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  **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 April 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* *(I.R.S. Employer**incorporation or organization)* *Identification No.)*  **500 McCarthy Boulevard,** **95035****Milpitas, CA** *(Zip Code)**(Address of principal executive offices)*  **Registrant’s telephone number, including area code:****(408) 894-5000**     Indicate by checkmark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has beensubject to such filing requirements for the past90 days.     Yes þ          No o     Indicate by checkmark whether the registrant is an acceleratedfiler (as defined in Rule 12b-2 of the ExchangeAct.     Yes þ          No o     As of May 5, 2005, 253,212,950 shares of theregistrant’s Common Stock, $.01 par value, were issuedand outstanding.  

**MAXTOR CORPORATION****FORM 10-Q****April 2, 2005****INDEX**           **Page**     ** PART I.  FINANCIAL    INFORMATION**     Item 1.      Condensed Consolidated Financial Statements    (Unaudited)  2        Condensed Consolidated Balance    Sheets — April 2, 2005, and December 25,    2004 (Unaudited)  2        Condensed Consolidated Statements of    Operations — Three months ended April 2, 2005,    and March 27, 2004 (Unaudited)  3        Condensed Consolidated Statements of Cash    Flows — Three months ended April 2, 2005, and    March 27, 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  20      Item 3.      Quantitative and Qualitative Disclosures    about Market Risk  46      Item 4.      Controls and Procedures  47  ** PART II.  OTHER    INFORMATION**     Item 1.      Legal Proceedings  50      Item 2.      Unregistered Sales of Equity Securities and    Use of Proceeds  50      Item 3.      Defaults Upon Senior Securities  51      Item 4.      Submission of Matters to a Vote of Security    Holders  51      Item 5.      Other Information  51      Item 6.      Exhibits  51      Signature Page  52  EXHIBIT 10.6 EXHIBIT 10.7 EXHIBIT 10.8 EXHIBIT 10.9 EXHIBIT 10.10 EXHIBIT 10.11 EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1 EXHIBIT 32.2
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**PART I.     FINANCIALINFORMATION****Item 1.*****Condensed Consolidated Financial Statements    (Unaudited)*****MAXTOR CORPORATION****CONDENSED CONSOLIDATED BALANCE SHEETS**             **April 2,** **December 25,**  **2005** **2004**       **(Unaudited)**  **(In thousands, except share and**  **per share amounts)****ASSETS**    Current assets:             Cash and cash equivalents $375,607  $378,065      Restricted cash  15,033   24,561      Marketable securities  89,205   103,969      Accounts receivable, net of allowance of doubtful accounts of    $7,813 at April 2, 2005 and $8,228 at December 25, 2004  428,824   425,528      Other receivables  30,300   40,838      Inventories  226,993   229,410      Prepaid expenses and other  31,391   36,336              Total current assets  1,197,353   1,238,707     Property, plant and equipment, net  338,252   347,934     Goodwill  489,482   489,482     Other intangible assets, net  1,233   1,450     Other assets  11,981   30,168              Total assets $2,038,301  $2,107,741         **LIABILITIES AND STOCKHOLDERS’ EQUITY**    Current liabilities:             Short-term borrowings, including current portion of long-term    debt $72,469  $82,561      Accounts payable  629,208   674,947      Accrued and other liabilities  345,894   324,369              Total current liabilities  1,047,571   1,081,877     Long-term debt, net of current portion  363,963   382,570     Other liabilities  65,448   66,695              Total liabilities  1,476,982   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; 266,375,220 shares issued and    253,129,482 shares outstanding at April 2, 2005 and    263,413,578 shares issued and 250,167,840 shares    outstanding at December 25, 2004  2,664   2,634     Additional paid-in capital  2,440,074   2,429,551     Accumulated deficit  (1,819,379)  (1,795,183)    Cumulative other comprehensive income  2,899   4,536     Treasury stock (13,245,738 shares) at cost  (64,939)  (64,939)             Total stockholders’ equity  561,319   576,599              Total liabilities and stockholders’ equity $2,038,301  $2,107,741        The accompanying notes are an integral part of these financialstatements.
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**MAXTOR CORPORATION****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**             **Three Months Ended**     **April 2, 2005** **March 27, 2004**       **(Unaudited)**  **(In thousands, except share and per**  **share amounts)**    Net revenues $1,069,601  $1,019,688     Cost of revenues  957,232   864,625             Gross profit  112,369   155,063     Operating expenses:             Research and development  78,551   85,103      Selling, general and administrative  37,302   32,514      Amortization of intangible assets  217   20,836      Restructuring charge  13,854   —              Total operating expenses  129,924   138,453            Income (loss) from operations  (17,555)  16,610     Interest expense  (8,401)  (8,932)    Interest income  2,356   1,288     Other gain (loss)  (268)  38            Income (loss) before income taxes  (23,868)  9,004     Provision for income taxes  328   274            Net income (loss) $(24,196) $8,730            Net income (loss) per share — basic $(0.10) $0.04     Net income (loss) per share — diluted $(0.10) $0.03     Shares used in per share calculation              — basic  251,595,181   246,590,255       — diluted  251,595,181   256,960,154 The accompanying notes are an integral part of these financialstatements.
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**MAXTOR CORPORATION****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**              **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**       **(Unaudited)**  **(In thousands)****Cash Flows from Operating Activities:**            Net income (loss) $(24,196) $8,730     Adjustments to reconcile net income to net cash provided by    (used in) operating activities:             Depreciation and amortization  37,307   36,107      Amortization of intangible assets  217   20,836      Stock-based compensation expense  13   144      Restructuring charge, net  13,752   —      Loss (gain) on sale of property, plant and equipment and other    assets  (338)  353      Net loss on sale of investments  12   —      Change in assets and liabilities:              Accounts receivable  (3,296)  69,097       Other receivables  10,538   (7,888)      Inventories  2,417   (10,128)      Prepaid expenses and other assets  3,765   3,910       Accounts payable  (47,211)  (32,177)      Accrued and other liabilities  6,526   (90,879)              Net cash used in operating activities from continuing operations  (494)  (1,895)       Net cash flow used in discontinued operations  —   (680)              Net cash used in operating activities  (494)  (2,575)       **Cash Flows from Investing Activities:**            Proceeds from sale of property, plant and equipment  1   720     Purchase of property, plant and equipment  (25,816)  (52,176)    Decrease (increase) in restricted assets  27,627   (8,512)    Proceeds from sale of marketable securities  28,283   12,920     Purchase of marketable securities  (13,900)  (14,289)              Net cash provided by (used in) investing activities  16,195   (61,337)       **Cash Flows from Financing Activities:**            Proceeds from issuance of debt, including short-term borrowings  —   24,655     Principal payments of debt including short-term borrowings  (27,567)  (3,391)    Principal payments under capital lease obligations  (1,132)  (4,225)    Payment of receivable-backed borrowing  —   (50,000)    Proceeds from issuance of common stock from employee stock    purchase plan and stock options exercised  10,540   9,718               Net cash used in financing activities  (18,159)  (23,243)           Net change in cash and cash equivalents  (2,458)  (87,155)    Cash and cash equivalents at beginning of period  378,065   530,816            Cash and cash equivalents at end of period $375,607  $443,661        **Supplemental Disclosures of Cash Flow Information:**             Cash paid during the period for:              Interest $4,013  $4,168       Income taxes $647  $2,146 **Schedule of Non-Cash Investing and Financing Activities:**             Purchase of property, plant and equipment financed by accounts    payable $6,252  $2,966      Retirement of debt in exchange for bond redemption $5,000  $5,000      Change in unrealized loss on investments $(1,637) $(897)The accompanying notes are an integral part of these financialstatements.
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****1.****Summary of Significant Accounting Policies*****Basis of Presentation***     The accompanying unaudited condensed consolidated financialstatements have been prepared in accordance with theinstructions to Form 10-Q and do not include all of theinformation and footnotes required by generally acceptedaccounting principles for complete financial statements. Theconsolidated financial statements include the accounts of MaxtorCorporation (“Maxtor” or the “Company”) andits wholly-owned subsidiaries. All significant intercompanytransactions have been eliminated in consolidation. Alladjustments of a normal recurring nature which, in the opinionof management, are necessary for a fair statement of the resultsfor the interim periods have been made. The unaudited interimfinancial statements should be read in conjunction with theCompany’s audited consolidated financial statements andnotes thereto for the fiscal year ended December 25, 2004incorporated in the Company’s Annual Report onForm  10-K/A. Interim results are not necessarilyindicative of the operating results expected for later quartersor the full fiscal year.***Use of Estimates***     The preparation of consolidated financial statements inconformity with generally accepted accounting principles in theUnited States requires management to make estimates andassumptions that affect the amounts of assets and liabilitiesand disclosure of contingent assets and liabilities as of thedate of the financial statements and reported amounts ofrevenues and expenses during the reporting periods. Actualresults may differ from those estimates and such differencescould be material.***Fiscal Calendar***     The Company operates and reports financial results on a fiscalyear of 52 or 53 weeks ending on the last Saturday ofDecember in each year. Accordingly, the three month periodsended April 2, 2005 and March 27, 2004 comprised 14and 13 weeks, respectively. The current fiscal year ends onDecember 31, 2005. All references to years in these Notesto Consolidated Financial Statements represent fiscal yearsunless otherwise noted.***Recent Accounting Pronouncements***     In March 2005, the FASB issued Interpretation No. 47,“Accounting for Conditional Asset RetirementObligations — an interpretation of FASB StatementNo. 143” (“FIN 47”). FIN 47clarifies that the term conditional asset retirement obligationas used in FASB Statement No. 143, Accounting for AssetRetirement Obligations, refers to a legal obligation to performan asset retirement activity in which the timing and(or) method of settlement are conditional on a future eventthat may or may not be within the control of the entity. Theobligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timingand (or) method of settlement. Thus, the timing and(or) method of settlement may be conditional on a futureevent. Accordingly, an entity is required to recognize aliability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonablyestimated. This Interpretation is effective no later than theend of fiscal years ending after December 15, 2005. TheCompany is evaluating the effect that FIN 47 will have onits financial position or results of operations and expects thatit will not be material.     In December 2004, the FASB issued Statement of FinancialAccounting Standards No. 123(revised 2004),“Share-Based Payment” (“SFAS 123(R)”).SFAS 123R addresses the accounting for share-based paymentsto employees, including grants of employee stock options. Underthe new standard, companies will no longer be able to accountfor share-based compensation transactions using the intrinsicmethod in accordance with APB Opinion No. 25, Accountingfor Stock Issued to Employees. Instead, companies will be
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**required to account for such transactions using a fair-valuemethod and recognize the expense in the consolidated statementof income. The SEC has adopted a rule making SFAS 123(R)effective for the first annual reporting period of the firstfiscal year beginning after June 15, 2005. SFAS 123(R)allows, but does not require, companies to restate the fullfiscal year of 2005 to reflect the impact of expensingshare-based payments under SFAS 123(R). The Company expectsto adopt SFAS 123(R) in the quarterly period beginning onDecember 26, 2005. The Company is evaluating the twomethods of adoption allowed under SFAS 123(R) and has notyet determined which fair-value method and transitionalprovision it will follow. However, the Company expects that theadoption of SFAS 123(R) will have a significant impact onits results of operations. The Company does not expect theadoption of SFAS 123(R) will impact its overall financialposition. For additional information regarding stock-basedcompensation, see the discussion below.     In September 2004, the Emerging Issues Task Force(“EITF”) reached a consensus on Issue No. 04-10,“Determining Whether to Aggregate Operating Segments ThatDo Not Meet the Quantitative Thresholds.” FASB StatementNo. 131, *Disclosures about Segments of an Enterprise andRelated Information,*requires that a public businessenterprise report financial and descriptive information aboutits reportable operating segments. Operating segments arecomponents of an enterprise about which separate financialinformation is available that is evaluated regularly by thechief operating decision maker in deciding how to allocateresources and in assessing performance. Generally, financialinformation is required to be reported on the basis that it isused internally for evaluating segment performance and decidinghow to allocate resources to segments. The issue is how anenterprise should evaluate the aggregation criteria inparagraph 17 of Statement 131 when determining whetheroperating segments that do not meet the quantitative thresholdsmay be aggregated in accordance with paragraph 19 ofStatement 131. The FASB staff will propose an FASB StaffPosition (FSP) to provide guidance in determining whethertwo or more operating segments have similar economiccharacteristics. The EITF agreed that since the issues areinterrelated, the effective date of this Issue should coincidewith the effective date of the anticipated FSP. Accordingly, theTask Force changed the transition provisions of the consensus todelayed the effective date of this Issue. The Company willevaluate the effect of adopting the recognition and measurementguidance when the anticipated FSP is issued.     In March 2004, the Emerging Issues Task Force reached aconsensus on recognition and measurement guidance previouslydiscussed under Emerging Issues Task Force No. 03-01,“The Meaning of Other-Than-Temporary Impairment and ItsApplication To Certain Investments”(“EITF 03-01”). The consensus clarified themeaning of other-than-temporary impairment and its applicationto debt and equity investments accounted for under SFAS 115and other investments accounted for under the cost method. Therecognition and measurement guidance for which the consensus wasreached in March 2004 is to be applied to other-than-temporaryimpairment evaluations in reporting periods beginning afterJune 15, 2004. In September 2004, the FASB issued a finalFSP that delays the effective date for the measurement andrecognition guidance for all investments within the scope ofEITF No. 03-01. The consensus reached in March 2004 alsoprovided for certain disclosure requirements associated withcost method investments that were effective for fiscal yearsending after June 15, 2004. The Company will evaluate theeffect of adopting the recognition and measurement guidance whenthe final consensus is reached.***Stock-Based Compensation***     The Company accounts for stock-based employee compensation inaccordance with Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued toEmployees and related Interpretations,” and complies withthe disclosure provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”) and Statement ofFinancial Accounting Standard No. 148, “Accounting forStock-Based Compensation, Transition and Disclosures”(“SFAS 148”). The Company adopted FASBInterpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation, an interpretation ofAPB 25” (“FIN 44”) as of July 1,2000. FIN 44 provides guidance on the application of APBOpinion No. 25 for stock-based compensation to employees.For fixed grants, under APB
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**Opinion No. 25, compensation expense is based on the excessof the fair value of the Company’s stock over the exerciseprice, if any, on the date of the grant and is recorded on astraight-line basis over the vesting period of the options,which is generally four years. For variable grants, compensationexpense is based on changes in the fair value of theCompany’s stock and is recorded using the methodology setout in FASB Interpretation No. 28, “Accounting forStock Appreciation Rights and Other Variable Stock Option orAward Plans, an interpretation of APB 15 andAPB 25” (“FIN 28”).     The Company accounts for non-cash stock-based compensationissued to non-employees in accordance with the provisions ofSFAS 123 and Emerging Issues Task Force No. 96-18,“Accounting for Equity Investments that are Issued toNon-Employees for Acquiring, or in Conjunction with Selling,Goods or Services.”     The following pro forma net income (loss) information forMaxtor’s stock options and employee stock purchase plan hasbeen prepared following the provisions of SFAS 123 (inthousands, except per share data):            **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         Net income (loss) applicable to common stockholders, as reported $(24,196) $8,730     Add: Stock-based employee compensation expense included in    reported net income (loss)  13   144     Deduct: Total stock-based employee compensation expense    determined under fair value method for all awards  3,917   5,491             Pro forma net income (loss) $(28,100) $3,383            Net income (loss) per share             As reported — basic $(0.10) $0.04      Pro forma — basic $(0.11) $0.01      As reported — diluted $(0.10) $0.03      Pro forma — diluted $(0.11) $0.01      The pro forma net income (loss) disclosures made above are notnecessarily representative of the effects on pro forma netincome (loss) for future years as options granted typically vestover several years and additional option grants are expected tobe made in future years. Had we adopted the recognition andmeasurement provisions of SFAS 123 for the three monthsended April 2, 2005 and March 27, 2004, thestock-based employee compensation expense would have been$3.9 million and $5.5 million, respectively.     The fair value of option grants has been estimated on the dateof grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions:           **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         Risk-free interest rate  3.89%  3.02%    Weighted average expected life  4.5 years   4.5 years     Volatility  74%  75%    Dividend yield  —   — 
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     The fair value of employee stock purchase plan option grants hasbeen estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-averageassumptions:           **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         Risk-free interest rate  2.86%  1.01%    Weighted average expected life  0.5 years   0.5 years     Volatility  74%  76%    Dividend yield  —   —      No dividend yield is assumed as the Company has not paiddividends and has no plans to do so.**2.****Supplemental Financial Statement Data**            **April 2,** **December 25,**  **2005** **2004**       **(In thousands)**    Inventories:             Raw materials $75,699  $79,904      Work-in-process  48,899   57,800      Finished goods  102,395   91,706          $226,993  $229,410            Prepaid expenses and other:             Investments in equity securities, at fair value $3,776  $10,042      Asset held for sale  8,200   8,200      Prepaid expenses and other  19,415   18,094          $31,391  $36,336            Property, plant and equipment, at cost:             Buildings $159,271  $155,172      Machinery and equipment  663,146   659,324      Software  86,282   86,014      Furniture and fixtures  27,718   27,604      Leasehold improvements  91,675   91,571          $1,028,092  $1,019,685     Less accumulated depreciation and amortization  (689,840)  (671,751)           Net property, plant and equipment $338,252  $347,934            Accrued and other liabilities:             Income taxes payable $7,508  $7,605      Accrued payroll and payroll-related expenses  52,039   59,524      Accrued warranty  206,006   185,940      Restructuring liabilities, short-term  21,942   9,707      Accrued expenses  58,399   61,593          $345,894  $324,369        
