##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the period ended July 2, 2005                                                           
|          
|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: 001-16447


Maxtor Corporation


(Exact name of registrant as specified in its charter)


|                                                                                 |  |                                         
|-------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                         |  | 77-0123732                              
|(State or other jurisdiction of
    incorporation or organization)               |  | (I.R.S. Employer
    Identification No.)
|                                                                                
|500 McCarthy Boulevard,
    Milpitas, CA(Address of principal executive offices) |  | 95035(Zip Code)                         

Registrants telephone number, including area code:


(408) 894-5000


þ o


þ o












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MAXTOR CORPORATION


FORM 10-Q


July 2, 2005


INDEX


|                                  |  |                                                                                                                                  |    |      |    | 
|--------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                  |  |                                                                                                                                  |    | Page |   
|                                  |  |                                                                                                                                  |    |      |   
|PART I. FINANCIAL
    INFORMATION
|Item 1.                           |  | Condensed Consolidated Financial Statements
    (Unaudited)                                                                      |    |      | 2  | 
|                                  |  | Condensed Consolidated Balance
    Sheets  July 2, 2005, and December 25, 2004
    (Unaudited)                                  |    |      | 2  | 
|                                  |  | Condensed Consolidated Statements of
    Operations  Three and six months ended July 2,
    2005, and June 26, 2004 (Unaudited) |    |      | 3  | 
|                                  |  | Condensed Consolidated Statements of Cash
    Flows  Six months ended July 2, 2005, and
    June 26, 2004 (Unaudited)           |    |      | 4  | 
|                                  |  | Notes to Condensed Consolidated Financial
    Statements (Unaudited)                                                             |    |      | 5  | 
|Item 2.                           |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                        |    |      | 18 | 
|Item 3.                           |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                                   |    |      | 43 | 
|Item 4.                           |  | Controls and Procedures                                                                                                          |    |      | 43 | 
|                                 
|PART II. OTHER INFORMATION       
|Item 1.                           |  | Legal Proceedings                                                                                                                |    |      | 46 | 
|Item 2.                           |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                                                                  |    |      | 46 | 
|Item 3.                           |  | Defaults Upon Senior Securities                                                                                                  |    |      | 46 | 
|Item 4.                           |  | Submission of Matters to a Vote of Security
    Holders                                                                          |    |      | 47 | 
|Item 5.                           |  | Other Information                                                                                                                |    |      | 47 | 
|Item 6.                           |  | Exhibits                                                                                                                         |    |      | 47 | 
|Signature Page                    |  |                                                                                                                                  | 48 |     
|EXHIBIT 10.1                     
|EXHIBIT 10.3                     
|EXHIBIT 31.1                     
|EXHIBIT 31.2                     
|EXHIBIT 32.1                     
|EXHIBIT 32.2                     



1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION







|        |                                                            
|------- | -----------------------------------------------------------
|Item 1. | Condensed Consolidated Financial Statements
    (Unaudited)

MAXTOR CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              |  |            |         |           | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ------- | ------------ |  | ---------- | ------- | --------- | 
|                                           |                                                                                                                                                                                                                                                  | July 2,                                    |            |         | December 25, | 
|                                           |                                                                                                                                                                                                                                                  | 2005                                       |            |         | 2004         | 
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | (Unaudited)                                |           
|                                           |                                                                                                                                                                                                                                                  | (In thousands, except share                |           
|                                           |                                                                                                                                                                                                                                                  | and per share amounts)                     |           
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                                                                                                  |                                            |            |         |              |  |            |        
|                                           | Cash and cash equivalents                                                                                                                                                                                                                        |                                            | $          | 335,992 |              |  | $          | 378,065 |          
|                                           | Restricted cash                                                                                                                                                                                                                                  |                                            |            | 14,273  |              |  |            | 24,561  |          
|                                           | Marketable securities                                                                                                                                                                                                                            |                                            |            | 89,279  |              |  |            | 103,969 |          
|                                           | Accounts receivable, net of allowance of doubtful accounts of
    $8,992 at July 2, 2005 and $8,228 at December 25, 2004                                                                                                                         |                                            |            | 404,104 |              |  |            | 425,528 |          
|                                           | Other receivables                                                                                                                                                                                                                                |                                            |            | 16,184  |              |  |            | 40,838  |          
|                                           | Inventories                                                                                                                                                                                                                                      |                                            |            | 264,443 |              |  |            | 229,410 |          
|                                           | Prepaid expenses and other                                                                                                                                                                                                                       |                                            |            | 33,561  |              |  |            | 36,336  |          
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | Total current assets                       |            |         | 1,157,836    |  |            |         | 1,238,707 | 
|Property, plant and equipment, net         |                                                                                                                                                                                                                                                  |                                            | 337,818    |         |              |  | 347,934    |        
|Goodwill                                   |                                                                                                                                                                                                                                                  |                                            | 489,482    |         |              |  | 489,482    |        
|Other intangible assets, net               |                                                                                                                                                                                                                                                  |                                            | 1,014      |         |              |  | 1,450      |        
|Other assets                               |                                                                                                                                                                                                                                                  |                                            | 11,593     |         |              |  | 30,168     |        
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | Total assets                               |            | $       | 1,997,743    |  |            | $       | 2,107,741 | 
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|Current liabilities:                       |                                                                                                                                                                                                                                                  |                                            |            |         |              |  |            |        
|                                           | Short-term borrowings, including current portion of long-term
    debt                                                                                                                                                                           |                                            | $          | 21,808  |              |  | $          | 82,561  |          
|                                           | Accounts payable                                                                                                                                                                                                                                 |                                            |            | 643,105 |              |  |            | 674,947 |          
|                                           | Accrued and other liabilities                                                                                                                                                                                                                    |                                            |            | 330,271 |              |  |            | 324,369 |          
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | Total current liabilities                  |            |         | 995,184      |  |            |         | 1,081,877 | 
|Long-term debt, net of current portion     |                                                                                                                                                                                                                                                  |                                            | 362,757    |         |              |  | 382,570    |        
|Other liabilities                          |                                                                                                                                                                                                                                                  |                                            | 63,524     |         |              |  | 66,695     |        
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | Total liabilities                          |            |         | 1,421,465    |  |            |         | 1,531,142 | 
|Stockholders equity:                      |                                                                                                                                                                                                                                                  |                                            |            |         |              |  |            |        
|                                           | Preferred stock, $0.01 par value, 95,000,000 shares
    authorized; no shares issued or outstanding                                                                                                                                              |                                            |            |        |              |  |            |        |          
|                                           | Common stock, $0.01 par value, 525,000,000 shares
    authorized; 266,955,129 shares issued and
    253,709,391 shares outstanding at July 2, 2005 and
    263,413,578 shares issued and 250,167,840 shares
    outstanding at December 25, 2004 |                                            |            | 2,669   |              |  |            | 2,634   |          
|Additional paid-in capital                 |                                                                                                                                                                                                                                                  |                                            | 2,441,749  |         |              |  | 2,429,551  |        
|Accumulated deficit                        |                                                                                                                                                                                                                                                  |                                            | (1,805,900 | )       |              |  | (1,795,183 | )      
|Cumulative other comprehensive income      |                                                                                                                                                                                                                                                  |                                            | 2,699      |         |              |  | 4,536      |        
|Treasury stock (13,245,738 shares) at cost |                                                                                                                                                                                                                                                  |                                            | (64,939    | )       |              |  | (64,939    | )      
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | Total stockholders equity                 |            |         | 576,278      |  |            |         | 576,599   | 
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 
|                                           |                                                                                                                                                                                                                                                  | Total liabilities and stockholders equity |            | $       | 1,997,743    |  |            | $       | 2,107,741 | 
|                                           |                                                                                                                                                                                                                                                  |                                            |            |         |              | 



