##### 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 March 27,
    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
April 29, 2004, 247,321,877 shares of the
registrants Common Stock, $.01 par value, were issued
and outstanding.



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MAXTOR CORPORATION

FORM 10-Q

March 27, 2004


INDEX

|                                  |  |                                                                                                                             |    |      |    | 
|--------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                  |  |                                                                                                                             |    | Page
|                                  |  |                                                                                                                             |    |     
|PART I. FINANCIAL
    INFORMATION
|Item 1.                           |  | Condensed Consolidated
    Financial Statements (Unaudited)                                                                 |    |      | 2  | 
|                                  |  | Condensed Consolidated
    Balance Sheets  March 27, 2004, and
    December 27, 2003 (Unaudited)                           |    |      | 2  | 
|                                  |  | Condensed Consolidated
    Statements of Operations  Three months ended
    March 27, 2004, and March 29, 2003 (Unaudited) |    |      | 3  | 
|                                  |  | Condensed Consolidated
    Statements of Cash Flows  Three months ended
    March 27, 2004, and March 29, 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                                                              |    |      | 39 | 
|Item 4.                           |  | Controls and Procedures                                                                                                     |    |      | 39 | 
|PART II. OTHER
    INFORMATION   
|Item 1.                           |  | Legal Proceedings                                                                                                           |    |      | 40 | 
|Item 2.                           |  | Changes in Securities and
    Use of Proceeds                                                                               |    |      | 41 | 
|Item 3.                           |  | Defaults Upon Senior
    Securities                                                                                         |    |      | 41 | 
|Item 4.                           |  | Submission of Matters to a
    Vote of Security Holders                                                                     |    |      | 41 | 
|Item 5.                           |  | Other Information                                                                                                           |    |      | 41 | 
|Item 6.                           |  | Exhibits and Reports on
    Form 8-K                                                                                        |    |      | 41 | 
|Signature Page                    |  |                                                                                                                             | 42 |     
|EXHIBIT 10.1                     
|EXHIBIT 10.2                     
|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

(In thousands, except share and per share
amounts)


|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |         |           | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------ | --------- |  | ---------- | ------- | --------- | 
|                                           |                                                                                                                                                                                                                                                    | March 27,                                  |            | December 27,
|                                           |                                                                                                                                                                                                                                                    | 2004                                       |            | 2003        
|                                           |                                                                                                                                                                                                                                                    |                                            |            |             
|                                           |                                                                                                                                                                                                                                                    |                                           
|                                           |                                                                                                                                                                                                                                                    | (Unaudited)                               
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           | Cash and cash equivalents                                                                                                                                                                                                                          |                                            | $          | 443,661      |           |  | $          | 530,816 |          
|                                           | Restricted cash                                                                                                                                                                                                                                    |                                            |            | 45,666       |           |  |            | 37,154  |          
|                                           | Marketable securities                                                                                                                                                                                                                              |                                            |            | 46,236       |           |  |            | 44,543  |          
|                                           | Restricted marketable securities                                                                                                                                                                                                                   |                                            |            | 41,930       |           |  |            | 42,337  |          
|                                           | Accounts receivable, net of allowance of doubtful
    accounts of $8,801 at March 27, 2004 and $11,220 at
    December 27, 2003                                                                                                                    |                                            |            | 471,846      |           |  |            | 540,943 |          
|                                           | Other receivables                                                                                                                                                                                                                                  |                                            |            | 45,852       |           |  |            | 37,964  |          
|                                           | Inventories                                                                                                                                                                                                                                        |                                            |            | 228,139      |           |  |            | 218,011 |          
|                                           | Prepaid expenses and other                                                                                                                                                                                                                         |                                            |            | 34,254       |           |  |            | 38,301  |          
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                    | Total current assets                       |            |              | 1,357,584 |  |            |         | 1,490,069 | 
|Property, plant and equipment, net         |                                                                                                                                                                                                                                                    |                                            | 354,773    |              |           |  | 342,679    |        
|Goodwill                                   |                                                                                                                                                                                                                                                    |                                            | 813,951    |              |           |  | 813,951    |        
|Other intangible assets, net               |                                                                                                                                                                                                                                                    |                                            | 40,783     |              |           |  | 61,619     |        
|Other assets                               |                                                                                                                                                                                                                                                    |                                            | 13,231     |              |           |  | 13,908     |        
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                    | Total assets                               |            | $            | 2,580,322 |  |            | $       | 2,722,226 | 
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           | Short-term borrowings, including current portion
    of long-term debt                                                                                                                                                                             |                                            | $          | 22,045       |           |  | $          | 77,037  |          
|                                           | Accounts payable                                                                                                                                                                                                                                   |                                            |            | 694,977      |           |  |            | 730,056 |          
|                                           | Accrued and other liabilities                                                                                                                                                                                                                      |                                            |            | 367,981      |           |  |            | 454,388 |          
|                                           | Liabilities of discontinued operations                                                                                                                                                                                                             |                                            |            | 807          |           |  |            | 1,487   |          
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                    | Total current liabilities                  |            |              | 1,085,810 |  |            |         | 1,262,968 | 
|Deferred taxes                             |                                                                                                                                                                                                                                                    |                                            | 196,455    |              |           |  | 196,455    |        
|Long-term debt, net of current portion     |                                                                                                                                                                                                                                                    |                                            | 377,840    |              |           |  | 355,809    |        
|Other liabilities                          |                                                                                                                                                                                                                                                    |                                            | 181,580    |              |           |  | 186,485    |        
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                    | Total liabilities                          |            |              | 1,841,685 |  |            |         | 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; 260,540,360 shares
    issued and 247,294,622 shares outstanding at March 27,
    2004 and 259,246,819 shares issued and
    246,001,081 shares outstanding at December 27, 2003 |                                            |            | 2,605        |           |  |            | 2,592   |          
|Additional paid-in capital                 |                                                                                                                                                                                                                                                    |                                            | 2,419,821  |              |           |  | 2,410,082  |        
|Deferred stock-based compensation          |                                                                                                                                                                                                                                                    |                                            |           |              |           |  | (110       | )      
|Accumulated deficit                        |                                                                                                                                                                                                                                                    |                                            | (1,628,757 | )            |           |  | (1,637,920 | )      
|Cumulative other comprehensive income      |                                                                                                                                                                                                                                                    |                                            | 9,907      |              |           |  | 10,804     |        
|Treasury stock (13,245,738 shares) at cost |                                                                                                                                                                                                                                                    |                                            | (64,939    | )            |           |  | (64,939    | )      
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                    | Total stockholders equity                 |            |              | 738,637   |  |            |         | 720,509   | 
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        
|                                           |                                                                                                                                                                                                                                                    | Total liabilities and stockholders equity |            | $            | 2,580,322 |  |            | $       | 2,722,226 | 
|                                           |                                                                                                                                                                                                                                                    |                                            |            |              |           |  |            |        

See accompanying notes to condensed consolidated
financial statements.

2



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MAXTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except share and per share
amounts)


|                                     |                                     |                          |           |                |         |   |         |             |         | 
|------------------------------------ | ----------------------------------- | ------------------------ | --------- | -------------- | ------- | - | ------- | ----------- | ------- | 
|                                     |                                     |                         
|                                     |                                     | Three Months Ended      
|                                     |                                     |                         
|                                     |                                     | March 27, 2004           |           | March 29, 2003
|                                     |                                     |                          |           |               
|                                     |                                     |                         
|                                     |                                     | (Unaudited)             
|Net revenues                         |                                     |                          | 1,019,688 |                |         |   | 938,889 |            
|Cost of revenues                     |                                     |                          | 864,625   |                |         |   | 767,042 |            
|                                     |                                     |                          |           |                |         |   |         |            
|                                     | Gross profit                        |                          |           | 155,063        |         |   |         | 171,847     |        
|Operating expenses:                  |                                     |                          |           |                |         |   |         |            
|                                     | Research and development            |                          |           | 84,770         |         |   |         | 86,661      |        
|                                     | Selling, general and administrative |                          |           | 32,514         |         |   |         | 31,932      |        
|                                     | Amortization of intangible assets   |                          |           | 20,836         |         |   |         | 20,562      |        
|                                     |                                     |                          |           |                |         |   |         |            
|                                     |                                     | Total operating expenses |           |                | 138,120 |   |         |             | 139,155 | 
|                                     |                                     |                          |           |                |         |   |         |            
|Income from operations               |                                     |                          | 16,943    |                |         |   | 32,692  |            
|Interest expense                     |                                     |                          | (8,832    | )              |         |   | (5,422  | )          
|Interest income                      |                                     |                          | 1,288     |                |         |   | 1,208   |            
|Other gain                           |                                     |                          | 38        |                |         |   | 207     |            
|                                     |                                     |                          |           |                |         |   |         |            
|Income before income taxes           |                                     |                          | 9,437     |                |         |   | 28,685  |            
|Provision for income taxes           |                                     |                          | 274       |                |         |   | 1,277   |            
|                                     |                                     |                          |           |                |         |   |         |            
|Net income                           |                                     | $                        | 9,163     |                |         | $ | 27,408  |            
|                                     |                                     |                          |           |                |         |   |         |            
|Net income per share  basic         |                                     | $                        | 0.04      |                |         | $ | 0.11    |            
|Net income per share  diluted       |                                     | $                        | 0.04      |                |         | $ | 0.11    |            
|Shares used in per share calculation |                                     |                          |           |                |         |   |         |            
|                                     |  basic                             |                          |           | 246,590,255    |         |   |         | 243,634,139 |        
|                                     |  diluted                           |                          |           | 256,960,154    |         |   |         | 246,866,117 |        

