##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|                                            |  |                                                                                                 
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark one)                                  |  |                                                                                                 
|þ                                           |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                           
|For the period ended September 28,
    2002
|                                           
|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: 0-14016

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                           |  | 95035                                   
|(Address of principal executive
    offices)                       |  | (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

As of November 6, 2002,
241,226,625 shares of the registrants Common Stock,
$.01 par value, were issued and outstanding.



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TABLE OF CONTENTS



|                                             |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION               
|                                             | Item 1. Condensed Consolidated Financial Statements                                          
|                                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
|                                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                             | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                  
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 2. Changes in Securities                                                                
|                                             | Item 3. Defaults Upon Senior Securities                                                      
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 5. Other Information                                                                    
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                  
|EXHIBIT INDEX                               
|EXHIBIT 10.1                                
|EXHIBIT 10.2                                
|EXHIBIT 10.3                                
|EXHIBIT 10.4                                
|EXHIBIT 10.5                                
|EXHIBIT 10.6                                
|EXHIBIT 10.7                                
|EXHIBIT 10.8                                
|EXHIBIT 10.9                                
|EXHIBIT 99.1                                
|EXHIBIT 99.2                                



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##### Table of Contents



MAXTOR CORPORATION

FORM 10-Q

September 28, 2002


INDEX

|                                   |  |                                                                                                                                  |    |      |    | 
|---------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                                  |    | Page
|                                   |  |                                                                                                                                  |    |     
|PART I.  FINANCIAL
    INFORMATION
|Item 1.                            |  | Condensed Consolidated Financial Statements                                                                                      |    |      | 2  | 
|                                   |  | Condensed Consolidated Balance Sheets 
    September 28, 2002, and December 29, 2001                                            |    |      | 2  | 
|                                   |  | Condensed Consolidated Statements of
    Operations  Three and nine months ended
    September 28, 2002, and September 29, 2001 |    |      | 3  | 
|                                   |  | Condensed Consolidated Statements of Cash
    Flows  Nine months ended September 28, 2002, and
    September 29, 2001           |    |      | 4  | 
|                                   |  | Notes to Condensed Consolidated Financial
    Statements                                                                         |    |      | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                        |    |      | 21 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                   |    |      | 50 | 
|Item 4.                            |  | Controls and Procedures                                                                                                          |    |      | 50 | 
|PART II.  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                                |    |      | 51 | 
|Item 2.                            |  | Changes in Securities                                                                                                            |    |      | 51 | 
|Item 3.                            |  | Defaults Upon Senior Securities                                                                                                  |    |      | 52 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                          |    |      | 52 | 
|Item 5.                            |  | Other Information                                                                                                                |    |      | 52 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                 |    |      | 52 | 
|Signature Page                     |  |                                                                                                                                  | 53 |     
|Certifications                     |  |                                                                                                                                  | 54 |     

1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item 1.Condensed
Consolidated Financial Statements

MAXTOR CORPORATION






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |         |           | 
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ------------ | --------- |  | ---------- | ------- | --------- | 
|                                          |                                                                                                                                                                                                                                                        | September 28,                              |            | December 29,
|                                          |                                                                                                                                                                                                                                                        | 2002                                       |            | 2001        
|                                          |                                                                                                                                                                                                                                                        |                                            |            |             
|                                          |                                                                                                                                                                                                                                                        |                                           
|                                          |                                                                                                                                                                                                                                                        | (Unaudited)                               
|                                          |                                                                                                                                                                                                                                                        | (In thousands, except share               
|                                          |                                                                                                                                                                                                                                                        | and per share amounts)                    
|ASSETS                                   
|Current assets:                           |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          | Cash and cash equivalents                                                                                                                                                                                                                              |                                            | $          | 282,420      |           |  | $          | 379,927 |          
|                                          | Restricted cash                                                                                                                                                                                                                                        |                                            |            | 56,462       |           |  |            | 98,629  |          
|                                          | Marketable securities                                                                                                                                                                                                                                  |                                            |            | 71,600       |           |  |            | 167,217 |          
|                                          | Accounts receivable, net of allowance of doubtful
    accounts of $23,422 at September 28, 2002 and $21,638 at
    December 29, 2001                                                                                                                   |                                            |            | 313,848      |           |  |            | 379,918 |          
|                                          | Inventories                                                                                                                                                                                                                                            |                                            |            | 203,773      |           |  |            | 185,556 |          
|                                          | Prepaid expenses and other                                                                                                                                                                                                                             |                                            |            | 38,821       |           |  |            | 45,606  |          
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          |                                                                                                                                                                                                                                                        | Total current assets                       |            |              | 966,924   |  |            |         | 1,256,853 | 
|Property, plant and equipment, net        |                                                                                                                                                                                                                                                        |                                            | 383,576    |              |           |  | 366,786    |        
|Goodwill                                  |                                                                                                                                                                                                                                                        |                                            | 813,951    |              |           |  | 814,863    |        
|Other intangible assets, net              |                                                                                                                                                                                                                                                        |                                            | 167,458    |              |           |  | 262,552    |        
|Other assets                              |                                                                                                                                                                                                                                                        |                                            | 10,464     |              |           |  | 14,410     |        
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          |                                                                                                                                                                                                                                                        | Total assets                               |            | $            | 2,342,373 |  |            | $       | 2,715,464 | 
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY 
|Current liabilities:                      |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          | Short-term borrowings, including current portion
    of long-term debt                                                                                                                                                                                 |                                            | $          | 42,298       |           |  | $          | 44,160  |          
|                                          | Accounts payable                                                                                                                                                                                                                                       |                                            |            | 668,808      |           |  |            | 593,263 |          
|                                          | Accrued and other liabilities                                                                                                                                                                                                                          |                                            |            | 423,957      |           |  |            | 532,358 |          
|                                          | Liabilities of discontinued operations                                                                                                                                                                                                                 |                                            |            | 15,609       |           |  |            |        |          
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          |                                                                                                                                                                                                                                                        | Total current liabilities                  |            |              | 1,150,672 |  |            |         | 1,169,781 | 
|Deferred taxes                            |                                                                                                                                                                                                                                                        |                                            | 196,457    |              |           |  | 196,455    |        
|Long-term debt, net of current portion    |                                                                                                                                                                                                                                                        |                                            | 209,127    |              |           |  | 244,458    |        
|Other liabilities                         |                                                                                                                                                                                                                                                        |                                            | 201,725    |              |           |  | 204,587    |        
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          |                                                                                                                                                                                                                                                        | Total liabilities                          |            |              | 1,757,981 |  |            |         | 1,815,281 | 
|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; 247,292,239 shares issued and 242,292,239 shares
    outstanding at September 28, 2002 and 241,977,795 shares
    issued and 236,977,795 shares outstanding at December 29,
    2001 |                                            |            | 2,473        |           |  |            | 2,420   |          
|Additional paid-in capital                |                                                                                                                                                                                                                                                        |                                            | 2,347,481  |              |           |  | 2,323,885  |        
|Deferred compensation                     |                                                                                                                                                                                                                                                        |                                            | (1,792     | )            |           |  | (3,809     | )      
|Accumulated deficit                       |                                                                                                                                                                                                                                                        |                                            | (1,744,175 | )            |           |  | (1,406,524 | )      
|Cumulative other comprehensive income     |                                                                                                                                                                                                                                                        |                                            | 405        |              |           |  | 4,211      |        
|Treasury stock (5,000,000 shares) at cost |                                                                                                                                                                                                                                                        |                                            | (20,000    | )            |           |  | (20,000    | )      
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          |                                                                                                                                                                                                                                                        | Total stockholders equity                 |            |              | 584,392   |  |            |         | 900,183   | 
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        
|                                          |                                                                                                                                                                                                                                                        | Total liabilities and stockholders equity |            | $            | 2,342,373 |  |            | $       | 2,715,464 | 
|                                          |                                                                                                                                                                                                                                                        |                                            |            |              |           |  |            |        

See accompanying notes to condensed consolidated
financial statements.

