##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q



---

|                                       |  |                                                      
|-------------------------------------- |  | -----------------------------------------------------
|(Mark One)                             |  |                                                      
|þ                                      |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) 
|                                       |  | OF THE SECURITIES EXCHANGE ACT OF
    1934           
|For the period ended June 28,
    2003
|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, August 1, 2003, 239,490,780 shares of
the registrants Common Stock, $.01 par value, were issued
and outstanding.



---






---



##### 



MAXTOR CORPORATION

FORM 10-Q

June 28, 2003


INDEX

|                              |  |                                                                                                                       |  |      |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                       |  | Page
|                              |  |                                                                                                                       |  |     
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Condensed Consolidated Financial Statements                                                                           |  |      | 2  | 
|                              |  | Condensed Consolidated Balance Sheets 
    June 28, 2003, and December 28, 2002                                      |  |      | 2  | 
|                              |  | Condensed Consolidated Statements of
    Operations  Three and six months ended June 28,
    2003, and June 29, 2002 |  |      | 3  | 
|                              |  | Condensed Consolidated Statements of Cash
    Flows  Six months ended June 28, 2003, and
    June 29, 2002           |  |      | 4  | 
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                              |  |      | 5  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                             |  |      | 19 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                        |  |      | 41 | 
|Item 4.                       |  | Controls and Procedures                                                                                               |  |      | 42 | 
|                              |  | PART II. OTHER INFORMATION                                                                                            |  |      |    | 
|Item 1.                       |  | Legal Proceedings                                                                                                     |  |      | 43 | 
|Item 2.                       |  | Changes in Securities                                                                                                 |  |      | 44 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                        |  |      | 44 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                               |  |      | 44 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                      |  |      | 44 | 
|Signature Page                |  |                                                                                                                       |  |     
|Certifications                |  |                                                                                                                       |  |     

1



---



##### 



PART I. FINANCIAL INFORMATION



|        |                                                
|------- | -----------------------------------------------
|Item 1. | Condensed Consolidated Financial
    Statements

MAXTOR CORPORATION



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |         |           | 
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------ | --------- |  | ---------- | ------- | --------- | 
|                                                                                                               |                                                                                                                                                                                                                                                   | June 28,                                   |            | December 28,
|                                                                                                               |                                                                                                                                                                                                                                                   | 2003                                       |            | 2002        
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |             
|                                                                                                               |                                                                                                                                                                                                                                                   |                                           
|                                                                                                               |                                                                                                                                                                                                                                                   | (Unaudited)                               
|                                                                                                               |                                                                                                                                                                                                                                                   |                                           
|                                                                                                               |                                                                                                                                                                                                                                                   | (In thousands, except share and           
|                                                                                                               |                                                                                                                                                                                                                                                   | per share amounts)                        
|ASSETS                                                                                                        
|Current assets:                                                                                                |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               | Cash and cash equivalents                                                                                                                                                                                                                         |                                            | $          | 483,984      |           |  | $          | 306,444 |          
|                                                                                                               | Restricted cash                                                                                                                                                                                                                                   |                                            |            | 55,020       |           |  |            | 56,747  |          
|                                                                                                               | Marketable securities                                                                                                                                                                                                                             |                                            |            | 87,614       |           |  |            | 87,507  |          
|                                                                                                               | Accounts receivable, net of allowance for
    doubtful accounts of $16,846 at June 28, 2003 and $18,320
    at December 28, 2002                                                                                                                  |                                            |            | 436,800      |           |  |            | 363,664 |          
|                                                                                                               | Inventories                                                                                                                                                                                                                                       |                                            |            | 232,630      |           |  |            | 175,545 |          
|                                                                                                               | Prepaid expenses and other                                                                                                                                                                                                                        |                                            |            | 60,788       |           |  |            | 33,438  |          
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               |                                                                                                                                                                                                                                                   | Total current assets                       |            |              | 1,356,836 |  |            |         | 1,023,345 | 
|Property, plant and equipment, net                                                                             |                                                                                                                                                                                                                                                   |                                            | 322,892    |              |           |  | 364,842    |        
|Goodwill                                                                                                       |                                                                                                                                                                                                                                                   |                                            | 813,951    |              |           |  | 813,951    |        
|Other intangible assets, net                                                                                   |                                                                                                                                                                                                                                                   |                                            | 105,780    |              |           |  | 146,898    |        
|Other assets                                                                                                   |                                                                                                                                                                                                                                                   |                                            | 14,973     |              |           |  | 11,798     |        
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               |                                                                                                                                                                                                                                                   | Total assets                               |            | $            | 2,614,432 |  |            | $       | 2,360,834 | 
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                      
|Current liabilities:                                                                                           |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               | Short-term borrowings, including current portion
    of long-term debt                                                                                                                                                                            |                                            | $          | 184,587      |           |  | $          | 41,042  |          
|                                                                                                               | Accounts payable                                                                                                                                                                                                                                  |                                            |            | 641,721      |           |  |            | 642,206 |          
|                                                                                                               | Accrued and other liabilities                                                                                                                                                                                                                     |                                            |            | 456,438      |           |  |            | 471,750 |          
|                                                                                                               | Liabilities of discontinued operations                                                                                                                                                                                                            |                                            |            | 5,506        |           |  |            | 11,646  |          
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               |                                                                                                                                                                                                                                                   | Total current liabilities                  |            |              | 1,288,252 |  |            |         | 1,166,644 | 
|Deferred taxes                                                                                                 |                                                                                                                                                                                                                                                   |                                            | 196,455    |              |           |  | 196,455    |        
|Long-term debt, net of current portion                                                                         |                                                                                                                                                                                                                                                   |                                            | 330,134    |              |           |  | 206,343    |        
|Other liabilities                                                                                              |                                                                                                                                                                                                                                                   |                                            | 192,200    |              |           |  | 199,071    |        
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               |                                                                                                                                                                                                                                                   | Total liabilities                          |            |              | 2,007,041 |  |            |         | 1,768,513 | 
|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; 250,804,397 shares
    issued and 237,558,659 shares outstanding at June 28,
    2003 and 247,507,244 shares issued and 242,507,244 shares
    outstanding at December 28, 2002 |                                            |            | 2,508        |           |  |            | 2,475   |          
|Additional paid-in capital                                                                                     |                                                                                                                                                                                                                                                   |                                            | 2,362,090  |              |           |  | 2,349,253  |        
|Deferred stock-based compensation                                                                              |                                                                                                                                                                                                                                                   |                                            | (457       | )            |           |  | (1,193     | )      
|Accumulated deficit                                                                                            |                                                                                                                                                                                                                                                   |                                            | (1,706,989 | )            |           |  | (1,740,591 | )      
|Cumulative other comprehensive income                                                                          |                                                                                                                                                                                                                                                   |                                            | 15,178     |              |           |  | 2,377      |        
|Treasury stock of 13,245,738 shares at
    June 28, 2003 and 5,000,000 shares at
    December 28, 2002 at cost |                                                                                                                                                                                                                                                   |                                            | (64,939    | )            |           |  | (20,000    | )      
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               |                                                                                                                                                                                                                                                   | Total stockholders equity                 |            |              | 607,391   |  |            |         | 592,321   | 
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        
|                                                                                                               |                                                                                                                                                                                                                                                   | Total liabilities and stockholders equity |            | $            | 2,614,432 |  |            | $       | 2,360,834 | 
|                                                                                                               |                                                                                                                                                                                                                                                   |                                            |            |              |           |  |            |        

See accompanying notes to condensed consolidated
financial statements.

2



---



##### 



MAXTOR CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |             |         | 
|---------------------------------------------------------------- | ----------------------------------- | -------------------------------------------------- | ------- | ---------------- | ------- | ------------- | -------- | ------------- | ------- | - | --------- | ----------- | ------- | - | --------- | ----------- | ------- | 
|                                                                 |                                     |                                                    |         |                 
|                                                                 |                                     | Three Months Ended                                 |         | Six Months Ended
|                                                                 |                                     |                                                    |         |                 
|                                                                 |                                     | June 28, 2003                                      |         | June 29, 2002    |         | June 28, 2003 |          | June 29, 2002
|                                                                 |                                     |                                                    |         |                  |         |               |          |              
|                                                                 |                                     |                                                    |         |                 
|                                                                 |                                     | (Unaudited)                                        |         | (Unaudited)     
|                                                                 |                                     |                                                   
|                                                                 |                                     | (In thousands, except share and per share amounts)
|Net revenues                                                     |                                     | $                                                  | 910,903 |                  |         | $             | 885,350  |               |         | $ | 1,849,792 |             |         | $ | 1,921,450 |            
|Cost of revenues                                                 |                                     |                                                    | 761,657 |                  |         |               | 825,960  |               |         |   | 1,528,699 |             |         |   | 1,748,294 |            
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|                                                                 | Gross profit                        |                                                    |         | 149,246          |         |               |          | 59,390        |         |   |           | 321,093     |         |   |           | 173,156     |        
|Operating expenses:                                              |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|                                                                 | Research and development            |                                                    |         | 84,218           |         |               |          | 104,052       |         |   |           | 170,879     |         |   |           | 207,110     |        
|                                                                 | Selling, general and administrative |                                                    |         | 30,967           |         |               |          | 35,318        |         |   |           | 62,899      |         |   |           | 76,670      |        
|                                                                 | Amortization of intangible assets   |                                                    |         | 20,562           |         |               |          | 20,562        |         |   |           | 41,124      |         |   |           | 41,124      |        
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|                                                                 |                                     | Total operating expenses                           |         |                  | 135,747 |               |          |               | 159,932 |   |           |             | 274,902 |   |           |             | 324,904 | 
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Income (loss) from operations                                    |                                     |                                                    | 13,499  |                  |         |               | (100,542 | )             |         |   | 46,191    |             |         |   | (151,748  | )          
|Interest expense                                                 |                                     |                                                    | (8,325  | )                |         |               | (6,562   | )             |         |   | (13,747   | )           |         |   | (13,108   | )          
|Interest and other income                                        |                                     |                                                    | 1,459   |                  |         |               | 2,376    |               |         |   | 2,786     |             |         |   | 5,405     |            
|Other gain                                                       |                                     |                                                    |        |                  |         |               | 1,577    |               |         |   | 88        |             |         |   | 1,577     |            
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Income (loss) from continuing operations before
    income taxes |                                     |                                                    | 6,633   |                  |         |               | (103,151 | )             |         |   | 35,318    |             |         |   | (157,874  | )          
|Provision for income taxes                                       |                                     |                                                    | 437     |                  |         |               | 152      |               |         |   | 1,714     |             |         |   | 806       |            
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Income (loss) from continuing operations                         |                                     |                                                    | 6,196   |                  |         |               | (103,303 | )             |         |   | 33,604    |             |         |   | (158,680  | )          
|Loss from discontinued operations                                |                                     |                                                    |        |                  |         |               | (5,699   | )             |         |   |          |             |         |   | (15,360   | )          
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Net income (loss)                                                |                                     | $                                                  | 6,196   |                  |         | $             | (109,002 | )             |         | $ | 33,604    |             |         | $ | (174,040  | )          
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Net income (loss) per share  basic                              |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Continuing operations                                            |                                     | $                                                  | 0.03    |                  |         | $             | (0.43    | )             |         | $ | 0.14      |             |         | $ | (0.67     | )          
|Discontinued operations                                          |                                     | $                                                  |        |                  |         | $             | (0.03    | )             |         | $ |          |             |         | $ | (0.06     | )          
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Total                                                            |                                     | $                                                  | 0.03    |                  |         | $             | (0.46    | )             |         | $ | 0.14      |             |         | $ | (0.73     | )          
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Net income (loss) per share  diluted                            |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Continuing operations                                            |                                     | $                                                  | 0.03    |                  |         | $             | (0.43    | )             |         | $ | 0.14      |             |         | $ | (0.67     | )          
|Discontinued operations                                          |                                     | $                                                  |        |                  |         | $             | (0.03    | )             |         | $ |          |             |         | $ | (0.06     | )          
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Total                                                            |                                     | $                                                  | 0.03    |                  |         | $             | (0.46    | )             |         | $ | 0.14      |             |         | $ | (0.73     | )          
|                                                                 |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|Shares used in per share calculation                             |                                     |                                                    |         |                  |         |               |          |               |         |   |           |             |         |   |           |            
|                                                                 |  basic                             |                                                    |         | 241,120,075      |         |               |          | 238,803,423   |         |   |           | 242,382,530 |         |   |           | 237,892,949 |        
|                                                                 |  diluted                           |                                                    |         | 245,259,831      |         |               |          | 238,803,423   |         |   |           | 245,999,915 |         |   |           | 237,892,949 |        

See accompanying notes to condensed consolidated
financial statements.

