##### 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 June 26,
    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 July 23,
2004, 247,569,676 shares of the registrants Common
Stock, $.01 par value, were issued and outstanding.



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MAXTOR CORPORATION

FORM 10-Q

June 26, 2004


INDEX

|                                  |  |                                                                                                                                   |    |      |    | 
|--------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                  |  |                                                                                                                                   |    | Page
|                                  |  |                                                                                                                                   |    |     
|PART I. FINANCIAL
    INFORMATION
|Item 1.                           |  | Condensed Consolidated
    Financial Statements (Unaudited)                                                                       |    |      | 2  | 
|                                  |  | Condensed Consolidated
    Balance Sheets  June 26, 2004, and
    December 27, 2003 (Unaudited)                                  |    |      | 2  | 
|                                  |  | Condensed Consolidated
    Statements of Operations  Three and six months ended
    June 26, 2004, and June 28, 2003 (Unaudited) |    |      | 3  | 
|                                  |  | Condensed Consolidated
    Statements of Cash Flows  Six months ended
    June 26, 2004, and June 28, 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                                         |    |      | 18 | 
|Item 3.                           |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                                    |    |      | 41 | 
|Item 4.                           |  | Controls and Procedures                                                                                                           |    |      | 41 | 
|PART II. OTHER
    INFORMATION   
|Item 1.                           |  | Legal Proceedings                                                                                                                 |    |      | 42 | 
|Item 2.                           |  | Changes in Securities and
    Use of Proceeds                                                                                     |    |      | 43 | 
|Item 3.                           |  | Defaults Upon Senior
    Securities                                                                                               |    |      | 43 | 
|Item 4.                           |  | Submission of Matters to a
    Vote of Security Holders                                                                           |    |      | 43 | 
|Item 5.                           |  | Other Information                                                                                                                 |    |      | 44 | 
|Item 6.                           |  | Exhibits and Reports on
    Form 8-K                                                                                              |    |      | 44 | 
|Signature Page                    |  |                                                                                                                                   | 45 |     
|EXHIBIT 10.1                     
|EXHIBIT 10.2                     
|Exhibit 10.3                     
|Exhibit 10.4                     
|Exhibit 10.5                     
|EXHIBIT 31.1                     
|EXHIBIT 31.2                     
|EXHIBIT 32.1                     
|EXHIBIT 32.2                     



1



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Condensed
Consolidated Financial Statements (Unaudited)

MAXTOR CORPORATION



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |         |           | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------ | --------- |  | ---------- | ------- | --------- | 
|                                           |                                                                                                                                                                                                                                                   | June 26,                                   |            | December 27,
|                                           |                                                                                                                                                                                                                                                   | 2004                                       |            | 2003        
|                                           |                                                                                                                                                                                                                                                   |                                            |            |             
|                                           |                                                                                                                                                                                                                                                   |                                           
|                                           |                                                                                                                                                                                                                                                   | (Unaudited)                               
|                                           |                                                                                                                                                                                                                                                   |                                           
|                                           |                                                                                                                                                                                                                                                   | (In thousands, except share and           
|                                           |                                                                                                                                                                                                                                                   | per share amounts)                        
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           | Cash and cash equivalents                                                                                                                                                                                                                         |                                            | $          | 387,667      |           |  | $          | 530,816 |          
|                                           | Restricted cash                                                                                                                                                                                                                                   |                                            |            | 23,460       |           |  |            | 37,154  |          
|                                           | Marketable securities                                                                                                                                                                                                                             |                                            |            | 63,674       |           |  |            | 44,543  |          
|                                           | Restricted marketable securities                                                                                                                                                                                                                  |                                            |            | 41,686       |           |  |            | 42,337  |          
|                                           | Accounts receivable, net of allowance of doubtful
    accounts of $10,095 at June 26, 2004 and $11,220 at
    December 27, 2003                                                                                                                   |                                            |            | 372,145      |           |  |            | 540,943 |          
|                                           | Other receivables                                                                                                                                                                                                                                 |                                            |            | 39,232       |           |  |            | 37,964  |          
|                                           | Inventories                                                                                                                                                                                                                                       |                                            |            | 259,339      |           |  |            | 218,011 |          
|                                           | Prepaid expenses and other                                                                                                                                                                                                                        |                                            |            | 37,174       |           |  |            | 38,301  |          
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                   | Total current assets                       |            |              | 1,224,377 |  |            |         | 1,490,069 | 
|Property, plant and equipment, net         |                                                                                                                                                                                                                                                   |                                            | 367,668    |              |           |  | 342,679    |        
|Goodwill                                   |                                                                                                                                                                                                                                                   |                                            | 813,951    |              |           |  | 813,951    |        
|Other intangible assets, net               |                                                                                                                                                                                                                                                   |                                            | 35,730     |              |           |  | 61,619     |        
|Other assets                               |                                                                                                                                                                                                                                                   |                                            | 34,348     |              |           |  | 13,908     |        
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                   | Total assets                               |            | $            | 2,476,074 |  |            | $       | 2,722,226 | 
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           | Short-term borrowings, including current portion
    of long-term debt                                                                                                                                                                            |                                            | $          | 72,976       |           |  | $          | 77,037  |          
|                                           | Accounts payable                                                                                                                                                                                                                                  |                                            |            | 620,669      |           |  |            | 730,056 |          
|                                           | Accrued and other liabilities                                                                                                                                                                                                                     |                                            |            | 322,451      |           |  |            | 454,388 |          
|                                           | Liabilities of discontinued operations                                                                                                                                                                                                            |                                            |            | 692          |           |  |            | 1,487   |          
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                   | Total current liabilities                  |            |              | 1,016,788 |  |            |         | 1,262,968 | 
|Deferred taxes                             |                                                                                                                                                                                                                                                   |                                            | 196,455    |              |           |  | 196,455    |        
|Long-term debt, net of current portion     |                                                                                                                                                                                                                                                   |                                            | 371,405    |              |           |  | 355,809    |        
|Other liabilities                          |                                                                                                                                                                                                                                                   |                                            | 179,291    |              |           |  | 186,485    |        
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                   | Total liabilities                          |            |              | 1,763,939 |  |            |         | 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; 260,818,982 shares
    issued and 247,573,244 shares outstanding at June 26,
    2004 and 259,246,819 shares issued and
    246,001,081 shares outstanding at December 27, 2003 |                                            |            | 2,608        |           |  |            | 2,592   |          
|Additional paid-in capital                 |                                                                                                                                                                                                                                                   |                                            | 2,421,051  |              |           |  | 2,410,082  |        
|Deferred stock-based compensation          |                                                                                                                                                                                                                                                   |                                            |           |              |           |  | (110       | )      
|Accumulated deficit                        |                                                                                                                                                                                                                                                   |                                            | (1,654,855 | )            |           |  | (1,637,920 | )      
|Cumulative other comprehensive income      |                                                                                                                                                                                                                                                   |                                            | 8,270      |              |           |  | 10,804     |        
|Treasury stock (13,245,738 shares) at cost |                                                                                                                                                                                                                                                   |                                            | (64,939    | )            |           |  | (64,939    | )      
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                   | Total stockholders equity                 |            |              | 712,135   |  |            |         | 720,509   | 
|                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                   | Total liabilities and stockholders equity |            | $            | 2,476,074 |  |            | $       | 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                                 |         | Six Months Ended
|                                      |                                     |                                                    |         |                 
|                                      |                                     | June 26,                                           |         | June 28,         |             | June 26, |         | June 28,
|                                      |                                     | 2004                                               |         | 2003             |             | 2004     |         | 2003    
|                                      |                                     |                                                    |         |                  |             |          |         |         
|                                      |                                     |                                                    |         |                 
|                                      |                                     | (Unaudited)                                        |         | (Unaudited)     
|                                      |                                     |                                                   
|                                      |                                     | (In thousands, except share and per share amounts)
|Net revenues                          |                                     | $                                                  | 818,254 |                  |             | $        | 910,903 |          |             | $ | 1,837,942 |         |             | $ | 1,849,792 |        
|Cost of revenues                      |                                     |                                                    | 744,468 |                  |             |          | 761,657 |          |             |   | 1,609,093 |         |             |   | 1,528,699 |        
|                                      |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|                                      | Gross profit                        |                                                    |         | 73,786           |             |          |         | 149,246  |             |   |           | 228,849 |             |   |           | 321,093 |            
|Operating expenses:                   |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|                                      | Research and development            |                                                    |         | 80,615           |             |          |         | 84,218   |             |   |           | 165,385 |             |   |           | 170,879 |            
|                                      | Selling, general and administrative |                                                    |         | 32,383           |             |          |         | 30,967   |             |   |           | 64,897  |             |   |           | 62,899  |            
|                                      | Amortization of intangible assets   |                                                    |         | 5,053            |             |          |         | 20,562   |             |   |           | 25,889  |             |   |           | 41,124  |            
|                                      |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|                                      |                                     | Total operating expenses                           |         |                  | 118,051     |          |         |          | 135,747     |   |           |         | 256,171     |   |           |         | 274,902     | 
|                                      |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|Income (loss) from operations         |                                     |                                                    | (44,265 | )                |             |          | 13,499  |          |             |   | (27,322   | )       |             |   | 46,191    |        
|Interest expense                      |                                     |                                                    | (7,364  | )                |             |          | (8,325  | )        |             |   | (16,196   | )       |             |   | (13,747   | )      
|Interest income                       |                                     |                                                    | 1,082   |                  |             |          | 1,423   |          |             |   | 2,370     |         |             |   | 2,631     |        
|Income from litigation settlement     |                                     |                                                    | 24,750  |                  |             |          |        |          |             |   | 24,750    |         |             |   |          |        
|Other gain                            |                                     |                                                    | 16      |                  |             |          | 36      |          |             |   | 54        |         |             |   | 243       |        
|                                      |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|Income (loss) before income taxes     |                                     |                                                    | (25,781 | )                |             |          | 6,633   |          |             |   | (16,344   | )       |             |   | 35,318    |        
|Provision for income taxes            |                                     |                                                    | 317     |                  |             |          | 437     |          |             |   | 591       |         |             |   | 1,714     |        
|                                      |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|Net income (loss)                     |                                     | $                                                  | (26,098 | )                |             | $        | 6,196   |          |             | $ | (16,935   | )       |             | $ | 33,604    |        
|                                      |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|Net income (loss) per share  basic   |                                     | $                                                  | (0.11   | )                |             | $        | 0.03    |          |             | $ | (0.07     | )       |             | $ | 0.14      |        
|Net income (loss) per share  diluted |                                     | $                                                  | (0.11   | )                |             | $        | 0.03    |          |             | $ | (0.07     | )       |             | $ | 0.14      |        
|Shares used in per share calculation  |                                     |                                                    |         |                  |             |          |         |          |             |   |           |         |             |   |           |        
|                                      |                                     |  basic                                            |         |                  | 247,367,176 |          |         |          | 241,120,075 |   |           |         | 246,981,817 |   |           |         | 242,382,530 | 
|                                      |                                     |  diluted                                          |         |                  | 247,367,176 |          |         |          | 245,259,831 |   |           |         | 246,981,817 |   |           |         | 245,999,915 | 

See accompanying notes to condensed consolidated
financial statements.