2



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MAXTOR CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |             |         |   |           |             |         | 
|------------------------------------ | ----------------------------------- | -------------------------------------------------- | ------- | ----------- | ---------------- | - | ------- | ------------ | ------- | - | ------------- | ----------- | ------- | - | --------- | ----------- | ------- | 
|                                     |                                     | Three Months Ended                                 |         |             | Six Months Ended |  
|                                     |                                     |                                                    |         |             |                  |  
|                                     |                                     | July 2, 2005                                       |         |             | June 26, 2004    |   |         | July 2, 2005 |         |   | June 26, 2004 |            
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|                                     |                                     | (Unaudited)                                        |         |             | (Unaudited)      |  
|                                     |                                     | (In thousands, except share and per share amounts) |        
|Net revenues                         |                                     | $                                                  | 924,729 |             |                  | $ | 818,254 |              |         | $ | 1,994,330     |             |         | $ | 1,837,942 |            
|Cost of revenues                     |                                     |                                                    | 802,936 |             |                  |   | 745,771 |              |         |   | 1,756,133     |             |         |   | 1,611,699 |            
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|                                     | Gross profit                        |                                                    |         | 121,793     |                  |   |         | 72,483       |         |   |               | 238,197     |         |   |           | 226,243     |        
|Operating expenses:                  |                                     |                                                    |         |             |                  |   |         |              |         |   |               |             |         |   |           |            
|                                     | Research and development            |                                                    |         | 68,318      |                  |   |         | 79,188       |         |   |               | 146,869     |         |   |           | 162,543     |        
|                                     | Selling, general and administrative |                                                    |         | 37,216      |                  |   |         | 33,083       |         |   |               | 74,518      |         |   |           | 66,042      |        
|                                     | Amortization of intangible assets   |                                                    |         | 219         |                  |   |         | 5,053        |         |   |               | 436         |         |   |           | 25,889      |        
|                                     | Restructuring charges               |                                                    |         | 710         |                  |   |         |             |         |   |               | 14,564      |         |   |           |            |        
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|                                     |                                     | Total operating expenses                           |         |             | 106,463          |   |         |              | 117,324 |   |               |             | 236,387 |   |           |             | 254,474 | 
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|Income (loss) from operations        |                                     |                                                    | 15,330  |             |                  |   | (44,841 | )            |         |   | 1,810         |             |         |   | (28,231   | )          
|Interest expense                     |                                     |                                                    | (7,673  | )           |                  |   | (7,141  | )            |         |   | (16,074       | )           |         |   | (16,073   | )          
|Interest income                      |                                     |                                                    | 2,293   |             |                  |   | 1,082   |              |         |   | 4,649         |             |         |   | 2,370     |            
|Income from litigation settlement    |                                     |                                                    |        |             |                  |   | 24,750  |              |         |   |              |             |         |   | 24,750    |            
|Other gain (loss)                    |                                     |                                                    | 18      |             |                  |   | 16      |              |         |   | (250          | )           |         |   | 54        |            
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|Income (loss) before income taxes    |                                     |                                                    | 9,968   |             |                  |   | (26,134 | )            |         |   | (9,865        | )           |         |   | (17,130   | )          
|Provision for income taxes           |                                     |                                                    | 524     |             |                  |   | 317     |              |         |   | 852           |             |         |   | 591       |            
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|Net income (loss)                    |                                     | $                                                  | 9,444   |             |                  | $ | (26,451 | )            |         | $ | (10,717       | )           |         | $ | (17,721   | )          
|                                     |                                     |                                                    |         |             |                  |   |         |              |         |   |               |            
|Net income (loss) per share          |                                     |                                                    |         |             |                  |   |         |              |         |   |               |             |         |   |           |            
|                                     |  basic                             |                                                    | $       | 0.04        |                  |   | $       | (0.11        | )       |   | $             | (0.04       | )       |   | $         | (0.07       | )      
|                                     |  diluted                           |                                                    | $       | 0.04        |                  |   | $       | (0.11        | )       |   | $             | (0.04       | )       |   | $         | (0.07       | )      
|Shares used in per share calculation |                                     |                                                    |         |             |                  |   |         |              |         |   |               |             |         |   |           |            
|                                     |  basic                             |                                                    |         | 253,310,023 |                  |   |         | 247,367,176  |         |   |               | 252,431,153 |         |   |           | 246,981,817 |        
|                                     |  diluted                           |                                                    |         | 255,543,219 |                  |   |         | 247,367,176  |         |   |               | 252,431,153 |         |   |           | 246,981,817 |        



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MAXTOR CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |         |          |        |          |          |  
|-------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------- | ------ | -------- | ------- | -------- | ------ | -------- | -------- | -
|                                                                                                         |                                                                            | Six Months Ended                  |                                                                                   
|                                                                                                         |                                                                            |                                   |                                                                                   
|                                                                                                         |                                                                            | July 2,                           |                                                                                    |        | June 26, |        
|                                                                                                         |                                                                            | 2005                              |                                                                                    |        | 2004     |        
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|                                                                                                         |                                                                            | (Unaudited)                       |                                                                                   
|                                                                                                         |                                                                            | (In thousands)                    |                                                                                   
|Cash Flows from Operating Activities:                                                                    |                                                                            |                                   |                                                                                    |        |          |         |          |       
|Net loss                                                                                                 |                                                                            | $                                 | (10,717                                                                            | )      |          | $       | (17,721  | )     
|Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:            |                                                                            |                                   |                                                                                    |        |          |         |          |       
|                                                                                                         | Depreciation and amortization                                              |                                   |                                                                                    | 75,114 |          |         |          | 69,464 |         
|                                                                                                         | Amortization of intangible assets                                          |                                   |                                                                                    | 436    |          |         |          | 25,889 |         
|                                                                                                         | Stock-based compensation expense                                           |                                   |                                                                                    | 83     |          |         |          | 182    |         
|                                                                                                         | Restructuring charge, net                                                  |                                   |                                                                                    | 14,462 |          |         |          |       |         
|                                                                                                         | Loss on sale of property, plant and equipment                              |                                   |                                                                                    | 434    |          |         |          | 460    |         
|                                                                                                         | Other                                                                      |                                   |                                                                                    | 69     |          |         |          |       |         
|                                                                                                         | Changes in assets and liabilities:                                         |                                   |                                                                                    |        |          |         |          |        |         
|                                                                                                         |                                                                            | Accounts receivable               |                                                                                    |        | 21,424   |         |          |        | 168,798  |         
|                                                                                                         |                                                                            | Other receivables                 |                                                                                    |        | 24,654   |         |          |        | (1,268   | )       
|                                                                                                         |                                                                            | Inventories                       |                                                                                    |        | (35,033  | )       |          |        | (41,328  | )       
|                                                                                                         |                                                                            | Prepaid expenses and other assets |                                                                                    |        | 1,618    |         |          |        | 1,131    |         
|                                                                                                         |                                                                            | Accounts payable                  |                                                                                    |        | (38,021  | )       |          |        | (110,988 | )       
|                                                                                                         |                                                                            | Accrued and other liabilities     |                                                                                    |        | (11,731  | )       |          |        | (138,345 | )       
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|                                                                                                         |                                                                            |                                   | Net cash provided by (used in) operating activities from
    continuing operations |        |          | 42,792  |          |        |          | (43,726  | )
|                                                                                                         |                                                                            |                                   | Net cash used in discontinued operations                                           |        |          |        |          |        |          | (795     | )
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|                                                                                                         |                                                                            |                                   | Net cash provided by (used in) operating activities                                |        |          | 42,792  |          |        |          | (44,521  | )
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|Cash Flows from Investing Activities:                                                                    |                                                                            |                                   |                                                                                    |        |          |         |          |       
|Proceeds from sale of property, plant and equipment                                                      |                                                                            |                                   | 46                                                                                 |        |          |         | 736      |       
|Purchase of property, plant and equipment                                                                |                                                                            |                                   | (59,299                                                                            | )      |          |         | (94,048  | )     
|Decrease (increase) in restricted assets                                                                 |                                                                            |                                   | 28,387                                                                             |        |          |         | (7,882   | )     
|Maturities and sales of marketable securities                                                            |                                                                            |                                   | 54,804                                                                             |        |          |         | 25,892   |       
|Purchase of marketable securities                                                                        |                                                                            |                                   | (40,387                                                                            | )      |          |         | (45,522  | )     
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|                                                                                                         |                                                                            |                                   | Net cash used in investing activities                                              |        |          | (16,449 | )        |        |          | (120,824 | )
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|Cash Flows from Financing Activities:                                                                    |                                                                            |                                   |                                                                                    |        |          |         |          |       
|Proceeds from issuance of debt, including short-term borrowings                                          |                                                                            |                                   |                                                                                   |        |          |         | 24,655   |       
|Principal payments of debt including short-term borrowings                                               |                                                                            |                                   | (28,276                                                                            | )      |          |         | (4,401   | )     
|Principal payments under capital lease obligations                                                       |                                                                            |                                   | (2,290                                                                             | )      |          |         | (8,719   | )     
|Net proceeds from receivable-backed borrowing                                                            |                                                                            |                                   |                                                                                   |        |          |         | 49,748   |       
|Repayment of receivable-backed borrowing                                                                 |                                                                            |                                   | (50,000                                                                            | )      |          |         | (50,000  | )     
|Proceeds from issuance of common stock from employee stock
    purchase plan and stock options exercised |                                                                            |                                   | 12,150                                                                             |        |          |         | 10,913   |       
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|                                                                                                         |                                                                            |                                   | Net cash provided by (used in) financing activities                                |        |          | (68,416 | )        |        |          | 22,196   |  
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|Net change in cash and cash equivalents                                                                  |                                                                            |                                   | (42,073                                                                            | )      |          |         | (143,149 | )     
|Cash and cash equivalents at beginning of period                                                         |                                                                            |                                   | 378,065                                                                            |        |          |         | 530,816  |       
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|Cash and cash equivalents at end of period                                                               |                                                                            | $                                 | 335,992                                                                            |        |          | $       | 387,667  |       
|                                                                                                         |                                                                            |                                   |                                                                                    |        |          |        
|Supplemental Disclosures of Cash Flow Information:                                                       |                                                                            |                                   |                                                                                    |        |          |         |          |       
|                                                                                                         | Cash paid during the period for:                                           |                                   |                                                                                    |        |          |         |          |        |         
|                                                                                                         |                                                                            | Interest                          |                                                                                    | $      | 13,834   |         |          | $      | 14,225   |         
|                                                                                                         |                                                                            | Income taxes                      |                                                                                    | $      | 1,240    |         |          | $      | 2,807    |         
|Schedule of Non-Cash Investing and Financing Activities:                                                 |                                                                            |                                   |                                                                                    |        |          |         |          |       
|                                                                                                         | Purchase of property, plant and equipment financed by accounts
    payable |                                   | $                                                                                  | 10,959 |          |         | $        | 7,469  |         
|                                                                                                         | Retirement of debt in exchange for bond redemption                         |                                   | $                                                                                  | 5,000  |          |         | $        | 5,000  |         