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**            **April 2,** **December 25,**  **2005** **2004**       **(In thousands)**    Other liabilities             Tax indemnification liability $8,760  $8,760      Restructuring liabilities, long-term  42,538   43,911      Other  14,150   14,024          $65,448  $66,695             Depreciation and amortization expense of property, plant andequipment for the periods ended April 2, 2005 andMarch 27, 2004 was $37.3 million and$36.1 million, respectively. Total property, plant andequipment recorded under capital leases was $15.6 millionas of April 2, 2005 and December 25, 2004,respectively. Total accumulated depreciation under capitalleases was $9.9 million and $8.9 million as ofApril 2, 2005 and December 25, 2004, respectively.**3.****Goodwill and Other Intangible Assets**     Commencing in fiscal 2002, the Company adopted Statement ofFinancial Accounting Standards No. 142, “Goodwill andOther Intangible Assets” (“SFAS 142”).SFAS 142 requires goodwill to be tested for impairmentunder certain circumstances, written down when impaired, andrequires purchased intangible assets other than goodwill to beamortized over their useful lives unless these lives aredetermined to be indefinite. Goodwill and indefinite livedintangible assets will be subject to an impairment test at leastannually.     As of April 2, 2005, goodwill amounted to$489.5 million. Purchased intangible assets are carried atcost less accumulated amortization. The Company evaluated itsintangible assets and determined that all such assets havedeterminable lives. Amortization is computed over the estimateduseful lives of the respective assets, generally three to fiveyears. The Company expects amortization expense on purchasedintangible assets to be $0.7 million in the remainder offiscal 2005 and $0.6 million in fiscal 2006, at which timepurchased intangible assets will be fully amortized.Amortization of other intangible assets was $0.2 millionand $20.8 million for the three months ended April 2,2005 and March 27, 2004, respectively.                                           **April 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   (3,117)  —   1,233   4,350   (2,900)  —   1,450                             **Total other intangible assets**     $290,450  $(265,042) $(24,175) $1,233  $290,450  $(264,825) $(24,175) $1,450                             
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****4.****Short-term Borrowings and Long-term Debt**     Short-term borrowings and long-term debt consist of thefollowing (in thousands):           **April 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  59,311   59,311     Economic Development Board of Singapore Loans  —   27,148     Manufacturing Facility Loan, Suzhou China  60,000   60,000     Mortgages  32,163   32,582     Equipment Loans and Capital Leases  4,958   6,090     Receivables-backed Borrowings  50,000   50,000           436,432   465,131     Less amounts due within one year  (72,469)  (82,561)         $363,963  $382,570             On May 7, 2003, the Company sold $230 million inaggregate principal amount of 6.8% convertible senior notesdue April 30, 2010 to qualified institutional buyerspursuant to Rule 144A under the Securities Act of 1933, asamended. The notes are unsecured and effectively subordinated toall existing and future secured indebtedness. The notes areconvertible into the Company’s common stock at a conversionrate of 81.5494 shares per $1,000 principal amount of thenotes, or an aggregate of 18,756,362 shares, subject toadjustment in certain circumstances (equal to an initialconversion price of $12.2625 per share). The Company hasthe right to settle its obligation with cash or common stock.The initial conversion price represents a 125% premium over theclosing price of the Company’s common stock on May 1,2003, which was $5.45 per share. Prior to May 5, 2008,the Notes will not be redeemable at the Company’s option.Beginning May 5, 2008, if the closing price of theCompany’s common stock for 20 trading days within a periodof 30 consecutive trading days ending on the trading day beforethe date of mailing of the redemption notice exceeds 130% of theconversion price in effect on such trading day, the Company mayredeem the Notes in whole or in part, in cash, at a redemptionprice equal to 100% of the principal amount of the Notes beingredeemed plus any accrued and unpaid interest and accrued andunpaid liquidated damages, if any, to, but excluding, theredemption date. If, at any time, substantially all of theCompany’s common stock is exchanged or acquired forconsideration that does not consist entirely of common stockthat is listed on a United States national securities exchangeor approved for quotation on the NASDAQ National Market orsimilar system, the holders of the notes have the right torequire the Company to repurchase all or any portion of thenotes at their face value plus accrued interest.     The 5.75% Subordinated Debentures due March 1, 2012require semi-annual interest payments and annual sinking fundpayments of $5.0 million, which commenced March 1,1998. The Debentures are subordinated in right to payment to allsenior indebtedness.     On June 24, 2004, the Company entered into a one-yearreceivable-backed borrowing arrangement of up to$100 million with one financial institution collateralizedby all United States and Canadian accounts receivable. In thearrangement the Company uses a special purpose subsidiary topurchase and hold all of its United States and Canadian accountsreceivable. This special purpose subsidiary has borrowingauthority up to $100 million based upon eligible UnitedStates and Canadian accounts receivable. The special purposesubsidiary is consolidated for financial reporting purposes. Thetransactions under the arrangement are accounted for as shortterm borrowings and remain on the Company’s consolidatedbalance sheet. As of April 2, 2004 the Company had borrowed$50 million under the arrangement (subject to transactionfees);
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**and, the interest rate was LIBOR plus 3% and $157.8 millionof United States and Canadian receivables were pledged underthis arrangement and remain on the Company’s consolidatedbalance sheet. The terms of the facility require compliance withoperational covenants and several financial covenants, includingrequirements to maintain agreed-upon levels of liquidity and fora dilution-to-liquidation ratio, an operating income (loss)before depreciation and amortization to long-term debt ratio andcertain other tests relating to the quality and nature of thefinanced receivables. Based on the Company’s experiencewith collections on receivables the Company does not believethat repayment would take longer than 30 days. However,early amortization events under the facility generally will notcause an event of default under the Company’s convertiblesenior notes due 2010 and the Company does not believe that suchan event or the lack of borrowing availability under thisfacility would have a material adverse effect on theCompany’s liquidity.     In December 2004, the liquidity covenant and covenant regardingthe ratio of operating income (loss) before depreciation andamortization to long-term debt were amended in order to assurecompliance based on actual and projected operating results. OnFebruary 7, 2005, the Company reported to the lender that,as of January 31, 2005, it was not in compliance with afinancial covenant under the facility setting a maximum amountfor the ratio of dilution-to-liquidation of our accountsreceivable. The dilution-to-liquidation ratio compares theamount of returns, discounts, credits, offsets, and otherreductions to the Company’s existing accounts receivable tocollections on accounts receivable over specified periods oftime. On February 11, 2005, the Company entered into anagreement with the lender providing that it would temporarilyforbear from exercising rights and remedies available to it as aresult of the occurrence of the early amortization event underthe facility caused by the Company’s noncompliance withthis covenant as of January 31, 2005. On March 4,2005, the Company and the lender entered into a second amendmentto the facility documents providing that the lender willpermanently forbear from exercising rights and remedies as aresult of that early amortization event, and providing for anincrease to the permitted maximum level of thedilution-to-liquidation ratio. In connection with the secondamendment, the Company and the lender also agreed to increasethe annual interest rate under the facility by 0.75%, to LIBORplus 3.75%, during any period when the dilution-to-liquidationratio exceeds the pre-amendment level. As a result, the Companyis currently in compliance with all operational and financialcovenants under the facility. This facility terminates under itspresent terms in June 2005. The Company is currently evaluatingvarious alternatives, including extension of the currentfacility. The Company can not give assurance that it can replaceor extend this facility on terms acceptable to the Company. IfMaxtor does not extend this facility, it is required to repaythe outstanding balance in its entirety. The Company does notbelieve that the repayment of the balance owing on the facilitywould have a material adverse effect on the Company’sliquidity.     In April 2003, the Company obtained credit lines with the Bankof China to be used for the construction and working capitalrequirements of the manufacturing facility being established inSuzhou, China. These lines of credit are U.S.-dollar-denominatedand are drawable until April 2007. Maxtor Technology Suzhou(“MTS”) has drawn down $60 million as ofApril 2, 2005, consisting of the plant construction loan inthe amount of $30 million made available by the Bank ofChina to MTS in October 2003, and a project loan in the amountof $30 million made available by the Bank of China to MTSin August 2004. Borrowings under these lines of credit arecollateralized by the Company’s facilities in Suzhou,China. The interest rate on the plant construction loan is LIBORplus 50 basis points (subject to adjustment to60 basis points), with the borrowings repayable in twoinstallment payments of $15 million in October 2008 andApril 2009, respectively. The interest rate on the project loanwas LIBOR plus 100 basis points, and the borrowing isrepayable in August 2009. Both the construction loan and theproject loan require the Company to make semi-annual payments ofinterest and require MTS to maintain financial covenants,including a maximum liability to assets ratio and a minimumearnings to interest expense ratio, the first ratio to be testedannually commencing in December 2004 and the latter ratio to betested annually commencing in December 2005. MTS is incompliance with all covenants as of December 25, 2004. Inconnection with the funding of the new project loan, the parentcompany of MTS, Maxtor International Sàrl, Switzerland,agreed to guaranty MTS’
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**obligations under both the construction loan and the projectloan. Maxtor does not expect to draw down any further fundingunder this facility.     In September 1999, Maxtor Peripherals (S) Pte Ltd.(“MPS”) entered into a four-year Singapore dollardenominated loan agreement with the Economic Development Boardof Singapore (the “Board”), which was amortized inseven equal semi-annual installments ending March 2004. Thisloan was paid in full in March 2004.     In September 2003, MPS entered into a second four-year52 million Singapore dollar loan agreement with the Boardat 4.25% which is amortized in seven equal semi-annualinstallments ending December 2007. On March 31, 2005, theCompany elected to repay this loan, which had an outstandingbalance of $27.1 million, in full. As of April 2,2005, there was no balance outstanding.     In connection with the acquisition of the Quantum HDD business,the Company acquired real estate and related mortgageobligations. The term of the mortgages is ten years, at aninterest rate of 9.2%, with monthly payments based on atwenty-year amortization schedule, and a balloon payment at theend of the 10-year term, which is September 2006. Theoutstanding balance at April 2, 2005 was $32.2 million.     As of April 2, 2005, the Company had capital leasestotaling $5.0 million. These capital leases have maturitydates through August 2009 and interest rates averaging 7.8%.**5.****Guarantees*****Intellectual Property Indemnification Obligations***     The Company indemnifies certain customers, distributors,suppliers, and subcontractors for attorney fees and damages andcosts awarded against these parties in certain circumstances inwhich its products are alleged to infringe third partyintellectual property rights, including patents, registeredtrademarks, or copyrights. The terms of its indemnificationobligations are generally perpetual from the effective date ofthe agreement. In certain cases, there are limits on andexceptions to its potential liability for indemnificationrelating to intellectual property infringement claims. TheCompany cannot estimate the amount of potential future payments,if any, that the Company might be required to make as a resultof these agreements. To date, the Company has not paid anyclaims or been required to defend any claim related to itsindemnification obligations, and accordingly, the Company hasnot accrued any amounts for its indemnification obligations.However, there can be no assurances that the Company will nothave any future financial exposure under those indemnificationobligations.***Accrued Warranty***     The Company generally warrants its products against defects inmaterials and workmanship for varying lengths of time. TheCompany records an accrual for estimated warranty costs whenrevenue is recognized. Warranty covers cost of repair of thehard drive and the warranty periods generally range from one tofive years. The Company has comprehensive processes that it usesto estimate accruals for warranty exposure. The processesinclude specific detail on hard drives in the field by producttype, estimated failure rates and costs to repair or replace.Although the Company believes it has the continued ability toreasonably estimate warranty expenses, unforeseeable changes infactors used to estimate the accrual for warranty could occur.These unforeseeable changes could cause a material change in theCompany’s warranty accrual estimate. Such a change would berecorded in the period in which the change was identified.Effective September 2004, the Company announced the introductionof a new warranty period for new sales, extending the term tothree or five years for products shipped to the distributionchannel. Changes in the Company’s product warranty
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**liability during the twelve-month periods ended April 2,2005 and March 27, 2004 were as follows (in thousands):           **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         Balance at beginning of period $185,940  $209,426     Charges to operations  52,419   39,431     Settlements  (47,341)  (56,507)    Changes in estimates  14,987(2)  (1,025)(1)           Balance at end of period $206,006  $191,325         (1)     Primarily related to product expirations. (2)     The increase in warranty liability was primarily attributed to a    change in estimate of $14.9 million which is comprised of a    $14.5 million reserve to cover specific claims received    from customers for additional warranty costs and an increase in    the estimated Annual Return Rate of $5.0 million which was    partially offset by a decrease in the estimated cost of future    repair of $4.4 million. Expirations for the period amounted    to $0.2 million.     The reduction in the estimated cost of future repair of$4.4 million is the result of continued improvements in theoverall pricing structure with third party vendors andrelocating repair facilities from the United States and Irelandto lower cost locations in Mexico and Hungary. The Company alsoincreased yields from its repair processes, which increased thenumber of refurbished units available as replacement units andreduced the cost of repair. The Company will continue to makeoperational improvements to its repair process throughout 2005and the impact of these improvements on the warranty liabilitywill be reflected in the period in which they are achieved.     The ship versus return impact on the warranty reserve of$5.1 million, denoted as the difference between the chargesto operations and settlements, represents the change in theliability requirement attributable to changes to the “inwarranty” installed base, caused by the shipment of drivesin the period offset by drive returns and retirements. Theimpact of changes in the ship versus return dynamic on thewarranty liability requirement in 2005 reflects the improvedquality of products currently being shipped relative to historicproducts being settled and retired from the installed base. Thischange is evidenced in a higher number of actualreturns/settlements on older products, compared with expectedreturns associated with new product shipments. The impact ofextending the warranty period on distribution products is alsoincluded in this ship versus return impact.**6.****Restructuring**     In connection with the 2001 acquisition of the hard drivebusiness of Quantum Corporation (“Quantum HDD”), theCompany recorded a $45.3 million liability for estimatedfacility exit costs for the closure of three Quantum HDD officesand research and development facilities located in Milpitas,California, and two Quantum HDD office facilities located inSingapore.     During the three months ended September 25, 2004, inassociation with the Company’s restructuring activities,the Company recorded an additional $16.4 million liabilitydue to a change in estimated lease obligations for two of theQuantum HDD acquired offices and research and developmentfacilities located in California. This estimate was based uponcurrent comparable market rates for leases and anticipated datesfor these properties to be subleased. Expected sublease incomeon these two facilities included in the Company’s estimatesis $15.9 million. Should facilities rental rates decreaseor should it take longer than expected to
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**sublease these facilities, the actual loss could exceed theseestimates. The Company continues to evaluate and review itsrestructuring accrual for any indications in the market thatcould require the Company to change its assumptions for therestructuring accruals already recorded.     The balance remaining in the facilities exit accrual is expectedto be paid over several years, based on the underlying leaseagreements. The merger-related restructuring accrual is includedwithin the balance sheet captions of Accrued and otherliabilities and Other liabilities.     During the year ended December 28, 2002, the Companyrecorded a restructuring charge of $9.5 million associatedwith closure of one of its facilities located in California. Theamount comprised $8.9 million of future non-cancelablelease payments, which were expected to be paid over severalyears based on the underlying lease agreement, and the write-offof $0.6 million in leasehold improvements. Therestructuring accrual is included on the balance sheet withinAccrued and other liabilities with the balance of$9.7 million. The Company increased this restructuringaccrual by $3.3 million due to a change in estimated leaseobligations associated with its restructuring activities in thethree months ended September 25, 2004. This estimate isbased upon current comparable market rates for leases andanticipated dates for one of the properties to be subleased.Expected sublease income on this facility included in theCompany’s estimates is $2.5 million. Should facilitiesrental rates decrease or should it take longer than expected tosublease these facilities, the actual loss could exceed theseestimates. The Company continues to evaluate and review itsrestructuring accrual for any indications in the market thatcould require the Company to change its assumptions for therestructuring accruals already recorded. During the three monthsended September 25, 2004, the Company also recorded$0.6 million in association with the closure of one of itsfacilities in Colorado.     In July 2004, the Company announced a reduction in force whichaffected approximately 377 employees in the United States andSingapore. During the three months ended April 2, 2005, anadjustment of $(0.3) million was made to the associatedrestructuring liability. As of December 25, 2004, theCompany incurred a total of $12.9 million ofseverance-related charges and it expects to be substantiallycompleted with this restructuring by the second quarter of 2005.     On March 4, 2005, the Company determined to proceed with areduction in force of up to 5,500 employees at its Singaporemanufacturing operations. The reduction in force is a resultfrom the Company’s previously announced transition ofmanufacturing for additional desktop products from its Singaporemanufacturing operations to China and closure of one of its twoplants in Singapore, scheduled to be completed by the firstquarter of 2006. The Company expects that approximately 2,500positions will be reduced by attrition and the remainder byseverance. During the three months ended April 2, 2005, theCompany incurred $1.9 million and $12.3 million inseverance-related charges associated with the Company’sreduction in force of approximately 125 employees in the UnitedStates and 5,500 employees in Singapore, respectively. TheCompany expect to be substantially completed with therestructuring by the first quarter of 2006.