See accompanying notes to condensed consolidated
financial statements.

3



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MAXTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |        |         |         |  
|-------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------- | --------- | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | Three Months Ended               
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | March 27,                         |                                                                                    | March 29,
|                                                                                                         |                                                                                     | 2004                              |                                                                                    | 2003     
|                                                                                                         |                                                                                     |                                   |                                                                                    |          
|                                                                                                         |                                                                                     |                                  
|                                                                                                         |                                                                                     | (Unaudited)                      
|                                                                                                         |                                                                                     | (In thousands)                   
|Cash Flows from Operating
    Activities:                                                                |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Net income                                                                                               |                                                                                     | $                                 | 9,163                                                                              |           |         | $       | 27,408  |       
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:          |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         | Depreciation and amortization                                                       |                                   |                                                                                    | 36,107    |         |         |         | 41,942 |        
|                                                                                                         | Amortization of intangible assets                                                   |                                   |                                                                                    | 20,836    |         |         |         | 20,562 |        
|                                                                                                         | Stock-based compensation expense                                                    |                                   |                                                                                    | 144       |         |         |         | 273    |        
|                                                                                                         | Loss on sale of property, plant and equipment and
    other assets                  |                                   |                                                                                    | 353       |         |         |         | 2,308  |        
|                                                                                                         | Gain on retirement of bond                                                          |                                   |                                                                                    |          |         |         |         | (111   | )      
|                                                                                                         | Change in assets and liabilities:                                                   |                                   |                                                                                    |           |         |         |         |        |        
|                                                                                                         |                                                                                     | Accounts receivable               |                                                                                    |           | 69,097  |         |         |        | 38,404  |        
|                                                                                                         |                                                                                     | Other receivables                 |                                                                                    |           | (7,888  | )       |         |        | 5,015   |        
|                                                                                                         |                                                                                     | Inventories                       |                                                                                    |           | (10,128 | )       |         |        | (41,528 | )      
|                                                                                                         |                                                                                     | Prepaid expenses and other assets |                                                                                    |           | 3,910   |         |         |        | (8,992  | )      
|                                                                                                         |                                                                                     | Accounts payable                  |                                                                                    |           | (32,177 | )       |         |        | (18,232 | )      
|                                                                                                         |                                                                                     | Accrued and other liabilities     |                                                                                    |           | (91,312 | )       |         |        | (22,898 | )      
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         |                                                                                     |                                   | Net cash provided by (used in) operating
    activities from continuing operations |           |         | (1,895  | )       |        |         | 44,151  |  
|                                                                                                         |                                                                                     |                                   | Net cash flow used in discontinued operations                                      |           |         | (680    | )       |        |         | (4,744  | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         |                                                                                     |                                   | Net cash provided by (used in) operating
    activities                            |           |         | (2,575  | )       |        |         | 39,407  |  
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Cash Flows from Investing
    Activities:                                                                |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Proceeds from sale of property, plant and
    equipment                                                  |                                                                                     |                                   | 720                                                                                |           |         |         | 103     |       
|Purchase of property, plant and equipment                                                                |                                                                                     |                                   | (52,176                                                                            | )         |         |         | (20,609 | )     
|Decrease (increase) in restricted cash                                                                   |                                                                                     |                                   | (8,512                                                                             | )         |         |         | 2,739   |       
|Proceeds from sale of marketable securities                                                              |                                                                                     |                                   | 12,920                                                                             |           |         |         | 17,357  |       
|Purchase of marketable securities                                                                        |                                                                                     |                                   | (14,289                                                                            | )         |         |         | (13,886 | )     
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         |                                                                                     |                                   | Net cash used in investing activities                                              |           |         | (61,337 | )       |        |         | (14,296 | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Cash Flows from Financing
    Activities:                                                                |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Proceeds from issuance of debt, including
    short-term borrowings                                      |                                                                                     |                                   | 24,655                                                                             |           |         |         |        |       
|Principal payments of debt including short-term
    borrowings                                           |                                                                                     |                                   | (3,391                                                                             | )         |         |         | (4,622  | )     
|Principal payments under capital lease obligations                                                       |                                                                                     |                                   | (4,225                                                                             | )         |         |         | (7,132  | )     
|Payment of receivable-backed borrowing                                                                   |                                                                                     |                                   | (50,000                                                                            | )         |         |         |        |       
|Proceeds from issuance of common stock from
    employee stock purchase plan and stock options exercised |                                                                                     |                                   | 9,718                                                                              |           |         |         | 8,865   |       
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         |                                                                                     |                                   | Net cash used in financing activities                                              |           |         | (23,243 | )       |        |         | (2,889  | )
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Net change in cash and cash equivalents                                                                  |                                                                                     |                                   | (87,155                                                                            | )         |         |         | 22,222  |       
|Cash and cash equivalents at beginning of period                                                         |                                                                                     |                                   | 530,816                                                                            |           |         |         | 306,444 |       
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Cash and cash equivalents at end of period                                                               |                                                                                     | $                                 | 443,661                                                                            |           |         | $       | 328,666 |       
|                                                                                                         |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|Supplemental Disclosures of Cash Flow
    Information:                                                   |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         | Cash paid during the period for:                                                    |                                   |                                                                                    |           |         |         |         |        |        
|                                                                                                         |                                                                                     | Interest                          |                                                                                    | $         | 4,168   |         |         | $      | 7,370   |        
|                                                                                                         |                                                                                     | Income taxes                      |                                                                                    | $         | 2,146   |         |         | $      | 1,551   |        
|Schedule of Non-Cash Investing and Financing
    Activities:                                             |                                                                                     |                                   |                                                                                    |           |         |         |         |       
|                                                                                                         | Purchase of property, plant and equipment
    financed by accounts payable          |                                   | $                                                                                  | 2,966     |         |         | $       | 3,287  |        
|                                                                                                         | Retirement of debt in exchange for bond redemption                                  |                                   | $                                                                                  | 5,000     |         |         | $       | 5,000  |        
|                                                                                                         | Change in unrealized gain (loss) on investments                                     |                                   | $                                                                                  | (897      | )       |         | $       | 1,711  |        
|                                                                                                         | Purchase of property, plant and equipment
    financed by capital lease obligations |                                   | $                                                                                  |          |         |         | $       | 2,826  |        

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.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In March 2004, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 03-6,
Participating Securities and the Two-class Method
Under FASB Statement No. 128, Earnings Per Share.
EITF Issue No. 03-6 addresses a number of questions
regarding the computation of earnings per share
(EPS) by companies that have issued securities other
than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and
if, it declares dividends on its common stock. The issue also
provides further guidance in applying the two-class method of
calculating EPS. It clarifies what constitutes a participating
security and how to apply the two-class method of computing EPS
once it is determined that a security is participating,
including how to allocate undistributed earnings to such a
security. This pronouncement is effective for fiscal periods
beginning after March 31, 2004. The Company is currently
evaluating the provisions of EITF 03-6 to determine the impact,
if any, on its computation of EPS.



| |                         
| | ------------------------
| | 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