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation





| |                 
| | ----------------
| | Use of Estimates





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





| |                
| | ---------------
| | Fiscal Calendar





|   |                                 
|-- | --------------------------------
|2. | Recent Accounting Pronouncements





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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                         
|-- | ------------------------
|3. | Stock-Based Compensation





|                                                                                                     |                             |                    |       |       |                  |   |         |         |   |   |          |         |   |   |         |         |  
|---------------------------------------------------------------------------------------------------- | --------------------------- | ------------------ | ----- | ----- | ---------------- | - | ------- | ------- | - | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                                     |                             | Three Months Ended |       |       | Six Months Ended |  
|                                                                                                     |                             |                    |       |       |                  |  
|                                                                                                     |                             | July 2,            |       |       | June 26,         |   |         | July 2, |   |   | June 26, |        
|                                                                                                     |                             | 2005               |       |       | 2004             |   |         | 2005    |   |   | 2004     |        
|                                                                                                     |                             |                    |       |       |                  |   |         |         |   |   |          |        
|Net income (loss), as reported                                                                       |                             | $                  | 9,444 |       |                  | $ | (26,451 | )       |   | $ | (10,717  | )       |   | $ | (17,721 | )      
|Add: Stock-based employee compensation expense included in net
    income (loss)                     |                             |                    | 70    |       |                  |   | 38      |         |   |   | 83       |         |   |   | 182     |        
|Deduct: Total stock-based compensation expense determined under
    fair value method for all awards |                             |                    | 3,446 |       |                  |   | 4,392   |         |   |   | 7,364    |         |   |   | 9,895   |        
|                                                                                                     |                             |                    |       |       |                  |   |         |         |   |   |          |        
|                                                                                                     | Pro forma net income (loss) |                    | $     | 6,068 |                  |   | $       | (30,805 | ) |   | $        | (17,998 | ) |   | $       | (27,434 | )
|                                                                                                     |                             |                    |       |       |                  |   |         |         |   |   |          |        
|Net income (loss) per share                                                                          |                             |                    |       |       |                  |   |         |         |   |   |          |         |   |   |         |        
|                                                                                                     | As reported  basic         |                    | $     | 0.04  |                  |   | $       | (0.11   | ) |   | $        | (0.04   | ) |   | $       | (0.07   | )
|                                                                                                     | Pro forma  basic           |                    | $     | 0.02  |                  |   | $       | (0.12   | ) |   | $        | (0.07   | ) |   | $       | (0.11   | )
|                                                                                                     | As reported  diluted       |                    | $     | 0.04  |                  |   | $       | (0.11   | ) |   | $        | (0.04   | ) |   | $       | (0.07   | )
|                                                                                                     | Pro forma  diluted         |                    | $     | 0.02  |                  |   | $       | (0.12   | ) |   | $        | (0.07   | ) |   | $       | (0.11   | )



|                               |  |                    |            |   |                  |  |           |         |  |  |            |   |  |  |           |  
|------------------------------ |  | ------------------ | ---------- | - | ---------------- |  | --------- | ------- |  |  | ---------- | - |  |  | --------- | -
|                               |  | Three Months Ended |            |   | Six Months Ended | 
|                               |  |                    |            |   |                  | 
|                               |  | July 2,            |            |   | June 26,         |  |           | July 2, |  |  | June 26,   |  
|                               |  | 2005               |            |   | 2004             |  |           | 2005    |  |  | 2004       |  
|                               |  |                    |            |   |                  |  |           |         |  |  |            |  
|Risk-free interest rate        |  |                    | 3.87       | % |                  |  | 2.82      | %       |  |  | 3.88       | % |  |  | 2.82      | %
|Weighted average expected life |  |                    | 4.5  years |   |                  |  | 4.5 years |         |  |  | 4.5  years |   |  |  | 4.5 years |  
|Volatility                     |  |                    | 72         | % |                  |  | 73        | %       |  |  | 72         | % |  |  | 73        | %
|Dividend yield                 |  |                    |           |   |                  |  |          |         |  |  |           |   |  |  |          |  

6



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |  |                    |            |   |                  |  |           |         |  |  |            |   |  |  |           |  
|------------------------------ |  | ------------------ | ---------- | - | ---------------- |  | --------- | ------- |  |  | ---------- | - |  |  | --------- | -
|                               |  | Three Months Ended |            |   | Six Months Ended | 
|                               |  |                    |            |   |                  | 
|                               |  | July 2,            |            |   | June 26,         |  |           | July 2, |  |  | June 26,   |  
|                               |  | 2005               |            |   | 2004             |  |           | 2005    |  |  | 2004       |  
|                               |  |                    |            |   |                  |  |           |         |  |  |            |  
|Risk-free interest rate        |  |                    | 2.86       | % |                  |  | 1.01      | %       |  |  | 2.86       | % |  |  | 1.01      | %
|Weighted average expected life |  |                    | 0.5  years |   |                  |  | 0.6 years |         |  |  | 0.5  years |   |  |  | 0.6 years |  
|Volatility                     |  |                    | 74         | % |                  |  | 76        | %       |  |  | 74         | % |  |  | 76        | %
|Dividend yield                 |  |                    |           |   |                  |  |          |         |  |  |           |   |  |  |          |  





|   |                   
|-- | ------------------
|4. | Balance Sheet Data

|                                               |                                                 |                |           |         |              |   |           |         | 
|---------------------------------------------- | ----------------------------------------------- | -------------- | --------- | ------- | ------------ | - | --------- | ------- | 
|                                               |                                                 | July 2,        |           |         | December 25, |  
|                                               |                                                 | 2005           |           |         | 2004         |  
|                                               |                                                 |                |           |         |              |  
|                                               |                                                 | (In thousands) |          
|Inventories:                                   |                                                 |                |           |         |              |   |           |        
|                                               | Raw materials                                   |                | $         | 86,703  |              |   | $         | 79,904  | 
|                                               | Work-in-process                                 |                |           | 50,172  |              |   |           | 57,800  | 
|                                               | Finished goods                                  |                |           | 127,568 |              |   |           | 91,706  | 
|                                               |                                                 |                |           |         |              |  
|                                               |                                                 | $              | 264,443   |         |              | $ | 229,410   |        
|                                               |                                                 |                |           |         |              |  
|Prepaid expenses and other:                    |                                                 |                |           |         |              |   |           |        
|                                               | Prepaid expenses                                |                | $         | 10,824  |              |   | $         | 11,913  | 
|                                               | Asset held for sale                             |                |           | 8,200   |              |   |           | 8,200   | 
|                                               | Vendor down payment                             |                |           | 7,628   |              |   |           |        | 
|                                               | Investments in equity securities, at fair value |                |           | 3,411   |              |   |           | 10,042  | 
|                                               | Other                                           |                |           | 3,498   |              |   |           | 6,181   | 
|                                               |                                                 |                |           |         |              |  
|                                               |                                                 | $              | 33,561    |         |              | $ | 36,336    |        
|                                               |                                                 |                |           |         |              |  
|Property, plant and equipment:                 |                                                 |                |           |         |              |   |           |        
|                                               | Buildings                                       |                | $         | 163,428 |              |   | $         | 155,172 | 
|                                               | Machinery and equipment                         |                |           | 664,602 |              |   |           | 659,324 | 
|                                               | Software                                        |                |           | 84,851  |              |   |           | 86,014  | 
|                                               | Furniture and fixtures                          |                |           | 27,214  |              |   |           | 27,604  | 
|                                               | Leasehold improvements                          |                |           | 90,482  |              |   |           | 91,571  | 
|                                               |                                                 |                |           |         |              |  
|                                               |                                                 | $              | 1,030,577 |         |              | $ | 1,019,685 |        
|Less accumulated depreciation and amortization |                                                 |                | (692,759  | )       |              |   | (671,751  | )      
|                                               |                                                 |                |           |         |              |  
|Property, plant and equipment, net             |                                                 | $              | 337,818   |         |              | $ | 347,934   |        
|                                               |                                                 |                |           |         |              |  