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     The facilities-related restructuring accrual is included withinthe balance sheet captions of Accrued and other liabilities andOther liabilities. The following table summarizes the activityrelated to the severance and facilities-related restructuringcosts as of April 2, 2005:               **Facilities-related** **Severance**    **Restructuring** **and**    **Charge** **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)    2005 accrual  —   14.2   14.2               Balance at April 2, 2005 $50.1  $14.4  $64.5           **7.****Asset Held for Sale**     During the year ended December 25, 2004, the Companyclassified a building owned by Maxtor in Louisville, Colorado asheld for sale in accordance with the requirements ofSFAS 144, resulting in an impairment charge of$7.8 million. The Company’s asset held for saleamounted to $8.2 million representing the estimatedrealizable value of the building and is included within thebalance sheet caption of Prepaid expenses and other. Upon theclassification, the Company suspended depreciation of thisbuilding which was $0.4 million annually.**8.****Net Income (Loss) Per Share**     In accordance with the disclosure requirements of Statements ofFinancial Accounting Standards No. 128, “Earnings perShare” a reconciliation of the numerator and denominator ofthe basic and diluted net loss per share calculations isprovided as follows (in thousands, except share and per shareamounts):            **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**     **Numerator — Basic and Diluted**            Net income (loss) $(24,196) $8,730            Net income (loss) available to common stockholders $(24,196) $8,730        **Denominator**            Basic weighted average common shares outstanding  251,595,181   246,590,255     Effect of dilutive securities:             Common stock options  —   10,304,899      Restricted shares subject to repurchase  —   65,000            Diluted weighted average common shares  251,595,181   256,960,154            Net income (loss) per share — basic $(0.10) $0.04            Net income (loss) per share — diluted $(0.10) $0.03             As-if convertible shares and interest expense related to the6.8% convertible senior notes due 2010 were excluded fromthe calculation, as the effect was anti-dilutive. The followingnumber of common stock options
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**and as-if converted shares were excluded from the computation ofdiluted net income per share as the effect was anti-dilutive:           **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         Common stock options  13,466,798   2,880,733     Restricted shares subject to repurchase  20,000   —     As-if converted shares related to 6.8% Convertible Senior    Notes due 2010 issued on May 7, 2003  18,756,362   18,756,362 **9.****Comprehensive Income (Loss)**     Comprehensive income (loss) as defined includes all changes inequity (net assets) during a period from non-owner sources.Cumulative other comprehensive income (loss), as presented inthe accompanying consolidated balance sheets, consists of thenet unrealized gains (losses) on available-for-sale securities,net of tax, if any. Total comprehensive income (loss) for thethree months ended April 2, 2005 and March 27, 2004,is presented in the following table (in thousands):           **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         Net income (loss) $(24,196) $8,730     Unrealized loss on investments in securities  (1,920)  (865)    Less: reclassification adjustment for gain (loss) included in    net income (loss)  (283)  32            Comprehensive income (loss) $(25,833) $7,833        **10.****Segment and Major Customers Information**     Statement of Financial Accounting Standards No. 131,“Disclosures about Segments of an Enterprise and RelatedInformation,” establishes annual and interim reportingstandards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas andmajor customers. The method for determining what information toreport is based upon the way management organizes the operatingsegments within the Company for making operating decisions andassessing financial performance. The Company’s chiefoperating decision-maker is considered to be the Chief ExecutiveOfficer (“CEO”). The CEO reviews financial informationfor purposes of making operational decisions and assessingfinancial performance. The Company only has one reportablesegment.     Sales to original equipment manufacturers (“OEMs”) forthe three months ended April 2, 2005 represented 51.3% oftotal revenue, compared to 55.2% of total revenue for thecorresponding period in fiscal year 2004. Sales to thedistribution and retail channels for the three months endedApril 2, 2005 represented 48.7% of total revenue, comparedto 44.8% of total revenue in the corresponding period in fiscalyear 2004. Sales to two customers exceeded 10% of total revenuesin the three months ended April 2, 2005, respectively.Sales to one customer exceeded 10% of total revenues in thethree months ended March 27, 2004.
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     The Company has a worldwide sales, service and distributionnetwork. Products are marketed and sold through a direct salesforce to computer equipment manufacturers, distributors andretailers in the United States, Asia Pacific and Japan, Europe,the Netherlands, Middle East and Africa, Latin America andother. Maxtor operations outside the United States primarilyconsist of its manufacturing facilities in Singapore and Chinathat produce subassemblies and final assemblies for theCompany’s disk drive products. Revenue by destination forthe three months ended April 2, 2005 and March 27,2004, respectively, is presented in the following table (inthousands):           **Three Months Ended**     **April 2,** **March 27,**  **2005** **2004**         United States $332,278  $318,647     Asia Pacific and Japan  323,311   306,837     Europe, Middle East and Africa (excluding the Netherlands)  285,002   307,391     The Netherlands  117,212   73,843     Latin America and other  11,798   12,970            Total $1,069,601  $1,019,688             Long-lived asset information by geographic area as ofApril 2, 2005 and December 25, 2004 is presented inthe following table (in thousands):           **April 2,** **December 25,**  **2005** **2004**         United States $688,288  $696,317     Asia Pacific and Japan  152,119   172,002     Europe, Middle East and Africa  541   444     Latin America and other  —   271            Total $840,948  $869,034             Long-lived assets located within the United States consistprimarily of goodwill and other intangible assets. Goodwill andother intangible assets within the United States amounted to$490.7 million and $490.9 million as of April 2,2005 and December 25, 2004, respectively. Long-lived assetslocated outside the United States consist primarily of theCompany’s manufacturing operations located in Singapore andChina.**11.****Contingencies*****Legal Proceedings***     From time to time, the Company has been subject to litigationincluding the pending litigation described below. Because of theuncertainties related to both the amount and range of loss onthe remaining pending litigation, the Company is unable to makea reasonable estimate of the liability that could result from anunfavorable outcome. As additional information becomesavailable, the Company will assess its potential liability andrevise its estimates. Pending or future litigation could becostly, could cause the diversion of management’s attentionand could upon resolution, have a material adverse effect on itsbusiness, results of operations, financial condition and cashflow.     In particular, the Company is engaged in certain legal andadministrative proceedings incidental to the Company’snormal business activities and believes that these matters willnot have a material adverse effect on the Company’sfinancial position, results of operations or cash flow.
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     Prior to Maxtor’s acquisition of the Quantum HDD business,the Company, on the one hand, and Quantum and MatsushitaKotobuki Electronics Industries, Ltd. (“MKE”), on theother hand, were sued by Papst Licensing, GmbH, a Germancorporation, for infringement of a number of patents that relateto hard disk drives. Papst’s complaint against Quantum andMKE was filed on July 30, 1998, and Papst’s complaintagainst Maxtor was filed on March 18, 1999. Both lawsuits,filed in the United States District Court for the NorthernDistrict of California, were transferred by the Judicial Panelon Multidistrict Litigation to the United States District Courtfor the Eastern District of Louisiana for coordinated pre-trialproceedings with other pending litigations involving the Papstpatents (the “MDL Proceeding”). The matters will betransferred back to the District Court for the Northern Districtof California for trial. Papst’s infringement allegationsare based on spindle motors that Maxtor and Quantum purchasedfrom third party motor vendors, including MKE, and the use ofsuch spindle motors in hard disk drives. The Company purchasedthe overwhelming majority of spindle motors used in our harddisk drives from vendors that were licensed under the Papstpatents. Quantum purchased many spindle motors used in its harddisk drives from vendors that were not licensed under the Papstpatents, including MKE. As a result of the Company’sacquisition of the Quantum HDD business, Maxtor assumedQuantum’s potential liabilities to Papst arising from thepatent infringement allegations Papst asserted against Quantum.The Company filed a motion to substitute the Company for Quantumin this litigation. The motion was denied by the Court presidingover the MDL Proceeding, without prejudice to being filed againin the future.     In February 2002, Papst and MKE entered into an agreement tosettle Papst’s pending patent infringement claims againstMKE. That agreement includes a license of certain Papst patentsto MKE which might provide Quantum, and thus the Company, withadditional defenses to Papst’s patent infringement claims.     On April 15, 2002, the Judicial Panel on MultidistrictLitigation ordered a separation of claims and remand to theDistrict of Columbia of certain claims between Papst and anotherparty involved in the MDL Proceeding. By order enteredJune 4, 2002, the court stayed the MDL Proceeding pendingresolution by the District of Columbia court of the remandedclaims. These separated claims relating to the other party arecurrently proceeding in the District Court for the District ofColumbia.     The results of any litigation are inherently uncertain and Papstmay assert other infringement claims relating to currentpatents, pending patent applications, and/or future patentapplications or issued patents. Additionally, the Company cannotassure you it will be able to successfully defend itself againstthis or any other Papst lawsuit. Because the Papst complaintsassert claims to an unspecified dollar amount of damages, andbecause the Company was at an early stage of discovery when thelitigation was stayed, the Company is unable to determine thepossible loss, if any, that the Company may incur as a result ofan adverse judgment or a negotiated settlement with respect tothe claims against us. The Company made an estimate of thepotential liability which might arise from the Papst claimsagainst Quantum at the time of the Company’s acquisition ofthe Quantum HDD business. The Company has revised this estimateas a result of a related settlement with MKE and this estimatewill be further revised as additional information becomesavailable. A favorable outcome for Papst in these lawsuits couldresult in the issuance of an injunction against the Company andits products and/or the payment of monetary damages equal to areasonable royalty. In the case of a finding of a willfulinfringement, the Company also could be required to pay trebledamages and Papst’s attorney’s fees. The litigationcould result in significant diversion of time by our technicalpersonnel, as well as substantial expenditures for future legalfees. Accordingly, although the Company cannot currentlyestimate whether there will be a loss, or the size of any loss,a litigation outcome favorable to Papst could have a materialadverse effect on our business, financial condition andoperating results. Management believes that it has validdefenses to the claims of Papst and is defending this mattervigorously.
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**MAXTOR CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)*****Investment Commitment***     The Company has agreed to invest $200.0 million over thenext five years to establish a manufacturing facility in Suzhou,China. As of April 2, 2005, the Company has invested$100.0 million and intends to complete the investment inthe remaining three years.**12.****Related Party Transactions**     In the three months ended April 2, 2005 and March 27,2004, the Company sold an aggregate of approximately$10.7 million and $24.2 million of goods to SolectronCorporation, respectively, and purchased an aggregate ofapproximately $16.6 million and $8.0 million of goodsand services from Solectron, respectively. The Company’saccounts receivable balances for Solectron were$5.3 million and $7.2 million as of April 2, 2005and December 25, 2004, respectively. The Company’saccounts payable balances for Solectron were $8.1 millionand $0.4 million, as of April 2, 2005 andDecember 25, 2004, respectively. A director of the Companyis also the Chief Executive Officer and a director of Solectron.
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**Item 2.*****Management’s Discussion and Analysis of Financial    Condition and Results of Operations***     The following discussion should be read in conjunction with thecondensed consolidated financial statements and the accompanyingnotes included in Part I. Financial Information,Item 1. Condensed Consolidated Financial Statements of thisreport.     This report contains forward-looking statements within themeaning of the U.S. federal securities laws that involverisks and uncertainties. The statements contained in this reportthat are not purely historical, including, without limitation,statements regarding our expectations, beliefs, intentions orstrategies regarding the future, are forward-looking statements.Examples of forward-looking statements in this report includestatements regarding capital expenditures, liquidity, impacts ofour restructuring, our indemnification obligations, the resultsof litigation, amortization of other intangible assets and ourrelationships with vendors. In this report, the words“anticipate,” “believe,” “expect,”“intend,” “may,” “will,”“should,” “could,” “would,”“project,” “plan,” “estimate,”“predict,” “potential,” “future,”“continue,” or similar expressions also identifyforward-looking statements. These statements are onlypredictions. We make these forward-looking statements based uponinformation available on the date hereof, and we have noobligation (and expressly disclaim any such obligation) toupdate or alter any such forward-looking statements, whether asa result of new information, future events, or otherwise. Ouractual results could differ materially from those anticipated inthis report as a result of certain factors including, but notlimited to, those set forth in the following section entitled“Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Certain FactorsAffecting Future Performance” and elsewhere in this report.**Background**     Maxtor Corporation (“Maxtor” or the“Company”) was founded in 1982 and completed aninitial public offering of common stock in 1986. In 1994, wesold 40% of our outstanding common stock to Hyundai ElectronicsIndustries (now Hynix Semiconductors Inc. —“HSI”) and its affiliates. In early 1996, HyundaiElectronics America (now Hynix Semiconductor AmericaInc. — “Hynix”) acquired all of theremaining publicly held shares of our common stock as well asall of our common stock then held by Hynix Semiconductor, Inc.and its affiliates. In July 1998, we completed a public offeringof 49.7 million shares of our common stock, receiving netproceeds of approximately $328.8 million from the offering.In February 1999, we completed a public offering of7.8 million shares of our common stock with net proceeds tous of approximately $95.8 million.     On April 2, 2001, we acquired Quantum Corporation’sHard Disk Drive Group (“Quantum HDD”). The primaryreason for our acquisition of Quantum HDD was to create astronger, more competitive company, with enhanced prospects forcontinued viability in the storage industry.     On May 7, 2003, we sold $230 million in aggregateprincipal amount of 6.8% convertible senior notes due inApril 2010 to qualified institutional buyers pursuant toRule 144A under the Securities Act of 1933, as amended. Foradditional information regarding the convertible senior notes,see the discussion below under the heading “Liquidity andCapital Resources.”**Executive Overview**     Maxtor is a leading supplier of hard disk drives for desktopcomputers, Intel-based servers and consumer electronicsapplications. We sell to original equipment manufacturers(“OEMs,”) distributors and retail customers worldwide.We manufacture our products in our factories in Singapore andChina. We produce approximately 60% of our required media andpurchase the remainder of our components from third partysuppliers.     We estimate that approximately 80% of our revenue will come fromour desktop computer products in 2005. Revenue from our OneTouch personal storage products and other retail products(“branded products”) are a growing part of ourbusiness and we expect these products will represent in theaggregate approximately 6-8% of our revenue in 2005. Hard diskdrives for Intel-based servers are expected to representapproximately 12-14% of our revenue in 2005. We recentlyintroduced our next generation server products which have
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received strong market acceptance. We expect strong demand forour server products at least through the second quarter of 2005.Although our server products were unprofitable during 2004, weexpect to have improved gross profit on these productsthroughout 2005. We expect only modest improvement in grossprofit for our desktop products in 2005.     Maxtor had several challenges in 2004, including product qualityissues, an uncompetitive cost structure and high operatingexpenses. A new management team, appointed at the end of 2004,has identified several opportunities and developed a strategy toaddress the Company’s business issues. We have madeprogress on quality improvements on our desktop products and weexperienced increased volume at our OEM customers beginning inthe fourth quarter of 2004. During 2005, the Company will focuson improving the efficiency of our product roadmap, lowering ourcost of goods sold and reducing operating costs. We stoppeddevelopment on our single-head desktop platform in late 2004 anddelayed our planned entry into the 2.5-inch mobile drive marketby canceling the product which was scheduled to ship in thefirst half of 2005. These actions resulted in charges of$4.9 million in the first quarter 2005. We will be fundingaccelerated development efforts in small form factor productsfor the emerging handheld consumer markets in 2005, with a goalto have those products available to ship in volume in 2006. Weare continuing development efforts on our next generationmulti-head desktop products and will be developing a common,scalable architecture for our products. We expect products withthis architecture will launch by the end of 2006 and we expectthis common architecture will significantly improve ourdevelopment efficiency and manufacturability of our products. Wewill also be funding development for our enterprise products andretail products in 2005.     We are working on achieving cost improvements from our captivemedia supplier, MMC, and from our two head suppliers. We will beaccelerating the move of one- and two-headed drives for desktopcomputers to our China facility during 2005 and by the end of2005 we expect two-thirds of our desktop disk drive productswill be manufactured in China. We therefore expect to reduceheadcount in our Singapore manufacturing facility by up to 5,500employees over the course of 2005 and early 2006. We expect thatapproximately 2,500 positions will be reduced by attrition andthe remainder by severance. We recorded a $12.3 millioncharge in the first quarter of 2005 for severance-relatedexpenses from the reduction in force in Singapore, all of whichwill be cash expenditures over time. The Company anticipatesthat the cash outflow from this charge will be approximatelyeven over four quarters commencing in the second quarter of2005. In addition to the severance costs, the Company will alsospend approximately $6.0 million in retention bonuses overa two year period, paid out as $1.5 million at the end ofone year and $4.5 million at the end of the second year,recorded ratably over those periods. By the end of fiscal 2005we expect the China operation to deliver a 50% reduction in thelabor and overhead per drive or an approximately two percentagepoint improvement in gross margins of our desktop products. Wewill be taking further actions to enhance throughput and improvemanufacturing efficiencies in 2005. We are also developing plansto relocate the majority of our media production to Asiastarting in 2006 which we expect will also lower ourmanufacturing costs.     We also took action in the first quarter to reduce headcount inthe United States in quality, supplier engineering and SG&Aeliminating approximately 125 positions which will take effectthroughout 2005. We recorded a charge of $1.9 millionassociated with this reduction in the first quarter of 2005 andexpect further charges over the remainder of the year. We areunable to estimate the balance and timing of additional chargesfrom further headcount reductions at this time, as we areevaluating personnel requirements in certain functions. At thesame time, we have decided to incrementally fund our enterpriseand retail businesses and accelerate small form factordevelopment efforts, which will result in incremental hiring andinvestment in those areas. We believe that we can fund theseadditional activities while keeping the quarterly expenses inthe $100 million to $110 million range for the yearwhich would approximate 10.0% to 10.5% of revenues.     We believe that we have cash and cash equivalents, together withcash generated from operations, sufficient to fund ouroperations through at least the next twelve months. We expect tomaintain capital expenditures at approximately$175 million. We expect severance-related payments in 2005associated with our restructuring activities unpaid as ofApril 2, 2005 to be approximately $11.3 million, ofwhich $9.0 million is related to Singapore and$2.3 million is related to the United States. Additionally,we expect facilities-related payments in 2005 associated withour restructuring activities to be approximately$12.9 million. We believe our cash conversion cycle, or thenet total of days of sales outstanding plus days of sales ininventory
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less days of accounts payable outstanding, for 2005 will be zeroto negative five days, allowing us to grow revenue with limitedimpact to our liquidity.     There are numerous risks to our successful execution of ourbusiness plans, including our ability to timely introduce andramp our new products, transition our manufacturing of desktopproducts from Singapore to China, achieve manufacturingefficiencies, procure the components we require, specificallyheads and media, from our suppliers in the quantities we need tomeet demand and at reasonable prices and develop a commonarchitectural platform in the time projected. The Company facescompetition, including increased competition in the sale of itsproducts to the near-and mid-line storage market and theconsumer electronics markets and expects continuing pressure onaverage selling prices. See “Certain Factors AffectingFuture Performance” for further information concerningrisks to our business.**Critical Accounting Policies**     Our discussion and analysis of the Company’s financialcondition and results of operations are based upon Maxtor’sconsolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in theUnited States. The preparation of these financial statementsrequires management to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets andliabilities. On an on-going basis, we evaluate our estimates andthe sensitivity of these estimates to deviations in theassumptions used in making them. We base our estimates onhistorical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparentfrom other sources. Historically, we have been reasonablyaccurate in our ability to make these estimates and judgments;however, significant changes in our technology, our customerbase, the economy and other factors may result in materialdeviations between management’s estimates and actualresults.     We believe the following critical accounting policies representour significant judgments and estimates used in the preparationof the company’s consolidated financial statements: •     revenue recognition;  •     sales returns, other sales allowances and allowance for doubtful    accounts;  •     valuation of intangibles, long-lived assets and goodwill;  •     warranty;  •     inventory reserves;  •     income taxes; and  •     restructuring liabilities, litigation and other contingencies.     For additional information regarding our critical accountingpolicies mentioned above, see “Management’s Discussionand Analysis of Financial Condition and Results ofOperations” in our Annual Report on Form 10-K/A forthe fiscal year ended December 25, 2004.