3



---



##### 



MAXTOR CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |        |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------- | -------- | ------- | ------- | -------- | ------ | ------- | ------- | -
|                                                                                                                                      |                                                                                     |                                  
|                                                                                                                                      |                                                                                     | Six Months Ended                 
|                                                                                                                                      |                                                                                     |                                  
|                                                                                                                                      |                                                                                     | June 28,                          |                                                                                    | June 29,
|                                                                                                                                      |                                                                                     | 2003                              |                                                                                    | 2002    
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |         
|                                                                                                                                      |                                                                                     |                                  
|                                                                                                                                      |                                                                                     | (Unaudited)                      
|                                                                                                                                      |                                                                                     | (In thousands)                   
|Cash Flows from Operating
    Activities:                                                                                             |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Net income (loss) from continuing operations                                                                                          |                                                                                     | $                                 | 33,604                                                                             |          |         | $       | (158,680 | )     
|Adjustments to reconcile net income (loss) from
    continuing operations to net cash provided by (used in)
    operating activities: |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      | Depreciation and amortization                                                       |                                   |                                                                                    | 83,130   |         |         |          | 73,000 |        
|                                                                                                                                      | Amortization of intangible assets                                                   |                                   |                                                                                    | 41,124   |         |         |          | 41,124 |        
|                                                                                                                                      | Amortization of deferred compensation related to
    Quantum                        |                                   |                                                                                    |         |         |         |          | 4,103  |        
|                                                                                                                                      | Stock-based compensation expense                                                    |                                   |                                                                                    | 496      |         |         |          | 2,850  |        
|                                                                                                                                      | Loss on sale of property, plant and equipment and
    other assets                  |                                   |                                                                                    | 2,555    |         |         |          | 3,104  |        
|                                                                                                                                      | Gain on retirement of bond                                                          |                                   |                                                                                    | (111     | )       |         |          | (1,162 | )      
|                                                                                                                                      | Realized gain on investment                                                         |                                   |                                                                                    |         |         |         |          | (1,079 | )      
|                                                                                                                                      | Change in assets and liabilities:                                                   |                                   |                                                                                    |          |         |         |          |        |        
|                                                                                                                                      |                                                                                     | Accounts receivable               |                                                                                    |          | (73,136 | )       |          |        | 33,726  |        
|                                                                                                                                      |                                                                                     | Inventories                       |                                                                                    |          | (57,085 | )       |          |        | (35,129 | )      
|                                                                                                                                      |                                                                                     | Prepaid expenses and other assets |                                                                                    |          | (8,866  | )       |          |        | 4,527   |        
|                                                                                                                                      |                                                                                     | Accounts payable                  |                                                                                    |          | 1,574   |         |          |        | 68,413  |        
|                                                                                                                                      |                                                                                     | Accrued and other liabilities     |                                                                                    |          | (22,188 | )       |          |        | (84,752 | )      
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by (used in) operating
    activities from continuing operations |          |         | 1,097   |          |        |         | (49,955 | )
|                                                                                                                                      |                                                                                     |                                   | Net cash flow used in discontinued operations                                      |          |         | (6,140  | )        |        |         | (12,498 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by (used in) operating
    activities                            |          |         | (5,043  | )        |        |         | (62,453 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Cash Flows from Investing
    Activities:                                                                                             |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Proceeds from sale of property, plant and
    equipment                                                                               |                                                                                     |                                   | 274                                                                                |          |         |         | 65       |       
|Purchase of property, plant and equipment                                                                                             |                                                                                     |                                   | (39,290                                                                            | )        |         |         | (77,082  | )     
|Decrease (Increase) in restricted cash                                                                                                |                                                                                     |                                   | 1,727                                                                              |          |         |         | (18      | )     
|Proceeds from sale of marketable securities                                                                                           |                                                                                     |                                   | 28,761                                                                             |          |         |         | 102,158  |       
|Purchase of marketable securities                                                                                                     |                                                                                     |                                   | (29,493                                                                            | )        |         |         | (34,192  | )     
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      |                                                                                     |                                   | Net cash used in investing activities                                              |          |         | (38,021 | )        |        |         | (9,069  | )
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Cash Flows from Financing
    Activities:                                                                                             |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Proceeds from issuance of debt including
    short-term borrowings                                                                    |                                                                                     |                                   | 223,858                                                                            |          |         |         |         |       
|Principal payments of debt including short-term
    borrowings                                                                        |                                                                                     |                                   | (5,327                                                                             | )        |         |         | (18,400  | )     
|Principal payments under capital lease obligations                                                                                    |                                                                                     |                                   | (14,004                                                                            | )        |         |         | (11,741  | )     
|Purchase of treasury shares at cost                                                                                                   |                                                                                     |                                   | (44,939                                                                            | )        |         |         |         |       
|Net proceeds from receivable-backed borrowing                                                                                         |                                                                                     |                                   | 47,908                                                                             |          |         |         |         |       
|Proceeds from issuance of common stock from
    employee stock purchase plan and stock options exercised                              |                                                                                     |                                   | 13,108                                                                             |          |         |         | 13,988   |       
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      |                                                                                     |                                   | Net cash provided by (used in) financing
    activities                            |          |         | 220,604 |          |        |         | (16,153 | )
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Net change in cash and cash equivalents                                                                                               |                                                                                     |                                   | 177,540                                                                            |          |         |         | (87,675  | )     
|Cash and cash equivalents at beginning of period                                                                                      |                                                                                     |                                   | 306,444                                                                            |          |         |         | 379,927  |       
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Cash and cash equivalents at end of year                                                                                              |                                                                                     | $                                 | 483,984                                                                            |          |         | $       | 292,252  |       
|                                                                                                                                      |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|Supplemental Disclosures of Cash Flow
    Information:                                                                                |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      | Cash paid during the period for:                                                    |                                   |                                                                                    |          |         |         |          |        |        
|                                                                                                                                      |                                                                                     | Interest                          |                                                                                    | $        | 2,049   |         |          | $      | 11,583  |        
|                                                                                                                                      |                                                                                     | Income taxes                      |                                                                                    | $        | 687     |         |          | $      | 5,369   |        
|Schedule of Non-Cash Investing and Financing
    Activities:                                                                          |                                                                                     |                                   |                                                                                    |          |         |         |          |       
|                                                                                                                                      | Purchase of property, plant and equipment
    financed by accounts payable          |                                   | $                                                                                  | 4,999    |         |         | $        | 13,728 |        
|                                                                                                                                      | Retirement of debt in exchange for bond redemption                                  |                                   | $                                                                                  |         |         |         | $        | 5,000  |        
|                                                                                                                                      | Change in unrealized gain (loss) on
    investments                                 |                                   | $                                                                                  | 12,801   |         |         | $        | (603   | )      
|                                                                                                                                      | Purchase of property, plant and equipment
    financed by capital lease obligations |                                   | $                                                                                  | 5,526    |         |         | $        |       |        

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

4



---



##### 



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 28, 2002
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 could differ from those estimates.

Material differences may result in the amount and
timing of the Companys revenue for any period, if the
Companys management made different judgments or utilized
different estimates.

The actual results with regard to warranty
expenditures could have a material impact on Maxtor if the
actual rate of unit failure or the cost to repair a unit varies
significantly from what the Company has used in estimating its
warranty expense accrual.

Given the volatility of the market for disk
drives and for the Companys products, the Company makes
adjustments to the value of inventories based on estimates of
potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted
average selling prices. However, forecasts are always subject to
revisions, cancellations, and rescheduling. Actual demand will
inevitably differ from such anticipated demand and such
differences may have a material impact on the financial
statements.

The actual results with regard to the useful
lives of property, plant and equipment may vary from their
estimated useful lives, which could have a material impact on
the Companys results of operations.



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

The Company operates and reports financial
results on a fiscal year of 52 or 53 weeks ending on the
Saturday closest to December 31. As a result, the three and
six month periods ended June 28, 2003 comprised
13 weeks and 26 weeks, respectively, as did the three
and six months ended June 29, 2002. All references to years
in these notes to consolidated financial statements represent
fiscal years unless otherwise noted.



|   |                        
|-- | -----------------------
|2. | Discontinued Operations

On August 15, 2002, the Company announced
its decision to shut down the manufacturing and sales of its
MaxAttachTM branded network attached storage products
of the Companys Network Systems Group (NSG).
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

5



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 and
its operating results have been segregated and reported as
discontinued operations in the accompanying consolidated
statements of operations.

Operating results of NSG are presented in the
following table (in millions):

|                                     |  |                    |   |                  |  |          |      |          |  |   |   |  |  |   |       |  
|------------------------------------ |  | ------------------ | - | ---------------- |  | -------- | ---- | -------- |  | - | - |  |  | - | ----- | -
|                                     |  |                    |   |                 
|                                     |  | Three Months Ended |   | Six Months Ended
|                                     |  |                    |   |                 
|                                     |  | June 28,           |   | June 29,         |  | June 28, |      | June 29,
|                                     |  | 2003               |   | 2002             |  | 2003     |      | 2002    
|                                     |  |                    |   |                  |  |          |      |         
|Revenue from discontinued operations |  | $                  |  |                  |  | $        | 10.4 |          |  | $ |  |  |  | $ | 19.0  |  
|Loss from discontinued operations    |  | $                  |  |                  |  | $        | (5.7 | )        |  | $ |  |  |  | $ | (15.4 | )

The following is a summary of the liabilities of
the NSG discontinued operations as of June 28, 2003 (in
millions):

|                                   |  |   |     | 
|---------------------------------- |  | - | --- | 
|Payroll and other accrued expenses |  | $ | 3.1 | 
|Warranty, returns and other        |  |   | 2.4 | 
|                                   |  |   |     | 
|Total                              |  | $ | 5.5 | 
|                                   |  |   |     | 



|   |              
|-- | -------------
|3. | 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
$8.1 million after cash payments of $0.4 and
$0.8 million during the three and six months ended
June 28, 2003, respectively.



|   |                        
|-- | -----------------------
|4. | 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.

6



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes the activity
related to the merger-related restructuring costs as of
June 28, 2003:

|                             |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|---------------------------- |  | ------------- | ---- | --------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                             |  |               |      | 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                 |  |               | (4.9 | )         |  |       |      |       |  |   |      |   |  |   | (4.9  | )
|                             |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at June 28 2003      |  | $             | 48.8 |           |  | $     |      |       |  | $ |      |   |  | $ | 48.8  |  
|                             |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  

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 on the balance sheet within Accrued and
other liabilities and Other liabilities.



|   |                
|-- | ---------------
|5. | Restricted Cash

The Companys restricted cash balance of
$55.0 million at June 28, 2003 and $56.7 million
at December 28, 2002, is associated with short-term letters
of credit (LOCs), where the Company has chosen to
provide cash security in order to lower the cost of the LOCs.



|   |                            
|-- | ---------------------------
|6. | Supplemental Financial Data

|                            |                                                 |                |         |              |  |   |         |         | 
|--------------------------- | ----------------------------------------------- | -------------- | ------- | ------------ |  | - | ------- | ------- | 
|                            |                                                 | June 28,       |         | December 28,
|                            |                                                 | 2003           |         | 2002        
|                            |                                                 |                |         |             
|                            |                                                 |               
|                            |                                                 | (In thousands)
|Inventories:                |                                                 |                |         |              |  |   |         |        
|                            | Raw materials                                   |                | $       | 47,129       |  |   | $       | 40,209  | 
|                            | Work-in-process                                 |                |         | 31,518       |  |   |         | 25,523  | 
|                            | Finished goods                                  |                |         | 153,983      |  |   |         | 109,813 | 
|                            |                                                 |                |         |              |  |   |         |        
|                            |                                                 | $              | 232,630 |              |  | $ | 175,545 |        
|                            |                                                 |                |         |              |  |   |         |        
|Prepaid expenses and other: |                                                 |                |         |              |  |   |         |        
|                            | Investments in equity securities, at fair value |                | $       | 19,573       |  |   | $       | 6,589   | 
|                            | Prepaid expenses and other                      |                |         | 41,215       |  |   |         | 26,849  | 
|                            |                                                 |                |         |              |  |   |         |        
|                            |                                                 | $              | 60,788  |              |  | $ | 33,438  |        
|                            |                                                 |                |         |              |  |   |         |        

7



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                               |                                              |                |          |              |  |   |          |         | 
|---------------------------------------------- | -------------------------------------------- | -------------- | -------- | ------------ |  | - | -------- | ------- | 
|                                               |                                              | June 28,       |          | December 28,
|                                               |                                              | 2003           |          | 2002        
|                                               |                                              |                |          |             
|                                               |                                              |               
|                                               |                                              | (In thousands)
|Property, plant and equipment, at cost:        |                                              |                |          |              |  |   |          |        
|                                               | Buildings                                    |                | $        | 139,782      |  |   | $        | 137,467 | 
|                                               | Machinery and equipment                      |                |          | 557,238      |  |   |          | 548,149 | 
|                                               | Software                                     |                |          | 76,095       |  |   |          | 75,284  | 
|                                               | Furniture and fixtures                       |                |          | 25,391       |  |   |          | 23,962  | 
|                                               | Leasehold improvements                       |                |          | 84,998       |  |   |          | 77,925  | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 883,504  |              |  | $ | 862,787  |        
|Less accumulated depreciation and amortization |                                              |                | (560,612 | )            |  |   | (497,945 | )      
|                                               |                                              |                |          |              |  |   |          |        
|Net property, plant and equipment              |                                              | $              | 322,892  |              |  | $ | 364,842  |        
|                                               |                                              |                |          |              |  |   |          |        
|Accrued and other liabilities:                 |                                              |                |          |              |  |   |          |        
|                                               | Income taxes payable                         |                | $        | 22,635       |  |   | $        | 22,183  | 
|                                               | Accrued payroll and payroll-related expenses |                |          | 84,277       |  |   |          | 76,876  | 
|                                               | Accrued warranty                             |                |          | 256,661      |  |   |          | 278,713 | 
|                                               | Restructuring liabilities, short-term        |                |          | 9,642        |  |   |          | 11,589  | 
|                                               | Accrued expenses                             |                |          | 83,223       |  |   |          | 82,389  | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 456,438  |              |  | $ | 471,750  |        
|                                               |                                              |                |          |              |  |   |          |        
|Other liabilities                              |                                              |                |          |              |  |   |          |        
|                                               | Payable to Quantum Corporation               |                | $        | 136,651      |  |   | $        | 138,567 | 
|                                               | Restructuring liabilities, long-term         |                |          | 47,224       |  |   |          | 50,921  | 
|                                               | Other                                        |                |          | 8,325        |  |   |          | 9,583   | 
|                                               |                                              |                |          |              |  |   |          |        
|                                               |                                              | $              | 192,200  |              |  | $ | 199,071  |        
|                                               |                                              |                |          |              |  |   |          |        



|   |                 
|-- | ----------------
|7. | Accrued Warranty

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. Although the Company believes it has the continued
ability to reasonably estimate warranty expenses, unforeseeable
changes in factors used to estimate the accrual for warranty
could occur. These unforeseeable changes could cause a material
change in the Companys warranty accrual estimate. Such a
change would be recorded in the period in which the change was
identified. Changes in the Companys product warranty
liability during the three and six months ended June 28,
2003 and June 29, 2002 were as follows (in thousands):

|                                       |                                                             |               |          |              |   |          |          |          |   |   |          |         |   |   |          |         |  
|-------------------------------------- | ----------------------------------------------------------- | ------------- | -------- | ------------ | - | -------- | -------- | -------- | - | - | -------- | ------- | - | - | -------- | ------- | -
|                                       |                                                             |               |          |             
|                                       |                                                             | For the Three |          | For the Six 
|                                       |                                                             | Months Ended  |          | Months Ended
|                                       |                                                             |               |          |             
|                                       |                                                             | June 28,      |          | June 29,     |   | June 28, |          | June 29,
|                                       |                                                             | 2003          |          | 2002         |   | 2003     |          | 2002    
|                                       |                                                             |               |          |              |   |          |          |         
|Balance at the beginning of the period |                                                             | $             | (266,583 | )            |   | $        | (301,287 | )        |   | $ | (278,713 | )       |   | $ | (313,894 | )      
|                                       | Accruals for warranties issued during the period            |               |          | (30,591      | ) |          |          | (35,282  | ) |   |          | (60,887 | ) |   |          | (90,808 | )
|                                       | Settlements made (in cash or in kind) during the
    period |               |          | 40,513       |   |          |          | 63,924   |   |   |          | 82,939  |   |   |          | 132,057 |  
|                                       |                                                             |               |          |              |   |          |          |          |   |   |          |         |   |   |          |        
|Balance at the end of the period       |                                                             | $             | (256,661 | )            |   | $        | (272,645 | )        |   | $ | (256,661 | )       |   | $ | (272,645 | )      
|                                       |                                                             |               |          |              |   |          |          |          |   |   |          |         |   |   |          |        