7



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                               |                                              |                |         |         |              |   |         |         | 
|------------------------------ | -------------------------------------------- | -------------- | ------- | ------- | ------------ | - | ------- | ------- | 
|                               |                                              | July 2,        |         |         | December 25, |  
|                               |                                              | 2005           |         |         | 2004         |  
|                               |                                              |                |         |         |              |  
|                               |                                              | (In thousands) |        
|Accrued and other liabilities: |                                              |                |         |         |              |   |         |        
|                               | Accrued warranty                             |                | $       | 201,898 |              |   | $       | 185,940 | 
|                               | Accrued payroll and payroll-related expenses |                |         | 48,701  |              |   |         | 59,524  | 
|                               | Restructuring liabilities, short-term        |                |         | 18,271  |              |   |         | 9,707   | 
|                               | Income taxes payable                         |                |         | 7,381   |              |   |         | 7,605   | 
|                               | Accrued expenses                             |                |         | 54,020  |              |   |         | 61,593  | 
|                               |                                              |                |         |         |              |  
|                               |                                              | $              | 330,271 |         |              | $ | 324,369 |        
|                               |                                              |                |         |         |              |  
|Other liabilities:             |                                              |                |         |         |              |   |         |        
|                               | Restructuring liabilities, long-term         |                | $       | 40,600  |              |   | $       | 43,911  | 
|                               | Tax indemnification liability                |                |         | 8,760   |              |   |         | 8,760   | 
|                               | Other                                        |                |         | 14,164  |              |   |         | 14,024  | 
|                               |                                              |                |         |         |              |  
|                               |                                              | $              | 63,524  |         |              | $ | 66,695  |        
|                               |                                              |                |         |         |              |  



|   |                                     
|-- | ------------------------------------
|5. | Goodwill and Other Intangible Assets



|                              |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |          |         |          |   |         |         |   |   |         |       |   | 
|----------------------------- | -------------------- | -------- |  | -------------- | -------- | - | ------- | ------------ | ----------------- | - | -------------- | ------- | -------- | --- | ------- | -------- | ------ | - | ----------- | ------------ | - | ----- | ---------- | ------ | ------- | --- | -------- | ------- | -------- | - | ------- | ------- | - | - | ------- | ----- | - | 
|                              |                      |          |  | July 2, 2005   |          |   |         |              | December 25, 2004 |   |                |        
|                              |                      |          |  |                |          |   |         |              |                   |   |                |        
|                              |                      | Useful   |  |                | Gross    |   |         |              |                   |   |                | Gross   |          |     |         |          |       
|                              |                      | Life     |  |                | Carrying |   |         | Accumulated  |                   |   | Asset          |         |          |     |         | Carrying |        |   | Accumulated |              |   | Asset |            |        |        
|                              |                      | (Years)  |  |                | Amount   |   |         | Amortization |                   |   | Impairment     |         |          | Net |         |          | Amount |   |             | Amortization |   |       | Impairment |        |         | Net |         
|                              |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |         
|                              |                      |          |  | (In thousands) |          |   |         |              |                   |   | (In thousands) |         |          |     |         |         
|Goodwill                      |                      |          |  |                |          | $ | 489,482 |              |                   |   |               |         |          |     |        |          |        | $ | 489,482     |              |   | $     | 489,482    |        |         |     |         |         |          |   |        |         |   | $ | 489,482 |      
|                              |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |         
|Quantum HDD                   |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |          |         |          |   |         |         |   |   |         |      
|Existing Technology           |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |          |         |          |   |         |         |   |   |         |      
|                              | Core technology      |          |  | 5              |          |   | $       | 96,700       |                   |   | $              | (72,525 | )        |     | $       | (24,175  | )      |   | $           |             |   |       | $          | 96,700 |         |     | $        | (72,525 | )        |   | $       | (24,175 | ) |   | $       |      |  
|                              | Consumer electronics |          |  | 3              |          |   |         | 8,900        |                   |   |                | (8,900  | )        |     |         |         |        |   |             |             |   |       |            | 8,900  |         |     |          | (8,900  | )        |   |         |        |   |   |         |      |  
|                              |                      | High-end |  |                | 3        |   |         |              | 75,500            |   |                |         | (75,500  | )   |         |          |       |   |             |              |  |       |            |        | 75,500  |     |          |         | (75,500  | ) |         |         |  |   |         |       |  | 
|                              |                      | Desktop  |  |                | 3        |   |         |              | 105,000           |   |                |         | (105,000 | )   |         |          |       |   |             |              |  |       |            |        | 105,000 |     |          |         | (105,000 | ) |         |         |  |   |         |       |  | 
|MMC Technology                |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |          |         |          |   |         |         |   |   |         |      
|                              | Existing technology  |          |  | 5              |          |   |         | 4,350        |                   |   |                | (3,336  | )        |     |         |         |        |   |             | 1,014        |   |       |            | 4,350  |         |     |          | (2,900  | )        |   |         |        |   |   |         | 1,450 |  
|                              |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |         
|Total other intangible assets |                      |          |  |                |          | $ | 290,450 |              |                   | $ | (265,261       | )       |          | $   | (24,175 | )        |        | $ | 1,014       |              |   | $     | 290,450    |        |         | $   | (264,825 | )       |          | $ | (24,175 | )       |   | $ | 1,450   |      
|                              |                      |          |  |                |          |   |         |              |                   |   |                |         |          |     |         |          |        |   |             |              |   |       |            |        |         |     |         

8



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                         
|-- | ----------------------------------------
|6. | Short-term Borrowings and Long-term Debt



|                                                 |  |         |         |   |              |   |         |  
|------------------------------------------------ |  | ------- | ------- | - | ------------ | - | ------- | -
|                                                 |  | July 2, |         |   | December 25, |  
|                                                 |  | 2005    |         |   | 2004         |  
|                                                 |  |         |         |   |              |  
|6.8% Convertible Senior Notes due April 30, 2010 |  | $       | 230,000 |   |              | $ | 230,000 |  
|5.75% Subordinated Debentures due March 1, 2012  |  |         | 59,031  |   |              |   | 59,311  |  
|Economic Development Board of Singapore Loans    |  |         |        |   |              |   | 27,148  |  
|Manufacturing Facility Loan, Suzhou China        |  |         | 60,000  |   |              |   | 60,000  |  
|Mortgages                                        |  |         | 31,734  |   |              |   | 32,582  |  
|Equipment Loans and Capital Leases               |  |         | 3,800   |   |              |   | 6,090   |  
|Receivables-Backed Borrowings                    |  |         |        |   |              |   | 50,000  |  
|                                                 |  |         |         |   |              |  
|                                                 |  |         | 384,565 |   |              |   | 465,131 |  
|Less amounts due within one year                 |  |         | (21,808 | ) |              |   | (82,561 | )
|                                                 |  |         |         |   |              |  
|                                                 |  | $       | 362,757 |   |              | $ | 382,570 |  
|                                                 |  |         |         |   |              |  







9



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












10



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|   |           
|-- | ----------
|7. | Guarantees



| |                                                  
| | -------------------------------------------------
| | Intellectual Property Indemnification Obligations





| |                 
| | ----------------
| | Accrued Warranty





|                               |  |                    |         |      |                  |   |         |         |  |   |          |     |  |   |          |     
|------------------------------ |  | ------------------ | ------- | ---- | ---------------- | - | ------- | ------- |  | - | -------- | --- |  | - | -------- | ----
|                               |  | Three Months Ended |         |      | Six Months Ended |  
|                               |  |                    |         |      |                  |  
|                               |  | July 2,            |         |      | June 26,         |   |         | July 2, |  |   | June 26, |    
|                               |  | 2005               |         |      | 2004             |   |         | 2005    |  |   | 2004     |    
|                               |  |                    |         |      |                  |   |         |         |  |   |          |    
|Balance at beginning of period |  | $                  | 206,006 |      |                  | $ | 191,325 |         |  | $ | 185,940  |     |  | $ | 209,426  |     
|Charges to operations          |  |                    | 47,565  |      |                  |   | 40,403  |         |  |   | 99,984   |     |  |   | 79,834   |     
|Settlements                    |  |                    | (42,239 | )    |                  |   | (48,689 | )       |  |   | (89,579  | )   |  |   | (105,196 | )   
|Changes in estimates           |  |                    | (9,434  | )(2) |                  |   | (3,427  | )(1)    |  |   | 5,553    | (2) |  |   | (4,452   | )(1)
|                               |  |                    |         |      |                  |   |         |         |  |   |          |    
|Balance at end of period       |  | $                  | 201,898 |      |                  | $ | 179,612 |         |  | $ | 201,898  |     |  | $ | 179,612  |     
|                               |  |                    |         |      |                  |   |         |         |  |   |          |    

11



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)







|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Primarily related to product expirations.                                                                                                                                                                                    
|   
|(2) | Comprises changes in the estimated cost of repair; changes in
    expected return rates; changes due to product expirations and
    changes in estimates related to specific non-standard claims
    received from customers.







|   |              
|-- | -------------
|8. | Restructuring





12



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                             |  |                    |      |   |                        |   |      |       |  |   |      |  
|---------------------------- |  | ------------------ | ---- | - | ---------------------- | - | ---- | ----- |  | - | ---- | -
|                             |  | Facilities-Related |      |   | Severance and Benefits |   |      | Total | 
|                             |  |                    |      |   |                        |   |      |       | 
|                             |  | (In millions)      |     
|Balance at December 25, 2004 |  | $                  | 51.3 |   |                        | $ | 2.2  |       |  | $ | 53.5 |  
|Amounts paid                 |  |                    | (1.2 | ) |                        |   | (1.7 | )     |  |   | (2.9 | )
|Adjustments                  |  |                    |     |   |                        |   | (0.3 | )     |  |   | (0.3 | )
|Accruals                     |  |                    |     |   |                        |   | 14.2 |       |  |   | 14.2 |  
|                             |  |                    |      |   |                        |   |      |       | 
|Balance at April 2, 2005     |  |                    | 50.1 |   |                        |   | 14.4 |       |  |   | 64.5 |  
|Amounts paid                 |  |                    | (1.8 | ) |                        |   | (4.5 | )     |  |   | (6.3 | )
|Accruals                     |  |                    |     |   |                        |   | 0.7  |       |  |   | 0.7  |  
|                             |  |                    |      |   |                        |   |      |       | 
|Balance at July 2, 2005      |  | $                  | 48.3 |   |                        | $ | 10.6 |       |  | $ | 58.9 |  
|                             |  |                    |      |   |                        |   |      |       | 