2



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##### Table of Contents



MAXTOR CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |         |             | 
|------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------- | -------- | ----------------- | ----------- | ------------- | --------- | ------------- | ----------- | - | --------- | ------- | ----------- | - | --------- | ------- | ----------- | 
|                                                        |                                                             |                                                    |          |                  
|                                                        |                                                             | Three Months Ended                                 |          | Nine Months Ended
|                                                        |                                                             |                                                    |          |                  
|                                                        |                                                             | September 28,                                      |          | September 29,     |             | September 28, |           | September 29,
|                                                        |                                                             | 2002                                               |          | 2001              |             | 2002          |           | 2001         
|                                                        |                                                             |                                                    |          |                   |             |               |           |              
|                                                        |                                                             |                                                   
|                                                        |                                                             | (Unaudited)                                       
|                                                        |                                                             | (In thousands, except share and per share amounts)
|Net revenues                                            |                                                             | $                                                  | 819,716  |                   |             | $             | 1,035,193 |               |             | $ | 2,741,166 |         |             | $ | 2,694,368 |        
|Cost of revenues                                        |                                                             |                                                    | 762,187  |                   |             |               | 955,564   |               |             |   | 2,510,481 |         |             |   | 2,451,138 |        
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Gross profit                                            |                                                             |                                                    | 57,529   |                   |             |               | 79,629    |               |             |   | 230,685   |         |             |   | 243,230   |        
|Operating expenses:                                     |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                                        | Research and development                                    |                                                    |          | 94,095            |             |               |           | 118,555       |             |   |           | 301,205 |             |   |           | 304,644 |            
|                                                        | Selling, general and administrative                         |                                                    |          | 34,754            |             |               |           | 48,026        |             |   |           | 111,424 |             |   |           | 174,497 |            
|                                                        | Amortization of goodwill and other intangible
    assets(1) |                                                    |          | 20,562            |             |               |           | 60,778        |             |   |           | 61,686  |             |   |           | 120,210 |            
|                                                        | Purchased in-process research and development               |                                                    |          |                  |             |               |           | 400           |             |   |           |        |             |   |           | 95,140  |            
|                                                        | Restructuring charge                                        |                                                    |          | 9,495             |             |               |           |              |             |   |           | 9,495   |             |   |           |        |            
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                                        |                                                             | Total operating expenses                           |          |                   | 158,906     |               |           |               | 227,759     |   |           |         | 483,810     |   |           |         | 694,491     | 
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Loss from operations                                    |                                                             |                                                    | (101,377 | )                 |             |               | (148,130  | )             |             |   | (253,125  | )       |             |   | (451,261  | )      
|Interest expense                                        |                                                             |                                                    | (7,133   | )                 |             |               | (6,188    | )             |             |   | (20,241   | )       |             |   | (14,659   | )      
|Interest and other income                               |                                                             |                                                    | 2,944    |                   |             |               | 2,784     |               |             |   | 8,349     |         |             |   | 20,569    |        
|Other gain (loss)                                       |                                                             |                                                    | 623      |                   |             |               | (503      | )             |             |   | 2,200     |         |             |   | (1,109    | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Loss from continuing operations before income
    taxes |                                                             |                                                    | (104,943 | )                 |             |               | (152,037  | )             |             |   | (262,817  | )       |             |   | (446,460  | )      
|Provision for income taxes                              |                                                             |                                                    | 527      |                   |             |               | 1,140     |               |             |   | 1,333     |         |             |   | 2,448     |        
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Loss from continuing operations                         |                                                             |                                                    | (105,470 | )                 |             |               | (153,177  | )             |             |   | (264,150  | )       |             |   | (448,908  | )      
|Loss from discontinued operations                       |                                                             |                                                    | (58,141  | )                 |             |               | (12,550   | )             |             |   | (73,501   | )       |             |   | (35,248   | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Net loss                                                |                                                             | $                                                  | (163,611 | )                 |             | $             | (165,727  | )             |             | $ | (337,651  | )       |             | $ | (484,156  | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Net loss per share  basic                              |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Continuing operations                                   |                                                             | $                                                  | (0.44    | )                 |             | $             | (0.64     | )             |             | $ | (1.11     | )       |             | $ | (2.28     | )      
|Discontinued operations                                 |                                                             | $                                                  | (0.24    | )                 |             | $             | (0.05     | )             |             | $ | (0.31     | )       |             | $ | (0.18     | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Total                                                   |                                                             | $                                                  | (0.68    | )                 |             | $             | (0.69     | )             |             | $ | (1.42     | )       |             | $ | (2.46     | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Net loss per share  diluted                            |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Continuing operations                                   |                                                             | $                                                  | (0.44    | )                 |             | $             | (0.64     | )             |             | $ | (1.11     | )       |             | $ | (2.28     | )      
|Discontinued operations                                 |                                                             | $                                                  | (0.24    | )                 |             | $             | (0.05     | )             |             | $ | (0.31     | )       |             | $ | (0.18     | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Total                                                   |                                                             | $                                                  | (0.68    | )                 |             | $             | (0.69     | )             |             | $ | (1.42     | )       |             | $ | (2.46     | )      
|                                                        |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|Shares used in per share calculation                    |                                                             |                                                    |          |                   |             |               |           |               |             |   |           |         |             |   |           |        
|                                                        |                                                             |  basic                                            |          |                   | 240,177,574 |               |           |               | 238,629,903 |   |           |         | 238,413,709 |   |           |         | 196,829,537 | 
|                                                        |                                                             |  diluted                                          |          |                   | 240,177,574 |               |           |               | 238,629,903 |   |           |         | 238,413,709 |   |           |         | 196,829,537 | 



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|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts for three and nine months ended
    September 28, 2002 represent only amortization of other
    intangible assets.

See accompanying notes to condensed consolidated
financial statements.