8



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

The Company accounts for non-cash stock-based
compensation issued to non-employees in accordance with the
provisions of SFAS No. 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 No. 123 (in thousands, except per share
data):

|                                                                                                              |                             |                    |       |                  |  |          |          |          |   |   |        |        |  |   |          |          |  
|------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------ | ----- | ---------------- |  | -------- | -------- | -------- | - | - | ------ | ------ |  | - | -------- | -------- | -
|                                                                                                              |                             |                    |       |                 
|                                                                                                              |                             | Three Months Ended |       | Six Months Ended
|                                                                                                              |                             |                    |       |                 
|                                                                                                              |                             | June 28,           |       | June 29,         |  | June 28, |          | June 29,
|                                                                                                              |                             | 2003               |       | 2002             |  | 2003     |          | 2002    
|                                                                                                              |                             |                    |       |                  |  |          |          |         
|Net income (loss) applicable to common
    stockholders, as reported                                          |                             | $                  | 6,196 |                  |  | $        | (109,002 | )        |   | $ | 33,604 |        |  | $ | (174,040 | )       
|Add: Stock-based employee compensation expense
    included in reported net income (loss)                     |                             |                    | 223   |                  |  |          | 1,359    |          |   |   | 496    |        |  |   | 2,850    |         
|Deduct: Total stock-based employee compensation
    expense determined under fair value method for all awards |                             |                    | 5,590 |                  |  |          | 10,063   |          |   |   | 11,358 |        |  |   | 21,270   |         
|                                                                                                              |                             |                    |       |                  |  |          |          |          |   |   |        |        |  |   |          |         
|                                                                                                              | Pro forma net income (loss) |                    | $     | 829              |  |          | $        | (117,706 | ) |   | $      | 22,742 |  |   | $        | (192,460 | )
|                                                                                                              |                             |                    |       |                  |  |          |          |          |   |   |        |        |  |   |          |         
|Net income (loss) per share                                                                                   |                             |                    |       |                  |  |          |          |          |   |   |        |        |  |   |          |         
|                                                                                                              | As reported  basic         |                    | $     | 0.03             |  |          | $        | (0.46    | ) |   | $      | 0.14   |  |   | $        | (0.73    | )
|                                                                                                              | Pro forma  basic           |                    | $     | 0.00             |  |          | $        | (0.49    | ) |   | $      | 0.09   |  |   | $        | (0.81    | )
|                                                                                                              | As reported  diluted       |                    | $     | 0.03             |  |          | $        | (0.46    | ) |   | $      | 0.14   |  |   | $        | (0.73    | )
|                                                                                                              | Pro forma  diluted         |                    | $     | 0.00             |  |          | $        | (0.49    | ) |   | $      | 0.09   |  |   | $        | (0.81    | )

9



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

9.     Net Income
(Loss) Per Share

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

|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |       |  
|-------------------------------------------------- | --------------------------------------- | ------------------ | ----------- | ---------------- |  | ------------- | ----------- | ------------- | - | - | ----------- | --------- |  | - | ----------- | ----- | -
|                                                   |                                         |                    |             |                 
|                                                   |                                         | Three Months Ended |             | Six Months Ended
|                                                   |                                         |                    |             |                 
|                                                   |                                         | June 28, 2003      |             | June 29, 2002    |  | June 28, 2003 |             | June 29, 2002
|                                                   |                                         |                    |             |                  |  |               |             |              
|Numerator  Basic and
    Diluted                  |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Income (loss) from continuing operations           |                                         | $                  | 6,196       |                  |  | $             | (103,303    | )             |   | $ | 33,604      |           |  | $ | (158,680    | )    
|Loss from discontinued operations                  |                                         | $                  |            |                  |  | $             | (5,699      | )             |   | $ |            |           |  | $ | (15,360     | )    
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Net income (loss)                                  |                                         | $                  | 6,196       |                  |  | $             | (109,002    | )             |   | $ | 33,604      |           |  | $ | (174,040    | )    
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Net income (loss) available to common stockholders |                                         | $                  | 6,196       |                  |  | $             | (109,002    | )             |   | $ | 33,604      |           |  | $ | (174,040    | )    
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Denominator                                        |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Basic weighted average common shares outstanding   |                                         |                    | 241,120,075 |                  |  |               | 238,803,423 |               |   |   | 242,382,530 |           |  |   | 237,892,949 |      
|Effect of dilutive securities:                     |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|                                                   | Common stock options                    |                    |             | 4,043,577        |  |               |             |              |   |   |             | 3,521,206 |  |   |             |      |  
|                                                   | Restricted shares subject to repurchase |                    |             | 96,179           |  |               |             |              |   |   |             | 96,179    |  |   |             |      |  
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Diluted weighted average common shares             |                                         |                    | 245,259,831 |                  |  |               | 238,803,423 |               |   |   | 245,999,915 |           |  |   | 237,892,949 |      
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Net income (loss) per share  basic                |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Continuing operations                              |                                         | $                  | 0.03        |                  |  | $             | (0.43       | )             |   | $ | 0.14        |           |  | $ | (0.67       | )    
|Discontinued operations                            |                                         | $                  |            |                  |  | $             | (0.03       | )             |   | $ |            |           |  | $ | (0.06       | )    
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|                                                   | Total                                   |                    | $           | 0.03             |  |               | $           | (0.46         | ) |   | $           | 0.14      |  |   | $           | (0.73 | )
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Net income (loss) per share  diluted              |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|Continuing operations                              |                                         | $                  | 0.03        |                  |  | $             | (0.43       | )             |   |   | 0.14        |           |  |   | (0.67       | )    
|Discontinued operations                            |                                         | $                  |            |                  |  | $             | (0.03       | )             |   |   |            |           |  |   | (0.06       | )    
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      
|                                                   | Total                                   |                    | $           | 0.03             |  |               | $           | (0.46         | ) |   | $           | 0.14      |  |   | $           | (0.73 | )
|                                                   |                                         |                    |             |                  |  |               |             |               |   |   |             |           |  |   |             |      

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.
As-if converted shares and interest expense related to the pro
rata portion of Quantum Corporations 7% subordinated
convertible notes due 2004 were excluded from the calculations,
as the effect was anti-dilutive.

10



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following number of common stock options,
restricted shares and as-if converted shares were excluded from
the computation of diluted net loss per shares as the effect was
anti-dilutive:

|                                                                                                                               |  |                    |            |                  |  |          |            |          |  |  |            |  |  |  |            | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ---------- | ---------------- |  | -------- | ---------- | -------- |  |  | ---------- |  |  |  | ---------- | 
|                                                                                                                               |  |                    |            |                 
|                                                                                                                               |  | Three Months Ended |            | Six Months Ended
|                                                                                                                               |  |                    |            |                 
|                                                                                                                               |  | June 28,           |            | June 29,         |  | June 28, |            | June 29,
|                                                                                                                               |  | 2003               |            | 2002             |  | 2003     |            | 2002    
|                                                                                                                               |  |                    |            |                  |  |          |            |         
|Common stock options                                                                                                           |  |                    | 13,825,057 |                  |  |          | 34,226,219 |          |  |  | 13,825,057 |  |  |  | 34,599,950 | 
|Restricted shares subject to repurchase                                                                                        |  |                    |           |                  |  |          | 1,269,058  |          |  |  |           |  |  |  | 1,269,058  | 
|As-if converted shares related to 6.8%
    Convertible Senior Notes due 2010                                                   |  |                    | 18,756,362 |                  |  |          |           |          |  |  | 18,756,362 |  |  |  |           | 
|As-if converted shares related to pro rata
    portion of Quantum Corporations 7% Subordinated
    Convertible Notes due 2004 |  |                    | 4,716,676  |                  |  |          | 4,716,676  |          |  |  | 4,716,676  |  |  |  | 4,716,676  | 

10.     Short-term
Borrowings and Long-term Debt.

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

|                                                                                                   |  |          |          |              |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------- | -------- | ------------ |  | - | ------- | -
|                                                                                                   |  | June 28, |          | December 28,
|                                                                                                   |  | 2003     |          | 2002        
|                                                                                                   |  |          |          |             
|5.75% Subordinated Debentures due March 1,
    2012                                                |  | $        | 59,885   |              |  | $ | 60,427  |  
|6.8% Convertible Senior Notes due 2010                                                             |  |          | 230,000  |              |  |   |        |  
|Economic Development Board of Singapore Loan due
    March 2004                                    |  |          | 6,609    |              |  |   | 9,909   |  
|Pro rata portion of Quantum Corporations 7%
    Subordinated Convertible Notes due August 1, 2004 |  |          | 95,833   |              |  |   | 95,833  |  
|Mortgages                                                                                          |  |          | 34,902   |              |  |   | 35,609  |  
|Equipment Loans and Capital Leases                                                                 |  |          | 37,492   |              |  |   | 45,607  |  
|Receivables-backed Borrowings                                                                      |  |          | 50,000   |              |  |   |        |  
|                                                                                                   |  |          |          |              |  |   |         |  
|                                                                                                   |  |          | 514,721  |              |  |   | 247,385 |  
|Less amounts due within one year                                                                   |  |          | (184,587 | )            |  |   | (41,042 | )
|                                                                                                   |  |          |          |              |  |   |         |  
|                                                                                                   |  | $        | 330,134  |              |  | $ | 206,343 |  
|                                                                                                   |  |          |          |              |  |   |         |  

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 has
bonds to fulfill its sinking fund obligation until March 1,
2006.

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 is being amortized
in seven equal semi-annual installments ending September 2003.
As of June 28, 2003, the balance was equivalent to
$6.6 million. The Board charges interest at 1.0% above the
prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year (3.5% as of June 28, 2003). This
loan is supported by a two-year guaranty from a bank. Cash is
currently provided as collateral for this guaranty but the
Company may, at its option, substitute other assets as security.
As part of this agreement, the Company had been subject to two
financial covenants, the maintenance of minimum unrestricted
cash and a tangible net worth test. On January 29, 2003,
the loan was amended to remove the tangible net worth covenant.
As of June 28, 2003, the Company was in compliance with the
covenant regarding maintenance of minimum restricted cash.

11



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In connection with the Companys acquisition
of Quantum HDD, Maxtor agreed to indemnify Quantum for the
Quantum HDD pro rata portion of Quantums outstanding
$287.5 million 7.0% convertible subordinated notes due
August 1, 2004, and the principal amount of
$95.8 million has been included in the Companys
long-term debt. Quantum is required to pay interest
semi-annually on February 1 and August 1, and
principal is payable on maturity. The notes are convertible at
the option of the holder at any time prior to maturity, unless
previously redeemed into shares of Quantum common stock and
Maxtor common stock. The Companys pro rata share of the
notes would be convertible to 4,716,676 shares of Maxtor common
stock (or 16.405 shares per $1,000 note).

The Company is required to reimburse Quantum for
interest and principal payments relating to the
$95.8 million representing Quantum HDDs pro rata
portion of such notes. On August 6, 2003, Quantum announced
that it has delivered a notice of redemption to the holders of
such notes designating August 21, 2003 as the date for
redemption of all of these notes. Assuming that the notes are
not converted into Quantum and Maxtor stock prior to the
redemption date, the Company intends to reimburse Quantum for
$97.2 million which will satisfy the Companys
reimbursement obligation in full. Accordingly, the Company has
reclassified $95.8 million on its balance sheet at
June 28, 2003 as short-term debt.

In connection with the acquisition of Quantum
HDD, the Company acquired real estate and related mortgage
obligations. The term of the mortgages is ten years, at an
interest rate of 9.2%, with monthly payments based on a
twenty-year amortization schedule, and a balloon payment at the
end of the 10-year term, which is September 2006. The
outstanding balance at June 28, 2003 was $34.9 million.

In April 2003, the Company secured 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 to be established in Suzhou, China. These
lines of credit are U.S.-dollar-denominated and are drawable
until April 2007. Borrowings which, under these lines of credits
will be collateralized by the facilities to be established in
Suzhou, China, bear interest at LIBOR plus 50 basis points
(subject to adjustments to 60 basis points) will be repayable in
eight semi-annual installments commencing October 2007, except
for $30 million repayable in April 2013. As of
June 28, 2003, the outstanding balance was zero.

On May 7, 2003, the Company sold
$230 million in aggregate principal amount of 6.8%
convertible senior notes due 2010 to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of
1933, as amended. The notes are unsecured and effectively
subordinated to all existing and future secured indebtedness.
The notes are convertible into the Companys common stock
at a conversion rate of 81.5494 shares per $1,000 principal
amount of the notes, or an aggregate of 18,756,362 shares,
subject to adjustment in certain circumstances (equal to an
initial conversion price of $12.2625 per share). The Company has
the right to settle its obligation with cash or common stock.
The initial conversion price represents a 125% premium over the
closing price of the Companys common stock on May 1,
2003, which was $5.45 per share. Prior to May 5, 2008, the
Notes will not be redeemable at the Companys option.
Beginning May 5, 2008, if the closing price of the
Companys common stock for 20 trading days within a
period of 30 consecutive trading days ending on the trading day
before the date of mailing of the redemption notice exceeds 130%
of the conversion price in effect on such trading day, the
Company may redeem the Notes in whole or in part, in cash, at a
redemption price equal to 100% of the principal amount of the
Notes being redeemed plus any accrued and unpaid interest and
accrued and unpaid liquidated damages, if any, to, but
excluding, the redemption date. If, at any time, substantially
all of the Companys common stock is exchanged or acquired
for consideration that does not consist entirely of common stock
that is listed on United States national securities exchange or
approved for quotation on the Nasdaq National Market or similar
system, the holders of the notes have the right to require the
Company to repurchase all or any portion of the notes at their
face value plus accrued interest.

On May 9, 2003, the Company entered into a
two-year receivable-backed borrowing arrangement for up to
$100 million with certain financial institutions. Under
this arrangement the Company uses a special purpose subsidiary
to purchase U.S. and Canadian accounts receivable and can borrow
up to $100 million collateralized by the U.S. and Canadian
accounts receivable. The special purpose subsidiary is
consolidated for financial

12



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

reporting purposes. The transactions under the
arrangement are accounted for as short-term borrowings and
remain on the Companys consolidated balance sheet. As of
June 28, 2003, the Company had borrowed $50.0 million
under the arrangement, which had been reported as short-term
borrowings in the Companys consolidated financial
statements. The average interest rate of the loans outstanding
under this arrangement is 6.09%. As of June 28, 2003,
$205.0 million of US and Canadian receivables were pledged
under the Companys receivable-backed borrowing arrangement
and remain on the Companys consolidated balance sheet. The
arrangement requires the Company to comply with operational and
financial covenants, including a liquidity covenant, and
initially set forth an operating cash flow to long-term debt
test. The Company entered into an amendment to replace the
operating cash flow to long-term debt test with a test of
operating income (loss) before depreciation and amortization to
long-term debt. The Company is required under the arrangement to
obtain a shadow rating for the arrangement from a credit rating
agency, and in furtherance of this obligation, agreed to
additional amendments to meet certain technical requirements of
the rating agency and will now seek the required rating. The
Company does not believe that any of these modifications will
have a material adverse impact on its ability to access funds
under this arrangement.

