   
|                                                                  |                                                              |                                                          |         | December 29,       |        | December 30,
|                                                                  |                                                              |                                                          |         | 2002               |        | 2001        
|                                                                  |                                                              |                                                          |         |                    |        |             
|Cash flows from operating activities:                             |                                                              |                                                          |         |                    |        |              |         |        
|Net loss                                                          |                                                              | $                                                        | (46,093 | )                  |        | $            | (4,492  | )      
|Adjustments to reconcile net loss to cash
provided by operations: |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  |                                                              | Depreciation and amortization                            |         |                    | 21,721 |              |         |         | 23,852 |  
|                                                                  |                                                              | Impairment of property, plant and equipment              |         |                    | 3,284  |              |         |         |       |  
|                                                                  |                                                              | Minority interest in net loss of consolidated subsidiary |         |                    |       |              |         |         | 2,199  |  
|                                                                  |                                                              | Other non-cash expenses                                  |         |                    | 119    |              |         |         | (402   | )
|Changes in assets and liabilities                                 |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  | Accounts receivable                                          |                                                          |         | 4                  |        |              |         | 7,831   |       
|                                                                  | Inventories                                                  |                                                          |         | 5,571              |        |              |         | (1,523  | )     
|                                                                  | Accounts payable and accrued liabilities                     |                                                          |         | 3,228              |        |              |         | (31,950 | )     
|                                                                  | Other assets and liabilities, net                            |                                                          |         | (795               | )      |              |         | (1,420  | )     
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Net cash used in operating activities                             |                                                              |                                                          | (12,961 | )                  |        |              | (5,905  | )      
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Cash flows from investing activities:                             |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  | Capital expenditures                                         |                                                          |         | (3,989             | )      |              |         | (17,270 | )     
|                                                                  | Maturities of available-for-sale investments                 |                                                          |         | 5,575              |        |              |         | 40,629  |       
|                                                                  | Purchase of available -for-sale investments                  |                                                          |         |                   |        |              |         | (77,283 | )     
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Net cash provided by (used in) investing activities               |                                                              |                                                          | 1,586   |                    |        |              | (53,924 | )      
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Cash flows from financing activities                              |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  | Proceeds from long-term debt                                 |                                                          |         | 10,200             |        |              |         |        |       
|                                                                  | Cash paid for debt issuance costs                            |                                                          |         | (1,835             | )      |              |         |        |       
|                                                                  | Payment of long-term debt and capital leases                 |                                                          |         | (1,706             | )      |              |         | (2,056  | )     
|                                                                  | Proceeds from short-term borrowings                          |                                                          |         |                   |        |              |         | 5,709   |       
|                                                                  | Payments from short-term borrowings                          |                                                          |         | (415               | )      |              |         |        |       
|                                                                  | Proceeds from issuance of common stock, net                  |                                                          |         | 33                 |        |              |         | 2,818   |       
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Net cash provided by financing activities                         |                                                              |                                                          | 6,277   |                    |        |              | 6,471   |        
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Net decrease in cash and cash equivalents                         |                                                              |                                                          | (5,098  | )                  |        |              | (53,358 | )      
|Cash and cash equivalents                                         |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  | Beginning of period                                          |                                                          |         | 18,307             |        |              |         | 126,646 |       
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  | End of period                                                |                                                          | $       | 13,209             |        |              | $       | 73,288  |       
|                                                                  |                                                              |                                                          |         |                    |        |              |         |        
|Supplemental disclosures of non-cash activities                   |                                                              |                                                          |         |                    |        |              |         |        
|                                                                  | Conversion of debt and accrued interest to common stock      |                                                          |         |                   |        |              |         | 465     |       
|                                                                  | Reclassification of short-term debt to long-term debt        |                                                          |         | 13,824             |        |              |         |        |       
|                                                                  | Reclassification of accounts payable to short-term borrowing |                                                          |         | 1,676              |        |              |         |        |       

See accompanying notes to the consolidated condensed financial statements.

4



---



##### Table of Contents



NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

Read-Rite Corporation (Read-Rite or the Company) maintains a
fifty-two/fifty-three week fiscal year ending on the Sunday closest to
September 30. The first quarters of fiscal 2003 and fiscal 2002 ended on
December 29, 2002 and December 30, 2001, respectively.

The unaudited consolidated condensed financial statements included herein have
been prepared in accordance with principles generally accepted in the United
States for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management all
adjustments, including all normal recurring adjustments, necessary for a fair
presentation of the interim periods presented have been included. The interim
results are not necessarily indicative of the operating results expected for
the full fiscal year ending on September 28, 2003.

The Companys consolidated financial statements have been prepared on the
assumption that it will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The independent auditors report on the financial statements of the
Company as of and for the fiscal year ended September 29, 2002 included in Form
10-K contained an explanatory paragraph highlighting the Companys need for
additional capital in fiscal 2003 to fund the Companys operating and capital
requirements, and that this condition raises substantial doubt about the
Companys ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.

As of December 29, 2002, the Company had a working capital deficit of $47.7
million and incurred losses from continuing operations of $47.5 million for
the first quarter of fiscal 2003 and $231.0 million for fiscal year 2002. The
Company expects to continue to expend cash and incur operating losses at least
through the first half of fiscal 2003, and its ability to generate cash and
operating income is dependent on its ability to successfully qualify for
customers 80 gigabyte per platter programs.

As discussed in Note 4, in December 2002 the Company entered into a $30 million
credit facility. The amount available under the loan facility is subject to a
borrowing base formula calculated on the Companys domestic cash balances,
eligible accounts receivable balances and appraised value of domestic
equipment. The Company drew $10.2 million representing the amount available
under the facility on December 27, 2002. Receipts from customers are remitted
to a restricted account and may only be withdrawn by the Company if the
eligible accounts receivable and appraised value of domestic equipment exceeds
the amount borrowed under the facility. Eligibility of the non-U.S. accounts
receivable, for purposes of the borrowing base formula, is contingent on the
satisfaction of certain conditions. The Company is working on satisfying these
conditions. As of February 2003, these conditions had not yet been satisfied
which prevents the Companys ability to draw additional amounts under the
credit facility. The Company estimates it will need to raise additional
capital through debt, including increased availability under this $30 million
secured facility, equity offerings, or by selling assets in the second fiscal
quarter of 2003. The Company believes that its ability to fund its operating
and capital requirements for fiscal 2003 and its ability to obtain financing
are, in part, dependent on timely qualification and volume shipments of head
gimbal assemblies (HGAs) and head stack assemblies (HSAs) for customers 80
gigabyte per platter programs. Design changes on 80 gigabyte programs made in
the first fiscal quarter of 2003 are demonstrating improved manufacturing
yields which will be critical to the high volume ramp of these products. In
addition, these new designs are resulting in excellent performance internally
and at customer sites. Qualifications are expected late in the second fiscal
quarter of 2003. There can be no assurance, however, that the Company will be
successful on these programs. Even if the Company successfully qualifies for
customers 80 gigabyte programs, its financial resources may not be sufficient
to fund its

5



---



##### Table of Contents



operations until it achieves positive cash flow, or its sales of products for
customers 80 gigabyte programs may not result in positive cash flow or net
income. There is no assurance that additional financing will be available on
terms and conditions acceptable or favorable to the Company or its
shareholders, if at all. If the Company does not achieve timely customer
qualifications, is unsuccessful at ramping up volume production on new products
at acceptable yields, or is unsuccessful in obtaining sufficient financing, the
Companys operations will be materially negatively impacted and it will be
required to take actions that will harm its business, including potentially
ceasing certain or all of its operations.

In October 2002, the Company adopted SFAS No. 144, which supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, and certain provisions of Accounting Principles
Board (APB) Opinion No. 30 Reporting the Results of OperationsReporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 related to: (i) the recognition and
measurement of the impairment of long-lived assets to be held and used, and
(ii) the measurement of long-lived assets to be disposed by sale. It provides
more guidance on estimating cash flows when performing recoverability tests,
requires long-lived assets to be disposed of other than by sale to be
classified as held and used until disposal, and establishes more restrictive
criteria to classify long-lived assets as held for sale.

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others (FIN 45). FIN 45
clarifies the requirements of a guarantors accounting for and disclosure of
certain issued and outstanding guarantees. It also clarifies that at the time
a company issues a guarantee the company must recognize that information in its
interim and annual financial information. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements ending after December 15, 2002.

The balance sheet at September 29, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

The financial statements included herein should be read in conjunction with the
Companys audited financial statements included in its 2002 Annual Report on
Form 10-K.

NOTE 2. INVENTORIES

Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out method) or market. It is the Companys policy to
write-off inventory on hand in excess of six months forecasted sales volumes.
Adjustments may be made to take into account the product life cycles, which can
range from 6 to 12 months, the maturity of the product (whether newly
introduced products or products approaching end of life), and the impact of
competitors product announcements. The Company believes that six months is an
appropriate period of sales forecasts and inventory exposure calculations
because it is difficult to accurately forecast for a specific product beyond
this time frame due to the potential introduction of new products by
competitors, technology obsolescence or fluctuations in demand for the
Companys products.