3



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##### Table of Contents



MAXTOR CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |           |          |         |  
|---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------------------------------------------------------- | ------------- | -------- | ------- | -------- | --------- | -------- | ------- | -
|                                                                                                           |                                                                                                      |                              
|                                                                                                           |                                                                                                      | Nine Months Ended            
|                                                                                                           |                                                                                                      |                              
|                                                                                                           |                                                                                                      | September 28,                 |                                                                                    | September 29,
|                                                                                                           |                                                                                                      | 2002                          |                                                                                    | 2001         
|                                                                                                           |                                                                                                      |                               |                                                                                    |              
|                                                                                                           |                                                                                                      |                              
|                                                                                                           |                                                                                                      | (Unaudited)                  
|                                                                                                           |                                                                                                      | (In thousands)               
|Cash Flows from Operating Activities from
    Continuing Operations:                                       |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Net loss from continuing operations                                                                        |                                                                                                      | $                             | (264,150                                                                           | )             |          | $       | (448,908 | )        
|Adjustments to reconcile net loss from continuing
    operations to net cash used in operating activities: |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|                                                                                                           | Depreciation and amortization                                                                        |                               |                                                                                    | 112,856       |          |         |          | 91,423    |         
|                                                                                                           | Amortization of goodwill and other intangible
    assets                                             |                               |                                                                                    | 61,686        |          |         |          | 120,210   |         
|                                                                                                           | Amortization of deferred and prepaid stock-based
    compensation related to Quantum HDD acquisition |                               |                                                                                    | 4,103         |          |         |          | 33,467    |         
|                                                                                                           | Purchased in-process research and development                                                        |                               |                                                                                    |              |          |         |          | 95,140    |         
|                                                                                                           | Stock compensation expense                                                                           |                               |                                                                                    | 3,450         |          |         |          | 6,175     |         
|                                                                                                           | Restructuring charge                                                                                 |                               |                                                                                    | 9,495         |          |         |          |          |         
|                                                                                                           | Loss on sale of property, plant and equipment and
    other assets                                   |                               |                                                                                    | 3,700         |          |         |          | (104      | )       
|                                                                                                           | Gain on investment                                                                                   |                               |                                                                                    | (1,307        | )        |         |          |          |         
|                                                                                                           | Gain on retirement of bond                                                                           |                               |                                                                                    | (2,400        | )        |         |          | (857      | )       
|                                                                                                           | Change in assets and liabilities:                                                                    |                               |                                                                                    |               |          |         |          |           |         
|                                                                                                           |                                                                                                      | Accounts receivable           |                                                                                    |               | 67,199   |         |          |           | 205,106  |        
|                                                                                                           |                                                                                                      | Inventories                   |                                                                                    |               | (22,641  | )       |          |           | 78,805   |        
|                                                                                                           |                                                                                                      | Other assets                  |                                                                                    |               | 3,991    |         |          |           | 63,497   |        
|                                                                                                           |                                                                                                      | Accounts payable              |                                                                                    |               | 71,158   |         |          |           | (144,986 | )      
|                                                                                                           |                                                                                                      | Accrued and other liabilities |                                                                                    |               | (115,957 | )       |          |           | (68,881  | )      
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|                                                                                                           |                                                                                                      |                               | Net cash provided by (used in) operating
    activities from continuing operations |               |          | (68,817 | )        |           |          | 30,087  |  
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Cash Flows from Investing Activities from
    Continuing Operations:                                       |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Proceeds from sale of property, plant and
    equipment                                                    |                                                                                                      |                               | 181                                                                                |               |          |         | 183      |          
|Purchase of property, plant and equipment                                                                  |                                                                                                      |                               | (118,732                                                                           | )             |          |         | (101,805 | )        
|Cash acquired from acquisition, net of merger
    related expenses                                         |                                                                                                      |                               |                                                                                   |               |          |         | 374,692  |          
|Restricted cash acquired from acquisition                                                                  |                                                                                                      |                               |                                                                                   |               |          |         | (98,594  | )        
|Decrease in restricted cash                                                                                |                                                                                                      |                               | 42,167                                                                             |               |          |         |         |          
|Proceeds from sale of marketable securities                                                                |                                                                                                      |                               | 146,260                                                                            |               |          |         | 139,478  |          
|Purchase of marketable securities                                                                          |                                                                                                      |                               | (50,888                                                                            | )             |          |         | (125,000 | )        
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|                                                                                                           |                                                                                                      |                               | Net cash provided by investing activities from
    continuing operations           |               |          | 18,988  |          |           |          | 188,954 |  
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Cash Flows from Financing Activities from
    Continuing Operations:                                       |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Principal payments of debt including short-term
    borrowings                                             |                                                                                                      |                               | (24,572                                                                            | )             |          |         | (16,034  | )        
|Principal payments under capital lease obligations                                                         |                                                                                                      |                               | (17,818                                                                            | )             |          |         |         |          
|Repurchase of common stock                                                                                 |                                                                                                      |                               | (606                                                                               | )             |          |         |         |          
|Proceeds from issuance of common stock from
    employee stock purchase plan and stock options exercised   |                                                                                                      |                               | 22,933                                                                             |               |          |         | 12,420   |          
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|                                                                                                           |                                                                                                      |                               | Net cash used in financing activities from
    continuing operations               |               |          | (20,063 | )        |           |          | (3,614  | )
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Net cash flow used in discontinued operations                                                              |                                                                                                      |                               | (27,615                                                                            | )             |          |         | (33,641  | )        
|Net change in cash and cash equivalents                                                                    |                                                                                                      |                               | (97,507                                                                            | )             |          |         | 181,786  |          
|Cash and cash equivalents at beginning of period                                                           |                                                                                                      |                               | 379,927                                                                            |               |          |         | 193,228  |          
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Cash and cash equivalents at end of period                                                                 |                                                                                                      | $                             | 282,420                                                                            |               |          | $       | 375,014  |          
|                                                                                                           |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|Supplemental Disclosures of Cash Flow
    Information:                                                     |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|                                                                                                           | Cash paid during the period for:                                                                     |                               |                                                                                    |               |          |         |          |           |         
|                                                                                                           |                                                                                                      | Interest                      |                                                                                    | $             | 19,304   |         |          | $         | 16,379   |        
|                                                                                                           |                                                                                                      | Income taxes                  |                                                                                    | $             | 5,617    |         |          | $         | 646      |        
|Schedule of Non-Cash Investing and Financing
    Activities:                                               |                                                                                                      |                               |                                                                                    |               |          |         |          |          
|                                                                                                           | Purchase of property, plant and equipment
    financed by accounts payable                           |                               | $                                                                                  | 7,838         |          |         | $        | 12,747    |         
|                                                                                                           | Retirement of debt in exchange for bond redemption                                                   |                               | $                                                                                  | 5,000         |          |         | $        | 5,000     |         
|                                                                                                           | Change in unrealized loss on investments                                                             |                               | $                                                                                  | (3,806        | )        |         | $        | 1,010     |         
|                                                                                                           | Purchase of property, plant and equipment
    financed by capital lease obligations                  |                               | $                                                                                  | 7,597         |          |         | $        |          |         
|                                                                                                           | Value of shares issued for Quantum HDD acquisition                                                   |                               | $                                                                                  |              |          |         | $        | 1,240,597 |         
|                                                                                                           | Net receivables forgiven for MMC Technology Inc.
    acquisition                                     |                               | $                                                                                  |              |          |         | $        | 16,001    |         

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



MAXTOR CORPORATION






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


1.     Summary of
Significant Accounting Policies



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

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. The
consolidated financial statements include the accounts of Maxtor
Corporation (Maxtor or the Company) and
its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. All
adjustments of a normal recurring nature which, in the opinion
of management, are necessary for a fair statement of the results
for the interim periods have been made. The unaudited interim
financial statements should be read in conjunction with the
Companys audited consolidated financial statements and
notes thereto for the fiscal year ended December 29, 2001
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.



| |                
| | ---------------
| | 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
nine month periods ended September 28, 2002 comprised
13 weeks and 39 weeks, respectively, as did the three
and nine month periods ended September 29, 2001. 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 discontinue 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 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,
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 sheet as of September 28, 2002 and its
operating results have been segregated and reported as
discontinued operations in the accompanying consolidated
statements of operations.

Operating results of NSG for the three and nine
months ended September 28, 2002 and September 29, 2001
are as follows (in millions):

|                                     |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                     |  |                    |         |                  
|                                     |  | Three Months Ended |         | Nine Months Ended
|                                     |  |                    |         |                  
|                                     |  | September 28,      |         | September 29,     |  | September 28, |         | September 29,
|                                     |  | 2002               |         | 2001              |  | 2002          |         | 2001         
|                                     |  |                    |         |                   |  |               |         |              
|Revenue from discontinued operations |  | $                  | 1,363   |                   |  | $             | 9,827   |               |  | $ | 20,384  |   |  | $ | 23,040  |  
|Loss from discontinued operations    |  | $                  | (58,141 | )                 |  | $             | (12,550 | )             |  | $ | (73,501 | ) |  | $ | (35,248 | )

5



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Included in the 2002 loss from the NSG
discontinued operations are the following significant charges
(in millions):

|                                          |  |   |      | 
|----------------------------------------- |  | - | ---- | 
|Personnel related                         |  | $ | 13.0 | 
|Goodwill and other intangibles write-offs |  |   | 32.5 | 
|Non-cancelable purchase commitments       |  |   | 4.2  | 

The following is a summary of the net liabilities
of the NSG discontinued operations as of September 28, 2002
(in millions):

|                                   |  |  |      | 
|---------------------------------- |  |  | ---- | 
|Accounts payable                   |  |  | 2.9  | 
|Payroll and other accrued expenses |  |  | 7.7  | 
|                                   |  |  |      | 
|Warranty, returns and other        |  |  | 5.0  | 
|                                   |  |  |      | 
|Total                              |  |  | 15.6 | 
|                                   |  |  |      | 

3.     Acquisitions



| |                       
| | ----------------------
| | a.     Quantum
    HDD

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. As of the effective time of the merger, each share of
Quantum HDD common stock was converted into 1.52 shares of
Maxtor common stock, and each outstanding Quantum HDD option
assumed by Maxtor was converted into an option to purchase
Maxtor common stock, with appropriate adjustment to the exercise
price and share numbers in accordance with the exchange ratio.
The total purchase price of $1,269.4 million included
consideration of 121.0 million shares of Maxtors
common stock valued at an average price of $9.40 per common
share. The average market price was based on the average closing
price for two trading days prior and two trading days subsequent
to October 4, 2000, the announcement date of the terms of
the merger.

The total purchase price was determined as
follows (in millions):

|                                  |                      |   |         |         | 
|--------------------------------- | -------------------- | - | ------- | ------- | 
|Value of securities issued        |                      | $ | 1,133.5 |        
|Assumption of Quantum HDD options |                      |   | 107.1   |        
|                                  |                      |   |         |        
|                                  |                      |   | 1,240.6 |        
|Transaction costs                 |                      |   | 28.8    |        
|                                  |                      |   |         |        
|                                  | Total purchase price |   | $       | 1,269.4 | 
|                                  |                      |   |         |        

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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price allocation was as follows (in
millions):

|                                    |                                           |                           |       |       |          |  
|----------------------------------- | ----------------------------------------- | ------------------------- | ----- | ----- | -------- | -
|Tangible assets:                    |                                           |                           |       |      
|                                    | Cash and cash equivalents                 |                           | $     | 315.3 |         
|                                    | Restricted cash                           |                           |       | 93.9  |         
|                                    | Accounts receivable                       |                           |       | 249.1 |         
|                                    | Inventories                               |                           |       | 181.7 |         
|                                    | Prepaid expenses and other current assets |                           |       | 120.9 |         
|                                    | Property, plant and equipment             |                           |       | 126.4 |         
|                                    | Other noncurrent assets                   |                           |       | 21.1  |         
|                                    |                                           |                           |       |      
|                                    |                                           | Total tangible assets     |       | $     | 1,108.4  |  
|                                    |                                           |                           |       |      
|Intangible assets acquired:         |                                           |                           |       |      
|                                    | Core and other existing technology        |                           |       | 286.1 |         
|                                    | Assembled workforce                       |                           |       | 43.0  |         
|Deferred stock-based compensation   |                                           |                           | 6.8   |      
|Goodwill                            |                                           |                           | 896.3 |      
|In-process research and development |                                           |                           | 94.7  |      
|Liabilities assumed:                |                                           |                           |       |      
|                                    | Accounts payable                          |                           |       | 230.0 |         
|                                    | Accruals and other liabilities            |                           |       | 364.3 |         
|                                    | Deferred taxes                            |                           |       | 196.2 |         
|Long-term debt                      |                                           |                           | 132.4 |      
|Other long-term liabilities         |                                           |                           | 142.0 |      
|Merger-related restructuring costs  |                                           |                           | 101.0 |      
|                                    |                                           |                           |       |      
|                                    |                                           | Total liabilities assumed |       |       | (1,165.9 | )
|                                    |                                           |                           |       |      
|                                    |                                           | Total purchase price      |       | $     | 1,269.4  |  
|                                    |                                           |                           |       |      

The Company recorded $29.2 million for
estimated severance pay associated with termination of
approximately 700 Quantum HDD 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.