13



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|9. | Earnings Per Share



|                                       |                                                  |                                         |             |             |                  |   |             |             |         |   |             |             |         |   |             |             |         |  
|-------------------------------------- | ------------------------------------------------ | --------------------------------------- | ----------- | ----------- | ---------------- | - | ----------- | ----------- | ------- | - | ----------- | ----------- | ------- | - | ----------- | ----------- | ------- | -
|                                       |                                                  | Three Months Ended                      |             |             | Six Months Ended |  
|                                       |                                                  |                                         |             |             |                  |  
|                                       |                                                  | July 2,                                 |             |             | June 26,         |   |             | July 2,     |         |   | June 26,    |            
|                                       |                                                  | 2005                                    |             |             | 2004             |   |             | 2005        |         |   | 2004        |            
|                                       |                                                  |                                         |             |             |                  |   |             |             |         |   |             |            
|Numerator  Basic and Diluted          |                                                  |                                         |             |             |                  |   |             |             |         |   |             |             |         |   |             |            
|                                       |                                                  | Net income (loss)                       |             | $           | 9,444            |   |             | $           | (26,451 | ) |             | $           | (10,717 | ) |             | $           | (17,721 | )
|                                       |                                                  |                                         |             |             |                  |   |             |             |         |   |             |            
|Denominator                            |                                                  |                                         |             |             |                  |   |             |             |         |   |             |             |         |   |             |            
|                                       | Basic weighted average common shares outstanding |                                         |             | 253,310,023 |                  |   |             | 247,367,176 |         |   |             | 252,431,153 |         |   |             | 246,981,817 |        
|                                       | Effect of dilutive securities:                   |                                         |             |             |                  |   |             |             |         |   |             |             |         |   |             |             |        
|                                       |                                                  | Common stock options                    |             |             | 2,210,960        |   |             |             |        |   |             |             |        |   |             |             |        |  
|                                       |                                                  | Restricted shares subject to repurchase |             |             | 22,236           |   |             |             |        |   |             |             |        |   |             |             |        |  
|                                       |                                                  |                                         |             |             |                  |   |             |             |         |   |             |            
|Diluted weighted average common shares |                                                  |                                         | 255,543,219 |             |                  |   | 247,367,176 |             |         |   | 252,431,153 |             |         |   | 246,981,817 |            
|                                       |                                                  |                                         |             |             |                  |   |             |             |         |   |             |            
|Net income (loss) per share            |                                                  |                                         |             |             |                  |   |             |             |         |   |             |             |         |   |             |            
| basic                                |                                                  | $                                       | 0.04        |             |                  | $ | (0.11       | )           |         | $ | (0.04       | )           |         | $ | (0.07       | )          
| diluted                              |                                                  | $                                       | 0.04        |             |                  | $ | (0.11       | )           |         | $ | (0.04       | )           |         | $ | (0.07       | )          



|                                                                                                   |  |                    |            |  |                  |  |            |         |  |  |            |  |  |  |            | 
|-------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- |  | ---------------- |  | ---------- | ------- |  |  | ---------- |  |  |  | ---------- | 
|                                                                                                   |  | Three Months Ended |            |  | Six Months Ended | 
|                                                                                                   |  |                    |            |  |                  | 
|                                                                                                   |  | July 2,            |            |  | June 26,         |  |            | July 2, |  |  | June 26,   | 
|                                                                                                   |  | 2005               |            |  | 2004             |  |            | 2005    |  |  | 2004       | 
|                                                                                                   |  |                    |            |  |                  |  |            |         |  |  |            | 
|Common stock options                                                                               |  |                    | 9,708,116  |  |                  |  | 26,988,243 |         |  |  | 24,849,233 |  |  |  | 26,988,243 | 
|Restricted shares subject to repurchase                                                            |  |                    |           |  |                  |  | 75,000     |         |  |  | 207,000    |  |  |  | 75,000     | 
|As-if converted shares related to 6.8% Convertible Senior
    Notes due 2010 issued on May 7, 2003 |  |                    | 18,756,362 |  |                  |  | 18,756,362 |         |  |  | 18,756,362 |  |  |  | 18,756,362 | 



|    |                            
|--- | ---------------------------
|10. | Comprehensive Income (Loss)



|                                                                             |  |                    |       |   |                  |   |         |         |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ------- | ------- |  | - | -------- | - |  | - | ------- | -
|                                                                             |  | Three Months Ended |       |   | Six Months Ended |  
|                                                                             |  |                    |       |   |                  |  
|                                                                             |  | July 2,            |       |   | June 26,         |   |         | July 2, |  |   | June 26, |  
|                                                                             |  | 2005               |       |   | 2004             |   |         | 2005    |  |   | 2004     |  
|                                                                             |  |                    |       |   |                  |   |         |         |  |   |          |  
|Net income (loss)                                                            |  | $                  | 9,444 |   |                  | $ | (26,451 | )       |  | $ | (10,717  | ) |  | $ | (17,721 | )
|Unrealized loss on investments in securities                                 |  |                    | (225  | ) |                  |   | (1,636  | )       |  |   | (2,145   | ) |  |   | (2,501  | )
|Less: reclassification adjustment for gain included in net
    income (loss) |  |                    | (24   | ) |                  |   | 1       |         |  |   | (308     | ) |  |   | 33      |  
|                                                                             |  |                    |       |   |                  |   |         |         |  |   |          |  
|Comprehensive income (loss)                                                  |  | $                  | 9,243 |   |                  | $ | (28,088 | )       |  | $ | (12,554  | ) |  | $ | (20,255 | )
|                                                                             |  |                    |       |   |                  |   |         |         |  |   |          |  

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                        
|--- | ---------------------------------------
|11. | Segment and Major Customers Information







|                               |  |                    |         |  |                  |   |         |         |  |   |           |  |  |   |           | 
|------------------------------ |  | ------------------ | ------- |  | ---------------- | - | ------- | ------- |  | - | --------- |  |  | - | --------- | 
|                               |  | Three Months Ended |         |  | Six Months Ended |  
|                               |  |                    |         |  |                  |  
|                               |  | July 2,            |         |  | June 26,         |   |         | July 2, |  |   | June 26,  | 
|                               |  | 2005               |         |  | 2004             |   |         | 2005    |  |   | 2004      | 
|                               |  |                    |         |  |                  |   |         |         |  |   |           | 
|United States                  |  | $                  | 311,120 |  |                  | $ | 282,506 |         |  | $ | 643,398   |  |  | $ | 601,153   | 
|Asia Pacific and Japan         |  |                    | 291,526 |  |                  |   | 270,295 |         |  |   | 614,837   |  |  |   | 577,132   | 
|Europe, Middle East and Africa |  |                    | 295,449 |  |                  |   | 246,401 |         |  |   | 697,663   |  |  |   | 627,635   | 
|Latin America and other        |  |                    | 26,634  |  |                  |   | 19,052  |         |  |   | 38,432    |  |  |   | 32,022    | 
|                               |  |                    |         |  |                  |   |         |         |  |   |           | 
|Total                          |  | $                  | 924,729 |  |                  | $ | 818,254 |         |  | $ | 1,994,330 |  |  | $ | 1,837,942 | 
|                               |  |                    |         |  |                  |   |         |         |  |   |           | 



|                               |  |         |         |  |              |   |         | 
|------------------------------ |  | ------- | ------- |  | ------------ | - | ------- | 
|                               |  | July 2, |         |  | December 25, |  
|                               |  | 2005    |         |  | 2004         |  
|                               |  |         |         |  |              |  
|United States                  |  | $       | 687,688 |  |              | $ | 696,317 | 
|Asia Pacific and Japan         |  |         | 151,773 |  |              |   | 172,002 | 
|Europe, Middle East and Africa |  |         | 446     |  |              |   | 444     | 
|Latin America and other        |  |         |        |  |              |   | 271     | 
|                               |  |         |         |  |              |  
|Total                          |  | $       | 839,907 |  |              | $ | 869,034 | 
|                               |  |         |         |  |              |  



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |              
|--- | -------------
|12. | Contingencies



| |                  
| | -----------------
| | Legal Proceedings













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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | Investment Commitment





|    |                           
|--- | --------------------------
|13. | Related Party Transactions





|    |                 
|--- | ----------------
|14. | Rescission Offer





|    |                 
|--- | ----------------
|15. | Subsequent Event



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations





Background






Executive Overview






18



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Critical Accounting Policies








| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | revenue recognition;                                                          
|
| |  | sales returns, other sales allowances and allowance for doubtful
    accounts;
|
| |  | valuation of intangibles, long-lived assets and goodwill;                     
|
| |  | warranty;                                                                     
|
| |  | inventory reserves;                                                           

20



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| |   |                                                               
| | - | --------------------------------------------------------------
| |  | income taxes; and                                             
|
| |  | restructuring liabilities, litigation and other contingencies.