Inventories consisted of the following (in thousands):

|                |  |              |        |               |  |   |        | 
|--------------- |  | ------------ | ------ | ------------- |  | - | ------ | 
|                |  | December 29, |        | September 29,
|                |  | 2002         |        | 2002         
|                |  |              |        |              
|Raw materials   |  | $            | 2,431  |               |  | $ | 1,985  | 
|Work-in-process |  |              | 8,623  |               |  |   | 13,564 | 
|Finished goods  |  |              | 1,486  |               |  |   | 2,562  | 
|                |  |              |        |               |  |   |        | 
|                |  | $            | 12,540 |               |  | $ | 18,111 | 
|                |  |              |        |               |  |   |        | 

6



---



##### Table of Contents



NOTE 3. NET LOSS PER SHARE

Basic net loss per share is calculated based on the weighted average number of
shares outstanding during the period. The impact of common stock options,
warrants and the assumed conversion of the Companys convertible subordinated
debentures into common stock was excluded from the computation of diluted net
loss per share, as their effect is antidilutive for the periods presented.

NOTE 4. FINANCING TRANSACTIONS

In December 2002, the Company entered into a $30 million credit facility with
Tennenbaum Capital Partners, LLC (formerly Special Value Investment Management,
LLC). The amount available under the loan facility is subject to a borrowing
base formula calculated on the Companys domestic cash balances, eligible
accounts receivable balances and appraised value of domestic equipment. The
Company drew $10.2 million representing the amount available under the facility
on December 27, 2002, and paid a facility fee of $1.5 million in connection
with the transaction. Receipts from customers are remitted to a restricted
account and may only be withdrawn by the Company if the eligible accounts
receivable and appraised value of domestic equipment exceeds the amount
borrowed under the facility. Eligibility of the non-U.S. accounts receivable,
for purposes of the borrowing base formula, is contingent on the satisfaction
of certain conditions. The Company is working on satisfying these conditions.
As of February 2003, these conditions had not yet been satisfied which prevents
the Companys ability to draw additional amounts under the credit facility.
The remaining funds can be borrowed under the facility, subject to the
borrowing base formula, on or before September 30, 2003, with a December 2005
maturity date. The interest rate is based upon the Eurodollar rate plus 10%.
As of December 29, 2002, the interest rate on the $10.2 million was at 11.4%,
exclusive of the amortization of issuance costs and the valuation of the
warrants issued. The obligations under the credit agreement are secured by
substantially all of the domestic assets of the Company. The agreement
requires the Company to maintain certain financial covenants and observe a
series of additional covenants. The Company anticipates being out of
compliance with certain covenants and has secured a limited waiver of these
covenants through March 31, 2003. The Company is in discussions with the
lender concerning the anticipated noncompliance for the Companys third fiscal
quarter of 2003. The Company expects it will be successful in obtaining a
waiver or amendment for its anticipated noncompliance in the third fiscal
quarter of 2003 with respect to certain covenants, however, there can be no
assurance that the Company will obtain such waiver or amendment. If the
Company is not successful in obtaining a waiver or amendment of these covenants
for the Companys third fiscal quarter of 2003, the lender has the right to
demand immediate payment of the debt.

In connection with the loan facility, the Company has issued to affiliates of
Tennenbaum Capital Partners, LLC, a warrant to purchase approximately 24
million shares of common stock in the Company at $0.27 per share, which was the
closing market price of the Companys common stock on December 23, 2003.
Additional shares may be issued under this warrant if the Company issues stock
at a price below $0.27, provided that the aggregate number of shares issuable
under the warrant does not exceed 19.9% of the outstanding common stock. A
cash adjustment to the exercise price would be provided if the number of shares
to be issued under the antidilution provisions exceeded 19.9% of the
outstanding common stock. Because the number of shares to be issued under the
warrant is not fixed and may be partially settled in cash, this instrument is
not classified within equity and it is subject to accounting under Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). Under SFAS No. 133, the warrant will
be accounted for at fair value with changes in fair value recorded currently in
earnings. The fair value of the warrant at December 29, 2002 was calculated as
$2.7 million using the Black-Scholes valuation method, utilizing a volatility
factor of 0.8, risk-free interest rate of 2.5% and an expected life of 7 years.
The fair value of the warrant will be recognized as a component of interest
expense over the life of the related debt. The warrant is immediately
exercisable and expires in December 2009.

In the fourth quarter of fiscal 2002, the Company reached agreement with
two Thai financial institutions to refinance loans totaling $28.9 million of
which $23.4 million in principal payments were due on or before March 2003.
The agreement extended the maturities of the loans, with the first principal
payment on these loans due in the second fiscal quarter 2004. Documentation
was completed with one Thai financial institution in the first quarter of
fiscal 2003 and finalized with the second financial institution in January
2003.

Short-term borrowings as of December 29, 2002 consist of a Thai baht
denominated note totaling $4.7 million at an interest rate of 3.25%, a $1.7
million note at a rate of 4% and insurance financing of $0.6 million at a rate
of 6.45%.

7



---



##### Table of Contents



Long-term debt and capital leases consisted of the following as of December 29,
2002:

|                                                |  |   |        | 
|----------------------------------------------- |  | - | ------ | 
|Convertible subordinated notes due 2004 at 6.5% |  | $ | 19,151 | 
|Secured loan due 2004 at floating rate          |  |   | 14,002 | 
|Secured credit facility due 2005 at LIBOR + 10% |  |   | 10,200 | 
|Secured loan due 2006 at LIBOR + 3.5%           |  |   | 9,609  | 
|Secured loan due 2005 at LIBOR + 2.75%          |  |   | 11,450 | 
|Secured loan due 2004 at LIBOR + 2%             |  |   | 2,480  | 
|Secured loan due 2004 at LIBOR + 3.0%           |  |   | 3,000  | 
|Secured loan due 2004 at SIBOR + 3.5%           |  |   | 4,000  | 
|Capital lease                                   |  |   | 716    | 
|Other                                           |  |   | 2,443  | 
|                                                |  |   |        | 
|Total debt                                      |  |   | 77,051 | 
|Less: current portion                           |  |   | 8,616  | 
|                                                |  |   |        | 
|Total long-term debt                            |  | $ | 68,435 | 
|                                                |  |   |        | 

At December 29, 2002, the future minimum principal payments on long-term debt
and capital leases based on the contractual maturity dates were as follows (in
thousands):

|                                                           |  |              |        | 
|---------------------------------------------------------- |  | ------------ | ------ | 
|                                                           |  | December 29,
|Fiscal Year                                                |  | 2002        
|                                                           |  |             
|2003                                                       |  |              | 6,866  | 
|2004                                                       |  |              | 49,253 | 
|2005                                                       |  |              | 8,721  | 
|2006                                                       |  |              | 12,211 | 
|                                                           |  |              |        | 
|Total future payments on long-term debt and capital leases |  |              | 77,051 | 
|                                                           |  |              |        | 

NOTE 5. COMPREHENSIVE LOSS

The components of comprehensive loss, net of related tax are as follows (in
thousands):

|                                                                   |  |                    |         |              |  |   |        |  
|------------------------------------------------------------------ |  | ------------------ | ------- | ------------ |  | - | ------ | -
|                                                                   |  | Three months ended
|                                                                   |  |                   
|                                                                   |  | December 29,       |         | December 30,
|                                                                   |  | 2002               |         | 2001        
|                                                                   |  |                    |         |             
|Net loss                                                           |  | $                  | (46,093 | )            |  | $ | (4,492 | )
|Change in unrealized gain (loss) on
available-for-sale investments |  |                    | (14     | )            |  |   | 100    |  
|                                                                   |  |                    |         |              |  |   |        |  
|Comprehensive loss:                                                |  | $                  | (46,107 | )            |  | $ | (4,392 | )
|                                                                   |  |                    |         |              |  |   |        |  

NOTE 6. SEGMENT INFORMATION

The Company operates and tracks its results in two operating segments, the hard
disk drive and tape head segments. The tape segment is not a reportable
segment under FAS 131, Disclosures about Segments of an Enterprise and Related
Information (FAS 131), and has been combined with the disk drive segment
under the caption of magnetic heads. The Company designs, develops,
manufactures and markets head gimbal assemblies, head stack assemblies and tape
heads for the hard disk drive and tape drive markets. In April 2002, the
Company sold its interest in its majority-owned subsidiary, Scion Photonics,
Inc., which previously operated as the Companys fiber optic segment. The
Chief Executive Officer (CEO) has been identified as the Chief Operating
Decision Maker as defined by FAS 131. The Chief Executive Officer evaluates
performance and allocates resources based on revenue and gross profit from
operations.

8



---



##### Table of Contents



NOTE 7. CUSTOMER CONCENTRATION AND CREDIT RISK

Samsung and Western Digital, accounted for a total of 89% of net sales during
the three-month period ended December 29, 2002. Included as Western Digital
product sales are HGAs shipped and billed directly to third party
subcontractors, who assemble head stack assemblies for Western Digital. Given
the small number of disk drive manufacturers, the Company will continue to be
dependent upon a limited number of customers. The loss of any large customer,
or a significant decrease in sales orders from one or more large customers,
will have a material adverse effect on the Companys business, financial
condition, and results of operations.