As of June 28, 2003, the Company had
equipment loans and capital leases totaling $37.5 million.
These obligations include certain capital equipment loans and
leases assumed in connection with the September 2001 acquisition
of MMC Technology, Inc., which as of June 28, 2003 amounted
to $25.1 million, having maturity dates through October
2004 and interest rates averaging 9.7%.

11.     Comprehensive
Income (Loss)

Cumulative other comprehensive loss on the
consolidated balance sheets consists of unrealized loss on
investments. Total comprehensive income (loss) for the three and
six months ended June 28, 2003 and June 29, 2002,
respectively, is presented in the following table (in thousands):

|                                                                             |  |                    |        |                  |  |          |          |          |  |   |        |  |  |   |          |  
|---------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | -------- | -------- | -------- |  | - | ------ |  |  | - | -------- | -
|                                                                             |  |                    |        |                 
|                                                                             |  | Three Months Ended |        | Six Months Ended
|                                                                             |  |                    |        |                 
|                                                                             |  | June 28,           |        | June 29,         |  | June 28, |          | June 29,
|                                                                             |  | 2003               |        | 2002             |  | 2003     |          | 2002    
|                                                                             |  |                    |        |                  |  |          |          |         
|Net income (loss)                                                            |  | $                  | 6,196  |                  |  | $        | (109,002 | )        |  | $ | 33,604 |  |  | $ | (174,040 | )
|Unrealized gain (loss) on investments in equity
    securities               |  |                    | 11,118 |                  |  |          | (2,772   | )        |  |   | 12,917 |  |  |   | (2,492   | )
|Less: reclassification adjustment for gain
    included in net income (loss) |  |                    | 28     |                  |  |          | 1,577    |          |  |   | 116    |  |  |   | 291      |  
|                                                                             |  |                    |        |                  |  |          |          |          |  |   |        |  |  |   |          |  
|Comprehensive income (loss)                                                  |  | $                  | 17,286 |                  |  | $        | (110,197 | )        |  | $ | 46,405 |  |  | $ | (176,241 | )
|                                                                             |  |                    |        |                  |  |          |          |          |  |   |        |  |  |   |          |  

12.     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 of continuing operations to original
equipment manufacturers (OEMs) for the three and six
months ended June 28, 2003 represented 50.6% and 46.5% of
total revenue, compared to 50.7% and 46.7% of

13



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

total revenue for the corresponding periods in
fiscal year 2002. Sales to the distribution and retail channels
for the three and six months ended June 28, 2003
represented 49.4% and 53.5% of total revenue, compared to 49.3%
and 53.3% of total revenue in the corresponding periods in
fiscal year 2002.

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 from continuing
operations by destination for the three and six months ended
June 28, 2003 and June 29, 2002, respectively, are
presented in the following table:

|                               |  |                    |         |                  |  |          |         |          |  |   |           |  |  |   |           | 
|------------------------------ |  | ------------------ | ------- | ---------------- |  | -------- | ------- | -------- |  | - | --------- |  |  | - | --------- | 
|                               |  |                    |         |                 
|                               |  | Revenue            |         | Revenue         
|                               |  |                    |         |                 
|                               |  |                    |         |                 
|                               |  | Three Months Ended |         | Six Months Ended
|                               |  |                    |         |                 
|                               |  | June 28,           |         | June 29,         |  | June 28, |         | June 29,
|                               |  | 2003               |         | 2002             |  | 2003     |         | 2002    
|                               |  |                    |         |                  |  |          |         |         
|United States                  |  | $                  | 319,986 |                  |  | $        | 298,870 |          |  | $ | 639,094   |  |  | $ | 689,248   | 
|Asia Pacific and Japan         |  |                    | 288,434 |                  |  |          | 309,974 |          |  |   | 571,761   |  |  |   | 604,264   | 
|Europe, Middle East and Africa |  |                    | 298,424 |                  |  |          | 270,940 |          |  |   | 629,017   |  |  |   | 611,563   | 
|Latin America and other        |  |                    | 4,059   |                  |  |          | 5,566   |          |  |   | 9,920     |  |  |   | 16,375    | 
|                               |  |                    |         |                  |  |          |         |          |  |   |           |  |  |   |           | 
|Total                          |  | $                  | 910,903 |                  |  | $        | 885,350 |          |  | $ | 1,849,792 |  |  | $ | 1,921,450 | 
|                               |  |                    |         |                  |  |          |         |          |  |   |           |  |  |   |           | 

Long-lived asset information by geographic area
as of June 28, 2003 and December 28, 2002 is presented
in the following table:

|                               |  |                   |           |              |  |   |           | 
|------------------------------ |  | ----------------- | --------- | ------------ |  | - | --------- | 
|                               |  |                  
|                               |  | Long-lived Assets
|                               |  |                  
|                               |  | June 29,          |           | December 28,
|                               |  | 2003              |           | 2002        
|                               |  |                   |           |             
|United States                  |  | $                 | 1,148,455 |              |  | $ | 1,207,738 | 
|Asia Pacific and Japan         |  |                   | 108,474   |              |  |   | 128,860   | 
|Europe, Middle East and Africa |  |                   | 667       |              |  |   | 891       | 
|                               |  |                   |           |              |  |   |           | 
|Total                          |  | $                 | 1,257,596 |              |  | $ | 1,337,489 | 
|                               |  |                   |           |              |  |   |           | 

Long-lived assets located within the United
States consist primarily of goodwill and other intangible
assets, which amounted to $919.7 million and
$960.8 million as of June 28, 2003 and
December 28, 2002, respectively. Long-lived assets located
outside the United States consist primarily of the
Companys manufacturing operations located in Singapore,
which amounted to $105.1 million and $127.6 million as
of June 28, 2003 and December 28, 2002, respectively.

13.     Sale of
Accounts Receivable

In November 2001, the Company entered into an
accounts receivable securitization program (the
Program) with a group of commercial banks (the
Banks). On December 30, 2002, the Company
elected to terminate the Program. Under the Program, the Company
sold U.S. and Canadian accounts receivable in securitization
transactions and retains a subordinated interest and servicing
rights to those receivables. The eligible receivables, net of
estimated credit losses, were sold to third party conduits
through a wholly-owned bankruptcy-remote entity that was
consolidated for financial reporting purposes. The investors in
the securitized receivables had no recourse to the
Companys assets as a result of debtors defaults
except for the retained interests in the securitized accounts
receivable. The Company retained the portion of the sold
receivables that was in excess of the minimum receivables level
required to support the securities issued by the

14



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

third party conduits, referred to as retained
interest. The carrying amount of the Companys retained
interest, which approximated fair value because of the
short-term nature of receivables, was recorded in accounts
receivable. The Company serviced the sold receivables and
charged the third party conduits a monthly servicing fee at
market rates; accordingly, no servicing asset or liability was
recorded.

The Company accounted for the Program under the
FASBs Statement of Financial Accounting Standards
No. 140 (SFAS 140), Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities. The Program qualified for treatment as a
sale under SFAS 140. As of December 28, 2002, the
outstanding balance of securitized accounts receivable held by
the third party conduits totaled $140.3 million, of which
the Companys subordinated retained interest was
$95.3 million. Accordingly, $45.0 million of accounts
receivable balances, net of applicable allowances, were removed
from the consolidated balance sheets at December 28, 2002.
Delinquent amounts and credit losses related to these
receivables were not material as of December 28, 2002.
Expenses associated with the Program totaled $1.9 million,
in the six months ended June 29, 2002 and were included
within the interest expense caption of the results of operations
statement. In the six months ended June 29, 2002 $0.5
million of these expenses, related primarily to the loss on sale
of receivables, net of related servicing revenues, with the
remainder representing program and facility fees. Net cash flows
from sales (repayments) under the Program were
$0.2 million for the six months ended June 29, 2002.

14.     Contingencies

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

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

Prior to the Company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, the Company 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.

15



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

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

The results of any litigation are inherently
uncertain and Papst may assert other infringement claims
relating to current patents, pending patent applications, and/or
future patent applications or issued patents. Additionally,
there are no assurances that the Company 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 it may incur as a result of an adverse judgment or a
negotiated settlement with respect to the claims against Maxtor.
Management made an estimate of the potential liabilities which
might arise from the Papst claims against Quantum at the time of
the 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 the Companys
business, financial condition and operating results. Management
believes that it has valid defenses to the claims of Papst and
is defending this matter vigorously.

15.     Goodwill and
Other Intangible Assets

Commencing in fiscal 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires goodwill to be
tested for impairment under certain circumstances, written down
when impaired, and requires purchased intangible assets other
than goodwill to be amortized over their useful lives unless
these lives are determined to be indefinite. Goodwill and
indefinite lived intangible assets will be subject to an
impairment test at least annually.

The Company ceased amortizing goodwill totaling
$846.0 million as of the adoption date, including
$31.1 million, net of accumulated amortization, of acquired
workforce intangibles previously classified as purchased
intangible assets. Subsequent to the decision to shut down the
manufacture and sales of NSG products, the Company wrote off
goodwill related to the NSG operations of $32.0 million. As
of June 28, 2003, 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 $41.1 million in the remainder of
2003, $37.0 million in 2004, $21.9 million in 2005,
and $5.8 million in 2006, at which time purchased
intangible assets will be fully amortized.

16



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |        | 
|----------------------------- | ------------------- | -------------------- | - | ------------- | - | ----------------- | ------- | ----- | ------- | -------- | -------- | ------------ | ------- | --- | ------- | ----- | ------ | - | ------- | ----- | ------- | - | -------- | ------ | ------- | - | ------- | ----- | ------ | 
|                              |                     |                      |   |               |   |                  
|                              |                     |                      |   | June 28, 2003 |   | December 28, 2002
|                              |                     |                      |   |               |   |                  
|                              |                     |                      |   | Gross         |   |                   |         | Gross |         |         
|                              |                     | Useful               |   | Carrying      |   | Accumulated       |         |       |         | Carrying |          | Accumulated  |         |    
|                              |                     | Life                 |   | Amount        |   | Amortization      |         | Net   |         | Amount   |          | Amortization |         | Net
|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |    
|                              |                     | (Years)              |   |               |   |                   |         |       |         |          |          |              |         |    
|Goodwill                      |                     |                      |  |               |   | $                 | 813,951 |       |         | $        |         |              |         | $   | 813,951 |       |        | $ | 813,951 |       |         | $ |         |        |         | $ | 813,951 |      
|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Quantum HDD                   |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              | Existing Technology |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |       |       
|                              |                     | Core technology      |   |               | 5 |                   |         | $     | 105,000 |          |          |              | (47,250 | )   |         |       | 57,750 |   |         | $     | 105,000 |   |          |        | (36,750 | ) |         |       | 68,250 | 
|                              |                     | Consumer electronics |   |               | 3 |                   |         |       | 8,900   |          |          |              | (6,675  | )   |         |       | 2,225  |   |         |       | 8,900   |   |          |        | (5,192  | ) |         |       | 3,708  | 
|                              |                     | High-end             |   |               | 3 |                   |         |       | 75,500  |          |          |              | (56,625 | )   |         |       | 18,875 |   |         |       | 75,500  |   |          |        | (44,042 | ) |         |       | 31,458 | 
|                              |                     | Desktop              |   |               | 3 |                   |         |       | 96,700  |          |          |              | (72,525 | )   |         |       | 24,175 |   |         |       | 96,700  |   |          |        | (56,408 | ) |         |       | 40,292 | 
|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              |                     |                      |   |               |   |                   | 286,100 |       |         |          | (183,075 | )            |         |     | 103,025 |       |        |   | 286,100 |       |         |   | (142,392 | )      |         |   | 143,708 |      
|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|MMC Technology                |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|                              | Existing technology |                      |   | 5             |   |                   |         | 4,350 |         |          |          | (1,595       | )       |     |         | 2,755 |        |   | $       | 4,350 |         |   |          | (1,160 | )       |   |         | 3,190 |       
|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      
|Total other intangible assets |                     |                      |   |               |   | $                 | 290,450 |       |         | $        | (184,670 | )            |         | $   | 105,780 |       |        | $ | 290,450 |       |         | $ | (143,552 | )      |         | $ | 146,898 |      
|                              |                     |                      |   |               |   |                   |         |       |         |          |          |              |         |     |         |       |        |   |         |       |         |   |          |        |         |   |         |      

In accordance with SFAS No. 142, the Company
completed its impairment analysis as of January 1, 2002,
upon the adoption of SFAS 142, and as of December 28,
2002 for the purpose of the annual review. The Company found no
instances of impairment of the recorded goodwill on both dates
and accordingly no impairment was recorded.

16. Recent Accounting Pronouncements

In December 2002, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS
No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended after
December 15, 2002. The interim disclosure requirements are
effective for interim periods beginning after December 15,
2002.

In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46). Under that interpretation, certain
entities known as Variable Interest Entities
(VIE) must be consolidated by the primary
beneficiary of the entity. The primary beneficiary is
generally defined as having the majority of the risks and
rewards arising from the VIE. For VIEs in which a
significant (but not majority) variable interest is held,
certain disclosures are required. FIN 46 requires disclosure of
Variable Interest Entities in financial statements issued after
January 31, 2003, if it is reasonably possible that as of
the transition date: (1) the Company will be the primary
beneficiary of an existing VIE that will require consolidation
or, (2) the Company will hold a significant variable
interest in, or have significant involvement with, an existing
VIE. Any VIEs created after January 31, 2003, are
immediately subject to the consolidation guidance in FIN 46. The
measurement principles of this interpretation will be effective
for the Companys 2003 financial statements. The Company
does not have any entities that require disclosure or new
consolidation as a result of adopting the provisions of
FIN 46.

17



---



##### 



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In April 2003, the FASB issued SFAS No. 149,
Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. In particular,
this Statement clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a
financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is generally
effective for contracts entered into or modified after
June 30, 2003 and is not expected to have a material impact
on the Companys financial position or results of
operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for interim periods
beginning after June 15, 2003. The adoption of SFAS
No. 150 did not have a material impact on the
Companys financial position or results of operations.

18



---



##### 



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 our
expectations as to average selling prices, demand for our
products, capital expenditures, liquidity, completion of our
manufacturing facility in China, our indemnification
obligations, the results of litigation, amortization of other
intangible assets and our relationships with vendors. In this
report, the words anticipates, believe,
expect, intend, may,
will, should, 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.

