##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|                                            |  |                                                                                                 
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                  |  |                                                                                                 
|þ                                           |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     
|                                           
|For the period ended September 25,
    2004
|                                           
|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: 1-16447

Maxtor Corporation

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(408) 894-5000


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

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

As of October 28, 2004,
250,033,379 shares of the registrants Common Stock,
$.01 par value, were issued and outstanding.



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MAXTOR CORPORATION

FORM 10-Q

September 25, 2004


INDEX

|                                   |  |                                                                                                                                                  |    |      |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                   |  |                                                                                                                                                  |    | Page
|                                   |  |                                                                                                                                                  |    |     
|PART I.  FINANCIAL
    INFORMATION
|Item 1.                            |  | Condensed Consolidated
    Financial Statements (Unaudited)                                                                                      |    |      | 2  | 
|                                   |  | Condensed Consolidated
    Balance Sheets  September 25, 2004, and
    December 27, 2003 (Unaudited)                                            |    |      | 2  | 
|                                   |  | Condensed Consolidated
    Statements of Operations  Three and nine months ended
    September 25, 2004, and September 27, 2003
    (Unaudited) |    |      | 3  | 
|                                   |  | Condensed Consolidated
    Statements of Cash Flows  Nine months ended
    September 25, 2004, and September 27, 2003
    (Unaudited)           |    |      | 4  | 
|                                   |  | Notes to Condensed
    Consolidated Financial Statements (Unaudited)                                                                             |    |      | 5  | 
|Item 2.                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                                        |    |      | 19 | 
|Item 3.                            |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                                                   |    |      | 46 | 
|Item 4.                            |  | Controls and Procedures                                                                                                                          |    |      | 46 | 
|PART II.  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                                                |    |      | 48 | 
|Item 2.                            |  | Unregistered Sales of Equity
    Securities and Use of Proceeds                                                                                  |    |      | 49 | 
|Item 3.                            |  | Defaults Upon Senior
    Securities                                                                                                              |    |      | 49 | 
|Item 4.                            |  | Submission of Matters to a
    Vote of Security Holders                                                                                          |    |      | 49 | 
|Item 5.                            |  | Other Information                                                                                                                                |    |      | 49 | 
|Item 6.                            |  | Exhibits                                                                                                                                         |    |      | 49 | 
|Signature Page                     |  |                                                                                                                                                  | 50 |     
|EXHIBIT 10.1                      
|EXHIBIT 10.2                      
|EXHIBIT 10.3                      
|EXHIBIT 10.4                      
|EXHIBIT 31                        
|EXHIBIT 32                        



1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION






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

MAXTOR CORPORATION



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |         |           |           | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------- | ------------ | --------- | --------- | ---------- | ------- | --------- | --------- | 
|                                           |                                                                                                                                                                                                                                                        | September 25,                              |                           | December 27,
|                                           |                                                                                                                                                                                                                                                        | 2004                                       |                           | 2003        
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |             
|                                           |                                                                                                                                                                                                                                                        |                                           
|                                           |                                                                                                                                                                                                                                                        | (Unaudited)                               
|                                           |                                                                                                                                                                                                                                                        | (In thousands, except share and           
|                                           |                                                                                                                                                                                                                                                        | per share amounts)                        
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           | Cash and cash equivalents                                                                                                                                                                                                                              |                                            | $                         | 391,465      |           |           | $          | 530,816 |          
|                                           | Restricted cash                                                                                                                                                                                                                                        |                                            |                           | 22,686       |           |           |            | 37,154  |          
|                                           | Marketable securities                                                                                                                                                                                                                                  |                                            |                           | 64,894       |           |           |            | 44,543  |          
|                                           | Restricted marketable securities                                                                                                                                                                                                                       |                                            |                           | 42,974       |           |           |            | 42,337  |          
|                                           | Accounts receivable, net of allowance of doubtful
    accounts of $10,055 at September 25, 2004 and $11,220 at
    December 27, 2003                                                                                                                   |                                            |                           | 402,707      |           |           |            | 540,943 |          
|                                           | Other receivables                                                                                                                                                                                                                                      |                                            |                           | 44,093       |           |           |            | 37,964  |          
|                                           | Inventories                                                                                                                                                                                                                                            |                                            |                           | 251,060      |           |           |            | 218,011 |          
|                                           | Prepaid expenses and other                                                                                                                                                                                                                             |                                            |                           | 39,140       |           |           |            | 38,301  |          
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           |                                                                                                                                                                                                                                                        |                                            | Total current assets      |              |           | 1,259,019 |            |         |           | 1,490,069 | 
|Property, plant and equipment, net         |                                                                                                                                                                                                                                                        |                                            | 374,762                   |              |           |           | 342,679    |        
|Goodwill                                   |                                                                                                                                                                                                                                                        |                                            | 813,951                   |              |           |           | 813,951    |        
|Other intangible assets, net               |                                                                                                                                                                                                                                                        |                                            | 30,678                    |              |           |           | 61,619     |        
|Other assets                               |                                                                                                                                                                                                                                                        |                                            | 34,297                    |              |           |           | 13,908     |        
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           |                                                                                                                                                                                                                                                        |                                            | Total assets              |              | $         | 2,512,707 |            |         | $         | 2,722,226 | 
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           | Short-term borrowings, including current portion
    of long-term debt                                                                                                                                                                                 |                                            | $                         | 70,648       |           |           | $          | 77,037  |          
|                                           | Accounts payable                                                                                                                                                                                                                                       |                                            |                           | 698,524      |           |           |            | 730,056 |          
|                                           | Accrued and other liabilities                                                                                                                                                                                                                          |                                            |                           | 325,089      |           |           |            | 454,388 |          
|                                           | Liabilities of discontinued operations                                                                                                                                                                                                                 |                                            |                           | 689          |           |           |            | 1,487   |          
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           |                                                                                                                                                                                                                                                        |                                            | Total current liabilities |              |           | 1,094,950 |            |         |           | 1,262,968 | 
|Deferred taxes                             |                                                                                                                                                                                                                                                        |                                            | 196,455                   |              |           |           | 196,455    |        
|Long-term debt, net of current portion     |                                                                                                                                                                                                                                                        |                                            | 400,208                   |              |           |           | 355,809    |        
|Other liabilities                          |                                                                                                                                                                                                                                                        |                                            | 198,733                   |              |           |           | 186,485    |        
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           |                                                                                                                                                                                                                                                        |                                            | Total liabilities         |              |           | 1,890,346 |            |         |           | 2,001,717 | 
|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; 263,186,312 shares
    issued and 249,940,574 shares outstanding at
    September 25, 2004 and 259,246,819 shares issued and
    246,001,081 shares outstanding at December 27, 2003 |                                            |                           | 2,632        |           |           |            | 2,592   |          
|Additional paid-in capital                 |                                                                                                                                                                                                                                                        |                                            | 2,428,679                 |              |           |           | 2,410,082  |        
|Deferred stock-based compensation          |                                                                                                                                                                                                                                                        |                                            |                          |              |           |           | (110       | )      
|Accumulated deficit                        |                                                                                                                                                                                                                                                        |                                            | (1,749,636                | )            |           |           | (1,637,920 | )      
|Cumulative other comprehensive income      |                                                                                                                                                                                                                                                        |                                            | 5,625                     |              |           |           | 10,804     |        
|Treasury stock (13,245,738 shares) at cost |                                                                                                                                                                                                                                                        |                                            | (64,939                   | )            |           |           | (64,939    | )      
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           |                                                                                                                                                                                                                                                        | Total stockholders equity                 |                           |              | 622,361   |           |            |         | 720,509   |          
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        
|                                           |                                                                                                                                                                                                                                                        | Total liabilities and stockholders equity |                           | $            | 2,512,707 |           |            | $       | 2,722,226 |          
|                                           |                                                                                                                                                                                                                                                        |                                            |                           |              |           |           |            |        

See accompanying notes to condensed consolidated
financial statements.

2



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##### Table of Contents



MAXTOR CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |         |             | 
|----------------------------------------- | ----------------------------------- | -------------------------------------------------- | ------- | ----------------- | ----------- | ------------- | --------- | ------------- | ----------- | - | --------- | ------- | ----------- | - | --------- | ------- | ----------- | 
|                                          |                                     |                                                    |         |                  
|                                          |                                     | Three Months Ended                                 |         | Nine Months Ended
|                                          |                                     |                                                    |         |                  
|                                          |                                     | September 25,                                      |         | September 27,     |             | September 25, |           | September 27,
|                                          |                                     | 2004                                               |         | 2003              |             | 2004          |           | 2003         
|                                          |                                     |                                                    |         |                   |             |               |           |              
|                                          |                                     |                                                    |         |                  
|                                          |                                     | (Unaudited)                                        |         | (Unaudited)      
|                                          |                                     |                                                   
|                                          |                                     | (In thousands, except share and per share amounts)
|Net revenues                              |                                     | $                                                  | 927,204 |                   |             | $             | 1,065,531 |               |             | $ | 2,765,146 |         |             | $ | 2,915,323 |        
|Cost of revenues                          |                                     |                                                    | 867,680 |                   |             |               | 883,106   |               |             |   | 2,476,773 |         |             |   | 2,411,805 |        
|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                          | Gross profit                        |                                                    |         | 59,524            |             |               |           | 182,425       |             |   |           | 288,373 |             |   |           | 503,518 |            
|Operating expenses:                       |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                          | Research and development            |                                                    |         | 78,167            |             |               |           | 88,172        |             |   |           | 243,552 |             |   |           | 259,051 |            
|                                          | Selling, general and administrative |                                                    |         | 34,477            |             |               |           | 33,875        |             |   |           | 99,374  |             |   |           | 96,774  |            
|                                          | Amortization of intangible assets   |                                                    |         | 5,052             |             |               |           | 20,562        |             |   |           | 30,941  |             |   |           | 61,686  |            
|                                          | Restructuring charge                |                                                    |         | 31,393            |             |               |           |              |             |   |           | 31,393  |             |   |           |        |            
|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                          |                                     | Total operating expenses                           |         |                   | 149,089     |               |           |               | 142,609     |   |           |         | 405,260     |   |           |         | 417,511     | 
|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Income (loss) from operations             |                                     |                                                    | (89,565 | )                 |             |               | 39,816    |               |             |   | (116,887  | )       |             |   | 86,007    |        
|Interest expense                          |                                     |                                                    | (7,805  | )                 |             |               | (8,966    | )             |             |   | (24,001   | )       |             |   | (22,713   | )      
|Interest income                           |                                     |                                                    | 1,276   |                   |             |               | 1,183     |               |             |   | 3,646     |         |             |   | 3,814     |        
|Income from litigation settlement         |                                     |                                                    |        |                   |             |               |          |               |             |   | 24,750    |         |             |   |          |        
|Other gain (loss)                         |                                     |                                                    | 13      |                   |             |               | (937      | )             |             |   | 67        |         |             |   | (694      | )      
|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Income (loss) before income taxes         |                                     |                                                    | (96,081 | )                 |             |               | 31,096    |               |             |   | (112,425  | )       |             |   | 66,414    |        
|Provision for (benefit from) income taxes |                                     |                                                    | (1,300  | )                 |             |               | 1,209     |               |             |   | (709      | )       |             |   | 2,923     |        
|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Net income (loss)                         |                                     | $                                                  | (94,781 | )                 |             | $             | 29,887    |               |             | $ | (111,716  | )       |             | $ | 63,491    |        
|                                          |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Net income (loss) per share  basic       |                                     | $                                                  | (0.38   | )                 |             | $             | 0.12      |               |             | $ | (0.45     | )       |             | $ | 0.26      |        
|Net income (loss) per share  diluted     |                                     | $                                                  | (0.38   | )                 |             | $             | 0.12      |               |             | $ | (0.45     | )       |             | $ | 0.26      |        
|Shares used in per share calculation      |                                     |                                                    |         |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                          |                                     | basic                                             |         |                   | 248,728,113 |               |           |               | 241,618,230 |   |           |         | 247,611,347 |   |           |         | 242,135,752 | 
|                                          |                                     | diluted                                           |         |                   | 248,728,113 |               |           |               | 252,343,682 |   |           |         | 247,611,347 |   |           |         | 248,358,269 | 

See accompanying notes to condensed consolidated
financial statements.

3



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##### Table of Contents



MAXTOR CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |         |          |         |  
|-------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------- | ------------- | -------- | -------- | -------- | ------- | -------- | ------- | -
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | Nine Months Ended                
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | September 25,                     |                                                                                    | September 27,
|                                                                                                         |                                                                                     | 2004                              |                                                                                    | 2003         
|                                                                                                         |                                                                                     |                                   |                                                                                    |              
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | (Unaudited)                      
|                                                                                                         |                                                                                     | (In thousands)                   
|Cash Flows from Operating
    Activities:                                                                |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Net income (loss)                                                                                        |                                                                                     | $                                 | (111,716                                                                           | )             |          | $        | 63,491   |        
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:   |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         | Depreciation and amortization                                                       |                                   |                                                                                    | 105,789       |          |          |          | 121,018 |         
|                                                                                                         | Amortization of intangible assets                                                   |                                   |                                                                                    | 30,941        |          |          |          | 61,686  |         
|                                                                                                         | Stock-based compensation expense                                                    |                                   |                                                                                    | 218           |          |          |          | 736     |         
|                                                                                                         | Restructuring charge                                                                |                                   |                                                                                    | 24,502        |          |          |          |        |         
|                                                                                                         | Loss on sale of property, plant and equipment and
    other assets                  |                                   |                                                                                    | 1,238         |          |          |          | 2,908   |         
|                                                                                                         | Gain on retirement of bond                                                          |                                   |                                                                                    |              |          |          |          | (111    | )       
|                                                                                                         | Change in assets and liabilities:                                                   |                                   |                                                                                    |               |          |          |          |         |         
|                                                                                                         |                                                                                     | Accounts receivable               |                                                                                    |               | 138,236  |          |          |         | (273,985 | )      
|                                                                                                         |                                                                                     | Other receivables                 |                                                                                    |               | (6,129   | )        |          |         | 144,199  |        
|                                                                                                         |                                                                                     | Inventories                       |                                                                                    |               | (33,049  | )        |          |         | (42,839  | )      
|                                                                                                         |                                                                                     | Prepaid expenses and other assets |                                                                                    |               | (3,168   | )        |          |         | (5,019   | )      
|                                                                                                         |                                                                                     | Accounts payable                  |                                                                                    |               | (31,625  | )        |          |         | 49,254   |        
|                                                                                                         |                                                                                     | Accrued and other liabilities     |                                                                                    |               | (141,547 | )        |          |         | (28,714  | )      
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         |                                                                                     |                                   | Net cash provided by (used in) operating
    activities from continuing operations |               |          | (26,310  | )        |         |          | 92,624  |  
|                                                                                                         |                                                                                     |                                   | Net cash flow provided by (used in) discontinued
    operations                    |               |          | (798     | )        |         |          | (7,404  | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         |                                                                                     |                                   | Net cash used in operating activities                                              |               |          | (27,108  | )        |         |          | 85,220  |  
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Cash Flows from Investing
    Activities:                                                                |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Proceeds from sale of property, plant and
    equipment                                                  |                                                                                     |                                   | 750                                                                                |               |          |          | 340      |        
|Purchase of property, plant and equipment                                                                |                                                                                     |                                   | (139,743                                                                           | )             |          |          | (83,602  | )      
|Decrease (Increase) in restricted cash                                                                   |                                                                                     |                                   | (7,108                                                                             | )             |          |          | 16,724   |        
|Proceeds from sale of marketable securities                                                              |                                                                                     |                                   | 37,769                                                                             |               |          |          | 42,766   |        
|Purchase of marketable securities                                                                        |                                                                                     |                                   | (60,168                                                                            | )             |          |          | (41,195  | )      
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         |                                                                                     |                                   | Net cash used in investing activities                                              |               |          | (168,500 | )        |         |          | (64,967 | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Cash Flows from Financing
    Activities:                                                                |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Proceeds from issuance of debt, including
    short-term borrowings                                      |                                                                                     |                                   | 54,655                                                                             |               |          |          | 241,763  |        
|Principal payments of debt including short-term
    borrowings                                           |                                                                                     |                                   | (4,238                                                                             | )             |          |          | (107,067 | )      
|Principal payments under capital lease obligations                                                       |                                                                                     |                                   | (12,431                                                                            | )             |          |          | (22,797  | )      
|Purchase of treasury shares at cost                                                                      |                                                                                     |                                   |                                                                                   |               |          |          | (44,939  | )      
|Net proceeds from receivable-backed borrowing                                                            |                                                                                     |                                   | 49,748                                                                             |               |          |          | 47,908   |        
|Payment of receivable-backed borrowing                                                                   |                                                                                     |                                   | (50,000                                                                            | )             |          |          |         |        
|Proceeds from issuance of common stock from
    employee stock purchase plan and stock options exercised |                                                                                     |                                   | 18,523                                                                             |               |          |          | 49,202   |        
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         |                                                                                     |                                   | Net cash provided by financing activities                                          |               |          | 56,257   |          |         |          | 164,070 |  
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Net change in cash and cash equivalents                                                                  |                                                                                     |                                   | (139,351                                                                           | )             |          |          | 184,322  |        
|Cash and cash equivalents at beginning of period                                                         |                                                                                     |                                   | 530,816                                                                            |               |          |          | 306,444  |        
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Cash and cash equivalents at end of period                                                               |                                                                                     | $                                 | 391,465                                                                            |               |          | $        | 490,766  |        
|                                                                                                         |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|Supplemental Disclosures of Cash Flow
    Information:                                                   |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         | Cash paid during the period for:                                                    |                                   |                                                                                    |               |          |          |          |         |         
|                                                                                                         |                                                                                     | Interest                          |                                                                                    | $             | 17,880   |          |          | $       | 17,688   |        
|                                                                                                         |                                                                                     | Income taxes                      |                                                                                    | $             | 3,334    |          |          | $       | 2,532    |        
|Schedule of Non-Cash Investing and Financing
    Activities:                                             |                                                                                     |                                   |                                                                                    |               |          |          |          |        
|                                                                                                         | Purchase of property, plant and equipment
    financed by accounts payable          |                                   | $                                                                                  | 5,961         |          |          | $        | 3,765   |         
|                                                                                                         | Retirement of debt in exchange for bond redemption                                  |                                   | $                                                                                  | 5,000         |          |          | $        | 5,000   |         
|                                                                                                         | Change in unrealized loss on investments                                            |                                   | $                                                                                  | (5,179        | )        |          | $        | (4,461  | )       
|                                                                                                         | Purchase of property, plant and equipment
    financed by capital lease obligations |                                   | $                                                                                  | 24            |          |          | $        | 595     |         

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

4



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##### Table of Contents






MAXTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. The
consolidated financial statements include the accounts of Maxtor
Corporation (Maxtor or the Company) and
its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. All
adjustments of a normal recurring nature which, in the opinion
of management, are necessary for a fair statement of the results
for the interim periods have been made. The unaudited interim
financial statements should be read in conjunction with the
Companys audited consolidated financial statements and
notes thereto for the fiscal year ended December 27, 2003
incorporated in the Companys Annual Report on
Form 10-K. Interim results are not necessarily indicative
of the operating results expected for later quarters or the full
fiscal year.