NOTE 8. DISCONTINUED OPERATIONS

In April 2002, JDS Uniphase acquired Scion Photonics, Inc., the Companys
majority-owned subsidiary, in a cash transaction. As a result, the Company
recorded a gain on the disposal of the subsidiary of $9.4 million in fiscal
2002. The Company received cash proceeds of $15.2 million in the third quarter
of fiscal 2002. In accordance with the agreement, additional amounts were
receivable by the Company pending the settlement of contingencies related to
the sale. During the quarter ending December 29, 2002, the Company received
$1.4 million pursuant to settlement of those contingencies and recorded an
additional gain on the disposal of the subsidiary of $1.4 million. An
additional $0.45 million is receivable by the Company in April 2003 less any
contingencies related to the sale and has been excluded from the calculation of
the gain on disposal of discontinued operations.

NOTE 9. RESTRUCTURING CHARGE

During the fourth quarter of fiscal 2002, the Company recorded total
restructuring and other charges of $19.5 million. The restructuring charge was
primarily related to cost-cutting actions initiated by the Company in the
fourth quarter of fiscal 2002. The charge included $4.6 million related to
severance costs associated with a 5% reduction in force, or approximately 500
employees (330 and 110 employees engaged in manufacturing activities in
Thailand and the U.S., respectively). The Company consolidated its staff in
the United States, with the exception of its tape head operations, to its
Fremont facility. Approximately $12.6 million of the charge is related to
future lease payments on the vacated Milpitas facility. The lease on this
facility expires in July 2006. At the time the charge was incurred in the
fourth fiscal quarter of 2002, the Company anticipated the complete exit of the
facilities by November 2002. As the complete exit of the facility did not
occur until January 2003 an adjustment was made to the restructuring charge in
the first fiscal quarter of 2003 to take into account the occupation of the
facility for the additional period. The cost of the idle facilities less
estimated sublease rentals, has been accrued as part of the restructuring
charge. At December 29, 2002, the aggregate lease payments are approximately
$13.5 million over the remaining lease term. The Company estimates that
sublease rental proceeds will be approximately $1.2 million over the remaining
term of the lease. The estimated sublease rentals may vary significantly based
upon the timing and the amount per square foot of a sublease arrangement, and
whether a sublease arrangement is available at terms acceptable to the Company.
The balance of the charge represents equipment write-downs and a write-off of
leasehold improvements at the Milpitas facility. The fair value of the assets
written down was determined based upon salvage value, as no further uses were
identified.

The following table reflects the total restructuring charge (amount in
thousands):

|                                   |  |             |        |           |  |             |        |       |  |   |        |   |  |   |        |  
|---------------------------------- |  | ----------- | ------ | --------- |  | ----------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Equipment & |        |           |  |             |        | Lease |  |   |        |  
|                                   |  | Leaseholds  |        | Severance |  | Commitments |        | Total
|                                   |  |             |        |           |  |             |        |      
|Restructuring charge               |  | $           | 2,373  |           |  | $           | 4,589  |       |  | $ | 12,565 |   |  | $ | 19,527 |  
|Write offs/write downs             |  |             | (2,373 | )         |  |             |       |       |  |   |       |   |  |   | (2,373 | )
|Cash payments                      |  |             |       |           |  |             | (4,269 | )     |  |   |       |   |  |   | (4,269 | )
|Change in estimates                |  |             |       |           |  |             |       |       |  |   |        |   |  |   |       |  
|                                   |  |             |        |           |  |             |        |       |  |   |        |   |  |   |        |  
|Reserve balance September 29, 2002 |  | $           |       |           |  | $           | 320    |       |  | $ | 12,565 |   |  | $ | 12,885 |  
|Cash payments                      |  |             |        |           |  |             | (336   | )     |  |   |        |   |  |   | (336   | )
|Change in estimate                 |  |             |        |           |  |             | 16     |       |  |   | (301   | ) |  |   | (285   | )
|                                   |  |             |        |           |  |             |        |       |  |   |        |   |  |   |        |  
|Accrual balance December 29, 2002: |  | $           |       |           |  | $           |       |       |  | $ | 12,264 |   |  | $ | 12,264 |  
|                                   |  |             |        |           |  |             |        |       |  |   |        |   |  |   |        |  

9



---



##### Table of Contents



NOTE 10. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

The Company evaluates the carrying value of property, plant and equipment,
whenever certain events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. Such events or circumstances
include, but are not limited to, a prolonged industry downturn, a current
period operating cash flow loss combined with a history of operating cash flow
losses, or significant reductions in projected future cash flows. Based on its
evaluation performed in the first quarter of fiscal 2003, the Company recorded
a charge of $3.3 million to reduce the property, plant and equipment of the
tape head assets based on the amounts by which the carrying amounts of these
assets exceeded their fair value. The Companys estimation of the fair value
of the assets was based on estimated salvage value.

NOTE 11. GUARANTEES

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others (FIN 45). FIN 45
clarifies the requirements of a guarantors accounting for and disclosure of
certain issued and outstanding guarantees. It also clarifies that at the time
a company issues a guarantee the company must recognize that information in its
interim and annual financial information. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements ending after December 15, 2002.

The Companys product warranty accrual reflects managements best estimate of
probable liability. Management determines the warranty based on historical
experience and other current available evidence.

Warranty accrual for the three-month period ended December 29, 2002 was as
follows: (in thousands):

|                                                      |  |   |        |  
|----------------------------------------------------- |  | - | ------ | -
|Balance as of September 29, 2002                      |  | $ | 4,756  |  
|Accrual                                               |  |   | 1,639  |  
|Settlements                                           |  |   | (897   | )
|Adjustment related to completion of warranty programs |  |   | (2,822 | )
|                                                      |  |   |        |  
|Balance as of December 29, 2002                       |  | $ | 2,676  |  
|                                                      |  |   |        |  

The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties. At December 29, 2002,
the primary instance of this type of contract is a divestiture agreement, under
which the Company provides customary indemnifications to JDS Uniphase, the
purchaser of the Companys divested operations of Scion Photonics, Inc.
Because the obligated amounts of this type of indemnification are not
explicitly stated, the maximum amount of the obligation cannot be reasonably
estimated. The Company has not recorded a liability for such possible
contingencies on
its balance sheet as of December 29, 2002.

NOTE 12. LEGAL PROCEEDINGS

On December 11, 1996, a purported class action lawsuit was filed in the
Superior Court of the State of California, Santa Clara County, by Joan D.
Ferrari and Mark S. Goldman against the Company and certain of its officers and
directors (the Ferrari State Action), alleging that the defendants made false
and misleading statements about the Companys business condition and prospects,
and seeking an unspecified amount of damages. On May 16, 1997, the court
sustained the demurrer of certain defendants to the entire complaint, and
sustained the demurrer of the remaining defendants, including the Company, to
certain causes of action in the complaint. The remaining causes of action in
the Ferrari State Action allege violation of the California Corporations Code.
On July 7, 1997, the remaining defendants answered the complaint. On November
14, 2000, the remaining defendants filed a motion for judgment on the pleadings
seeking to use the federal actions final judgment (see below) to extinguish
the state claims under the doctrine of res judicata. A hearing on that motion
occurred on January 22, 2001. On April 20, 2001 the court entered an order
granting that motion, and final judgment in favor of the remaining defendants
was entered on May 23, 2001. Plaintiffs thereafter served a notice of appeal
on July 20, 2001. On March 20, 2002, plaintiffs filed their opening appellate
brief, on June 18, 2002, defendants filed their opposition brief, and on
September 6, 2002, plaintiffs filed their brief in reply to the opposition.
The court has not yet set a hearing date for the appeal.

10



---



##### Table of Contents



On January 16, 1997 and May 19, 1997, two purported class action lawsuits were
filed in the United States District Court for the Northern District of
California against the Company and certain of its officers and directors by
Ferrari and Goldman (the Ferrari Federal Action) and by James C. Nevius and
William Molair (the Nevius Federal Action), respectively. Both complaints
alleged that the defendants made false and misleading statements about the
Companys business condition and prospects, alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and
sought an unspecified amount of damages. On December 22, 1997, the Court
consolidated the Ferrari Federal Action and the Nevius Federal Action (the
Consolidated Federal Action). On October 13, 2000, following a motion for
dismissal by defendants, the court ordered that both the Ferrari plaintiffs
and Nevius plaintiffs complaints be dismissed with prejudice and without leave
to amend. The Nevius plaintiffs and Ferrari plaintiffs thereafter filed
notices of appeal on October 27, 2000, and November 9, 2000, respectively, and
these appeals have been consolidated. The Nevius and Ferrari plaintiffs filed
their opening appellate briefs on July 8, 2002, defendants filed their reply
brief on September 6, 2002, and oral arguments on the appeals were heard in the
United States Court of Appeal for the Ninth Circuit on December 5, 2002. The
Company is now awaiting the outcome of the appeal.