Results of Operations




| |                              
| | -----------------------------
| | Net Revenues and Gross Profit

|                            |  |                    |       |   |          |   |                  |        |  |         |        |   |          |      |         |    |        |   |         |    |  |   |        |  
|--------------------------- |  | ------------------ | ----- | - | -------- | - | ---------------- | ------ |  | ------- | ------ | - | -------- | ---- | ------- | -- | ------ | - | ------- | -- |  | - | ------ | -
|                            |  | Three Months Ended |       |   |          |   | Six Months Ended |        |  |        
|                            |  |                    |       |   |          |   |                  |        |  |        
|                            |  | July 2,            |       |   | June 26, |   |                  |        |  | July 2, |        |   | June 26, |      |         |   
|                            |  | 2005               |       |   | 2004     |   |                  | Change |  |         | 2005   |   |          | 2004 |         |    | Change |  
|                            |  |                    |       |   |          |   |                  |        |  |         |        |   |          |      |         |    |        |  
|                            |  | (In millions)      |       |   |          |   | (In millions)    |        |  |        
|Total revenues              |  | $                  | 924.7 |   |          | $ | 818.3            |        |  | $       | (106.4 | ) |          | $    | 1,994.3 |    |        | $ | 1,837.9 |    |  | $ | (156.4 | )
|Gross profit                |  | $                  | 121.8 |   |          | $ | 72.5             |        |  | $       | (49.3  | ) |          | $    | 238.2   |    |        | $ | 226.2   |    |  | $ | (12.0  | )
|Net income (loss)           |  | $                  | 9.4   |   |          | $ | (26.5            | )      |  | $       | (35.9  | ) |          | $    | (10.7   | )  |        | $ | (17.7   | )  |  | $ | (7.0   | )
|As a percentage of revenue: |  |                    |       |   |          |   |                  |        |  |         |        |   |          |      |         |    |        |   |         |    |  |   |        |  
|Total revenues              |  |                    | 100.0 | % |          |   | 100.0            | %      |  |         |        |   |          |      | 100.0   | %  |        |   | 100.0   | %  |  |   |        |  
|Gross profit                |  |                    | 13.2  | % |          |   | 8.9              | %      |  |         |        |   |          |      | 11.9    | %  |        |   | 12.3    | %  |  |   |        |  
|Net income (loss)           |  |                    | 1.0   | % |          |   | (3.2             | )%     |  |         |        |   |          |      | (0.5    | )% |        |   | (1.0    | )% |  |   |        |  

Net Revenues.








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Cost of Revenues; Gross Profit.










| |                   
| | ------------------
| | Operating Expenses

|                                    |  |                    |      |   |          |   |                  |        |  |         |       |   |          |      |       |   |        |   |       |   |  |   |       |  
|----------------------------------- |  | ------------------ | ---- | - | -------- | - | ---------------- | ------ |  | ------- | ----- | - | -------- | ---- | ----- | - | ------ | - | ----- | - |  | - | ----- | -
|                                    |  | Three Months Ended |      |   |          |   | Six Months Ended |        |  |        
|                                    |  |                    |      |   |          |   |                  |        |  |        
|                                    |  | July 2,            |      |   | June 26, |   |                  |        |  | July 2, |       |   | June 26, |      |       |  
|                                    |  | 2005               |      |   | 2004     |   |                  | Change |  |         | 2005  |   |          | 2004 |       |   | Change |  
|                                    |  |                    |      |   |          |   |                  |        |  |         |       |   |          |      |       |   |        |  
|                                    |  | (In millions)      |      |   |          |   | (In millions)    |        |  |        
|Research and development            |  | $                  | 68.3 |   |          | $ | 79.2             |        |  | $       | (10.9 | ) |          | $    | 146.9 |   |        | $ | 162.5 |   |  | $ | (15.6 | )
|Selling, general and administrative |  | $                  | 37.2 |   |          | $ | 33.1             |        |  | $       | 4.1   |   |          | $    | 74.5  |   |        | $ | 66.0  |   |  | $ | 8.5   |  
|Amortization of intangible assets   |  | $                  | 0.2  |   |          | $ | 5.1              |        |  | $       | (4.9  | ) |          | $    | 0.4   |   |        | $ | 25.9  |   |  | $ | (25.5 | )
|Restructuring charges               |  | $                  | 0.7  |   |          | $ |                 |        |  | $       | 0.7   |   |          | $    | 14.6  |   |        | $ |      |   |  | $ | 14.6  |  
|As a percentage of revenue:         |  |                    |      |   |          |   |                  |        |  |         |       |   |          |      |       |   |        |   |       |   |  |   |       |  
|Research and development            |  |                    | 7.4  | % |          |   | 9.7              | %      |  |         |       |   |          |      | 7.4   | % |        |   | 8.8   | % |  |   |       |  
|Selling, general and administrative |  |                    | 4.0  | % |          |   | 4.0              | %      |  |         |       |   |          |      | 3.7   | % |        |   | 3.6   | % |  |   |       |  
|Amortization of intangible assets   |  |                    | 0.0  | % |          |   | 0.6              | %      |  |         |       |   |          |      | 0.0   | % |        |   | 1.4   | % |  |   |       |  
|Restructuring charges               |  |                    | 0.1  | % |          |   | 0.0              | %      |  |         |       |   |          |      | 0.7   | % |        |   | 0.0   | % |  |   |       |  

Research and Development. (R&D).


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Selling, General and Administrative
(SG&A).




Restructuring Charge.






24



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Amortization of Intangible Assets.






| |                                                            
| | -----------------------------------------------------------
| | Interest Expense, Interest Income and Other Gain
    (Loss)

|                                  |  |                    |      |    |          |   |                  |        |  |         |       |   |          |      |       |    |        |   |       |    |  |   |       |  
|--------------------------------- |  | ------------------ | ---- | -- | -------- | - | ---------------- | ------ |  | ------- | ----- | - | -------- | ---- | ----- | -- | ------ | - | ----- | -- |  | - | ----- | -
|                                  |  | Three Months Ended |      |    |          |   | Six Months Ended |        |  |        
|                                  |  |                    |      |    |          |   |                  |        |  |        
|                                  |  | July 2,            |      |    | June 26, |   |                  |        |  | July 2, |       |   | June 26, |      |       |   
|                                  |  | 2005               |      |    | 2004     |   |                  | Change |  |         | 2005  |   |          | 2004 |       |    | Change |  
|                                  |  |                    |      |    |          |   |                  |        |  |         |       |   |          |      |       |    |        |  
|                                  |  | (In millions)      |      |    |          |   | (In millions)    |        |  |        
|Interest expense                  |  | $                  | (7.7 | )  |          | $ | (7.1             | )      |  | $       | (0.6  | ) |          | $    | (16.1 | )  |        | $ | (16.1 | )  |  | $ |      |  
|Interest income                   |  | $                  | 2.3  |    |          | $ | 1.0              |        |  | $       | 1.3   |   |          | $    | 4.6   |    |        | $ | 2.4   |    |  | $ | 2.2   |  
|Income from litigation settlement |  | $                  |     |    |          | $ | 24.8             |        |  | $       | (24.8 | ) |          | $    |      |    |        | $ | 24.8  |    |  | $ | (24.8 | )
|Other gain (loss)                 |  | $                  |     |    |          | $ |                 |        |  | $       |      |   |          | $    | (0.3  | )  |        | $ |      |    |  | $ | (0.3  | )
|As a percentage of revenue:       |  |                    |      |    |          |   |                  |        |  |         |       |   |          |      |       |    |        |   |       |    |  |   |       |  
|Interest expense                  |  |                    | (0.8 | )% |          |   | (0.9             | )%     |  |         |       |   |          |      | (0.8  | )% |        |   | (0.9  | )% |  |   |       |  
|Interest income                   |  |                    | 0.2  | %  |          |   | 0.1              | %      |  |         |       |   |          |      | 0.2   | %  |        |   | 0.1   | %  |  |   |       |  
|Income from litigation settlement |  |                    | 0.0  | %  |          |   | 3.0              | %      |  |         |       |   |          |      | 0.0   | %  |        |   | 1.3   | %  |  |   |       |  
|Other gain (loss)                 |  |                    | 0.0  | %  |          |   | 0.0              | %      |  |         |       |   |          |      | 0.0   | %  |        |   | 0.0   | %  |  |   |       |  

Interest Expense.


Interest Income.


Income from Litigation Settlement.


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Other Gain (Loss).




| |                           
| | --------------------------
| | Provision for Income Taxes

|                                                |  |                    |      |  |          |   |                  |        |  |         |  |   |          |   |  |        |       |   |  |   |     | 
|----------------------------------------------- |  | ------------------ | ---- |  | -------- | - | ---------------- | ------ |  | ------- |  | - | -------- | - |  | ------ | ----- | - |  | - | --- | 
|                                                |  | Three Months Ended |      |  |          |   | Six Months Ended |        |  |        
|                                                |  |                    |      |  |          |   |                  |        |  |        
|                                                |  | July 2,            |      |  | June 26, |   |                  |        |  | July 2, |  |   | June 26, |   |  |       
|                                                |  | 2005               |      |  | 2004     |   |                  | Change |  | 2005    |  |   | 2004     |   |  | Change |      
|                                                |  |                    |      |  |          |   |                  |        |  |         |  |   |          |   |  |        |      
|                                                |  | (In millions)      |      |  |          |   | (In millions)    |        |  |        
|Income (loss) before provision for income taxes |  | $                  | 10.0 |  |          | $ | (26.1            | )      |  | $(36.1) |  | $ | (9.9     | ) |  | $      | (17.1 | ) |  | $ | 7.2 | 
|Provision for income taxes                      |  | $                  | 0.5  |  |          | $ | 0.3              |        |  | $0.2    |  | $ | 0.9      |   |  | $      | 0.6   |   |  | $ | 0.3 | 