5



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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
|                                                                                                              |                       |                   
|                                                                                                              |                       | March 27,          |       | March 29,
|                                                                                                              |                       | 2004               |       | 2003     
|                                                                                                              |                       |                    |       |          
|Net income applicable to common stockholders, as
    reported                                                 |                       | $                  | 9,163 |           |  | $ | 27,408 |       
|Add: Stock-based employee compensation expense
    included in reported net income                            |                       |                    | 144   |           |  |   | 273    |       
|Deduct: Total stock-based employee compensation
    expense determined under fair value method for all awards |                       |                    | 5,491 |           |  |   | 5,523  |       
|                                                                                                              |                       |                    |       |           |  |   |        |       
|                                                                                                              | Pro forma net income  |                    | $     | 3,816     |  |   | $      | 22,158 | 
|                                                                                                              |                       |                    |       |           |  |   |        |       
|Net income per share                                                                                          |                       |                    |       |           |  |   |        |       
|                                                                                                              | As reported  basic   |                    | $     | 0.04      |  |   | $      | 0.11   | 
|                                                                                                              | Pro forma  basic     |                    | $     | 0.02      |  |   | $      | 0.09   | 
|                                                                                                              | As reported  diluted |                    | $     | 0.04      |  |   | $      | 0.11   | 
|                                                                                                              | Pro forma  diluted   |                    | $     | 0.02      |  |   | $      | 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
|                               |  |                   
|                               |  | March 27,          |           | March 29,
|                               |  | 2004               |           | 2003     
|                               |  |                    |           |          
|Risk-free interest rate        |  |                    | 3.02      | %         |  |  | 2.88      | %
|Weighted average expected life |  |                    | 4.5 years |           |  |  | 4.5 years |  
|Volatility                     |  |                    | 75        | %         |  |  | 75        | %
|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
|                               |  |                   
|                               |  | March 27,          |           | March 29,
|                               |  | 2004               |           | 2003     
|                               |  |                    |           |          
|Risk-free interest rate        |  |                    | 1.01      | %         |  |  | 1.12      | %
|Weighted average expected life |  |                    | 0.5 years |           |  |  | 0.5 years |  
|Volatility                     |  |                    | 76        | %         |  |  | 75        | %
|Dividend yield                 |  |                    |          |           |  |  |          |  

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

6



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | 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 month periods ended March 27, 2004 comprised
13 weeks, as did the three months ended March 29,
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.



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

|                                               |                                              |                |          |              |  |   |          |         | 
|---------------------------------------------- | -------------------------------------------- | -------------- | -------- | ------------ |  | - | -------- | ------- | 
|                                               |                                              | March 27,      |          | December 27,
|                                               |                                              | 2004           |          | 2003        
|                                               |                                              |                |          |             
|                                               |                                              |               
|                                               |                                              | (In thousands)
|Inventories:                                   |                                              |                |          |              |  |   |          |        
|                                               | Raw materials                                |                | $        | 54,002       |  |   | $        | 56,132  | 
|                                               | Work-in-process                              |                |          | 36,106       |  |   |          | 44,650  | 
|                                               | Finished goods                               |                |          | 138,031      |  |   |          | 117,229 | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 228,139  |              |  | $ | 218,011  |        
|                                               |                                              |                |          |              |  |   |          |        
|Prepaid expenses and other:                    |                                              |                |          |              |  |   |          |        
|                                               | Investments in securities, at fair value     |                | $        | 14,592       |  |   | $        | 15,536  | 
|                                               | Prepaid expenses and other                   |                |          | 19,662       |  |   |          | 22,765  | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 34,254   |              |  | $ | 38,301   |        
|                                               |                                              |                |          |              |  |   |          |        
|Property, plant and equipment, at cost:        |                                              |                |          |              |  |   |          |        
|                                               | Buildings                                    |                | $        | 161,115      |  |   | $        | 152,381 | 
|                                               | Machinery and equipment                      |                |          | 630,505      |  |   |          | 608,735 | 
|                                               | Software                                     |                |          | 80,690       |  |   |          | 79,682  | 
|                                               | Furniture and fixtures                       |                |          | 27,145       |  |   |          | 26,583  | 
|                                               | Leasehold improvements                       |                |          | 86,789       |  |   |          | 86,430  | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 986,244  |              |  | $ | 953,811  |        
|Less accumulated depreciation and amortization |                                              |                | (631,471 | )            |  |   | (611,132 | )      
|                                               |                                              |                |          |              |  |   |          |        
|Net property, plant and equipment              |                                              | $              | 354,773  |              |  | $ | 342,679  |        
|                                               |                                              |                |          |              |  |   |          |        
|Accrued and other liabilities:                 |                                              |                |          |              |  |   |          |        
|                                               | Income taxes payable                         |                | $        | 22,183       |  |   | $        | 23,763  | 
|                                               | Accrued payroll and payroll-related expenses |                |          | 70,340       |  |   |          | 132,967 | 
|                                               | Accrued warranty                             |                |          | 191,325      |  |   |          | 209,426 | 
|                                               | Restructuring liabilities, short-term        |                |          | 10,684       |  |   |          | 9,096   | 
|                                               | Accrued expenses                             |                |          | 73,449       |  |   |          | 79,136  | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 367,981  |              |  | $ | 454,388  |        
|                                               |                                              |                |          |              |  |   |          |        

7



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                  |                                      |                |         |              |  |   |         |         | 
|----------------- | ------------------------------------ | -------------- | ------- | ------------ |  | - | ------- | ------- | 
|                  |                                      | March 27,      |         | December 27,
|                  |                                      | 2004           |         | 2003        
|                  |                                      |                |         |             
|                  |                                      |               
|                  |                                      | (In thousands)
|Other liabilities |                                      |                |         |              |  |   |         |        
|                  | Tax indemnification liability        |                | $       | 135,245      |  |   | $       | 135,559 | 
|                  | Restructuring liabilities, long-term |                |         | 39,618       |  |   |         | 43,517  | 
|                  | Other                                |                |         | 6,717        |  |   |         | 7,409   | 
|                  |                                      |                |         |              |  |   |         |        
|                  |                                      | $              | 181,580 |              |  | $ | 186,485 |        
|                  |                                      |                |         |              |  |   |         |        

Depreciation and amortization expense of
property, plant and equipment for the periods ended
March 27, 2004 and March 29, 2003 was
$36.1 million and $41.9 million, respectively. Total
property, plant and equipment recorded under capital leases was
$38.2 million as of March 27, 2004. Total accumulated
depreciation under capital leases was $16.4 million as of
March 27, 2004.



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

Commencing in fiscal 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires goodwill to
be tested for 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 March 27, 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 $15.2 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

8



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fully amortized. Amortization of other intangible
assets was $20.8 million and $20.6 million for the
three months ended March 27, 2004 and March 29, 2003,
respectively.

|                              |                     |                      |  |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |        | 
|----------------------------- | ------------------- | -------------------- |  | -------------- | - | ----------------- | ------- | ----- | ------- | -------- | -------- | ------------ | -------- | --- | ------- | ----- | ------ | - | ------- | ----- | ------- | - | -------- | ------ | ------- | - | ------- | ----- | ------ | 
|                              |                     |                      |  |                |   |                  
|                              |                     |                      |  | March 27, 2004 |   | December 27, 2003
|                              |                     |                      |  |                |   |                  
|                              |                     | Useful               |  | Gross          |   |                   |         | Gross |         |         
|                              |                     | Life                 |  | Carrying       |   | Accumulated       |         |       |         | Carrying |          | Accumulated  |          |    
|                              |                     | (Years)              |  | Amount         |   | Amortization      |         | Net   |         | Amount   |          | Amortization |          | Net
|                              |                     |                      |  |                |   |                   |         |       |         |          |          |              |          |    
|                              |                     |                      |  |                |   |                  
|                              |                     |                      |  | (In thousands) |   | (In thousands)   
|Goodwill                      |                     |                      |  |                |   | $                 | 813,951 |       |         |          |         |              |          | $   | 813,951 |       |        | $ | 813,951 |       |         |   |         |        |         | $ | 813,951 |      
|                              |                     |                      |  |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Quantum HDD                   |                     |                      |  |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              | Existing Technology |                      |  |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |       
|                              |                     | Core technology      |  |                | 5 |                   |         | $     | 96,700  |          |          | $            | (58,020  | )   |         | $     | 38,680 |   |         | $     | 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 |         |          |          | (2,247       | )        |     |         | 2,103 |        |   | $       | 4,350 |         |   | $        | (2,030 | )       |   | $       | 2,320 |       
|                              |                     |                      |  |                |   |                   |         |       |         |          |          |              |          |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Total other intangible assets |                     |                      |  |                |   | $                 | 290,450 |       |         | $        | (249,667 | )            |          | $   | 40,783  |       |        | $ | 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.