7



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activity
related to the merger-related restructuring costs as of
September 28, 2002:

|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|----------------------------- |  | ------------- | ---- | --------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                              |  |               |      | 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                  |  |               | (2.0 | )         |  |       | (13.7 | )     |  |   |      |   |  |   | (15.7 | )
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  
|Balance at September 28, 2002 |  | $             | 56.2 |           |  | $     |      |       |  | $ |      |   |  | $ | 56.2  |  
|                              |  |               |      |           |  |       |       |       |  |   |       |   |  |   |       |  

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.



| |                                
| | -------------------------------
| | b.     MMC
    Technology, Inc.

On September 2, 2001, Maxtor completed the
acquisition of MMC Technology, Inc. (MMC), a
wholly-owned subsidiary of Hynix Semiconductor America Inc.
(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 Maxtor
acquiring MMC was to provide the Company with a reliable source
of media supply. The acquisition was accounted for as a purchase
with a total cost of $17.9 million, which consisted of cash
consideration of $1.0 million, $16.0 million of loan
forgiveness and $0.9 million of direct transaction costs.
In connection with the acquisition, the Company also assumed
liabilities of $105.7 million, including a
$7.3 million note owed by MMC to Hynix, which was
non-interest bearing through March 31, 2002, with any
balance remaining thereafter bearing interest at 9% per annum
(the Maxtor Note). On January 5, 2001, Hynix
issued a promissory note to Maxtor for $2 million in
principal amount, representing Hynixs share of a
settlement relating to litigation between Maxtor, Hynix and
Stormedia. This note bore interest at 9% per annum, with the
payment of principal and interest due on December 31, 2001
(the Hynix Note). Hynix and Maxtor agreed that the
principal and accrued interest on the Hynix Note as of
December 28, 2001 was offset against the principal amount
of the Maxtor Note, such that the Hynix Note was fully paid and
the Maxtor Note had a principal amount of approximately
$5.1 million as of December 29, 2001. On April 5,
2002, the outstanding balance under the Maxtor Note was fully
paid. MMCs results of operations are included in the
financial statements from the date of acquisition, and the
assets and liabilities acquired were recorded based on their
fair values as of the date of acquisition.

The total purchase price and the purchase price
allocation of the MMC acquisition were as follows (in millions):

|                                  |                      |   |      |      | 
|--------------------------------- | -------------------- | - | ---- | ---- | 
|Cash paid                         |                      | $ | 1.0  |     
|Forgiveness of loan consideration |                      |   | 16.0 |     
|                                  |                      |   |      |     
|                                  |                      |   | 17.0 |     
|Transaction costs                 |                      |   | 0.9  |     
|                                  |                      |   |      |     
|                                  | Total purchase price |   | $    | 17.9 | 
|                                  |                      |   |      |     

8



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Purchase Price Allocation (in millions):

|                                    |                                    |                           |      |      |        |  
|----------------------------------- | ---------------------------------- | ------------------------- | ---- | ---- | ------ | -
|Total tangible assets               |                                    | $                         | 97.7 |     
|Existing technology                 |                                    |                           | 4.4  |     
|Goodwill                            |                                    |                           | 21.1 |     
|In-process research and development |                                    |                           | 0.5  |     
|Liabilities assumed:                |                                    |                           |      |     
|                                    | Accruals and other liabilities     |                           |      | 30.6 |       
|                                    | Capital lease obligations and debt |                           |      | 75.1 |       
|                                    |                                    |                           |      |     
|                                    |                                    | Total liabilities assumed |      |      | (105.7 | )
|                                    |                                    |                           |      |     
|                                    |                                    | Total purchase price      |      | $    | 17.9   |  
|                                    |                                    |                           |      |     



| |                                
| | -------------------------------
| | c.     Pro forma
    disclosure

The following unaudited pro forma consolidated
amounts give effect to the acquisitions of Quantum HDD and MMC,
excluding the charges for acquired in-process research and
development, as if the acquisitions had occurred on
January 1, 2001. The three and nine months ended
September 28, 2002 represent the Companys actual
results of operations. On a pro forma basis, the results of
operations of Quantum HDD are consolidated with the
Companys results for the nine months ended
September 29, 2001 and the results of operations of MMC are
consolidated with the Companys results for the three and
nine months ended September 29, 2001. The pro forma amounts
do not purport to be indicative of what would have occurred had
the acquisitions been made as of the beginning of each period or
of results which may occur in the future.

|                                       |                         |                                                   |        |                   |   |               |         |               |   |   |         |             |   |   |         |             |  
|-------------------------------------- | ----------------------- | ------------------------------------------------- | ------ | ----------------- | - | ------------- | ------- | ------------- | - | - | ------- | ----------- | - | - | ------- | ----------- | -
|                                       |                         |                                                   |        |                  
|                                       |                         | Three Months Ended                                |        | Nine Months Ended
|                                       |                         |                                                   |        |                  
|                                       |                         | September 28,                                     |        | September 29,     |   | September 28, |         | September 29,
|                                       |                         | 2002                                              |        | 2001              |   | 2002          |         | 2001         
|                                       |                         |                                                   |        |                   |   |               |         |              
|                                       |                         |                                                  
|                                       |                         | (In millions, except share and per share amounts)
|Revenue from continuing operations     |                         | $                                                 | 819.7  |                   |   | $             | 1,035.6 |               |   | $ | 2,741.2 |             |   | $ | 3,347.4 |            
|Revenue from discontinued operations   |                         | $                                                 | 1.4    |                   |   | $             | 9.8     |               |   | $ | 20.4    |             |   | $ | 23.0    |            
|Net loss from continued operations     |                         | $                                                 | (105.5 | )                 |   | $             | (160.4  | )             |   | $ | (264.2  | )           |   | $ | (486.7  | )          
|Net loss from discontinued operations  |                         | $                                                 | (58.1  | )                 |   | $             | (12.6   | )             |   | $ | (73.5   | )           |   | $ | (35.2   | )          
|Loss per share- basic and diluted:     |                         |                                                   |        |                   |   |               |         |               |   |   |         |             |   |   |         |            
|                                       | Continuing operations   |                                                   | $      | (0.44             | ) |               | $       | (0.67         | ) |   | $       | (1.11       | ) |   | $       | (2.47       | )
|                                       | Discontinued operations |                                                   | $      | (0.24             | ) |               | $       | (0.05         | ) |   | $       | (0.31       | ) |   | $       | (0.18       | )
|Shares used in per share calculations: |                         |                                                   |        |                   |   |               |         |               |   |   |         |             |   |   |         |            
|                                       | Basic                   |                                                   |        | 240,177,574       |   |               |         | 238,629,903   |   |   |         | 238,413,709 |   |   |         | 196,829,537 |  
|                                       | Diluted                 |                                                   |        | 240,177,574       |   |               |         | 238,629,903   |   |   |         | 238,413,709 |   |   |         | 196,829,537 |  

4.     Restricted
Cash

The Companys restricted cash balance of
$56.5 million at September 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. The reduction of cash security required
for a letter of credit during the third quarter accounted for
the decrease in restricted cash of $42.2 million from the
previous quarter.

5.     Restructuring

During the three month period ended
September 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

9



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$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.