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

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



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

The Company operates and reports financial
results on a fiscal year of 52 or 53 weeks ending on the
last Saturday of December in each year. Accordingly, the three
and nine month periods ended September 25, 2004 comprised
13 and 39 weeks, respectively, as did the three and nine
month periods ended September 27, 2003. The current fiscal
year ends on December 25, 2004. All references to years in
these notes to consolidated financial statements represent
fiscal years unless otherwise noted.



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

The Company accounts for non-cash stock-based
employee compensation in accordance with APB Opinion No. 25
(APB 25), Accounting for Stock Issued to
Employees and Related Interpretations, and complies with
the disclosure provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation and
Statement of Financial Accounting Standard No. 148
(SFAS 148), Accounting for Stock-Based
Compensation, Transition and Disclosures. The Company
adopted FASB Interpretation No. 44
(FIN 44), Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB 25 as of July 1, 2000. FIN 44 provides
guidance on the application of APB 25 for non-cash
stock-based compensation to employees. For fixed grants, under
APB 25, compensation expense is based on the excess of the
fair value of the Companys stock over the exercise price,
if any, on the date of the grant and is recorded on a
straight-line basis over the vesting period of the options,
which is generally four years. For variable grants, compensation
expense is based on changes in the fair value of the
Companys stock and is recorded using the methodology set
out in FASB Interpretation No. 28
(FIN 28), Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans, an Interpretation of APB 15 and APB 25.

The Company accounts for non-cash stock-based
compensation issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force
No. 96-18, Accounting for Equity

5



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Instruments that are Issued to Non-Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services.

The following pro forma net income (loss)
information for Maxtors stock options and employee stock
purchase plan has been prepared following the provisions of
SFAS 123 (in thousands, except per share data):

|                                                                                                     |                             |                    |         |                   |   |               |        |               |  |   |          |          |   |   |        |        | 
|---------------------------------------------------------------------------------------------------- | --------------------------- | ------------------ | ------- | ----------------- | - | ------------- | ------ | ------------- |  | - | -------- | -------- | - | - | ------ | ------ | 
|                                                                                                     |                             |                    |         |                  
|                                                                                                     |                             | Three Months Ended |         | Nine Months Ended
|                                                                                                     |                             |                    |         |                  
|                                                                                                     |                             | September 25,      |         | September 27,     |   | September 25, |        | September 27,
|                                                                                                     |                             | 2004               |         | 2003              |   | 2004          |        | 2003         
|                                                                                                     |                             |                    |         |                   |   |               |        |              
|Net income (loss) applicable to common
    stockholders, as reported                                 |                             | $                  | (94,781 | )                 |   | $             | 29,887 |               |  | $ | (111,716 | )        |   | $ | 63,491 |       
|Add: Stock-based employee compensation expense
    included in reported net income (loss)            |                             |                    | 36      |                   |   |               | 225    |               |  |   | 218      |          |   |   | 736    |       
|Deduct: Total stock-based compensation expense
    determined under fair value method for all awards |                             |                    | 7,479   |                   |   |               | 8,519  |               |  |   | 17,197   |          |   |   | 19,747 |       
|                                                                                                     |                             |                    |         |                   |   |               |        |               |  |   |          |          |   |   |        |       
|                                                                                                     | Pro forma net income (loss) |                    | $       | (102,224          | ) |               | $      | 21,593        |  |   | $        | (128,695 | ) |   | $      | 44,480 | 
|                                                                                                     |                             |                    |         |                   |   |               |        |               |  |   |          |          |   |   |        |       
|Net income (loss) per share                                                                          |                             |                    |         |                   |   |               |        |               |  |   |          |          |   |   |        |       
|As reported  basic                                                                                  |                             | $                  | (0.38   | )                 |   | $             | 0.12   |               |  | $ | (0.45    | )        |   | $ | 0.26   |       
|Pro forma  basic                                                                                    |                             | $                  | (0.41   | )                 |   | $             | 0.09   |               |  | $ | (0.52    | )        |   | $ | 0.18   |       
|As reported  diluted                                                                                |                             | $                  | (0.38   | )                 |   | $             | 0.12   |               |  | $ | (0.45    | )        |   | $ | 0.26   |       
|Pro forma  diluted                                                                                  |                             | $                  | (0.41   | )                 |   | $             | 0.09   |               |  | $ | (0.52    | )        |   | $ | 0.18   |       

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

|                               |  |                    |           |                   |  |               |           |               |  |  |           |   |  |  |           |  
|------------------------------ |  | ------------------ | --------- | ----------------- |  | ------------- | --------- | ------------- |  |  | --------- | - |  |  | --------- | -
|                               |  |                    |           |                  
|                               |  | Three Months Ended |           | Nine Months Ended
|                               |  |                    |           |                  
|                               |  | September 25,      |           | September 27,     |  | September 25, |           | September 27,
|                               |  | 2004               |           | 2003              |  | 2004          |           | 2003         
|                               |  |                    |           |                   |  |               |           |              
|Risk-free interest rate        |  |                    | 3.51      |                   |  |               | 2.97      |               |  |  | 3.51      |   |  |  | 2.97      |  
|Weighted average expected life |  |                    | 4.5 years |                   |  |               | 4.5 years |               |  |  | 4.5 years |   |  |  | 4.5 years |  
|Volatility                     |  |                    | 72        | %                 |  |               | 77        | %             |  |  | 72        | % |  |  | 77        | %
|Dividend yield                 |  |                    |          |                   |  |               |          |               |  |  |          |   |  |  |          |  

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

|                               |  |                    |           |                   |  |               |           |               |  |  |           |   |  |  |           |  
|------------------------------ |  | ------------------ | --------- | ----------------- |  | ------------- | --------- | ------------- |  |  | --------- | - |  |  | --------- | -
|                               |  |                    |           |                  
|                               |  | Three Months Ended |           | Nine Months Ended
|                               |  |                    |           |                  
|                               |  | September 25,      |           | September 27,     |  | September 25, |           | September 27,
|                               |  | 2004               |           | 2003              |  | 2004          |           | 2003         
|                               |  |                    |           |                   |  |               |           |              
|Risk-free interest rate        |  |                    | 1.77      |                   |  |               | 1.00      |               |  |  | 1.77      |   |  |  | 1.00      |  
|Weighted average expected life |  |                    | 0.6 years |                   |  |               | 0.6 years |               |  |  | 0.6 years |   |  |  | 0.6 years |  
|Volatility                     |  |                    | 73        | %                 |  |               | 77        | %             |  |  | 73        | % |  |  | 77        | %
|Dividend yield                 |  |                    |          |                   |  |               |          |               |  |  |          |   |  |  |          |  

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

6



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                            
|-- | ---------------------------
|2. | Supplemental Financial Data

|                                               |                                                                |                |           |              |  |   |          |         | 
|---------------------------------------------- | -------------------------------------------------------------- | -------------- | --------- | ------------ |  | - | -------- | ------- | 
|                                               |                                                                | September 25,  |           | December 27,
|                                               |                                                                | 2004           |           | 2003        
|                                               |                                                                |                |           |             
|                                               |                                                                |               
|                                               |                                                                | (In thousands)
|Inventories:                                   |                                                                |                |           |              |  |   |          |        
|                                               | Raw materials                                                  |                | $         | 71,391       |  |   | $        | 56,132  | 
|                                               | Work-in-process                                                |                |           | 53,497       |  |   |          | 44,650  | 
|                                               | Finished goods                                                 |                |           | 126,172      |  |   |          | 117,229 | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 251,060   |              |  | $ | 218,011  |        
|                                               |                                                                |                |           |              |  |   |          |        
|Prepaid expenses and other:                    |                                                                |                |           |              |  |   |          |        
|                                               | Investments in marketable equity securities, at
    fair value |                | $         | 10,862       |  |   | $        | 15,536  | 
|                                               | Prepaid expenses and other                                     |                |           | 28,278       |  |   |          | 22,765  | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 39,140    |              |  | $ | 38,301   |        
|                                               |                                                                |                |           |              |  |   |          |        
|Property, plant and equipment, at cost:        |                                                                |                |           |              |  |   |          |        
|                                               | Buildings                                                      |                | $         | 169,141      |  |   | $        | 152,381 | 
|                                               | Machinery and equipment                                        |                |           | 663,381      |  |   |          | 608,735 | 
|                                               | Software                                                       |                |           | 84,554       |  |   |          | 79,682  | 
|                                               | Furniture and fixtures                                         |                |           | 26,773       |  |   |          | 26,583  | 
|                                               | Leasehold improvements                                         |                |           | 87,825       |  |   |          | 86,430  | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 1,031,674 |              |  | $ | 953,811  |        
|Less accumulated depreciation and amortization |                                                                |                | (656,912  | )            |  |   | (611,132 | )      
|                                               |                                                                |                |           |              |  |   |          |        
|Net property, plant and equipment              |                                                                | $              | 374,762   |              |  | $ | 342,679  |        
|                                               |                                                                |                |           |              |  |   |          |        
|Accrued and other liabilities:                 |                                                                |                |           |              |  |   |          |        
|                                               | Income taxes payable                                           |                | $         | 20,197       |  |   | $        | 23,763  | 
|                                               | Accrued payroll and payroll-related expenses                   |                |           | 49,626       |  |   |          | 132,967 | 
|                                               | Accrued warranty                                               |                |           | 177,131      |  |   |          | 209,426 | 
|                                               | Restructuring liabilities, short-term                          |                |           | 11,903       |  |   |          | 9,096   | 
|                                               | Accrued expenses                                               |                |           | 66,232       |  |   |          | 79,136  | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 325,089   |              |  | $ | 454,388  |        
|                                               |                                                                |                |           |              |  |   |          |        
|Other liabilities:                             |                                                                |                |           |              |  |   |          |        
|                                               | Tax indemnification liability                                  |                | $         | 133,697      |  |   | $        | 135,559 | 
|                                               | Restructuring liabilities, long-term                           |                |           | 59,072       |  |   |          | 43,517  | 
|                                               | Other                                                          |                |           | 5,964        |  |   |          | 7,409   | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 198,733   |              |  | $ | 186,485  |        
|                                               |                                                                |                |           |              |  |   |          |        

Depreciation and amortization expense of
property, plant and equipment for the nine month periods ended
September 25, 2004 and September 27, 2003 was
$105.8 million and $121.0 million, respectively. Total
property, plant and equipment recorded under capital leases was
$17.7 million as of September 25, 2004. Total
accumulated depreciation under capital leases was
$9.2 million as of September 25, 2004.



|   |                                     
|-- | ------------------------------------
|3. | Goodwill and Other Intangible Assets

Commencing in fiscal 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires goodwill to
be tested for

7



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

impairment under certain circumstances, written
down when impaired, and requires purchased intangible assets
other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. Goodwill and
indefinite lived intangible assets will be subject to an
impairment test at least annually.

The Company ceased amortizing goodwill totaling
$846.0 million as of the adoption date, including
$31.1 million, net of accumulated amortization, of acquired
workforce intangibles previously classified as purchased
intangible assets. Subsequent to the decision to shut down the
manufacture and sales of NSG products, the Company wrote off
goodwill related to the NSG operations of $32.0 million. As
of September 25, 2004, goodwill amounted to
$814.0 million.

Purchased intangible assets are carried at cost
less accumulated amortization. The Company evaluated its
intangible assets and determined that all such assets have
determinable lives. Amortization is computed over the estimated
useful lives of the respective assets, generally three to five
years. The Company expects amortization expense on purchased
intangible assets to be $5.1 million in the remainder of
fiscal 2004, $20.2 million in fiscal 2005 and
$5.4 million in fiscal 2006, at which time purchased
intangible assets will be fully amortized. Amortization of other
intangible assets was $5.1 million and $30.9 million
for the three and nine months ended September 25, 2004 and
$20.6 million and $61.7 million for the three and nine
months ended September 27, 2003, respectively.

|                              |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |        | 
|----------------------------- | ------------------- | -------------------- | - | ------------------ | - | ----------------- | ------- | ----- | ------- | -------- | -------- | ------------ | -------- | --- | ------- | ----- | ------ | - | ------- | ----- | ------- | - | -------- | ------ | ------- | - | ------- | ----- | ------ | 
|                              |                     |                      |   |                    |   |                  
|                              |                     |                      |   | September 25, 2004 |   | December 27, 2003
|                              |                     |                      |   |                    |   |                  
|                              |                     |                      |   | Gross              |   |                   |         | Gross |         |         
|                              |                     | Useful               |   | Carrying           |   | Accumulated       |         |       |         | Carrying |          | Accumulated  |          |    
|                              |                     | Life                 |   | Amount             |   | Amortization      |         | Net   |         | Amount   |          | Amortization |          | Net
|                              |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |    
|                              |                     | (Years)              |   |                    |   |                  
|                              |                     |                      |   | (In thousands)     |   | (In thousands)   
|Goodwill                      |                     |                      |  |                    |   | $                 | 813,951 |       |         | $        |         |              |          | $   | 813,951 |       |        | $ | 813,951 |       |         | $ |         |        |         | $ | 813,951 |      
|                              |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Quantum HDD                   |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              | Existing Technology |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |       
|                              |                     | Core technology      |   |                    | 5 |                   |         | $     | 96,700  |          |          | $            | (67,690  | )   |         | $     | 29,010 |   |         | $     | 96,700  |   |          | $      | (53,185 | ) |         | $     | 43,515 | 
|                              |                     | Consumer electronics |   |                    | 3 |                   |         |       | 8,900   |          |          |              | (8,900   | )   |         |       |       |   |         |       | 8,900   |   |          |        | (8,158  | ) |         |       | 742    | 
|                              |                     | High-end             |   |                    | 3 |                   |         |       | 75,500  |          |          |              | (75,500  | )   |         |       |       |   |         |       | 75,500  |   |          |        | (69,208 | ) |         |       | 6,292  | 
|                              |                     | Desktop              |   |                    | 3 |                   |         |       | 105,000 |          |          |              | (105,000 | )   |         |       |       |   |         |       | 105,000 |   |          |        | (96,250 | ) |         |       | 8,750  | 
|                              |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|MMC Technology                |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              | Existing technology |                      |   | 5                  |   |                   |         | 4,350 |         |          |          | (2,682       | )        |     |         | 1,668 |        |   |         | 4,350 |         |   |          | (2,030 | )       |   |         | 2,320 |       
|                              |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Total other intangible assets |                     |                      |   |                    |   | $                 | 290,450 |       |         | $        | (259,772 | )            |          | $   | 30,678  |       |        | $ | 290,450 |       |         | $ | (228,831 | )      |         | $ | 61,619  |      
|                              |                     |                      |   |                    |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      

In accordance with SFAS 142, the Company
completed its annual impairment review as of December 27,
2003. The Company found no instances of impairment of the
recorded goodwill and accordingly no impairment was recorded.

8



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                             
|-- | --------------------------------------------
|4. | Short-term Borrowings and Long-term
    Debt

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

|                                                    |  |               |         |              |  |   |         |  
|--------------------------------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | -
|                                                    |  | September 25, |         | December 27,
|                                                    |  | 2004          |         | 2003        
|                                                    |  |               |         |             
|6.8% Convertible Senior Notes due 2010              |  | $             | 230,000 |              |  | $ | 230,000 |  
|5.75% Subordinated Debentures due
    March 1, 2012 |  |               | 59,311  |              |  |   | 59,352  |  
|Receivable-backed Borrowing                         |  |               | 50,000  |              |  |   | 50,000  |  
|Manufacturing Facility Loan, Suzhou, China          |  |               | 60,000  |              |  |   | 15,000  |  
|Economic Development Board of Singapore Loans       |  |               | 30,769  |              |  |   | 24,138  |  
|Mortgages                                           |  |               | 32,991  |              |  |   | 34,164  |  
|Equipment Loans and Capital Leases                  |  |               | 7,785   |              |  |   | 20,192  |  
|                                                    |  |               |         |              |  |   |         |  
|                                                    |  |               | 470,856 |              |  |   | 432,846 |  
|Less amounts due within one year                    |  |               | (70,648 | )            |  |   | (77,037 | )
|                                                    |  |               |         |              |  |   |         |  
|                                                    |  | $             | 400,208 |              |  | $ | 355,809 |  
|                                                    |  |               |         |              |  |   |         |  

On May 7, 2003, the Company sold
$230 million in aggregate principal amount of
6.8% convertible senior notes due 2010 to qualified
institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended. The notes are unsecured and
effectively subordinated to all existing and future secured
indebtedness. The notes are convertible into the Companys
common stock at a conversion rate of 81.5494 shares per
$1,000 principal amount of the notes, or an aggregate of
18,756,362 shares, subject to adjustment in certain
circumstances (equal to an initial conversion price of
$12.2625 per share). The Company has the right to settle
its obligation with cash or common stock. The initial conversion
price represents a 125% premium over the closing 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 the Companys
common stock for 20 trading days within a period of 30
consecutive trading days ending on the trading day before the
date of mailing of the redemption notice exceeds 130% of the
conversion price in effect on such trading day, the Company may
redeem the Notes in whole or in part, in cash, at a redemption
price equal to 100% of the principal amount of the Notes being
redeemed plus any accrued and unpaid interest and accrued and
unpaid liquidated damages, if any, to, but excluding, the
redemption date. If, at any time, substantially all of the
Companys common stock is exchanged or acquired for
consideration that does not consist entirely of common stock
that is listed on a United States national securities exchange
or approved for quotation on the NASDAQ National Market or
similar system, the holders of the notes have the right to
require the Company to repurchase all or any portion of the
notes at their face value plus accrued interest.