3



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##### Table of Contents



MAXTOR CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |        |          |         |  
|-------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------- | -------- | -------- | -------- | ------- | ------ | -------- | ------- | -
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | Six Months Ended                 
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | June 26,                          |                                                                                    | June 28,
|                                                                                                         |                                                                                     | 2004                              |                                                                                    | 2003    
|                                                                                                         |                                                                                     |                                   |                                                                                    |         
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | (Unaudited)                      
|                                                                                                         |                                                                                     | (In thousands)                   
|Cash Flows from Operating
    Activities:                                                                |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Net income (loss)                                                                                        |                                                                                     | $                                 | (16,935                                                                            | )        |          | $        | 33,604  |       
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:   |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         | Depreciation and amortization                                                       |                                   |                                                                                    | 69,464   |          |          |         | 83,130 |         
|                                                                                                         | Amortization of intangible assets                                                   |                                   |                                                                                    | 25,889   |          |          |         | 41,124 |         
|                                                                                                         | Stock-based compensation expense                                                    |                                   |                                                                                    | 182      |          |          |         | 511    |         
|                                                                                                         | Loss on sale of property, plant and equipment and
    other assets                  |                                   |                                                                                    | 460      |          |          |         | 2,555  |         
|                                                                                                         | Gain on retirement of bond                                                          |                                   |                                                                                    |         |          |          |         | (111   | )       
|                                                                                                         | Change in assets and liabilities:                                                   |                                   |                                                                                    |          |          |          |         |        |         
|                                                                                                         |                                                                                     | Accounts receivable               |                                                                                    |          | 168,798  |          |         |        | (209,610 | )      
|                                                                                                         |                                                                                     | Other receivables                 |                                                                                    |          | (1,268   | )        |         |        | 136,474  |        
|                                                                                                         |                                                                                     | Inventories                       |                                                                                    |          | (41,328  | )        |         |        | (57,085  | )      
|                                                                                                         |                                                                                     | Prepaid expenses and other assets |                                                                                    |          | 1,131    |          |         |        | (8,866   | )      
|                                                                                                         |                                                                                     | Accounts payable                  |                                                                                    |          | (110,988 | )        |         |        | 1,574    |        
|                                                                                                         |                                                                                     | Accrued and other liabilities     |                                                                                    |          | (139,131 | )        |         |        | (22,203  | )      
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         |                                                                                     |                                   | Net cash provided by (used in) operating
    activities from continuing operations |          |          | (43,726  | )       |        |          | 1,097   |  
|                                                                                                         |                                                                                     |                                   | Net cash flow used in discontinued operations                                      |          |          | (795     | )       |        |          | (6,140  | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         |                                                                                     |                                   | Net cash used in operating activities                                              |          |          | (44,521  | )       |        |          | (5,043  | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Cash Flows from Investing
    Activities:                                                                |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Proceeds from sale of property, plant and
    equipment                                                  |                                                                                     |                                   | 736                                                                                |          |          |          | 274     |       
|Purchase of property, plant and equipment                                                                |                                                                                     |                                   | (94,048                                                                            | )        |          |          | (39,290 | )     
|Decrease (Increase) in restricted cash                                                                   |                                                                                     |                                   | (7,882                                                                             | )        |          |          | 1,727   |       
|Proceeds from sale of marketable securities                                                              |                                                                                     |                                   | 25,892                                                                             |          |          |          | 28,761  |       
|Purchase of marketable securities                                                                        |                                                                                     |                                   | (45,522                                                                            | )        |          |          | (29,493 | )     
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         |                                                                                     |                                   | Net cash used in investing activities                                              |          |          | (120,824 | )       |        |          | (38,021 | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Cash Flows from Financing
    Activities:                                                                |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Proceeds from issuance of debt, including
    short-term borrowings                                      |                                                                                     |                                   | 24,655                                                                             |          |          |          | 223,858 |       
|Principal payments of debt including short-term
    borrowings                                           |                                                                                     |                                   | (4,401                                                                             | )        |          |          | (5,327  | )     
|Principal payments under capital lease obligations                                                       |                                                                                     |                                   | (8,719                                                                             | )        |          |          | (14,004 | )     
|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 |                                                                                     |                                   | 10,913                                                                             |          |          |          | 13,108  |       
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         |                                                                                     |                                   | Net cash provided by financing activities                                          |          |          | 22,196   |         |        |          | 220,604 |  
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Net change in cash and cash equivalents                                                                  |                                                                                     |                                   | (143,149                                                                           | )        |          |          | 177,540 |       
|Cash and cash equivalents at beginning of period                                                         |                                                                                     |                                   | 530,816                                                                            |          |          |          | 306,444 |       
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Cash and cash equivalents at end of period                                                               |                                                                                     | $                                 | 387,667                                                                            |          |          | $        | 483,984 |       
|                                                                                                         |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|Supplemental Disclosures of Cash Flow
    Information:                                                   |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         | Cash paid during the period for:                                                    |                                   |                                                                                    |          |          |          |         |        |         
|                                                                                                         |                                                                                     | Interest                          |                                                                                    | $        | 14,225   |          |         | $      | 10,550   |        
|                                                                                                         |                                                                                     | Income taxes                      |                                                                                    | $        | 2,807    |          |         | $      | 993      |        
|Schedule of Non-Cash Investing and Financing
    Activities:                                             |                                                                                     |                                   |                                                                                    |          |          |          |         |       
|                                                                                                         | Purchase of property, plant and equipment
    financed by accounts payable          |                                   | $                                                                                  | 7,469    |          |          | $       | 4,999  |         
|                                                                                                         | Retirement of debt in exchange for bond redemption                                  |                                   | $                                                                                  | 5,000    |          |          | $       | 5,000  |         
|                                                                                                         | Change in unrealized gain (loss) on investments                                     |                                   | $                                                                                  | (2,534   | )        |          | $       | 12,801 |         
|                                                                                                         | Purchase of property, plant and equipment
    financed by capital lease obligations |                                   | $                                                                                  |         |          |          | $       | 5,526  |         

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.



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

5



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 |         | Six Months Ended
|                                                                                                     |                             |                    |         |                 
|                                                                                                     |                             | June 26,           |         | June 28,         |   | June 26, |       | June 28,
|                                                                                                     |                             | 2004               |         | 2003             |   | 2004     |       | 2003    
|                                                                                                     |                             |                    |         |                  |   |          |       |         
|Net income (loss) applicable to common
    stockholders, as reported                                 |                             | $                  | (26,098 | )                |   | $        | 6,196 |          |  | $ | (16,935 | )       |   | $ | 33,604 |       
|Add: Stock-based employee compensation expense
    included in reported net income (loss)            |                             |                    | 38      |                  |   |          | 256   |          |  |   | 182     |         |   |   | 511    |       
|Deduct: Total stock-based compensation expense
    determined under fair value method for all awards |                             |                    | 4,392   |                  |   |          | 5,590 |          |  |   | 9,895   |         |   |   | 11,358 |       
|                                                                                                     |                             |                    |         |                  |   |          |       |          |  |   |         |         |   |   |        |       
|                                                                                                     | Pro forma net income (loss) |                    | $       | (30,452          | ) |          | $     | 862      |  |   | $       | (26,648 | ) |   | $      | 22,757 | 
|                                                                                                     |                             |                    |         |                  |   |          |       |          |  |   |         |         |   |   |        |       
|Net income (loss) per share                                                                          |                             |                    |         |                  |   |          |       |          |  |   |         |         |   |   |        |       
|As reported  basic                                                                                  |                             | $                  | (0.11   | )                |   | $        | 0.03  |          |  | $ | (0.07   | )       |   | $ | 0.14   |       
|Pro forma  basic                                                                                    |                             | $                  | (0.12   | )                |   | $        | 0.00  |          |  | $ | (0.11   | )       |   | $ | 0.09   |       
|As reported  diluted                                                                                |                             | $                  | (0.11   | )                |   | $        | 0.03  |          |  | $ | (0.07   | )       |   | $ | 0.14   |       
|Pro forma  diluted                                                                                  |                             | $                  | (0.12   | )                |   | $        | 0.00  |          |  | $ | (0.11   | )       |   | $ | 0.09   |       

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 |           | Six Months Ended
|                               |  |                    |           |                 
|                               |  | June 26,           |           | June 28,         |  | June 26, |           | June 28,
|                               |  | 2004               |           | 2003             |  | 2004     |           | 2003    
|                               |  |                    |           |                  |  |          |           |         
|Risk-free interest rate        |  |                    | 2.82      |                  |  |          | 2.52      |          |  |  | 2.82      |   |  |  | 2.52      |  
|Weighted average expected life |  |                    | 4.5 years |                  |  |          | 4.5 years |          |  |  | 4.5 years |   |  |  | 4.5 years |  
|Volatility                     |  |                    | 73        | %                |  |          | 78        | %        |  |  | 73        | % |  |  | 78        | %
|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 |            | Six Months Ended
|                               |  |                    |            |                 
|                               |  | June 26,           |            | June 28,         |  | June 26, |           | June 28,
|                               |  | 2004               |            | 2003             |  | 2004     |           | 2003    
|                               |  |                    |            |                  |  |          |           |         
|Risk-free interest rate        |  |                    | 1.01       |                  |  |          | 1.12      |          |  |  | 1.01      |   |  |  | 1.12      |  
|Weighted average expected life |  |                    | 0.6  years |                  |  |          | 0.6 years |          |  |  | 0.6 years |   |  |  | 0.6 years |  
|Volatility                     |  |                    | 76         | %                |  |          | 78        | %        |  |  | 76        | % |  |  | 78        | %
|Dividend yield                 |  |                    |           |                  |  |          |          |          |  |  |          |   |  |  |          |  

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



| |                
| | ---------------
| | 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 six month periods ended June 26, 2004 comprised 13 and
26 weeks, respectively, as did the three and six month
periods ended June 28, 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.