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**Results of Operations*****Net Revenues and Gross Profit***               **Three Months Ended**         **April 2,** **March 27,**    **2005** **2004** **Change**         **(In millions)**    Total revenues $1,069.6  $1,019.7  $49.9     Gross profit $112.4  $155.1  $(42.7)    Net income (loss) $(24.2) $8.7  $(32.9)*As a percentage of revenue:*                Total revenues  100.0%  100.0%        Gross profit  10.5%  15.2%        Net income (loss)  (2.3)%  0.9%         *Net Revenues.* Revenue in the three months endedApril 2, 2005 was $1,070 million. This represented anincrease of 4.9% when compared to $1,020 million in thecorresponding period in fiscal 2004. Total shipments for thethree months ended April 2, 2005 were 14.2 millionunits, which was 0.6 million units or 4.4% higher ascompared to the three months ended March 27, 2004. Totalunits and revenue increased during the three months endedApril 2, 2005 as a result of increased shipments of ourMaxtor branded and desktop products to distribution and retailcustomers. Additionally, we experienced increased revenue fromsales of our enterprise products to major OEM and distributioncustomers due to excess demand for these products in theindustry that created a favorable pricing environment withstable average selling prices (“ASP”).     Revenue from sales to OEMs represented 51.3% of revenue in thethree months ended April 2, 2005 compared to 55.2% ofrevenue in the corresponding period in fiscal year 2004. Inabsolute dollars, sales to OEMs decreased 2.6% during the threemonths ended April 2, 2005 compared to the correspondingperiod in 2004. The decrease in revenue both in absolute dollarsand as a percentage of revenues was primarily the result ofreduced shipments of digital entertainment products at regionalOEMs. This reduction was caused by product delays andcompetitive pricing on lower capacity products. These factorsresulted in lost sales opportunities to these customers. Thisreduction was partially offset by increased revenue from thesales of our enterprise products. This increase was driven byexcess demand for these products in the industry that created afavorable pricing environment with stable ASPs.     Revenue from sales to the distribution channel and retailcustomers in the three months ended April 2, 2005represented 48.7% of revenue, compared to 44.8% of revenue, inthe corresponding period in fiscal 2004.     Revenue from sales to the distribution channel in the threemonths ended April 2, 2005 represented 38.0% of revenue,compared to 38.6% of revenue, in the corresponding period infiscal 2004. In absolute dollars, sales to the distributionchannel increased 3.4%, during the three months endedApril 2, 2005. The increase in revenue in absolute dollarswas primarily the result of growth in shipments of our desktopproducts as we experience strong carry over demand from thefourth quarter of fiscal 2004 and stable pricing. Additionally,we experienced growth in revenue from the sales of enterpriseproducts as market demand for these products was in excess ofsupply.     Revenue from sales to retail customers in the three months endedApril 2, 2005 represented 10.7% of revenue, compared to6.2% of revenue in the corresponding period in fiscal 2004. Inabsolute dollars, sales to the retail channel increased 80.0% or$51.0 million, during the three months ended April 2,2005. The increase in retail sales as a percentage of revenueand in absolute dollars during the three month periods was theresult of the growth in sales of our Maxtor branded productsdriven by continued positive customer acceptance.     Domestic revenue in the three months ended April 2, 2005represented 31.1% of total sales compared to 32.0% of totalsales in the corresponding period in fiscal year 2004. Inabsolute dollars, domestic revenue increased 1.9%, during thethree months ended April 2, 2005. Domestic revenue includessales to the United States and Canada. The increase in domesticrevenue in absolute dollars during the three months ended
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April 2, 2005 was a result of increased shipments of Maxtorbranded products to retail customers. Additionally, weexperienced increased sales of desktop and enterprise productsto distribution customers. This increase was partially offset byreduced shipments of digital entertainment products to regionalOEMs and desktop products to major personal computer OEMs.     International revenue in the three months ended April 2,2005 represented 68.9% of total sales compared to 68.0% of totalsales in the corresponding period in fiscal year 2004. In thethree months ended April 2, 2005, international revenue wascomprised of 54.6% Europe, Middle East and Africa, 43.8% AsiaPacific and Japan and 1.6% for Latin America and other regions.In the three months ended March 27, 2004, internationalrevenue was comprised of 55.0% Europe, Middle East and Africa,44.2% Asia Pacific and Japan and 0.8% for Latin America andother regions.     Sales to Europe, Middle East and Africa in the three monthsended April 2, 2005 and March 27, 2004 represented37.6% and 37.4% of total revenue, respectively. In absolutedollars, sales to Europe, Middle East and Africa increased 5.5%during the three months ended April 2, 2005. The increasein European sales in absolute dollars during the three monthsended April 2, 2005 was a result of increased demand forour desktop products with regional OEM customers and growth insales of our Maxtor branded products. This was partially offsetby decreased shipments of desktop products to our major personalcomputer OEM and digital entertainment customers.     Sales to Asia Pacific and Japan in the three months endedApril 2, 2005 and March 27, 2004 represented 30.2% and30.1% of total revenue, respectively. In absolute dollars, salesto Asia Pacific and Japan decreased 5.4% during the three monthsended April 2, 2005. The decrease in sales to Asia andJapan in absolute dollars during the three months endedApril 2, 2005, was the result of reduced sales of ourDesktop and Enterprise products to major personal computer OEMs.     Sales to two customers respectively exceeded 10% of totalrevenues in the three months ended April 2, 2005. Sales toone customer exceeded 10% of total revenues in the three monthsended March 27, 2004.     *Cost of Revenues; Gross Profit.* Gross profit decreased to$112.4 million in the three months ended April 2,2005, compared to $155.1 million for the correspondingthree months in fiscal year 2004. This represented an overalldecrease in gross profit of $42.7 million. As a percentageof revenue, gross profit decreased to 10.5% in the three monthsended April 2, 2005 from 15.2% in the corresponding threemonths of fiscal year 2004. The decrease in gross profit, bothas a percentage of revenue and actual dollars during the threemonths ended April 2, 2005, was primarily due to the impactof the decline in ASPs of $166.9 million. This decline inASP was partially offset by the impact of an increase in productcapacity mix of $44.2 million, reflecting the shipment of agreater proportion of higher capacity products. These twofactors together accounted for a net decline in gross profit of$122.7 million     We achieved net product cost reductions of $80.0 million topartially offset this decline. These net product cost reductionsincluded materials cost reductions of $74.6 million.Additionally, gross profit was benefited $21.3 million dueto our Singapore and China plants operating at greater capacity.These benefits were offset by adverse warranty impact of$29.0 million which was primarily driven by specific claimsreceived from customers for additional warranty costs andincreased charges to operations. Other productivity improvementscontributed $13.1 million to gross profit.
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***Operating Expenses***               **Three Months Ended**         **April 2,** **March 27,**    **2005** **2004** **Change**         **(In millions)**    Research and development $78.5  $85.1  $(6.6)    Selling, general and administrative $37.3  $32.5  $4.8     Amortization of intangible assets $0.2  $20.8  $(20.6)    Restructuring charge $13.9  $—  $13.9 *As a percentage of revenue:*                Research and development  7.3%  8.3%        Selling, general and administrative  3.5%  3.2%        Amortization of intangible assets  0.0%  2.0%        Restructuring charge  1.3%  0.0%         *Research and Development. (“R&D”).* R&Dexpense in the three months ended April 2, 2005 was$78.5 million, or 7.3% of revenue compared to$85.1 million, or 8.3% of revenue in the correspondingperiod in fiscal year 2004. R&D expenses decreased by$6.6 million, or 7.8%, in the three month period endedApril 2, 2005 compared to the corresponding period infiscal year 2004. The decrease in R&D expenses was primarilydue to a decrease in compensation and related expenses of$4.6 million associated with reductions in force during2004, depreciation of $1.8 million, and other expenses of$1.7 million. These decreases were offset by a$1.5 million increase in expensed parts related to productdevelopment.     *Selling, General and Administrative(“SG&A”).* SG&A expense in the three monthsended April 2, 2005 was $37.3 million, or 3.5% ofrevenue compared to $32.5 million, or 3.2% of revenue inthe corresponding period in fiscal year 2004. SG&A expenseincreased by $4.8 million, or 14.8%, in the three monthperiod ended April 2, 2005 compared to the correspondingperiod in fiscal year 2004. The increase in SG&A wasprimarily due to increased spending in compensation and relatedexpense of $2.5 million and a net change in bad debtexpense of $2.3 million.     *Restructuring Charge.* Restructuring charge in thethree months ended April 2, 2005 was$13.9 million, or 1.3% of revenue compared to zero in thecorresponding period in fiscal year 2004. During thethree months ended April 2, 2005, an adjustment of$(0.3) million was made to the restructuring liabilityassociated with our reduction in force of approximately 377employees in the United States and Singapore that we hadannounced in July 2004.     On March 4, 2005, we determined to proceed with a reductionin force of up to 5,500 employees at our Singapore manufacturingoperations. The reduction in force is a result from ourpreviously announced transition of manufacturing for additionaldesktop products from our Singapore manufacturing operations toChina and closure of one of our two plants in Singapore,scheduled to be completed by the first quarter of 2006. Weexpect that approximately 2,500 positions will be reduced byattrition and the remainder by severance.     During the three months ended April 2, 2005, we incurred$1.9 million and $12.3 million in severance-relatedcharges associated with our reduction in force of approximately125 employees in the United States and 5,500 employees inSingapore, respectively. The Company anticipates that the cashoutflow from these charges will be approximately even over thefour quarters commencing in the second quarter of 2005. Inaddition to the severance costs, we will also spendapproximately $6.0 million in retention bonuses over a twoyear period, paid out as $1.5 million at the end of oneyear and $4.5 million at the end of the second year,recorded ratably over those periods. We expect to besubstantially completed with the restructuring by the firstquarter of 2006.     *Amortization of Intangible Assets.* Amortization of otherintangible assets represents the amortization of existingtechnology, arising from our acquisitions of the Quantum HDDbusiness in April 2001 and MMC
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in September 2001. The net book value of these intangibles atApril 2, 2005 was $1.2 million. Amortization of otherintangible assets was $0.2 million and $20.8 millionfor the three months ended April 2, 2005 and March 27,2004, respectively.     Amortization of other intangible assets is computed over theestimated useful lives of the respective assets, generally threeto five years. The Company expects amortization expense onintangible assets to be $0.7 million in the remainder of2005 and $0.6 million in 2006, at which time the purchasedintangible assets will be fully amortized.***Interest Expense, Interest Income and Other Gain    (Loss)***               **Three Months Ended**         **April 2,** **March 27,**    **2005** **2004** **Change**         **(In millions)**    Interest expense $(8.4) $(8.9) $0.5     Interest income $2.4  $1.3  $1.1     Other gain (loss) $(0.3) $—  $(0.3)*As a percentage of revenue:*                Interest expense  (0.8)%  (0.9)%        Interest income  0.2%  0.1%        Other gain (loss)  0.0%  0.0%         *Interest Expense.* Interest expense was $8.4 millionand $8.9 million in the three months ended April 2,2005 and March 27, 2004, respectively. The decrease wasprimarily due to a reduction in expense related to thereceivable backed borrowings and the amortization of financingfees in March 27, 2004. This was partially offset by interestfor the increased borrowing in China.     *Interest Income.* Interest income was $2.4 millionand $1.3 million for the three months ended April 2,2005 and March 27, 2004, respectively. The increaseresulted primarily from high interest rates during the threemonths ended April 2, 2005 rates.     *Other Gain (Loss).* Other loss was $0.3 million forthe three months ended April 2, 2005 as compared to zero inMarch 27, 2004. The loss was due to the sale of equityinvestments.***Provision for Income Taxes***               **Three Months Ended**         **April 2,** **March 27,**    **2005** **2004** **Change**         **(In millions)**    Income (loss) before provision for income taxes $(23.9) $9.0  $(32.9)    Provision for income taxes $0.3  $0.3  $—      The provision for income taxes consists primarily of state andforeign taxes. Due to our net operating losses(“NOL”), NOL carry-forwards and favorable tax statusin Singapore, Switzerland and China, we have not incurred anysignificant foreign, U.S. federal, state or local incometaxes for the current or prior fiscal periods. We have notrecorded a tax benefit associated with our loss carry-forwardbecause of the uncertainty of realization.     Pursuant to a “Tax Sharing and Indemnity Agreement”entered into in connection with the Company’s acquisitionof Quantum HDD, Maxtor, as successor to Quantum HDD, and Quantumare allocated their share of Quantum’s income tax liabilityfor periods before the Company’s acquisition of QuantumHDD, consistent with past practices and as if the Quantum HDDand Quantum DSS business divisions had been separate andindependent corporations. To the extent that the income taxliability attributable to one business division is reduced byusing NOLs and other tax attributes of the other businessdivision, the business division utilizing the attributes mustpay the other for the use of those attributes. We also agreed toindemnify
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Quantum for additional taxes related to the Quantum DSS businessfor all periods before Quantum’s issuance of tracking stockand additional taxes related to the Quantum HDD business for allperiods prior to our acquisition of Quantum HDD. This indemnitywas originally limited to aggregate of $142.0 million plus50% of any excess over $142.0 million, excluding anyrequired gross up payments (the “Tax Indemnity”). Asof April 2, 2005, the Company had paid $8.6 millionunder this tax indemnity. On December 23, 2004, as a resultof certain favorable developments concerning Quantum’spotential liability subject to the Tax Indemnity, the Companyand Quantum amended the Tax Sharing and Indemnity Agreement, aspart of a Mutual General Release and Global SettlementAgreement. Under the amended terms of the Tax Sharing andIndemnity Agreement, our remaining Tax Indemnity liability islimited to $8.8 million for all tax claims other than theIRS audit of Quantum for the fiscal years ending March 31,1997 through and including March 31, 1999. We believe thatour Tax Indemnity liability for the IRS audit of Quantum for thefiscal years ending March 31, 1997 through and includingMarch 31, 1999, is remote.     We purchased a $340 million insurance policy covering therisk that the separation of Quantum HDD from Quantum DSS couldbe determined to be subject to federal income tax or stateincome or franchise tax. Under the “Tax Sharing andIndemnity Agreement,” the Company agreed to indemnifyQuantum for the amount of any tax payable by Quantum as a resultof the separation of Quantum HDD from Quantum Corporation to theextent such tax is not covered by such insurance policy, unlessimposition of the tax is the result of Quantum’s actions,or acquisitions of Quantum stock, after the transaction. Theamount of the tax not covered by insurance could be substantial.In addition, if it is determined that Quantum owes federal orstate tax as a result of the separation of Quantum HDD fromQuantum Corporation, in connection with the Company’sacquisition of Quantum HDD, and the circumstances giving rise tothe tax are covered by our indemnification obligations, theCompany will be required to pay Quantum the amount of the tax atthat time, whether or not reimbursement may be allowed under ourtax insurance policy. We believe that any liability resultingfrom this indemnification is remote.**Liquidity and Capital Resources**     At April 2, 2005, we had $375.6 million in cash andcash equivalents, $15.0 million in restricted cash,$89.2 million in unrestricted marketable securities for acombined total of $479.8 million. In comparison, atDecember 25, 2004, we had $378.1 million in cash andcash equivalents, $24.6 million in restricted cash and$104.0 million in marketable securities for a combinedtotal of $506.6 million. Cash and cash equivalents balancedecreased $2.5 and the combined balance decreased by $26.8during the quarter ended April 2, 2005 due to activities inthe following three areas. We used $0.5 million foroperating activities and used $18.2 million for financingactivities, partially offset by $16.2 million frominvesting activities, as discussed below. The significantnegative factor affecting our overall liquidity position duringthe quarter ended April 2, 2005 compared toDecember 25, 2004 was our net loss.     Our restricted cash balance decreased $9.5 million due totermination of a guaranty supporting the EDB loan. The remainingamounts are pledged as collateral for certain stand-by lettersof credit issued by commercial banks. At April 2, 2005 theCompany held cash and marketable securities of approximately$340.0 million in foreign jurisdictions. We estimate thatas of such date, repatriation of this amount would have resultedin net tax liability of approximately $6.2 million afterutilization of our available net operating losses.     Cash used in operating activities was $0.5 million in thethree months ended April 2, 2005. This was comprised of$24.2 million in net loss, offset by non-cash items of$37.5 million primarily relating to depreciation andamortization and a $13.8 million restructuring charge.Operating capital (defined as accounts receivables, otherreceivables and inventories less accounts payables) was a use of$37.6 million. Other sources of cash in the three monthsended April 2, 2005 included a decrease in prepaid expensesand other assets of $3.8 million primarily due to the saleof an equity investment and accrued and other liabilities of$6.5 million. The increase in accrued and other liabilitieswas primarily due to a $20.0 million net increase ofwarranty obligations, primarily offset by $9.1 milliondecrease in payroll related accruals and $1.4 of accruedexpenses and $2.9 million in payment related to ourrestructuring activities. We expect severance-related paymentsin 2005 associated with our restructuring activities unpaid asof April 2, 2005 to be approximately $11.3 million,
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of which $9.0 million is related to Singapore and$2.3 million is related to the United States. Additionally,we expect facilities-related payments in 2005 associated withour restructuring activities to be approximately$12.9 million.     Cash used by operating capital of $37.6 million during thethree months ended April 2, 2005 was a result of thefollowing factors: decline in accounts payable of$47.2 million partially offset by a decrease in accountsreceivables and other receivables of $7.2 million andinventory of $2.4 million. Our cash conversion cycle (thenet total of days of sales outstanding plus days of sales ininventory less days of accounts payables outstanding) increasedfrom -2 days to 0 days from December 25, 2004 toApril 2, 2005, remaining within our target range of0 days to -5 days.     Cash used in investing activities was $16.2 million for thethree months ended April 2, 2005, primarily reflectinginvestments in property, plant and equipment of$25.8 million to support the new manufacturing capacityadded in 2005. This was offset by sales (net of purchases) ofmarketable securities of $14.4 million, and an decrease inrestricted assets of $27.6 million. During 2005, capitalexpenditures are expected to aggregate approximately$175 million, primarily used for manufacturing expansionand upgrades, product development and updating our informationtechnology systems.     Cash used by financing activities was $18.2 million for thethree months ended April 2, 2005. Primarily thisrepresented repayment of the EDB loan in full for$27.1 million and $1.1 million in amortization ofcapital lease obligation. This was partially offset by$10.5 million received upon the issuance of common stockthrough our employee stock purchase plan and options exercised.     We believe that our existing cash and cash equivalents,short-term investment and capital resources, together with cashgenerated from operations and available borrowing capacity willbe sufficient to fund our operations through at least the nexttwelve months. We expect that our liquidity will be impacted bycontinuing losses during 2005. We require substantial capital tofund our business, particularly to fund operating losses and toinvest in property, plant and equipment. If we need additionalcapital, there can be no assurance that such additionalfinancing can be obtained, or that it will be available onsatisfactory terms. See discussion below under the heading“Certain Factors Affecting Future Performance.” Ourability to generate cash and achieve profitable operations willdepend on, among other things, demand in the hard disk drivemarket for our products and pricing conditions.***Contractual Obligations***     Payments due under known contractual obligations as ofApril 2, 2005 are reflected in the following table (inthousands):                          **Less Than**     **More Than**  **Total** **1 Year** **1-3 Years** **3-5 Years(1)(2)** **5 Years(1)(2)**               Long-term Debt $431,474  $68,170  $28,993  $70,000  $264,311      Interest Payments  121,026   23,588   42,870   40,710   13,858     Capital Lease Obligations  4,958   4,299   652   7   —      Interest Payments  135   130   5   —   —     Operating Leases(3)  268,566   34,542   65,453   61,598   106,973     Purchase Obligations(4)  743,450   735,170   8,280   —   —                     Total $1,569,609  $865,899  $146,253  $172,315  $385,142                  (1)     Does not include $103 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).