The 5.75% Subordinated Debentures due
March 1, 2012 require semi-annual interest payments and
annual sinking fund payments of $5.0 million, which
commenced March 1, 1998. The Debentures are subordinated in
right to payment to all senior indebtedness. The Company owns
bonds in a principal amount sufficient to fulfill its sinking
fund obligation until March 1, 2005.

On June 24, 2004, the Company entered into a
one-year receivable-backed borrowing arrangement of up to
$100 million with one financial institution collateralized
by all United States and Canadian accounts receivable. In the
arrangement the Company uses a special purpose subsidiary to
purchase and hold all of its United States and Canadian accounts
receivable. This special purpose subsidiary has borrowing
authority up to $100 million based upon eligible United
States and Canadian accounts receivable. The special purpose
subsidiary is consolidated for financial reporting purposes. The
transactions under the arrangement are accounted for as short
term borrowings and remain on the Companys consolidated
balance sheet. As of September 25, 2004 the Company had
borrowed $50 million under the arrangement (subject to
transaction

9



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fees); and, the interest rate was LIBOR plus 3%
and $148 million of United States and Canadian receivables
were pledged under this arrangement and remain on the
Companys consolidated balance sheet. The terms of the
facility require compliance with operational covenants and
several financial covenants, including a liquidity covenant, an
operating income (loss) before depreciation and amortization to
long-term debt ratio and certain tests relating to the quality
and nature of the receivables. A violation of these covenants
will result in an early amortization event that will cause a
prohibition on further payments and distributions to the Company
from the special purpose subsidiary until the facility has been
repaid in full. As of September 25, 2004, the Company was
in compliance with these requirements.

In April 2003, the Company obtained credit lines
with the Bank of China for up to $133 million to be used
for the construction and working capital requirements of the
manufacturing facility being established in Suzhou, China. These
lines of credit are U.S.-dollar-denominated and are drawable
until April 2007. Maxtor Technology Suzhou (MTS) has
drawn down $60 million as of September 2004, consisting of
the plant construction loan in the amount of $30 million
made available by the Bank of China to MTS in October 2003, and
a project loan in the amount of $30 million made available
by the Bank of China to MTS in August 2004. Borrowings under
these lines of credit are collateralized by the facilities being
established in Suzhou, China. The interest rate on the plant
construction loan was LIBOR plus 50 basis points (subject
to adjustment to 60 basis points), with the borrowings
repayable in two installment payments of $15 million in
October 2008 and April 2009, respectively. The interest rate on
the project loan was LIBOR plus 100 basis points, and the
borrowing is repayable in August 2009. Both the construction
loan and the project loan require the Company to make
semi-annual payments of interest and require MTS to maintain
financial covenants, including a maximum liability to assets
ratio and a minimum earnings to interest expense ratio, the
first ratio to be tested annually commencing in December 2004
and the latter ratio to be tested annually commencing in
December 2005. In connection with the funding of the new project
loan, the parent company of MTS, Maxtor International Sàrl,
Switzerland, agreed to guaranty MTS obligations under both
the construction loan and the project loan.

In September 1999, Maxtor Peripherals
(S) Pte Ltd. (MPS) entered into a four-year
Singapore dollar denominated loan agreement with the Economic
Development Board of Singapore (the Board), which
was amortized in seven equal semi-annual installments ending
March 2004. This loan was paid in full.

In September 2003, MPS entered into a second
four-year 52 million Singapore dollar loan agreement with
the Board at 4.25% which is amortized in seven equal semi-annual
installments ending December 2007. As of September 25,
2004, the balance was 52.0 million Singapore dollars,
equivalent to $30.8 million. This loan is supported by a
guaranty from a bank. Cash is currently provided as collateral
for this guaranty; $21.9 million was recorded as other
assets and the remaining $8.9 million was recorded as
restricted cash. However, the Company may at its option
substitute other assets as security. MPS is required to invest a
certain level of capital by 2006 as defined in the loan
agreement.

In connection with the acquisition of the Quantum
HDD business, the Company acquired real estate and related
mortgage obligations. The term of the mortgages is ten years, at
an interest rate of 9.2%, with monthly payments based on a
twenty-year amortization schedule, and a balloon payment at the
end of the 10-year term, which is September 2006. The
outstanding balance at September 25, 2004 was
$33.0 million.

As of September 25, 2004, the Company had
capital leases totaling $7.8 million. These obligations
include certain leases assumed in connection with the September
2001 acquisition of MMC Technology, Inc. These capital leases
have maturity dates through August 2009 and interest rates
averaging 8.2%.



|   |           
|-- | ----------
|5. | Guarantees



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

The Company indemnifies certain customers,
distributors, suppliers, and subcontractors for attorney fees
and damages and costs awarded against these parties in certain
circumstances in which its products are alleged

10



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to infringe third party intellectual property
rights, including patents, registered trademarks, or copyrights.
The terms of its indemnification obligations are generally
perpetual from the effective date of the agreement. In certain
cases, there are limits on and exceptions to its potential
liability for indemnification relating to intellectual property
infringement claims. The Company cannot estimate the amount of
potential future payments, if any, that the Company might be
required to make as a result of these agreements. To date, the
Company has not paid any claims or been required to defend any
claim related to its indemnification obligations, and
accordingly, the Company has not accrued any amounts for its
indemnification obligations. However, there can be no assurances
that the Company will not have any future financial exposure
under those indemnification obligations.



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

The Company generally warrants its products
against defects in materials and workmanship for varying lengths
of time. The Company records an accrual for estimated warranty
costs when revenue is recognized. Warranty covers cost of repair
of the hard drive and the warranty periods generally range from
one to five years. The Company has comprehensive processes that
it uses to estimate accruals for warranty exposure. The
processes include specific detail on hard drives in the field by
product type, estimated failure rates and costs to repair or
replace. Although the Company believes it has the continued
ability to reasonably estimate warranty expenses, unforeseeable
changes in factors used to estimate the accrual for warranty
could occur. These unforeseeable changes could cause a material
change in the Companys warranty accrual estimate. Such a
change would be recorded in the period in which the change was
identified. Effective September 2004, the Company announced the
introduction of a new warranty period for new sales, extending
the term to three or five years for products shipped to the
distribution channel. Changes in the Companys product
warranty liability during the three and nine months ended
September 25, 2004 and September 27, 2003 were as
follows (in thousands):

|                                            |  |                    |         |                   |  |               |         |               |  |   |          |   |  |   |          |  
|------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | -------- | - |  | - | -------- | -
|                                            |  |                    |         |                  
|                                            |  | Three Months Ended |         | Nine Months Ended
|                                            |  |                    |         |                  
|                                            |  | September 25,      |         | September 27,     |  | September 25, |         | September 27,
|                                            |  | 2004               |         | 2003              |  | 2004          |         | 2003         
|                                            |  |                    |         |                   |  |               |         |              
|Balance at beginning of period              |  | $                  | 179,612 |                   |  | $             | 256,661 |               |  | $ | 209,426  |   |  | $ | 278,713  |  
|Charges to operations                       |  |                    | 39,483  |                   |  |               | 30,312  |               |  |   | 119,317  |   |  |   | 126,703  |  
|Settlements                                 |  |                    | (41,934 | )                 |  |               | (41,896 | )             |  |   | (147,131 | ) |  |   | (136,030 | )
|Changes in estimates, primarily expirations |  |                    | (29     | )                 |  |               | (3,442  | )             |  |   | (4,481   | ) |  |   | (27,749  | )
|                                            |  |                    |         |                   |  |               |         |               |  |   |          |   |  |   |          |  
|Balance at end of period                    |  | $                  | 177,131 |                   |  | $             | 241,636 |               |  | $ | 177,131  |   |  | $ | 241,636  |  
|                                            |  |                    |         |                   |  |               |         |               |  |   |          |   |  |   |          |  



|   |                        
|-- | -----------------------
|6. | Quantum HDD Acquisition

On April 2, 2001, Maxtor acquired the hard
disk drive business of Quantum Corporation (Quantum
HDD). The acquisition was approved by the stockholders of
both companies on March 30, 2001 and was accounted for as a
purchase. The total purchase price of $1,269.4 million
included consideration of 121.0 million shares of our
common stock valued at an average of $9.40 per common share.

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

11



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Quantum HDD office facilities located in
Singapore. The Company also recorded a $12.7 million
liability for certain non-cancelable adverse inventory and other
purchase commitments.

The following table summarizes the activity
related to the merger-related restructuring costs as of
September 25, 2004:

|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|----------------------------- |  | ------------- | ---- | --------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                              |  |               |      | Severance |  |       |       |      
|                              |  | Facility      |      | and       |  | Other |       |      
|                              |  | Costs         |      | Benefits  |  | Costs |       | Total
|                              |  |               |      |           |  |       |       |      
|                              |  |              
|                              |  | (In millions)
|Provision at April 2, 2001    |  | $             | 59.1 |           |  | $     | 29.2  |       |  | $ | 12.7  |   |  | $ | 101.0 |  
|Amounts paid                  |  |               | (0.9 | )         |  |       | (15.5 | )     |  |   | (12.7 | ) |  |   | (29.1 | )
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at December 29, 2001  |  |               | 58.2 |           |  |       | 13.7  |       |  |   |      |   |  |   | 71.9  |  
|Amounts paid                  |  |               | (4.5 | )         |  |       | (13.7 | )     |  |   |      |   |  |   | (18.2 | )
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at December 28, 2002  |  |               | 53.7 |           |  |       |      |       |  |   |      |   |  |   | 53.7  |  
|Amounts paid                  |  |               | (8.5 | )         |  |       |      |       |  |   |      |   |  |   | (8.5  | )
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at December 27, 2003  |  |               | 45.2 |           |  |       |      |       |  |   |      |   |  |   | 45.2  |  
|Amounts paid                  |  |               | (1.9 | )         |  |       |      |       |  |   |      |   |  |   | (1.9  | )
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at March 27, 2004     |  |               | 43.3 |           |  |       |      |       |  |   |      |   |  |   | 43.3  |  
|Amounts paid                  |  |               | (1.8 | )         |  |       |      |       |  |   |      |   |  |   | (1.8  | )
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at June 26, 2004      |  |               | 41.5 |           |  |       |      |       |  |   |      |   |  |   | 41.5  |  
|Amounts paid                  |  |               | (1.4 | )         |  |       |      |       |  |   |      |   |  |   | (1.4  | )
|2004 accrual                  |  |               | 16.4 |           |  |       |      |       |  |   |      |   |  |   | 16.4  |  
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at September 25, 2004 |  | $             | 56.5 |           |  | $     |      |       |  | $ |      |   |  | $ | 56.5  |  
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  

During the quarter ended September 25, 2004,
in association with the Companys restructuring activities,
the Company recorded an additional $16.4 million liability due
to a change in estimated lease obligations for two of the
Quantum HDD acquired offices and research and development
facilities located in California. This estimate is based upon
current comparable market rates for leases and anticipated dates
for these properties to be subleased. Expected sublease income
on these two facilities included in the Companys estimates
is $15.9 million. Should facilities rental rates decrease
or should it take longer than expected to sublease these
facilities, the actual loss could exceed these estimates. The
Company continues to evaluate and review its restructuring
accrual for any indications in the market that could require the
Company to change its assumptions for the restructuring accruals
already recorded.

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



|   |                        
|-- | -----------------------
|7. | Discontinued Operations

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

12



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

There were no results from discontinued
operations for the three and nine months ended
September 25, 2004 and September 27, 2003. The
remaining liabilities of the NSG discontinued operations as of
September 25, 2004 were $0.7 million relating to
returns and other miscellaneous expenses.



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

During the year ended December 28, 2002, the
Company recorded a restructuring charge of $9.5 million
associated with closure of one of its facilities located in
California. The amount comprised $8.9 million of future
non-cancelable lease payments, which were expected to be paid
over several years based on the underlying lease agreement, and
the write-off of $0.6 million in leasehold improvements. The
restructuring accrual is included on the balance sheet within
Accrued and other liabilities with the balance of $9.7 million.
The Company increased this restructuring accrual by
$3.3 million due to a change in estimated lease obligations
associated with its restructuring activities in the three months
ended September 25, 2004. This estimate is based upon
current comparable market rates for leases and anticipated dates
for one of the properties to be subleased. Expected sublease
income on this facility included in the Companys estimates
is $2.5 million. Should facilities rental rates decrease or
should it take longer than expected to sublease these
facilities, the actual loss could exceed these estimates. The
Company continues to evaluate and review its restructuring
accrual for any indications in the market that could require the
Company to change its assumptions for the restructuring accruals
already recorded. During the three months ended
September 25, 2004, the Company also recorded
$0.6 million in association with the closure of one of its
facilities in Colorado.

In the three months ended September 25,
2004, the Company incurred $11.0 million in
severance-related charges associated with the Companys
reduction in force of approximately 330 employees in the United
States and Singapore.

The facilities-related restructuring accrual is
included within the balance sheet captions of Accrued and other
liabilities and Other liabilities. The following table
summarizes the activity related to the facilities-related
restructuring costs as of September 25, 2004:

|                              |  |               |      |               |  |           |     |       |  |   |      |   |  |   |      |  
|----------------------------- |  | ------------- | ---- | ------------- |  | --------- | --- | ----- |  | - | ---- | - |  | - | ---- | -
|                              |  |               |      |               |  | 2004      |     |      
|                              |  | 2002          |      | 2004          |  | Severance |     |      
|                              |  | Restructuring |      | Restructuring |  | and       |     |      
|                              |  | Charge        |      | Charge        |  | Benefits  |     | Total
|                              |  |               |      |               |  |           |     |      
|                              |  |              
|                              |  | (in millions)
|Balance at December 28, 2002  |  | $             | 8.9  |               |  | $         |    |       |  | $ |     |   |  | $ | 8.9  |  
|Amounts paid                  |  |               | (1.5 | )             |  |           |    |       |  |   |     |   |  |   | (1.5 | )
|                              |  |               |      |               |  |           |     |       |  |   |      |   |  |   |      |  
|Balance at December 27, 2003  |  |               | 7.4  |               |  |           |    |       |  |   |     |   |  |   | 7.4  |  
|Amounts paid                  |  |               | (0.3 | )             |  |           |    |       |  |   |     |   |  |   | (0.3 | )
|                              |  |               |      |               |  |           |     |       |  |   |      |   |  |   |      |  
|Balance at March 27, 2004     |  |               | 7.1  |               |  |           |    |       |  |   |     |   |  |   | 7.1  |  
|Amounts paid                  |  |               | (0.4 | )             |  |           |    |       |  |   |     |   |  |   | (0.4 | )
|                              |  |               |      |               |  |           |     |       |  |   |      |   |  |   |      |  
|Balance at June 26, 2004      |  |               | 6.7  |               |  |           |    |       |  |   |     |   |  |   | 6.7  |  
|Amounts paid                  |  |               | (0.3 | )             |  |           |    |       |  |   | (6.9 | ) |  |   | (7.2 | )
|2004 accrual                  |  |               | 3.3  |               |  |           | 0.6 |       |  |   | 11.0 |   |  |   | 14.9 |  
|                              |  |               |      |               |  |           |     |       |  |   |      |   |  |   |      |  
|Balance at September 25, 2004 |  | $             | 9.7  |               |  | $         | 0.6 |       |  | $ | 4.1  |   |  | $ | 14.4 |  
|                              |  |               |      |               |  |           |     |       |  |   |      |   |  |   |      |  

13



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                            
|-- | ---------------------------
|9. | Net Income (Loss) Per Share

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

|                                                   |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |           | 
|-------------------------------------------------- | --------------------------------------- | ------------------ | ----------- | ----------------- |  | ------------- | ----------- | ------------- |  | - | ----------- | - |  | - | ----------- | --------- | 
|                                                   |                                         |                    |             |                  
|                                                   |                                         | Three Months Ended |             | Nine Months Ended
|                                                   |                                         |                    |             |                  
|                                                   |                                         | September 25,      |             | September 27,     |  | September 25, |             | September 27,
|                                                   |                                         | 2004               |             | 2003              |  | 2004          |             | 2003         
|                                                   |                                         |                    |             |                   |  |               |             |              
|Numerator  Basic and
    Diluted                  |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|Net income (loss)                                  |                                         | $                  | (94,781     | )                 |  | $             | 29,887      |               |  | $ | (111,716    | ) |  | $ | 63,491      |          
|                                                   |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|Net income (loss) available to common stockholders |                                         | $                  | (94,781     | )                 |  | $             | 29,887      |               |  | $ | (111,716    | ) |  | $ | 63,491      |          
|                                                   |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|Denominator                                        |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|Basic weighted average common shares outstanding   |                                         |                    | 248,728,113 |                   |  |               | 241,618,230 |               |  |   | 247,611,347 |   |  |   | 242,135,752 |          
|Effect of dilutive securities:                     |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|                                                   | Common stock options                    |                    |             |                  |  |               |             | 10,631,807    |  |   |             |  |  |   |             | 6,128,872 | 
|                                                   | Restricted shares subject to repurchase |                    |             |                  |  |               |             | 93,645        |  |   |             |  |  |   |             | 93,645    | 
|                                                   |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|Diluted weighted average common shares             |                                         |                    | 248,728,113 |                   |  |               | 252,343,682 |               |  |   | 247,611,347 |   |  |   | 248,358,269 |          
|                                                   |                                         |                    |             |                   |  |               |             |               |  |   |             |   |  |   |             |          
|Net income (loss) per share  basic                |                                         | $                  | (0.38       | )                 |  | $             | 0.12        |               |  | $ | (0.45       | ) |  | $ | 0.26        |          
|Net income (loss) per share  diluted              |                                         | $                  | (0.38       | )                 |  | $             | 0.12        |               |  | $ | (0.45       | ) |  | $ | 0.26        |          