6



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

|                                               |                                                                |                |           |              |  |   |          |         | 
|---------------------------------------------- | -------------------------------------------------------------- | -------------- | --------- | ------------ |  | - | -------- | ------- | 
|                                               |                                                                | June 26,       |           | December 27,
|                                               |                                                                | 2004           |           | 2003        
|                                               |                                                                |                |           |             
|                                               |                                                                |               
|                                               |                                                                | (In thousands)
|Inventories:                                   |                                                                |                |           |              |  |   |          |        
|                                               | Raw materials                                                  |                | $         | 65,627       |  |   | $        | 56,132  | 
|                                               | Work-in-process                                                |                |           | 41,486       |  |   |          | 44,650  | 
|                                               | Finished goods                                                 |                |           | 152,226      |  |   |          | 117,229 | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 259,339   |              |  | $ | 218,011  |        
|                                               |                                                                |                |           |              |  |   |          |        
|Prepaid expenses and other:                    |                                                                |                |           |              |  |   |          |        
|                                               | Investments in marketable equity securities, at
    fair value |                | $         | 13,649       |  |   | $        | 15,536  | 
|                                               | Prepaid expenses and other                                     |                |           | 23,525       |  |   |          | 22,765  | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 37,174    |              |  | $ | 38,301   |        
|                                               |                                                                |                |           |              |  |   |          |        
|Property, plant and equipment, at cost:        |                                                                |                |           |              |  |   |          |        
|                                               | Buildings                                                      |                | $         | 166,202      |  |   | $        | 152,381 | 
|                                               | Machinery and equipment                                        |                |           | 639,965      |  |   |          | 608,735 | 
|                                               | Software                                                       |                |           | 82,164       |  |   |          | 79,682  | 
|                                               | Furniture and fixtures                                         |                |           | 26,480       |  |   |          | 26,583  | 
|                                               | Leasehold improvements                                         |                |           | 87,333       |  |   |          | 86,430  | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 1,002,144 |              |  | $ | 953,811  |        
|Less accumulated depreciation and amortization |                                                                |                | (634,476  | )            |  |   | (611,132 | )      
|                                               |                                                                |                |           |              |  |   |          |        
|Net property, plant and equipment              |                                                                | $              | 367,668   |              |  | $ | 342,679  |        
|                                               |                                                                |                |           |              |  |   |          |        
|Accrued and other liabilities:                 |                                                                |                |           |              |  |   |          |        
|                                               | Income taxes payable                                           |                | $         | 21,830       |  |   | $        | 23,763  | 
|                                               | Accrued payroll and payroll-related expenses                   |                |           | 55,994       |  |   |          | 132,967 | 
|                                               | Accrued warranty                                               |                |           | 179,612      |  |   |          | 209,426 | 
|                                               | Restructuring liabilities, short-term                          |                |           | 9,303        |  |   |          | 9,096   | 
|                                               | Accrued expenses                                               |                |           | 55,712       |  |   |          | 79,136  | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 322,451   |              |  | $ | 454,388  |        
|                                               |                                                                |                |           |              |  |   |          |        
|Other liabilities:                             |                                                                |                |           |              |  |   |          |        
|                                               | Tax indemnification liability                                  |                | $         | 134,025      |  |   | $        | 135,559 | 
|                                               | Restructuring liabilities, long-term                           |                |           | 38,951       |  |   |          | 43,517  | 
|                                               | Other                                                          |                |           | 6,315        |  |   |          | 7,409   | 
|                                               |                                                                |                |           |              |  |   |          |        
|                                               |                                                                | $              | 179,291   |              |  | $ | 186,485  |        
|                                               |                                                                |                |           |              |  |   |          |        

Depreciation and amortization expense of
property, plant and equipment for the six month periods ended
June 26, 2004 and June 28, 2003 was $69.5 million
and $83.1 million, respectively. Total property, plant and
equipment recorded under capital leases was $36.6 million
as of June 26, 2004. Total accumulated depreciation under
capital leases was $17.8 million as of June 26, 2004.

7



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                     
|-- | ------------------------------------
|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 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 June 26, 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 $10.1 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 $25.9 million
for the three and six months ended June 26, 2004 and
$20.6 million and $41.1 million for the three and six
months ended June 28, 2003, respectively.

|                              |                     |                      |   |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |        | 
|----------------------------- | ------------------- | -------------------- | - | -------------- | - | ----------------- | ------- | ----- | ------- | -------- | -------- | ------------ | -------- | --- | ------- | ----- | ------ | - | ------- | ----- | ------- | - | -------- | ------ | ------- | - | ------- | ----- | ------ | 
|                              |                     |                      |   |                |   |                  
|                              |                     |                      |   | June 26, 2004  |   | December 27, 2003
|                              |                     |                      |   |                |   |                  
|                              |                     |                      |   |                |   |                  
|                              |                     |                      |   | (In thousands) |   | (In thousands)   
|                              |                     |                      |   | Gross          |   |                   |         | Gross |         |         
|                              |                     | Useful               |   | Carrying       |   | Accumulated       |         |       |         | Carrying |          | Accumulated  |          |    
|                              |                     | Life                 |   | Amount         |   | Amortization      |         | Net   |         | Amount   |          | Amortization |          | Net
|                              |                     |                      |   |                |   |                   |         |       |         |          |          |              |          |    
|                              |                     | (Years)              |   |                |   |                   |         |       |         |          |          |              |          |    
|Goodwill                      |                     |                      |  |                |   | $                 | 813,951 |       |         | $        |         |              |          | $   | 813,951 |       |        | $ | 813,951 |       |         | $ |         |        |         | $ | 813,951 |      
|                              |                     |                      |   |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Quantum HDD                   |                     |                      |   |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              | Existing Technology |                      |   |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |       
|                              |                     | Core technology      |   |                | 5 |                   |         | $     | 96,700  |          |          | $            | (62,855  | )   |         | $     | 33,845 |   |         | $     | 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 |         |          |          | (2,465       | )        |     |         | 1,885 |        |   |         | 4,350 |         |   |          | (2,030 | )       |   |         | 2,320 |       
|                              |                     |                      |   |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Total other intangible assets |                     |                      |   |                |   | $                 | 290,450 |       |         | $        | (254,720 | )            |          | $   | 35,730  |       |        | $ | 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):

|                                                    |  |          |         |              |  |   |         |  
|--------------------------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | -
|                                                    |  | June 26, |         | 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          |  |          | 30,000  |              |  |   | 15,000  |  
|Economic Development Board of Singapore Loans       |  |          | 30,206  |              |  |   | 24,138  |  
|Mortgages                                           |  |          | 33,391  |              |  |   | 34,164  |  
|Equipment Loans and Capital Leases                  |  |          | 11,473  |              |  |   | 20,192  |  
|                                                    |  |          |         |              |  |   |         |  
|                                                    |  |          | 444,381 |              |  |   | 432,846 |  
|Less amounts due within one year                    |  |          | (72,976 | )            |  |   | (77,037 | )
|                                                    |  |          |         |              |  |   |         |  
|                                                    |  | $        | 371,405 |              |  | $ | 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 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. In the
arrangement the Company used 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 collateralized by the United
States and Canadian accounts receivable. The special purpose
subsidiary was 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 June 26, 2004 the Company
had borrowed $50 million under the arrangement, the
interest rate is Libor plus 3% and $157 million of United
States and Canadian

9



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, including limits
on the percentage of all receivables represented by delinquent
or defaulted receivables, a dilution to liquidation ratio
comparing reductions to the invoiced amounts of receivables to
actual collections in a designated period. 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 June 26, 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 $30 million as of June 2004. Borrowings under
these lines of credit are collateralized by the facilities being
established in Suzhou, China, and bear interest at LIBOR plus
50 basis points (subject to adjustments to 60 basis
points). The borrowings are repayable in eight semi-annual
installments commencing October 2007, except for
$30 million initially repayable in April 2013; in March
2004, the Company and the Bank of China amended the loan to
provide that the $30 million would be repaid in two
installment payments of $15 million in October 2008 and
April 2009, respectively. MTS is required to maintain a
liability to assets ratio as detailed in the line of credit
agreement starting in fiscal 2004; the Company was in compliance
with the ratio as of June 26, 2004.

In September 1999, Maxtor Peripherals
(S) Pte Ltd. 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, Maxtor Peripherals
(S) Pte Ltd. 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 June 26, 2004, the
balance was 52.0 million Singapore dollars, equivalent to
$30.2 million. This loan is supported by a guaranty from a
bank. Cash is currently provided as collateral for this
guaranty; $21.6 million was recorded as other assets and
the remaining $8.6 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 June 26, 2004 was $33.4 million.

As of June 26, 2004, the Company had capital
leases totaling $11.5 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 September 2006 and interest rates
averaging 8.5%.