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(3)     Includes future minimum annual rental commitments, including    amounts accrued as restructuring liabilities as of April 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.     On May 7, 2003, we sold $230 million in aggregateprincipal amount of 6.8% convertible senior notes due 2010to qualified institutional buyers pursuant to Rule 144Aunder the Securities Act of 1933, as amended. The notes bearinterest at a rate of 6.8% per annum and are convertibleinto our common stock at a conversion rate of81.5494 shares per $1,000 principal amount of the notes, oran aggregate of 18,756,362 shares, subject to adjustment incertain circumstances (equal to an initial conversion price of$12.2625 per share). The initial conversion pricerepresents a 125% premium over the closing price of our commonstock on May 1, 2003, which was $5.45 per share. Thenotes and underlying stock have been registered for resale withthe Securities and Exchange Commission.     We may not redeem the notes prior to May 5, 2008.Thereafter, we may redeem the notes at 100% of their principalamount, plus accrued and unpaid interest, if the closing priceof our common stock for 20 trading days within a period of30 consecutive trading days ending on the trading day before thedate of our mailing of the redemption notice exceeds 130% of theconversion price on such trading day. If, at any time,substantially all of our common stock is exchanged or acquiredfor consideration that does not consist entirely of common stockthat is listed on a United States national securities exchangeor approved for quotation on the NASDAQ National Market orsimilar system, the holders of the notes have the right torequire us to repurchase all or any portion of the notes attheir face value plus accrued interest.     We have agreed to invest $200 million over the next fiveyears to establish a manufacturing facility in Suzhou, China,and we have secured credit lines with the Bank of China to beused for the construction and working capital requirements ofthis operation. The remainder of our commitment will besatisfied primarily with the transfer of manufacturing assetsfrom Singapore or from our other manufacturing site. MTS hasdrawn down $60 million as of April 2, 2005. MTS isrequired to maintain a maximum liability to assets ratio and aminimum earnings to interest expense ratio, the first ratio tobe tested annually commencing in December 2004 and the latterratio to be tested annually commencing in December 2005. MTS isin compliance with all covenants as of December 25, 2004.We do not expect to draw down any further funding under thisfacility.     In September 2003, MPS entered into a second four-year52 million Singapore dollar loan agreement with theEconomic Development Board of Singapore (the “Board”)at 4.25% which is amortized in seven equal semi-annualinstallments ending December 2007. On March 31, 2005, theCompany elected to repay this loan, which had an outstandingbalance $27.1 million, in full. As of April 2, 2005,there was no balance outstanding.     On May 9, 2003, we entered into a two-yearreceivable-backed borrowing arrangement of up to$100 million with certain financial institutions. In thearrangement we used a special purpose subsidiary to purchase andhold all of our United States and Canadian accounts receivable.This special purpose subsidiary had borrowing authority up to$100 million collateralized by the United States andCanadian accounts receivable. The special purpose subsidiary wasconsolidated for financial reporting purposes. The transactionsunder the arrangement were accounted for as secured borrowingand accounts receivables, and the related short-term borrowings,if any, remain on our consolidated balance sheet. As ofMarch 9, 2004 the dilution to liquidation ratio for thisfacility exceeded the agreed upon threshold. The lenders underthe facility agreed to forbear from exercising remedies fornoncompliance with this ratio through March 31, 2004 and inreturn, we agreed to apply all collections of receivables to therepayment of the outstanding facility until repaid in full. Asof March 27, 2004, we had no borrowing under this facility.On April 2, 2004, this agreement was terminated by allparties involved.
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     On June 24, 2004, we entered into a one-yearreceivable-backed borrowing arrangement of up to$100.0 million with one financial institutioncollateralized by all United States and Canadian accountsreceivable. In the arrangement we use a special purposesubsidiary to purchase and hold all of our United States andCanadian accounts receivable. This special purpose subsidiaryhas borrowing authority up to $100.0 million based uponeligible United States and Canadian accounts receivable. Thespecial purpose subsidiary is consolidated for financialreporting purposes. The transactions under the arrangement areaccounted for as short term borrowings and remain on ourconsolidated balance sheet. As of April 2, 2005 we hadborrowed $50.0 million under the arrangement (subject totransaction fees); and the interest rate was LIBOR plus 3% and$157.8 million of United States and Canadian receivableswere pledged under this arrangement and remain on ourconsolidated balance sheet. The terms of the facility requirecompliance with operational covenants and several financialcovenants, including requirements to maintain agreed-upon levelsof liquidity and for a dilution-to-liquidation ratio, anoperating income (loss) before depreciation and amortization tolong-term debt ratio and certain other tests relating to thequality and nature of the financed receivables. A violation ofthese covenants will result in an early amortization event thatwill cause a prohibition on further payments and distributionsto us from the special purpose subsidiary until the facility hasbeen repaid in full. Based on the our experience withcollections on receivables we do not believe that repaymentwould take longer than 30 days. However, early amortizationevents under the facility generally will not cause an event ofdefault under our convertible senior notes due 2010 and we donot believe that such an event or the lack of borrowingavailability under this facility would have a material adverseeffect on our liquidity.     In December 2004, the liquidity covenant and covenant regardingthe ratio of operating income (loss) before depreciation andamortization to long-term debt were amended in order to assurecompliance based on actual and projected operating results. OnFebruary 7, 2005, we reported to the lender that, as ofJanuary 31, 2005, it was not in compliance with thefinancial covenant under the facility setting a maximum amountfor the ratio of dilution-to-liquidation of our accountsreceivable. The dilution-to-liquidation ratio compares theamount of returns, discounts, credits, offsets, and otherreductions to our existing accounts receivable to collections onaccounts receivable over specified periods of time. OnFebruary 11, 2005, we entered into an agreement with thelender providing that it would temporarily forbear fromexercising rights and remedies available to it as a result ofthe occurrence of the early amortization event under thefacility caused by our noncompliance with this covenant as ofJanuary 31, 2005. On March 4, 2005, we and the lenderentered into a second amendment to the facility documentsproviding that the lender will permanently forbear fromexercising rights and remedies as a result of that earlyamortization event, and providing for an increase to thepermitted maximum level of the dilution-to-liquidation ratio toassure future compliance based on actual and projected operatingresults. In connection with the second amendment, we and thelender also agreed to increase the annual interest rate underthe facility by 0.75%, to LIBOR plus 3.75%, during any periodwhen the dilution-to-liquidation ratio exceeds the pre-amendmentlevel. As a result, we are currently in compliance with alloperational and financial covenants under the facility. Thisfacility terminates under its present terms in June 2005. TheCompany is currently evaluating various alternatives, includingextension of the current facility. The Company cannot giveassurance that it can replace or extend this facility on termsacceptable to the Company. If Maxtor does not extend thisfacility, it is required to repay the outstanding balance in itsentirety. The Company does not believe that the repayment of thebalance owing on the facility would have a material adverseeffect on the Company’s liquidity.
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**CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE****We have a history of significant losses.**     We have a history of significant losses. In the last five fiscalyears, we were profitable in only fiscal years 2000 and 2003.For the year ended December 25, 2004, our net loss was$183.4 million and for the quarterly period endedApril 2, 2005, our net loss was $24.2 million. As ofApril 2, 2005, we had an accumulated deficit of$1,819.4 million.***The decline of average selling prices in the hard disk    drive industry could cause our operating results to suffer and    make it difficult for us to achieve or maintain    profitability.***     It is very difficult to achieve and maintain profitability andrevenue growth in the hard disk drive industry because theaverage selling price of a hard disk drive rapidly declines overits commercial life as a result of technological enhancement,productivity improvement and increases in supply. In addition,intense price competition among personal computer manufacturersand Intel-based server manufacturers may cause the price of harddisk drives to decline. As a result, the hard disk drive markettends to experience periods of excess capacity and intense pricecompetition. Competitors’ attempts to liquidate excessinventories, restructure, or gain market share also tend tocause average selling prices to decline. This excess capacityand intense price competition may cause us in future quarters tolower prices, which will have the effect of reducing margins,causing operating results to suffer and making it difficult forus to achieve or maintain profitability. If we are unable tolower the cost of producing our hard disk drives to beconsistent with any decline of average selling prices, we willnot be able to compete effectively and our operating resultswill suffer. Furthermore, a decline in average selling pricesmay result from end-of-period buying patterns where distributorsand sub-distributors tend to make a majority of their purchasesat the end of a fiscal quarter, aided by disparities betweendistribution pricing and OEM pricing greater than historicalnorms and pressure on disk drive manufacturers to sellsignificant units in the quarter. Due to these factors,forecasts may not be achieved, either because expected sales donot occur or because they occur at lower prices or on terms thatare less favorable to us. This increases the chances that ourresults could diverge from the expectations of investors andanalysts, which could make our stock price more volatile.***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.***     The desktop computer market segment and the overall hard diskdrive market are intensely competitive even during periods whendemand is stable. We compete primarily with manufacturers of3.5-inch hard disk drives, including Fujitsu, Hitachi GlobalStorage, Samsung, Seagate Technology and Western Digital. Manyof our competitors historically have had a number of significantadvantages, including larger market shares, a broader productline, preferred vendor status with customers, extensive namerecognition and marketing power, and significantly greaterfinancial, technical and manufacturing resources. Some of ourcompetitors make many of their own components, which may providethem with benefits including lower costs. Others may themselvesor through affiliated entities produce complete computer orother systems that contain disk drives or other informationstorage products, enabling them to the ability to determinepricing for complete systems without regard to the margins onindividual components. In addition, because components otherthan disk drives generally contribute a greater portion of theoperating margin on a complete system than do disk drives, thesemanufacturers of complete systems do not necessarily need torealize a profit on the disk drives included in a system. Ourcompetitors may also: •     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;  •     develop new technology which would significantly reduce the cost    of their products;
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 •     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.Increasing competition could reduce the demand for our productsand/or the prices of our products as a result of theintroduction of technologically better and cheaper products,which could reduce our revenues. In addition, new competitorscould emerge and rapidly capture market share. If we fail tocompete successfully against current or future competitors, ourbusiness, financial condition and operating results will suffer.***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.***     A significant portion of our products is sold to desktopcomputer and Intel-based server manufacturers or to theirsubcontractors. These manufacturers select or qualify their harddisk drive suppliers, either directly or through theirsubcontractors, based on quality, storage capacity, performanceand price. Manufacturers typically seek to qualify two or moresuppliers for each hard disk drive product generation. Toqualify consistently, and thus succeed in the desktop andIntel-based server hard disk drive industry, we mustconsistently be among the first-to-market introduction andfirst-to-volume production at leading storage capacities perdisk, offering competitive prices and high quality. Once amanufacturer or subcontractor has chosen its hard disk drivesuppliers for a given desktop computer or Intel-based serverproduct, it often will purchase hard disk drives from thosesuppliers for the commercial lifetime of that product line. Itis, however, possible to fail to maintain a qualification due toquality or yield issues. If we miss a qualification opportunityor cease to be qualified due to yield or quality issues, we maynot have another opportunity to do business with thatmanufacturer or subcontractor until it introduces its nextgeneration of products. The effect of missing a productqualification opportunity is magnified by the limited number ofhigh-volume manufacturers of personal computers and Intel-basedservers. If we do not reach the market or deliver volumeproduction in a timely manner, we may not qualify our productsand may need to deliver lower margin, older products thanrequired in order to meet our customers’ demands. In suchcase, our business, financial condition and operating resultswould be adversely affected. In addition, continuingdevelopments in technology cause a need for us to continuouslymanage product transitions, including a need to qualify newproducts or qualify improvements to existing products.Accordingly, if we are unable to manage a product transitioneffectively, including the introduction, production orqualification of any new products or product improvements, ourbusiness and results of operations could be negatively affected.***Because we are substantially dependent on desktop computer    drive sales, a decrease in the demand for desktop computers    could reduce demand for our products.***     Our revenue growth and profitability depend significantly on theoverall demand for desktop computers and related products andservices. Because we sell a significant portion of our productsto the desktop segment of the personal computer industry, wewill be affected more by changes in market conditions fordesktop computers than a company with a broader range ofproducts. End-user demand for the computer systems that containour hard disk drives has historically been subject to rapid andunpredictable fluctuations. Demand in general for our productsmay be reduced by the shift to smaller form factor rigid diskdrives caused by increased sales of notebook computers. Anydecrease in the demand for desktop computers could reduce thedemand for our products, harming our business, financialcondition and operating results.***The loss of one or more significant customers or a    decrease in their orders of products would cause our revenues to    decline.***     We sell most of our products to a limited number of customers.For the fiscal year ended December 25, 2004, although noneof our customers accounted for 10% or greater of our totalrevenue, our top five customers accounted for approximately35.5% of our revenue. We expect that a relatively small numberof customers will continue to account for a significant portionof our revenue, and the proportion of our revenue from these
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customers could continue to increase in the future. Thesecustomers have a wide variety of suppliers to choose from andtherefore can make substantial demands on us. Even if wesuccessfully qualify a product for a given customer, thecustomer generally will not be obligated to purchase any minimumvolume of product from us and generally will be able toterminate its relationship with us at any time. Our ability tomaintain strong relationships with our principal customers isessential to our future performance. If we lose a key customeror if any of our key customers reduce their orders of ourproducts or require us to reduce our prices before we are ableto reduce costs, our business, financial condition and operatingresults could suffer. Mergers, acquisitions, consolidations orother significant transactions involving our significantcustomers may adversely affect our business and operatingresults.***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.***     We have taken, and continue to take, various actions to attemptto improve operating efficiencies at Maxtor throughrestructuring. These activities have included closures andtransfers of facilities and significant personnel reductions.For example, in our third fiscal quarter of 2004, wetransitioned our manufacturing of our server products from MKEto our facilities in Singapore, began volume shipments of someof our desktop products from our new manufacturing plant inSuzhou, China and completed a reduction in force that affectedapproximately 377 positions and involved the closures of certainfacilities. In the fourth quarter of 2004 we announced plans toreduce our U.S. headcount by up to 200 persons in 2005, tomove manufacturing of additional desktop products from Singaporeto China, consolidating our Singapore manufacturing into onefacility by the end of 2005, and plans to relocate the majorityof our media production to Asia starting in 2006. We continue tolook at opportunities for further cost reductions, which mayresult in additional restructuring activities in the future. Wecannot assure you that our efforts will result in the increasedprofitability, cost savings or other benefits that we expect.Many factors, including reduced sales volume and average sellingprices, which have impacted gross margins in the past, and theaddition of, or increase in, other operating expenses, mayoffset some or all of our anticipated or estimated savings.Moreover, the reduction of personnel and closure and transfersof facilities may result in disruptions that affect our productsand customer service. In addition, the transfer of manufacturingcapacity of a product to a different facility frequentlyrequires qualification of the new facility by some of our OEMcustomers. We cannot assure you that these activities andtransfers will be implemented on a cost-effective basis withoutdelays or disruption in our production and without adverselyaffecting our customer relationships and results of operations.Each of the above measures could have long-term adverse effectson our business by reducing our pool of technical talent,decreasing our employee morale, disrupting our productionschedules or impacting the quality of products, making it moredifficult for us to respond to customers, limiting our abilityto increase production quickly if and when the demand for ourproducts increases and limiting our ability to hire and retainkey personnel. These circumstances could adversely affect ourbusiness and operating results.***If we do not expand into new hard drive markets, our    revenues will suffer.***     To remain a significant supplier of hard disk drives to majormanufacturers of personal computers and Intel-based servers, wewill need to offer a broad range of hard disk drive products toour customers. Although almost all of our current products aredesigned for the desktop computer and the Intel-based servermarkets, demand in these markets may shift to products we do notoffer or volume demand may shift to other markets. Such marketsmay include laptop computers or handheld consumer products,which none of our products currently serves. Many other harddisk drives suppliers compete in these additional parts of themarket, including Cornice, Inc., Fujitsu, Hitachi GlobalStorage, GS Magicstor Inc., Samsung, Seagate Technology, Toshibaand Western Digital, and because these competitors compete in abroader range of the market, they may not be as impacted bydeclines in demand or average selling prices in desktopproducts. Improvements in areal density and increases in salesof notebook computers are resulting in a shift to smaller formfactor rigid disk drives for an expanding number ofapplications, including enterprise storage, personal computersand consumer electronic devices. We will need to successfullydevelop and manufacture new products that address additionalhard disk drive market markets or competitors’ technologyor feature development to remain competitive in the hard diskdrive industry. We recently delayed our planned introduction ofa 2.5-inch