As-if convertible shares and interest expense
related to the 6.8% convertible senior notes due 2010 were
excluded from the calculation, as the effect was anti-dilutive.
The following number of common stock options and as-if converted
shares were excluded from the computation of diluted net income
per share as the effect was anti-dilutive:

|                                                                                                   |  |                    |            |                   |  |               |            |               |  |  |            |  |  |  |           | 
|-------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ------------- | ---------- | ------------- |  |  | ---------- |  |  |  | --------- | 
|                                                                                                   |  |                    |            |                  
|                                                                                                   |  | Three Months Ended |            | Nine Months Ended
|                                                                                                   |  |                    |            |                  
|                                                                                                   |  | September 25,      |            | September 27,     |  | September 25, |            | September 27,
|                                                                                                   |  | 2004               |            | 2003              |  | 2004          |            | 2003         
|                                                                                                   |  |                    |            |                   |  |               |            |              
|Common stock options                                                                               |  |                    | 26,533,098 |                   |  |               | 2,547,455  |               |  |  | 26,533,098 |  |  |  | 7,583,202 | 
|Restricted shares subject to repurchase                                                            |  |                    | 30,000     |                   |  |               |           |               |  |  | 30,000     |  |  |  |          | 
|As-if converted shares related to 6.8%
    Convertible Senior Notes due 2010 issued on May 7, 2003 |  |                    | 18,756,362 |                   |  |               | 18,756,362 |               |  |  | 18,756,362 |  |  |  | 9,378,181 | 



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

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

14



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total comprehensive income for the three months
and nine months ended September 25, 2004 and
September 27, 2003, is presented in the following table (in
thousands):

|                                                                             |  |                    |         |                   |  |               |        |               |  |   |          |   |  |   |        |  
|---------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ------------- | ------ | ------------- |  | - | -------- | - |  | - | ------ | -
|                                                                             |  |                    |         |                  
|                                                                             |  | Three Months Ended |         | Nine Months Ended
|                                                                             |  |                    |         |                  
|                                                                             |  | September 25,      |         | September 27,     |  | September 25, |        | September 27,
|                                                                             |  | 2004               |         | 2003              |  | 2004          |        | 2003         
|                                                                             |  |                    |         |                   |  |               |        |              
|Net income (loss)                                                            |  | $                  | (94,781 | )                 |  | $             | 29,887 |               |  | $ | (111,716 | ) |  | $ | 63,491 |  
|Unrealized gain (loss) on investments in
    securities                      |  |                    | (2,644  | )                 |  |               | (5,412 | )             |  |   | (5,145   | ) |  |   | 7,505  |  
|Less: reclassification adjustment for gain
    included in net income (loss) |  |                    | 1       |                   |  |               | (951   | )             |  |   | 34       |   |  |   | (835   | )
|                                                                             |  |                    |         |                   |  |               |        |               |  |   |          |   |  |   |        |  
|Comprehensive income (loss)                                                  |  | $                  | (97,426 | )                 |  | $             | 25,426 |               |  | $ | (116,895 | ) |  | $ | 71,831 |  
|                                                                             |  |                    |         |                   |  |               |        |               |  |   |          |   |  |   |        |  



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

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

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

Sales to original equipment manufacturers
(OEMs) for the three and nine months ended
September 25, 2004 represented 46.8% and 53.1% of total
revenue, respectively, compared to 53.7% and 49.1% of total
revenue for the corresponding periods in fiscal year 2003,
respectively. Sales to the distribution and retail channels for
the three and nine months ended September 25, 2004
represented 53.2% and 46.9% of total revenue, respectively,
compared to 46.3% and 50.9% of total revenue in the
corresponding periods in fiscal year 2003, respectively. Sales
to one customer were over 10% of total revenues in each of the
three and nine months ended September 25, 2004; only one
customer represented more than 10% of revenue during these
periods.

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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has a worldwide sales, service and
distribution network. Products are marketed and sold through a
direct sales force to computer equipment manufacturers,
distributors and retailers in the United States, Asia Pacific
and Japan, Europe, Middle East and Africa, the Netherlands,
Latin America and other. Maxtor operations outside the United
States primarily consist of its manufacturing facilities in
Singapore and China that produce subassemblies and final
assemblies for the Companys disk drive products. Revenue
by destination for the three and nine months ended
September 25, 2004 and September 27, 2003,
respectively, is presented in the following table (in thousands):

|                               |  |                    |         |                   |  |               |           |               |  |   |           |  |  |   |           | 
|------------------------------ |  | ------------------ | ------- | ----------------- |  | ------------- | --------- | ------------- |  | - | --------- |  |  | - | --------- | 
|                               |  |                    |         |                  
|                               |  | Three Months Ended |         | Nine Months Ended
|                               |  |                    |         |                  
|                               |  | September 25,      |         | September 27,     |  | September 25, |           | September 27,
|                               |  | 2004               |         | 2003              |  | 2004          |           | 2003         
|                               |  |                    |         |                   |  |               |           |              
|United States                  |  | $                  | 297,543 |                   |  | $             | 362,697   |               |  | $ | 898,696   |  |  | $ | 971,135   | 
|Asia Pacific and Japan         |  |                    | 261,539 |                   |  |               | 318,119   |               |  |   | 838,671   |  |  |   | 889,880   | 
|Europe, Middle East and Africa |  |                    | 200,490 |                   |  |               | 311,201   |               |  |   | 687,434   |  |  |   | 781,938   | 
|The Netherlands                |  |                    | 130,682 |                   |  |               | 49,235    |               |  |   | 271,373   |  |  |   | 207,515   | 
|Latin America and other        |  |                    | 36,950  |                   |  |               | 24,279    |               |  |   | 68,972    |  |  |   | 64,855    | 
|                               |  |                    |         |                   |  |               |           |               |  |   |           |  |  |   |           | 
|Total                          |  | $                  | 927,204 |                   |  | $             | 1,065,531 |               |  | $ | 2,765,146 |  |  | $ | 2,915,323 | 
|                               |  |                    |         |                   |  |               |           |               |  |   |           |  |  |   |           | 

Long-lived asset information by geographic area
as of September 25, 2004 and December 27, 2003 is
presented in the following table (in thousands):

|                               |  |               |           |              |  |   |           | 
|------------------------------ |  | ------------- | --------- | ------------ |  | - | --------- | 
|                               |  | September 25, |           | December 27,
|                               |  | 2004          |           | 2003        
|                               |  |               |           |             
|United States                  |  | $             | 1,074,802 |              |  | $ | 1,101,889 | 
|Asia Pacific and Japan         |  |               | 178,118   |              |  |   | 129,380   | 
|Europe, Middle East and Africa |  |               | 456       |              |  |   | 731       | 
|Latin America and other        |  |               | 312       |              |  |   | 157       | 
|                               |  |               |           |              |  |   |           | 
|Total                          |  | $             | 1,253,688 |              |  | $ | 1,232,157 | 
|                               |  |               |           |              |  |   |           | 

Long-lived assets located within the United
States consist primarily of goodwill and other intangible
assets. Goodwill and other intangible assets within the United
States amounted to $844.6 million and $875.6 million
as of September 25, 2004 and December 27, 2003,
respectively. Long-lived assets located outside the United
States consist primarily of the Companys manufacturing
operations located in Singapore and China.



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

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

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

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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

The results of any litigation are inherently
uncertain and Papst may assert other infringement claims
relating to current patents, pending patent applications, and/or
future patent applications or issued patents. Additionally, the
Company cannot assure you it will be able to successfully defend
itself against this or any other Papst lawsuit. Because the
Papst complaints assert claims to an unspecified dollar amount
of damages, and because the Company was at an early stage of
discovery when the litigation was stayed, the Company is unable
to determine the possible loss, if any, that the Company may
incur as a result of an adverse judgment or a negotiated
settlement with respect to the claims against us. The Company
made an estimate of the potential liability which might arise
from the Papst claims against Quantum at the time of the
Companys acquisition of the Quantum HDD business. As a
result of the settlement of an action filed by MKE against the
Company and Quantum relating to ownership of certain
intellectual property acquired by the Company in the acquisition
of the Quantum HDD business, after the end of the period ended
September 25, 2004, the Company paid $2.5 million to
MKE in connection with Quantums indemnification claim in
the Papst lawsuit and MKE was awarded joint ownership to fifteen
patents and certain trade secrets. Quantum had indemnified MKE
on this claim and the Company had indemnified Quantum as part of
the acquisition of the Quantum HDD business. The payment reduced
the reserve established at the time of the acquisition. This
estimate will be further revised as additional information
becomes available. A favorable outcome for Papst in these
lawsuits could result in the issuance of an injunction against
the Company and its products and/or the payment of monetary
damages equal to a reasonable royalty. In the case of a finding
of a willful infringement, the Company also could be required to
pay treble damages and Papsts attorneys fees. The
litigation could result in significant diversion of time by our
technical personnel, as well as substantial expenditures for
future legal fees. Accordingly, although the Company cannot
currently estimate whether there will be a loss, or the

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

size of any loss, a litigation outcome favorable
to Papst could have a material adverse effect on our business,
financial condition and operating results. Management believes
that it has valid defenses to the claims of Papst and is
defending this matter vigorously.

The Company has agreed to invest
$200 million over the next five years to establish a
manufacturing facility in Suzhou, China, and it has secured
credit lines with the Bank of China for up to $133 million
to be used for the construction and working capital requirements
of this operation. The remainder of its commitment will be
satisfied primarily with the transfer of manufacturing assets
from Singapore or from our other manufacturing site. MTS has
drawn down $60 million as of September 2004. MTS is
required to maintain a liability to assets ratio and earnings to
interest expense ratio, the first ratio to be tested annually
commencing in December 2004 and the latter ratio to be tested
annually commencing in December 2005.



|    |                      
|--- | ---------------------
|13. | Litigation Settlement

On April 28, 2004, in connection with the
Companys suit against Koninklijke Philips Electronics N.V.
and several other Philips-related companies in the Superior
Court of California, County of Santa Clara whereby the
Company alleged that an integrated circuit chip supplied by
Philips was defective and caused significant levels of failure
of certain Quantum legacy products acquired as part of the
Companys acquisition of the Quantum HDD business, the
Company entered into a settlement agreement with the other
parties pursuant to which the parties dismissed the lawsuit with
prejudice and the Company received a cash payment of
$24.8 million, which was recorded as litigation settlement
income in the nine months ended September 25, 2004.



|    |                          
|--- | -------------------------
|14. | Related Party Transaction

In the three and nine months ended
September 25, 2004, the Company sold an aggregate of
approximately $20.2 million and $74.7 million of goods
to Solectron Corporation, respectively, and purchased an
aggregate of approximately $0.6 million and
$5.6 million of goods and services from Solectron,
respectively. The Companys accounts receivable and
accounts payable balances for Solectron were $9.6 million
and $0.1 million, respectively, as of September 25,
2004. A Director of the Company is 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 the condensed consolidated financial statements
and the accompanying notes included in Part I. Financial
Information, Item 1. Condensed Consolidated Financial
Statements of this report.

This report contains forward-looking statements
within the meaning of the U.S. federal securities laws that
involve risks and uncertainties. The statements contained in
this report that are not purely historical, including, without
limitation, statements regarding our expectations, beliefs,
intentions or strategies regarding the future, are
forward-looking statements. Examples of forward-looking
statements in this report include statements regarding capital
expenditures, liquidity, impacts of our restructuring, our
indemnification obligations, the results of litigation,
amortization of other intangible assets and our relationships
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 identify forward-looking statements.
These statements are only predictions. We make these
forward-looking statements based upon information available on
the date hereof, and we have no obligation (and expressly
disclaim any such obligation) to update or alter any such
forward-looking statements, whether as a result of new
information, future events, or otherwise. Our actual results
could differ materially from those anticipated in this report as
a result of certain factors including, but not limited to, those
set forth in the following section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Certain Factors
Affecting Future Performance and elsewhere in this report.

Background

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

On April 2, 2001, we acquired Quantum
Corporations Hard Disk Drive Group (Quantum
HDD). The primary reason for our acquisition of Quantum
HDD was to create a stronger, more competitive company, with
enhanced prospects for continued viability in the storage
industry. For additional information regarding the Quantum HDD
acquisition, see note 6 of the Notes to Consolidated
Financial Statements.

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

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

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

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and further reduce expenses. The NSG business was
accounted for as a discontinued operation and therefore, results
of operations and cash flows have been removed from our results
of continuing operations for all periods presented in this
report. For additional information regarding the NSG
discontinued operations, see note 7 of the Notes to
Consolidated Financial Statements.


On May 7, 2003, we sold $230 million in
aggregate principal amount of 6.8% convertible senior notes
due in April 2010 to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933, as amended. For
additional information regarding the convertible senior notes,
see the discussion below under the heading Liquidity and
Capital Resources.

Executive Overview

Revenue decreased 13.0% and 5.2%, and total
shipments declined 7.4% and 1.5% in the three and nine months
ended September 25, 2004 compared to the corresponding
periods in 2003. Total units and revenue declined during the
three months ended September 25, 2004 primarily as a result
of reduced demand due to a lost opportunity at a major original
equipment manufacturer (OEM) and reduced sales of our desktop
products to certain key regional OEM customers. Total units and
revenue declined during the nine months ended September 25, 2004
primarily as a result of reduced demand due to a lost
opportunity at a major OEM and reduced shipments to distribution
customers due to competitive pressures experienced in the
distribution channel and continued price erosion with greater
erosion on higher capacity products. The reductions in both the
three and nine month periods were partially offset by growth in
shipments and revenue of our digital entertainment storage
products and Maxtor OneTouch personal storage products.

Gross profit decreased to 6.4% and 10.4% in the
three and nine months ended September 25, 2004 compared to
17.1% and 17.3% in the corresponding periods in 2003. The
decrease in gross profit, both as a percentage of revenue and in
actual dollars during the three and nine months ended
September 25, 2004, was primarily due to the decline of
average selling prices, partially offset by the increase in our
average capacity shipped. In the three months and nine months
ended September 25, 2004, gross profit was also negatively
impacted by weaker server product profitability driven by price
erosion and reduced cost leverage on our products produced at
MKE and lower volume shipments of our 40GB per platter areal
density product due to a lost opportunity at a major OEM
resulting in reduced fixed cost absorption at our manufacturing
facilities and in the three months ended September 25,
2004, a reserve for an anticipated settlement with a European
OEM. In the three months and nine months ended
September 25, 2004, we also experienced increased costs as
a result of our investments in our China and MMC manufacturing
facilities.

Operating expenses increased in absolute dollars
by $6.5 million or 4.5% in the three months ended
September 25, 2004 compared to the corresponding period in
2003 due to a restructuring charge of $31.4 million and
$0.6 million increase in SG&A expense offset by a decrease
in amortization of intangible assets of $15.5 million and
$10.0 million in R&D expense. Operating expenses
decreased in absolute dollars by $12.3 million or 2.9% in
the nine month period compared to the corresponding period in
2003 due to a $30.7 million decrease in amortization of
intangible assets and a $15.4 million decrease in R&D
expense, offset by a restructuring charge of $31.4 million
and increased SG&A expense of $2.6 million.

In July 2004, we completed a reduction in force
that affected approximately 330 positions. We incurred
facilities and severance-related charges of $31.4 million
in the third fiscal quarter of 2004. We expect to incur total
restructuring charges of approximately $40 to $50 million
which is a revision from the previously announced estimate of
$80 to $90 million primarily due to managements
intention to sell certain owned assets, the changes in the
discount applied to the facility-related accrual,
managements revised assessment of the Companys
facilities requirements and changes in the timing of
implementation. We expect to be substantially completed with the
restructuring by the second quarter of 2005. In fiscal 2005, we
expect to begin to realize cost and expense savings of
approximately $8 to 10 million per quarter associated with
the restructuring activities. The anticipated or estimated
savings result primarily from the employee headcount reductions
and reduced facility costs. However, many factors, including
reduced sales volume and average

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selling prices, which have impacted gross margins
in the past, and the addition of, or increase in, other
operating expenses, may offset some or all of these anticipated
or estimated savings.


Operating capital (defined as accounts
receivable, other receivables and inventories less accounts
payable) decreased $67.4 million as a result of a decline
in accounts receivable, partially offset by an increase in
finished goods inventory and a decrease in accounts payable, all
as a result of reduced sales in the three months ended
September 25, 2004 as compared to the three months ended
December 27, 2003. Capital expenditures are expected to
aggregate approximately $180 million in 2004.

Critical Accounting Policies

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

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



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

Warranty

Effective September 2004, we announced the
introduction of a new warranty period for new sales extending
the term to three or five years for certain products shipped to
the distribution channel. Consistent with our existing
accounting policies relating to product warranties, we revised
our estimate of product warranties to reflect this new warranty
period; this revised estimate is reflected in our results
reported for the three and nine months ended September 25,
2004.

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

From time to time, we may be subject to
additional costs related to warranty claims from our customers.
If and when this occurs, we generally must make significant
judgements and estimates in establishing the

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related warranty liability. This estimating
process is based on historical experience, communication with
our customers and various assumptions that are believed to be
reasonable under the circumstances. This additional warranty
reserve would be recorded in the determination of net income in
the period in which the additional cost was identified.


For additional information regarding our critical
accounting policies mentioned above, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the
fiscal year ended December 27, 2003.