There has been no discovery to date in the Consolidated Federal Action and no
trial is scheduled in any of these actions. The Company believes the Company
and the individual defendants have meritorious defenses to the above-described
lawsuits. Accordingly, both on its own behalf, and pursuant to indemnification
agreements between the Company and the named individual defendants, the Company
intends to continue to defend each of these actions vigorously, and believes
the final disposition of the claims in these lawsuits will not have a material
adverse effect on the Companys business, results of operations and financial
condition.

In September 2001, the Bay Area Air Quality Management District (BAAQMD)
filed a lawsuit in the Superior Court of the State of California, Alameda
County, alleging violations of permit conditions and district regulations
relating primarily to breakdowns of the Companys thermal oxidizer in its
Fremont plant over a three-year period. The Company had promptly notified the
BAAQMD of all such breakdowns and had not been assessed any fines or received
any further correspondence relating to these incidents by the BAAQMD prior to
being served with the complaint. The Company answered the complaint in October
of 2001. The matter was thereafter referred to mediation, with the first of
several mediation sessions in November 2002. A settlement of this action was
reached in December 2002 that will have no material adverse effect on the
Companys business, financial condition, or results of operations.

On January 16, 2003, Limar Realty #2 filed a lawsuit in the Superior Court of
the State of California, Santa Clara County, alleging that the Company failed
to make the December 2002 and January 2003 rent payments on a building it
leases in Milpitas, California. The lawsuit seeks recovery of approximately
$300,000 per month in unpaid rent, plus interest and attorneys fees. The
Company no longer uses the building in its operations, and the lawsuit was
filed shortly after Limar Realty #2, the buildings owner, rejected the
Companys efforts to renegotiate the lease on terms consistent with current
commercial rental market conditions, the Companys current financial condition
and its lack of need for the space. Efforts to resolve the matter are
continuing. At December 29, 2002, the Company has accrued $12.3 million
related to the property in connection with the restructuring activities
undertaken in the fourth quarter of fiscal 2002.

Except as so noted, the Company is not a party to, and its property is not
subject to any pending legal proceedings other than ordinary routine litigation
incidental and not material to the Companys business. The Company does not
believe such routine litigation, taken individually or in the aggregate, will
have a material adverse effect on the Companys business, financial condition,
or results of operations.

NOTE 13: SUBSEQUENT EVENT

At the Companys Annual Shareholders meeting held on February 5, 2003,
shareholders approved a proposal to authorize the Companys Board of Directors,
in its discretion to effect a reverse stock split. The Companys Board of
Directors approved a 1-for-5 reverse stock split. The 1-for-5 reverse stock
split will be effective on Monday, February 24, 2003. No fractional shares
will be issued and holders of less than one share will receive cash in lieu of
fractional shares. Basic and diluted net loss per
share for the three-month period ending December 29, 2002 is based upon
pre-split shares.

11



---



##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information should be read in conjunction with the unaudited consolidated
condensed financial statements and the notes thereto included in Part I, Item 1
of this Quarterly Report; and Item 1, Business, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, and Item 8,
Financial Statements and Supplementary Data and notes thereto, in the Annual
Report for the fiscal year 2002 as filed on Form 10-K.

FORWARD LOOKING INFORMATION

Certain statements in this Managements Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbor created by those sections. These statements include, but
are not limited to: the Companys expectation that the industry trend toward
fewer average head gimbal assemblies per head stack assembly and competitive
pricing pressures will continue; the Companys expectation that it will achieve
and maintain acceptable yields on its GMR programs; the Companys expectation
for increased revenue and unit growth in fiscal 2003; the Companys plan to
acquire $25-30 million in capital equipment during fiscal 2003, including the
potential acquisition of certain assets through operating leases; the Companys
plan to pursue opportunities to continue to improve the efficiency of its
operations, and the Companys belief that the Company and the individual
defendants in the purported class actions (collectively, the Actions)
described in Part II, Item 1 Legal Proceedings, have meritorious defenses in
such Actions. Actual results for future periods could differ materially from
those projected in such forward-looking statements.

Some factors which could cause future actual results to materially differ from
the Companys recent results or those projected in the forward-looking
statements include, but are not limited to: failure by the Company to timely,
effectively and continuously execute on GMR product development; failure to
obtain necessary customer qualifications on new programs; failure to timely and
cost-effectively introduce those programs into manufacturing, and failure to
achieve and maintain acceptable production yields on those programs;
introduction of competitors products more quickly or cost effectively than the
Companys products; constraints on supplies of raw materials or components
limiting the Companys ability to maintain or increase production; the
anticipated trend of increases in areal density not occurring; significant
increases or decreases in demand for the Companys products, cancellation or
rescheduling of customer orders, changes to the Companys product mix, and
changes in business conditions affecting the Companys financial position or
results of operations which significantly increase the Companys working
capital needs; the Companys inability to obtain or generate sufficient capital
to fund its research and development expenses, capital expenditures, operating
losses and other working capital needs; or failure by the Company to obtain
favorable resolution of the claims set forth in the Actions. For a more
detailed discussion of certain risks associated with the Companys business,
see Certain Additional Business Risks. The Company undertakes no obligation
to update forward-looking statements to reflect events or circumstances
occurring after the date of such statements.

Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States require the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and expenses, and related disclosures. The Company
bases the estimates on historical experience, knowledge of economic and market
factors and various other assumptions that it believes to be reasonable under
the circumstances. Actual results may differ materially from these estimates
if the assumptions or conditions turn out to be incorrect. The Company
believes the following critical accounting policies are affected by significant
estimates, assumptions and judgments used in the preparation of the Companys
consolidated financial statements.

Long-lived assets. The Company evaluates the carrying value of long-lived
assets, consisting primarily of property, plant and equipment, whenever certain
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Such events or circumstances include, but are
not limited to, a prolonged industry downturn, a current period operating cash
flow loss combined with a history of operating cash flow losses, or significant
reductions in projected future cash flows. The Companys business is highly
capital intensive, with demand for products highly variable and difficult to
predict. The Company had limited participation on 40 gigabyte per platter
3.5-inch hard disk drive products during fiscal year 2002 and the transition to
80 GB per 3.5-inch platter

12



---



##### Table of Contents



programs is not expected to occur until the end of the second quarter of fiscal
2003. As a result, the Company had significantly lower sales in fiscal 2002
and in the first quarter of fiscal 2003 as compared to fiscal 2001 and the
first quarter of fiscal 2002, respectively. In addition, the Company incurred
a loss of $46 million in the first quarter of fiscal 2003 and expects to incur
a loss for the first half of fiscal 2003. In assessing the recoverability of
long-lived assets, the Company compares the carrying value to the undiscounted
future cash flows the assets are expected to generate. If the total of the
undiscounted future cash flows is less than the carrying amount of the assets,
the assets will be written down based on the excess of the carrying amount over
the fair value of the assets. Fair value would generally be determined by
calculating the discounted future cash flows using a discount rate based upon
the Companys weighted average cost of capital or based on assets estimated
market value. Based upon the estimate of the future undiscounted cash flows,
the Company has not recognized an impairment loss for the assets related to the
hard disk drive head operations. The Company recognized an asset impairment
loss of $3.3 million for its tape head operations. Significant judgments and
assumptions are required in the forecast of future operating results used in
the preparation of the estimated future cash flows, including long-term
forecasts of overall market conditions, the availability of debt or equity
financing, and the Companys timely participation in the next generation 80
gigabyte products. In its analysis, the Company has assumed qualification and
volume shipments of its 80 gigabyte products late in the second fiscal quarter
of 2003, with the expectation of a return to its 2001 level of profitability in
the second half of fiscal 2003. Changes in the Companys estimates of future
operating results could have a material adverse effect on the assessment of the
long-lived assets, thereby requiring the Company to write down the assets.

Inventory Valuation. The Company is dependent on a few customers and a limited
number of product programs for each customer. Because its products are
custom-built, the Company typically cannot shift raw materials, work-in-process
or finished goods from customer to customer, or from one program to another for
a particular customer. The Company regularly assesses the valuation of
inventories and writes down those inventories that are obsolete or in excess of
the forecasted usage to the estimated realizable values. It is the Companys
policy to write-off inventory on hand in excess of six months forecasted sales
volumes. Adjustments may be made to take into account the product life cycles,
which typically range from 6 to 12 months, the maturity of the product (whether
a newly introduced product or a product approaching its end-of-life), and the
impact of competitors product announcements. The Company believes that six
months is an appropriate period for assessing inventory write-off requirements
because it is difficult to accurately forecast for a specific product beyond
this time frame due to potential introducing of new products by competitors,
technology obsolescence or fluctuation in demand for the Companys products.
If market conditions are less favorable than the Companys forecast or if
actual demand from the customers is lower than the estimates, the Company may
be required to record additional inventory write-downs. Conversely, if demand
is higher than expected due to a change in mix or forecast, the Company may
sell inventory that had previously been written down.

Allowance for bad debt. The Company is dependent on a limited number of
customers. As a result, the Companys trade accounts receivable is highly
concentrated. While the Company performs ongoing credit reviews of its
customers and has established an allowance for bad debt, a significant
deterioration in the credit-worthiness of any significant customer may result
in additional charges to increase the allowance for bad debt.