On May 9, 2003, the Company entered into a
two-year receivable-backed borrowing arrangement of up to
$100 million with certain financial institutions. In the
arrangement the Company used a special purpose subsidiary to
purchase and hold all of its 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

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

March 31, 2004 and in return, the Company
agreed to apply all collections of receivables to the repayment
of the outstanding facility until repaid in full. As of
March 27, 2004, the Company had a no borrowing under this
facility. On April 2, 2004, this agreement was terminated
by all parties involved.



|   |           
|-- | ----------
|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 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. Changes in the Companys product warranty
liability during the three and six months ended June 26,
2004 and June 28, 2003 were as follows (in thousands):

|                                            |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|------------------------------------------- |  | ------------------ | ------- | ---------------- |  | -------- | ------- | -------- |  | - | -------- | - |  | - | ------- | -
|                                            |  |                    |         |                 
|                                            |  | Three Months Ended |         | Six Months Ended
|                                            |  |                    |         |                 
|                                            |  | June 26,           |         | June 28,         |  | June 26, |         | June 28,
|                                            |  | 2004               |         | 2003             |  | 2004     |         | 2003    
|                                            |  |                    |         |                  |  |          |         |         
|Balance at beginning of period              |  | $                  | 191,325 |                  |  | $        | 266,583 |          |  | $ | 209,426  |   |  | $ | 278,713 |  
|Charges to operations                       |  |                    | 40,403  |                  |  |          | 35,567  |          |  |   | 79,834   |   |  |   | 96,391  |  
|Settlements                                 |  |                    | (48,689 | )                |  |          | (45,100 | )        |  |   | (105,196 | ) |  |   | (94,136 | )
|Changes in estimates, primarily expirations |  |                    | (3,427  | )                |  |          | (389    | )        |  |   | (4,452   | ) |  |   | (24,307 | )
|                                            |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Balance at end of period                    |  | $                  | 179,612 |                  |  | $        | 256,661 |          |  | $ | 179,612  |   |  | $ | 256,661 |  
|                                            |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  



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

11



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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
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
June 26, 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  |  
|                             |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  

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
MaxAttach 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.
There were no results from discontinued operations for the three
and six months ended June 26, 2004 and June 28, 2003.
The remaining liabilities of the NSG discontinued operations as
of June 26, 2004 were $0.7 million relating to returns
and other miscellaneous expenses.

12



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |              
|-- | -------------
|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 are 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
$0.7 million during the three and six months ended
June 26, 2004, respectively.



|   |                            
|-- | ---------------------------
|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 |             | Six Months Ended
|                                                   |                                         |                    |             |                 
|                                                   |                                         | June 26,           |             | June 28,         |  | June 26, |             | June 28, 
|                                                   |                                         | 2004               |             | 2003             |  | 2004     |             | 2003     
|                                                   |                                         |                    |             |                  |  |          |             |          
|Numerator  Basic and
    Diluted                  |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|Net income (loss)                                  |                                         | $                  | (26,098     | )                |  | $        | 6,196       |           |  | $ | (16,935     | ) |  | $ | 33,604      |          
|                                                   |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|Net income (loss) available to common stockholders |                                         | $                  | (26,098     | )                |  | $        | 6,196       |           |  | $ | (16,935     | ) |  | $ | 33,604      |          
|                                                   |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|Denominator                                        |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|Basic weighted average common shares outstanding   |                                         |                    | 247,367,176 |                  |  |          | 241,120,075 |           |  |   | 246,981,817 |   |  |   | 242,382,530 |          
|Effect of dilutive securities:                     |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|                                                   | Common stock options                    |                    |             |                 |  |          |             | 4,043,577 |  |   |             |  |  |   |             | 3,521,206 | 
|                                                   | Restricted shares subject to repurchase |                    |             |                 |  |          |             | 96,179    |  |   |             |  |  |   |             | 96,179    | 
|                                                   |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|Diluted weighted average common shares             |                                         |                    | 247,367,176 |                  |  |          | 245,259,831 |           |  |   | 246,981,817 |   |  |   | 245,999,915 |          
|                                                   |                                         |                    |             |                  |  |          |             |           |  |   |             |   |  |   |             |          
|Net income (loss) per share  basic                |                                         | $                  | (0.11       | )                |  | $        | 0.03        |           |  | $ | (0.07       | ) |  | $ | 0.14        |          
|Net income (loss) per share  diluted              |                                         | $                  | (0.11       | )                |  | $        | 0.03        |           |  | $ | (0.07       | ) |  | $ | 0.14        |          

13



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 |            | Six Months Ended
|                                                                                                       |  |                    |            |                 
|                                                                                                       |  | June 26,           |            | June 28,         |  | June 26, |            | June 28,
|                                                                                                       |  | 2004               |            | 2003             |  | 2004     |            | 2003    
|                                                                                                       |  |                    |            |                  |  |          |            |         
|Common stock options                                                                                   |  |                    | 26,988,243 |                  |  |          | 13,825,057 |          |  |  | 26,988,243 |  |  |  | 13,825,057 | 
|Restricted shares subject to repurchase                                                                |  |                    | 75,000     |                  |  |          |           |          |  |  | 75,000     |  |  |  |           | 
|As-if converted shares related to
    6.8% Convertible Senior Notes due 2010 issued on
    May 7, 2003 |  |                    | 18,756,362 |                  |  |          | 18,756,362 |          |  |  | 18,756,362 |  |  |  | 18,756,362 | 



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

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.

Total comprehensive income for the three months
and six months ended June 26, 2004 and June 28, 2003,
is presented in the following table (in thousands):

|                                                                             |  |                    |         |                  |  |          |        |          |  |   |         |   |  |   |        | 
|---------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | -------- | ------ | -------- |  | - | ------- | - |  | - | ------ | 
|                                                                             |  |                    |         |                 
|                                                                             |  | Three Months Ended |         | Six Months Ended
|                                                                             |  |                    |         |                 
|                                                                             |  | June 26,           |         | June 28,         |  | June 26, |        | June 28,
|                                                                             |  | 2004               |         | 2003             |  | 2004     |        | 2003    
|                                                                             |  |                    |         |                  |  |          |        |         
|Net income (loss)                                                            |  | $                  | (26,098 | )                |  | $        | 6,196  |          |  | $ | (16,935 | ) |  | $ | 33,604 | 
|Unrealized gain (loss) on investments in
    securities                      |  |                    | (1,636  | )                |  |          | 11,118 |          |  |   | (2,501  | ) |  |   | 12,917 | 
|Less: reclassification adjustment for gain
    included in net income (loss) |  |                    | 1       |                  |  |          | 28     |          |  |   | 33      |   |  |   | 116    | 
|                                                                             |  |                    |         |                  |  |          |        |          |  |   |         |   |  |   |        | 
|Comprehensive income (loss)                                                  |  | $                  | (27,735 | )                |  | $        | 17,286 |          |  | $ | (19,469 | ) |  | $ | 46,405 | 
|                                                                             |  |                    |         |                  |  |          |        |          |  |   |         |   |  |   |        | 

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 six months ended
June 26, 2004 represented 57.6% and 56.3% of total revenue,
respectively, compared to 50.6% and 46.5% of total revenue for
the corresponding periods in fiscal year 2003, respectively.
Sales to the distribution and retail channels for the three and
six months ended June 26, 2004 represented 42.4% and 43.7%
of total revenue, respectively, compared to 49.4% and 53.5% of
total revenue in the corresponding periods in fiscal year 2003,
respectively.

14



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Sales to one customer was over 10% of total
revenues in each of the three months ended June 26, 2004
and June 28, 2003; only one customer represented more than
10% of revenue during these periods.

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, Latin America and
other. Maxtor operations outside the United States primarily
consist of its manufacturing facilities in Singapore that
produce subassemblies and final assemblies for the
Companys disk drive products. Revenue by destination for
the three and six months ended June 26, 2004 and
June 28, 2003, respectively, is presented in the following
table (in thousands):

|                               |  |                    |         |                  |  |          |         |          |  |   |           |  |  |   |           | 
|------------------------------ |  | ------------------ | ------- | ---------------- |  | -------- | ------- | -------- |  | - | --------- |  |  | - | --------- | 
|                               |  |                    |         |                 
|                               |  | Three Months Ended |         | Six Months Ended
|                               |  |                    |         |                 
|                               |  | June 26,           |         | June 28,         |  | June 26, |         | June 28,
|                               |  | 2004               |         | 2003             |  | 2004     |         | 2003    
|                               |  |                    |         |                  |  |          |         |         
|United States                  |  | $                  | 282,506 |                  |  | $        | 304,469 |          |  | $ | 601,153   |  |  | $ | 608,438   | 
|Asia Pacific and Japan         |  |                    | 270,295 |                  |  |          | 288,434 |          |  |   | 577,132   |  |  |   | 571,761   | 
|Europe, Middle East and Africa |  |                    | 246,401 |                  |  |          | 298,424 |          |  |   | 627,635   |  |  |   | 629,017   | 
|Latin America and other        |  |                    | 19,052  |                  |  |          | 19,576  |          |  |   | 32,022    |  |  |   | 40,576    | 
|                               |  |                    |         |                  |  |          |         |          |  |   |           |  |  |   |           | 
|Total                          |  | $                  | 818,254 |                  |  | $        | 910,903 |          |  | $ | 1,837,942 |  |  | $ | 1,849,792 | 
|                               |  |                    |         |                  |  |          |         |          |  |   |           |  |  |   |           | 

Long-lived asset information by geographic area
as of June 26, 2004 and December 27, 2003 is presented
in the following table (in thousands):

|                               |  |          |           |              |  |   |           | 
|------------------------------ |  | -------- | --------- | ------------ |  | - | --------- | 
|                               |  | June 26, |           | December 27,
|                               |  | 2004     |           | 2003        
|                               |  |          |           |             
|United States                  |  | $        | 1,081,510 |              |  | $ | 1,101,889 | 
|Asia Pacific and Japan         |  |          | 169,403   |              |  |   | 129,380   | 
|Europe, Middle East and Africa |  |          | 573       |              |  |   | 731       | 
|Latin America and other        |  |          | 211       |              |  |   | 157       | 
|                               |  |          |           |              |  |   |           | 
|Total                          |  | $        | 1,251,697 |              |  | $ | 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 $849.7 million and $875.6 million
as of June 26, 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 addition, 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.

15



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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 liabilities, which might arise
from the Papst claims against Quantum at the time of the
Companys acquisition of the Quantum HDD business. This
estimate will be 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 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, 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 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 Maxtor and Quantum alleging, among other things,
MKEs ownership of certain intellectual property the
Company acquired in the acquisition of the Quantum HDD business.
The action was filed in the United States District Court for the
Northern District of

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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

California. On March 1, 2004, the Company
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. The Company 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 injunctive relief. The
results of any litigation are inherently uncertain. Although the
Company cannot currently estimate whether there will be a loss,
or the size of any loss, a litigation outcome unfavorable to
Maxtor could have a material adverse effect on our business,
financial condition and operating results. Management believes
that the lawsuit is without merit, that it has valid defenses to
the claims of MKE, and plans to defend the 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. Maxtor
Technology Suzhou (MTS) has drawn down
$30 million as of June 2004. MTS is required to maintain a
liability to assets ratio as detailed in the line of credit
agreement starting in fiscal 2004; the Company was in compliance
with the ratio as of June 26, 2004.



|    |                      
|--- | ---------------------
|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 three months ended June 26, 2004.