Results of Operations



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

|                            |  |                    |       |               |  |                   |         |               |  |               |        |        |  |   |         |    |  |   |         |   |  |   |        |  
|--------------------------- |  | ------------------ | ----- | ------------- |  | ----------------- | ------- | ------------- |  | ------------- | ------ | ------ |  | - | ------- | -- |  | - | ------- | - |  | - | ------ | -
|                            |  |                    |       |               |  |                   |         |              
|                            |  | Three Months Ended |       |               |  | Nine Months Ended |         |              
|                            |  |                    |       |               |  |                   |         |              
|                            |  | September 25,      |       | September 27, |  |                   |         | September 25, |  | September 27, |        |       
|                            |  | 2004               |       | 2003          |  | Change            |         | 2004          |  | 2003          |        | Change
|                            |  |                    |       |               |  |                   |         |               |  |               |        |       
|                            |  |                    |       |               |  |                   |         |              
|                            |  | (In millions)      |       |               |  | (In millions)     |         |              
|Total revenues              |  | $                  | 927.2 |               |  | $                 | 1,065.5 |               |  | $             | (138.3 | )      |  | $ | 2,765.1 |    |  | $ | 2,915.3 |   |  | $ | (150.2 | )
|Gross profit                |  | $                  | 59.5  |               |  | $                 | 182.4   |               |  | $             | (122.9 | )      |  | $ | 288.3   |    |  | $ | 503.5   |   |  | $ | (215.2 | )
|Net income (loss)           |  | $                  | (94.8 | )             |  | $                 | 29.9    |               |  | $             | (124.7 | )      |  | $ | (111.7  | )  |  | $ | 63.5    |   |  | $ | (175.2 | )
|As a percentage of revenue: |  |                    |       |               |  |                   |         |               |  |               |        |        |  |   |         |    |  |   |         |   |  |   |        |  
|Total revenues              |  |                    | 100.0 | %             |  |                   | 100.0   | %             |  |               |        |        |  |   | 100.0   | %  |  |   | 100.0   | % |  |   |        |  
|Gross profit                |  |                    | 6.4   | %             |  |                   | 17.1    | %             |  |               |        |        |  |   | 10.4    | %  |  |   | 17.3    | % |  |   |        |  
|Net income (loss)           |  |                    | (10.2 | )%            |  |                   | 2.8     | %             |  |               |        |        |  |   | (4.0    | )% |  |   | 2.2     | % |  |   |        |  

Revenues.Revenue in
the three months ended September 25, 2004 was
$927.2 million. This represented a reduction of 13.0% when
compared to $1,065.5 million in the corresponding period in
fiscal 2003. Revenue in the nine months ended September 25, 2004
was $2,765.1 million. This represented a reduction of 5.2%
when compared to $2,915.3 million in the corresponding
period in fiscal 2003. Total shipments for the three months
ended September 25, 2004 were 13.8 million units,
which were 1.1 million units, or 7.4%, lower as compared to
the three months ended September 27, 2003. Total shipments
for the nine months ended September 25, 2004 were
38.9 million units, which was 0.6 million units, or
1.5%, lower as compared to the nine months ended
September 27, 2003. Total units and revenue declined during
the three months ended September 25, 2004 primarily as a
result of reduced demand due to a lost opportunity at a major
OEM customer and reduced sales of our desktop products to
certain key regional OEM customers. Total units and revenue
declined during the nine months ended September 25, 2004
primarily as a result of reduced demand due to a lost
opportunity at a major OEM and reduced shipments to distribution
customers due to competitive pressures experienced in the
distribution channel and continued price erosion, with greater
erosion on higher capacity products. The reductions in both the
three and nine month periods were partially offset by growth in
shipments and revenue of our digital entertainment storage
products and Maxtor OneTouch personal storage products.

Revenue from sales to OEMs represented 46.8% and
53.1% of revenue in the three and nine months ended
September 25, 2004, respectively, compared to 53.7% and
49.1% of revenue, respectively, in the corresponding period in
fiscal year 2003. In absolute dollars, sales to OEMs decreased
24.1% during the three months ended September 25, 2004 and
increased 2.6% during the nine months ended September 25,
2004. The decrease in OEM sales as a percentage of revenue and
in absolute dollars in the three month period was primarily
driven by reduced demand due to a lost opportunity at a major
OEM customer and reduced sales of our desktop products to
certain key regional OEM customers. The increase in OEM sales as
a percentage of revenue and in absolute dollars in the nine
month period was driven primarily by growth in shipments and
revenue resulting from increased demand for our digital
entertainment storage products partially offset by reduced
shipments due to a lost opportunity at a major OEM customer.

Revenue from sales to the distribution channel
and retail customers in the three and nine months ended
September 25, 2004 represented 53.2% and 46.9% of revenue,
respectively, compared to 46.3% and 50.9% of revenue,
respectively, in the corresponding periods in fiscal 2003.
Revenue from sales to the distribution

22



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##### Table of Contents



channel in the three and nine months ended
September 25, 2004 represented 43.4% and 38.8% of revenue,
respectively, compared to 38.8% and 43.4% of revenue,
respectively, in the corresponding periods in fiscal 2003. In
absolute dollars, sales to the distribution channel decreased
2.8% and 15.2%, respectively, during the three and nine months
ended September 25, 2004. The increase in distribution
sales as a percentage of revenue during the three months ended
September 25, 2004 was a result of reduced OEM revenue as a
percentage of total revenue. The reduction of distribution sales
in absolute dollars during the three month period was the result
of continued price erosion, with greater erosion on higher
capacity products. The decrease in distribution sales as a
percentage of revenue and in absolute dollars during the nine
months ended September 25, 2004 was primarily a result of
reduced shipments due to competitive pressures experienced in
the distribution channel and continued price erosion with
greater erosion on higher capacity products.


Revenue from sales to retail customers in the
three and nine months ended September 25, 2004 represented
9.8% and 8.1% of revenue, respectively, compared to 7.5% of
revenue in each of the corresponding periods in fiscal 2003. In
absolute dollars, sales to the retail channel increased 13.6%
and 2.4%, respectively, during the three and nine months ended
September 25, 2004. The increase in retail sales as a
percentage of revenue and in absolute dollars during the three
and nine month periods was the result of the increase in sales
of our Maxtor OneTouch personal storage products.

Domestic revenue in the three and nine months
ended September 25, 2004 represented 32.9% and 33.4% of
total sales, respectively compared to 35.9% and 35.0% of total,
respectively, in the corresponding periods in fiscal year 2003.
Domestic revenue includes sales to the United States and Canada.
The decrease in domestic revenue as a percentage of total
revenue during the three and nine months ended
September 25, 2004 was primarily a result of reduced demand
due to a lost opportunity at a major OEM customer. The decrease
in domestic revenue as a percentage of total revenue during the
nine months ended September 25, 2004 was a result of decreased
demand due to a lost opportunity at a major OEM and reduced
shipments due to competitive pressures experienced in the
distribution channel and continued price erosion, with greater
erosion on higher capacity products.

International revenue in the three and nine
months ended September 25, 2004 represented 67.1% and 66.6%
of total sales, respectively compared to 64.1% and 65.0% of
total sales, respectively, in the corresponding periods in
fiscal year 2003. In the three months ended September 25,
2004, international revenue was comprised of 35.7% Europe,
Middle East and Africa, 28.2% Asia Pacific and Japan and 3.2%
for Latin America and other regions. In the three months ended
September 27, 2003, international revenue was comprised of
33.8% Europe, Middle East and Africa, 29.9% Asia Pacific and
Japan and 0.4% for Latin America and other regions.

Sales to Europe, Middle East and Africa in the
three months ended September 25, 2004 and
September 27, 2003 represented 35.7% and 33.8% of total
revenue, respectively. In absolute dollars, sales to Europe,
Middle East and Africa decreased 8.1% during the three months
ended September 25, 2004. The decrease in sales to Europe,
Middle East and Africa in absolute dollars during the three
months ended September 25, 2004 was a result of decreased
shipments of desktop products to our OEM customers primarily due
to a lost opportunity at a major OEM customer, partially offset
by increased demand for our Maxtor OneTouch personal storage
products.

Sales to Asia Pacific and Japan in the three
months ended September 25, 2004 and September 27, 2003
represented 28.2% and 29.9% of total revenue, respectively. In
absolute dollars, sales to Asia Pacific and Japan decreased
17.8% during the three months ended September 25, 2004. The
decrease in sales to Asia and Japan in absolute dollars during
the three months ended September 25, 2004, was the result
of reduced sales of our desktop and server products to OEM
customers, primarily due to reduced sales of our desktop
products to certain key regional OEM customers and a lost
opportunity at a major OEM customer.

Sales to Latin America and other regions in the
three months ended September 25, 2004 and September 27, 2003
represented 3.2% and 0.4% of total revenue, respectively. The
increase in sales was the result of increased sales of our
desktop products to regional OEM customers.

23



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In the nine months ended September 25, 2004,
international revenue was comprised of 34.7% Europe, Middle East
and Africa, 30.3% Asia Pacific and Japan and 1.6% for Latin
America and other regions. In the nine months ended
September 27, 2003, international revenue was comprised of
33.9% Europe, Middle East and Africa, 30.5% Asia Pacific and
Japan and 0.5% for Latin America and other regions.

Sales to Europe, Middle East and Africa in the
nine months ended September 25, 2004 and September 27,
2003 represented 34.7% and 33.9% of total revenue, respectively.
In absolute dollars, sales to Europe, Middle East and Africa
decreased 3.1% during the nine months ended September 25,
2004. The decrease in sales to Europe, Middle East and Africa in
absolute dollars during the nine months ended September 25,
2004 was a result of decreased shipments of desktop products
primarily due to competitive pressures experienced in the
distribution channel and continued price erosion, with greater
erosion on higher capacity products, partially offset by
increased demand for our Maxtor OneTouch personal storage
products.

Sales to Asia Pacific and Japan in the nine
months ended September 25, 2004 and September 27, 2003
represented 30.3% and 30.5% of total revenue, respectively. In
absolute dollars, sales to Asia Pacific and Japan decreased 5.8%
during the nine months ended September 25, 2004. The
decrease in sales to Asia and Japan in absolute dollars during
the nine months ended September 25, 2004, was primarily the
result of reduced sales of our desktop products to certain key
regional OEM customers as well as decrease in distribution sales
due to continued price erosion, with greater erosion on higher
capacity products.

Sales to Latin America and other regions in the
nine months ended September 25, 2004 and September 27, 2003
represented 1.6% and 0.5% of total revenue, respectively. The
increase in sales was the result of increased sales of our
desktop products to regional OEM customers.



| |                                   
| | ----------------------------------
| | Cost of Revenues; Gross
    Profit

Gross profit decreased to $59.5 million in
the three months ended September 25, 2004, compared to
$182.4 million for the corresponding three months in fiscal
year 2003. As a percentage of revenue, gross profit decreased to
6.4% in the three months ended September 25, 2004 from
17.1% in the corresponding three months of fiscal year 2003.
Gross profit decreased to $288.3 million in the nine months
ended September 25, 2004, compared to $503.5 million
for the corresponding nine months in fiscal year 2003. As a
percentage of revenue, gross profit decreased to 10.4% in the
nine months ended September 25, 2004 from 17.3% in the
corresponding nine months of fiscal year 2003. The decrease in
gross profit, both as a percentage of revenue and actual dollars
during the three months and nine months ended September 25,
2004, was primarily due to the decline of average selling prices
partially offset by the increase in our average capacity
shipped. In the three months and nine months ended
September 25, 2004, gross profit was also negatively
impacted by weaker server product profitability driven by price
erosion and reduced cost leverage on our products produced at
MKE and lower volume shipments of our 40GB per platter areal
density product due to a lost opportunity at a major OEM
customer resulting in reduced fixed cost absorption at our
manufacturing facilities, and in the three months ended
September 25, 2004, a reserve for an anticipated settlement
with a European OEM. In the three months and nine months ended
September 25, 2004, we also experienced increased costs as
a result of our investments in our China and MMC manufacturing
facilities. Our cost of revenues includes depreciation and
amortization of property, plant and equipment.

24



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##### Table of Contents



Operating Expenses

|                                    |  |                    |      |               |  |                   |      |               |  |               |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|----------------------------------- |  | ------------------ | ---- | ------------- |  | ----------------- | ---- | ------------- |  | ------------- | ----- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                    |  |                    |      |               |  |                   |      |              
|                                    |  | Three Months Ended |      |               |  | Nine Months Ended |      |              
|                                    |  |                    |      |               |  |                   |      |              
|                                    |  | September 25,      |      | September 27, |  |                   |      | September 25, |  | September 27, |       |       
|                                    |  | 2004               |      | 2003          |  | Change            |      | 2004          |  | 2003          |       | Change
|                                    |  |                    |      |               |  |                   |      |               |  |               |       |       
|                                    |  |                    |      |               |  |                   |      |              
|                                    |  | (In millions)      |      |               |  | (In millions)     |      |              
|Research and development            |  | $                  | 78.2 |               |  | $                 | 88.2 |               |  | $             | (10.0 | )      |  | $ | 243.6 |   |  | $ | 259.0 |   |  | $ | (15.4 | )
|Selling, general and administrative |  | $                  | 34.5 |               |  | $                 | 33.9 |               |  | $             | 0.6   |        |  | $ | 99.4  |   |  | $ | 96.8  |   |  | $ | 2.6   |  
|Amortization of intangible assets   |  | $                  | 5.1  |               |  | $                 | 20.6 |               |  | $             | (15.5 | )      |  | $ | 31.0  |   |  | $ | 61.7  |   |  | $ | (30.7 | )
|Restructuring charge                |  | $                  | 31.4 |               |  | $                 |     |               |  | $             | 31.4  |        |  | $ | 31.4  |   |  | $ |      |   |  | $ | 31.4  |  
|As a percentage of revenue:         |  |                    |      |               |  |                   |      |               |  |               |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|Research and development            |  |                    | 8.4  | %             |  |                   | 8.3  | %             |  |               |       |        |  |   | 8.8   | % |  |   | 8.9   | % |  |   |       |  
|Selling, general and administrative |  |                    | 3.7  | %             |  |                   | 3.2  | %             |  |               |       |        |  |   | 3.6   | % |  |   | 3.3   | % |  |   |       |  
|Amortization of intangible assets   |  |                    | 0.6  | %             |  |                   | 1.9  | %             |  |               |       |        |  |   | 1.1   | % |  |   | 2.1   | % |  |   |       |  
|Restructuring charge                |  |                    | 3.4  | %             |  |                   | 0.0  | %             |  |               |       |        |  |   | 1.1   | % |  |   | 0.0   | % |  |   |       |  



| |                                     
| | ------------------------------------
| | Research and Development
    (R&D)

R&D expense in the three months and nine
months ended September 25, 2004 was $78.2 million, or
8.4% of revenue and $243.6 million, or 8.8% of revenue
compared to $88.2 million, or 8.3% of revenue and
$259.0 million and 8.9% of revenue, respectively, in the
corresponding periods in fiscal year 2003. R&D expenses
decreased by $10.0 million, or 12.8%, in the three month
period ended September 25, 2004 compared to the
corresponding period in fiscal year 2003. The decrease in
R&D expenses during the three month period was primarily due
to decreases in compensation of $10.4 million, depreciation
and equipment expense of $1.9 million and other expenses of
$1.9 million. These decreases were offset by a
$4.2 million increase in expensed parts and services due to
an increase in the number of products in development. R&D
expenses decreased by $15.4 million, or 6.3%, in the nine
month period ended September 25, 2004 compared to the
corresponding period in fiscal year 2003. The decrease in
R&D expenses during the nine month period was primarily due
to decreases in compensation expense of $18.3 million, and
in depreciation, decreases in our facilities and information
technology departments and other expenses of $6.8 million.
These decreases were offset by a $9.7 million increase in
expensed parts and services due to an increase in the number of
products in development.



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

SG&A expense in the three months and nine
months ended September 25, 2004 was $34.5 million, or
3.7% of revenue and $99.4 million, or 3.6% of revenue
compared to $33.9 million, or 3.2% of revenue and
$96.8 million, or 3.3% of revenue, respectively, in the
corresponding periods in fiscal year 2003. SG&A expenses
increased by $0.6 million, or 1.7%, in the three month
period ended September 25, 2004 compared to the
corresponding period in fiscal year 2003. The increase in
SG&A expenses during the three month period was primarily
due to an increase in services of $3.4 million related to
Sarbanes Oxley compliance, bad debt expense of $1.6 million
primarily relating to reserves for receivable balances from a
European OEM and $0.2 million of other expense. These
increases were offset by reduced spending in our facilities and
information technology departments of $1.6 million as a
result of our expense reduction program in addition to decreases
in compensation expenses of $3.0 million. SG&A expenses
increased by $2.6 million, or 2.6%, in the nine month
period ended September 25, 2004 compared to the
corresponding period in fiscal year 2003. The increase in
SG&A expenses during the nine month period was primarily due
to an increase in facility costs of $1.4 million as a
result of a reduction in offsetting rental income, increased
services of $4.0 million related to Sarbanes Oxley
compliance, $2.3 million in litigation expenses,
$1.4 million related to sales and marketing expenses, and
$1.8 million of other expenses. Reduced spending in our
facilities and information technology departments of
$5.0 million, as a result of our expense reduction program
as well as a decrease in compensation expense of
$3.3 million offset these increases.

25



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

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



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

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

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

|                                       |  |                    |   |                   |  |               |     |               |  |   |     |  |  |   |     | 
|-------------------------------------- |  | ------------------ | - | ----------------- |  | ------------- | --- | ------------- |  | - | --- |  |  | - | --- | 
|                                       |  |                    |   |                  
|                                       |  | Three Months Ended |   | Nine Months Ended
|                                       |  |                    |   |                  
|                                       |  | September 25,      |   | September 27,     |  | September 25, |     | September 27,
|                                       |  | 2004               |   | 2003              |  | 2004          |     | 2003         
|                                       |  |                    |   |                   |  |               |     |              
|                                       |  |                    |   |                  
|                                       |  | (In millions)      |   | (In millions)    
|Research and development               |  | $                  |  |                   |  | $             | 0.2 |               |  | $ | 0.1 |  |  | $ | 0.5 | 
|Selling, general and administrative    |  |                    |  |                   |  |               |    |               |  |   |    |  |  |   | 0.2 | 
|                                       |  |                    |   |                   |  |               |     |               |  |   |     |  |  |   |     | 
|Total stock-based compensation expense |  | $                  |  |                   |  | $             | 0.2 |               |  | $ |    |  |  | $ | 0.7 | 
|                                       |  |                    |   |                   |  |               |     |               |  |   |     |  |  |   |     | 

As of March 27, 2004, we completed the
amortization of stock-based compensation associated with our
acquisition of the Quantum HDD business.



| |                                      
| | -------------------------------------
| | Amortization of Intangible
    Assets

Amortization of other intangible assets
represents the amortization of existing technology, arising from
our acquisitions of the Quantum HDD business in April 2001 and
MMC in September 2001. The net book value of these intangibles
at September 25, 2004 was $30.7 million. Amortization
of other intangible assets was $5.1 million and
$31.0 million for the three and nine months ended
September 25, 2004 and September 27, 2003,
respectively.

Amortization of other intangible assets is
computed over the estimated useful lives of the respective
assets, generally three to five years. We expect amortization
expense on intangible assets to be $5.1 million in the
remainder of 2004, $20.2 million in 2005, and
$5.4 million in 2006, at which time the purchased
intangible assets will be fully amortized.



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

In the three months ended September 25,
2004, we recorded a restructuring charge of $31.4 million
in connection with our on-going restructuring activities
announced in July 2004. These charges represent expenses
incurred in connection with the reduction in force and
evaluation of lease obligations that the Company had undertaken.
The charge comprised $20.4 million in facility-related charges
primarily due to a

26



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##### Table of Contents



change in estimated lease obligations primarily
as a result of further deterioration in the Silicon Valley real
estate market and $11.0 million in severance-related
charges associated with the our reduction in force of
approximately 330 employees.