Overview

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

On April 2, 2001, we acquired Quantum
Corporations Hard Disk Drive Group (Quantum
HDD). The primary reason for our acquisition of Quantum
HDD was to create a stronger, more competitive company, with
enhanced prospects for continued viability in the storage
industry. For additional information regarding the Quantum HDD
acquisition, see note 4 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 (including exercise of the
underwriters over-allotment) 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. In February 2002, Hynix distributed
the balance of its Maxtor shares to the beneficial owners of a
trust and ceased to be a stockholder of Maxtor.

On August 15, 2002 we announced our decision
to shut down the manufacturing and sale of our
MaxAttachTM branded network attached storage products
of our Network Systems Group (NSG). 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

19



---



##### 



commoditized and the other segment placing us in
competition with some of our hard disk drive customers. The shut
down of the operations of our NSG business allowed us to focus
on our core hard disk drive market and further reduce expenses.
The NSG business was accounted for as a discontinued operation
and therefore, results of operations and cash flows have been
removed from our results of continuing operations for all
periods presented in this report. For additional information
regarding the NSG discontinued operations, see note 2 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
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.

Critical Accounting Policies

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

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



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

For additional information regarding the
Companys critical accounting policies mentioned above, see
Managements Discussion and Analysis of Financial
Condition and Results of Operation in our Annual Report on
Form 10-K for the fiscal year ended December 28, 2002.

20



---



##### 



Results of Operations



| |                         
| | ------------------------
| | Revenue and Gross Profit

|                                         |  |                    |       |          |  |                  |        |          |  |          |       |        |  |   |         |   |  |   |         |    |  |   |       |  
|---------------------------------------- |  | ------------------ | ----- | -------- |  | ---------------- | ------ | -------- |  | -------- | ----- | ------ |  | - | ------- | - |  | - | ------- | -- |  | - | ----- | -
|                                         |  |                    |       |          |  |                  |        |         
|                                         |  | Three Months Ended |       |          |  | Six Months Ended |        |         
|                                         |  |                    |       |          |  |                  |        |         
|                                         |  | June 28,           |       | June 29, |  |                  |        | June 28, |  | June 29, |       |       
|                                         |  | 2003               |       | 2002     |  | Change           |        | 2003     |  | 2002     |       | Change
|                                         |  |                    |       |          |  |                  |        |          |  |          |       |       
|                                         |  |                    |       |          |  |                  |        |         
|                                         |  | (Unaudited)        |       |          |  | (Unaudited)      |        |         
|                                         |  | (In millions)      |       |          |  | (In millions)    |        |         
|Total revenue from continuing operations |  | $                  | 910.9 |          |  | $                | 885.4  |          |  | $        | 25.5  |        |  | $ | 1,849.8 |   |  | $ | 1,921.5 |    |  | $ | (71.7 | )
|Gross profit                             |  | $                  | 149.2 |          |  | $                | 59.4   |          |  | $        | 89.8  |        |  | $ | 321.1   |   |  | $ | 173.2   |    |  | $ | 147.9 |  
|Income (loss) from continuing operations |  | $                  | 6.2   |          |  | $                | (103.3 | )        |  | $        | 109.5 |        |  | $ | 33.6    |   |  | $ | (158.7  | )  |  | $ | 192.3 |  
|As a percentage of revenue:              |  |                    |       |          |  |                  |        |          |  |          |       |        |  |   |         |   |  |   |         |    |  |   |       |  
|Total revenue from continuing operations |  |                    | 100.0 | %        |  |                  | 100.0  | %        |  |          |       |        |  |   | 100.0   | % |  |   | 100.0   | %  |  |   |       |  
|Gross profit                             |  |                    | 16.4  | %        |  |                  | 6.7    | %        |  |          |       |        |  |   | 17.4    | % |  |   | 9.0     | %  |  |   |       |  
|Income (loss) from continuing operations |  |                    | 0.7   | %        |  |                  | (11.7  | )%       |  |          |       |        |  |   | 1.8     | % |  |   | (8.3    | )% |  |   |       |  



| |        
| | -------
| | Revenue

Revenue in the three and six months ended
June 28, 2003 were $910.9 million and
$1,849.8 million, compared to $885.4 million and
$1,921.5 million in the corresponding periods in fiscal
2002. Total shipments for the three months ended June 28,
2003 were 12.2 million units, which was 0.5 million
units, or 3.9%, lower as compared to the three months ended
June 29, 2002. Total shipments for the six months ended
June 28, 2003 were 24.6 million units, which was
1.8 million units or 6.9% lower as compared to the six
months ended June 29, 2002. Although total shipments
declined during the three months ended June 28, 2003 as a
result of our transition to the 80GB per platter areal density
hard disk drive, total revenue increased as we continued to
increase our average GB shipped and grow our server hard disk
drive and personal storage businesses. During the six months
ended June 28, 2003 total shipments and revenue declined as
a result of our transition to the 80GB per platter areal density
hard disk drive.

Revenue from sales to original equipment
manufacturers (OEMs) represented 50.6% and 46.5% of
revenue in the three and six months ended June 28, 2003,
respectively, compared to 50.7% and 46.7% of revenue,
respectively, in the corresponding period in fiscal year 2002.
Revenue from sales to the distribution channel and retail
customers in the three and six months ended June 28, 2003
represented 49.4% and 53.5% of revenue, respectively compared to
49.3% and 53.3% of revenue, respectively, in the corresponding
period in fiscal 2002. Although the percentage of sales to OEMs
remained relatively constant, sales to retail customers
increased to 6.4% and 7.4% in the three and six months ended
June 28, 2003, respectively compared to 4.9% and 4.9% for
the corresponding period in fiscal 2002. The increase was
primarily due to growth in the sales of personal storage
products. Conversely, sales to distribution customers decreased
to 43.0% and 46.1% in the three and six months ended
June 28, 2003, respectively, from 44.4% and 48.4% for the
corresponding period in fiscal 2002. The decrease was a result
of reduced sales to Asian distributors due to our transition to
the 80GB per platter areal density hard disk drive.

Domestic revenue in the three and six months
ended June 28, 2003 represented 35.5% and 35.1% of total
sales, respectively compared to 34.4% and 36.8% of total,
respectively, in the corresponding period in fiscal year 2002.
The increase in United States & Canada revenue as a
percentage of total revenue during the three months ended
June 28, 2003 was a result of increased shipments to our
OEM and distribution customers. This increase was driven by the
growth in server hard disk drive product sales and continued
progress in the ramp of our 80GB product. The decline during the
six months ended June 28, 2003 was the result of our
transition to the 80GB per platter areal density hard disk
drive. International revenue in the three and six months ended
June 28, 2003 represented 64.5% and 64.9% of total sales,
respectively compared to 65.6% and 63.2% of total, respectively,
in the corresponding period in fiscal year 2002.

21



---



##### 



Sales to Europe, Middle East and Africa in the
three months ended June 28, 2003 and June 29, 2002
represented 32.8% and 30.6% of total revenue, respectively. In
absolute dollars, Europe, Middle East and Africa sales increased
10.1% compared to the corresponding period in fiscal year 2002.
The increase in Europe, Middle East and Africa sales both in
absolute dollars and as a percentage of revenue during the three
months ended June 28, 2003, was the result of increased
shipments of server hard disk drive product and growth of our
retail and distribution business. The retail and distribution
growth was driven by the success of our personal storage
products and increased acceptance of our 80GB per platter areal
density hard disk drive. Sales to Asia Pacific and Japan in the
three months ended June 28, 2003 and June 29, 2002
represented 31.7% and 35.0% of total revenue, respectively. In
absolute dollars, Asia Pacific and Japan sales decreased 6.9%
compared to the corresponding period in fiscal year 2002. The
decrease in Asia Pacific and Japan sales both in absolute
dollars and as a percentage of revenue during the three months
ended June 28, 2003, was due to decreased sales to Asian
distributors as the result of the ramp of our 80GB per platter
areal density hard disk drive.

Sales to Europe, Middle East and Africa in the
six months ended June 28, 2003 and June 29, 2002
represented 34.0% and 31.8% of total revenue, respectively. In
absolute dollars, Europe, Middle East and Africa sales increased
2.9% compared to the corresponding six months in fiscal year
2002. The increase in Europe, Middle East and Africa sales was
the result of increased shipments of server hard disk drive
product and growth of our retail and distribution business. The
retail and distribution growth was driven by the success of our
personal storage products and increased acceptance of our 80GB
per platter areal density hard disk drive. Sales to Asia Pacific
and Japan in the six months ended June 28, 2003 and
June 29, 2002 represented 30.9 % and 31.4% of total
revenue, respectively. In absolute dollars, Asia
Pacific & Japan sales decreased 5.4% compared to the
corresponding period in fiscal year 2002. The decrease in Asia
Pacific and Japan sales was the result of decreased sales to
Asian distributors as the result of the ramp of our 80GB per
platter areal density hard disk drive.



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

Gross profit increased to $149.2 million in
the three months ended June 28, 2003, compared to
$59.4 million for the corresponding three months in fiscal
year 2002. As a percentage of revenue, gross profit increased to
16.4% in the three months ended June 28, 2003 from 6.7% in
the corresponding three months of fiscal year 2002. Gross profit
increased to $321.1 million in the six months ended
June 28, 2003, compared to $173.2 million for the
corresponding three months in fiscal year 2002. As a percentage
of revenue, gross profit increased to 17.4% in the six months
ended June 28, 2003 from 9.0% in the corresponding three
months of fiscal year 2002. The increase in gross profit, both
as a percentage of revenue and actual dollars, was primarily due
to the transition of our desktop product from MKE to our
Singapore manufacturing facility and the improved manufacturing
efficiencies on the 80GB per platter areal density hard disk
drive. These efficiencies resulted in reduced costs associated
with drive components and a more favorable product mix. Our cost
of goods sold includes depreciation and amortization of
property, plant and equipment.

Operating Expenses

|                                    |  |                    |      |          |  |                  |       |          |  |          |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|----------------------------------- |  | ------------------ | ---- | -------- |  | ---------------- | ----- | -------- |  | -------- | ----- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                    |  |                    |      |          |  |                  |       |         
|                                    |  | Three Months Ended |      |          |  | Six Months Ended |       |         
|                                    |  |                    |      |          |  |                  |       |         
|                                    |  | June 28,           |      | June 29, |  |                  |       | June 28, |  | June 29, |       |       
|                                    |  | 2003               |      | 2002     |  | Change           |       | 2003     |  | 2002     |       | Change
|                                    |  |                    |      |          |  |                  |       |          |  |          |       |       
|                                    |  |                    |      |          |  |                  |       |         
|                                    |  | (In millions)      |      |          |  | (In millions)    |       |         
|Research and development            |  | $                  | 84.2 |          |  | $                | 104.1 |          |  | $        | (19.9 | )      |  | $ | 170.9 |   |  | $ | 207.1 |   |  | $ | (36.2 | )
|Selling, general and administrative |  | $                  | 31.0 |          |  | $                | 35.3  |          |  | $        | (4.3  | )      |  | $ | 62.9  |   |  | $ | 76.7  |   |  | $ | (13.8 | )
|Amortization of intangible assets   |  | $                  | 20.6 |          |  | $                | 20.6  |          |  | $        |      |        |  | $ | 41.1  |   |  | $ | 41.1  |   |  | $ |      |  
|As a percentage of revenue:         |  |                    |      |          |  |                  |       |          |  |          |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|Research and development            |  |                    | 9.2  | %        |  |                  | 11.8  | %        |  |          |       |        |  |   | 9.2   | % |  |   | 10.8  | % |  |   |       |  
|Selling, general and administrative |  |                    | 3.4  | %        |  |                  | 4.0   | %        |  |          |       |        |  |   | 3.4   | % |  |   | 4.0   | % |  |   |       |  
|Amortization of intangible assets   |  |                    | 2.3  | %        |  |                  | 2.3   | %        |  |          |       |        |  |   | 2.2   | % |  |   | 2.1   | % |  |   |       |  

22



---



##### 





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

R&D expense in the three and six months ended
June 28, 2003 was $84.2 million, or 9.2% of revenue
and $170.9 million or 9.2% of revenue, respectively,
compared to $104.1 million, or 11.8% of revenue and
$207.1 million or 10.8% of revenue, respectively, in the
three and six month period ending June 29, 2002. The
decrease in absolute dollars and as a percentage of revenue was
primarily due to reduced compensation expense associated with
our reductions in force in 2002 and a more focused development
effort on fewer products, that resulted in less expense for
development parts in the three and six months ended
June 28, 2003.

As a result of our acquisition of the Quantum HDD
business, R&D expense includes stock-based compensation
charges of $0.2 million and $0.3 million in the three
and six months ended June 28, 2003, respectively, compared
to $0.4 and $1.0 million in the three and six months ended
June 29, 2002, respectively, resulting from options we
issued to Quantum employees who joined Maxtor in connection with
the acquisition on April 2, 2001. Additionally, in the six
months ended June 28, 2003 there was no longer amortization
of deferred stock-based compensation required for DSS restricted
shares from our acquisition of the Quantum HDD business as the
amortization period had been completed. R&D expense in the
six months ended June 29, 2002 includes $2.8 million
of stock-based compensation amortization for Quantum DSS
restricted shares issued to Quantum employees who joined Maxtor
in connection with the acquisition. The following table
summarizes the effect of these acquisition-related charges:

|                                              |  |                    |      |                  |  |          |       |          |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | ------------------ | ---- | ---------------- |  | -------- | ----- | -------- |  | - | ----- | - |  | - | ----- | -
|                                              |  |                    |      |                 
|                                              |  | Three Months Ended |      | Six Months Ended
|                                              |  |                    |      |                 
|                                              |  | June 28,           |      | June 29,         |  | June 28, |       | June 29,
|                                              |  | 2003               |      | 2002             |  | 2003     |       | 2002    
|                                              |  |                    |      |                  |  |          |       |         
|                                              |  |                    |      |                 
|                                              |  | (In millions)      |      | (In millions)   
|R&D expense                                   |  | $                  | 84.2 |                  |  | $        | 104.1 |          |  | $ | 170.9 |   |  | $ | 207.1 |  
|Stock-based compensation expense              |  |                    | (0.2 | )                |  |          | (0.4  | )        |  |   | (0.3  | ) |  |   | (1.0  | )
|Amortization related to DSS restricted shares |  |                    |     |                  |  |          |      |          |  |   |      |   |  |   | (2.8  | )
|                                              |  |                    |      |                  |  |          |       |          |  |   |       |   |  |   |       |  
|                                              |  | $                  | 84.0 |                  |  | $        | 103.7 |          |  | $ | 170.6 |   |  | $ | 203.3 |  
|                                              |  |                    |      |                  |  |          |       |          |  |   |       |   |  |   |       |  

For further information, see discussion below
under the section Stock-based Compensation.