LIQUIDITY AND CAPITAL RESOURCES

The Companys consolidated financial statements are prepared and presented on a
going concern basis. As of December 29, 2002, the Company had an accumulated
deficit of $654.0 million and incurred a net loss of $46.1 million for the
three-month period ended December 29, 2002. As of December 29, 2002, the
Company had cash and cash equivalents of $13.2 million, a working capital
deficit of $47.7 million, total assets of $227.5 million and total liabilities
of $173.6 million.

Cash used in operating activities was $13.0 million. The cash utilization was
the result of the loss for the three-month period of $46.1 million, offset by
the depreciation and amortization of $21.7 million and the impairment of
property, plant and equipment for the tape head assets of $3.3 million. Cash
was also provided by a reduction in inventory balances of $5.6 million and an
increase in accounts payable and accrued liabilities of $3.2 million. The
reduction in inventory balances was mainly attributed to a scheduled plant
shutdown the last week of December 2002.

Cash utilized by investing activities totaled $1.6 million. During the
quarter, the Company incurred capital expenditures of $4.0 million. The
Companys plan for capital equipment purchases during fiscal 2003 for its head
gimbal assembly, head stack assembly and tape head business is approximately
$25-30 million.

13



---



##### Table of Contents



Cash provided by financing activities was $6.3 million primarily as the result
of the net proceeds from a secured credit facility, offset by $2.1 million in
scheduled debt payments. In December 2002, the Company entered into a $30
million credit facility with Tennenbaum Capital Partners, LLC (formerly Special
Value Investment Management, LLC). The amount available under the loan
facility is subject to a borrowing base formula calculated on the Companys
domestic cash balances, eligible accounts receivable balances and appraised
value of domestic equipment. The Company drew $10.2 million representing the
amount available under the facility, on December 27, 2002, and paid a facility
fee of $1.5 million in connection with the transaction. Receipts from
customers are remitted to a restricted account and may only be withdrawn by the
Company if the eligible accounts receivable and appraised value of domestic
equipment exceeds the amount borrowed under the facility. Eligibility of the
non-U.S. accounts receivable, for purposes of the borrowing base formula, is
contingent on the satisfaction of certain conditions. The Company is working
on satisfying these conditions. As of February 2003, these conditions had not
yet been satisfied which prevents the Companys ability to draw additional
amounts under the credit facility. The remaining funds can be borrowed under
the facility, subject to the borrowing base formula, on or before September 30,
2003, with a December 2005 maturity date. The interest rate is based upon the
Eurodollar rate plus 10%. As of December 29, 2002, the interest rate on the
$10.2 million was at 11.4%, exclusive of the amortization of issuance costs and
the valuation of the warrants issued. The obligations under the credit
agreement are secured by substantially all of the domestic assets of the
Company. The agreement requires the Company to maintain certain financial
covenants and observe a series of additional covenants. The Company
anticipates being out of compliance with certain covenants and has secured a
limited waiver of these covenants through March 31, 2003. The Company is in
discussions with the lender concerning the anticipated noncompliance for the
Companys third fiscal quarter of 2003. The Company expects it will be
successful in obtaining a waiver or amendment for its anticipated noncompliance
in the third fiscal quarter of 2003 with respect to certain covenants, however,
there can be no assurance that the Company will obtain such waiver or
amendment. If the Company is not successful in obtaining a waiver or amendment
of these covenants for the Companys third fiscal quarter of 2003, the lender
has the right to demand immediate payment of the debt.

In connection with the loan facility, the Company has issued to affiliates of
Tennenbaum Capital Partners, LLC, a warrant to purchase approximately 24
million shares of common stock in the Company at $0.27 per share, which was the
closing market price of the Companys common stock on December 23, 2003.
Additional shares may be issued under this warrant if the Company issues stock
at a price below $0.27, provided that the aggregate number of shares issuable
under the warrant does not exceed 19.9% of the outstanding common stock. A
cash adjustment to the exercise price would be provided if the number of shares
to be issued under the antidilution provisions exceeded 19.9% of the
outstanding common stock. Because the number of shares to be issued under the
warrant is not fixed and may be partially settled in cash, this instrument is
not classified within equity and it is subject to accounting under Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). Under SFAS No. 133, the warrant will
be accounted for at fair value with changes in fair value recorded currently in
earnings. The fair value of the warrant at December 29, 2002 was calculated as
$2.7 million using the Black-Scholes valuation method, utilizing a volatility
factor of 0.8, risk-free interest rate of 2.5% and an expected life of 7 years.
The fair value of the warrant will be recognized as a component of interest
expense over the life of the related debt. The warrant is immediately
exercisable and expires in December 2009.

The Company estimates it will need to raise additional capital through debt,
including increased availability under the $30 million secured credit facility,
equity offerings, or by selling assets in the second fiscal quarter of 2003.
The Company believes that its ability to fund its operating and capital
requirements for fiscal 2003 and its ability to obtain financing are dependent,
in part, on timely qualification and volume shipments of HGAs and HSAs for
customers 80 gigabyte per platter programs. Design changes on 80 gigabyte
programs made in the first fiscal quarter of 2003 are demonstrating improved
manufacturing yields which will be critical to the high volume ramp of these
products. In addition, these new designs are resulting in excellent
performance internally and at customer sites. Qualifications are expected late
in the second fiscal quarter of 2003. There can be no assurance, however, that
the Company will be successful on these programs. Even if the Company
successfully qualifies for customers 80 gigabyte programs, additional
financing may not be sufficient to fund its operations until it achieves
positive cash flow, or its sales of products for customers 80 gigabyte
programs may not result in positive cash flow or net income. There is no
assurance that additional financing will be available on terms and conditions
acceptable or favorable to the Company and its stockholders, if at all. If the
Company does not achieve timely customer qualifications, is unsuccessful at
ramping up volume production on new products at acceptable yields, or is
unsuccessful in obtaining sufficient financing, the Companys operations will
be materially negatively impacted and

14



---



##### Table of Contents



it will be required to take actions that will harm its business, including
potentially ceasing certain or all of its operations.

RESULTS OF OPERATIONS

NET SALES

Net sales from continuing operations for the three-month period ended December
29, 2002 decreased $86.9 million to $49.1 million compared to $135.9 million
for the same period last year. The decrease in sales is attributed to lower
unit shipments and lower pricing for the first fiscal quarter of 2003 as
compared to the first fiscal quarter of 2002. During the first fiscal quarter
of 2003, the Company shipped 8.4 million HGAs, including HGAs shipped as HSAs,
compared to 21.5 million HGAs (including HGAs shipped as HSAs) in the first
fiscal quarter of 2002. Lower unit shipments during the first fiscal quarter
of 2003 is the result of the Companys late and limited participation on
customers 40 gigabyte per platter program combined with delays in shipments
and qualification on 80 gigabyte programs. The Company was primarily shipping
product supporting customers 20 gigabyte programs during the first fiscal
quarter of 2002.


Head gimbal assemblies accounted for 56% of net sales during the first fiscal
quarter of 2003 versus 63% of net sales during the first fiscal quarter of
2002. Head stack assemblies accounted for 35% of net sales during the first
fiscal quarter of 2003 compared to 31% of net sales during the first quarter of
fiscal 2002. There was an average of 1.9 HGAs per head stack assembly for
the first fiscal quarter of 2003, compared to 2.38 HGAs per head stack assembly
for the first fiscal quarter of 2002.

GROSS MARGIN

The Companys gross margins are primarily influenced by four factors: the
level of unit sales in relation to fixed costs, average selling prices
(ASPs), manufacturing yields and product mix. As a result of the Companys
limited participation on customers 40 gigabyte per platter programs, the lower
volume significantly impacted the Companys gross margin. Pricing was also
impacted, as the average price of HGAs was lower for the first fiscal quarter
of 2003 compared to the same period last year. Lower pricing and volume
resulted in a negative gross margin of $29.7 million for the three-month period
ended December 29, 2002, compared to a positive gross margin of $21.7 million
for the same period last year.


OPERATING EXPENSES

RESEARCH AND DEVELOPMENT

Research and development expenses were $9.6 million for the three-month period
ended December 29, 2002 as compared to $12.4 million for the three-month period
ended December 30, 2001. The decrease in expenditures is primarily attributed
to reduction in workforce and lower depreciation expense.


SELLING, GENERAL & ADMINISTRATIVE

Selling, general and administrative (SG&A) expenses were $3.7 million for the
three-month period ended December 29, 2002 as compared to $6.0 million for the
three-month period ended December 30, 2001. The lower expense is primarily due
to a reduction in workforce and a $0.7 million reversal of the allowance for
bad debt for the first fiscal quarter of 2003 as compared to the first fiscal
quarter of 2002.


IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

The Company incurred an asset impairment charge of $3.3 million in the
three-month period ended December 29, 2002 as a result of an impairment
analysis for the Companys tape head assets.