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

In the three and six months ended June 26,
2004, the Company sold an aggregate of approximately
$30.3 million and $54.5 million of goods to Solectron
Corporation, respectively, and purchased an aggregate of
approximately $0.5 million and $0.9 million of goods
and services from Solectron, respectively. The Companys
accounts receivable and accounts payable balances for Solectron
were $16.7 million and $0.1 million, respectively, as
of June 26, 2004. A Director of the Company is also the
Chief Executive Officer and a Director of Solectron.



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

In July 2004, the Company completed a reduction
in force that affected approximately 450 positions. The
Company expects to incur facilities and severance-related
charges beginning in the quarter ending September 25, 2004,
and expects to begin to realize cost and expense savings
associated with the reduction in force by the end of fiscal 2004.

17



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##### Table of Contents






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, commencement of volume shipments from
our manufacturing facility in China, impacts of our
restructuring, the effect of our planned transition of
manufacturing server products from MKE to our Singapore
facility, 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
MaxAttachTMbranded 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

18



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##### Table of Contents



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 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 10.2% and 0.6% in the three and
six months ended June 26, 2004 compared to the
corresponding periods in 2003. Total revenue declined during the
three and six months ended June 26, 2004 as a result of
reduced shipments driven by a lost opportunity with a major OEM
customer and decreased demand and pricing pressure experienced
in the OEM and distribution channels. These factors were
partially offset by growth in shipments and revenue resulting
from increased demand for our digital entertainment and Maxtor
OneTouch personal storage products. There is a possibility that
pricing pressures will continue in the third quarter of 2004.

Gross profit decreased to 9.0% and 12.4% in the
three and six months ended June 26, 2004 compared to 16.4%
and 17.4% 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 six months ended June 26,
2004, was primarily due to the decline of average selling prices
partially offset by the increase in our average capacity
shipped. In the three and six months ended June 26, 2004,
gross profit was also negatively impacted by weaker server
product profitability due in part to price erosion and reduced
cost leverage on our products produced at MKE; as well as lower
than anticipated volume shipments and revenues of our 40GB per
platter desktop product due in part to a lost opportunity at a
major OEM customer and lower than anticipated volume shipments
to our distribution channel which together resulted in reduced
fixed cost absorption at our manufacturing facilities. In the
three and six months ended June 26, 2004, we also
experienced increased costs as a result of our investments in
our China and MMC manufacturing facilities.

Operating expenses decreased in both absolute
dollars and as a percentage of revenue for the three and six
months ended June 26, 2004 compared to the corresponding
periods in 2003. The decrease in the three month period was due
to a $15.5 million decrease in amortization of intangible
assets and a $3.6 million decrease in R&D expense,
partially offset by increased SG&A expense of
$1.4 million. The decrease in the six month period was due
to a $15.2 million decrease in amortization of intangible
assets and a $5.5 million decrease in R&D expense,
partially offset by increased SG&A expense of
$2.0 million.

In July 2004, we completed a reduction in force
that affected approximately 450 positions. We expect to incur
facilities and severance-related charges of approximately $80 to
$90 million beginning in the third fiscal quarter of 2004 and
expect to begin to realize cost and expense savings associated
with the reduction in force by the end of fiscal 2004.

Operating capital (defined as accounts
receivable, other receivables and inventories less accounts
payable) decreased $15.2 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, as
a result of seasonally slower sales, reduced shipments driven by
a lost opportunity with a major OEM customer and decreased
demand experienced in the OEM and distribution channels. Capital
expenditures are expected to be below $200 million in 2004.

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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.            

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 |       |          |  | Six Months Ended |       |         
|                            |  |                    |       |          |  |                  |       |         
|                            |  | June 26,           |       | June 28, |  |                  |       | June 26, |  | June 28, |       |       
|                            |  | 2004               |       | 2003     |  | Change           |       | 2004     |  | 2003     |       | Change
|                            |  |                    |       |          |  |                  |       |          |  |          |       |       
|                            |  |                    |       |          |  |                  |       |         
|                            |  | (In millions)      |       |          |  | (In millions)    |       |         
|Total revenues              |  | $                  | 818.3 |          |  | $                | 910.9 |          |  | $        | (92.6 | )      |  | $ | 1,837.9 |   |  | $ | 1,849.8 |   |  | $ | (11.9 | )
|Gross profit                |  | $                  | 73.8  |          |  | $                | 149.2 |          |  | $        | (75.4 | )      |  | $ | 228.8   |   |  | $ | 321.1   |   |  | $ | (92.3 | )
|Net income                  |  | $                  | (26.1 | )        |  | $                | 6.2   |          |  | $        | (32.3 | )      |  | $ | (16.9   | ) |  | $ | 33.6    |   |  | $ | (50.5 | )
|As a percentage of revenue: |  |                    |       |          |  |                  |       |          |  |          |       |        |  |   |         |   |  |   |         |   |  |   |       |  
|Total revenues              |  |                    | 100.0 | %        |  |                  | 100.0 | %        |  |          |       |        |  |   | 100.0   | % |  |   | 100.0   | % |  |   |       |  
|Gross profit                |  |                    | 9.0   | %        |  |                  | 16.4  | %        |  |          |       |        |  |   | 12.4    | % |  |   | 17.4    | % |  |   |       |  
|Net income                  |  |                    | -3.2  | %        |  |                  | 0.7   | %        |  |          |       |        |  |   | -0.9    | % |  |   | 1.8     | % |  |   |       |  

Revenues.Revenue in
the three and six months ended June 26, 2004 was
$818.3 million and $1,837.9 million, compared to
$910.9 million and $1,849.8 million in the
corresponding periods in fiscal 2003. Total shipments for the
three months ended June 26, 2004 were 11.5 million
units, which was 0.7 million units, or 5.7%, lower as
compared to the three months ended June 28, 2003. Total
shipments for the six months ended June 26, 2004 were
25.1 million units, which was 0.5 million units or
2.0% greater as compared to the six months ended June 28,
2003. Total revenue declined during the three and six months
ended June 26, 2004 as a result of reduced shipments driven
by a lost opportunity with a major OEM customer and decreased
demand and pricing pressure experienced in the OEM and
distribution channels. These factors were partially

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offset by growth in shipments and revenue
resulting from increased demand for our digital entertainment
and Maxtor OneTouch personal storage products.


Revenue from sales to original equipment
manufacturers (OEMs) represented 57.6% and 56.3% of
revenue in the three and six months ended June 26, 2004,
respectively, compared to 50.6% and 46.5% of revenue,
respectively, in the corresponding period in fiscal year 2003.
In absolute dollars, sales to OEMs increased 2.3% and 20.3%,
respectively, during the three and six months ended
June 26, 2004. The increase in OEM sales as a percentage of
revenue and in absolute dollars during the three and six month
periods was driven by the continued growth of our sales of
desktop products to digital entertainment customers as well as
growth in our sales of server products. This growth in OEM sales
was partially offset by a lost opportunity at a major OEM
customer.

Revenue from sales to the distribution channel
and retail customers in the three and six months ended
June 26, 2004 represented 42.4% and 43.7% of revenue,
respectively, compared to 49.4% and 53.5% of revenue,
respectively, in the corresponding period in fiscal 2003.
Revenue from sales to the distribution channel in the three and
six months ended June 26, 2004 represented 34.1% and 36.6%
of revenue, respectively, compared to 43.0% and 46.1% of
revenue, respectively, in the corresponding periods in fiscal
2003. In absolute dollars, sales to the distribution channel
decreased 28.8% and 21.1%, respectively, during the three and
six months ended June 26, 2004. The decrease in
distribution sales as a percentage of revenue and in absolute
dollars during the three and six months ended June 26, 2004
was a result of decreased shipments resulting from reduced
demand and pricing pressure created by higher than normal price
gaps relative to OEM pricing.

Revenue from sales to retail customers in the
three and six months ended June 26, 2004 represented 8.3%
and 7.2% of revenue, respectively, compared to 6.4% and 7.4% of
revenue, respectively, in the corresponding periods in fiscal
2003. In absolute dollars, sales to the distribution channel
increased 16.1% during the three months ended June 26, 2004
and decreased 4.2% during the six months ended June 26,
2004. The increase in retail sales as a percentage of revenue
and in absolute dollars in the three month period was a result
of the increase in sales of our Maxtor OneTouch personal storage
products. The decrease in retail sales as a percentage of
revenue, during the six month period was a result of the
decrease in sales of our internal hard drive products offset by
an increase in sales of our Maxtor OneTouch personal storage
products.

Domestic revenue in the three and six months
ended June 26, 2004 represented 36.9% and 34.5% of total
sales, respectively, compared to 35.6% and 35.1% of revenue,
respectively, in the corresponding periods in fiscal year 2003.
Domestic revenue includes sales to United States, Canada and
Latin America. The increase in domestic revenue as a percentage
of total revenue during the three months ended June 26,
2004 was a result of increased shipments of desktop products to
our digital entertainment customers. The decline during the six
months ended June 26, 2004 was the result of reduced
shipments of our desktop products in the distribution channel.

International revenue in the three and six months
ended June 26, 2004 represented 63.1% and 65.5% of total
sales, respectively, compared to 64.4% and 64.9% of total,
respectively, in the corresponding periods in fiscal year 2003.
Sales to Europe, Middle East and Africa in the three months
ended June 26, 2004 and June 28, 2003 represented
30.1% and 32.8% of total revenue, respectively. In absolute
dollars, sales to Europe, Middle East and Africa decreased 17.4%
during the three months ended June 26, 2004. The decrease
in sales to Europe, Middle East and Africa as a percentage of
revenue and in absolute dollars during the three months ended
June 26, 2004 was the result of reduced shipments to the
distribution channel of our desktop products partially offset by
growth in the sales of our Maxtor OneTouch personal storage
products.