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

SG&A expense in the three and six months
ended June 28, 2003 was $31.0 million, or 3.4% of
revenue and $62.9 million, or 3.4%, respectively, compared
to $35.3 million, or 4.0% and $76.7 million, or 4.0%
of revenue, respectively, in the corresponding periods in fiscal
year 2002. SG&A expense decreased in absolute dollars and as
a percentage of revenue primarily due to reduced compensation
expense associated with our reductions in force in 2002 coupled
with overall reduced spending on facilities.

As a result of our acquisition of the Quantum HDD
business, SG&A expense includes stock-based compensation
charges of $0.0 million and $0.1 million in the three
and six months ended June 28, 2003 and $0.1 million
and $0.3 million in the three and six months ending
June 29, 2002, respectively, resulting from options we
issued to Quantum employees who joined Maxtor in connection with
the acquisition on April 2, 2001. Additionally, in the six
months ended June 28, 2003 there was no longer amortization
of deferred stock-based compensation required for DSS restricted
shares from our acquisition of the Quantum HDD business as the
amortization period had been completed. SG&A expense in the
three and six months ended June 29, 2002 includes $0 and
$1.0 million, respectively, of stock-based compensation
amortization for Quantum DSS

23



---



##### 



restricted shares issued to Quantum employees who
joined Maxtor in connection with the acquisition. The following
table summarizes the effect of these acquisition-related charges:


|                                              |  |                    |      |                  |  |          |      |          |  |   |      |   |  |   |      |  
|--------------------------------------------- |  | ------------------ | ---- | ---------------- |  | -------- | ---- | -------- |  | - | ---- | - |  | - | ---- | -
|                                              |  |                    |      |                 
|                                              |  | Three Months Ended |      | Six Months Ended
|                                              |  |                    |      |                 
|                                              |  | June 28,           |      | June 29,         |  | June 28, |      | June 29,
|                                              |  | 2003               |      | 2002             |  | 2003     |      | 2002    
|                                              |  |                    |      |                  |  |          |      |         
|                                              |  |                    |      |                 
|                                              |  | (In millions)      |      | (In millions)   
|SG&A expense                                  |  | $                  | 31.0 |                  |  | $        | 35.3 |          |  | $ | 62.9 |   |  | $ | 76.7 |  
|Stock-based compensation expense              |  |                    |     |                  |  |          | (0.1 | )        |  |   | (0.1 | ) |  |   | (0.3 | )
|Amortization related to DSS restricted shares |  |                    |     |                  |  |          |     |          |  |   |     |   |  |   | (1.0 | )
|                                              |  |                    |      |                  |  |          |      |          |  |   |      |   |  |   |      |  
|                                              |  | $                  | 31.0 |                  |  | $        | 35.2 |          |  | $ | 62.8 |   |  | $ | 75.4 |  
|                                              |  |                    |      |                  |  |          |      |          |  |   |      |   |  |   |      |  

For further information, see discussion below
under the section Stock-based Compensation.



| |                         
| | ------------------------
| | Stock-based Compensation

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



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

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

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

|                                       |  |                    |     |                  |  |          |     |          |  |   |     |  |  |   |     | 
|-------------------------------------- |  | ------------------ | --- | ---------------- |  | -------- | --- | -------- |  | - | --- |  |  | - | --- | 
|                                       |  |                    |     |                 
|                                       |  | Three Months Ended |     | Six Months Ended
|                                       |  |                    |     |                 
|                                       |  | June 28,           |     | June 29,         |  | June 28, |     | June 29,
|                                       |  | 2003               |     | 2002             |  | 2003     |     | 2002    
|                                       |  |                    |     |                  |  |          |     |         
|                                       |  |                    |     |                 
|                                       |  | (In millions)      |     | (In millions)   
|Cost of revenues                       |  | $                  |    |                  |  | $        |    |          |  | $ |    |  |  | $ | 0.4 | 
|Research and development               |  |                    | 0.2 |                  |  |          | 0.4 |          |  |   | 0.3 |  |  |   | 1.0 | 
|Selling, general and administrative    |  |                    |    |                  |  |          | 0.1 |          |  |   | 0.1 |  |  |   | 0.3 | 
|                                       |  |                    |     |                  |  |          |     |          |  |   |     |  |  |   |     | 
|Total stock-based compensation expense |  | $                  | 0.2 |                  |  | $        | 0.5 |          |  | $ | 0.4 |  |  | $ | 1.7 | 
|                                       |  |                    |     |                  |  |          |     |          |  |   |     |  |  |   |     | 

As of June 28, 2003, $0.5 million of
stock-based compensation associated with our acquisition of the
Quantum HDD business remains to be amortized, based on vesting
schedules, and this amortization is expected to be completed
early in fiscal year 2004.

In addition, Quantum Corporation issued
restricted DSS shares to Quantum employees who joined Maxtor in
connection with the acquisition in exchange for the fair value
of DSS options held by such employees. A portion of the
acquisition purchase price has been allocated to this deferred
stock-based

24



---



##### 



compensation, recorded as prepaid expense, and is
amortized to expenses over the vesting period as the vesting of
the shares are subject to continued employment with Maxtor.
Amortization of the expense ended in the first quarter of 2002.
In that period, the amortization expense that effected cost of
revenues, research and development, selling, general and
administrative was $0.3 million, $2.8 million and
$1.0 million, respectively, totaling $4.1 million.




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

Amortization of other intangible assets
represents the amortization of existing technology, arising from
our acquisitions of the Quantum HDD business in April 2001 and
MMC in September 2001. The net book value of these intangibles
at June 28, 2003 was $105.8 million. Amortization of
other intangible assets was $20.6 million and
$41.1 million for the three and six months ended
June 28, 2003 and June 29, 2002.

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
$41.1 million in the remainder of 2003, $37.0 million
in fiscal 2004, $21.9 million in 2005, and
$5.8 million in 2006, at which time the intangible assets
will be fully amortized.



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

|                            |  |                    |     |          |  |                  |     |          |  |          |      |        |  |   |      |   |  |   |      |   |  |   |      |  
|--------------------------- |  | ------------------ | --- | -------- |  | ---------------- | --- | -------- |  | -------- | ---- | ------ |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                            |  |                    |     |          |  |                  |     |         
|                            |  | Three Months Ended |     |          |  | Six Months Ended |     |         
|                            |  |                    |     |          |  |                  |     |         
|                            |  | June 28,           |     | June 29, |  |                  |     | June 28, |  | June 29, |      |       
|                            |  | 2003               |     | 2002     |  | Change           |     | 2003     |  | 2002     |      | Change
|                            |  |                    |     |          |  |                  |     |          |  |          |      |       
|                            |  |                    |     |          |  |                  |     |         
|                            |  | (In millions)      |     |          |  | (In millions)    |     |         
|Interest expense            |  | $                  | 8.3 |          |  | $                | 6.6 |          |  | $        | 1.7  |        |  | $ | 13.7 |   |  | $ | 13.1 |   |  | $ | 0.6  |  
|Interest and other income   |  | $                  | 1.5 |          |  | $                | 2.4 |          |  | $        | (0.9 | )      |  | $ | 2.8  |   |  | $ | 5.4  |   |  | $ | (2.6 | )
|Other gain                  |  | $                  |    |          |  | $                | 1.6 |          |  | $        | (1.6 | )      |  | $ | 0.1  |   |  | $ | 1.6  |   |  | $ | (1.5 | )
|As a percentage of revenue: |  |                    |     |          |  |                  |     |          |  |          |      |        |  |   |      |   |  |   |      |   |  |   |      |  
|Interest expense            |  |                    | 0.9 | %        |  |                  | 0.7 | %        |  |          |      |        |  |   | 0.7  | % |  |   | 0.7  | % |  |   |      |  
|Interest and other income   |  |                    | 0.2 | %        |  |                  | 0.3 | %        |  |          |      |        |  |   | 0.2  | % |  |   | 0.3  | % |  |   |      |  
|Other gain                  |  |                    | 0.0 | %        |  |                  | 0.2 | %        |  |          |      |        |  |   | 0.0  | % |  |   | 0.1  | % |  |   |      |  



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

Interest expense increased $1.7 million and
$0.6 million in the three months and six months ended
June 28, 2003 compared to the corresponding periods in
fiscal year 2002. The increase in interest expense was due
primarily to interest associated with the $230 million in
6.8% convertible senior notes due 2010 issued May 7, 2003. Total
short-term and long-term outstanding borrowings were
$514.7 million as of June 28, 2003 compared to
$247.4 million, as of December 28, 2002.



| |                          
| | -------------------------
| | Interest and Other Income

Interest and other income decreased
$0.9 million and $2.6 million in the three and six months
ended June 28, 2003 compared to the corresponding periods
in fiscal year 2002. The decrease in interest and other income
was due to reduced interest income from our investment
portfolios as a result of lower short-term interest rates. Total
cash and cash equivalents, restricted cash and marketable
securities were $626.6 million as of June 28, 2003
compared to $489.9 million as of June 29, 2002. See
the Liquidity and Capital Resources discussion for
further information.

25



---



##### 



Provision
for Income Taxes

|                                                |  |                    |     |          |  |                  |        |          |  |          |       |        |  |   |      |  |  |   |        |   |  |   |       | 
|----------------------------------------------- |  | ------------------ | --- | -------- |  | ---------------- | ------ | -------- |  | -------- | ----- | ------ |  | - | ---- |  |  | - | ------ | - |  | - | ----- | 
|                                                |  |                    |     |          |  |                  |        |         
|                                                |  | Three Months Ended |     |          |  | Six Months Ended |        |         
|                                                |  |                    |     |          |  |                  |        |         
|                                                |  | June 28,           |     | June 29, |  |                  |        | June 28, |  | June 29, |       |       
|                                                |  | 2003               |     | 2002     |  | Change           |        | 2003     |  | 2002     |       | Change
|                                                |  |                    |     |          |  |                  |        |          |  |          |       |       
|                                                |  |                    |     |          |  |                  |        |         
|                                                |  | (In millions)      |     |          |  | (In millions)    |        |         
|Income/(loss) before provision for income taxes |  | $                  | 6.6 |          |  | $                | (103.2 | )        |  | $        | 109.8 |        |  | $ | 35.3 |  |  | $ | (157.9 | ) |  | $ | 193.2 | 
|Provision for income taxes                      |  | $                  | 0.4 |          |  | $                | 0.2    |          |  | $        | 0.2   |        |  | $ | 1.7  |  |  | $ | 0.8    |   |  | $ | 0.9   | 

The provision for income taxes consists primarily
of state and foreign taxes. Due to our net operating losses
(NOL), NOL carryforwards 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.

We were part of the HEA consolidated group for
federal income tax returns for periods from early 1996 to August
1998 (the Affiliation Period). As a member of the
HEA consolidated group, the Company was subject to a tax
allocation agreement. During the Affiliation Period, for
financial reporting purposes, our tax loss was computed on a
separate tax return basis and, as such, we did not record any
tax benefit in our financial statements for the amount of the
net operating loss included in the HEA consolidated income tax
return.

We ceased to be a member of the HEA consolidated
group as of August 1998. We remain liable for our share of the
total consolidated or combined tax return liability of the HEA
consolidated group prior to August 1998. We have agreed to
indemnify or reimburse HEA if there is any increase in our share
of the HEA consolidated or combined tax return liability
resulting from revisions to our taxable income.

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.
Management believes that, based on the facts available at this
time, the likelihood that our indemnification obligations will
exceed $142.0 million is remote. As of June 28, 2003,
the Company has reimbursed $5.3 million to Quantum
Corporation leaving a balance of $136.7 million on the
original indemnity, prior to any sharing of tax liability with
Quantum.

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

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

26



---



##### 





| |                                      
| | -------------------------------------
| | Loss from Discontinued
    Operations

On August 15, 2002, we announced our
decision to shut down the manufacturing and sales of our
MaxAttachTM branded network attached storage products
(NSG). The discontinuance of our NSG operations
represents the disposal of a component of an entity as defined
in Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, our financial statements have been
presented to reflect NSG as a discontinued operation for all
periods presented. Our liabilities (no remaining assets) have
been segregated from continuing operations in the accompanying
consolidated balance sheet as of December 28, 2002 and our
operating results have been segregated and reported as
discontinued operations in the accompanying consolidated
statement of operations.

Operating results of the NSG discontinued
operations for the three and six months ended June 28, 2003
and June 29, 2002 are as follows (in millions):

|                                     |  |                    |   |                  |  |          |      |          |  |   |   |  |  |   |       |  
|------------------------------------ |  | ------------------ | - | ---------------- |  | -------- | ---- | -------- |  | - | - |  |  | - | ----- | -
|                                     |  |                    |   |                 
|                                     |  | Three Months Ended |   | Six Months Ended
|                                     |  |                    |   |                 
|                                     |  | June 28,           |   | June 29,         |  | June 28, |      | June 29,
|                                     |  | 2003               |   | 2002             |  | 2002     |      | 2002    
|                                     |  |                    |   |                  |  |          |      |         
|Revenue from discontinued operations |  | $                  |  |                  |  | $        | 10.4 |          |  | $ |  |  |  | $ | 19.0  |  
|Loss from discontinued operations    |  | $                  |  |                  |  | $        | (5.7 | )        |  | $ |  |  |  | $ | (15.4 | )

Liquidity and Capital Resources



| |                          
| | -------------------------
| | Cash and Cash Equivalents

At June 28, 2003, we had $484.0 million
in cash and cash equivalents, $55.0 million in restricted
cash and $87.6 million in marketable securities, for a
combined total of $626.6 million. In comparison, at
December 28, 2002 we had $306.5 million in cash and
cash equivalents, $ 56.7 million in restricted cash and $
87.5 million in marketable securities, for a combined total
of $450.7 million. The restricted cash balance was pledged
as collateral for certain stand-by letters of credit issued by
commercial banks. We have a net deferred tax liability amounting
to $196.5 million, which could become payable upon
repatriation of the earnings invested abroad.

Operating activities used cash of
$5.0 million in the six months ended June 28, 2003.
Sources of cash from operating activities reflect our net income
from operations of $33.6 million, non-cash adjustments for
depreciation and amortization of $83.1 million,
amortization of intangible assets of $41.1 million, and
$2.9 million of other non-cash items. Uses of cash from
operating activities include an increase in accounts receivable
of $73.1 million, due to closure of the asset
securitization program and the purchase back of
$45.0 million secured receivables and an increase in sales
activity during the last month of the second quarter, an
increase of inventory of $57.1 million, due to growth in
average unit cost caused by a change in product mix toward
higher capacity drives, as well as an increase in the quantity
of server hard disk drives on hand, a decrease in accrued
expenses and other liabilities of $22.2 million due to
reductions in warranty liability, and an increase in other
assets of $8.9 million primarily due to increases in
prepaid expenses, partially offset by an increase of accounts
payable of $1.6 million.