NON-OPERATING EXPENSES

INTEREST EXPENSE

Interest expense was $1.0 million for the quarter ended December 29, 2002 as
compared to $1.1 million for the same period last year. The slight decrease in
interest expense is due to lower interest rates for the quarter ended December
29, 2002 compared to the quarter ended December 30, 2001. The Company expects
an increase in interest expense for the remainder of fiscal 2003 as a result of
the secured credit facility completed at the end of the first fiscal quarter of
2003. Borrowings under the credit facility currently bear interest at a rate
of 11.4%, exclusive of the amortization of issuance costs and the valuation of
the warrants issued.


15



---



##### Table of Contents



INTEREST INCOME AND OTHER, NET

Interest income and other, net for the quarter ended December 29, 2002 was an
expense of $0.5 million compared to income of $2.7 million for the quarter
ended December 30, 2001. The decrease in income is the result of a decrease of
approximately $1.0 million in interest income due to significantly lower cash
investments in the first fiscal quarter of 2003 compared to the same period
last year. The Company also incurred a $0.4 million charge to write-down an
investment in Tessera, Inc. in the first quarter of fiscal 2003. In addition,
higher income in the three-month period of 2002 was attributable to rental
income of $0.8 million on the Companys excess space in the Philippines during
the first quarter of fiscal 2002 and a foreign exchange gain of $0.2 million
during the first quarter of fiscal 2002 compared to no rental income and an
foreign exchange loss of $0.4 million for the three-month period ended December
29, 2002. The Company also converted $0.7 million of 6.5% convertible bonds to
equity, realizing a gain of $0.2 million during the quarter ended December 30,
2001.


INCOME TAXES

The Company recorded no tax expense for the first quarter of fiscal 2003
compared to a tax expense of $0.05 million for the first fiscal quarter of
2002. The tax provisions in both years reflect no benefit for net operating
losses until realized, federal alternative minimum taxes, and foreign taxes.


GAIN ON SALE OF SUBSIDIARY

The Company sold its interest in Scion Photonics, Inc. to JDS Uniphase in April
2002. In accordance with the acquisition agreement, additional amounts were
receivable by the Company pending the settlement of contingencies related to
the sale. During the quarter ending December 29, 2002, the Company received
$1.4 million pursuant to the settlement of those contingencies and recorded a
gain on the disposal of the subsidiary of $1.4 million.


CERTAIN ADDITIONAL BUSINESS RISKS

The Companys business, financial condition and operating results can be
affected by a number of factors, including but not limited to those set forth
below, any one of which could cause the Companys actual results to vary
materially from recent results or from the Companys anticipated future
results.

Financial Resources and The Companys Ability To Continue As a Going Concern Is Uncertain

The Companys consolidated financial statements have been prepared on the
assumption that it will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The independent auditors report on the financial statements of the
Company as of and for the fiscal year ended September 29, 2002 included herein
contains an explanatory paragraph pointing out that the Companys need for
additional capital in fiscal 2003 to fund the Companys operating and capital
requirements and which condition raises substantial doubt about the Companys
ability to continue as a going concern.

As of December 29, 2002, the Company had cash and cash equivalents totaling
$13.2 million and the Company had a working capital deficit of $47.7 million.
In December 2002, the Company entered into a $30 million credit facility with
Tennenbaum Capital Partners, LLC (formerly Special Value Investment Management,
LLC). The amount available under the loan facility is subject to a borrowing
base formula calculated on the Companys domestic cash balances, eligible
accounts receivable balances and appraised value of domestic equipment. The
Company drew $10.2 million the amount available under the facility, on December
27, 2002, and paid a facility fee of $1.5 million in connection with the
transaction. Receipts from customers are remitted to a restricted account and
may only be withdrawn by the Company if the eligible accounts receivable and
appraised value of domestic equipment exceeds the amount borrowed under the
facility. Eligibility of the non-U.S. accounts receivable, for purposes of the
borrowing base formula, is contingent on the satisfaction of certain
conditions. The Company is working to satisfy these conditions. As of
February 2003, these conditions had not been satisfied which prevents the
Companys ability to draw additional amounts under the credit facility. The
remaining funds can be borrowed under the facility, subject to the borrowing
base formula, on or before September 30, 2003, with a December 2005 maturity
date. The interest rate is based upon the Eurodollar rate plus 10%. As of
December 29, 2002, the interest rate on the $10.2 million was at 11.4%,
exclusive of the amortization of issuance costs and the valuation of the
warrants issued. The obligations under the credit agreement are secured by
substantially all of the domestic assets of the Company. The agreement
requires the Company to maintain certain financial covenants and observe a
series of additional covenants. The Company anticipates being out of
compliance with certain covenants and has secured a limited waiver of these
covenants through March 31, 2003. The Company is in discussions with the
lender concerning the anticipated noncompliance for the Companys third fiscal
quarter of 2003. The Company expects it will be

16



---



##### Table of Contents



successful in obtaining a waiver or amendment for its anticipated noncompliance
in the third fiscal quarter of 2003 with respect to certain covenants, however,
there can be no assurance that the Company will obtain such waiver or
amendment. If the Company is not successful in obtaining a waiver of these
covenants for the Companys third fiscal quarter of 2003, the lender has the
right to demand immediate payment of the debt.

The Company expects losses and negative cash flow to continue, which will
require the Company to obtain additional capital or pursue other strategic
alternatives. It is uncertain whether the Company will be able to obtain a
sufficient amount of additional capital on acceptable terms, or at all.
Further, if future financing requirements are satisfied through the issuance of
equity or debt securities, investors may experience additional dilution in
terms of their percentage ownership of the Companys securities. In the event
that the Company is unable to obtain additional capital or is not successful in
qualification of its products for customers 80 gigabyte per platter programs,
the Companys operations will be materially negatively impacted and it will be
required to take actions that will harm its business, including potentially
ceasing certain or all of its operations.

Rapid Technological Change

Technology changes rapidly in the Companys industry. These rapid changes
require the Company both to address obsolescence of old technologies and to
anticipate new technologies. There can be no assurance that the Companys R&D
efforts will be successful in the development of new technologies or that if
successful, that the Company will be able to obtain qualifications in customer
programs or transition the technologies into commercially viable products.
Failure to smoothly transition from old technologies or to anticipate and
execute on new technologies can have a material adverse effect on the Companys
business, financial condition and results of operations. For example, during
fiscal 2002, the Company experienced difficulty making the transition to the 40
GB technology, and, as a result, had limited participation on customers 40
gigabyte per platter programs which resulted in significantly lower sales and a
loss from continuing operations of $231 million. The Company is currently in
the process of qualifying product for customers 80 gigabyte per platter
programs. The Company anticipates qualifications on 80 gigabyte products late
in the second fiscal quarter of 2003. Failure to qualify on these programs
would likely delay positive cash flow. Given the Companys current cash
position, discussed below, such a delay in achieving positive cash flow would
have a material adverse effect on the Companys business, financial condition
and results of operations.

The Company expects to continue investing significant resources in GMR and in
other thin film magnetic product development and manufacturing equipment. In
November 2002, the Company announced it had achieved an areal density of 146
gigabits per square inch using perpendicular recording technology. There can
be no assurance, however, that the Company will be successful in timely and
cost effectively developing and manufacturing heads for future programs using
perpendicular recording technology, or other future technologies, at acceptable
manufacturing yields as is needed to achieve consistent design wins on
customers new product programs.

Dependence on a Limited Number of Customers; Risk of Reduced or Cancelled Orders

The Company is a component supplier dependent upon a limited number of
customers in a volatile industry characterized by rapid technological change,
short product life cycles, intense competition, frequent delivery schedule
changes and steady price erosion. In addition, demand for the Companys
products is highly variable and thus difficult to predict accurately. These
factors, as well as the demand for personal computers, can materially and
adversely affect the Companys business, financial condition and results of
operations.

The Companys largest customers are Western Digital, Maxtor and Samsung,
representing 49%, 27%, and 15%, respectively, of the Companys net sales during
fiscal 2002. Western Digital and Samsung accounted for 89% of the sales in the
first fiscal quarter of 2003. Given the small number of high performance disk
drive and tape drive manufacturers who require an independent source of head
gimbal assemblies, head stack assemblies or tape head supply, the Company will
continue to be dependent upon a limited number of customers. The loss of any
large customer, or a significant decrease in or cancellation of orders from one
or more large customers, will have a material adverse effect on the Companys
business, financial condition and results of operations. In addition, this
dependence upon a limited number of customers means that acquisitions,
consolidations or other material agreements affecting such customers could also
have a material adverse effect on the Companys business, financial condition
and operating results. Acquisitions or significant transactions by the
Companys customers leading to further consolidation, vertical integration or
other material agreements could also materially and adversely affect the
Companys business, financial condition and results of operations.

17



---



##### Table of Contents



Dependence on a Limited Number of Suppliers

As a high technology company in a narrowly defined industry, the Company is
often dependent upon a limited number of suppliers and subcontractors, and in
some cases on single sources, for critical components or supplies. The Company
has particularly limited alternative sources of certain key materials, such as
wafer substrates, photo resist and suspensions, and frequently must rely on a
single equipment supplier for a given type of equipment due to lack of viable
alternatives or to insure process consistency. Furthermore, the Companys
customers generally determine the suppliers in advance. The Companys
suppliers may, in the future, be unwilling to extend credit or provide the
Company with the required services based upon the financial resources of the
Company, which are currently limited as described in Financial Resources and
the Companys Ability to Continue as a Going Concern is Uncertain above.
Limitations on or interruption in the supply of certain components or supplies
can severely and adversely affect the Companys production and results of
operations.