Liquidity and Capital Resources




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| |                        
| | -----------------------
| | Contractual Obligations



|                          |                   |       |           |           |        |   |         |           |  |   |                 |        |  |               |         |        |  |   |         |       | 
|------------------------- | ----------------- | ----- | --------- | --------- | ------ | - | ------- | --------- |  | - | --------------- | ------ |  | ------------- | ------- | ------ |  | - | ------- | ----- | 
|                          |                   |       |           | Less Than |        |   |         |           |  |   | More Than       |       
|                          |                   | Total |           |           | 1 Year |   |         | 1-3 Years |  |   | 3-5 Years(1)(2) |        |  | 5 Years(1)(2) |        
|                          |                   |       |           |           |        |   |         |           |  |   |                 |        |  |               |        
|Long-term Debt            |                   | $     | 380,765   |           |        | $ | 18,035  |           |  | $ | 28,699          |        |  | $             | 300,000 |        |  | $ | 34,031  |      
|                          | Interest Payments |       |           | 110,411   |        |   |         | 22,757    |  |   |                 | 42,182 |  |               |         | 39,434 |  |   |         | 6,038 | 
|Capital Lease Obligations |                   |       | 3,800     |           |        |   | 3,773   |           |  |   | 22              |        |  |               | 5       |        |  |   |        |      
|                          | Interest Payments |       |           | 53        |        |   |         | 52        |  |   |                 | 1      |  |               |         |       |  |   |         |      | 
|Operating Leases(3)       |                   |       | 261,163   |           |        |   | 35,427  |           |  |   | 65,086          |        |  |               | 61,856  |        |  |   | 98,794  |      
|Purchase Obligations(4)   |                   |       | 797,347   |           |        |   | 792,090 |           |  |   | 5,257           |        |  |               |        |        |  |   |        |      
|                          |                   |       |           |           |        |   |         |           |  |   |                 |        |  |               |        
|Total                     |                   | $     | 1,553,539 |           |        | $ | 872,134 |           |  | $ | 141,247         |        |  | $             | 401,295 |        |  | $ | 138,863 |      
|                          |                   |       |           |           |        |   |         |           |  |   |                 |        |  |               |        

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include $73 million which may be borrowed under a
    facility in a U.S.-dollar-denominated loan, to be secured by our
    facilities in Suzhou, China, drawable until April 2007 and
    repayable in eight semi-annual installments commencing October
    2007; the borrowings under this facility will bear interest at
    LIBOR plus 50 basis points (subject to adjustment to
    60 basis points).                                                                                                                                                                                                                                                         
|   
|(2) | Does not include $67 million which we are obligated to
    contribute to our China subsidiary to allow drawdown under the
    facilities described under footnote (1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | Includes future minimum annual rental commitments, including
    amounts accrued as restructuring liabilities as of July 2,
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) | Purchase obligations are defined as contractual obligations for
    purchase of goods or services, which are enforceable and legally
    binding on the Company and that specify all significant terms,
    including fixed or minimum quantities to be purchased, fixed,
    minimum or variable price provisions and the approximate timing
    of the transaction. The expected timing of payment of the
    obligations set forth above is estimated based on current
    information. Timing of payments and actual amounts paid may be
    different depending on the time of receipt of goods or services
    or changes to agreed-upon amounts for some obligations.







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CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE


We have a history of significant losses.






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





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





| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | consolidate or establish strategic relationships to lower their
    product costs or to otherwise compete more effectively against
    us;
|
| |  | lower their product prices to gain market share;                                                                                          
|
| |  | sell their products with other products to increase demand for
    their products;                                                        

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| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop new technology which would significantly reduce the cost
    of their products;                                                                   
|
| |  | get to the market with the next generation product faster or
    ramp more effectively; or                                                                
|
| |  | offer more products than we do and therefore enter into
    agreements with customers to supply hard disk drives as part of
    a larger supply agreement.





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





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





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



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| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our efforts to improve operating efficiencies through
    restructuring activities may not be successful, and the actions
    we take to this end could limit our ability to compete
    effectively.





| |                                                                               
| | ------------------------------------------------------------------------------
| | If we do not expand into new hard drive markets, our
    revenues will suffer.



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| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If we do not successfully introduce new products or
    experience product quality problems, our revenues will
    suffer.





| |                                                                         
| | ------------------------------------------------------------------------
| | If we do not expand into new technologies, our revenues
    will suffer.





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





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



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| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | If we fail to match production with product demand or to
    manage inventory, our operating results could suffer.





| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to new environmental legislation enacted by
    the European Union; if we do not comply our sales could be
    adversely impacted.





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





| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We purchase most of our components from third party
    suppliers, and may have higher costs or more supply chain risks
    than our competitors who are more vertically integrated.



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| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we have difficulties with the transition of
    manufacturing to China or a disaster occurs at one of our
    plants, our business, financial condition and operating results
    could suffer.





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





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





| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the average selling price of our products;                                                                                                                                                                           
|
| |  | fluctuations in the demand for our products as a result of the
    seasonal nature of the desktop computer industry and the markets
    for our customers products, as well as the overall
    economic environment;
|
| |  | market acceptance of our products;                                                                                                                                                                                   
|
| |  | our ability to qualify our products successfully with our
    customers;                                                                                                                                             

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| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in purchases by our primary customers, including the
    cancellation, rescheduling or deferment of orders;                        
|
| |  | changes in product and customer mix;                                                                                                       
|
| |  | actions by our competitors, including announcements of new
    products or technological innovations;                                      
|
| |  | our ability to execute future product development and production
    ramps effectively;                                                    
|
| |  | the availability, and efficient use, of manufacturing capacity;                                                                            
|
| |  | our ability to retain key personnel;                                                                                                       
|
| |  | our inability to reduce a significant portion of our fixed costs
    due, in part, to our ongoing capital expenditure
    requirements; and
|
| |  | our ability to procure and purchase critical components at
    competitive prices.                                                         





| |                                                                           
| | --------------------------------------------------------------------------
| | We face risks from our substantial international
    operations and sales.





| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties with staffing and managing international operations;                                                                                                                                                         
|
| |  | transportation and supply chain disruptions and increased
    transportation expense as a result of epidemics, terrorist
    activity, acts of war or hostility, increased security and less
    developed infrastructure;
|
| |  | economic slowdown and/or downturn in foreign markets;                                                                                                                                                                     
|
| |  | international currency fluctuations;                                                                                                                                                                                      
|
| |  | political and economic uncertainty caused by epidemics,
    terrorism or acts of war or hostility;                                                                                                                        
|
| |  | legislative and regulatory responses to terrorist activity such
    as increased restrictions on cross-border movement of products
    and technology;                                                                    
|
| |  | legislative, regulatory, police, or civil responses to epidemics
    or other outbreaks of infectious diseases such as quarantines,
    factory closures, or increased restrictions on transportation or
    travel;      
|
| |  | general strikes or other disruptions in working conditions;                                                                                                                                                               
|
| |  | labor shortages;                                                                                                                                                                                                          
|
| |  | political instability;                                                                                                                                                                                                    
|
| |  | changes in tariffs;                                                                                                                                                                                                       

35



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| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | generally longer periods to collect receivables;                                                                                                                                  
|
| |  | unexpected legislative or regulatory requirements;                                                                                                                                
|
| |  | reduced protection for intellectual property rights in some
    countries;                                                                                                        
|
| |  | significant unexpected duties or taxes or other adverse tax
    consequences;                                                                                                     
|
| |  | difficulty in obtaining export licenses and other trade barriers;                                                                                                                 
|
| |  | seasonality;                                                                                                                                                                      
|
| |  | increased transportation/shipping costs;                                                                                                                                          
|
| |  | credit and access to capital issues faced by our international
    customers; and                                                                                                 
|
| |  | compliance with European Union directives implementing strict
    mandates on electronic equipment waste and banning the use of
    certain materials in electronic manufacturing.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our operations and prospects in China are subject to
    significant political, economic and legal uncertainties.





36



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| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We may need additional capital in the future which may not
    be available on favorable terms or at all.





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate of our sales growth;                                                                                                               
|
| |  | the level of our profits or losses;                                                                                                         
|
| |  | the timing and extent of our spending to expand manufacturing
    capacity, support facilities upgrades and product development
    efforts;
|
| |  | the timing and size of business or technology acquisitions;                                                                                 
|
| |  | the timing of introductions of new products and enhancements to
    our existing products; and                                              
|
| |  | the length of product life cycles.                                                                                                          





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We significantly increased our leverage as a result of the
    sale of the 6.8% convertible senior notes.



37



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







| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to existing claims relating to our
    intellectual property which are costly to defend and may harm
    our business.





38



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| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Quantum incurs non-insured tax liabilities as a result
    of its separation of Quantum HDD from Quantum Corporation in
    connection with our acquisition of the Quantum HDD business, our
    financial condition and operating results could be negatively
    affected.





| |                                                   
| | --------------------------------------------------
| | The loss of key personnel could harm our business.



39



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







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





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

40



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| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to maintain an effective system of internal
    control over financial reporting, we may not be able to
    accurately report our financial results. As a result, current
    and potential stockholders could lose confidence in our
    financial reporting, which would harm our business and the
    trading price of our stock.







| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Decreased effectiveness of equity compensation could
    adversely affect our ability to attract and retain employees,
    and proposed changes in accounting for equity compensation could
    adversely affect earnings.





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





| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We issued shares under our 1998 Employee Stock Purchase
    Plan that may not have been not exempt from registration or
    qualification under federal securities laws, and as a result, we
    may incur liability to repurchase such shares and may face
    additional potential claims.