Cash used in investing activities was
$38.0 million for the six months ended June 28, 2003,
primarily reflecting investments of property, plant and
equipment of $39.3 million and purchases (net of sales) of
marketable securities of $0.7 million, partially offset by
a decrease in restricted cash of $1.7 million.

Cash provided by financing activities was
$220.6 million for the six months ended June 28, 2003.
This increase in cash is primarily due to net proceeds of
$223.9 million from the issuance of 6.8% convertible senior
notes due 2010, a $47.9 million increase in short-term debt
from our receivable-backed borrowing arrangement, net and
proceeds of $13.1 million issuance of common stock through
the Companys employee stock purchase plan and stock option
exercises, partially offset by a repurchase of common stock of
$44.9 million associated with the issuance of the 6.8%
convertible senior notes due 2010 and amortization of our
equipment loans and capital lease obligations of
$19.3 million.

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

27



---



##### 



operations through at least the next twelve
months. Our receivable-backed borrowing arrangement has
availability of $46.9 million as of June 28, 2003, and
we also have availability of $133 million with the Bank of
China to fund our expansion into China. 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 2003, capital expenditures are
expected to be in the range of $150 million to
$175 million, primarily used for manufacturing upgrades and
expansion, product development, and updating our information
technology systems. We intend to seek financing arrangements to
fund our future capacity expansion and working capital, as
necessary. Our ability to generate cash will depend on, among
other things, demand in the hard disk drive market and pricing
conditions. 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.




| |                             
| | ----------------------------
| | Certain Financing Activities

Future payments due under lease and debt
obligations as of June 28, 2003 are reflected in the
following table (in thousands):

|                          |  |       |         |           |  |           |         |           |  |           |        |  |  |   |        |  |  |   |         | 
|------------------------- |  | ----- | ------- | --------- |  | --------- | ------- | --------- |  | --------- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                          |  |       |         |           |  |           |         |           |  | More than
|                          |  |       |         | Less than |  |           |         | 3-5 Years |  | 5 Years  
|                          |  | Total |         | 1 Year    |  | 1-3 Years |         | (1)(2)(3) |  | (1)(2)(3)
|                          |  |       |         |           |  |           |         |           |  |          
|Debt                      |  | $     | 479,451 |           |  | $         | 160,730 |           |  | $         | 13,918 |  |  | $ | 39,918 |  |  | $ | 264,885 | 
|Capital Lease Obligations |  |       | 35,270  |           |  |           | 23,857  |           |  |           | 11,402 |  |  |   | 11     |  |  |   |        | 
|Operating Leases          |  |       | 283,759 |           |  |           | 33,247  |           |  |           | 57,798 |  |  |   | 54,829 |  |  |   | 137,885 | 
|                          |  |       |         |           |  |           |         |           |  |           |        |  |  |   |        |  |  |   |         | 
|Total                     |  | $     | 798,480 |           |  | $         | 217,834 |           |  | $         | 83,118 |  |  | $ | 94,758 |  |  | $ | 402,770 | 
|                          |  |       |         |           |  |           |         |           |  |           |        |  |  |   |        |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $30 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 April 2013; the borrowing under
    this facility will bear interest at LIBOR plus 50 basis
    points (subject to adjustment to 60 basis points).                                                   
|   
|(3) | Does not include $67 million which we are
    obligated to contribute to our China Subsidiary to allow
    drawdowns under the facilities described under
    footnotes (1) and (2).                                                                                                                                                                                                                                 
|   
|(4) | Includes future minimum annual rental
    commitments, including amounts accrued as restructuring
    liabilities as of June 28, 2003.                                                                                                                                                                                                                                                                               

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 sites.

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.

We are obligated to file a registration statement
with the Securities and Exchange Commission registering the
notes and the shares underlying the notes within 90 days
after May 7, 2003 and to have that registration statement
declared effective within 180 days after May 7, 2003.
On June 24, 2003 we filed the

28



---



##### 



registration statement with the Securities and
Exchange Commission. For so long as we have not satisfied our
registration obligations and the notes are not tradeable under
Rule 144(k), we are subject to certain liquidated damages
in the form of additional interest on the notes and if we fail
to register the underlying shares into which the notes are
convertible, in the event a holder elects to convert the notes
during a period when the notes or the underlying shares are not
registered or tradeable under Rule 144(k) and we have not
satisfied our registration obligations, the conversion rate will
be increased by 3%.


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 its 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 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.

In connection with our sale of the notes, on
May 7, 2003, we also repurchased from an affiliate of one
of the initial purchasers of the notes 8,245,738 shares of our
common stock for an aggregate purchase price of
$44.9 million, or $5.45 per share, the closing price of our
common stock on May 1, 2003, plus commissions. The Company
will use the balance of the net proceeds of the offering for
repayment of indebtedness, investments, acquisitions, general
corporate purposes and working capital.

In connection with the acquisition of Quantum
HDD, we agreed to indemnify Quantum for the Quantum HDD pro rata
portion of payments that become due and payable for
Quantums outstanding $287.5 million 7% convertible
subordinated notes due August 1, 2004. For additional
information regarding the Quantum note reimbursement obligation,
see note 4 of the Notes to Consolidated Financial
Statements. On August 6, 2003, Quantum announced that it
has delivered a notice of redemption to the holders of such
notes designating August 21, 2003 as the date for
redemption of the notes. Assuming that the notes are not
converted into Quantum and Maxtor stock prior to the redemption
date, we intend to reimburse Quantum $97.2 million which,
will satisfy our reimbursement obligation in full. Accordingly,
we have reclassified $95.8 million on our balance sheet at
June 28, 2003 as short term debt.

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 use a special purpose subsidiary to purchase and
hold all of our U.S. and Canadian accounts receivable. This
special purpose subsidiary may borrow up to $100 million
collateralized by the U.S. and Canadian accounts receivable. The
special purpose subsidiary is consolidated for financial
reporting purposes. The transactions under the arrangement are
accounted for as secured borrowing and accounts receivables, and
the related short-term borrowings remain on our consolidated
balance sheet. As of June 28, 2003, we had borrowed $50.0
million under the arrangement, which had been reported as
short-term borrowings in our consolidated financial statements.
The average interest rate of the loans outstanding under this
agreement is 6.09%. As of June 28, 2003,
$205.0 million of US and Canadian receivables were pledged
under the companys receivable-backed borrowing arrangement.

The arrangement requires us to comply with
operational and financial covenants, including a liquidity
covenant, and initially set forth an operating cash flow to
long-term debt test. We entered into an amendment to replace the
operating cash flow to long-term debt test with a test of
operating income (loss) before depreciation and amortization to
long-term debt. We are required under the arrangement to obtain
a shadow rating for the arrangement from a credit rating agency,
and in furtherance of this obligation, we agreed to additional
amendments to meet certain technical requirements of the rating
agency and will now seek the required rating. We do not believe
that any of these modifications will have a material adverse
impact on our ability to access funds under this arrangement.



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

In December 2002, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. SFAS No. 148 provides alternative

29



---



##### 



methods of transition for a voluntary change to
the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that
disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro
forma effect in interim financial statements. The transition and
annual disclosure requirements of SFAS No. 148 are
effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim
periods beginning after December 15, 2002.


In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46). Under that interpretation, certain
entities known as Variable Interest Entities
(VIE) must be consolidated by the primary
beneficiary of the entity. The primary beneficiary is
generally defined as having the majority of the risks and
rewards arising from the VIE. For VIEs in which a
significant (but not majority) variable interest is held,
certain disclosures are required. FIN 46 requires
disclosure of Variable Interest Entities in financial statements
issued after January 31, 2003, if it is reasonably possible
that as of the transition date: (1) the Company will be the
primary beneficiary of an existing VIE that will require
consolidation or, (2) the Company will hold a significant
variable interest in, or have significant involvement with, an
existing VIE. Any VIEs created after January 31, 2003, are
immediately subject to the consolidation guidance in
FIN 46. The measurement principles of this interpretation
will be effective for the Companys 2003 financial
statements. The Company does not have any entities that require
disclosure or new consolidation as a result of adopting the
provisions of FIN 46.

In April 2003, the FASB issued SFAS No. 149,
Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. In particular,
this Statement clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a
financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is generally
effective for contracts entered into or modified after
June 30, 2003 and is not expected to have a material impact
on the Companys financial position or results of operations

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150
is effective for interim periods beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material
impact on the Companys financial position or results of
operations.

30



---



##### 



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 1998 and 2000. For the six
months ended June 28, 2003, we had net income of
$33.6 million, including $41.1 million for the
amortization of intangible assets and $0.4 million in
stock-based compensation expense. For the year ended
December 28, 2002, our net loss was $334.1 million,
which included $82.2 million for the amortization of
intangible assets, charges of $5.6 million for stock-based
compensation related to our acquisition of the Quantum HDD
business, severance charges of $12.3 million, restructuring
charges related to facilities closures of $9.5 million and
losses of $73.5 million related to the discontinuation of
our network attached storage business in the quarter ended
September 28, 2002. As of June 28, 2003, we had an
accumulated deficit of $1,707.0 million. Although we were
profitable in the six months ended June 28, 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
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 caused us in the first three
quarters of fiscal 2002, and will likely continue to cause us in
future quarters, to lower prices, which has 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 the 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 disk drive products with other
    products we do not offer, which may effectively 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.

31



---



##### 



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

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

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



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the average selling price of our products;                                                                                                                                                                           
|
| |  | fluctuations in the demand for our products as a
    result of the seasonal nature of the desktop computer industry
    and the markets for our customers products, as well as the
    overall economic environment;
|
| |  | market acceptance of our products;                                                                                                                                                                                   
|
| |  | our ability to qualify our products successfully
    with our customers;                                                                                                                                             
|
| |  | changes in purchases by our primary customers,
    including the cancellation, rescheduling or deferment of orders;                                                                                                  
|
| |  | changes in product and customer mix;                                                                                                                                                                                 
|
| |  | actions by our competitors, including
    announcements of new products or technological innovations;                                                                                                                
|
| |  | our ability to execute future product development
    and production ramps effectively;                                                                                                                              
|
| |  | the availability, and efficient use, of
    manufacturing capacity;                                                                                                                                                  
|
| |  | our 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. Due to current economic conditions and their impact on
information technology spending, particularly desktop computer
sales, our ability to predict demand for our products and our
financial results for current and future periods may be severely
diminished. This may adversely affect both our ability to adjust
production volumes and expenses and our ability to provide the
financial markets with forward-looking information.

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

A significant portion of our products are 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 in the early stages of production of

32



---



##### 



product. 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. In recent quarters, demand for
desktop computers has been adversely affected by unfavorable
economic conditions. If the economic conditions in the United
States and globally do not improve, or if we experience a
worsening in the global economic slowdown, we may experience a
further decrease in demand for desktop computers. 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 28, 2002,
one customer, Dell Computer Corporation, accounted for
approximately 11.5% of our total revenue, and our top five
customers accounted for approximately 31.8% of our revenue. For
the six months ended June 28, 2003, Ingram Micro, Inc.
accounted for 10% or more of our total revenue. We expect that a
relatively small number of customers will continue to account
for a significant portion of our revenue, and the proportion of
our revenue from these customers could continue to increase in
the future. These customers have a wide variety of suppliers to
choose from and therefore can make substantial demands on us.
Even if we successfully qualify a product for a given customer,
the customer generally will not be obligated to purchase any
minimum volume of product from us and generally will be able to
terminate its relationship with us at any time. Our ability to
maintain strong relationships with our principal customers is
essential to our future performance. If we lose a key customer
or if any of our key customers reduce their orders of our
products or require us to reduce our prices before we are able
to reduce costs, our business, financial condition and operating
results could suffer. Mergers, acquisitions, consolidations or
other significant transactions involving our significant
customers may adversely affect our business and operating
results.

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

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

33



---



##### 



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 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.

34



---



##### 



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.
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 some of
our key 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 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 enterprise hard disk
drives pursuant to a master agreement and a purchase agreement
that has been extended through March 31, 2004. If, for any
reason, we are unable in some quarters to make purchases in
adequate volumes or on terms advantageous to us, our revenue may
be lower or our costs may be higher than projected and our
operating results would suffer.

We negotiate pricing arrangements with MKE on a
quarterly basis. Any failure to reach an agreement on
competitive pricing arrangements would also negatively impact
our operating results.

If, at the time of termination of our current
agreement with MKE we are unable to extend the agreement on
mutually acceptable terms, we will need to arrange for
alternative manufacturing capacity for our enterprise hard disk
drive products. If we fail to make such arrangements in a timely
manner, for adequate volumes or on acceptable terms, our revenue
might be lower than projected and our business, financial
condition and operating results would suffer.

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

35



---



##### 



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. A flood, earthquake,
political instability, act of terrorism or other disaster or
condition in Singapore or Japan 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 warranty claims and related expenses, 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 and operating results 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 and operating results.

If Quantum incurs non-insured tax 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 to the extent such
tax is not covered by insurance, unless imposition of the tax is
the result of Quantums actions, or acquisitions of Quantum
stock, after the transaction. The amount of the tax not covered
by insurance could be substantial. In addition, if it is
determined that Quantum owes federal or state tax as a result of
the transaction and the circumstances giving rise to the tax are
covered by our indemnification obligations, we will be required
to pay Quantum the amount of the tax at that time, whether or
not reimbursement may be allowed under the insurance policy.
Even if a claim is available, made and pending under the
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.

36



---



##### 



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 infringement claims
which are costly to defend and may harm our business.

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

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

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

The results of any litigation are inherently
uncertain and Papst may assert other infringement claims
relating to current patents, pending patent applications, and/or
future patent applications or issued patents. Additionally, we
cannot assure you we will be able to successfully defend
ourselves against this or any other Papst lawsuit. Because the
Papst complaints assert claims to an unspecified dollar amount
of damages, and

37



---



##### 



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.