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

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

|                                                    |  |           |         |              |  |   |         |  
|--------------------------------------------------- |  | --------- | ------- | ------------ |  | - | ------- | -
|                                                    |  | March 27, |         | December 27,
|                                                    |  | 2004      |         | 2003        
|                                                    |  |           |         |             
|6.8% Convertible Senior Notes due 2010              |  | $         | 230,000 |              |  | $ | 230,000 |  
|5.75% Subordinated Debentures due
    March 1, 2012 |  |           | 59,352  |              |  |   | 59,352  |  
|Manufacturing Facility Loan, Suzhou, China          |  |           | 30,000  |              |  |   | 15,000  |  
|Economic Development Board of Singapore Loans       |  |           | 30,784  |              |  |   | 24,138  |  
|Mortgages                                           |  |           | 33,782  |              |  |   | 34,164  |  
|Equipment Loans and Capital Leases                  |  |           | 15,967  |              |  |   | 20,192  |  
|Receivable-backed Borrowing                         |  |           |        |              |  |   | 50,000  |  
|                                                    |  |           |         |              |  |   |         |  
|                                                    |  |           | 399,885 |              |  |   | 432,846 |  
|Less amounts due within one year                    |  |           | (22,045 | )            |  |   | (77,037 | )
|                                                    |  |           |         |              |  |   |         |  
|                                                    |  | $         | 377,840 |              |  | $ | 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

9



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 March 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 March 27, 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. As of
March 27, 2004, the remaining balance of $3.4 million
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 March 27, 2004,
the balance was 52.0 million Singapore dollars, equivalent
to $30.8 million. This loan is supported by a guaranty from
a bank. Cash is currently provided as collateral for this
guaranty; however, the Company may at its option substitute
other assets as security.

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 March 27, 2004 was
$33.8 million.

As of March 27, 2004, the Company had
capital leases totaling $16.0 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 8.6%.

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 our U.S. and Canadian accounts
receivable. This special purpose subsidiary had borrowing
authority up to $100 million collateralized by the
U.S. and Canadian accounts

10



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

receivable. The special purpose subsidiary was
consolidated for financial reporting purposes. The transactions
under the arrangement were accounted for as secured borrowing
and accounts receivables, and the related short-term borrowings,
if any, remain on our consolidated balance sheet. As of
March 9, 2004, the dilution to liquidation ratio for this
facility exceeded the agreed upon threshold. The lenders under
the facility agreed to forbear from exercising remedies for
noncompliance with this ratio through March 31, 2004 and in
return, 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 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 months ended March 27, 2004 and
March 29, 2003 were as follows (in thousands):

|                                            |  |                    |         |           |  |   |         |  
|------------------------------------------- |  | ------------------ | ------- | --------- |  | - | ------- | -
|                                            |  |                   
|                                            |  | Three Months Ended
|                                            |  |                   
|                                            |  | March 27,          |         | March 29,
|                                            |  | 2004               |         | 2003     
|                                            |  |                    |         |          
|Balance at the beginning of the period      |  | $                  | 209,426 |           |  | $ | 278,713 |  
|Charges to operations                       |  |                    | 39,431  |           |  |   | 60,824  |  
|Settlements                                 |  |                    | (56,507 | )         |  |   | (49,035 | )
|Changes in estimates, primarily expirations |  |                    | (1,025  | )         |  |   | (23,919 | )
|                                            |  |                    |         |           |  |   |         |  
|Balance at the end of the period            |  | $                  | 191,325 |           |  | $ | 266,583 |  
|                                            |  |                    |         |           |  |   |         |  

11



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

Under purchase accounting rules, the Company
recorded $29.2 million for estimated severance pay
associated with termination of approximately 700 employees in
the United States. In addition, the Company paid and expensed
$30.5 million for severance pay associated with termination
of approximately 600 Quantum Corporation (Quantum)
employees. As a result, total severance related costs amounted
to $59.7 million and the total number of terminated
employees, including Quantum transitional employees was
approximately 1,300. The Company also recorded a
$59.1 million liability for estimated facility exit costs
for the closure of three Quantum HDD offices and research and
development facilities located in Milpitas, California, and two
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
March 27, 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  |  
|                             |  |          |      |               |  |       |       |       |  |   |       |   |  |   |       |  

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



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

On August 15, 2002, the Company announced
its decision to shut down its Network Systems Group
(NSG) and cease the manufacturing and sale of its
MaxAttachTM branded network attached storage
products. The discontinuance of the NSG operations represents
the abandonment of a component of an entity as defined in
paragraph 47 of Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Accordingly, the Companys
financial statements have been presented to reflect NSG as a
discontinued operation for all periods presented. Its
liabilities (no remaining assets) have been segregated from
continuing operations in the accompanying consolidated balance
sheets. There were no results from discontinued operations for
the three months ended March 27, 2004 and March 29,
2003. The remaining liabilities of the NSG discontinued
operations as of March 27, 2004 were $0.8 million
relating to warranty, 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
$7.0 million after cash payments of $0.4 million
during the three months ended March 27, 2004.



|   |                     
|-- | --------------------
|9. | Net Income 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
|                                                 |                                         |                   
|                                                 |                                         | March 27, 2004     |             | March 29, 2003
|                                                 |                                         |                    |             |               
|Numerator  Basic and
    Diluted                |                                         |                    |             |                |  |   |             |          
|Net income                                       |                                         | $                  | 9,163       |                |  | $ | 27,408      |          
|                                                 |                                         |                    |             |                |  |   |             |          
|Net income available to common stockholders      |                                         | $                  | 9,163       |                |  | $ | 27,408      |          
|                                                 |                                         |                    |             |                |  |   |             |          
|Denominator                                      |                                         |                    |             |                |  |   |             |          
|Basic weighted average common shares outstanding |                                         |                    | 246,590,255 |                |  |   | 243,634,139 |          
|Effect of dilutive securities:                   |                                         |                    |             |                |  |   |             |          
|                                                 | Common stock options                    |                    |             | 10,304,899     |  |   |             | 3,135,070 | 
|                                                 | Restricted shares subject to repurchase |                    |             | 65,000         |  |   |             | 96,908    | 
|                                                 |                                         |                    |             |                |  |   |             |          
|Diluted weighted average common shares           |                                         |                    | 256,960,154 |                |  |   | 246,866,117 |          
|                                                 |                                         |                    |             |                |  |   |             |          
|Net income per share  basic                     |                                         | $                  | 0.04        |                |  | $ | 0.11        |          
|                                                 |                                         |                    |             |                |  |   |             |          
|Net income per share  diluted                   |                                         | $                  | 0.04        |                |  | $ | 0.11        |          
|                                                 |                                         |                    |             |                |  |   |             |          

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
|                                                                             |  |                   
|                                                                             |  | March 27,          |            | March 29,
|                                                                             |  | 2004               |            | 2003     
|                                                                             |  |                    |            |          
|Common stock options                                                         |  |                    | 2,880,733  |           |  |  | 17,747,072 | 
|As-if converted shares related to
    6.8% Convertible Senior Notes due 2010 |  |                    | 18,756,362 |           |  |  |           | 



|    |                     
|--- | --------------------
|10. | Comprehensive Income

Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner
sources. Cumulative other comprehensive income, 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.