6.     Supplemental
Financial Statement Data

|                               |                                              |                |         |              |  |   |         |         | 
|------------------------------ | -------------------------------------------- | -------------- | ------- | ------------ |  | - | ------- | ------- | 
|                               |                                              | September 28,  |         | December 29,
|                               |                                              | 2002           |         | 2001        
|                               |                                              |                |         |             
|                               |                                              |               
|                               |                                              | (In thousands)
|Inventories:                   |                                              |                |         |              |  |   |         |        
|                               | Raw materials                                |                | $       | 48,937       |  |   | $       | 36,914  | 
|                               | Work-in-process                              |                |         | 21,738       |  |   |         | 9,087   | 
|                               | Finished goods                               |                |         | 133,098      |  |   |         | 139,555 | 
|                               |                                              |                |         |              |  |   |         |        
|                               |                                              | $              | 203,773 |              |  | $ | 185,556 |        
|                               |                                              |                |         |              |  |   |         |        
|Accrued and other liabilities: |                                              |                |         |              |  |   |         |        
|                               | Income taxes payable                         |                | $       | 22,399       |  |   | $       | 27,740  | 
|                               | Accrued payroll and payroll-related expenses |                |         | 65,900       |  |   |         | 82,828  | 
|                               | Accrued warranty                             |                |         | 252,353      |  |   |         | 313,894 | 
|                               | Accrued expenses                             |                |         | 83,305       |  |   |         | 107,896 | 
|                               |                                              |                |         |              |  |   |         |        
|                               |                                              | $              | 423,957 |              |  | $ | 532,358 |        
|                               |                                              |                |         |              |  |   |         |        

7.     Net Loss Per
Share

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

|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |       |  
|------------------------------------------------ | ---------------------------- | ------------------ | ----------- | ----------------- | - | ------------- | ----------- | ------------- | - | - | ----------- | ----- | - | - | ----------- | ----- | -
|                                                 |                              |                    |             |                  
|                                                 |                              | Three Months Ended |             | Nine Months Ended
|                                                 |                              |                    |             |                  
|                                                 |                              | September 28,      |             | September 29,     |   | September 28, |             | September 29,
|                                                 |                              | 2002               |             | 2001              |   | 2002          |             | 2001         
|                                                 |                              |                    |             |                   |   |               |             |              
|Numerator  Basic and
    diluted                |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|Loss from continuing operations                  |                              | $                  | (105,470    | )                 |   | $             | (153,177    | )             |   | $ | (264,150    | )     |   | $ | (448,908    | )    
|Loss from discontinued operations                |                              | $                  | (58,141     | )                 |   | $             | (12,550     | )             |   | $ | (73,501     | )     |   | $ | (35,248     | )    
|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|Net loss                                         |                              | $                  | (163,611    | )                 |   | $             | (165,727    | )             |   | $ | (337,651    | )     |   | $ | (484,156    | )    
|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|Denominator                                      |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|Basic weighted average common shares outstanding |                              |                    | 240,177,574 |                   |   |               | 238,629,903 |               |   |   | 238,413,709 |       |   |   | 196,829,537 |      
|Effect of dilutive securities:                   |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|                                                 | Common stock options         |                    |             |                  |   |               |             |              |   |   |             |      |   |   |             |      |  
|                                                 | Contingently issuable shares |                    |             |                  |   |               |             |              |   |   |             |      |   |   |             |      |  
|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|Diluted weighted average common shares           |                              |                    | 240,177,574 |                   |   |               | 238,629,903 |               |   |   | 238,413,709 |       |   |   | 196,829,537 |      
|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|Net loss per share  basic and diluted           |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|                                                 | Continuing operations        |                    | $           | (0.44             | ) |               | $           | (0.64         | ) |   | $           | (1.11 | ) |   | $           | (2.28 | )
|                                                 | Discontinued operations      |                    | $           | (0.24             | ) |               | $           | (0.05         | ) |   | $           | (0.31 | ) |   | $           | (0.18 | )
|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      
|                                                 | Total                        |                    | $           | (0.68             | ) |               | $           | (0.69         | ) |   | $           | (1.42 | ) |   | $           | (2.46 | )
|                                                 |                              |                    |             |                   |   |               |             |               |   |   |             |       |   |   |             |      

10



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As the Company incurred net loss from continuing
and discontinued operations, the following dilutive securities
were excluded from the diluted net loss per share calculation.

|                             |  |                    |            |                   |  |               |            |               |  |  |            |  |  |  |            | 
|---------------------------- |  | ------------------ | ---------- | ----------------- |  | ------------- | ---------- | ------------- |  |  | ---------- |  |  |  | ---------- | 
|                             |  |                    |            |                  
|                             |  | Three Months Ended |            | Nine Months Ended
|                             |  |                    |            |                  
|                             |  | September 28,      |            | September 29,     |  | September 28, |            | September 29,
|                             |  | 2002               |            | 2001              |  | 2002          |            | 2001         
|                             |  |                    |            |                   |  |               |            |              
|Common stock options         |  |                    | 34,326,113 |                   |  |               | 32,932,841 |               |  |  | 34,326,113 |  |  |  | 32,932,841 | 
|Contingently issuable shares |  |                    | 1,104,658  |                   |  |               | 1,541,240  |               |  |  | 1,104,658  |  |  |  | 1,541,240  | 



|   |                                             
|-- | --------------------------------------------
|8. | Short-Term Borrowings and Long-Term
    Debt

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

|                                                                                                   |  |               |         |              |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | -
|                                                                                                   |  | September 28, |         | December 29,
|                                                                                                   |  | 2002          |         | 2001        
|                                                                                                   |  |               |         |             
|5.75% Subordinated Debentures due March 1,
    2012                                                |  | $             | 61,327  |              |  | $ | 74,262  |  
|Economic Development Board of Singapore Loan due
    March 2004                                    |  |               | 9,682   |              |  |   | 16,313  |  
|Pro rata portion of Quantum Corporations 7%
    Subordinated Convertible Notes due August 1, 2004 |  |               | 95,833  |              |  |   | 95,833  |  
|Mortgages                                                                                          |  |               | 35,949  |              |  |   | 36,926  |  
|Hynix Semiconductor America Inc. Note                                                              |  |               |        |              |  |   | 5,095   |  
|Equipment Loans and Capital Leases                                                                 |  |               | 48,634  |              |  |   | 60,189  |  
|                                                                                                   |  |               |         |              |  |   |         |  
|                                                                                                   |  |               | 251,425 |              |  |   | 288,618 |  
|Less amounts due within one year                                                                   |  |               | (42,298 | )            |  |   | (44,160 | )
|                                                                                                   |  |               |         |              |  |   |         |  
|                                                                                                   |  | $             | 209,127 |              |  | $ | 244,458 |  
|                                                                                                   |  |               |         |              |  |   |         |  

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.

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 March 2004. As of
September 28, 2002, the balance was equivalent to
$9.7 million. The Board charges interest at 1% above the
prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year (3.5% as of September 28, 2002).
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 arrangement, the Company is subject to two
financial covenants, the maintenance of minimum unrestricted
cash and a tangible net worth test.

As of December 29, 2001, the Company
determined that it was not in compliance with the tangible net
worth covenant under the loan agreement. On February 15,
2002, the Company received a waiver and amendment from the
lender for its Singapore loan relating to the tangible net worth
covenant. On the same date, the banks participating in the
Companys asset securitization program (the
Program) agreed to a first amendment through
May 15, 2002 to the Program. In each case, the definition
for calculating tangible net worth was amended to include an
adjustment associated with the purchase price accounting for the
acquisition of Quantum HDD. After giving effect to this
first amendment, the Company was in compliance with the tangible
net worth covenant.

On March 15, 2002, the first amendment was
superceded by a second amendment reflecting the terms of the
first amendment and extending the terms of the amendment for the
duration of the Program. At this time

11



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Program was reduced from $300 million to
$210 million due to the withdrawal of one of the
participating banks.

On May 28, 2002, the banks participating in
the Program approved a third amendment, which modified the
tangible net worth covenant and the minimum unrestricted cash
requirement. On June 20, 2002 the Singapore loan was
amended to the same effect. After giving effect to the third
amendment to the Program and the amendment to the Singapore
loan, the Company was in compliance with all covenants.

As of September 28, 2002, the Company
concluded that it would not be in compliance with the tangible
net worth covenant under the Program and the Singapore loan. On
October 22, 2002, the Company received a waiver of the
default as to the tangible net worth covenant for the quarter
ended September 28, 2002 from the lender of the Singapore
loan. After giving effect to this waiver, the Company was in
compliance with the tangible net worth covenant under the
Singapore loan. On October 21, 2002, the Banks
participating in the Program agreed to waive a violation of the
tangible net worth covenant for the period ended
September 30, 2002 on condition that the Company is able to
comply with a lower tangible net worth covenant. After giving
effect to the waiver, the Company was in compliance under the
Program. Pursuant to the fourth amendment on November 5,
2002, the Company and the Banks agreed to reduce the Program
size from $210 million to $100 million, cap the
purchase limit at $45 million and extend the liquidity
agreement to December 13, 2002, in anticipation of a new
program to be in place by December 13, 2002.