During the year ended December 28, 2002, we
recorded a restructuring charge of $9.5 million associated
with closure of one of our facilities located in California. The
amount comprised $8.9 million of future non-cancelable
lease payments, which were expected to be paid over several
years based on the underlying lease agreement, and the write-off
of $0.6 million in leasehold improvements. The
restructuring accrual is included on the balance sheet within
Accrued and other liabilities with the balance of
$6.7 million after cash payments of $0.3 million and
$1.0 million during the three and nine months ended
September 25, 2004, respectively. We increased this
restructuring accrual by $3.3 million associated with our
restructuring activities in the three months ended
September 25, 2004. During the three months ended September
25, 2004, we also recorded $16.4 million to increase a
restructuring accrual previously recorded as part of the Quantum
HDD merger and $0.6 million was recorded in association
with the closure of one of our facilities in Colorado. These
combined actions resulted in a net facility-related
restructuring charge of $20.3 million for the three and
nine months ended September 25, 2004. The
facilities-related restructuring accrual is included within the
balance sheet captions of Accrued and other liabilities and
Other liabilities with the balance of $66.8 million as of
September 25, 2004.

We expect to incur total restructuring charges of
approximately $40 to $50 million which is a revision from
the previously announced estimate of $80 to $90 million
primarily due to managements intention to sell certain
owned assets, the changes in the discount applied to the
facility-related accrual, managements revised assessment
of the Companys facilities requirements and changes in the
timing of implementation. We expect to be substantially
completed with the restructuring by the second quarter of 2005.
In fiscal 2005, we expect to begin to realize cost and expense
savings of approximately $8 to $10 million per quarter
associated with the restructuring activities. The anticipated or
estimated savings result primarily from the employee headcount
reductions and reduced facility costs. However, many factors,
including reduced sales volume and average selling prices, which
have impacted gross margins in the past, and the addition of, or
increase in, other operating expenses, may offset some or all of
these anticipated or estimated savings.

For more information regarding the
facility-related restructuring charge, see Note 8 of the
Notes to the Consolidated Financial Statements.



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

|                                  |  |                    |      |               |  |                   |      |               |  |               |     |        |  |   |       |    |  |   |       |    |  |   |      |  
|--------------------------------- |  | ------------------ | ---- | ------------- |  | ----------------- | ---- | ------------- |  | ------------- | --- | ------ |  | - | ----- | -- |  | - | ----- | -- |  | - | ---- | -
|                                  |  |                    |      |               |  |                   |      |              
|                                  |  | Three Months Ended |      |               |  | Nine Months Ended |      |              
|                                  |  |                    |      |               |  |                   |      |              
|                                  |  | September 25,      |      | September 27, |  |                   |      | September 25, |  | September 27, |     |       
|                                  |  | 2004               |      | 2003          |  | Change            |      | 2004          |  | 2003          |     | Change
|                                  |  |                    |      |               |  |                   |      |               |  |               |     |       
|                                  |  |                    |      |               |  |                   |      |              
|                                  |  | (In millions)      |      |               |  | (In millions)     |      |              
|Interest expense                  |  | $                  | (7.8 | )             |  | $                 | (9.0 | )             |  | $             | 1.2 |        |  | $ | (24.0 | )  |  | $ | (22.7 | )  |  | $ | (1.3 | )
|Interest income                   |  | $                  | 1.3  |               |  | $                 | 1.2  |               |  | $             | 0.1 |        |  | $ | 3.7   |    |  | $ | 3.8   |    |  | $ | (0.1 | )
|Income from litigation settlement |  | $                  |     |               |  | $                 |     |               |  | $             |    |        |  | $ | 24.8  |    |  | $ |      |    |  | $ | 24.8 |  
|Other gain (loss)                 |  | $                  |     |               |  | $                 | (0.9 | )             |  | $             | 0.9 |        |  | $ |      |    |  | $ | (0.7  | )  |  | $ | 0.7  |  
|As a percentage of revenue:       |  |                    |      |               |  |                   |      |               |  |               |     |        |  |   |       |    |  |   |       |    |  |   |      |  
|Interest expense                  |  |                    | (0.8 | )%            |  |                   | (0.8 | )%            |  |               |     |        |  |   | (0.9  | )% |  |   | (0.8  | )% |  |   |      |  
|Interest income                   |  |                    | 0.1  | %             |  |                   | 0.1  | %             |  |               |     |        |  |   | 0.1   | %  |  |   | 0.1   | %  |  |   |      |  
|Income from litigation settlement |  |                    | 0.0  | %             |  |                   | 0.0  | %             |  |               |     |        |  |   | 0.9   | %  |  |   | 0.0   | %  |  |   |      |  
|Other gain (loss)                 |  |                    | 0.0  | %             |  |                   | (0.1 | )%            |  |               |     |        |  |   | 0.0   | %  |  |   | 0.0   | %  |  |   |      |  



| |                 
| | ----------------
| | Interest Expense

Interest expense decreased $1.2 million in
the three months and increased $1.3 million in the nine
months ended September 25, 2004 as compared to the
corresponding periods in fiscal year 2003. The decrease in the

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##### Table of Contents



three months ended September 25, 2004 was
due to reduction in debt balance for the quarter as compared to
the corresponding quarter in 2003. The increase in the nine
months ended September 25, 2004 was primarily due to higher
average debt balance over the nine month period as compared to
the corresponding period in 2003.




| |                
| | ---------------
| | Interest Income

Interest income increased $0.1 million and
decreased $0.1 million in the three months and nine months
ended September 25, 2004 compared to the corresponding
periods in fiscal year 2003. The changes in interest income
resulted primarily from fluctuations in the balances in our cash
and cash equivalent.



| |                                      
| | -------------------------------------
| | Income from Litigation
    Settlement

On April 28, 2004, in connection with our
suit against Koninklijke Philips Electronics N.V. and several
other Philips-related companies in the Superior Court of
California, County of Santa Clara whereby the Company
alleged that an integrated circuit chip supplied by Philips was
defective and caused significant levels of failure of certain
Quantum legacy products acquired as part of our acquisition of
the Quantum HDD business, we entered into a settlement agreement
with the other parties pursuant to which the parties dismissed
the lawsuit with prejudice and we received a cash payment of
$24.8 million, which was recorded as litigation settlement
income in the nine months ended September 25, 2004.



| |                  
| | -----------------
| | Other Gain (Loss)

Other loss was zero in the three and nine months
ended September 25, 2004 as compared to $0.9 million
and $0.7 million for the corresponding periods in fiscal
year 2003.



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

|                                                |  |                    |       |               |  |                   |      |               |  |               |        |        |  |   |        |   |  |   |      |  |  |   |        |  
|----------------------------------------------- |  | ------------------ | ----- | ------------- |  | ----------------- | ---- | ------------- |  | ------------- | ------ | ------ |  | - | ------ | - |  | - | ---- |  |  | - | ------ | -
|                                                |  |                    |       |               |  |                   |      |              
|                                                |  | Three Months Ended |       |               |  | Nine Months Ended |      |              
|                                                |  |                    |       |               |  |                   |      |              
|                                                |  | September 25,      |       | September 27, |  |                   |      | September 25, |  | September 27, |        |       
|                                                |  | 2004               |       | 2003          |  | Change            |      | 2004          |  | 2003          |        | Change
|                                                |  |                    |       |               |  |                   |      |               |  |               |        |       
|                                                |  |                    |       |               |  |                   |      |              
|                                                |  | (In millions)      |       |               |  | (In millions)     |      |              
|Income (loss) before provision for income taxes |  | $                  | (96.1 | )             |  | $                 | 31.1 |               |  | $             | (127.2 | )      |  | $ | (112.4 | ) |  | $ | 66.4 |  |  | $ | (178.8 | )
|Provision for income taxes                      |  | $                  | (1.3  | )             |  | $                 | 1.2  |               |  | $             | (2.5   | )      |  | $ | (0.7   | ) |  | $ | 2.9  |  |  | $ | (3.6   | )

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

Pursuant to a Tax Sharing and Indemnity
Agreement entered into in connection with the
Companys acquisition of Quantum HDD, Maxtor, as successor
to Quantum HDD, and Quantum are allocated their share of
Quantums income tax liability for periods before the
Companys acquisition of Quantum HDD, consistent with past
practices and as if the Quantum HDD and Quantum DSS business
divisions had been separate and independent corporations. To the
extent that the income tax liability attributable to one
business division is reduced by using NOLs and other tax
attributes of the other business division, the business division
utilizing the attributes must pay the other for the use of those
attributes. We must also indemnify Quantum for additional taxes
related to the Quantum DSS business for all periods before
Quantums issuance of tracking stock and additional taxes
related to the Quantum HDD business for all periods before our
acquisition of Quantum HDD, limited in the aggregate to
$142.0 million plus 50% of any excess over
$142.0 million, excluding any required gross-up payment.
Although we expect to be required to make indemnification
payments in future periods, we are unable to determine
significantly in advance the amount and timing of such payments.
Management believes that, based on the facts available at this
time, the likelihood that our aggregate indemnification
obligations will exceed $142.0 million is remote. As of

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September 25, 2004, the Company has
reimbursed $8.3 million to Quantum Corporation leaving a
balance of $133.7 million on the original indemnity, prior
to any sharing of tax liability with Quantum.


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

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

Liquidity and Capital Resources

At September 25, 2004, we had
$391.4 million in cash and cash equivalents,
$22.7 million in restricted cash, $64.9 million in
marketable securities and $43.0 million in restricted
marketable securities for a combined total of
$522.0 million. In comparison, at December 27, 2003,
we had $530.8 million in cash and cash equivalents,
$37.2 million in restricted cash and $44.6 million in
marketable securities and $42.3 million in restricted
marketable securities for a combined total of
$654.9 million. The restricted cash and restricted
marketable securities balance amounts are pledged as collateral
for certain stand-by letters of credit issued by commercial
banks.

Cash used in operating activities was
$27.1 million in the nine months ended September 25,
2004. This comprised $111.7 million in net loss plus
non-cash items of $138.0 million primarily relating to
depreciation and amortization, $0.2 million of stock
compensation and $24.5 million restructuring charge, a
decrease in operating capital (defined as accounts receivables,
other receivables and inventories less accounts payables) of
$67.4 million and prepaid expenses and other assets of
$3.2 million, partially offset by a decrease in accrued and
other liabilities of $141.5 million and cash used in
discontinued operations of $0.8 million. The decrease in
accrued and other liabilities was primarily due to an
$83.3 million payment of compensation accruals,
$32.3 million net settlement of warranty obligations,
$14.7 million of other accrued expenses and
$11.2 million in facility accrual payments.

The decrease in operating capital of
$67.4 million during the nine months ended September 25,
2004 was a result of the following factors: decline in accounts
receivable, partially offset by an increase in finished goods
inventory and a decrease in accounts payable, all as a result of
reduced sales in the three months ended September 25, 2004
as compared to the three months ended December 27, 2003.

Cash used in investing activities was
$168.5 million for the nine months ended September 25,
2004, primarily reflecting investments in property, plant and
equipment (net of proceeds) of $139.0 million and purchases
(net of sales) of marketable securities of $22.4 million,
partially offset by an increase in restricted cash of
$7.1 million.

Cash provided by financing activities was
$56.3 million for the nine months ended September 25,
2004. Primarily this represented increased borrowings of
$49.7 million net of transaction fees from the new asset
backed borrowing facility, $45.0 million drawing on the
manufacturing facility loan in Suzhou, China, $9.7 million
drawing on the second Economic Development Board loan and
$18.5 million received upon the issuance of common stock
through our employee stock purchase plan and options exercised.
This was

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primarily offset by repayments of
$50.0 million on original asset back borrowing,
$12.4 million amortization of capital lease obligations and
payments of $3.4 million on the first Economic Development
Board loan.


We believe that our existing cash and cash
equivalents, short-term investment and capital resources,
together with cash generated from operations and available
borrowing capacity will be sufficient to fund our operations
through at least the next twelve months. We require substantial
capital to fund our business, particularly to fund operating
losses and to invest in property, plant and equipment. During
2004, capital expenditures are expected to aggregate
$180 million, primarily used for manufacturing expansion
and upgrades, product development, and updating our information
technology systems. In 2005 we expect our capital expenditures
to be reduced below $150 million. We may require additional
capital to successfully manufacture some of our new products. If
we need additional capital, there can be no assurance that such
additional financing can be obtained, or that it will be
available on satisfactory terms. See discussion below under the
heading Certain Factors Affecting Future
Performance. Our ability to generate cash and achieve
profitable operations will depend on, among other things, demand
in the hard disk drive market for our products and pricing
conditions. We have a net deferred tax liability amounting to
$196.4 million, which could become payable upon
repatriation of our earnings invested abroad.



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

Payments due under known contractual obligations
as of September 25, 2004 are reflected in the following
table (in thousands):

|                          |  |          |           |           |  |           |         |           |  |           |         |  |  |   |         |  |  |   |         | 
|------------------------- |  | -------- | --------- | --------- |  | --------- | ------- | --------- |  | --------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                          |  |          |           |           |  |           |         |           |  | More than
|                          |  |          |           | Less than |  |           |         | 3-5 Years |  | 5 Years  
|                          |  | Total(5) |           | 1 Year    |  | 1-3 Years |         | (1)(2)    |  | (1)(2)   
|                          |  |          |           |           |  |           |         |           |  |          
|Long-term Debt            |  | $        | 463,071   |           |  | $         | 65,486  |           |  | $         | 58,878  |  |  | $ | 74,396  |  |  | $ | 264,311 | 
|Capital Lease Obligations |  |          | 7,785     |           |  |           | 5,162   |           |  |           | 2,614   |  |  |   | 9       |  |  |   |        | 
|Operating Leases(3)       |  |          | 284,945   |           |  |           | 34,307  |           |  |           | 63,987  |  |  |   | 61,766  |  |  |   | 124,885 | 
|Purchase Obligations(4)   |  |          | 797,035   |           |  |           | 790,651 |           |  |           | 3,301   |  |  |   | 3,083   |  |  |   |        | 
|                          |  |          |           |           |  |           |         |           |  |           |         |  |  |   |         |  |  |   |         | 
|Total                     |  | $        | 1,552,836 |           |  | $         | 895,606 |           |  | $         | 128,780 |  |  | $ | 139,254 |  |  | $ | 389,196 | 
|                          |  |          |           |           |  |           |         |           |  |           |         |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    drawdowns under the facilities described under footnote (1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Includes future minimum annual rental
    commitments, including amounts accrued as restructuring
    liabilities as of September 25, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(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.
|   
|(5) | We have excluded $133.7 million relating to
    our tax sharing indemnification agreement with Quantum
    Corporation as the time period within which the obligations may
    become due and owing is not specified.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

On May 7, 2003, we sold $230 million in
aggregate principal amount of 6.8% convertible senior notes
due 2010 to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933, as amended. The
notes bear interest at a rate of 6.8% per annum and are
convertible into our common stock at a conversion rate of
81.5494 shares per $1,000 principal amount of the notes, or
an aggregate of 18,756,362 shares, subject to adjustment in
certain circumstances (equal to an initial conversion price of
$12.2625 per share). The initial

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conversion price represents a 125% premium over
the closing price of our common stock on May 1, 2003, which
was $5.45 per share. The notes and underlying stock have
been registered for resale with the 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
principal amount, plus accrued and unpaid interest, if the
closing price of our common stock for 20 trading days within a
period of 30 consecutive trading days ending on the trading day
before the date of our mailing of the redemption notice exceeds
130% of the conversion price on such trading day. If, at any
time, substantially all of our common stock is exchanged or
acquired for consideration that does not consist entirely of
common stock that is listed on a United States national
securities exchange or approved for quotation on the NASDAQ
National Market or similar system, the holders of the notes have
the right to require us to repurchase all or any portion of the
notes at their face value plus accrued interest.

We have agreed to invest $200 million over
the next five years to establish a manufacturing facility in
Suzhou, China, and we have secured credit lines with the Bank of
China for up to $133 million to be used for the
construction and working capital requirements of this operation.
The remainder of our commitment will be satisfied primarily with
the transfer of manufacturing assets from Singapore or from our
other manufacturing site. MTS has drawn down $60 million as
of September 2004. MTS is required to maintain a maximum
liability to assets ratio and a minimum earnings to interest
expense ratio, the first ratio to be tested annually commencing
in December 2004 and the latter ratio to be tested annually
commencing in December 2005.

In September 2003, MPS entered into a second
four-year 52 million Singapore dollar loan agreement with
the Economic Development Board of Singapore (the
Board) at 4.25% which is amortized in seven equal
semi-annual installments ending December 2007. As of
September 25, 2004, the balance was 52.0 million
Singapore dollars, equivalent to $30.8 million. This loan
is supported by a guaranty from a bank. Cash is currently
provided as collateral for this guaranty; $21.9 million was
recorded as other assets and the remaining $8.6 million was
recorded as restricted cash. However, we may at our option
substitute other assets as security. MPS is required to invest a
certain level of capital by 2006 as defined in the loan
agreement.

On May 9, 2003, we entered into a two-year
receivable-backed borrowing arrangement of up to
$100 million with certain financial institutions. In the
arrangement we used a special purpose subsidiary to purchase and
hold 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 and
Canadian accounts receivable. The special purpose subsidiary was
consolidated for financial reporting purposes. The transactions
under the arrangement were accounted for as secured borrowing
and accounts receivables, and the related short-term borrowings,
if any, remain on our consolidated balance sheet. As of
March 9, 2004 the dilution to liquidation ratio for this
facility exceeded the agreed upon threshold. The lenders under
the facility agreed to forbear from exercising remedies for
noncompliance with this ratio through March 31, 2004 and in
return, we agreed to apply all collections of receivables to the
repayment of the outstanding facility until repaid in full. As
of March 27, 2004, we had no borrowing under this facility.
On April 2, 2004, this agreement was terminated by all
parties involved.