Sales to Asia Pacific and Japan in the three
months ended June 26, 2004 and June 28, 2003
represented 33.0% and 31.7% of total revenue, respectively. In
absolute dollars, sales to Asia Pacific and Japan decreased 6.3%
during the three months ended June 26, 2004. The increase
in sales to Asia Pacific and Japan as a percentage of revenue
during the three months ended June 26, 2004, was the result
of the decrease in Europe, Middle East and Africa as a
percentage of revenue. In absolute dollars, Asia Pacific and
Japan revenue decreased due to reduced sales of our desktop
products to OEM and distribution customers.

21



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##### Table of Contents



Sales to Europe, Middle East and Africa in the
six months ended June 26, 2004 and June 26, 2003
represented 34.1% and 34.0% of total revenue, respectively. In
absolute dollars, sales to Europe, Middle East and Africa
decreased 0.2% during the six months ended June 26, 2004.
The decrease in European sales as a percentage of revenue and in
absolute dollars during the six months ended June 26, 2004
was the result of reduced shipments in the distribution channel
of our desktop products partially offset by growth in the sales
of our Maxtor OneTouch personal storage and server products.

Sales to Asia Pacific and Japan in the six months
ended June 26, 2004 and June 28, 2003 represented
31.4% and 30.9% of total revenue, respectively. In absolute
dollars, sales to Asia Pacific and Japan increased 0.9% during
the six months ended June 26, 2004. The increase in sales
to Asia and Japan as a percentage of revenue and in absolute
dollars during the six months ended June 26, 2004 was due
to increased sales of our server products to OEM customers.



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

Gross profit decreased to $73.8 million in
the three months ended June 26, 2004, compared to
$149.2 million for the corresponding three months in fiscal
year 2003. As a percentage of revenue, gross profit decreased to
9.0% in the three months ended June 26, 2004 from 16.4% in
the corresponding three months of fiscal year 2003. Gross profit
decreased to $228.8 million in the six months ended
June 26, 2004, compared to $321.1 million for the
corresponding six months in fiscal year 2003. As a percentage of
revenue, gross profit decreased to 12.4% in the six months ended
June 26, 2004 from 17.4% in the corresponding six months of
fiscal year 2003. The decrease in gross profit, both as a
percentage of revenue and actual dollars during the three and
six months ended June 26, 2004, was primarily due to the
decline of average selling prices partially offset by the
increase in our average capacity shipped. In the three and six
months ended June 26, 2004, gross profit was also
negatively impacted by weaker server product profitability due
in part to price erosion and reduced cost leverage on our
products produced at MKE; as well as lower than anticipated
volume shipments and revenues of our 40GB per platter desktop
product due in part to a lost opportunity at a major OEM
customer and lower than anticipated volume shipments to our
distribution channel which together resulted in reduced fixed
cost absorption at our manufacturing facilities. In the three
and six months ended June 26, 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.

Operating Expenses

|                                    |  |                    |      |          |  |                  |      |          |  |          |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|----------------------------------- |  | ------------------ | ---- | -------- |  | ---------------- | ---- | -------- |  | -------- | ----- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                    |  |                    |      |          |  |                  |      |         
|                                    |  | Three Months Ended |      |          |  | Six Months Ended |      |         
|                                    |  |                    |      |          |  |                  |      |         
|                                    |  | June 26,           |      | June 28, |  |                  |      | June 26, |  | June 28, |       |       
|                                    |  | 2004               |      | 2003     |  | Change           |      | 2004     |  | 2003     |       | Change
|                                    |  |                    |      |          |  |                  |      |          |  |          |       |       
|                                    |  |                    |      |          |  |                  |      |         
|                                    |  | (In millions)      |      |          |  | (In millions)    |      |         
|Research and development            |  | $                  | 80.6 |          |  | $                | 84.2 |          |  | $        | (3.6  | )      |  | $ | 165.4 |   |  | $ | 170.9 |   |  | $ | (5.5  | )
|Selling, general and administrative |  | $                  | 32.4 |          |  | $                | 31.0 |          |  | $        | 1.4   |        |  | $ | 64.9  |   |  | $ | 62.9  |   |  | $ | 2.0   |  
|Amortization of intangible assets   |  | $                  | 5.1  |          |  | $                | 20.6 |          |  | $        | (15.5 | )      |  | $ | 25.9  |   |  | $ | 41.1  |   |  | $ | (15.2 | )
|As a percentage of revenue:         |  |                    |      |          |  |                  |      |          |  |          |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|Research and development            |  |                    | 9.8  | %        |  |                  | 9.2  | %        |  |          |       |        |  |   | 9.0   | % |  |   | 9.2   | % |  |   |       |  
|Selling, general and administrative |  |                    | 4.0  | %        |  |                  | 3.4  | %        |  |          |       |        |  |   | 3.5   | % |  |   | 3.4   | % |  |   |       |  
|Amortization of intangible assets   |  |                    | 0.6  | %        |  |                  | 2.3  | %        |  |          |       |        |  |   | 1.4   | % |  |   | 2.2   | % |  |   |       |  



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

R&D expense in the three and six months ended
June 26, 2004 was $80.6 million, or 9.8% of revenue
and $165.4 million, or 9.0% of revenue compared to
$84.2 million, or 9.2% of revenue and $170.9 million
and 9.2% of revenue, respectively, in the corresponding periods
in fiscal year 2003. R&D expenses decreased by
$3.6 million, or 4.3%, in the three month period ended
June 26, 2004 compared to the corresponding period in
fiscal year 2003. The decrease in R&D expenses was primarily
due to decreases in compensation of $5.6 million and in
depreciation and equipment expense of $1.9 million. These
decreases were offset by a

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$3.9 million increase in expensed parts due
to a change in the number of products in development. R&D
expenses decreased by $5.5 million, or 3.2%, in the six
month period ended June 26, 2004 compared to the
corresponding period in fiscal year 2003. The decrease in
R&D expenses was primarily due to decreases in compensation
of $8.1 million, and $4.0 million in depreciation, our
facilities and information technology departments, and services.
These decreases were offset by a $6.6 million increase in
expensed parts due to a change in the number of products in
development.




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

SG&A expense in the three and six months
ended June 26, 2004 was $32.4 million, or 4.0% of
revenue and $64.9 million, or 3.5% of revenue compared to
$31.0 million, or 3.4% of revenue and $62.9 million
and 3.4% of revenue, respectively, in the corresponding periods
in fiscal year 2003. SG&A expenses increased by
$1.4 million, or 4.5%, in the three month period ended
June 26, 2004 compared to the corresponding period in
fiscal year 2003. The increase in SG&A expenses was
primarily due to reduction in rental income of $0.8 million
and an increase of services of $0.6 million. SG&A
expenses increased by $2.0 million, or 3.2%, in the six
month period ended June 26, 2004 compared to the
corresponding period in fiscal year 2003. The increase in
SG&A expenses was primarily due to reduction in rental
income of $1.0 million, increased services of
$5.3 million and $1.6 million of miscellaneous
expenses. These increases were offset by reduced spending in our
facilities and information technology departments of
$3.4 million, as well as a decrease in bad debt of
$2.5 million.

In July 2004, we completed a reduction in force
that affected approximately 450 positions. We expect to incur
facilities and severance-related charges of approximately $80 to
$90 million beginning in the third fiscal quarter of 2004 and
expect to begin to realize cost and expense savings associated
with the reduction in force by the end of fiscal 2004. We
anticipate cost savings of approximately $15 million a
quarter by the end of fiscal 2004.



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

23



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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 |   | Six Months Ended
|                                       |  |                    |   |                 
|                                       |  | June 26,           |   | June 28,         |  | June 26, |     | June 28,
|                                       |  | 2004               |   | 2003             |  | 2004     |     | 2003    
|                                       |  |                    |   |                  |  |          |     |         
|                                       |  |                    |   |                 
|                                       |  | (In millions)      |   | (In millions)   
|Cost of revenues                       |  | $                  |  |                  |  | $        |    |          |  | $ |  |  |  | $ |    | 
|Research and development               |  |                    |  |                  |  |          | 0.2 |          |  |   |  |  |  |   | 0.3 | 
|Selling, general and administrative    |  |                    |  |                  |  |          |    |          |  |   |  |  |  |   | 0.1 | 
|                                       |  |                    |   |                  |  |          |     |          |  |   |   |  |  |   |     | 
|Total stock-based compensation expense |  | $                  |  |                  |  | $        | 0.2 |          |  | $ |  |  |  | $ | 0.4 | 
|                                       |  |                    |   |                  |  |          |     |          |  |   |   |  |  |   |     | 

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 June 26, 2004 was $35.7 million. Amortization of
other intangible assets was $5.1 million and
$25.9 million for the three and six months ended
June 26, 2004 and June 28, 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 $10.1 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

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 are 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 $0.7 million during
the three and six months ended June 26, 2004.

In July 2004, we completed a reduction in force
that affected approximately 450 positions. We expect to incur
facilities and severance-related charges of approximately $80 to
$90 million beginning in the third fiscal quarter of 2004 and
expect to begin to realize cost and expense savings associated
with the reduction in force by the end of fiscal 2004.