The Company is in discussions with lenders
regarding a possible replacement facility for the Program of up
to $100 million; however, the Company does not have a
commitment letter for such replacement facility at this time.
The Company believes that if it receives a commitment for such a
replacement facility, the Banks will extend the Program as
amended for a reasonable period beyond December 13, 2002 to
permit it to negotiate a definitive agreement for such facility.
If, however, the Company does not receive a commitment on terms
acceptable to it, or at all, or the Banks decline to extend the
Program beyond December 13, 2002, the Company will not have
access to the Program beyond that date and there could be a
liquidation event under the Program in the quarter ending
December 29, 2002.

If a liquidation event or termination of the
Program were to occur, the Banks would be entitled to all cash
collections on the Companys accounts receivables in the
United States until their net investments had been recovered.
The Company does not expect that such an event by itself would
have a significant adverse impact on its liquidity, given the
fact that it believes the Banks net investment would be
satisfied shortly following such liquidation event or
termination, based on the Companys historical collection
rate of receivables. However, the Company would no longer have
access to the Program following such liquidation event or
termination. The Company does not expect that the unavailability
of the Program would have a material adverse effect on its
liquidity.

The Company may not satisfy the minimum tangible
net worth covenant under the Singapore loan at the end of the
quarter ending December 29, 2002. There can be no assurance
that the Singapore lender will agree to any amendments or
provide a waiver for any such covenant violation. In the event
that a default occurs in a financial covenant under the
Singapore loan, and the Company does not receive a waiver, it
may be required to repay the loan earlier than anticipated;
however, the Company does not expect that such an earlier
repayment of the Singapore loan would have a material adverse
effect on its liquidity.

In connection with the acquisition of the
Quantum HDD business, Maxtor agreed to indemnify Quantum
for the Quantum HDD pro rata portion of Quantums
outstanding $287.5 million 7% convertible subordinated
notes due August 1, 2004, and accordingly 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 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.

12



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the acquisition of the
Quantum HDD business, the Company acquired real estate and
related mortgage obligations. The term of the mortgages is ten
years, at an interest rate of 9.2%, with monthly payments based
on a twenty-year amortization schedule, and a balloon payment at
the end of the 10-year term, which is September 2006. The
outstanding balance at September 28, 2002 and
December 29, 2001 were $35.9 million and
$36.9 million, respectively.

In connection with the acquisition of MMC, the
Company assumed certain amortizing equipment loans and capital
leases. As of September 28, 2002, obligations having final
maturity dates ranging from December 2002 to October 2004 and
interest rates averaging 9.9% amounted to $48.6 million, of
which $41.0 million was related debt assumed from the
acquisition of MMC.

In connection with the acquisition of MMC, the
Company assumed a note for $7.3 million owing to Hynix,
which bore no interest through March 31, 2002; thereafter,
unpaid principal amounts were to bear interest at 9% per annum
(the Maxtor Note). On January 5, 2001, Hynix
issued a promissory note to Maxtor for $2 million in
principal amount, the note bore interest at 9% per annum, with
the payment of principal and interest due on December 31,
2001 (the Hynix Note). Hynix and Maxtor agreed that
the principal and accrued interest on the Hynix Note as of
December 28, 2001 was offset against the principal amount
of the Maxtor Note, such that the Hynix Note was fully paid and
the Maxtor Note had a principal amount of approximately
$5.1 million as of such date. On April 5, 2002, the
outstanding balance under the Maxtor Note was fully paid.



|   |                   
|-- | ------------------
|9. | Comprehensive Loss

Cumulative other comprehensive loss on the
consolidated balance sheets consists of unrealized loss on
investments. Total comprehensive loss for the three and nine
months ended September 28, 2002 and September 29,
2001, is presented in the following table (in thousands):

|                           |                                          |                    |          |                   |   |               |          |               |  |   |          |        |   |   |          |       | 
|-------------------------- | ---------------------------------------- | ------------------ | -------- | ----------------- | - | ------------- | -------- | ------------- |  | - | -------- | ------ | - | - | -------- | ----- | 
|                           |                                          |                    |          |                  
|                           |                                          | Three Months Ended |          | Nine Months Ended
|                           |                                          |                    |          |                  
|                           |                                          | September 28,      |          | September 29,     |   | September 28, |          | September 29,
|                           |                                          | 2002               |          | 2001              |   | 2002          |          | 2001         
|                           |                                          |                    |          |                   |   |               |          |              
|Net loss from operations   |                                          | $                  | (163,611 | )                 |   | $             | (165,727 | )             |  | $ | (337,651 | )      |   | $ | (484,156 | )    
|Other comprehensive loss  |                                          |                    |          |                   |   |               |          |               |  |   |          |        |   |   |          |      
|                           | Change in unrealized loss on investments |                    |          | (1,605            | ) |               |          | 1,613         |  |   |          | (3,806 | ) |   |          | 1,010 | 
|                           |                                          |                    |          |                   |   |               |          |               |  |   |          |        |   |   |          |      
|Comprehensive loss         |                                          | $                  | (165,216 | )                 |   | $             | (164,114 | )             |  | $ | (341,457 | )      |   | $ | (483,146 | )    
|                           |                                          |                    |          |                   |   |               |          |               |  |   |          |        |   |   |          |      



|    |                                                       
|--- | ------------------------------------------------------
|10. | 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 discontinue the
manufacture and sales of NSG products, the Company determined
that it operates in one reportable segment.

Sales of continuing operations to original
equipment manufacturers (OEMs) for the three and
nine months ended September 28, 2002 represented 52.0% and
48.4% of total revenue, respectively, compared to 52.8% and
59.7% of total revenue, respectively, for the corresponding
period in fiscal year 2001. Sales to the

13



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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

distribution and retail channels for the three
and nine months ended September 28, 2002 represented 48.0%
and 51.6% of total revenue, respectively, compared to 47.2% and
40.3% of total revenue, respectively, in the corresponding
period in fiscal year 2001. Sales to one customer were 13.0% and
11.5% of revenue in the three and nine months ended
September 28, 2002; sales to one customer represented 10.9%
and 12.7% of total revenue for the corresponding period in
fiscal year 2001, and there was only one customer with over 10%
of revenue in these periods.

The Company has a world-wide 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, Europe, Latin
America and Asia Pacific. Maxtor operations outside the
United States primarily consist of its manufacturing
facilities in Singapore that produce subassemblies and final
assemblies for the Companys disk drive products. Revenue
by destination information for the three and nine months ended
September 28, 2002 and September 29, 2001 is presented
in the following table:

|                         |  |                    |         |                   |  |               |           |               |  |   |           |  |  |   |           | 
|------------------------ |  | ------------------ | ------- | ----------------- |  | ------------- | --------- | ------------- |  | - | --------- |  |  | - | --------- | 
|                         |  |                    |         |                  
|                         |  | Three Months Ended |         | Nine Months Ended
|                         |  |                    |         |                  
|                         |  | September 28,      |         | September 29,     |  | September 28, |           | September 29,
|                         |  | 2002               |         | 2001              |  | 2002          |           | 2001         
|                         |  |                    |         |                   |  |               |           |              
|                         |  |                   
|                         |  | (In thousands)    
|United States and Canada |  | $                  | 315,671 |                   |  | $             | 435,771   |               |  | $ | 997,793   |  |  | $ | 1,181,503 | 
|Asia Pacific             |  |                    | 257,279 |                   |  |               | 291,445   |               |  |   | 864,823   |  |  |   | 748,340   | 
|Europe                   |  |                    | 242,340 |                   |  |               | 304,974   |               |  |   | 857,728   |  |  |   | 706,778   | 
|Latin America and other  |  |                    | 4,426   |                   |  |               | 3,003     |               |  |   | 20,822    |  |  |   | 57,747    | 
|                         |  |                    |         |                   |  |               |           |               |  |   |           |  |  |   |           | 
|Total                    |  | $                  | 819,716 |                   |  | $             | 1,035,193 |               |  | $ | 2,741,166 |  |  | $ | 2,694,368 | 
|                         |  |                    |         |                   |  |               |           |               |  |   |           |  |  |   |           | 

Long-lived asset information by geographic area
as of September 28, 2002 and December 29, 2001 is
presented in the following table:

|                   |  |                |           |              |  |   |           | 
|------------------ |  | -------------- | --------- | ------------ |  | - | --------- | 
|                   |  | September 28,  |           | December 29,
|                   |  | 2002           |           | 2001        
|                   |  |                |           |             
|                   |  |               
|                   |  | (In thousands)
|Long-lived assets: |  |                |           |              |  |   |           | 
|United States      |  | $              | 1,234,196 |              |  | $ | 1,334,122 | 
|Asia Pacific       |  |                | 140,206   |              |  |   | 122,901   | 
|Europe             |  |                | 1,047     |              |  |   | 1,588     | 
|                   |  |                |           |              |  |   |           | 
|Total              |  | $              | 1,375,449 |              |  | $ | 1,458,611 | 
|                   |  |                |           |              |  |   |           | 

Long-lived assets located within the United
States consist primarily of goodwill and other intangible assets
which amounted to $981.4 million and $1,077.4 million
as of September 28, 2002 and December 29, 2001,
respectively. Long-lived assets located outside the United
States consist primarily of the Companys manufacturing
operations located in Singapore which amounted to
$138.7 million and $121.1 million as of
September 28, 2002 and December 29, 2001, respectively.



|    |                     
|--- | --------------------
|11. | Asset Securitization

In July 1998, the Company entered into an
accounts receivable securitization program (the
Program) with a financial institution. On
November 15, 2001, the Company amended its asset
securitization program to increase the amount available to
$300 million from $200 million. The program allows the
company to sell on a revolving basis an undivided interest in up
to $300 million in eligible receivables. The eligible
receivables are sold to bank conduits through a
bankruptcy-remote special purpose entity which is consolidated
for financial reporting purposes.