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product by canceling our 2.5-inch development program andalthough we are accelerating our development efforts in thesmall form factor market there can be no assurance that we willsuccessfully develop and introduce a small form factor productin a timely fashion. If we do not suitably adapt our technologyand product offerings to successfully develop and introduceadditional smaller form factor rigid disk drives, we may not beable to effectively compete and our business may suffer.Products using alternative technologies, such as opticalstorage, semiconductor memory and other storage technologies,may also compete with hard disk drive products in such markets.***If we do not successfully introduce new products or    experience product quality problems, our revenues will    suffer.***     While we continually develop new products, the success of ournew product introductions is dependent on a number of factors,including market acceptance, our ability to manage the risksassociated with product transitions, and the risk that our newproducts will have quality problems or other defects in theearly stages of introduction that were not anticipated in thedesign of those products. We cannot assure you that we willavoid technical or other difficulties that could delay orprevent the successful development, introduction or marketing ofnew hard disk drives. Any failure to successfully develop andintroduce new products for our existing customers, or anyquality problems with newly introduced products, could result inloss of customer business or require us to deliver older, lowermargin product not targeted effectively to customerrequirements, which in turn could adversely affect our business,financial condition and operating results.***If we fail to develop and maintain relationships with our    key distributors, if we experience problems associated with    distribution channels, or if our key distributors favor our    competitors’ products over ours, our operating results    could suffer.***     We sell a significant amount of our hard disk drive productsthrough a limited number of key distributors. If we fail todevelop, cultivate and maintain relationships with our keydistributors, or if these distributors are not successful intheir sales efforts, sales of our products may decrease and ouroperating results could suffer. As our sales through thesedistribution channels continue to increase, we may experienceproblems typically associated with these distribution channelssuch as unstable pricing, increased return rates and otherlogistical difficulties. Our distributors also sell productsmanufactured by our competitors. If our distributors favor ourcompetitors’ products over our products for any reason,they may fail to market our products effectively or continue todevote the resources necessary to provide us with effectivesales and, as a result, 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.***     Our significant OEM customers have a subcontractor model thatrequires us to contract directly with companies that providemanufacturing services for personal computer manufacturers. Thisexposes us to increased credit risk because these subcontractorsare generally not as well capitalized as personal computermanufacturers, and our agreements with our customers may notpermit us to increase our prices to compensate for thisincreased credit risk. Any credit losses would increase ouroperating costs, which could cause our operating results tosuffer. Moreover, the subcontractor will often negotiate forlower prices than have been agreed with the OEM customer,resulting in reduced profits to us.***If we fail to match production with product demand or to    manage inventory, our operating results could suffer.***     We base our inventory purchases and commitments on forecastsfrom our customers, who are not obligated to purchase theforecast amounts. If actual orders do not match our forecasts,or if any products become obsolete between order and deliverytime, we may have excess or inadequate inventory of ourproducts. In addition, our significant OEM customers haveadopted build-to-order manufacturing models, just-in-timeinventory management processes or customized product featuresthat require us to maintain inventory at or near thecustomer’s production facility. These policies havecomplicated inventory manage-
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ment strategies that make it more difficult to matchmanufacturing plans with projected customer demand and cause usto carry inventory for more time and to incur additional coststo manage inventory which could cause our operating results tosuffer. If we fail to manage inventory of older products as weor our competitors introduce new products with higher arealdensity, we may have excess inventory. Excess inventory couldmaterially adversely affect our operating results and cause ouroperating results to suffer.***We are subject to new environmental legislation enacted by    the European Union, if we do not comply our sales could be    adversely impacted.***     The European Union has enacted the Restriction of the Use ofCertain Hazardous Substances in Electrical and ElectronicEquipment Directive (“RoHS”). RoHS prohibits the useof certain substances, including lead, in certain products,including hard disk drives, sold after July 1, 2006. Wewill need to ensure that we can manufacture compliant products,and that we can be assured a supply of compliant components fromsuppliers. If we fail to timely provide RoHS compliant products,our European customers may refuse to purchase our products, andour business, financial condition and operating results couldsuffer.***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 depend on a limited number of qualified suppliers forcomponents and subassemblies, including recording heads, mediaand integrated circuits. Currently, we purchase recording headsfrom two sources, digital signal processors/ controllers fromone source and spin/ servo integrated circuits from two sources.We are in the process of developing a two-vendor supply strategyfor digital signal processors/ controllers, but we cannot assureyou that such a transition would be successful or that theresulting model would be more effective than our currentone-vendor model. We purchase approximately 40% of our mediafrom an outside source. If one or more of our suppliers whoprovide sole or limited source components encounters businessdifficulties or ceases to sell components to us for any reason,we could have immediate shortages of supply for thosecomponents. If we cannot obtain sufficient quantities ofhigh-quality parts when needed, product shipments would bedelayed and our business, financial condition and operatingresults could suffer. We cannot assure you that we will be ableto obtain adequate supplies of critical components in a timelyand economic manner, or at all.***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.***     Our products incorporate parts and components designed by andpurchased from third party suppliers. As a result, the successof our products depends on our ability to gain access to andeffectively integrate parts and components that use leading-edgetechnology. To do so we must effectively manage ourrelationships with our strategic component suppliers. We mustalso effectively integrate different products from a variety ofsuppliers and manage difficult scheduling and delivery problemsand in some cases we must incur higher delivery costs forcomponents than incurred by our competitors.     Some required parts may be periodically in short supply. As aresult, we will have to allow for significant ordering leadtimes for some components. In some cases, shortages of criticalcomponents may delay or frustrate our ability to meet customerdemand, which could materially and adversely impact ourbusiness, results of operations and financial condition.Furthermore, in the event that these suppliers cannot qualify tonew leading-edge technology specifications, our ramp up ofproduction for the new products will be delayed, reducingopportunities to lower component and manufacturing costs andlengthening product life cycles. In addition, we may have to paysignificant cancellation charges to suppliers if we cancelorders for components because we reduce production due to marketoversupply, reduced demand, transition to new products ortechnologies or for other reasons. We order the majority of ourcomponents on a purchase order basis and we have limitedlong-term volume purchase agreements with only some of ourexisting suppliers. If we are unable
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to successfully manage the access to and integration of partsobtained from third party suppliers, our business, financialcondition and operating results could suffer.***If we encounter any problems in qualifying our new China    manufacturing facility for production with any of our major OEM    customers, or we have difficulties with transition of    manufacturing to China or a disaster occurs at one of our    plants, our business, financial condition and operating results    could suffer.***     Our Maxtor-owned facilities in Singapore and China are our onlycurrent sources of production for our hard disk drive products.Our division, MMC, manufactures about 60% of our media needs outof its facilities in California. Our new manufacturing facilityin China is intended to provide us with a low-cost manufacturingfacility. The China facility has begun volume shipments, isramping production and has been qualified for production by mostof our OEM customers. We are planning to transition themanufacturing of more desktop products from Singapore to Chinaduring 2005. To successfully expand our China manufacturingoperation, we need to recruit and hire a substantial number ofemployees, including both direct labor and key managementpersonnel in China. Any delay or difficulty in qualifying ourChina facility’s production of various products with ourcustomers, or any difficulties or delay in recruiting, hiring ortraining personnel in China, could interfere with the plannedramp in production at the facility, which could harm ourbusiness, financial condition and operating results. We are alsoplanning to consolidate our manufacturing in Singapore into onefacility by early 2006 and to relocate the majority of our mediaproduction to Asia starting in 2006. Any difficulties or delaysencountered in these transitions may adversely impact ourbusiness. In addition, a tsunami, flood, earthquake, politicalinstability, act of terrorism or other disaster or condition inSingapore or China that adversely affects our facilities orability to manufacture our hard disk drive products couldsignificantly harm our business, financial condition andoperating results.***We are subject to risks related to product defects, which    could subject us to warranty claims in excess of our warranty    provision or which are greater than anticipated due to the    unenforceability of liability limitations.***     Our products may contain defects. We generally warrant ourproducts for one to five years. The standard warranties used byus and Quantum HDD contain limits on damages and exclusions ofliability for consequential damages and for negligent orimproper use of the products. We establish a warranty provisionat the time of product shipment in an amount equal to estimatedwarranty expenses. We may incur additional operating expenses ifthese steps do not reflect the actual cost of resolving theseissues, and if any resulting expenses are significant, ourbusiness, financial condition and results of operations willsuffer.***Our quarterly operating results have fluctuated    significantly in the past and are likely to fluctuate in the    future.***     Our quarterly operating results have fluctuated significantly inthe past and may fluctuate significantly in the future. Ourfuture performance will depend on many factors, including: •     the average selling price of our products;  •     fluctuations in the demand for our products as a result of the    seasonal nature of the desktop computer industry and the markets    for our customers’ products, as well as the overall    economic environment;  •     market acceptance of our products;  •     our ability to qualify our products successfully with our    customers;  •     changes in purchases 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;
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 •     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.     Many of our expenses are relatively fixed and difficult toreduce or modify. The fixed nature of our operating expenseswill magnify any adverse effect of a decrease in revenue on ouroperating results. Because of these and other factors, period toperiod comparisons of our historical results of operations arenot a good predictor of our future performance. If our futureoperating results are below the expectations of stock marketanalysts, our stock price may decline. Our ability to predictdemand for our products and our financial results for currentand future periods may be affected by economic conditions. Thismay adversely affect both our ability to adjust productionvolumes and expenses and our ability to provide the financialmarkets with forward-looking information.**     *****We face risks from our substantial international    operations and sales.***     We conduct most of our manufacturing and testing operations andpurchase a substantial portion of our key parts outside theUnited States. In particular, currently manufacturing operationsfor our products are concentrated in Singapore and China, whereour principal manufacturing operations are located. Suchconcentration of operations in Singapore and China will likelymagnify the effects on us of any disruptions or disastersrelating to those countries. In addition, we also sell asignificant portion of our products to foreign distributors andretailers. As a result, we will be dependent on revenue frominternational sales. Inherent risks relating to our overseasoperations include: •     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;  •     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;
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 •     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 ban the use of    certain materials in electronic manufacturing.     The specific economic conditions in each country impact ourinternational sales. For example, our international contractsare denominated primarily in U.S. dollars. Significantdownward fluctuations in currency exchange rates against theU.S. dollar could result in higher product prices and/ordeclining margins and increased manufacturing costs. Inaddition, we attempt to manage the impact of foreign currencyexchange rate changes by entering into short-term, foreignexchange contracts. If we do not effectively manage the risksassociated with international operations and sales, ourbusiness, financial condition and operating results could suffer.**     *****Our operations and prospects in China are subject to    significant political, economic and legal uncertainties.***     Our new manufacturing plant in China began volume shipments inthe second half of 2004. We also intend to expand our presencein the distribution channels serving China. Our business,financial condition and operating results may be adverselyaffected by changes in the political, social or economicenvironment in China. Under its current leadership, China hasbeen pursuing economic reform policies, including theencouragement of private economic activity and greater economicdecentralization. There can be no assurance, however, that theChinese government will continue to pursue such policies or thatsuch policies will not be significantly altered from time totime without notice. In addition, Chinese credit policies mayfluctuate from time to time without notice and this fluctuationin policy may adversely impact our credit arrangements. Anychanges in laws and regulations, or their interpretation, theimposition of surcharges or any material increase in Chinese taxrates, restrictions on currency conversion, imports and sourcesof supply, devaluations of currency or the nationalization orother expropriation of private enterprises could have a materialadverse effect on our ability to conduct business and operateour planned manufacturing facility in China. Chinese policiestoward economic liberalization, and, in particular, policiesaffecting technology companies, foreign investment and othersimilar matters could change. In addition, our business andprospects are dependent upon agreements and regulatory approvalwith various entities controlled by Chinese governmentalinstrumentalities. Our operations and prospects in China wouldbe materially and adversely affected by the failure of suchgovernmental entities to grant necessary approvals or honorexisting contracts. If breached, any such contract might bedifficult to enforce in China.     The legal system of China relating to corporate organization andgovernance, foreign investment, commerce, taxation and trade isboth new and continually evolving, and currently there can be nocertainty as to the application of its laws and regulations inparticular instances. Our ability to enforce commercial claimsor to resolve commercial disputes is unpredictable. If ourbusiness ventures in China are unsuccessful, or other adversecircumstances arise from these transactions, we face the riskthat the parties to these ventures may seek ways to terminatethe transactions, or, may hinder or prevent us from accessingimportant financial and operational information regarding theseventures. The resolution of these matters may be subject to theexercise of considerable discretion by agencies of the Chinesegovernment, and forces unrelated to the legal merits of aparticular matter or dispute may influence their determination.Any rights we may have to specific performance, or to seek aninjunction under Chinese law, in either of these cases, areseverely limited, and without a means of recourse by virtue ofthe Chinese legal system, we may be unable to prevent thesesituations from occurring. The occurrence of any such eventscould have a material adverse effect on our business, financialcondition and operating results. Further, our intellectualproperty protection measures may not be sufficient to preventmisappropriation of our technology in China. The Chinese legalsystem does not protect intellectual property rights to the sameextent as the legal system of the United States and effectiveintellectual property enforcement may be unavailable or limited.If we are unable to adequately protect our
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proprietary information and technology in China, our business,financial condition and operating results could be materiallyadversely affected.**     *****We may need additional capital in the future which may not    be available on favorable terms or at all.***     Our business is capital intensive and we may need more capitalin the future. Our future capital requirements will depend onmany factors, including: •     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.     If we require additional capital it is uncertain whether we willbe able to obtain additional financing on favorable terms, if atall. Further, if we issue equity securities in connection withadditional financing, our stockholders may experience dilutionand/or the new equity securities may have rights, preferences orprivileges senior to those of existing holders of common stock.If we cannot raise funds on acceptable terms, if and whenneeded, we may not be able to develop or enhance our productsand services in a timely manner, take advantage of futureopportunities or respond to competitive pressures orunanticipated requirements or may be forced to limit the numberof products and services we offer, any of which could seriouslyharm our business.**     *****We significantly increased our leverage as a result of the    sale of the 6.8% convertible senior notes.***     In connection with our sale of the 6.8% convertible seniornotes (the “Notes”) on May 7, 2003, we incurred$230 million of indebtedness, set to mature in April 2010.We will require substantial amounts of cash to fund semi-annualinterest payments on the Notes, payment of the principal amountof the Notes upon maturity (or earlier upon a mandatory orvoluntary redemption or if we elect to satisfy a conversion ofthe Notes, in whole or in part, with cash rather than shares ofour common stock), as well as future capital expenditures,investments and acquisitions, payments on our leases and loans,and any increased working capital requirements. If we are unableto meet our cash requirements out of available funds, we mayneed be to obtain alternative financing, which may not beavailable on favorable terms or at all. The degree to which weare financially leveraged could materially and adversely affectour ability to obtain additional financing for working capital,acquisitions or other purposes and could make us more vulnerableto industry downturns and competitive pressures. In the absenceof such financing, our ability to respond to changing businessand economic conditions, to make future acquisitions, to absorbadverse operating results or to fund capital expenditures orincreased working capital requirements would be significantlyreduced. Our ability to meet our debt service obligations willbe dependent upon our future performance, which will be subjectto financial, business and other factors affecting ouroperations, some of which are beyond our control. If we do notgenerate sufficient cash flow from operations to repay the Notesat maturity, we could attempt to refinance the Notes; however,no assurance can be given that such a refinancing would beavailable on terms acceptable to us, if at all. Any failure byus to satisfy our obligations under the Notes or the indenturecould cause a default under agreements governing our otherindebtedness.**     *****The asset-backed credit facility of up to    $100 million has certain financial covenants with which we    will have to comply to use the facility.***     On June 24, 2004, we entered into a one-year asset-backedcredit facility for up to $100 million with one financialinstitution. The facility uses a special purpose subsidiary topurchase and hold all of our United States and Canadian accountsreceivable. This special purpose subsidiary may borrow up to$100 million