Dependence on Single Manufacturing & Assembly Facilities

The Company has one wafer fabrication facility in Fremont, California and
operates in one location in Thailand for its head gimbal and head stack
assembly operations. In addition, the Company uses one wafer fabrication
facility, which it subleases from JDS Uniphase, in Milpitas, California for its
tape head operations, and one location in the Philippines for its tape head
assembly operations. The Companys wafer fabrication facilities, and a
majority of its administration and data processing functions, are located in a
seismically active area that has experienced major earthquakes in the past. A
fire, flood, earthquake or other disaster affecting any of these locations may
have an adverse effect on the Companys business, financial condition and
results of operations.

Complex Manufacturing Processes

The Companys manufacturing processes involve numerous complex steps. Minor
deviations can cause substantial manufacturing yield loss and, in some cases,
can cause production to be suspended. Manufacturing yields for new products
initially tend to be lower as the Company completes product development and
commences volume manufacturing, and thereafter yields typically increase as the
Company ramps to full production. The Companys forward product pricing
reflects this assumption of improving manufacturing yields and, as a result,
material variances between projected and actual manufacturing yields have a
direct effect on the Companys gross margin and profitability. The difficulty
of forecasting manufacturing yields accurately and maintaining cost
competitiveness through improving manufacturing yields will continue to be
magnified by the ever-increasing process complexity of manufacturing GMR
products. Further, short product cycles require that the Company produce new
products at higher volume and acceptable manufacturing yields without, in many
cases, reaching the longer-term, higher volume manufacturing cycle which is
more conducive to higher manufacturing yields and declining costs.

In addition, the HSA business carries certain risks and demands in addition to
those of the HGA business. Among those risks are lower gross margins,
increased exposure to inventory obsolescence due to the larger number of parts
required for an HSA and the fact that each HSA program requires unique
components with long lead-time purchasing cycles and varying product life spans
between different HSA models.

International Operations

The Companys production process is labor intensive. As a result, the Company
conducts substantially all of its head gimbal assembly machining, assembly and
test operations, head stack assembly and tape head assembly operations
offshore, and is thus subject to the many risks associated with contracting
with foreign vendors and suppliers and with the ownership and operation of
foreign manufacturing facilities. These risks include the need to obtain
requisite governmental permits and approvals, currency exchange fluctuations
and restrictions, variable or higher tax rates, expiration of tax holidays,
political instability, changes in government policies relating to foreign
investment and operations, cultural issues, labor problems, trade restrictions,
transportation delays and interruptions, and changes in tariff and freight
rates. The Company has from time to time experienced labor organization
activities at certain of its foreign operations. At this time none of the
Companys employees are represented by a union. There can be no assurance,
however, that the Company will continue to be successful in avoiding work
stoppages or other labor issues in the future.

18



---



##### Table of Contents



In addition, several Asian countries, including Thailand and the Philippines,
experience fluctuations in the value of their currencies relative to the U.S.
dollar. The Company is unable to predict what effect, if any, these factors
will have on its ability to manufacture products in these markets. The Company
enters into foreign currency forward and option contracts in an effort to
manage exposure related to certain foreign currency commitments, foreign
currency denominated balance sheet positions and anticipated foreign currency
denominated expenditures. There can be no assurance, however, that the
Companys attempts to manage these exposures will be successful.

Substantial Capital Expenditures; Asset Utilization

The Companys business is highly capital intensive. The Company has made
substantial capital expenditures and installed significant production capacity
to support new technologies and anticipated increased demand for its products.
The Company made capital expenditures for its magnetic head operations during
fiscal 2002 of $49.7 million compared to $84 million during fiscal 2001. A
significant percentage of the capital expenditures in fiscal years 2001 and
2002 were for the round wafer conversion. The Company expects capital
expenditures to be between $25-30 million in fiscal 2003. To maintain its
market position, the Company must anticipate demand for its products and the
path of new technologies so that production capacity, both in terms of amount
and the proper technologies, will be in place to meet customers needs.
Accurate capacity planning is complicated by the pace of technological change,
unpredictable demand variations, the effects of variable manufacturing yields,
and the fact that most of the Companys plant and equipment expenditures have
long lead times, requiring major commitments well in advance of actual
requirements. The Companys underestimation or overestimation of its capacity
requirements, or its failure to successfully and timely put in place the proper
technologies, could have a material adverse effect on the Companys business,
financial condition and results of operations.

Fluctuations in demand can also lead to under-utilization of assets and the
consideration of asset impairment charges. The carrying value of property,
plant and equipment is reviewed if the facts and circumstances suggest that
property, plant and equipment may be impaired. An impairment review requires
management to make certain estimates and judgments regarding future cash flows
that management expects to be generated by groups of assets. In assessing the
recoverability of long-lived assets, the Company compares the carrying value to
the undiscounted future cash flows the assets are expected to generate. If the
total of the undiscounted future cash flows is less than the carrying amount of
the assets, the assets will be written down based on the excess of the carrying
amount over the fair value of the assets. Fair value would generally be
determined by calculating the discounted future cash flows using a discount
rate based upon the Companys weighted average cost of capital. Significant
judgments and assumptions are required in the forecast of future operating
results used in the preparation of the estimated future cash flows, including
long-term forecasts of overall market conditions and the expected successful
execution of the Companys business strategy in that market. These assumptions
include forecasts regarding revenue, gross margins, and other operating
expenditures. Because the Company operates in a volatile industry,
characterized by rapid technological change, these assumptions are inherently
subject to change in the near term and may result in an adverse impact on
earnings. For example, in the first fiscal quarter of 2003, the Company
recorded a $3.3 million impairment charge related to tape head assets.

Inventory Risks; Custom Product Risks

Due to the cyclical nature of and rapid technological change in the hard disk
drive industry, the Companys inventory is subject to substantial risk. To
address these risks, the Company monitors its inventories on a periodic basis
and provides inventory write-downs intended to cover inventory risks. However,
the Company is dependent on a few customers and a limited number of product
programs for each customer. The magnitude of the commitments the Company must
make to support its customers programs is very large and the Company has
limited remedies in the event of program cancellations. The Company believes
it is common practice for disk drive manufacturers to place orders in excess of
requirements and to change or cancel outstanding purchase orders in response to
rapidly shifting business conditions. If a customer cancels or materially
reduces orders for one or more product programs, or experiences financial
difficulties, the Company may be required to take significant inventory
charges, which in turn could materially and adversely affect the Companys
business, financial condition and results of operations.

The Company manufactures custom products for a limited number of customers.
Because its products are custom-built, the Company typically cannot shift raw
materials, work-in-process or finished goods from customer to customer, or from
one product program to another for a particular customer. However, to enable
its customers to get products to market quickly and to address its customers
demand requirements, the Company must invest substantial

19



---



##### Table of Contents



resources and make significant materials commitments, often before obtaining
formal customer qualifications and generally before the market prospects for
its customers products are clear. Moreover, given the rapid pace of
technology advancement in the disk drive industry, the disk drive products that
do succeed typically have very short life cycles. Finally, in response to
rapidly shifting business conditions, some of the Companys customers have
generally sought to limit purchase order commitments to the Company, and have
done so by employing what is known in the industry as JIT (Just-in-Time) hubs.
If the customer does not have demand from its end customer, the customer will
not pull the inventory from the JIT hub and thus the Company may be left with
excess and or obsolete inventory, which increases inventory risk.

In fiscal 2002, the Company incurred special charges totaling $36.7 million
primarily relating to 40 gigabyte per platter inventory. The Company may be
required to take additional inventory write-downs in the future due to the
Companys inability to obtain necessary product qualifications, or due to order
cancellations by customers.

Dependence on Key Personnel

The Companys future performance depends on the continued service of key
members of management and its highly skilled research and development and
manufacturing personnel. If the Company is unable to retain the existing
employees or hire and integrate new employees, it may have an adverse effect on
the Companys business, financial condition and results of operations.

Intellectual Property & Proprietary Rights

Read-Rite has over 300 U.S. and foreign patents, generally having terms of 20
years from their filing dates, and many additional U.S. and foreign
applications pending. In addition, Read-Rite has a variety of licenses and
cross-licenses with other companies within the industry such as IBM, Seagate
and TDK for certain uses of those companies patents. The Company knows that
its success depends on the innovative skills and technical competence of its
employees and upon proper protection of its intellectual property. Despite
Read-Rites protective measures, there can be no assurance that such measures
will be adequate to protect its proprietary rights or that the Companys
competitors will not independently develop or patent technologies that are
equivalent or superior to the Companys technology.

The Company has, from time to time, been notified of claims that it may be
infringing patents owned by others. To the extent that the Company receives
additional claims of infringement from others in the future, where necessary or
desirable, the Company may seek licenses under patents that it is allegedly
infringing. Although patent holders commonly offer such licenses, no assurance
can be given that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. Defending a claim of infringement
or the failure to obtain a key patent license from a third party could cause
the Company to incur substantial liabilities and/or to suspend the
manufacturing of the products utilizing the patented invention.