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| |                                                     
| | ----------------------------------------------------
| | Interest Expense, Interest Income and Other
    Gain

|                                  |  |                    |      |          |  |                  |      |          |  |          |      |        |  |   |       |   |  |   |       |   |  |   |      |  
|--------------------------------- |  | ------------------ | ---- | -------- |  | ---------------- | ---- | -------- |  | -------- | ---- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | ---- | -
|                                  |  |                    |      |          |  |                  |      |         
|                                  |  | Three Months Ended |      |          |  | Six Months Ended |      |         
|                                  |  |                    |      |          |  |                  |      |         
|                                  |  | June 26,           |      | June 28, |  |                  |      | June 26, |  | June 28, |      |       
|                                  |  | 2004               |      | 2003     |  | Change           |      | 2004     |  | 2003     |      | Change
|                                  |  |                    |      |          |  |                  |      |          |  |          |      |       
|                                  |  |                    |      |          |  |                  |      |         
|                                  |  | (In millions)      |      |          |  | (In millions)    |      |         
|Interest expense                  |  | $                  | (7.4 | )        |  | $                | (8.3 | )        |  | $        | (0.9 | )      |  | $ | (16.2 | ) |  | $ | (13.7 | ) |  | $ | 2.5  |  
|Interest income                   |  | $                  | 1.0  |          |  | $                | 1.5  |          |  | $        | (0.5 | )      |  | $ | 2.4   |   |  | $ | 2.6   |   |  | $ | (0.2 | )
|Income from litigation settlement |  | $                  | 24.8 |          |  | $                |     |          |  | $        | 24.8 |        |  | $ | 24.8  |   |  | $ |      |   |  | $ | 24.8 |  
|Other gain                        |  | $                  |     |          |  | $                |     |          |  | $        |     |        |  | $ |      |   |  | $ | 0.2   |   |  | $ | (0.2 | )
|As a percentage of revenue:       |  |                    |      |          |  |                  |      |          |  |          |      |        |  |   |       |   |  |   |       |   |  |   |      |  
|Interest expense                  |  |                    | 0.9  | %        |  |                  | 0.9  | %        |  |          |      |        |  |   | 0.9   | % |  |   | 0.7   | % |  |   |      |  
|Interest income                   |  |                    | 0.1  | %        |  |                  | 0.2  | %        |  |          |      |        |  |   | 0.1   | % |  |   | 0.2   | % |  |   |      |  
|Income from settlement            |  |                    | 3.0  | %        |  |                  | 0.0  | %        |  |          |      |        |  |   | 1.3   | % |  |   | 0.0   | % |  |   |      |  
|Other gain                        |  |                    | 0.0  | %        |  |                  | 0.0  | %        |  |          |      |        |  |   | 0.0   | % |  |   | 0.1   | % |  |   |      |  



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

Interest expense decreased $0.9 million in
the three months and increased $2.5 million in the six
months ended June 26, 2004 as compared to the corresponding
periods in fiscal year 2003. The decrease in the three months
ended June 26, 2004 was due to reduction in debt balance
for the quarter as compared to the corresponding quarter in
2003. The increase in the six months ended June 26, 2004
was primarily due to higher average debt balance over the six
month period as compared to the corresponding period in 2003.



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

Interest income decreased $0.2 million and
$0.4 million in the three months and six months ended
June 26, 2004 compared to the corresponding periods in
fiscal year 2003. The decrease resulted primarily from lower
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 three months ended June 26, 2004.



| |           
| | ----------
| | Other Gain

Other gain was zero in the three months and six
months ended June 26, 2004 as compared to zero and
$0.2 million for the corresponding periods in fiscal year
2003.



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

|                                                    |  |                    |       |          |  |                  |     |          |  |          |       |        |  |   |       |   |  |   |      |  |  |   |       |  
|--------------------------------------------------- |  | ------------------ | ----- | -------- |  | ---------------- | --- | -------- |  | -------- | ----- | ------ |  | - | ----- | - |  | - | ---- |  |  | - | ----- | -
|                                                    |  |                    |       |          |  |                  |     |         
|                                                    |  | Three Months Ended |       |          |  | Six Months Ended |     |         
|                                                    |  |                    |       |          |  |                  |     |         
|                                                    |  | June 26,           |       | June 28, |  |                  |     | June 26, |  | June 28, |       |       
|                                                    |  | 2004               |       | 2003     |  | Change           |     | 2004     |  | 2003     |       | Change
|                                                    |  |                    |       |          |  |                  |     |          |  |          |       |       
|                                                    |  |                    |       |          |  |                  |     |         
|                                                    |  | (In millions)      |       |          |  | (In millions)    |     |         
|Income (loss) before provision for income
    taxes |  | $                  | (25.8 | )        |  | $                | 6.6 |          |  | $        | (32.4 | )      |  | $ | (16.3 | ) |  | $ | 35.3 |  |  | $ | (51.6 | )
|Provision for income taxes                          |  | $                  | 0.3   |          |  | $                | 0.4 |          |  | $        | (0.1  | )      |  | $ | 0.6   |   |  | $ | 1.7  |  |  | $ | (1.1  | )

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

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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
June 26, 2004, the Company has reimbursed $8.0 million
to Quantum Corporation leaving a balance of $134.0 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 June 26, 2004, we had $387.7 million
in cash and cash equivalents, $23.4 million in restricted
cash, $63.7 million in marketable securities and
$41.7 million in restricted marketable securities for a
combined total of $516.5 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
$44.5 million in the six months ended June 26, 2004.
This comprised $16.9 million in net loss plus non-cash
items of $96.0 million primarily relating to depreciation
and amortization, a decrease in operating capital (defined as
accounts receivables, other receivables and inventories less
accounts payables) of $15.2 million and prepaid expenses
and other assets of $1.1 million, partially offset by a
decrease in accrued and other liabilities of $139.1 million
and cash used in discontinued operations of $0.8 million.
The change in accrued and other liabilities was primarily due to
a $77.0 million

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##### Table of Contents



payment of compensation accruals,
$29.8 million net settlement of warranty, $9.4 million
payments of sundry taxes, and $13.8 million other accrued
expenses and $7.2 million in facility accrual payments.


The decrease in operating capital during the six
months ended June 26, 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 as a result of seasonally slower sales, reduced
shipments driven by a lost opportunity with a major OEM customer
and decreased demand experienced in the OEM and distribution
channels.

Cash used in investing activities was
$120.8 million for the six months ended June 26, 2004,
primarily reflecting investments in property, plant and
equipment (net of proceeds) of $93.3 million and purchases
(net of sales) of marketable securities of $19.6 million,
partially offset by an increase in restricted cash of
$7.9 million.

Cash provided by financing activities was
$22.2 million for the six months ended June 26, 2004.
Primarily this represented increased borrowings of $49.7 net of
transaction fees from the new asset backed borrowing facility,
$15 million drawing on the manufacturing facility loan in
Suzhou, China, $9.7 million drawing on the second EDB loan
and $10.9 million received upon the issuance of common
stock through our employee stock purchase plan and options
exercised. This was primarily offset by repayments of $50
million on original asset back borrowing, $8.7 million
amortization of capital lease obligations and payments of
$3.4 million on the first EDB 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
working capital to fund our business, particularly to finance
accounts receivable and inventory, and to invest in property,
plant and equipment. During 2004, capital expenditures are
expected to be below $200 million, primarily used for
manufacturing expansion and upgrades, product development, and
updating our information technology systems. 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 will depend on,
among other things, demand in the hard disk drive market 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 June 26, 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            |  | $        | 432,908   |           |  | $         | 65,287  |           |  | $         | 58,994  |  |  | $ | 44,316  |  |  | $ | 264,311 | 
|Capital Lease Obligations |  |          | 11,473    |           |  |           | 7,689   |           |  |           | 3,784   |  |  |   |        |  |  |   |        | 
|Operating Leases(3)       |  |          | 292,386   |           |  |           | 34,678  |           |  |           | 63,461  |  |  |   | 61,796  |  |  |   | 132,451 | 
|Purchase Obligations(4)   |  |          | 762,076   |           |  |           | 736,204 |           |  |           | 14,607  |  |  |   | 11,265  |  |  |   |        | 
|                          |  |          |           |           |  |           |         |           |  |           |         |  |  |   |         |  |  |   |         | 
|Total                     |  | $        | 1,498,843 |           |  | $         | 843,858 |           |  | $         | 140,846 |  |  | $ | 117,377 |  |  | $ | 396,762 | 
|                          |  |          |           |           |  |           |         |           |  |           |         |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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).                                                                                                                                                                                                                                              

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes future minimum annual rental
    commitments, including amounts accrued as restructuring
    liabilities as of June 26, 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 $134.0 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 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. Maxtor Technology Suzhou
(MTS) has drawn down $30 million as of June
2004. MTS is required to maintain a liability to assets ratio as
detailed in the line of credit agreement starting in fiscal
2004; we were in compliance with the ratio as of June 26,
2004. We and the Bank of China are in discussions which may
affect terms for future drawings and the availability of the
facility.

In September 2003, Maxtor Peripherals (S)
Pte Ltd. (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 June 26, 2004, the
balance was 52.0 million Singapore dollars, equivalent to
$30.2 million. This loan is supported by a guaranty from a
bank. Cash is currently provided as collateral for this
guaranty; $21.6 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

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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. 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 has 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 are accounted for as short term borrowings
and remain on our consolidated balance sheet. As of
June 26, 2004 we had borrowed $50 million under the
arrangement, the interest rate is Libor plus 3% and
$157 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, including limits on the percentage of all
receivables represented by delinquent or defaulted receivables,
a dilution to liquidation ratio comparing reductions to the
invoiced amounts of receivables to actual collections in a
designated period. 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.
As of June 26, 2004, we were in compliance with these
requirements.

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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 a quarterly loss in the second
fiscal quarter of 2004. We are projecting a loss for the third
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. 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.

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;                                                                        
|
| |  | 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.

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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 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
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 lose opportunities to
qualify our products and may need to deliver lower margin, older

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products than required in order to meet our
customers demands. In such case, our business, financial
condition and operating results would be adversely 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.

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. 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

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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 or other difficulties that
could delay or prevent the successful development, introduction
or marketing of new hard disk drives. 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. Both we
and Matsushita-Kotobuki Electronics Industries, Ltd., or MKE,
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
recently 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

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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 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 MKE does not meet our
manufacturing requirements or a disaster occurs at one of our or
MKEs plants, our growth will be adversely impacted and our
business, financial condition and operating results could
suffer.

Our Maxtor-owned facilities in Singapore and our
relationship with MKE for the manufacture of Atlas 10,000 RPM
hard disk drives for the enterprise market are currently our
only sources of production for our hard disk drive products. MKE
manufactures a substantial portion of our Atlas hard disk drives
for the enterprise market pursuant to a master agreement and a
purchase agreement that has been extended through March 31,
2004. Following the termination of the purchase agreement with
MKE in March 2004, we expect to continue to have MKE manufacture
a significant portion of our Atlas products pursuant to purchase
orders through September 2004. We plan to transition the
manufacturing of our server products to our Singapore
manufacturing facility and begin volume shipments in the second
half of 2004. Although we do not anticipate any disruption in
supply of the enterprise products which are being manufactured
by MKE prior to our transition to Singapore, any failure to
reach an agreement with MKE on competitive pricing arrangements
for product delivered before the transition, or any disruption
of supply of such products manufactured by MKE prior to the
transition of manufacturing to Singapore would negatively impact
our business and operating results for such periods.