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secured by eligible purchased receivables, and uses suchborrowed funds and collections from the receivables to purchaseadditional receivables from us and to make other permitteddistributions to us. This special purpose subsidiary isconsolidated for financial reporting purposes, and its resultingliabilities appear on our consolidated balance sheet asshort-term debt. The terms of the facility require compliancewith operational covenants and several financial covenants,including requirements to maintain agreed-upon levels ofliquidity and for a dilution-to-liquidation ratio, an operatingincome (loss) before depreciation and amortization to long-termdebt ratio and certain other tests relating to the quality andnature of the financed receivables. In December 2004, theliquidity covenant and covenant regarding the ratio of operatingincome (loss) before depreciation and amortization to long-termdebt were amended in order to assure compliance based on actualand projected operating results. On February 7, 2005, wereported to the lender that, as of January 31, 2005, wewere not in compliance with a financial covenant under thefacility setting a maximum amount for the ratio ofdilution-to-liquidation of our accounts receivable. Thedilution-to-liquidation ratio compares the amount of returns,discounts, credits, offsets, and other reductions to ourexisting accounts receivable to collections on accountsreceivable over specified periods of time. On February 11,2005, we entered into an agreement with the lender providingthat it would temporarily forbear from exercising rights andremedies available to it as a result of the occurrence of theearly amortization event under the facility caused by ournoncompliance with this covenant as of January 31, 2005. OnMarch 4, 2005, the Company and the lender entered into asecond amendment to the facility documents providing that thelender will permanently forbear from exercising rights andremedies as a result of that early amortization event, andproviding for an increase to the permitted maximum level of thedilution-to-liquidation ratio. In connection with the secondamendment, the Company and the lender also agreed to increasethe annual interest rate under the facility by 0.75%, to LIBORplus 3.75%, during any period when the dilution-to-liquidationratio exceeds the pre-amendment level. As a result, the Companyis currently in compliance with all operational and financialcovenants under the facility. A violation of the financialcovenants will result in an early amortization event that willcause a prohibition on further payments and distributions to usfrom the special purpose subsidiary until the facility has beenrepaid in full. Based on our experience with collections onreceivables we do not believe that repayment would take longerthan 30 days. However, early amortization events under thefacility generally will not cause an event of default under ourconvertible senior notes due 2010 and we do not believe thatsuch an event or the lack of borrowing availability under thisfacility would have a material adverse effect on our liquidity.This facility terminates under its present terms in June 2005.The Company is currently evaluating various alternatives,including extension of the current facility. The Company cannotgive assurance that it can replace or extend this facility onterms acceptable to the Company. If Maxtor does not extend thisfacility, it is required to repay the outstanding balance in itsentirety. The Company does not believe that the repayment of thebalance owing on the facility would have a material adverseeffect on the Company’s liquidity.**     *****Any failure to adequately protect and enforce our    intellectual property rights could harm our business.***     Our protection of our intellectual property is limited. Forexample, we have patent protection on only some of ourtechnologies. We may not receive patents for our pending orfuture patent applications, and any patents that we own or thatare issued to us may be invalidated, circumvented or challenged.In the case of products offered in rapidly emerging markets,such as consumer electronics, our competitors may file patentsmore rapidly or in greater numbers resulting in the issuance ofpatents that may result in unexpected infringement assertionsagainst us. Moreover, the rights granted under any such patentsmay not provide us with any competitive advantages. Finally, ourcompetitors may develop or otherwise acquire equivalent orsuperior technology. We also rely on trade secret, copyright andtrademark laws as well as the terms of our contracts to protectour proprietary rights. We may have to litigate to enforcepatents issued or licensed to us, to protect trade secrets orknow-how owned by us or to determine the enforceability, scopeand validity of our proprietary rights and the proprietaryrights of others. Enforcing or defending our proprietary rightscould be expensive and might not bring us timely and effectiverelief. We may have to obtain licenses of other parties’intellectual property and pay royalties. If we are unable toobtain such licenses, we may have to stop production of ourproducts or alter our products. In addition, the laws of certaincountries in which we sell and manufacture our products,including various countries in Asia, may not protect ourproducts and intellectual property rights to the same extent asthe laws of the United States. Our remedies in these countriesmay be
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inadequate to protect our proprietary rights. Any failure toenforce and protect our intellectual property rights could harmour business, financial condition and operating results.**     *****We are subject to existing claims relating to our    intellectual property which are costly to defend and may harm    our business.***     Prior to our acquisition of the Quantum HDD business, we, on theone hand, and Quantum and MKE, on the other hand, were sued byPapst Licensing, GmbH, a German corporation, for infringement ofa number of patents that relate to hard disk drives.Papst’s complaint against Quantum and MKE was filed onJuly 30, 1998, and Papst’s complaint against Maxtorwas filed on March 18, 1999. Both lawsuits, filed in theUnited States District Court for the Northern District ofCalifornia, were transferred by the Judicial Panel onMultidistrict Litigation to the United States District Court forthe Eastern District of Louisiana for coordinated pre-trialproceedings with other pending litigations involving the Papstpatents (the “MDL Proceeding”). The matters will betransferred back to the District Court for the Northern Districtof California for trial. Papst’s infringement allegationsare based on spindle motors that Maxtor and Quantum purchasedfrom third party motor vendors, including MKE, and the use ofsuch spindle motors in hard disk drives. We purchased theoverwhelming majority of the spindle motors used in our harddisk drives from vendors that were licensed under the Papstpatents. Quantum purchased many spindle motors used in its harddisk drives from vendors that were not licensed under the Papstpatents, including MKE. As a result of our acquisition of theQuantum HDD business, we assumed Quantum’s potentialliabilities to Papst arising from the patent infringementallegations Papst asserted against Quantum. We filed a motion tosubstitute Maxtor for Quantum in this litigation. The motion wasdenied by the Court presiding over the MDL Proceeding, withoutprejudice to being filed again in the future.     In February 2002, Papst and MKE entered into an agreement tosettle Papst’s pending patent infringement claims againstMKE. That agreement includes a license of certain Papst patentsto MKE, which might provide Quantum, and thus us, withadditional defenses to Papst’s patent infringement claims.     On April 15, 2002, the Judicial Panel on MultidistrictLitigation ordered a separation of claims and remand to theDistrict of Columbia of certain claims between Papst and anotherparty involved in the MDL Proceeding. By order enteredJune 4, 2002, the court stayed the MDL Proceeding pendingresolution by the District of Columbia court of the remandedclaims. These separated claims relating to the other party arecurrently proceeding in the District Court for the District ofColumbia.     The results of any litigation are inherently uncertain and Papstmay assert other infringement claims relating to currentpatents, pending patent applications, and/or future patentapplications or issued patents. Additionally, we cannot assureyou we will be able to successfully defend ourselves againstthis or any other Papst lawsuit. Because the Papst complaintsassert claims to an unspecified dollar amount of damages, andbecause we were at an early stage of discovery when thelitigation was stayed, we are unable to determine the possibleloss, if any, that we may incur as a result of an adversejudgment or a negotiated settlement with respect to claimsagainst us. We made an estimate of the potential liability whichmight arise from the Papst claims against Quantum at the time ofour acquisition of the Quantum HDD business. We have revisedthis estimate as a result of a related settlement with MKE andthis estimate will be further revised as additional informationbecomes available. A favorable outcome for Papst in theselawsuits could result in the issuance of an injunction againstus and our products and/or the payment of monetary damages equalto a reasonable royalty. In the case of a finding of a willfulinfringement, we also could be required to pay treble damagesand Papst’s attorney’s fees. The litigation couldresult in significant diversion of time by our technicalpersonnel, as well as substantial expenditures for future legalfees. Accordingly, although we cannot currently estimate whetherthere will be a loss, or the size of any loss, a litigationoutcome favorable to Papst could have a material adverse effecton our business, financial condition and operating results.Management believes that it has valid defenses to the claims ofPapst and is defending this matter vigorously.
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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.***     In connection with our acquisition of the Quantum HDD business,we agreed to indemnify Quantum for the amount of any tax payableby Quantum as a result of the separation of the Quantum HDDbusiness from Quantum Corporation (referred to as a“split-off”) to the extent such tax is not covered byinsurance, unless imposition of the tax is the result ofQuantum’s actions, or acquisitions of Quantum stock, afterthe transaction. The amount of the tax not covered by insurancecould be substantial. In addition, if it is determined thatQuantum owes federal or state tax as a result of the transactionand the circumstances giving rise to the tax are covered by ourindemnification obligations, we will be required to pay Quantumthe amount of the tax at that time, whether or not reimbursementmay be allowed under the insurance policy. Even if a claim isavailable, made and pending under the tax opinion insurancepolicy, there may be a substantial period after we pay Quantumfor the tax before the outcome of the insurance claim is finallyknown, particularly if the claim is denied by the insurancecompany and the denial is disputed by us and/or Quantum.Moreover, the insurance company could prevail in a coveragedispute. In any of these circumstances, we would have to eitheruse our existing cash resources or borrow money to cover ourobligations to Quantum. In either case, our payment of the tax,whether covered by insurance or not, could harm our business,financial condition, operating results and cash flows.**     *****The loss of key personnel could harm our business.***     Our success depends upon the continued contributions of ourexecutives and other key employees, many of whom would beextremely difficult to replace. The loss of the services of oneor more of our key senior executive officers could also affectour ability to successfully implement our business objectiveswhich could slow the growth of our business and cause ouroperating results to decline. Like many other technologycompanies, we have implemented workforce reductions that in somecases resulted in the termination of key employees who havesubstantial knowledge of our business. In addition, we haveexperienced significant turnover of our senior management overthe last two years. These and any future workforce reductionsmay also adversely affect the morale of, and our ability toretain, employees who have not been terminated, which may resultin the further loss of key employees. We do not have key personlife insurance on any of our personnel. Worldwide competitionfor experienced executives and finance personnel and otherskilled employees in the hard disk drive industry is extremelyintense. If we are unable to retain existing employees or tohire and integrate new employees, our business, financialcondition and operating results could suffer. In addition,companies in the hard disk drive industry whose employees acceptpositions with competitors often claim that the competitors haveengaged in unfair hiring practices. We may be the subject ofsuch claims in the future as we seek to hire qualified personneland we could incur substantial costs defending ourselves againstthose claims.**     *****We have experienced significant turnover of senior    management, our current executive management team has been    together for a limited time and we are continuing to hire new    senior executives, and these changes may impact our ability to    develop strategic plans or to execute effectively on our    business objectives, which could adversely impact our business    and operating results.***     Throughout 2003 and 2004, we announced a series of changes inour management that included the departure of many seniorexecutives and appointment of a number of the members of ourcurrent senior management team. We have had three chiefexecutive officers and five chief financial officers since thebeginning of 2003. Many of our senior executives joined us inlate 2004, and we may continue to make additional changes to oursenior management team. Both our Chief Executive OfficerDr. C.S. Park and our President and Chief Operating OfficerMichael Wingert were appointed in November 2004, though each hadserved us in different capacities since the mid-90s. Our ChiefFinancial Officer Duston Williams was appointed in December2004. Our Executive Vice President, Operations Fariba Danesh wasappointed in September 2004. Our Senior Vice President,Worldwide Sales Kurt Richarz was promoted to this position inFebruary 2005, although he has served in senior sales executivepositions with the Company since July 2002.
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Because of these changes, our current senior executive team hasnot worked together as a group for a significant length of time.If our new management team is unable to work togethereffectively to implement our strategies and manage ouroperations and accomplish our business objectives, our abilityto grow our business and successfully meet operationalchallenges could be severely impaired.**     *****We could be subject to environmental liabilities which    could increase our expenses and harm our business, financial    condition and results of operations.***     Because of the chemicals we use in our manufacturing andresearch operations, we are subject to a wide range ofenvironmental protection regulations in the United States,Singapore and China. While we do not believe our operations todate have been harmed as a result of such laws, futureregulations may increase our expenses and harm our business,financial condition and results of operations. Even if we are incompliance in all material respects with all presentenvironmental regulations, in the United States environmentalregulations often require parties to fund remedial actionregardless of fault. As a consequence, it is often difficult toestimate the future impact of environmental matters, includingpotential liabilities. If we have to make significant capitalexpenditures or pay significant expense in connection withfuture remedial actions or to continue to comply with applicableenvironmental laws, our business, financial condition andoperating results could suffer.     On January 27, 2003, the European Union adopted the WasteElectrical and Electronic Equipment Directive (“WEEE”)The WEEE directive will alter the manner in which electronicequipment is handled in the European Union. Ensuring compliancewith the WEEE directive could result in additional costs anddisruption to operations and logistics and thus, could have anegative impact on our business, operations and financialcondition. The directive will be phased-in gradually, with mostobligations becoming effective on August 13, 2005.**     *****The market price of our common stock fluctuated    substantially in the past and is likely to fluctuate in the    future as a result of a number of factors, including the release    of new products by us or our competitors, the loss or gain of    significant customers or changes in stock market analysts’    estimates.***     The market price of our common stock and the number of sharestraded each day have varied greatly. Such fluctuations maycontinue due to numerous factors, including: •     quarterly fluctuations in operating results;  •     announcements of new products by us or our competitors such as    products that address additional hard disk drive 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.**     *****If we fail to maintain an effective system of internal    controls, 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.***     Effective internal controls are necessary for us to providereliable financial reports. If we cannot provide reliablefinancial reports, our business and operating results could beharmed. We have in the past discovered, and may in the futurediscover, areas of our internal controls that need improvement.For example, in
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February 2005 the Company determined that two purchaseaccounting entries recorded in connection with the 2001acquisition of the Quantum HDD business required correction. Thefirst correction related to the fact that at the time of theacquisition, sufficient deferred tax assets were available tooffset the $196.5 million deferred tax liability recordedas part of the acquisition and accordingly a reduction in theCompany’s deferred tax asset valuation allowance shouldhave been recorded rather than recognition of additionalgoodwill. The second correction related to the reversal of$13.8 million of a restructuring reserve associated withthe acquisition to reflect discounting to present value ofliabilities associated with such accrual. These errors werefirst discovered and brought to the attention of management byPricewaterhouseCoopers LLP in connection with their work on theaudit for fiscal 2004. The Company restated its consolidatedfinancial statements for each of the three years in the periodended December 27, 2003 by filing a Form 10-K/A forthe year ended December 27, 2003 to correct these errors.     The Company also recorded two adjustments identified byPricewaterhouseCoopers LLP in connection with their interimreview of the Company’s third fiscal quarter of 2004results and the preparation of the Form 10-Q for suchquarter. These adjustments addressed the fact that theCompany’s severance accrual computations omitted futureseverance payments for certain personnel who had been notifiedof termination under the Company’s announced restructuringplan and also the fact that the Company had failed to apply theappropriate discount rate to the facility accrual associatedwith the Company’s restructuring activities. The impact ofthese two adjustments did not require the restatement of any ofthe Company’s financial statements.     Further, in connection with the preparation of theCompany’s interim financial statements for the quarterended April 2, 2005, the Company’s accounting andfinance staff, in reviewing certain complex, non-routinetransactions in remediation for the material weakness ininternal controls over financial reporting as ofDecember 25, 2004, determined that certain lease accountingentries originally recorded in April 2001 were in error. TheCompany initially identified two separate adjustments. The firstadjustment related to the incorrect determination of the netpresent value of the lease differential of adverse leasesassumed in connection with the Quantum HDD acquisition (the“Adverse Leases”). The second adjustment related tothe incorrect application of the straight line expensemethodology for lease entered into in April 2001 unrelated tothe Quantum acquisition (the “Straight Line Lease”).Upon further analysis, two additional adjustments wereidentified by the Company’s registered independent publicaccountants relating to the Adverse Leases. The additionalerrors relate to the incorrect determination of the fair valueof the Adverse Leases assumed and the corresponding impact onlease amortization over the remaining lease term. The liabilityfor the Adverse Leases was overstated, resulting in acorresponding overstatement of goodwill. The reduction of theliability for these Adverse Leases to their fair value at timeof acquisition had the effect of increasing the amount of thecorresponding rent expense for the Adverse Leases over theremaining lease term. The adjustments were not material to anyindividual prior year or interim reporting period; however,under relevant Securities and Exchange Commission accountinginterpretations, a restatement of the financial statements forsuch prior periods to correct immaterial misstatements thereinis required if the aggregate correcting adjustment related tosuch errors would be material to the financial statements of theperiod in which the adjustment was identified. Accordingly, theCompany restated its consolidated financial statements for theyears ended December 28, 2002, December 27, 2003 andDecember 25, 2004 and the related financial information forthose years as well as for the year ended December 31, 2001to reflect these corrections, as the adjustment would bematerial if recorded in the interim financial statements for thequarter ended April 2, 2005.     The ineffective control over the application of generallyaccepted accounting principles in relation to complex,non-routine transactions in the financial reporting processcould result in a material misstatement to the annual or interimfinancial statements that would not be prevented or detected. Asa result, management has determined that this control deficiencyconstituted a material weakness as of December 25, 2004.Because of the material weakness described above, managementconcluded that the Company did not maintain effective internalcontrol over financial reporting as of December 25, 2004,based on criteria in *Internal Control — IntegratedFramework*issued by the COSO. The Company’s managementhas identified the steps necessary to address the materialweakness described above, and has begun to execute remediationplans, as discussed in “Item 4. Controls andProcedures” of this quarterly report on Form 10-Q.