13



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total comprehensive income for the three months
ended March 27, 2004 and March 29, 2003, is presented
in the following table (in thousands):

|                                                                      |  |                    |       |           |  |   |        | 
|--------------------------------------------------------------------- |  | ------------------ | ----- | --------- |  | - | ------ | 
|                                                                      |  |                   
|                                                                      |  | Three Months Ended
|                                                                      |  |                   
|                                                                      |  | March 27,          |       | March 29,
|                                                                      |  | 2004               |       | 2003     
|                                                                      |  |                    |       |          
|Net income                                                            |  | $                  | 9,163 |           |  | $ | 27,408 | 
|Unrealized gain (loss) on investments in
    securities               |  |                    | (865  | )         |  |   | 1,799  | 
|Less: reclassification adjustment for gain
    included in net income |  |                    | 32    |           |  |   | 88     | 
|                                                                      |  |                    |       |           |  |   |        | 
|Comprehensive income                                                  |  | $                  | 8,266 |           |  | $ | 29,119 | 
|                                                                      |  |                    |       |           |  |   |        | 



|    |                                                       
|--- | ------------------------------------------------------
|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 months ended March 27,
2004 represented 55.2% of total revenue, compared to 42.5% of
total revenue for the corresponding period in fiscal year 2003.
Sales to the distribution and retail channels for the three
months ended March 27, 2004 represented 44.8% of total
revenue, compared to 57.5% of total revenue in the corresponding
period in fiscal year 2003. Sales to one customer was over 10%
of total revenues in the three months ended March 27, 2004;
only one customer represented more than 10% of revenue during
this period. No customer represented over 10% of revenues in the
three months ended March 29, 2003.

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 months ended March 27, 2004 and March 29,
2003, respectively, is presented in the following table (in
thousands):

|                               |  |                    |           |           |  |   |         | 
|------------------------------ |  | ------------------ | --------- | --------- |  | - | ------- | 
|                               |  |                   
|                               |  | Three Months Ended
|                               |  |                   
|                               |  | March 27,          |           | March 29,
|                               |  | 2004               |           | 2003     
|                               |  |                    |           |          
|United States                  |  | $                  | 318,647   |           |  | $ | 303,969 | 
|Asia Pacific and Japan         |  |                    | 306,837   |           |  |   | 283,327 | 
|Europe, Middle East and Africa |  |                    | 381,234   |           |  |   | 330,593 | 
|Latin America and other        |  |                    | 12,970    |           |  |   | 21,000  | 
|                               |  |                    |           |           |  |   |         | 
|Total                          |  | $                  | 1,019,688 |           |  | $ | 938,889 | 
|                               |  |                    |           |           |  |   |         | 

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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                               |  |           |           |              |  |   |           | 
|------------------------------ |  | --------- | --------- | ------------ |  | - | --------- | 
|                               |  | March 27, |           | December 27,
|                               |  | 2004      |           | 2003        
|                               |  |           |           |             
|United States                  |  | $         | 1,085,221 |              |  | $ | 1,101,889 | 
|Asia Pacific and Japan         |  |           | 136,600   |              |  |   | 129,380   | 
|Europe, Middle East and Africa |  |           | 693       |              |  |   | 731       | 
|Latin America and other        |  |           | 224       |              |  |   | 157       | 
|                               |  |           |           |              |  |   |           | 
|Total                          |  | $         | 1,222,738 |              |  | $ | 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 $854.7 million and $875.6 million
as of March 27, 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.



|    |              
|--- | -------------
|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 flows.

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
flows.

Prior to Maxtors acquisition of the Quantum
HDD business, the Company, 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. The Company purchased
the overwhelming majority of the spindle motors used in its 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

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Maxtor. 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 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 the
Companys 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 its 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 the Company 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 California. On March 1,
2004, the Company filed an answer denying all material
allegations and a motion to dismiss. 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 the
Company could have a material adverse effect on the
Companys 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.



|    |                          
|--- | -------------------------
|13. | Related Party Transaction

In the three months ended March 27, 2004,
the Company sold an aggregate of approximately
$24.2 million of goods to Solectron Corporation and
purchased an aggregate of approximately $8.0 million of
goods and services from Solectron. The Companys accounts
receivable and accounts payable balances for Solectron were
$16.8 million and $0.2 million, respectively, as of
March 27, 2004. A director of the Company is also the Chief
Executive Officer and a director of Solectron.



|    |                 
|--- | ----------------
|14. | Subsequent Event

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

16



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 agreed that the lawsuit would be dismissed
with prejudice and the Company received a cash payment of
$24,750,000.

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, completion of our manufacturing
facility in China, 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,
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 February 1999, we completed a public
offering of 7.8 million shares of our common stock with net
proceeds to us of approximately $95.8 million.

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

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

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

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

18



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##### Table of Contents



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 increased 8.6% in the three months ended
March 27, 2004 compared to the corresponding period in
2003. The increase was the result of increased market demand for
hard disk drives and increased sales of our server hard disk
drive, consumer electronics and personal storage products. The
increase in revenue was also driven by the continued increase in
our average capacity shipped, which was partially offset by
erosion of average selling prices over the period. Sales to OEMs
increased as a percentage of revenues and in absolute dollars
due to the continued growth in sales of consumer electronics and
server products and a decline in sales to the distribution
channel. Sales to the distribution channel decreased as a result
of the industrys oversupply of product in the channel
entering the fiscal quarter ended March 27, 2004. This
oversupply environment primarily impacted sales of our 80GB per
platter areal density hard disk drive. Sales to the retail
channel decreased due to a decline in the sales of our 80GB per
platter areal density hard disk drive due to our effort to
maintain our pricing in an environment characterized by
increased competitive pricing pressure, partially offset by an
increase in sales of personal storage products driven by sales
of Maxtor OneTouch and the expansion of our presence in Europe.
International revenue increased in absolute dollars by 12.1% and
from 65.4% to 67.5% of total revenues, as a result of continued
growth in sales of server, consumer electronics and personal
storage products.

Gross profit decreased to 15.2% in the three
months ended March 27, 2004 compared to 18.3% in the
corresponding period in 2003. The decrease in gross profit, both
as a percentage of revenue and actual dollars during the three
months ended March 27, 2004 was primarily due to the
decline of average selling prices partially offset by the
increase in our average capacity shipped. In the three months
ended March 27, 2004, gross profit was negatively impacted
by weaker server profitability driven by price erosion and
reduced cost leverage on our products produced at MKE; lower
than anticipated volume shipments of our 80GB per platter areal
density product resulted in reduced fixed cost absorption at our
manufacturing facilities. In the three months ended
March 27, 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 months
ended March 27, 2004 compared to the corresponding period
in 2003. The decrease was due to a $1.9 million decrease in
R&D expense partially offset by increased SG&A expense
of $0.6 million and amortization of intangible assets of
$0.2 million.

Operating capital (defined as accounts
receivable, other receivables and inventories less accounts
payable) decreased $18.9 million as a result of accounts
receivable decline on seasonally slower sales in the three
months ended March 27, 2004, partially offset by an
increase in finished goods inventory and a decrease in accounts
payable from seasonally slower shipments. Capital expenditures
are expected to be in the range of $200 million to
$250 million in 2004.

Critical Accounting Policies

Our discussion and analysis of the companys
financial condition and results of operations are based upon
Maxtors consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires management to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we
evaluate our

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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 |         |          
|                            |  |                    |         |          
|                            |  | March 27,          |         | March 29, |  |       
|                            |  | 2004               |         | 2003      |  | Change
|                            |  |                    |         |           |  |       
|                            |  |                    |         |          
|                            |  | (In millions)      |         |          
|Total revenues              |  | $                  | 1,019.7 |           |  | $      | 938.9 |   |  | $ | 80.8  |  
|Gross profit                |  | $                  | 155.1   |           |  | $      | 171.8 |   |  | $ | (16.7 | )
|Net income                  |  | $                  | 9.2     |           |  | $      | 27.4  |   |  | $ | (18.2 | )
|                           
|As a percentage of revenue: |  |                    |         |           |  |        |       |   |  |   |       |  
|Total revenues              |  |                    | 100.0   | %         |  |        | 100.0 | % |  |   |       |  
|Gross profit                |  |                    | 15.2    | %         |  |        | 18.3  | % |  |   |       |  
|Net income                  |  |                    | 0.9     | %         |  |        | 2.9   | % |  |   |       |  

Revenue

Revenues.Revenue
for the three months ended March 27, 2004 was
$1,019.7 million, which was $80.8 million, or 8.6%
higher as compared to the three months ended March 29,
2003. Total shipments for the three months ended March 27,
2004 were 13.6 million units, which was 1.2 million
units or 9.6% higher as compared to the three months ended
March 29, 2003. Total shipments and revenue increased
during the three months ended March 27, 2004 as a result of
increased market demand for hard disk drives and increased sales
of our server hard disk drive, consumer electronics and personal
storage products, as compared to the first quarter of 2003. The
increase in revenues was also driven by the continued increase
in volumes and of our average capacity shipped, partially offset
by erosion of average selling prices in the quarter.