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. We have a new manufacturing facility in China
that is intended to provide us with a low-cost facility to
accommodate anticipated future growth. We anticipate that the
facility will begin volume shipments in the second half of 2004.
Initial shipments commenced during the second quarter of 2004
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 delay the time
at which the facility could commence volume shipments, which
could harm our business, financial condition and operating
results.

In addition, our entire volume manufacturing
operations are based in Singapore. Our MKE-manufactured server
products are manufactured in Japan. We are planning to have our
factory in China begin volume shipments in the second half of
2004. A flood, earthquake, political instability, act of
terrorism or other disaster or condition in Singapore or Japan,
or after our China plant is operational, in 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.

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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 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.

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 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

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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 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

36



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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 injunctive relief. The results of any
litigation are inherently uncertain. Although we cannot
currently estimate whether there will be a loss, or the size of
any loss, a litigation outcome unfavorable to us could have a
material adverse effect on our business, financial condition and
operating results. Management believes that the lawsuit is
without merit, that it has valid defenses to the claims of MKE,
and plans to defend the matter vigorously.

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, where our principal manufacturing operations are
located, and in Japan, where MKEs manufacturing operations
are located. We expect to transition our manufacturing from MKE
to Singapore in the second half of 2004 and we also expect our
new manufacturing plant in Suzhou, China to begin volume
shipments in the second half of 2004. Such concentration of
operations in Singapore and either Japan or 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 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;                                                                                                                                                

37



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| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | significant unexpected duties or taxes or other
    adverse tax consequences;
|
| |  | difficulty in obtaining export licenses and other
    trade barriers;        
|
| |  | seasonality;                                                                 
|
| |  | increased transportation/shipping costs; and                                 
|
| |  | credit and access to capital issues faced by our
    international customers.

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.

We expect our new manufacturing plant in China to
begin 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
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.

38



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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 will use a special
purpose subsidiary to purchase and hold all of our United States
and Canadian accounts receivable. This special purpose
subsidiary will borrow up to $100 million secured by the
purchased receivables and will use 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 will be consolidated for
financial reporting purposes, and its resulting liabilities will
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, including
limits on the percentage of all receivables represented by
delinquent or defaulted receivables, a dilution to liquidation
ratio comparing reductions to the invoiced amounts of
receivables to actual collections in a designated period. 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. However,
early amortization events under the facility generally will not
cause an event of default under the convertible senior notes due
2010. We do not believe that an early amortization event or the
lack of borrowing availability under the facility would have a
material adverse effect on our liquidity.

The loss of key personnel could harm our
business.

Our success depends upon the continued
contributions of key employees, many of whom would be extremely
difficult to replace. 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 skilled employees in
the hard disk 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

39



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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 and Singapore. Once our new manufacturing facility in
Suzhou, China is operational, we will also be subject to
environmental regulation in 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.

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.                                                                 

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.

40



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##### Table of Contents






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
June 26, 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      |  |         |         |          |  |         
|                      |  |          |         |          |  |         |         | June 26,   |  |         |         |          |  |         
|                      |  |          |         |          |  |         |         | 2004       |  |         |         |          |  |         
|                      |  | +150 bps |         | +100 bps |  | +50 bps |         | ($000)     |  | -50 bps |         | -100 bps |  | -150 bps
|                      |  |          |         |          |  |         |         |            |  |         |         |          |  |         
|Financial Instruments |  | $        | 104,021 |          |  | $       | 104,464 |            |  | $       | 104,909 |          |  | $        | 105,360 |  |  | $ | 105,811 |   |  | $ | 106,269 |   |  | $ | 106,729 |  
|% Change              |  |          | (1.27   | )%       |  |         | (0.85   | )%         |  |         | (0.43   | )%       |  |          |         |  |  |   | 0.43    | % |  |   | 0.86    | % |  |   | 1.30    | %

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 |  |  |         |    |  |  
|                             |  |                          |        | as of    |  |                         
|                             |  | Valuation of Security    |        | June 26, |  | Valuation of Security   
|                             |  | Given X% Decrease in the |        | 2004     |  | Given X% Increase in the
|                             |  | Security Price           |        | ($000)   |  | Security Price          
|                             |  |                          |        |          |  |                         
|                             |  |                          |        |          |  |                          |         |            |  |  |         |   
|Corporate equity investments |  |                          | $6,824 |          |  |                          | $10,237 |            |  |  | $11,601 |    |  | $ | 13,649 |  |  |  | $15,696 |   |  |  | $17,061 |   |  |  | $20,473 |  
|% 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 and Chief Executive
Officer and our 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 and Chief Executive Officer and our
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.

There has been no change in our internal control
over financial reporting during the quarter ended June 26,
2004 that has materially affected, or is reasonably likely to
affect, our internal control over financial reporting.

41



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##### Table of Contents






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 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 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 with respect to the
claims against us. We made an estimate of the potential
liabilities, which might arise from the Papst claims against
Quantum at the time of our acquisition of the Quantum HDD
business. Our estimate will be revised as additional information
becomes available. 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.

In addition to the Papst lawsuit, on
June 13, 2002, we filed suit against Koninklijke Philips
Electronics N.V. and several other Philips-related companies in
the Superior Court of California, County of Santa Clara. On June
26, 2002, we filed a First Amended Complaint and on
January 6, 2003, we filed a Second Amended Complaint. The
lawsuit alleged that an integrated circuit chip supplied by
Philips was defective and caused significant levels of failure
of certain Quantum legacy products, which we acquired as part of
our acquisition of the Quantum HDD business. Philips
subsequent motions to dismiss were withdrawn or denied. Philips

42



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##### Table of Contents



answered the complaint on March 13, 2003.
The parties entered into a settlement agreement relating to this
lawsuit on April 28, 2004, pursuant to which the parties agreed
that the lawsuit would be dismissed with prejudice and we
received a cash payment of $24.8 million; neither party
made any admission relating to liability. Philips and we agreed
that we would continue as a preferred supplier to Philips
consumer electronics business, subject to terms and conditions
agreed between the parties.


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 injunctive relief. The results of any
litigation are inherently uncertain. Although we cannot
currently estimate whether there will be a loss, or the size of
any loss, a litigation outcome unfavorable to us could have a
material adverse effect on our business, financial condition and
operating results. Management believes that the lawsuit is
without merit, that it has valid defenses to the claims of MKE,
and plans to defend the matter vigorously.




Item 2.     Changes
in Securities and Use of Proceeds

None




Item 3.     Defaults
Upon Senior Securities

None




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

At our annual meeting of stockholders held on
May 20, 2004, the stockholders elected the nominees for
Class III directors to our Board of Directors. The votes
were as follows:

|                      |  |     |             |                    |  |  |            | 
|--------------------- |  | --- | ----------- | ------------------ |  |  | ---------- | 
|Nominee               |  | For |             | Withheld Authority
|                      |  |     |             |                   
|Paul J. Tufano        |  |     | 217,982,032 |                    |  |  | 8,207,584  | 
|Charles M. Boesenberg |  |     | 221,561,360 |                    |  |  | 4,628,256  | 
|Michael R. Cannon     |  |     | 180,725,056 |                    |  |  | 45,464,560 | 

Mr. Tufano, Mr. Boesenberg and
Mr. Cannons terms will expire at the 2007 annual
meeting. The following Directors terms of office continue
until the annual meeting indicated: Dr. C.S. Park, Charles
F. Christ and Gregory E. Myers, (Class I term expires at
the 2005 annual meeting) and Roger Johnson and Charles Hill,
(Class II term expires at the 2006 annual meeting).

The following matter was also submitted to and
approved by a vote of the stockholders with the results of the
voting being as shown:



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Proposal to ratify the appointment of
    PricewaterhouseCoopers LLP as our independent accountants for
    the fiscal year ending December 25, 2004:

|          |  |  |             | 
|--------- |  |  | ----------- | 
|For       |  |  | 223,600,749 | 
|Against   |  |  | 2,420,105   | 
|Abstained |  |  | 168,762     | 

43



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Item 5.     Other
Information

None




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits. See Index to Exhibits
at the end of this report.

(b) Reports on Form 8-K.

Maxtor filed a Current Report on Form 8-K on
April 6, 2004 in which it reported the termination of the
Receivables Loan and Security Agreement dated as of May 9,
2003, by and among Radian Reinsurance Inc., Maxtor Funding LLC,
Maxtor Corporation, Merrill Lynch Commercial Finance Corp., and
U.S. Bank National Association and its related agreements.

Maxtor filed a Current Report on Form 8-K on
April 21, 2004 in which it reported financial results for
the first fiscal quarter ended March 27, 2004.

44



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##### Table of Contents






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/ THEODORE A. HULL

| |                               
| | ------------------------------
| |                               
| | Theodore A. Hull              
| | Vice President, Finance and   
| | Acting Chief Financial Officer

Date: August 4, 2004

45



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##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                   
|Number  |  | Description                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                   
|10.1    |  | U.S. $100,000,000 Receivables Loan and Security
    Agreement dated as of June 24, 2004 among Maxtor
    Receivables LLC, Maxtor Corporation, Merrill Lynch Commercial
    Finance Corp. and U.S. Bank National Association.                      
|10.2    |  | Purchase and Contribution Agreement dated as of
    June 24, 2004 between Maxtor Corporation and Maxtor
    Receivables LLC.                                                                                                                      
|10.3    |  | Amendment No. 1 to Maxtor Standard Volume
    Purchase Agreement dated as of July 1, 2004 between Maxtor
    Corporation and Agere Systems Inc.*                                                                                                  
|10.4    |  | Agreement dated as of July 19, 2004 between
    Maxtor Corporation and Phillip C. Duncan.**                                                                                                                                                       
|10.5    |  | Employment Offer Letter dated as of July 19,
    2004 from Maxtor Corporation to John Viera.**                                                                                                                                                    
|31.1    |  | Certification of Paul J. Tufano, President and
    Chief Executive 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.
|31.2    |  | Certification of Theodore A. Hull, 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.         
|32.1    |  | Certification of Paul J. Tufano, President and
    Chief Executive 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.                                
|32.2    |  | Certification of Theodore A. Hull, 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.                                     



---



|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Portions of this exhibit have been filed
    separately with the Commission pursuant to an application for
    confidential treatment. The confidential portions of this
    Exhibit have been omitted and are marked by asterisks.



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