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     Any failure to implement and maintain the improvements in thecontrols over our financial reporting, or difficultiesencountered in the implementation of these improvements in ourcontrols, could cause us to fail to meet our reportingobligations. Any failure to improve our internal controls toaddress these identified weaknesses could also cause investorsto lose confidence in our reported financial information, whichcould have a negative impact on 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.***     We have historically used stock options and other forms ofequity-related compensation as key components of our totalemployee compensation program in order to align employees’interests with the interests of our stockholders, encourageemployee retention, and provide competitive compensationpackages. In recent periods, many of our employee stock optionshave had exercise prices in excess of our stock price, whichcould affect our ability to retain or attract present andprospective employees. In addition, the Financial AccountingStandards Board and other agencies have proposed changes toaccounting principles generally accepted in the United Statesthat would require Maxtor and other companies to record a chargeto earnings for employee stock option grants and other equityincentives. Moreover, new regulations implemented by the NewYork Stock Exchange (“NYSE”) prohibiting NYSE memberorganizations from giving a proxy to vote on equity-compensationplans unless the beneficial owner of the shares has given votinginstructions could make it more difficult for us to grantoptions to employees in the future. To the extent that newregulations make it more difficult or expensive to grant optionsto employees, we may incur increased compensation costs, changeour equity compensation strategy or find it difficult toattract, retain and motivate employees, each of which couldmaterially and adversely affect our business.**     *****Anti-takeover provisions in our certificate of    incorporation could discourage potential acquisition proposals    or delay or prevent a change of control.***     We have a number of protective provisions in place designed toprovide our board of directors with time to consider whether ahostile takeover is in our best interests and that of ourstockholders. These provisions could discourage potentialacquisition proposals and could delay or prevent a change incontrol of the Company and also could diminish the opportunitiesfor a holder of our common stock to participate in tenderoffers, including offers at a price above the then-currentmarket price for our common stock. These provisions also mayinhibit fluctuations in our stock price that could result fromtakeover attempts.
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**Item 3.*****Quantitative and Qualitative Disclosures About Market    Risk*****Derivatives**     We enter into foreign exchange forward contracts to manageforeign currency exchange risk associated with our operationsprimarily in Singapore and Switzerland. The foreign exchangeforward contracts we enter into generally have originalmaturities ranging from one to three months. We do not enterinto foreign exchange forward contracts for trading purposes. Wedo not expect gains or losses on these contracts to have amaterial impact on our financial results.**Investments**     We maintain an investment portfolio of various holdings, typesand maturities. These marketable securities are generallyclassified as available for sale and, consequently, are recordedon the balance sheet at fair value with unrealized gains orlosses reported as a separate component of accumulated othercomprehensive income. Part of this portfolio includesinvestments in bank issues, corporate bonds and commercialpapers.     The following table presents the hypothetical changes in fairvalues in the financial instruments held at April 2, 2005that are sensitive to changes in interest rates. Theseinstruments are not leveraged and are held for purposes otherthan trading. The hypothetical changes assume immediate shiftsin the U.S. Treasury yield curve of plus or minus50 basis points (“bps”), 100 bps, and150 bps.                                     **Fair Value**              **as of**              **April 2,**        **+150 bps** **+100 bps** **+50 bps** **2005** **-50 bps** **-100 bps** **-150 bps**                       **($000)**          Financial Instruments $88,365  $88,645  $88,925  $89,205  $89,490  $89,773  $90,063     % Change  (0.94)%  (0.63)%  (0.31)%      0.32%  0.64%  0.96%     We are exposed to certain equity price risks on our investmentsin common stock. These equity securities are held for purposesother than trading. The following table presents thehypothetical changes in fair values of the public equityinvestments that are sensitive to changes in the stock market.The modeling technique used measures the hypothetical change infair value arising from selected hypothetical changes in thestock price. Stock price fluctuations of plus or minus15 percent, plus or minus 25 percent, and plus orminus 50 percent were selected based on the probability oftheir occurrence.                                     **Fair Value**          **as of**    **Valuation of Security Given X%** **April 2,** **Valuation of Security Given X%**  **Decrease in the Security Price** **2005** **Increase in the Security Price**               **($000)**      Corporate equity investments $1,888  $2,832  $3,210  $3,776  $4,342  $4,720  $5,664     % Change  (50)%  (25)%  (15)%      15%  25%  50%
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**Item 4.*****Controls and Procedures*****Changes in Internal Control Over Financial Reporting**     As previously disclosed under Item 9A, *Controls andProcedures*, in our Annual Report on Form 10-K for thefiscal year ended December 25, 2004 filed with Securitiesand Exchange Commission on March 10, 2005 (“2004Form 10-K”), management concluded that as ofDecember 25, 2004 the Company did not maintain effectivecontrols over the application of generally accepted accountingprinciples related to the financial reporting process forcomplex, non-routine transactions. Further, management concludedthat our internal accounting personnel did not, as ofDecember 25, 2004, have sufficient depth, skills andexperience in accounting for complex, non-routine transactionsin the financial reporting process and there was a lack ofreview by internal accounting personnel or accountingcontractors with appropriate financial reporting expertise ofcomplex, non-routine transactions to ensure they are accountedfor in accordance with generally accepted accounting principles.Additionally, we did not, as of December 25, 2004,consistently use outside technical accounting contractors tosupplement our internal accounting personnel, and we hadinsufficient formalized procedures to assure that complex,non-routine transactions received adequate review by internalaccounting personnel or outside contractors with technicalaccounting expertise.     The ineffective control over the application of generallyaccepted accounting principles in relation to complex,non-routine transactions in the financial reporting processcould result in a material misstatement to the annual or interimfinancial statements that would not be prevented or detected. Asa result, management determined that this control deficiencyconstituted a material weakness as of December 25, 2004.Because of the material weakness described above, managementconcluded in our annual report on Form 10-K that theCompany did not maintain effective internal control overfinancial reporting as of December 25, 2004, based oncriteria in *Internal Control — IntegratedFramework* issued by the COSO.     In our 2004 Form 10-K, management identified the stepsnecessary to address the material weakness described above asfollows:          (1) Hiring additional accounting personnel and engaging    outside contractors with technical accounting expertise, as    needed, and reorganizing the accounting and finance department    to ensure that accounting personnel with adequate experience,    skills and knowledge relating to complex, non-routine    transactions are directly involved in the review and accounting    evaluation of our complex, non-routine transactions;           (2) Involving both internal accounting personnel and    outside contractors with technical accounting expertise, as    needed, early in the evaluation of a complex, non-routine    transaction to obtain additional guidance as to the application    of generally accepted accounting principles to such a proposed    transaction;           (3) Documenting to standards established by senior    accounting personnel and the principal accounting officer the    review, analysis and related conclusions with respect to    complex, non-routine transactions; and           (4) Requiring senior accounting personnel and the principal    accounting officer to review complex, non-routine transactions    to evaluate and approve the accounting treatment for such    transactions.     The Company’s management began to execute the remediationplans identified above in the fourth quarter of 2004. During thequarter ended December 25, 2004, the Company filled thethen vacant position of Chief Financial Officer to provideleadership in the areas of finance and accounting and appointedan Operations Controller, who provides senior management andreview in the accounting function. The Company had previouslyoutsourced its internal audit function and in the quarter endedDecember 25, 2004, the Company established the internalaudit function in-house and hired a senior, experiencedexecutive to lead this function. The Company engaged outsidecontractors with technical accounting expertise commencing inNovember 2004.     During the quarterly period ended April 2, 2005, managementmade a number of changes to internal control over financialreporting that materially affected, or are reasonably likely tomaterially affect, our internal control over financialreporting. The Company’s Corporate Controller resigned andthe Company
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appointed a replacement Corporate Controller and principalaccounting officer on February 18, 2005. Under thesupervision of our Chief Financial Officer and the CorporateController, management implemented additional processes andprocedures and have also effected a reorganization of itsaccounting and finance department, to assure adequate review ofcomplex, non-routine transactions. These measures included theimplementation of requirements for more stringent and completedocumentation of the review, analysis and conclusions regardingcomplex, non-routine transactions and the review of thedocumentation regarding the analysis of such transaction and theproposed accounting treatment by senior accounting personnel andthe principal accounting officer. Management also implementedpolicies and procedures to assure adequate and timelyinvolvement of outside accounting contractors, as needed, toobtain guidance as to the application of generally acceptedaccounting principles to complex, non-routine transactions.     In connection with the preparation of the Company’s interimfinancial statements for the quarter ended April 2, 2005,the Company’s accounting and finance staff, in reviewingcertain complex, non-routine transactions in remediation of thematerial weakness in internal controls over financial reportingas of December 25, 2004, determined that certain leaseaccounting entries originally recorded in April 2001 werein error. The Company initially identified two separateadjustments. The first adjustment related to the incorrectdetermination of the net present value of the lease differentialof adverse leases assumed in connection with the Quantum HDDacquisition (the “Adverse Leases”). The secondadjustment related to the incorrect application of the straightline expense methodology for a lease entered into inApril 2001 unrelated to the Quantum acquisition (the“Straight Line Lease”). Upon further analysis, twoadditional adjustments were identified by the Company’sindependent registered public accountants relating to theAdverse Leases. The additional errors relate to the incorrectdetermination of the fair value of the Adverse Leases assumedand the corresponding impact on lease amortization expense forthe Adverse Leases over the remaining lease term. Theadjustments were not material to any individual prior year orinterim reporting period; however, a restatement of thefinancial statements for such prior periods to correctimmaterial misstatements therein is required if the aggregatecorrecting adjustment related to such errors would be materialto the financial statements of the period in which theadjustment was identified. Accordingly, the Company restated itsconsolidated financial statements for the years endedDecember 28, 2002, December 27, 2003 andDecember 25, 2004 and the related financial information forthose years as well as for the year ended December 31, 2001to reflect these corrections, as the adjustment would bematerial if recorded in the interim financial statements for thequarter ended April 2, 2005.     In the preparation of this Quarterly Report on Form 10-Qfor the quarter ended April 2, 2005, in light of thediscovery of the errors in connection with the preparation ofour interim financial statements for the period endedApril 2, 2005 described above, the Company undertook areview of all of our significant lease accounting transactions,as well as all of the significant purchase accounting entriesrecorded in connection with the acquisition of theQuantum HDD business in April 2001. We also conducteda review of additional significant, complex, non-routinetransactions recorded from April 2001 through the periodended April 2, 2005. The accounts reviewed as part of thisremediation process were in addition to those reviewed inconnection with the Company’s preparation of itsForm 10-K/A for the year ended December 27, 2003 filedon February 22, 2005. The Company engaged contractors withtechnical expertise to supplement its internal review. TheCompany believes that these corrective actions, taken as awhole, have mitigated the control deficiencies with respect toour preparation of this Quarterly Report on Form 10-Q andthat these measures have been effective to ensure thatinformation required to be disclosed in this Quarterly Report onForm 10-Q has been recorded, processed, summarized andreported correctly. In particular, the Company’s managementbelieves that the measures implemented to date providedreasonable assurance that the Company’s financialstatements included in this Quarterly Report on Form 10-Qare prepared in accordance with generally accepted accountingprinciples.     The Company is in the process of developing procedures for thetesting of the remediated controls to determine if the materialweakness has been remediated and expects that testing of thesecontrols will be substantially completed by the end of ourfiscal year 2005. The Company will continue the implementationof policies, processes and procedures regarding the review ofcomplex, non-routine transactions and the hiring of
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additional experienced financial reporting personnel at bothmanagement and staff levels. Management believes that ourcontrols and procedures will continue to improve as a result ofthe further implementation of these measures.**Evaluation of Effectiveness of Disclosure Controls andProcedures**     Under the supervision and with the participation of ourmanagement, including our Chairman and Chief Executive Officerand our Chief Financial Officer, we evaluated the effectivenessof our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934, as amended. Based on thatevaluation, our Chairman and Chief Executive Officer and ourChief Financial Officer concluded that our disclosure controlsand procedures were ineffective as of the end of the periodcovered by this quarterly report, because of the materialweakness described above.
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**PART II.     OTHERINFORMATION****Item 1.*****Legal Proceedings***     Prior to our acquisition of the Quantum HDD business, we,on the one hand, and Quantum and MKE, on the other hand, weresued by Papst Licensing, GmbH, a German corporation, forinfringement of a number of patents that relate to hard diskdrives. Papst’s complaint against Quantum and MKE was filedon July 30, 1998, and Papst’s complaint against Maxtorwas filed on March 18, 1999. Both lawsuits, filed in theUnited States District Court for the Northern District ofCalifornia, were transferred by the Judicial Panel onMultidistrict Litigation to the United States District Court forthe Eastern District of Louisiana for coordinated pre-trialproceedings with other pending litigations involving the Papstpatents (the “MDL Proceeding”). The matters will betransferred back to the District Court for the Northern Districtof California for trial. Papst’s infringement allegationsare based on spindle motors that Maxtor and Quantum purchasedfrom third party motor vendors, including MKE, and the use ofsuch spindle motors in hard disk drives. We purchased theoverwhelming majority of the spindle motors used in our harddisk drives from vendors that were licensed under the Papstpatents. Quantum purchased many spindle motors used in its harddisk drives from vendors that were not licensed under the Papstpatents, including MKE. As a result of our acquisition of theQuantum HDD business, we assumed Quantum’s potentialliabilities to Papst arising from the patent infringementallegations Papst asserted against Quantum. We filed a motion tosubstitute the Company for Quantum in this litigation. Themotion was denied by the Court presiding over the MDLProceeding, without prejudice to being filed again in the future.     In February 2002, Papst and MKE entered into an agreementto settle Papst’s pending patent infringement claimsagainst MKE. That agreement includes a license of certain Papstpatents to MKE which might provide Quantum, and thus us, withadditional defenses to Papst’s patent infringement claims.     On April 15, 2002, the Judicial Panel on MultidistrictLitigation ordered a separation of claims and remand to theDistrict of Columbia of certain claims between Papst and anotherparty involved in the MDL Proceeding. By order enteredJune 4, 2002, the court stayed the MDL Proceeding pendingresolution by the District of Columbia court of the remandedclaims. These separated claims relating to the other party arecurrently proceeding in the District Court for the District ofColumbia.     The results of any litigation are inherently uncertain and Papstmay assert other infringement claims relating to currentpatents, pending patent applications, and/or future patentapplications or issued patents. Additionally, we cannot assureyou we will be able to successfully defend ourselves againstthis or any other Papst lawsuit. Because the Papst complaintsassert claims to an unspecified dollar amount of damages, andbecause we were at an early stage of discovery when thelitigation was stayed, we are unable to determine the possibleloss, if any, that we may incur as a result of an adversejudgment or a negotiated settlement with respect to the claimsagainst us. We made an estimate of the potential liabilities,which might arise from the Papst claims against Quantum at thetime of our acquisition of the Quantum HDD business. We haverevised this estimate as a result of a related settlement withMKE and this estimate will be further revised as additionalinformation becomes available. A favorable outcome for Papst inthese lawsuits could result in the issuance of an injunctionagainst us and our products and/or the payment of monetarydamages equal to a reasonable royalty. In the case of a findingof a willful infringement, we also could be required to paytreble damages and Papst’s attorney’s fees. Thelitigation could result in significant diversion of time by ourtechnical personnel, as well as substantial expenditures forfuture legal fees. Accordingly, although we cannot currentlyestimate whether there will be a loss, or the size of any loss,a litigation outcome favorable to Papst could have a materialadverse effect on our business, financial condition andoperating results. Management believes that it has validdefenses to the claims of Papst and is defending this mattervigorously.**Item 2.*****Unregistered Sales of Equity Securities and Use of    Proceeds***     None
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**Item 3.*****Defaults Upon Senior Securities***     None**Item 4.*****Submission of Matters to a Vote of Security Holders***     None**Item 5.*****Other Information***     None**Item 6.*****Exhibits***     See Index to Exhibits at the end of this report.
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**SIGNATURES**     Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following personson behalf of the registrant and the capacities and on the datesindicated.     MAXTOR CORPORATION By     /s/ DUSTON M. WILLIAMS           Duston M. Williams *Executive Vice President, Finance* *and Chief Financial Officer*Date: May 12, 2005
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**EXHIBIT INDEX**     **Exhibit**  **Number** **Description**    3.1(1)     Amended and Restated Bylaws of Maxtor Corporation, dated    February 18, 2005. 10.1(2)     Second Amendment Agreement to the Receivables Loan and Security    Agreement dated March 4, 2005 among Maxtor Receivables LLC,    Maxtor Corporation, Merrill Lynch Commercial Finance Corp. and    U.S. Bank National Association. 10.2(3)     Amendment to the Employment Offer Letter dated as of    February 7, 2005 from Maxtor Corporation to Dr. C.S.    Park.** 10.3(1)     Amendment to the Employment Offer Letter dated as of    February 7, 2005 from Maxtor Corporation to    Mr. Michael J. Wingert.** 10.4(2)     Forbearance Agreement by and among Maxtor Receivables LLC,    Maxtor Corporation and Merrill Lynch Commercial Finance    Corporation, dated as of February 11, 2005. 10.5(1)     Employment Offer Letter dated as of February 18, 2005 from    Maxtor Corporation to Mr. Kurt Richarz.** 10.6     Amended and Restated Executive Deferred Compensation Plan,    effective January 1, 2005.** 10.7     Executive Retention and Severance Plan adopted October 30,    2003, amended and restated effective March 7, 2005,    including forms of: (i) Agreement to Participate,    (ii) General Release of Claims, and (iii) Restrictive    Covenants Agreement.** 10.8     Forms of Agreement to Participate in the Maxtor Corporation    Executive Retention and Severance Plan, effective March 14,    2005, by: (i) Dr. C. S. Park;    (ii) Michael J. Wingert; (iii) Duston M. Williams;    (iv) Fariba Danesh; (v) David Beaver; and    (vi) Kurt Richarz.** 10.9     Restricted Stock Unit Plan, as amended and restated through    March 7, 2005, including forms of: (i) Standard Form    of Award Agreement and (ii) Designation of Beneficiary.** 10.10     Forms of Restated Restricted Stock Unit Award Agreement,    effective March 14, 2005, by:    (i) Dr. C. S. Park; (ii) Michael J.    Wingert; (iii) Duston M. Williams; (iv) Fariba Danesh;    (v) David Beaver; and (vi) Kurt Richarz.** 10.11     Form of Nonstatutory Stock Option Agreement under the Maxtor    Corporation Amended and Restated 1996 Stock Option Plan.** 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.(1)     Incorporated by reference to exhibits of Form 8-K filed    February 25, 2005. (2)     Incorporated by reference to exhibits of Form 10-K filed    March 10, 2005. (3)     Incorporated by reference to exhibits of Form 8-K filed    February 11, 2005.