41



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42



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##### Table of Contents








|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk

Derivatives




Investments






|                      |  |          |        |    |          |   |        |            |  |   |        |    |  |         |        |  |          |   |        |          |  |   |        |   |  |   |        |  
|--------------------- |  | -------- | ------ | -- | -------- | - | ------ | ---------- |  | - | ------ | -- |  | ------- | ------ |  | -------- | - | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                      |  |          |        |    |          |   |        | Fair Value |  |   |        |    |  |         |       
|                      |  |          |        |    |          |   |        | as of      |  |   |        |    |  |         |       
|                      |  |          |        |    |          |   |        | July 2,    |  |   |        |    |  |         |       
|                      |  | +150 bps |        |    | +100 bps |   |        | +50 bps    |  |   | 2005   |    |  | -50 bps |        |  | -100 bps |   |        | -150 bps | 
|                      |  |          |        |    |          |   |        |            |  |   |        |    |  |         |        |  |          |   |        |          | 
|                      |  | ($000)   |       
|Financial Instruments |  | $        | 88,480 |    |          | $ | 88,749 |            |  | $ | 89,011 |    |  | $       | 89,279 |  |          | $ | 89,546 |          |  | $ | 89,818 |   |  | $ | 90,086 |  
|% Change              |  |          | (0.89  | )% |          |   | (0.59  | )%         |  |   | (0.30  | )% |  |         |        |  |          |   | 0.30   | %        |  |   | 0.60   | % |  |   | 0.90   | %



|                             |  |                          |        |            |         |  |        |                          |  |  |        |    |  |   |       |  |  |  |        |   |  |  |        |   |  |  |        |  
|---------------------------- |  | ------------------------ | ------ | ---------- | ------- |  | ------ | ------------------------ |  |  | ------ | -- |  | - | ----- |  |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                             |  |                          |        | Fair Value |         |  |       
|                             |  | Valuation of Security    |        |            | as of   |  |        | Valuation of Security    | 
|                             |  | Given X% Decrease in the |        |            | July 2, |  |        | Given X% Increase in the | 
|                             |  | Security Price           |        |            | 2005    |  |        | Security Price           | 
|                             |  |                          |        |            |         |  |        |                          | 
|                             |  | ($000)                   |       
|Corporate equity investments |  |                          | $1,706 |            |         |  | $2,558 |                          |  |  | $2,899 |    |  | $ | 3,411 |  |  |  | $3,923 |   |  |  | $4,264 |   |  |  | $5,117 |  
|% Change                     |  |                          | (50    | )%         |         |  | (25    | )%                       |  |  | (15    | )% |  |   |       |  |  |  | 15     | % |  |  | 25     | % |  |  | 50     | %






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Changes in Internal Control Over Financial Reporting






| |   |                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application of generally accepted accounting principles related
    to the financial process for complex, non-routine transactions
    (purchase accounting entries relating to deferred taxes,
    goodwill and leases, and severance and facility accruals in
    connection with the establishment of restructuring reserves):



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lack of accounting personnel with sufficient skills and
    experience to ensure the accounting for complex, non-routine
    transactions is in compliance with generally accepted accounting
    principles; and

43



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| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Insufficient formalized procedures to assure that complex,
    non-routine transactions have been reviewed by management or
    internal accounting personnel with technical accounting expertise



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | Data entry of journal entry for inventory and cost of goods sold:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lack of communication of review responsibility for the review of
    the data entry of a journal entry for the recording of
    in-transit inventory; and
|
| |  | Ineffective reconciliation analysis in March 2005 of cost of
    goods sold as part of financial close process                                           







| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A)     Controls over the
    Application of Generally Accepted Accounting Principles Related
    to the Financial Reporting Process for Complex, Non-Routine
    Transactions







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the quarter ended December 25, 2004, the Company
    filled the then vacant position of Chief Financial Officer and
    appointed an Operations Controller to provide leadership and
    review in the accounting function. The Company also established
    the previously outsourced internal audit function in-house, led
    by a senior executive.                                                                                                                                                                                                     
|
| |  | During the first quarter of 2005, the Company appointed a
    Corporate Controller and Principal Accounting Officer to replace
    the former Corporate Controller who resigned. The Company also
    effected a reorganization of its accounting and finance
    department and implemented revised policies and procedures to
    ensure early involvement and adequate evaluation of complex,
    non-routine transactions by accounting personnel with technical
    expertise and review by senior management of the results of the
    accounting evaluation.
|
| |  | In the second quarter of 2005, the Company continued to enhance
    its accounting staffing, including the hiring of key accounting
    personnel with requisite technical accounting expertise. The
    addition of the accounting staff in this quarter completed the
    planned remediation steps.                                                                                                                                                                                                                                                             



44



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| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | (B)     Controls Over Accuracy of
    Data Entry of Journal Entry For Inventory and Cost of Goods
    Sold









Evaluation of Effectiveness of Disclosure Controls and
Procedures






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##### Table of Contents






PART II.     OTHER
INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings














|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds








|        |                                
|------- | -------------------------------
|Item 3. | Defaults Upon Senior Securities



46



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##### Table of Contents








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



|                  |  |     |             |  |                    |  |            | 
|----------------- |  | --- | ----------- |  | ------------------ |  | ---------- | 
|Nominee           |  | For |             |  | Withheld Authority | 
|                  |  |     |             |  |                    | 
|Dr. C.S. Park     |  |     | 227,937,698 |  |                    |  | 8,723,243  | 
|Charles F. Christ |  |     | 196,297,257 |  |                    |  | 40,363,684 | 
|Gregory E. Meyers |  |     | 229,198,335 |  |                    |  | 7,462,606  | 





Proposal to adopt the 2005 Performance Incentive Plan


|                |  |  |             | 
|--------------- |  |  | ----------- | 
|For             |  |  | 151,613,144 | 
|Against         |  |  | 38,267,568  | 
|Abstained       |  |  | 871,179     | 
|Broker Non-Vote |  |  | 45,909,050  | 



Proposal to amend the 1998 Employee Stock Purchase Plan


|                |  |  |             | 
|--------------- |  |  | ----------- | 
|For             |  |  | 163,928,080 | 
|Against         |  |  | 25,937,101  | 
|Abstained       |  |  | 886,710     | 
|Broker Non-Vote |  |  | 45,909,050  | 





|          |  |  |             | 
|--------- |  |  | ----------- | 
|For       |  |  | 234,023,541 | 
|Against   |  |  | 2,550,954   | 
|Abstained |  |  | 86,446      | 






|        |                  
|------- | -----------------
|Item 5. | Other Information








|        |         
|------- | --------
|Item 6. | Exhibits



47



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##### Table of Contents






SIGNATURES






| |                   
| | ------------------
| | MAXTOR CORPORATION



| |    |                       
| | -- | ----------------------
| | By | /s/ DUSTON M. WILLIAMS

| |                                  
| | ---------------------------------
| |                                  
| | Duston M. Williams               
| | Executive Vice President, Finance
| | and Chief Financial Officer      



48



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EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .1          |  | 2005 Performance Incentive Plan effective May 13, 2005,
    including forms of: (i) Restricted Stock Agreement for
    Section 16 Insiders; (ii) Restricted Stock Agreement for
    Non-Section 16 Insiders; (iii) Restricted Stock Units
    Agreement for Non-US Participants; (iv) Restricted Stock
    Units Agreement for US Participants; (v) Restricted Stock
    Units Agreement for Section 16 Insiders; (vi) Stock
    Option Agreement; (vii) Stock Option Agreement for Non-US
    Participants; (viii) Notice of Grant of Stock Option for
    Non-US Participants; (ix) Notice of Grant of Stock Option;
    (x) Notice of Grant of Restricted Stock; (xi) Notice of
    Grant of Restricted Stock Units for Non-US Participants; and
    (xii) Notice of Grant of Restricted Stock Units.**
|       
|        | 10 | .2          |  | 1998 Employee Stock Purchase Plan, as amended by the Board of
    Directors through March 7, 2005(1)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 10 | .3          |  | Supply Agreement dated October 6, 2003 between Maxtor
    Corporation and Komag, Inc. as amended by Addendum to Business
    Agreement dated July 8, 2005.***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 31 | .1          |  | Certification of Dr. C.S. Park, Chairman and Chief
    Executive Officer of Registrant pursuant to Rule 13a-14
    adopted under the Securities Exchange Act of 1934, as amended,
    and Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 31 | .2          |  | Certification of Duston M. Williams, Executive Vice President,
    Finance and Chief Financial Officer of Registrant pursuant to
    Rule 13a-14 adopted under the Securities Exchange Act of
    1934, as amended, and Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 32 | .1          |  | Certification of Dr. C.S. Park, Chairman and Chief
    Executive Officer of Registrant furnished pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|        | 32 | .2          |  | Certification of Duston M. Williams, Executive Vice President,
    Finance and Chief Financial Officer of Registrant furnished
    pursuant to 18 U.S.C. § 1350, as adopted pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                






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



|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*** | This exhibit (or portions thereof) has been filed
    separately with the Commission pursuant to an application for
    confidential treatment. The confidential portions of this
    Exhibit have been omitted and are marked by an asterisk.
|   
|(1) | Incorporated by reference to exhibit of Form 8-K filed
    May 19, 2005.