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, 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.
Such concentration of operations in Singapore and Japan will
likely magnify the effects on us of any disruptions or disasters
relating to Singapore and Japan. 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 as a
    result of epidemics, terrorist activity, acts of war or
    hostility;                                                                                         
|
| |  | economic slowdown and/or downturn in foreign
    markets;                                                                                                                                                           
|
| |  | international currency fluctuations;                                                                                                                                                                                
|
| |  | political and economic uncertainty caused by
    epidemics, terrorism or acts of war or hostility;                                                                                                                  
|
| |  | legislative and regulatory responses to terrorist
    activity such as increased restrictions on cross-border movement
    of products and technology;                                                              
|
| |  | legislative, regulatory, police, or civil
    responses to epidemics or other outbreaks of infectious diseases
    such as quarantines, factory closures, or increased restrictions
    on transportation or travel;
|
| |  | general strikes or other disruptions in working
    conditions;                                                                                                                                                     
|
| |  | labor shortages;                                                                                                                                                                                                    
|
| |  | political instability;                                                                                                                                                                                              
|
| |  | changes in tariffs;                                                                                                                                                                                                 
|
| |  | generally longer periods to collect receivables;                                                                                                                                                                    
|
| |  | unexpected legislative or regulatory requirements;                                                                                                                                                                  
|
| |  | reduced protection for intellectual property
    rights in some countries;                                                                                                                                          
|
| |  | significant unexpected duties or taxes or other
    adverse tax consequences;                                                                                                                                       
|
| |  | difficulty in obtaining export licenses and other
    trade barriers;                                                                                                                                               
|
| |  | seasonality;                                                                                                                                                                                                        
|
| |  | increased transportation/shipping costs; and                                                                                                                                                                        
|
| |  | credit and access to capital issues faced by our
    international customers.                                                                                                                                       

38



---



##### 



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.

We significantly increased our leverage as a
result of the sale of the 6.8% convertible senior notes due
2010.

In connection with our sale of the 6.8%
convertible senior notes due 2010 on May 7, 2003, we
incurred $230 million of indebtedness, set to mature in
April 2010. We will require substantial amounts of cash to fund
semi-annual interest payments on the Notes, payment of the
principal amount of the Notes upon maturity (or earlier upon a
mandatory or voluntary redemption or if we elect to satisfy a
conversion of the Notes, in whole or in part, with cash rather
than shares of our common stock), as well as future capital
expenditures, investments and acquisitions, payments on our
leases and loans, and any increased working capital
requirements. If we are unable to meet our cash requirements out
of available funds, we may need be to obtain alternative
financing, which may not be available on favorable terms or at
all. The degree to which we are financially leveraged could
materially and adversely affect our ability to obtain additional
financing for working capital, acquisitions or other purposes
and could make us more vulnerable to industry downturns and
competitive pressures. In the absence of such financing, our
ability to respond to changing business and economic conditions,
to make future acquisitions, to absorb adverse operating results
or to fund capital expenditures or increased working capital
requirements would be significantly reduced. Our ability to meet
our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and
other factors affecting our operations, some of which are beyond
our control. If we do not generate sufficient cash flow from
operations to repay the convertible senior notes at maturity, we
could attempt to refinance the 6.8% convertible senior notes due
2010; however, no assurance can be given that such a refinancing
would be available on terms acceptable to us, if at all. Any
failure by us to satisfy our obligations under the 6.8%
convertible senior notes due 2010 or the indenture could cause a
default under agreements governing our other indebtedness.

We entered into a receivable-backed borrowing
arrangement for up to $100 million which has certain
financial covenants with which we will have to comply to use the
facility.

On May 9, 2003, we entered into a two-year
receivable-backed borrowing arrangement for up to
$100 million with certain financial institutions. Under
this arrangement, we use a special purpose subsidiary to
purchase and hold all of our U.S. and Canadian accounts
receivable. This special purpose subsidiary borrows up to
$100 million secured by the purchased receivables. This
special purpose subsidiary is consolidated for financial
reporting purposes, and its resulting liabilities appear on our
consolidated balance sheet as short-term debt. The terms of the
arrangement require compliance with operational covenants and
financial covenants, including a liquidity covenant and an
operating income (loss) before depreciation and amortization to
long-term debt ratio. We are also required to obtain a shadow
rating letter for the arrangement from a credit rating agency,
and in furtherance of this obligation, we agreed to amendments
to meet certain technical requirements of the rating agency and
will now seek the required rating. We do not believe that these
modifications will have a material adverse effect on our ability
to access funds under this arrangement. A violation of the
covenants would result in an early amortization event that will
cause a prohibition on further payments and distributions to use
from the special purpose subsidiary until the arrangement has
been repaid in full. However, early amortization events under
this arrangement generally will not cause an event of default
under the 6.8% convertible senior notes due 2010. We do not
believe that the lack of borrowing availability under this
arrangement would have a material adverse effect on our
liquidity.

39



---



##### 



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. 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. Moreover, we may be subject to liability
in connection with our acquisition of the Quantum HDD and MMC
businesses to the extent that contamination requiring
remediation at our expense is present on properties currently or
formerly occupied by those businesses, or those businesses sent
wastes to sites at which remediation is required. If we have to
make significant capital expenditures or pay significant expense
in connection with future remedial actions or to continue to
comply with applicable environmental laws, our business,
financial condition and operating results could suffer.

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

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



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

40



---



##### 



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.



|        |                                                               
|------- | --------------------------------------------------------------
|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. For additional information regarding our impairment
policy, see note 1 of the Notes to Consolidated Financial
Statements.

The following table presents the hypothetical
changes in fair values in the financial instruments held at
June 28, 2003 that are sensitive to changes in interest
rates. These instruments are not leveraged and are held for
purposes other than trading. The hypothetical changes assume
immediate shifts in the U.S. Treasury yield curve of plus
or minus 50 basis points (bps), 100 bps, and
150 bps.

|                      |  |          |        |          |  |         |        |            |  |         |        |          |  |          |        |  |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------- |  | -------- | ------ | -------- |  | ------- | ------ | ---------- |  | ------- | ------ | -------- |  | -------- | ------ |  |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                      |  |          |        |          |  |         |        | Fair Value |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | as of      |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | June 28,   |  |         |        |          |  |         
|                      |  |          |        |          |  |         |        | 2003       |  |         |        |          |  |         
|                      |  | +150 bps |        | +100 bps |  | +50 bps |        | ($000)     |  | -50 bps |        | -100 bps |  | -150 bps
|                      |  |          |        |          |  |         |        |            |  |         |        |          |  |         
|Financial Instruments |  | $        | 86,401 |          |  | $       | 86,795 |            |  | $       | 87,196 |          |  | $        | 87,614 |  |  | $ | 88,014 |   |  | $ | 88,428 |   |  | $ | 88,621 |  
|% Change              |  |          | (1.38  | )%       |  |         | (0.93  | )%         |  |         | (0.48  | )%       |  |          |        |  |  |   | 0.46   | % |  |   | 0.93   | % |  |   | 1.15   | %

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      |  |   |        |    |  |  
|                             |  |                                |       | June 28, |  |                               
|                             |  | Valuation of Security Given X% |       | 2003     |  | Valuation of Security Given X%
|                             |  | Decrease in the Security Price |       | ($000)   |  | Increase in the Security Price
|                             |  |                                |       |          |  |                               
|                             |  |                                |       |          |  |                                |        |            |  |   |        |    |  |  
|Corporate equity investments |  | $                              | 9,787 |          |  | $                              | 14,680 |            |  | $ | 16,637 |    |  | $ | 19,573 |  |  | $ | 22,509 |   |  | $ | 24,466 |   |  | $ | 29,360 |  
|% Change                     |  |                                | (50   | )%       |  |                                | (25    | )%         |  |   | (15    | )% |  |   |        |  |  |   | 15     | % |  |   | 25     | % |  |   | 50     | %

41



---



##### 





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

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

42



---



##### 



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 Maxtor. 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 alleges that an integrated circuit chip supplied by
Philips was defective and caused significant levels of failure
of the Quantum HDD Corona Plus, Eagle, and Eagle Plus products,
each of which is a product line we acquired as part of our
acquisition of the Quantum HDD business. Philips subsequent

43



---



##### 



motions to dismiss were withdrawn or denied.
Philips answered the complaint on March 13, 2003. On
April 25, 2003, the Philips-related companies brought
cross-complaints against a number of Sumitomo-related companies
and a number of Amkor-related companies. Discovery is ongoing.
In the lawsuit, we are claiming damages of at least
$77 million, however, the results of litigation are
inherently uncertain and we cannot assure you that we will
achieve a favorable outcome.




|        |                      
|------- | ---------------------
|Item 2. | Changes in Securities

None



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



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

At our annual meeting of stockholders held on
May 8, 2003, the stockholders elected the nominees for
Class II directors to our Board of Directors. The votes
were as follows:

|                 |  |     |             |                    |  |  |            | 
|---------------- |  | --- | ----------- | ------------------ |  |  | ---------- | 
|Nominee          |  | For |             | Withheld Authority
|                 |  |     |             |                   
|Charles Hill     |  |     | 213,697,739 |                    |  |  | 11,915,136 | 
|Roger W. Johnson |  |     | 213,575,341 |                    |  |  | 12,037,534 | 

Mr. Hill and Mr. Johnsons terms
will expire at the 2006 annual meeting. The following
directors terms of office continue until the annual
meeting indicated: Charles M. Boesenberg, Michael R. Cannon and
Paul J. Tufano (Class III term expires at the 2004 annual
meeting); and Dr. C.S. Park and Charles F. Christ
(Class I term expires at the 2005 annual meeting). Greg
Myers was appointed to Class I on August 7, 2003.

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

Proposal to ratify the appointment of
PricewaterhouseCoopers LLP as our independent accountants for
the fiscal year ending December 27, 2003:

|           |  |  |             | 
|---------- |  |  | ----------- | 
|For:       |  |  | 221,019,299 | 
|Against:   |  |  | 4,461,053   | 
|Abstained: |  |  | 132,523     | 



|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits.

|        |    |             |  |                                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .1(1)       |  | U.S. $100,000,000 Receivables Loan and Security
    Agreement, dated as of May 9, 2003 among Maxtor Funding
    LLC, Maxtor Corporation, Merrill Lynch Commercial Finance Corp.,
    Merrill Lynch Commercial Finance Corp., Radian Reinsurance Inc.,
    and U.S. Bank National Association
|        | 10 | .2(1)       |  | Purchase and Contribution Agreement between
    Maxtor Corporation and Maxtor Funding LLC, dated as of
    May 9, 2003                                                                                                                                                                      

44



---



##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                        
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .3          |  | First Amendment to U.S. $100,000,000
    Receivables Loan and Security Agreement, dated as of
    July 21, 2003 among Maxtor Funding LLC, Maxtor Corporation,
    Merrill Lynch Commercial Finance Corp., Merrill Lynch Commercial
    Finance Corp., Radian Reinsurance Inc., and U.S. Bank
    National Association  
|        | 10  | .4          |  | Second Amendment to U.S. $100,000,000 Receivables
    Loan and Security Agreement, dated as of August 7, 2003
    among Maxtor Funding LLC, Maxtor Corporation, Merrill Lynch
    Commercial Finance Corp., Merrill Lynch Commercial Finance
    Corp., Radian Reinsurance Inc., and U.S. Bank National
    Association
|        | 10  | .5          |  | First Amendment to Purchase and Contribution
    Agreement, dated as of August 7, 2003 between Maxtor
    Corporation and Maxtor Funding LLC                                                                                                                                                                           
|        | 31  | .1          |  | Certification of Paul J. Tufano, President, Chief
    Executive Officer and Acting Chief Financial Officer of the
    Registrant pursuant to 13a-14(a) 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, Chief
    Executive Officer and Acting Chief Financial Officer of the
    Registrant furnished pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                 
|        | (1) |             |  | Incorporated by reference to exhibits filed with
    Maxtor Corporations Form S-3, dated June 24,
    2003.                                                                                                                                                                                                           

(b) Reports on Form 8-K.

Maxtor filed a Current Report on Form 8-K on
April 23, 2003, in which it reported financial results for
the first fiscal quarter ended March 29, 2003.

Maxtor filed a Current Report on Form 8-K/ A
on May 1, 2003, amending the Form 8-K filed on
April 23, 2003, in which it reported information concerning
managements reasons for using non-GAAP financial measures.

Maxtor filed a Current Report on Form 8-K on
May 1, 2003, in which it reported the offering of its
senior convertible notes to qualified institutional buyers
pursuant to Rule 144A.

Maxtor filed a Current Report on Form 8-K on
May 1, 2003, in which it reported information regarding its
leases and long-term debt.

Maxtor filed a Current Report on Form 8-K on
May 2, 2003, in which it reported certain material terms of
the offering of its senior convertible notes to qualified
institutional buyers pursuant to Rule 144A.

Maxtor filed a Current Report on Form 8-K on
May 5, 2003, in which it reported the repurchase of shares
of its common stock.

Maxtor filed a Current Report on Form 8-K on
May 7, 2003, in which it reported the completion of the
sale of its senior convertible notes to qualified institutional
buyers pursuant to Rule 144A and repurchase of shares of
its common stock.

45



---



##### 



SIGNATURES

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



| |                                   
| | ----------------------------------
| | MAXTOR CORPORATION                
|
| | By /s/ PAUL J. TUFANO             
| |                                   
| | Paul J. Tufano                    
| | President, Chief Executive Officer
| | and Acting Chief Financial Officer

Date: August 12, 2003

46



---



##### 



EXHIBIT INDEX

|        |     |             |  |                                                                                                                                                                                                                                                                                                                        
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .1(1)       |  | U.S. $100,000,000 Receivables Loan and
    Security Agreement, dated as of May 9, 2003 among Maxtor
    Funding LLC, Maxtor Corporation, Merrill Lynch Commercial
    Finance Corp., Merrill Lynch Commercial Finance Corp., Radian
    Reinsurance Inc., and U.S. Bank National Association                           
|        | 10  | .2(1)       |  | Purchase and Contribution Agreement between
    Maxtor Corporation and Maxtor Funding LLC, dated as of
    May 9, 2003                                                                                                                                                                                                 
|        | 10  | .3          |  | First Amendment to U.S. $100,000,000
    Receivables Loan and Security Agreement, dated as of
    July 21, 2003 among Maxtor Funding LLC, Maxtor Corporation,
    Merrill Lynch Commercial Finance Corp., Merrill Lynch Commercial
    Finance Corp., Radian Reinsurance Inc., and U.S. Bank
    National Association  
|        | 10  | .4          |  | Second Amendment to U.S. $100,000,000 Receivables
    Loan and Security Agreement, dated as of August 7, 2003
    among Maxtor Funding LLC, Maxtor Corporation, Merrill Lynch
    Commercial Finance Corp., Merrill Lynch Commercial Finance
    Corp., Radian Reinsurance Inc., and U.S. Bank National
    Association
|        | 10  | .5          |  | First Amendment to Purchase and Contribution
    Agreement, dated as of August 7, 2003 between Maxtor
    Corporation and Maxtor Funding LLC                                                                                                                                                                           
|        | 31  | .1          |  | Certification of Paul J. Tufano, President, Chief
    Executive Officer and Acting Chief Financial Officer of the
    Registrant pursuant to 13a-14(a) 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, Chief
    Executive Officer and Acting Chief Financial Officer of the
    Registrant furnished pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                 
|        | (1) |             |  | Incorporated by reference to exhibits filed with
    Maxtor Corporations Form S-3, dated June 24,
    2003.