Revenue from sales to original equipment
manufacturers (OEMs) represented 55.2% of revenue in
the three months ended March 27, 2004, compared to 42.5% of
revenue in the corresponding period in fiscal year 2003. This
increase in OEM sales as a percentage of revenues was the result
of the continued growth in sales of our consumer electronics and
server products and a decline in sales to the distribution
channel resulting from the industrys oversupply
environment.

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Revenue from sales to the distribution channel
and retail customers in the three months ended March 27,
2004 represented 44.8% of revenue compared to 57.5% of revenue
in the corresponding period in fiscal 2003. Sales to
distribution customers decreased to 38.6% of revenue in the
three months ended March 27, 2004 from 49.1% for the
corresponding period in fiscal 2003. Distribution revenue
decreased as a percentage of revenue during the three months
ended March 27, 2004 as a result of the oversupply of
product in the distribution channel entering the period ending
March 27, 2004. This oversupply environment primarily
impacted sales of our 80GB per platter areal density hard disk
drive. Sales to retail customers decreased to 6.2% in the three
months ended March 27, 2004 compared to 8.4% for the
corresponding period in fiscal 2003. The decrease was due to a
decline in the sales of our 80GB per platter areal density hard
disk drive partially offset by an increase in sales of personal
storage products driven by sales of Maxtor OneTouch and the
expansion of our presence in Europe. The decrease in sales of
our 80GB per platter product was the result of our effort to
maintain our pricing in an environment characterized by
increased competitive pricing pressure.

Domestic revenue in the three months ended
March 27, 2004 represented 32.5% of total sales compared to
34.6% of total sales in the corresponding period in fiscal year
2003. In absolute dollars, domestic revenue increased 2.0%.
Domestic revenue consists of United States, Canada and Latin
America sales. Domestic revenue decreased as a percentage of
revenue in the three months ended March 27, 2004 as a
result of the decrease in the sales of our 80GB per platter
areal density hard disk drive product to the distribution and
retail channels. This decrease in sales was partially offset by
increases in sales of our server, personal storage and consumer
electronics products.

International revenue in the three months ended
March 27, 2004 represented 67.5% of total sales compared to
65.4% in the corresponding period in fiscal year 2003. In
absolute dollars, international revenue increased 12.1% compared
to the corresponding period in fiscal year 2003. The increase
was driven by continued growth in sales of our server, consumer
electronics and personal storage products. This increase was
partially offset by the decrease in the sales of our 80GB per
platter areal density hard disk drive product to the
distribution channel.

Sales to Europe, Middle East and Africa in the
three months ended March 27, 2004 and March 29, 2003
represented 37.4% and 35.2% of total revenue, respectively. In
absolute dollars, Europe, Middle East and Africa sales in the
three months ended March 27, 2004 increased 15.3% compared
to the corresponding period in fiscal year 2003. The increase in
sales was the result of the success of our personal storage and
server products in the retail and OEM channels, respectively.

Sales to Asia Pacific and Japan in the three
months ended March 27, 2004 and March 29, 2003
represented 30.1% and 30.2% of total revenue, respectively. In
absolute dollars, Asia Pacific and Japan sales in the three
months ended March 27, 2004 increased 8.2% compared to the
corresponding period in fiscal year 2003. The increase in sales
was the result of the success of our consumer electronics and
server products sold through the OEM channel.

Sales to one customer was over 10% of total
revenues in the three months ended March 27, 2004; only one
customer represented more than 10% of revenue during this
period. No customer represented over 10% of revenues in the
three months ended March 29, 2003.



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

Gross profit decreased to $155.1 million in
the three months ended March 27, 2004, compared to
$171.8 million for the corresponding three months in fiscal
year 2003. As a percentage of revenue, gross profit decreased to
15.2% in the three months ended March 27, 2004 from 18.3%
in the corresponding three months of fiscal year 2003. The
decrease in gross profit, both as a percentage of revenue and
actual dollars during the three months ended March 27,
2004, was primarily due to the decline of average selling prices
partially offset by the increase in our average capacity
shipped. In the three months ended March 27, 2004, gross
profit was negatively impacted by weaker server profitability
driven by price erosion and reduced cost leverage on our
products produced at MKE; lower than anticipated volume
shipments of our 80GB per platter areal density product resulted
in reduced fixed cost absorption at our manufacturing
facilities. In the three months ended March 27, 2004, we
also experienced increased costs as a result of our investments
in our China and MMC

21



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##### Table of Contents



manufacturing facilities. Our cost of revenues
includes depreciation and amortization of property, plant and
equipment.


Operating Expenses

|                                    |  |                    |      |           |  |        |      |   |  |   |      |  
|----------------------------------- |  | ------------------ | ---- | --------- |  | ------ | ---- | - |  | - | ---- | -
|                                    |  |                    |      |          
|                                    |  | Three Months Ended |      |          
|                                    |  |                    |      |          
|                                    |  | March 27,          |      | March 29, |  |       
|                                    |  | 2004               |      | 2003      |  | Change
|                                    |  |                    |      |           |  |       
|                                    |  |                    |      |          
|                                    |  | (In millions)      |      |          
|Research and development            |  | $                  | 84.8 |           |  | $      | 86.7 |   |  | $ | (1.9 | )
|Selling, general and administrative |  | $                  | 32.5 |           |  | $      | 31.9 |   |  | $ | 0.6  |  
|Amortization of intangible assets   |  | $                  | 20.8 |           |  | $      | 20.6 |   |  | $ | 0.2  |  
|                                   
|As a percentage of revenue:         |  |                    |      |           |  |        |      |   |  |   |      |  
|Research and development            |  |                    | 8.3  | %         |  |        | 9.2  | % |  |   |      |  
|Selling, general and administrative |  |                    | 3.2  | %         |  |        | 3.4  | % |  |   |      |  
|Amortization of intangible assets   |  |                    | 2.0  | %         |  |        | 2.2  | % |  |   |      |  



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

R&D expense in the three months ended
March 27, 2004 was $84.8 million, or 8.3% of revenue
compared to $86.7 million, or 9.2% of revenue in the
corresponding period in fiscal year 2003. R&D expenses
decreased by $1.9 million, or 2.2%, in the three month
period ended March 27, 2004 compared to the corresponding
period in fiscal year 2003. The decrease in R&D expenses was
primarily due to a decrease in compensation expense of
$3.4 million, and a $1.2 million decrease in spending
in information technology and facilities. These decreases were
offset by a $2.7 million increase in expensed parts due to
the change in the number of products in development.



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

SG&A expense in the three months ended
March 27, 2004 was $32.5 million, or 3.2% of revenue
compared to $31.9 million, or 3.4% of revenue in the
corresponding period in fiscal year 2003. SG&A expense
increased by $0.6 million, or 1.8%, in the three month
period ended March 27, 2004 compared to the corresponding
period in fiscal year 2003. The increase in SG&A was
primarily due to increased spending for services of
$4.1 million. This increase was offset by a
$2.4 million reduction in allowance for bad debt,
$0.7 million decrease in spending associated with our
information technology and $0.4 million decrease in
compensation expense.



| |                         
| | ------------------------
| | 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

22



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exchange ratio of 1.52 shares of Maxtor
common stock for each share of Quantum HDD common stock. Vested
and unvested options for Quantum HDD common stock assumed in the
acquisition represented options for 7,650,965 shares and
4,655,236 shares of Maxtor common stock, respectively.


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

|                                       |  |                    |     |           |  |   |     | 
|-------------------------------------- |  | ------------------ | --- | --------- |  | - | --- | 
|                                       |  |                   
|                                       |  | Three Months Ended
|                                       |  |                   
|                                       |  | March 27,          |     | March 29,
|                                       |  | 2004               |     | 2003     
|                                       |  |                    |     |          
|                                       |  |                   
|                                       |  | (In millions)     
|Research and development               |  | $                  | 0.1 |           |  | $ | 0.2 | 
|Selling, general and administrative    |  |                    |    |           |  |   | 0.1 | 
|                                       |  |                    |     |           |  |   |     | 
|Total stock-based compensation expense |  | $                  | 0.1 |           |  | $ | 0.3 | 
|                                       |  |                    |     |           |  |   |     | 

As of March 27, 2004, the Company 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 March 27, 2004 was $40.8 million. Amortization of
other intangible assets was $20.8 million and
$20.6 million for the three months ended March 27,
2004 and March 29, 2003, respectively.