14



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##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The transaction has been accounted for as a sale
under Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. As of
September 28, 2002, the Company had sold $45.0 million
of receivables under the Program which are reflected as
reductions of receivables in the accompanying consolidated
balance sheets. As part of this arrangement, the Company is
subject to financial covenants including the maintenance of
certain financial ratios and a tangible net worth test.

As of December 29, 2001, the Company
determined that it was not in compliance with the tangible net
worth covenant under the Program. On February 15, 2002, the
Company received a waiver and amendment from the lender for its
Singapore loan relating to the tangible net worth covenant. On
the same date, the banks participating in the Companys
asset securitization program (the Program) agreed to
a first amendment through May 15, 2002 to the Program. In
each case, the definition for calculating tangible net worth was
amended to include an adjustment associated with the purchase
price accounting for the acquisition of Quantum HDD. After
giving effect to this first amendment, the Company was in
compliance with the tangible net worth covenant.

On March 15, 2002, the first amendment was
superceded by a second amendment reflecting the terms of the
first amendment and extending the terms of the amendment for the
duration of the Program. At this time the Program was reduced
from $300 million to $210 million due to the
withdrawal of one of the participating banks.

On May 28, 2002, the banks participating in
the Program approved a third amendment, which modified the
tangible net worth covenant and the minimum unrestricted cash
requirement. After giving effect to the third amendment, the
Company was in compliance with all covenants.

As of September 28, 2002, the Company
concluded that it would not be in compliance with the tangible
net worth covenant under the Program and the Singapore loan. On
October 22, 2002, the Company received a waiver of the
default as to the tangible net worth covenant for the quarter
ended September 28, 2002 from the lender of the Singapore
loan. After giving effect to this waiver, the Company was in
compliance with the tangible net worth covenant under the
Singapore loan. On October 21, 2002, the Banks
participating in the Program agreed to waive a violation of the
tangible net worth covenant for the period ended
September 30, 2002 on condition that the Company is able to
comply with a lower tangible net worth covenant. After giving
effect to the waiver, the Company was in compliance under the
Program. Pursuant to the fourth amendment on November 5,
2002, the Company and the Banks agreed to reduce the Program
size from $210 million to $100 million, cap the
purchase limit at $45 million and extend the liquidity
agreement to December 13, 2002, in anticipation of a new
program to be in place by December 13, 2002.

The Company is in discussions with lenders
regarding a possible replacement facility for the Program of up
to $100 million; however, the Company does not have a
commitment letter for such replacement facility at this time.
The Company believes that if it receives a commitment for such a
replacement facility, the Banks will extend the Program as
amended for a reasonable period beyond December 13, 2002 to
permit it to negotiate a definitive agreement for such facility.
If, however, the Company does not receive a commitment on terms
acceptable to it, or at all, or the Banks decline to extend the
Program beyond December 13, 2002, it will not have access
to the Program beyond that date and there could be a liquidation
event under the Program in the quarter ending December 29,
2002.

If a liquidation event or termination of the
Program were to occur, the Banks would be entitled to all cash
collections on the Companys accounts receivables in the
United States until their net investments had been recovered.
The Company does not expect that such an event by itself would
have a significant adverse impact on its liquidity, given the
fact that it believes the Banks net investment would be
satisfied shortly following such liquidation event or
termination, based on the Companys historical collection
rate of receivables. However, the Company would no longer have
access to the Program following such liquidation event or

15



---



##### Table of Contents



MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

termination. The Company does not expect that the
unavailability of the Program would have a material adverse
effect on its liquidity.

The Company may not satisfy the minimum tangible
net worth covenant under the Singapore loan at the end of the
quarter ending December 29, 2002. There can be no assurance
that the Singapore lender will agree to any amendments or
provide a waiver for any such covenant violation. In the event
that a default occurs in a financial covenant under the
Companys Singapore loan, and the Company does not receive
a waiver, it may be required to repay the loan earlier than
anticipated; however, the Company does not expect that such an
earlier repayment of the Singapore loan would have a material
adverse effect on its liquidity.

The Company receives cash in respect of the
interest in its receivables sold. The proceeds were used for
working capital purposes and are reflected as operating cash
flows in the Companys statement of cash flows. Delinquent
amounts and credit losses related to these receivables were not
material at September 28, 2002. Sales of receivables
resulted in recognition of expenses of approximately
$2.8 million and $5.6 million for the nine months
ended September 28, 2002 and September 29, 2001,
respectively. These expenses are included in interest expense.



|    |                           
|--- | --------------------------
|12. | Related Party Transactions

In 1994, Hyundai Electronics Industries,
HEI, and certain of its affiliates purchased 40% of
Maxtors outstanding common stock for $150.0 million
in cash. In early 1996, Hynix, formerly Hyundai Electronics
America, or HEA, acquired all of the remaining shares of common
stock of Maxtor in a tender offer and merger for
$215.0 million in cash and also acquired all of
Maxtors common stock held by HEI and its affiliates.
Maxtor operated as a wholly-owned subsidiary of Hynix until
completion of its initial public offering on July 31, 1998,
which reduced the ownership interest of Hynix to below 50%. In
April 2001 as a result of Maxtors acquisition of the
Quantum HDD business, Hynixs ownership in Maxtor was
reduced to approximately 17% of the outstanding common stock. As
described below, Hynix sold Maxtor shares to the public and to
Maxtor in October 2001, reducing Hynixs ownership to 5.17%
at December 29, 2001, and in February 2002, Hynix
distributed the balance of its Maxtor shares to the beneficial
owners of a trust and is no longer a stockholder of Maxtor.

On September 2, 2001, Maxtor completed its
acquisition of MMC which had previously been 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 constituted 95% of
MMCs annual revenues. The primary business reason for
Maxtors acquisition of MMC was to provide Maxtor with a
reliable source of supply of media for hard disk drives. A
fairness opinion was delivered to Maxtors Board of
Directors by a nationally recognized investment banking firm in
connection with the MMC acquisition. The fairness opinion
concluded that the consideration to be paid by Maxtor for MMC
was fair to Maxtor, from a financial point of view. The
acquisition of MMC was approved by the Maxtor Boards
Affiliated Transactions Committee and was determined by the
Committee to be in the best interests of Maxtor and its
stockholders. The Affiliated Transactions Committee was
comprised entirely of directors with no relationship with Hynix
and its affiliates. The acquisition was accounted for as a
purchase with a total cost of $17.9 million, which
consisted of cash consideration of $1.0 million,
$16.0 million of loan forgiveness, and $0.9 million of
direct transaction costs. In connection with the acquisition,
Maxtor also assumed liabilities of $105.7 million.

In connection with the acquisition of MMC
Technology, Inc., Maxtor assumed a note for $7.3 million
owing to Hynix, which bore no interest through March 31,
2002; thereafter, unpaid principal amounts bore interest at 9%
per annum (the Maxtor Note). On January 5,
2001, Hynix issued a promissory note to Maxtor for
$2 million in principal amount representing Hynixs
share of a settlement relating to litigation between Maxtor and
Hynix and Stormedia. This note bore interest at 9% per annum,
with the payment of principal and interest due on
December 31, 2001 (the Hynix Note). Hynix and
Maxtor agreed that the principal and accrued interest on the
Hynix Note as of December 28, 2001 was offset against the
principal

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amount of the Maxtor Note, such that the Hynix
Note was fully paid and the Maxtor Note had a principal amount
of approximately $5.1 million as of December 29. On
April 5, 2002, the outstanding balance under the Maxtor
Note was fully paid.