Fluctuations in Operating Results

The Companys business is capital intensive, and hence carries significant
fixed costs. The Company has experienced substantial fluctuations in its
quarterly and annual operating results in the past, and the Companys future
operating results could vary substantially from quarter to quarter. The
Companys operating results for a particular quarter or longer periods can be
materially and adversely affected by numerous factors, such as increased
competition or execution issues leading to a failure by the Company to obtain
design wins on one or more customer programs; delayed product introductions or
capacity constraints on certain technologies; decreased demand for or decreased
average selling prices for the Companys products; low product manufacturing
yields; increased returns or rework; changes in product mix; increased
operating costs associated with the ramp-up of production as capacity is added
or under-utilization of capacity if demand is less than anticipated; increased
material costs or material or equipment unavailability; disruptions in domestic
or foreign operations; and general economic conditions. The Companys net
sales are generally made pursuant to individual purchase orders that may be
changed or canceled by customers on short notice, often without material
penalties. Changes or cancellations of product orders could result in
under-utilization of production capacity and inventory write-offs. In the last
three quarters of fiscal 2002, the Company experienced significantly lower
shipments as a result of its late and limited participation on customers 40
gigabyte per platter programs. As a consequence, the Company experienced a
significant reduction in net sales, a negative gross margin and incurred
significant losses in fiscal 2002.

20



---



##### Table of Contents



Volatility of Stock Price

The trading price of the Companys common stock is expected to continue to be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products
by the Company or its competitors, qualifications on volume shipment programs
from major customers, general conditions in the disk drive and computer
industries, general economic conditions and other events or factors. In
addition, stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market price of
securities issued by many high technology companies, in many cases for reasons
unrelated to the operating performance of the specific companies. The
Companys common stock has experienced volatility not necessarily related to
announcements of Company performance. Broad market fluctuations may adversely
affect the market price of the Companys common stock.

Potential NASDAQ National Market Delisting Of The Companys Common Stock

The Companys common stock trades on the NASDAQ national market, which
specifies certain requirements for the continued listing of such securities.
One of these requirements is that the minimum closing bid price per share not
fall below $1.00 for more than 30 consecutive business days in a row. On
August 8, 2002, NASDAQ notified the Company that the minimum closing bid price
for the Companys common stock had fallen below the specified level for 30
consecutive business days, and therefore the Companys common stock was subject
to delisting from the NASDAQ National Market unless this deficiency was
remedied within 90 days. On November 7, 2002, the Company was contacted by
NASDAQ and advised that subject to the Companys right to a hearing, its common
stock would be delisted from the NASDAQ stock market quotation system as its
stock had not achieved a minimum bid price of at least $1.00 for ten
consecutive trading days during the 90 days subsequent to the original notice
from NASDAQ on August 8, 2002. The Company requested a hearing to appeal the
notice of delisting on November 14, 2002 with the NASDAQ Listing Qualifications
Panel. That hearing occurred on December 19, 2002, at which time the Company
requested the delisting be delayed until after the Companys annual
shareholders meeting in February 2003. At the shareholders meeting on
February 5, 2003, the shareholders approved a proposal to allow the Companys
Board of Directors, in its discretion to authorize a reverse stock split of
between 1  5 and 1  20. The Board of Directors approved a 1-for-5 reverse
stock split effective February 24, 2003.

There is no assurance that the Company will continue to satisfy the bid price
requirement or other NASDAQ requirements for continued listing on the NASDAQ
National Market. If the Companys common stock were to be delisted, it would
seriously limit the liquidity of the common stock and impair the Companys
potential to raise future capital through the sale of the Companys securities,
which would have a material adverse effect on the Companys business.
Delisting could also reduce the ability of holders of the Companys common
stock to purchase or sell shares as quickly and inexpensively as they have done
historically, and could have an adverse effect on the trading price of the
Companys common stock. Delisting could also adversely affect the Companys
relationships with vendors and customers.

Regulatory Changes

Recently enacted and proposed changes in securities laws and related regulation
could result in increased costs to the Company. Recently enacted and proposed
changes in the laws and regulations affecting public companies including the
provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and
NASDAQ could result in increased costs to the Company as it evaluates the
implications of any new rules and responds to the requirements. The new rules
could make it more difficult for the Company to obtain certain types of
insurance, including directors and officer liability insurance and the Company
may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact
of these events could also make it more difficult for the Company to attract
and retain qualified persons to serve on the Companys board of directors, or
as executive officers. The Company is presently evaluating and monitoring
developments with respect to new and proposed rules and cannot predict or
estimate the amount of the additional costs the Company may incur or the timing
of such costs.

21



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys market risk has not changed significantly from the risks
disclosed in Part II, Item 7A of the Companys Annual Report on Form 10-K for
fiscal year 2002 under the heading Quantitative and Qualitative Disclosures
About Market Risk.




PART II. OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS

For information on Legal Proceedings see Note 12 to the Companys Consolidated
Condensed Financial Statements in Part 1 of this report on Form 10-Q, which
information is incorporated herein by reference.




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Companys 2003 Annual Meeting of Stockholders was held on Wednesday,
February 5, 2003 at the Companys Fremont, California manufacturing facility.
At the meeting 121,119,675 shares were entitled to vote and 111,951,073 shares
were presented by proxy.



| |  | Proposal 1. ELECTION OF THE BOARD OF DIRECTORS. A Board of Directors
consisting of five
directors to serve for the
ensuing year or until their successors are duly elected and qualified. The
following are the votes received by the nominees for Board of Directors, all
of whom were elected:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |                |             |                |  |  |           | 
|------------------- |  | -------------- | ----------- | -------------- |  |  | --------- | 
|NAME OF NOMINEE     |  | VOTES CAST FOR |             | VOTES WITHHELD
|                    |  |                |             |               
|Cyril J. Yansouni   |  |                | 109,522,341 |                |  |  | 3,288,327 | 
|Matthew J. ORourke |  |                | 107,164,266 |                |  |  | 5,646,402 | 
|William J. Almon    |  |                | 107,153,155 |                |  |  | 5,657,513 | 
|Robert M. White     |  |                | 107,267,961 |                |  |  | 5,542,707 | 
|Alan S. Lowe        |  |                | 109,464,846 |                |  |  | 3,345,822 | 



| |  | Proposal 2. PROPOSAL TO AUTHORIZE THE BOARD OF DIRECTORS, IN ITS
DISCRETION, SHOULD IT DEEM IT TO BE APPROPRIATE AND IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS, TO AMEND THE CERTIFICATE OF INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT OF THE COMPANYS COMMON STOCK BY A RATIO OF
BETWEEN 1 FOR 5 AND 1 FOR 20, INCLUSIVE, WITHOUT FURTHER APPROVAL OR
AUTHORIZATION OF THE COMPANYS STOCKHOLDERS. The proposal to authorize the
Board of Directors to amend the Certificate of Incorporation to effect a
reverse stock split of the Companys Common Stock by a ratio of between 1 for
5 and 1 for 20 was approved with 109,484,546 votes in favor, 3,250,390 votes
against, and 75,195 abstentions.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Proposal 3. RATIFICATION OF INDEPENDENT AUDITORS. The ratification of
independent auditors provides for the appointment of Ernst & Young LLP as
independent auditors for the 2003 fiscal year. The stockholders approved the
ratification of independent auditors with 110,917,431 voting in favor,
1,602,254 voting against and 290,983 abstentions.                                                                                                                                                                                                                                                                                                                                                                     




Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K

There were no Reports on Form 8-K filed during the first quarter of fiscal
2003.

22



---



##### Table of Contents






SIGNATURE

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

|                        |  |                       |  |                                                                                  
|----------------------- |  | --------------------- |  | ---------------------------------------------------------------------------------
|                        |  | READ-RITE CORPORATION
|                        |  |                       |  |                                                                                  
|Date: February 12, 2003 |  | By:                   |  | /s/ Andrew C. Holcomb

Senior Vice President, Finance and
Chief Financial Officer

23



---



##### Table of Contents



READ-RITE CORPORATION

CERTIFICATIONS


I, Alan S. Lowe, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Read-Rite Corporation;

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

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

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



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

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



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

6. The registrants other certifying
officers and I have indicated in this quarterly report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: February 12, 2003



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | By: /s/ ALAN S. LOWE 
     _______________________________________ 
     Name: Alan S. Lowe 
     Title:  President & Chief Executive Officer

61



---



##### Table of Contents



READ-RITE CORPORATION

CERTIFICATIONS


I, Andrew C. Holcomb, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Read-Rite Corporation;

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

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

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



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

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



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

6. The registrants other certifying
officers and I have indicated in this quarterly report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: February 12, 2003



| |                          
| | -------------------------
| | By: /s/ ANDREW C. HOLCOMB
| |                          
| | Name: Andrew C. Holcomb  

| |        |                                                    
| | ------ | ---------------------------------------------------
| | Title: | Senior Vice President & Chief Financial
    Officer

62



---



##### Table of Contents






EXHIBIT INDEX

99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.