Amortization of other intangible assets is
computed over the estimated useful lives of the respective
assets, generally three to five years. The Company expects
amortization expense on intangible assets to be
$15.2 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, 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
$7.0 million after cash payments of $0.4 million
during the three months ended March 27, 2004.



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

|                 |                             |                    |      |           |  |        |      |    |  |   |      |   | 
|---------------- | --------------------------- | ------------------ | ---- | --------- |  | ------ | ---- | -- |  | - | ---- | - | 
|                 |                             |                    |      |          
|                 |                             | Three Months Ended |      |          
|                 |                             |                    |      |          
|                 |                             | March 27,          |      | March 29, |  |       
|                 |                             | 2004               |      | 2003      |  | Change
|                 |                             |                    |      |           |  |       
|                 |                             |                    |      |          
|                 |                             | (In millions)      |      |          
|Interest expense |                             | $                  | (8.8 | )         |  | $      | (5.4 | )  |  | $ | (3.4 | )
|Interest income  |                             | $                  | 1.3  |           |  | $      | 1.2  |    |  | $ | 0.1  |  
|Other gain       |                             | $                  |     |           |  | $      | 0.2  |    |  | $ | (0.2 | )
|                
|                 | As a percentage of revenue: |                    |      |           |  |        |      |    |  |   |      |   | 
|Interest expense |                             |                    | (0.9 | )%        |  |        | (0.6 | )% |  |   |      |  
|Interest income  |                             |                    | 0.1  | %         |  |        | 0.1  | %  |  |   |      |  
|Other gain       |                             |                    | 0.0  | %         |  |        | 0.0  | %  |  |   |      |  

23



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

Interest expense was $8.8 million and
$5.4 million in the three months ended March 27, 2004
and March 29, 2003, respectively. The increase was
primarily due to an increase in the debt from the issuance of
the $230 million convertible notes and the
receivable-backed borrowing established in May 2003. This
increase was offset by our reimbursement to Quantum Corporation
of our portion of amounts due upon their redemption of the
Quantum 7% convertible bonds in August 2003 and the decrease of
capital lease balances.



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

Interest income was $1.3 million and
$1.2 million for the three months ended March 27, 2004
and March 29, 2003, respectively. The increase resulted
primarily from high balances in our cash and cash equivalent,
offset by lower interest rates.



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

Other gain was zero for the three months ended
March 27, 2004 as compared to $0.2 million in
March 29, 2003. The gain in 2003 was due to the retirement
of bonds and sale of investments.



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

|                                         |  |                    |     |           |  |        |      |  |  |   |       |  
|---------------------------------------- |  | ------------------ | --- | --------- |  | ------ | ---- |  |  | - | ----- | -
|                                         |  |                    |     |          
|                                         |  | Three Months Ended |     |          
|                                         |  |                    |     |          
|                                         |  | March 27,          |     | March 29, |  |       
|                                         |  | 2004               |     | 2003      |  | Change
|                                         |  |                    |     |           |  |       
|                                         |  |                    |     |          
|                                         |  | (In millions)      |     |          
|Income before provision for income taxes |  | $                  | 9.4 |           |  | $      | 28.7 |  |  | $ | (19.3 | )
|Provision for income taxes               |  | $                  | 0.3 |           |  | $      | 1.3  |  |  | $ | (1.0  | )

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

Pursuant to a Tax Sharing and Indemnity
Agreement entered into in connection with the
Companys acquisition of Quantum HDD, Maxtor, as successor
to Quantum HDD, and Quantum are allocated their share of
Quantums income tax liability for periods before the
Companys acquisition of Quantum HDD, consistent with past
practices and as if the Quantum HDD and Quantum DSS business
divisions had been separate and independent corporations. To the
extent that the income tax liability attributable to one
business division is reduced by using NOLs and other tax
attributes of the other business division, the business division
utilizing the attributes must pay the other for the use of those
attributes. We must also indemnify Quantum for additional taxes
related to the Quantum DSS business for all periods before
Quantums issuance of tracking stock and additional taxes
related to the Quantum HDD business for all periods before our
acquisition of Quantum HDD, limited in the aggregate to
$142.0 million plus 50% of any excess over
$142.0 million, excluding any required gross-up payment.
Although we expect to be required to make indemnification
payments in future periods, we are unable to determine
significantly in advance the amount and timing of such payments.
Management believes that, based on the facts available at this
time, the likelihood that our aggregate indemnification
obligations will exceed $142.0 million is remote. As of
March 27, 2004, the Company has reimbursed
$6.8 million to Quantum Corporation leaving a balance of
$135.2 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

24



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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 March 27, 2004, we had
$443.7 million in cash and cash equivalents,
$45.7 million in restricted cash, $46.2 million in
marketable securities and $41.9 million in restricted
marketable securities for a combined total of
$577.5 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
$2.6 million in the three months ended March 27, 2004.
This comprised $9.2 million in net income plus non-cash
items of $57.4 million, and a decrease in operating capital
(defined as accounts receivables, other receivables and
inventories less accounts payables) of $18.9 million,
prepaid expenses and other assets of $3.9 million,
partially offset by a decrease in accrued and other liabilities
of $91.3 million and cash used in discontinued operations
of $0.7 million. The change in accrued and other
liabilities was primarily due to a $62.6 million payment of
compensation accruals, $18.1 million net settlement of
warranty, $4.1 million decrease of accrued expenses and
$3.6 million in facility accrual payments.

The decrease in operating capital during the
three months ended March 27, 2004 was a result of the
following factors: accounts receivable declined on seasonally
slower sales in the quarter, partially offset by an increase in
finished goods inventory as a result of the decline in
distribution sales and a decrease in accounts payable from
seasonally slower shipments.

Cash used in investing activities was
$61.3 million for the three months ended March 27,
2004, primarily reflecting investments in property, plant and
equipment (net of proceeds) of $51.4 million and purchases
(net of sales) of marketable securities of $1.4 million,
partially offset by a increase in restricted cash of
$8.5 million to support the increase in the first Economic
Development Board of Singapore (EDB) loan.

Cash used in financing activities was
$23.2 million for the three months ended March 27,
2004. This represents: payments of $50.0 million to reduce
the receivable backed borrowing, $3.4 million on our first
EDB loan, $4.2 million amortization of capital lease
obligations offset by funding of $15.0 million on our
manufacturing facility loan in Suzhou, China, funding of
$9.7 million on the second EDB loan and $9.7 million
upon the issuance of common stock through our employee stock
purchase plan.

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 have availability of
$103 million with the Bank of China to fund our expansion
into China as of March 27, 2004. 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 in the range of $200 million to
$250 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,

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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 March 27, 2004 are reflected in the following table
(in thousands):

|                                                                                       |  |       |           |           |  |           |         |             |  |               |         |  |  |   |         |  |  |   |         | 
|-------------------------------------------------------------------------------------- |  | ----- | --------- | --------- |  | --------- | ------- | ----------- |  | ------------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                       |  |       |           | Less than |  |           |         | 3-5         |  | More than    
|                                                                                       |  | Total |           | 1 Year    |  | 1-3 Years |         | Years(1)(2) |  | 5 Years(1)(2)
|                                                                                       |  |       |           |           |  |           |         |             |  |              
|Long-term Debt                                                                         |  | $     | 383,918   |           |  | $         | 11,017  |             |  | $             | 59,753  |  |  | $ | 33,796  |  |  | $ | 279,352 | 
|Capital Lease Obligations                                                              |  |       | 15,967    |           |  |           | 11,028  |             |  |               | 4,939   |  |  |   |        |  |  |   |        | 
|Operating Leases(3)                                                                    |  |       | 299,265   |           |  |           | 35,379  |             |  |               | 63,855  |  |  |   | 61,902  |  |  |   | 138,129 | 
|Purchase Obligations(4)                                                                |  |       | 813,155   |           |  |           | 788,530 |             |  |               | 12,686  |  |  |   | 11,939  |  |  |   |        | 
|Other Long-term Liabilities Reflected on the
    Companys Balance Sheet under GAAP(5) |  |       | 50        |           |  |           |        |             |  |               | 50      |  |  |   |        |  |  |   |        | 
|Total                                                                                  |  | $     | 1,512,355 |           |  | $         | 845,954 |             |  | $             | 141,283 |  |  | $ | 107,637 |  |  | $ | 417,481 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include $103 million which may be
    borrowed under a facility in a U.S.-dollar-denominated loan, to
    be secured by our facilities in Suzhou, China, drawable until
    April 2007, and repayable in eight semi-annual installments
    commencing October 2007; the borrowings under this facility will
    bear interest at LIBOR plus 50 basis points (subject to
    adjustment to 60 basis points).                                                                                                                                                                                                                                                           
|   
|(2) | Does not include $67 million which we are
    obligated to contribute to our China subsidiary to allow
    drawdowns under the facilities described under footnote (1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Includes future minimum annual rental
    commitments, including amounts accrued as restructuring
    liabilities as of March 27, 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) | Excludes operating leases accrued as
    restructuring liabilities as of March 27, 2004. We have
    also excluded $135.6 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.