On June 24, 2004, we entered into a one-year
receivable-backed borrowing arrangement of up to
$100 million with one financial institution collateralized
by all United States and Canadian accounts receivable. In the
arrangement we use a special purpose subsidiary to purchase and
hold all of our United States and Canadian accounts receivable.
This special purpose subsidiary has borrowing authority up to
$100 million based upon eligible United States and Canadian
accounts receivable. The special purpose subsidiary is
consolidated for financial reporting purposes. The transactions
under the arrangement are accounted for as short term borrowings
and remain on our consolidated balance sheet. As of
September 25, 2004 we had borrowed $50 million under
the arrangement (subject to transaction fees); and the interest
rate was LIBOR plus 3% and $148 million of United States
and Canadian receivables were pledged under this arrangement and
remain on our consolidated balance sheet. The terms of the
facility require compliance with operational covenants and
several financial covenants, including a liquidity covenant, an
operating income (loss) before depreciation and amortization to
long-term debt ratio and certain tests relating to the quality
and nature of the receivables. A violation of these covenants
will result in an early amortization event that will

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cause a prohibition on further payments and
distributions to us from the special purpose subsidiary until
the facility has been repaid in full. As of September 25,
2004, we were in compliance with these requirements.


It is likely that we will need to amend the
receivable backed borrowing program to revise the operating
income (loss) before depreciation and amortization to long-term
debt ratio prior to the end of our fourth fiscal quarter in
order to assure compliance. If we do not obtain the amendment
and the ratio is not met, there will be an early amortization
event under the program in the first quarter of 2005 and further
payments and distributions to us from the special purpose
subsidiary will be prohibited until the facility has been paid
in full. Based on our experience with collections on receivables
we do not believe that repayment would take longer than
30 days. However, early amortization events under the
facility generally will not cause an event of default under our
convertible senior notes due 2010 and we do not believe that
such an event or the lack of borrowing availability under this
facility would have a material adverse effect on our 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 fiscal years, we were profitable in only fiscal years
2000 and 2003. For the year ended December 27, 2003, our
net income was $102.7 million, which included
$85.3 million for the amortization of intangible assets,
charges of $0.8 million for stock-based compensation and
income from discontinued operations of $2.2 million. As of
December 27, 2003, we had an accumulated deficit of
$1,637.9 million. Although we were profitable in the fiscal
year 2003, we have experienced quarterly losses in the second
and third fiscal quarters of 2004. We are projecting a loss for
the fourth fiscal quarter of 2004 and may continue to experience
losses in the future.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 and revenue growth in the hard disk drive industry
because the average selling price of a hard disk drive rapidly
declines over its commercial life as a result of technological
enhancement, productivity improvement and increases in supply.
End-user demand for the computer systems that contain our hard
disk drives has historically been subject to rapid and
unpredictable fluctuations, and demand in general for our
products may be reduced by the shift to smaller form factor
rigid disc drives caused by increased sales of notebook
computers. Because the rate of technological advances in areal
density has slowed, product life cycles may lengthen, reducing
opportunities to lower component and manufacturing costs. In
addition, intense price competition among personal computer
manufacturers and Intel-based server manufacturers may cause the
price of hard disk drives to decline. As a result, the hard disk
drive market tends to experience periods of excess capacity and
intense price competition. Competitors attempts to
liquidate excess inventories, restructure, or gain market share
also tend to cause average selling prices to decline. This
excess capacity and intense price competition may cause us in
future quarters to lower prices, which will have the effect of
reducing margins, causing operating results to suffer and making
it difficult for us to achieve or maintain profitability. If we
are unable to lower the cost of producing our hard disk drives
to be consistent with any decline of average selling prices, we
will not be able to compete effectively and our operating
results will suffer. Furthermore, a decline in average selling
prices may result from end-of-period buying patterns where
distributors and sub-distributors tend to make a majority of
their purchases at the end of a fiscal quarter, aided by
disparities between distribution pricing and OEM pricing greater
than historical norms and pressure on disk drive manufacturers
to sell significant units in the quarter. Due to these factors,
forecasts may not be achieved, either because expected sales do
not occur or because they occur at lower prices or on terms that
are less favorable to us. This increases the chances that our
results could diverge from the expectations of investors and
analysts, 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 disk drive market are intensely competitive even
during periods when demand is stable. We compete primarily with
manufacturers of 3.5 inch hard disk drives, including
Fujitsu, Hitachi Global Storage, Samsung, Seagate Technology,
and Western Digital. Many of our competitors historically have
had a number of significant advantages, including larger market
shares, a broader product line, preferred vendor status with
customers, extensive name recognition and marketing power, and
significantly greater financial, technical and manufacturing
resources. Some of our competitors make many of their own
components, which may provide them with benefits including lower
costs. Our competitors may also:



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

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

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



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

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



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

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



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

A significant portion of our products is sold to
desktop computer and Intel-based server manufacturers or to
their subcontractors. These manufacturers select or qualify
their hard disk drive suppliers, either directly or through
their subcontractors, based on quality, storage capacity,
performance and price. Manufacturers typically seek to qualify
two or more suppliers for each hard disk drive product
generation. To qualify consistently, and thus succeed in the
desktop and Intel-based server hard disk drive industry, we must

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consistently be among the first-to-market
introduction and first-to-volume production at leading storage
capacities per disk, offering competitive prices and high
quality. Once a manufacturer or subcontractor has chosen its
hard disk drive suppliers for a given desktop computer or
Intel-based server product, it often will purchase hard disk
drives from those suppliers for the commercial lifetime of that
product line. It is, however, possible to fail to maintain a
qualification due to quality or yield issues. If we miss a
qualification opportunity or cease to be qualified due to yield
or quality issues, we may not have another opportunity to do
business with that manufacturer or subcontractor until it
introduces its next generation of products. The effect of
missing a product qualification opportunity is magnified by the
limited number of high-volume manufacturers of personal
computers and Intel-based servers. If we do not reach the market
or deliver volume production in a timely manner, we may not
qualify our products and may need to deliver lower margin, older
products than required in order to meet our customers
demands. In such case, our business, financial condition and
operating results would be adversely affected. In addition,
continuing developments in technology cause a need for us to
continuously manage product transitions, including a need to
qualify new products or qualify improvements to existing
products. Accordingly, if we are unable to manage a product
transition effectively, including the introduction, production
or qualification of any new products product improvements, our
business 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 the overall demand for desktop computers and
related products and services. Because we sell a significant
portion of our products to the desktop segment of the personal
computer industry, we will be affected more by changes in market
conditions for desktop computers than a company with a broader
range of products. Any decrease in the demand for desktop
computers could reduce the demand for our products, harming our
business, financial condition and operating results.



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

We sell most of our products to a limited number
of customers. For the fiscal year ended December 27, 2003,
one customer, Dell Computer Corporation, accounted for
approximately 11% of our total revenue, and our top five
customers accounted for approximately 38.9% of our revenue. We
expect that a relatively small number of customers will continue
to account for a significant portion of our revenue, and the
proportion of our revenue from these customers could continue to
increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial
demands on us. Even if we successfully qualify a product for a
given customer, the customer generally will not be obligated to
purchase any minimum volume of product from us and generally
will be able to terminate its relationship with us at any time.
Our ability to maintain strong relationships with our principal
customers is essential to our future performance. If we lose a
key customer or if any of our key customers reduce their orders
of our products or require us to reduce our prices before we are
able to reduce costs, our business, financial condition and
operating results could suffer. Mergers, acquisitions,
consolidations or other significant transactions involving our
significant customers may adversely affect our business and
operating results.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 attempt to improve operating efficiencies at Maxtor
through restructuring. These activities have included closures
and transfers of facilities and significant personnel
reductions. For example, in our third fiscal quarter of 2004, we
transitioned our manufacturing from MKE to our facilities in
Singapore and have begun volume shipments of products from our
new manufacturing plant in Suzhou, China. In our third fiscal
quarter of 2004, we also completed a reduction in force that
affected approximately 330 positions and involved the closures
of certain facilities. We continue to look at opportunities for
further cost reductions, which may result in additional
restructuring activities in the future.

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We cannot assure you that our efforts will result
in the increased profitability, cost savings or other benefits
that we expect. Many factors, including reduced sales volume and
average selling prices, which have impacted gross margins in the
past, and the addition of, or increase in, other operating
expenses, may offset some or all of our anticipated or estimated
savings. Moreover, the reduction of personnel and closure and
transfers of facilities may result in disruptions that affect
our products and customer service. In addition, the transfer of
manufacturing capacity of a product to a different facility
frequently requires qualification of the new facility by some of
our OEM customers. We cannot assure you that these activities
and transfers will be implemented on a cost-effective basis
without delays or disruption in our production and without
adversely affecting our customer relationships and results of
operations. Each of the above measures could have long-term
adverse effects on our business by reducing our pool of
technical talent, decreasing our employee morale, decreasing or
slowing improvements in our products, making it more difficult
for us to respond to customers, limiting our ability to increase
production quickly if and when the demand for our products
increases and limiting our ability to hire and retain key
personnel. These circumstances could adversely effect our
business and operating results.




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

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



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not expand into new hard drive
    market segments, and maintain our presence in the existing hard
    disk drive market, our revenues will suffer.

To remain a significant supplier of hard disk
drives to major manufacturers of personal computers and
Intel-based servers, we will need to offer a broad range of hard
disk drive products to our customers. Although almost all of our
current products are designed for the desktop computer and the
Intel-based server markets, demand in these segments may shift
to products we do not offer or volume demand may shift to other
segments. Such segments may include the laptop computer or
handheld consumer product segments, which none of our products
currently serves. Increases in sales of notebook computers and
in areal density are resulting in a shift to smaller form factor
rigid disc drives for an expanding number of applications,
including enterprise storage, personal computers and consumer
electronic devices. Many enterprise storage applications and
desktop computers have typically used rigid disc drives with a
3.5-inch form factor, which we currently manufacture. If we do
not successfully introduce these products or if we do not
suitably adapt our technology and product offerings to
successfully develop and introduce additional smaller form
factor rigid disc drives, we may not be able to effectively
compete and our business may suffer. Products using alternative
technologies, such as optical storage, semiconductor memory and
other storage technologies, may also compete with our hard disk
drive products. While we continually develop new products, the
success of our new product introductions is dependent on a
number of factors, including market acceptance, our ability to
manage the risks associated with product transitions, the
effective management of inventory levels in line with product
demand, and the risk that our new products will have quality
problems or other defects in the early stages of introduction
that were not anticipated in the design of those products. We
will need to successfully develop and manufacture new products
that address additional hard disk drive market segments or
competitors technology or feature development to remain
competitive in the hard disk drive industry. We cannot assure
you that we will successfully or timely develop and market any
new hard disk drives in response to technological changes or
evolving industry standards. We also cannot assure you that we
will avoid technical

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or other difficulties that could delay or prevent
the successful development, introduction or marketing of new
hard disk drives. We may require additional capital to
successfully manufacture some of our new products. Any failure
to successfully develop and introduce new products for our
existing customers or to address additional market segments
could result in loss of customer business or require us to
deliver product not targeted effectively to customer
requirements, which in turn could adversely affect our business,
financial condition and operating results.




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

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



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

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



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

Unlike some of our competitors, we do not
manufacture any of the parts used in our products, other than
media as a result of our acquisition of MMC Technologies Inc.,
or MMC. Instead, our products incorporate parts and components
designed by and purchased from third party suppliers. We depend
on a limited number of qualified suppliers for components and
subassemblies, including recording heads, media and integrated
circuits. Currently, we purchase recording heads from two
sources, digital signal processors/controllers from one source
and spin/servo integrated circuits from two sources. We entered
into agreements with our two recording head suppliers, TDK/ SAE
and ALPS Electric Co., Ltd., pursuant to which these suppliers
will each be collaborating with Maxtor on the development of
future head technologies, efficiencies, and in the case of TDK/
SAE, manufacturing and manufacturing strategies. TDK/ SAE will
be supplying recording heads to Maxtor on a priority
customer basis, subject to qualification and pricing
conditions. Although our acquisition of our primary media
supplier, MMC, has reduced our dependence on outside suppliers
for this component, MMC cannot supply all of our media needs,
and therefore we are still required to purchase media from two
outside sources. As we have experienced in the past, some
required parts may be periodically in short supply. As a result,
we will have to allow for significant ordering lead times for
some components. In addition, we may have to pay significant
cancellation charges to suppliers if we cancel orders for
components because we reduce production due to market
oversupply, reduced demand, transition to new products or
technologies

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or for other reasons. We order the majority of
our components on a purchase order basis and we have limited
long-term volume purchase agreements with only some of our
existing suppliers. In the event that these suppliers cannot
qualify to new leading-edge technology specifications, our ramp
up of production for the new products will be delayed, and our
business, operating results and financial condition will be
adversely affected.


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

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



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to acquire needed
    additional manufacturing capacity, or a disaster occurs at one
    of our plants, our growth will be adversely impacted and our
    business, financial condition and operating results could
    suffer.

Our Maxtor-owned facilities in Singapore and
China are our only current sources of production for our hard
disk drive products. Our inability to add capacity to allow us
to meet customers demands in a timely manner may limit our
future growth and could harm our business, financial condition
and operating results. Our new manufacturing facility in China
is intended to provide us with a low-cost facility to
accommodate anticipated future growth. The facility has begun
volume shipments and we plan to ramp production and qualify the
facility for OEM customers. Any delay or difficulty in
qualifying the facilitys production with customers could
interfere with the planned ramp in production at the facility,
which could harm our business, financial condition and operating
results. In addition, a flood, earthquake, political
instability, act of terrorism or other disaster or condition in
Singapore or China that adversely affects our facilities or
ability to manufacture our hard disk drive products could
significantly harm our business, financial condition and
operating 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 our products for one to five years and prior to the
acquisition, Quantum HDD generally warranted its products for
one to five years. We assumed Quantum HDDs warranty
obligations as a result of the acquisition. The standard
warranties used by us and Quantum HDD contain limits on damages
and exclusions of liability for consequential damages and for
negligent or improper use of the products. We establish a
warranty provision at the time of product shipment in an amount
equal to estimated warranty expenses. We may incur additional
operating expenses if these steps do not reflect the actual cost
of resolving these issues, and if any resulting expenses are
significant, our business, financial condition and results of
operations will suffer.



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

We conduct most of our manufacturing and testing
operations and purchase a substantial portion of our key parts
outside the United States. In particular, currently
manufacturing operations for our products are concentrated in
Singapore and China, where our principal manufacturing
operations are located. Such concentration of operations in
Singapore and China will likely magnify the effects on us of any
disruptions or disasters relating to those countries. In
addition, we also sell a significant portion of our products to
foreign

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distributors and retailers. As a result, we will
be dependent on revenue from international sales. Inherent risks
relating to our overseas operations include:




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



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

Our new manufacturing plant in China began volume
shipments in the second half of 2004, and we have secured a
credit facility with the Bank of China to fund the construction
of this facility. We also intend to expand our presence in the
distribution channels serving China. Our business, financial
condition and operating results may be adversely affected by
changes in the political, social or economic environment in
China. Under its current leadership, China has been pursuing
economic reform policies, including the

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encouragement of private economic activity and
greater economic decentralization. There can be no assurance,
however, that the Chinese government will continue to pursue
such policies or that such policies will not be significantly
altered from time to time without notice. In addition, Chinese
credit policies may fluctuate from time to time without notice
and this fluctuation in policy may adversely impact our credit
arrangements. Any changes in laws and regulations, or their
interpretation, the imposition of surcharges or any material
increase in Chinese tax rates, restrictions on currency
conversion, imports and sources of supply, devaluations of
currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our
ability to conduct business and operate our planned
manufacturing facility in China. Chinese policies toward
economic liberalization, and, in particular, policies affecting
technology companies, foreign investment and other similar
matters could change. In addition, our business and prospects
are dependent upon agreements and regulatory approval with
various entities controlled by Chinese governmental
instrumentalities. Our operations and prospects in China would
be materially and adversely affected by the failure of such
governmental entities to grant necessary approvals or honor
existing contracts. If breached, any such contract might be
difficult to enforce in China. The legal system of China
relating to corporate organization and governance, foreign
investment, commerce, taxation and trade is both new and
continually evolving, and currently there can be no certainty as
to the application of its laws and regulations in particular
instances. Our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. If our business
ventures in China are unsuccessful, or other adverse
circumstances arise from these transactions, we face the risk
that the parties to these ventures may seek ways to terminate
the transactions, or, may hinder or prevent us from accessing
important financial and operational information regarding these
ventures. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese
government, and forces unrelated to the legal merits of a
particular matter or dispute may influence their determination.
Any rights we may have to specific performance, or to seek an
injunction under Chinese law, in either of these cases, are
severely limited, and without a means of recourse by virtue of
the Chinese legal system, we may be unable to prevent these
situations from occurring. The occurrence of any such events
could have a material adverse effect on our business, financial
condition and operating results. Further, our intellectual
property protection measures may not be sufficient to prevent
misappropriation of our technology in China. The Chinese legal
system does not protect intellectual property rights to the same
extent as the legal system of the United States and effective
intellectual property enforcement may be unavailable or limited.
If we are unable to adequately protect our proprietary
information and technology in China, our business, financial
condition and operating results could be materially adversely
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 capital in the future. Our future capital requirements will
depend on many 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.                                                                                                          

We may require additional capital to successfully
manufacture some of our new products. If we require additional
capital it is uncertain whether we will be able to obtain
additional financing on favorable terms, if at all. Further, if
we issue equity securities in connection with additional
financing, our stockholders may experience dilution and/or the
new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. If we
cannot raise funds on acceptable terms, if and when needed, we
may not be able to develop or enhance our products and services
in a timely manner, take advantage of future

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opportunities or respond to competitive pressures
or unanticipated requirements or may be forced to limit the
number of products and services we offer, any of which could
seriously harm 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 senior notes (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-annual interest payments on the Notes,
payment of the principal amount of the Notes upon maturity (or
earlier upon a mandatory or voluntary redemption or if we elect
to satisfy a conversion of the Notes, in whole or in part, with
cash rather than shares of our 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 unable to meet our cash requirements out
of available funds, we may need be to obtain alternative
financing, which may not be available on favorable terms or at
all. The degree to which we are financially leveraged could
materially and adversely affect our ability to obtain additional
financing for working capital, acquisitions or other purposes
and could make us more vulnerable to industry downturns and
competitive pressures. In the absence of such financing, our
ability to respond to changing business and economic conditions,
to make future acquisitions, to absorb adverse operating results
or to fund capital expenditures or increased working capital
requirements would be significantly reduced. Our ability to meet
our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and
other factors affecting our operations, some of which are beyond
our control. If we do not generate sufficient cash flow from
operations to repay the Notes at maturity, we could attempt to
refinance the Notes; however, no assurance can be given that
such a refinancing would be available on terms acceptable to us,
if at all. Any failure by us to satisfy our obligations under
the Notes or the indenture could cause a default under
agreements governing our other indebtedness.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We entered into a new asset securitization
    facility of up to $100 million which 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 backed securitization facility for up to $100 million
with one financial institution. The facility uses a special
purpose subsidiary to purchase and hold all of our United States
and Canadian accounts receivable. This special purpose
subsidiary may borrow up to $100 million secured by
eligible purchased receivables, and uses such borrowed funds and
collections from the receivables to purchase additional
receivables from us and to make other permitted distributions to
us. This special purpose subsidiary is consolidated for
financial reporting purposes, and its resulting liabilities
appear on our consolidated balance sheet as short-term debt. The
terms of the facility require compliance with operational
covenants and several financial covenants, including a liquidity
covenant, an operating income (loss) before depreciation and
amortization to long-term debt ratio, and certain tests relating
to the quality and nature of the receivables. A violation of
these covenants will result in an early amortization event that
will cause a prohibition on further payments and distributions
to us from the special purpose subsidiary until the facility has
been repaid in full.

It is likely that we will need to amend the
receivable-backed borrowing program to revise the operating
income (loss) before depreciation and amortization to long-term
debt ratio prior to the end of our fourth fiscal quarter in
order to assure compliance. If we do not obtain the amendment
and the ratio is not met there will be an early amortization
event under the program in the first quarter of 2005 and further
payments and distributions to us from the special purpose
subsidiary will be prohibited until the facility has been paid
in full. Based on our experience with collections on receivables
we do not believe that repayment would take longer than
30 days. However, early amortization events under the
facility generally will not cause an event of default under our
convertible senior notes due 2010 and we do not believe that
such an event or the lack of borrowing availability under this
facility would have a material adverse effect on our liquidity.



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

Our protection of our intellectual property is
limited. For example, we have patent protection on only some of
our technologies. We may not receive patents for our pending or
future patent applications, and any

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




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

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

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

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

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products and/or the payment of monetary damages
equal to a reasonable royalty. In the case of a finding of a
willful infringement, we also could be required to pay treble
damages and Papsts attorneys fees. The litigation
could result in significant diversion of time by our technical
personnel, as well as substantial expenditures for future legal
fees. Accordingly, although we cannot currently estimate whether
there will be a loss, or the size of any loss, a litigation
outcome favorable to Papst could have a material adverse effect
on our business, financial condition and operating results.
Management believes that it has valid defenses to the claims of
Papst and is defending this matter vigorously.




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

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



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



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

Our success depends upon the continued
contributions of our executives and other key employees, many of
whom would be extremely difficult to replace. We are seeking a
chief financial officer after the unexpected departure of an
executive recently hired for that position, and our chief
executive officer is serving as acting chief financial officer.
While we are searching for a new chief financial officer, our
business and operations may suffer due to lack of direct,
full-time senior leadership of our finance group and the
diversion of attention of our chief executive officer from his
other key responsibilities. Like many other technology
companies, we have implemented workforce reductions that in some
cases resulted in the termination of key employees who have
substantial knowledge of our business. These and any future
workforce reductions may also adversely affect the morale of,
and our ability to retain, employees who have not been
terminated, which may result in the further loss of key
employees. We do not have key person life insurance on any of
our personnel. Worldwide competition for experienced executives
and finance personnel and other skilled employees in the hard
disk

43



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drive industry is extremely intense. If we are
unable to retain existing employees or to hire and integrate new
employees, our business, financial condition and operating
results could suffer. In addition, companies in the hard disk
drive industry whose employees accept positions with competitors
often claim that the competitors have engaged in unfair hiring
practices. We may be the subject of such claims in the future as
we seek to hire qualified personnel and we could incur
substantial costs defending ourselves against those claims.




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

Because of the chemicals we use in our
manufacturing and research operations, we are subject to a wide
range of environmental protection regulations in the United
States, Singapore and China. While we do not believe our
operations to date have been harmed as a result of such laws,
future regulations may increase our expenses and harm our
business, financial condition and results of operations. Even if
we are in compliance in all material respects with all present
environmental regulations, in the United States environmental
regulations often require parties to fund remedial action
regardless of fault. As a consequence, it is often difficult to
estimate the future impact of environmental matters, including
potential liabilities. If we have to make significant capital
expenditures or pay significant expense in connection with
future remedial actions or to continue to comply with applicable
environmental laws, our business, financial condition and
operating results could suffer.

On January 27, 2003, the European Union
adopted the following directives: (i) the Waste Electrical
and Electronic Equipment Directive (WEEE); and
(ii) the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment
(RoHS). These directives were to be implemented by
individual European Union governments by August 13, 2004.
Both the WEEE and RoHS directives will alter the type and manner
in which electronic equipment is imported, sold and handled in
the European Union. Ensuring compliance with the WEEE and RoHS
directives could result in additional costs and disruption to
operations and logistics and thus, could have a negative impact
on our business, operations and financial condition. The
directives will be phased-in gradually, with most obligations
under the WEEE and RoHS directives becoming effective on
August 13, 2005 and July 1, 2006, respectively.



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

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



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

44



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| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Standards for compliance with
    Section 404 of the Sarbanes-Oxley Act of 2002 are
    uncertain, and if we fail to comply in a timely manner, our
    business could be harmed and our stock price could
    decline.

Rules adopted by the Securities and Exchange
Commission pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002 require annual assessment of our internal control
over financial reporting, and attestation of our assessment by
our independent registered public accountants. This requirement
will first apply to our Annual Report on Form 10-K for the
fiscal year ending December 25, 2004. The standards that
must be met for management to assess the internal control over
financial reporting as effective are new and complex, and
require significant documentation, testing and possible
remediation to meet the detailed standards. We may encounter
problems or delays in completing activities necessary to make an
assessment of our internal control over financial reporting. In
addition, the attestation process by our independent registered
public accountants is new and we may encounter problems or
delays in completing the implementation of any requested
improvements and receiving an attestation of our assessment by
our independent registered public accountants. If we cannot
assess our internal control over financial reporting as
effective, or our independent registered public accountants are
unable to provide an unqualified attestation report on such
assessment, investor confidence and share value may be
negatively impacted.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 of equity-related compensation as key components of our
total employee compensation program in order to align
employees interests with the interests of our
stockholders, encourage employee retention, and provide
competitive compensation packages. In recent periods, many of
our employee stock options have had exercise prices in excess of
our stock price, which could affect our ability to retain or
attract present and prospective employees. In addition, the
Financial Accounting Standards Board and other agencies have
proposed changes to accounting principles generally accepted in
the United States that would require Maxtor and other companies
to record a charge to earnings for employee stock option grants
and other equity incentives. Moreover, new regulations
implemented by the New York Stock Exchange prohibiting NYSE
member organizations from giving a proxy to vote on
equity-compensation plans unless the beneficial owner of the
shares has given voting instructions could make it more
difficult for us to grant options to employees in the future. To
the extent that new regulations make it more difficult or
expensive to grant options to employees, we may incur increased
compensation costs, change our equity compensation strategy or
find it difficult to attract, retain and motivate employees,
each of which could materially 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 to provide our board of directors with time to
consider whether a hostile takeover is in our best interests and
that of our stockholders. These provisions could discourage
potential acquisition proposals and could delay or prevent a
change in control of the company and also could diminish the
opportunities for a holder of our common stock to participate in
tender offers, including offers at a price above the
then-current market price for our common stock. These provisions
also may inhibit fluctuations in our stock price that could
result from takeover attempts.

45



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

Derivatives

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

Investments

We maintain an investment portfolio of various
holdings, types and maturities. These marketable securities are
generally classified as available for sale and, consequently,
are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of accumulated
other comprehensive income. Part of this portfolio includes
investments in bank issues, corporate bonds and commercial
papers.

The following table presents the hypothetical
changes in fair values in the financial instruments held at
September 25, 2004 that are sensitive to changes in
interest rates. These instruments are not leveraged and are held
for purposes other than trading. The hypothetical changes assume
immediate shifts in the U.S. Treasury yield curve of plus
or minus 50 basis points (bps), 100 bps,
and 150 bps.

|                      |  |          |         |          |  |         |         |               |  |         |         |          |  |          |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------- |  | -------- | ------- | -------- |  | ------- | ------- | ------------- |  | ------- | ------- | -------- |  | -------- | ------- |  |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                      |  |          |         |          |  |         |         | Fair Value    |  |         |         |          |  |         
|                      |  |          |         |          |  |         |         | as of         |  |         |         |          |  |         
|                      |  |          |         |          |  |         |         | September 25, |  |         |         |          |  |         
|                      |  | +150 bps |         | +100 bps |  | +50 bps |         | 2004          |  | -50 bps |         | -100 bps |  | -150 bps
|                      |  |          |         |          |  |         |         |               |  |         |         |          |  |         
|                      |  |         
|                      |  | ($000)  
|Financial Instruments |  | $        | 106,607 |          |  | $       | 107,023 |               |  | $       | 107,443 |          |  | $        | 107,868 |  |  | $ | 108,294 |   |  | $ | 108,724 |   |  | $ | 109,159 |  
|Change                |  |          | (1.17   | )%       |  |         | (0.78   | )%            |  |         | (0.39   | )%       |  |          |         |  |  |   | 0.40    | % |  |   | 0.79    | % |  |   | 1.20    | %

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

|                             |  |                          |       |               |  |                          |       |    |  |   |       |    |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        |  
|---------------------------- |  | ------------------------ | ----- | ------------- |  | ------------------------ | ----- | -- |  | - | ----- | -- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                             |  |                          |       | Fair Value    |  |                         
|                             |  | Valuation of Security    |       | as of         |  | Valuation of Security   
|                             |  | Given X% Decrease in the |       | September 25, |  | Given X% Increase in the
|                             |  | Security Price           |       | 2004          |  | Security Price          
|                             |  |                          |       |               |  |                         
|                             |  |                          |       |               |  |                          |       |    |  |   |       |   
|                             |  |                         
|                             |  | ($000)                  
|Corporate equity investments |  | $                        | 5,431 |               |  | $                        | 8,146 |    |  | $ | 9,232 |    |  | $ | 10,862 |  |  | $ | 12,491 |   |  | $ | 13,577 |   |  | $ | 16,292 |  
|% Change                     |  |                          | (50   | )%            |  |                          | (25   | )% |  |   | (15   | )% |  |   |        |  |  |   | 15     | % |  |   | 25     | % |  |   | 50     | %






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

Under the supervision and with the participation
of our management, including our President, Chief Executive
Officer and Acting Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based on this
evaluation, our President, Chief Executive Officer and Acting
Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the period
covered by this quarterly report, except as discussed below.

There has been no change in our internal control
over financial reporting during the quarter ended
September 25, 2004 that has materially affected, or is
reasonably likely to affect, our internal control over

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financial reporting. Subsequent to the end of the
quarter, we have undertaken corrective action as described in
the next paragraph.


During the third quarter of 2004, the
Companys management and our independent registered public
accounting firm advised the Audit Committee that in connection
with the review of the Companys consolidated financial
statements for the quarter ended September 25, 2004, two
review adjustments were identified related to certain accrued
liabilities associated with the Companys restructuring
activities which constitute significant deficiencies in our
internal controls over financial reporting as defined by
standards established by the Public Company Accounting Oversight
Board. The impact of the above conditions was isolated to the
quarter ended September 25, 2004, and did not affect the
results of any prior periods. The Company has commenced
corrective action to remediate these conditions and expects to
have these conditions remediated in the fourth quarter of 2004.

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PART II.     OTHER
INFORMATION






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

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

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

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

On December 30, 2003, an action was filed by
MKE against us and Quantum alleging, among other things,
MKEs ownership of certain intellectual property we
acquired in the acquisition of the Quantum HDD business. The
action was filed in the United States District Court for the
Northern District of California. On March 1, 2004, we filed
an answer denying all material allegations and a motion to
dismiss. The motion to dismiss was granted and MKE filed a First
Amended Complaint on May 24, 2004. We again filed an answer
denying all material allegations. MKE seeks damages, the return
of the intellectual property, a constructive trust relating to
profits from the use or license of the intellectual property, a
declaratory judgment and

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injunctive relief. The parties agreed to binding
settlement terms on September 7, 2004. Subsequently, the
case was dismissed with prejudice.







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

None






|        |                                    
|------- | -----------------------------------
|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.

49



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SIGNATURES

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



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



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

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

Date: November 4, 2004

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EXHIBIT INDEX

|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                    
|----------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 3  | .1(1)       |  | Restated Certificate of Incorporation of
    Registrant.                                                                                                                                                                                                                                                                                           
|            | 3  | .2(2)       |  | Certificate of Correction to the Restated
    Certificate of Incorporation of Registrant.                                                                                                                                                                                                                                                          
|            | 3  | .3(3)       |  | Amended and Restated Bylaws of Registrant, dated
    March 12, 2001.                                                                                                                                                                                                                                                                               
|            | 3  | .4(4)       |  | Certificate of Merger as filed with the Secretary
    of State of State of Delaware on April 2, 2001.                                                                                                                                                                                                                                              
|            | 4  | .1(5)       |  | Stockholder Agreement dated June 25, 1998.                                                                                                                                                                                                                                                                                                         
|            | 4  | .2(6)       |  | Reimbursement Agreement between Registrant and
    Quantum Corporation, dated April 2, 2001, together with the
    Third Supplemental Trust Indenture dated April 2, 2001, the
    Second Supplemental Trust Indenture dated August 4, 1999,
    the Supplemental Trust Indenture dated August 1, 1997, and
    the Indenture dated August 1, 1997.
|            | 4  | .3(7)       |  | Indenture between Registrant and U.S. Bank
    National Association, dated as of May 7, 2003.                                                                                                                                                                                                                                                      
|            | 4  | .4(7)       |  | Resale Registration Rights Agreement between
    Registrant, Banc of America Securities LLC and Merrill Lynch,
    Pierce, Fenner & Smith Incorporated, dated as of
    May 7, 2003.                                                                                                                                                               
|            | 10 | .1          |  | Foreign Exchange Loan Agreement No. YZDZ
    (2003) NO. 197 between Maxtor Technology (Suzhou) Co., Ltd.
    and Bank of China Suzhou Industrial Park Sub-branch, dated
    October 10, 2003.                                                                                                                                                      
|            | 10 | .2          |  | Letter of Guarantee by Maxtor International
    S.à r.l. to and for the benefit of Bank of China Suzhou
    Branch regarding Foreign Exchange Loan Agreement No. YZDZ
    (2003) NO. 197 made as of August 16, 2004.                                                                                                                               
|            | 10 | .3          |  | Foreign Exchange Loan Agreement No. YZDZ
    (2004) NO. 089 between Maxtor Technology (Suzhou) Co., Ltd.
    and Bank of China Suzhou Industrial Park Sub-branch, dated
    August 16, 2004.                                                                                                                                                       
|            | 10 | .4          |  | Letter of Guarantee by Maxtor International
    S.à r.l. to and for the benefit of Bank of China Suzhou
    Branch regarding Foreign Exchange Loan Agreement No. YZDZ
    (2004) NO. 089 made as of August 16, 2004.                                                                                                                               
|            | 10 | .5(8)       |  | Employment Offer Letter from Registrant to
    Michael A. Bless, dated as of August 23, 2004.**                                                                                                                                                                                                                                                    
|            | 10 | .6(9)       |  | Employment Offer Letter from Registrant to Fariba
    Danesh, dated as of September 30, 2004.**                                                                                                                                                                                                                                                    
|            | 10 | .7(10)      |  | Form of Restricted Stock Unit Award Agreement
    between Registrant and John Viera (15,000 Restricted Stock
    Units), dated as of July 19, 2004, Michael A. Bless (35,000
    Restricted Stock Units), dated as of August 23, 2004 and
    Fariba Danesh (45,000 Restricted Stock Units), dated as of
    September 30, 2004.**                 
|            | 10 | .8(11)      |  | Form of Executive Retention and Severance
    Participation Agreement between Registrant and John Viera, dated
    as of July 27, 2004, Michael A. Bless, dated as of
    August 23, 2004 and Fariba Danesh, dated as of
    September 30, 2004.**                                                                                                 
|            | 10 | .9(12)      |  | Form of Indemnification Agreement between
    Registrant and John Viera, dated as of April 1, 2004,
    Michael A. Bless, dated as of August 23, 2004 and Fariba
    Danesh, dated as of September 30, 2004.                                                                                                                                       
|            | 31 |             |  | Certification of Paul J. Tufano, President, Chief
    Executive Officer and Acting Chief Financial Officer of the
    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 |             |  | Certification of Paul J. Tufano, President, Chief
    Executive Officer and Acting Chief Financial Officer of the
    Registrant furnished pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                             



---



| |     |                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to exhibits of
    registration statement on Form S-4, File
    No. 333-51592, filed December 11, 2000, as amended.
|
| | (2) | Incorporated by reference to exhibit of
    Form 8-K filed March 2, 2001.                                                                    
|
| | (3) | Incorporated by reference to exhibits of
    Form 10-K filed March 30, 2001, as amended.                                                     
|
| | (4) | Incorporated by reference to exhibits of
    Form 8-K filed April 17, 2001.                                                                  

51



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| |     |                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Incorporated by reference to exhibits to
    registration statement on Form S-1, File
    No. 333-56099, filed June 5, 1998, as amended.
|
| | (6) | Incorporated by reference to exhibits to
    registration statement on Form S-3, File
    No. 333-61770, filed May 29, 2001, as amended.
|
| | (7) | Incorporated by reference to exhibits of
    Form 10-Q filed May 13, 2003.                                                              
|
| | (8) | Incorporated by reference to exhibits of
    Form 8-K filed August 24, 2004.                                                            
|
| | (9) | Incorporated by reference to exhibits of
    Form 8-K filed October 4, 2004.                                                            



|     |                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to exhibits of
    Form 10-Q filed November 12, 2003.                                             
|    
|(11) | Incorporated by reference to exhibits of
    Form 10-K filed March 11, 2004.                                                
|    
|(12) | Incorporated by reference to exhibits of
    registration statement on Form S-1, File
    No. 333-56099, filed June 5, 1998.



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

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