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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 March
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 March 27,
2004.

In September 2003, Maxtor Peripherals
(S) Pte Ltd. 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 March 27, 2004,
the balance was 52.0 million Singapore dollars, equivalent
to $30.8 million. This loan is supported by a guaranty from
a bank. Cash is currently provided as collateral for this
guaranty; however, we may at our option substitute other assets
as security.

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 U.S. and Canadian accounts receivable. This
special purpose subsidiary had borrowing authority up to
$100 million collateralized by the U.S. and Canadian
accounts receivable. The special purpose subsidiary was
consolidated for financial reporting purposes. The transactions
under the arrangement were accounted for as secured borrowing
and accounts receivables, and the related short-term borrowings,
if any, remain on our consolidated balance sheet. As of
March 9, 2004 the dilution to liquidation ratio for this
facility exceeded the agreed upon threshold. The lenders under
the facility agreed to forbear from exercising remedies for
noncompliance with this ratio through March 31, 2004 and in
return, we agreed to apply all collections of receivables to the
repayment of the outstanding facility until repaid in full. As
of March 27, 2004, we had no borrowing under this facility.
On April 2, 2004, this agreement was terminated by all
parties involved. We currently expect to replace the facility on
substantially similar terms. We do not believe that the fact
that we exceeded the agreed upon threshold for the dilution to
liquidation ratio is indicative of any negative trend regarding
our business.

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CERTAIN FACTORS AFFECTING FUTURE
PERFORMANCE

We have a history of losses and may not
maintain profitability.

We have a history of significant losses and may
not maintain profitability. 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 a history of
losses and may not maintain profitability.

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.

We have significant leverage which could
materially and adversely affect our ability to obtain additional
financing and our ability to meet debt service obligations will
be dependent on our future performance, which is subject to
risk.

We have substantial long-term debt on our balance
sheet. We will require substantial amounts of cash to fund debt
service requirements, capital expenditures, investments and
acquisitions, payments on leases and working capital
requirements. The degree to which we are financially leverage
may materially and adversely affect our ability to obtain
additional financing for working capital, acquisitions or other
purposes. Any restrictions on our ability to obtain financing
could make us more vulnerable to industry downturns and
competitive pressures, and would reduce 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.
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 cannot generate
sufficient cash flow to meet our debt service requirements, we
could attempt to refinance some or all of our debt, but no
assurance can be given that such refinancing would be available
on terms acceptable to us, or at all. Any failure to satisfy our
obligations on one or more loan or financing agreements could
cause a default under other agreements governing our
indebtedness.

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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
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

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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 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 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

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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 TDK/ SAE, manufacturing and manufacturing
strategies. TDK/SAE and ALPS Electric Co., Ltd. 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 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

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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.


We will need to acquire additional manufacturing
capacity in the future. 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 begun construction of a
manufacturing facility in China that will provide us with a
low-cost facility to accommodate anticipated future growth. We
anticipate that the facility will become operational in the
second half of 2004. Any significant disruption in the
construction of the facility could delay the time at which the
facility could come online, 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 operational 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.

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

33



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##### Table of Contents



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 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.

34



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

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

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

On December 30, 2003, an action was filed by
MKE against us and Quantum alleging, among other things,
MKEs ownership of certain intellectual property we
acquired in the acquisition of the Quantum HDD business. The
action was filed in the United States District Court for the
Northern District of California. On March 1, 2004, we filed
an answer denying all material allegations and a motion to
dismiss. 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 be operational 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;                                                                                                                                                                 

35



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| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | international currency fluctuations;                                                                                                                                                                                
|
| |  | political and economic uncertainty caused by
    epidemics, terrorism or acts of war or hostility;                                                                                                                  
|
| |  | legislative and regulatory responses to terrorist
    activity such as increased restrictions on cross-border movement
    of products and technology;                                                              
|
| |  | legislative, regulatory, police, or civil
    responses to epidemics or other outbreaks of infectious diseases
    such as quarantines, factory closures, or increased restrictions
    on transportation or travel;
|
| |  | general strikes or other disruptions in working
    conditions;                                                                                                                                                     
|
| |  | labor shortages;                                                                                                                                                                                                    
|
| |  | political instability;                                                                                                                                                                                              
|
| |  | changes in tariffs;                                                                                                                                                                                                 
|
| |  | generally longer periods to collect receivables;                                                                                                                                                                    
|
| |  | unexpected legislative or regulatory requirements;                                                                                                                                                                  
|
| |  | reduced protection for intellectual property
    rights in some countries;                                                                                                                                          
|
| |  | significant unexpected duties or taxes or other
    adverse tax consequences;                                                                                                                                       
|
| |  | difficulty in obtaining export licenses and other
    trade barriers;                                                                                                                                               
|
| |  | seasonality;                                                                                                                                                                                                        
|
| |  | increased transportation/shipping costs; 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
be operational 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. 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, revaluations 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

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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.


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 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.

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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.

38



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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
March 27, 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      |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | March 27,  |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | 2004       |  |         |        |          |  |         
|                      |  | +150 bps |        | +100 bps |  | +50 bps |        | ($000)     |  | -50 bps |        | -100 bps |  | -150 bps
|                      |  |          |        |          |  |         |        |            |  |         |        |          |  |         
|Financial Instruments |  | $        | 87,062 |          |  | $       | 87,423 |            |  | $       | 87,790 |          |  | $        | 88,166 |  |  | $ | 88,512 |   |  | $ | 88,898 |   |  | $ | 89,087 |  
|% Change              |  |          | (1.25  | )%       |  |         | (0.84  | )%         |  |         | (0.43  | )%       |  |          |        |  |  |   | 0.39   | % |  |   | 0.83   | % |  |   | 1.04   | %

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 Given |       | March 27, |  |                               
|                             |  | X% Decrease in the Security |       | 2004      |  | Valuation of Security Given X%
|                             |  | Price                       |       | ($000)    |  | Increase in the Security Price
|                             |  |                             |       |           |  |                               
|                             |  |                             |       |           |  |                                |        |            |  |   |        |    |  |  
|Corporate equity investments |  | $                           | 7,296 |           |  | $                              | 10,944 |            |  | $ | 12,403 |    |  | $ | 14,592 |  |  | $ | 16,781 |   |  | $ | 18,240 |   |  | $ | 21,888 |  
|% 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 March 27,
2004 that has materially affected, or is reasonably likely to
affect, our internal control over financial reporting.

39



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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

40



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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 $24,750,000; 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. 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

None






|        |                  
|------- | -----------------
|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
January 13, 2004 in which it reported an action filed by
Matsushita Kotobuki Electronics Industries, Ltd. against Quantum
Corporation and Maxtor Corporation.

Maxtor filed a Current Report on Form 8-K on
January 21, 2004 in which it reported financial results for
the fourth fiscal quarter ended December 27, 2003.

Maxtor filed a Current Report on Form 8-K on
March 24, 2004 in which it announced the resignation of its
Chief Financial Officer and appointment of an Acting Chief
Financial Officer.

41



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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: May 6, 2004

42



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##### Table of Contents



EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                                                                                   
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 10.1 |             |  | Supplementary Agreement on Amendment of Foreign
    Exchange Loan Contract between Maxtor Technology (Suzhou) Co.,
    Ltd. and Bank of China SIP Sub-branch, dated March 24, 2004.                                                               
|        | 10.2 |             |  | Letter of Direction from Radian Reinsurance Inc.,
    Merrill Lynch Commercial Financial Corp., Maxtor Funding LLC and
    Maxtor Corporation to U.S. Bank National Association, dated
    April 2, 2004.                                         
|        | 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.