Maxtors cost of revenue includes certain
component parts Maxtor purchased from MMC. These purchases
amounted to $27 million and $99 million for the two
and eight months ended September 1, 2001, respectively. In
August 1998, Maxtor entered into an agreement with MMC with
respect to the pricing of future purchases that provided for
pricing discounts in return for a purchase volume commitment
based on a percentage of our total media purchases through
September 30, 2001. The pricing discounts generally ranged
from 2% to 4% off of competitive prices. As described above,
Maxtor completed its acquisition of MMC on September 2,
2001.

Maxtors cost of revenue also includes
certain DRAM chip purchases from Hynix Semiconductor, Inc.,
HSI, formerly HEI. Hynix is treated identically to
its competitors in the process by which commodity electronics,
principally DRAMs, are selected, qualified, and purchased;
pricing is negotiated with selected suppliers on the basis of
suppliers bids and market information. Maxtors
purchases from HSI totaled $26.5 million in fiscal year
1999, $41.6 million in fiscal year 2000 and
$19.3 million in fiscal year 2001.

In October 2001, Hynix sold approximately
23.3 million shares of Maxtor common stock in a registered
public offering. At the same time as Hynixs sale of Maxtor
common stock to the public, Maxtor purchased an additional
5.0 million shares of its common stock from Hynix.
Maxtors purchase of its shares from Hynix was on the same
terms as Hynixs sale of shares to the public at $4 per
share for an aggregate purchase price of $20.0 million. The
repurchase of its shares was intended to improve Maxtors
capital structure, increase shareholder returns, and increase
the price of Maxtors stock. The repurchase of the shares
from Hynix was approved by the Maxtor Boards Affiliated
Transaction Committee and determined to be in the best interest
of the Company and its stockholders. As a result of Hynixs
sale of its Maxtor shares to the public and to Maxtor, in
October 2001, and Hynixs distribution of its remaining
shares to the beneficial owners of a trust in February 2002,
Hynix is no longer a stockholder of Maxtor.

Pursuant to a sublicense agreement with HEI,
Maxtor is obligated to pay a portion of an IBM license royalty
fee otherwise due from HEI. Such payments are due in annual
installments through 2007, and are based upon the license fee
separately negotiated on an arms length basis between HEI
and IBM. For the years ended January 1, 2000,
December 30, 2000 and December 29, 2001, Maxtor
recorded $1.9 million of expenses each year in connection
with this obligation.

Hynix was an unconditional guarantor of one of
Maxtors facilities lease in Milpitas, California. The
aggregate rent under the lease was $3.24 million per annum
in each of the years ended January 1, 2000,
December 30, 2000 and December 29, 2001. The lease
rate was established by arms length negotiations with the
lessor based on applicable market rates. The lease expired on
March 31, 2002 and was not extended.

13.     Contingencies

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 the Company 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 the Company and Quantum purchased from third
party motor vendors, including MKE, and the use of such spindle
motors

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 with 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.

Papst and MKE recently 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 are currently proceeding
in the District 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. The Papst complaints assert claims to an unspecified
dollar amount of damages. 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.
Accordingly, a litigation outcome favorable to Papst could harm
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.

Maxtor has asserted multiple claims against
Quantum, and Quantum has asserted multiple claims against the
Company, for payment under agreements entered into in connection
with the Companys acquisition of the Quantum HDD business,
including a tax sharing and indemnity agreement, which provides
for the allocation of certain liabilities related to taxes. The
Company disagrees with Quantum about the amounts owed by each
party under the agreements and the parties are in negotiations
to resolve the claims. The parties have commenced dispute
resolution procedures under the tax sharing and indemnity
agreement. Although the Company believes that it will be
successful in asserting or defending these claims in the
aggregate, an unfavorable resolution of such claims in the
aggregate could harm its business, financial condition and
operating results.

14.     Goodwill and
Other Intangible Assets

On December 30, 2001, 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 beginning of fiscal 2002,
including $31.1 million, net of accumulated amortization,
of acquired workforce intangibles previously classified as
purchased intangible assets.

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 one to seven
years. The Company expects amortization expense on purchased
intangible assets to be $20.6 million for the fourth
quarter of fiscal 2002, $82.2 million in fiscal 2003,
$37.0 million in fiscal 2004, $21.9 million in fiscal
2005, and $5.8 million in fiscal 2006, at which time
purchased intangible assets will be fully amortized.

|                    |  |                |         |              |  |               |          |              |  |   |         |  |  |   |         | 
|------------------- |  | -------------- | ------- | ------------ |  | ------------- | -------- | ------------ |  | - | ------- |  |  | - | ------- | 
|                    |  |                |         |              |  | September 28, |          | December 29,
|                    |  |                |         |              |  | 2002          |          | 2001        
|                    |  | Gross Carrying |         | Accumulated  |  |               |          |             
|                    |  | Amount         |         | Amortization |  | Net           |          | Net         
|                    |  |                |         |              |  |               |          |             
|Existing technology |  | $              | 290,450 |              |  | $             | (122,992 | )            |  | $ | 167,458 |  |  | $ | 230,919 | 
|Acquired workforce  |  |                |        |              |  |               |         |              |  |   |        |  |  |   | 31,109  | 
|Other               |  |                |        |              |  |               |         |              |  |   |        |  |  |   | 524     | 
|                    |  |                |         |              |  |               |          |              |  |   |         |  |  |   |         | 
|Total               |  | $              | 290,450 |              |  | $             | (122,992 | )            |  | $ | 167,458 |  |  | $ | 262,552 | 
|                    |  |                |         |              |  |               |          |              |  |   |         |  |  |   |         | 

In accordance with SFAS No. 142, the Company
completed its first phase impairment analysis during the second
quarter of 2002 and found no instances of impairment of its
recorded goodwill; accordingly, the second testing phase, absent
future indicators of impairment, is not necessary during 2002.

The following tables present the impact of
SFAS 142 on net loss and net loss per share had the
standard been in effect for the three and nine months ended
September 29, 2001 (in thousands, except per share amounts):

|                                                                                  |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |        | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------ | -------- | ----------------- |  | ------------- | -------- | ------------- |  | - | -------- | - |  | - | -------- | ------ | 
|                                                                                  |                                                                                                         |                    |          |                  
|                                                                                  |                                                                                                         | Three Months Ended |          | Nine Months Ended
|                                                                                  |                                                                                                         |                    |          |                  
|                                                                                  |                                                                                                         | September 28,      |          | September 29,     |  | September 28, |          | September 29,
|                                                                                  |                                                                                                         | 2002               |          | 2001              |  | 2002          |          | 2001         
|                                                                                  |                                                                                                         |                    |          |                   |  |               |          |              
|Net loss from continuing operations 
    as reported                             |                                                                                                         | $                  | (105,470 | )                 |  | $             | (153,177 | )             |  | $ | (264,150 | ) |  | $ | (448,908 | )     
|Adjustments:                                                                      |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|                                                                                  | Amortization of goodwill                                                                                |                    |          |                  |  |               |          | 35,800        |  |   |          |  |  |   |          | 71,601 | 
|                                                                                  | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |                    |          |                  |  |               |          | 4,591         |  |   |          |  |  |   |          | 7,881  | 
|                                                                                  |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|                                                                                  | Net adjustments                                                                                         |                    |          |                  |  |               |          | 40,391        |  |   |          |  |  |   |          | 79,482 | 
|                                                                                  |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|Net loss from continuing operations 
    adjusted                                |                                                                                                         | $                  | (105,470 | )                 |  | $             | (112,786 | )             |  | $ | (264,150 | ) |  | $ | (369,426 | )     
|                                                                                  |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|Basic and diluted net loss per share from
    continuing operations  as reported |                                                                                                         | $                  | (0.44    | )                 |  | $             | (0.64    | )             |  | $ | (1.11    | ) |  | $ | (2.28    | )     
|Basic and diluted net loss per share from
    continuing operations  adjusted    |                                                                                                         | $                  | (0.44    | )                 |  | $             | (0.47    | )             |  | $ | (1.11    | ) |  | $ | (1.88    | )     

|                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |        | 
|---------------------- | ------------------------------------------------------------------------------------------------------- | ------------------ | -------- | ----------------- |  | ------------- | -------- | ------------- |  | - | -------- | - |  | - | -------- | ------ | 
|                       |                                                                                                         |                    |          |                  
|                       |                                                                                                         | Three Months Ended |          | Nine Months Ended
|                       |                                                                                                         |                    |          |                  
|                       |                                                                                                         | September 28,      |          | September 29,     |  | September 28, |          | September 29,
|                       |                                                                                                         | 2002               |          | 2001              |  | 2002          |          | 2001         
|                       |                                                                                                         |                    |          |                   |  |               |          |              
|Net loss  as reported |                                                                                                         | $                  | (163,611 | )                 |  | $             | (165,727 | )             |  | $ | (337,651 | ) |  | $ | (484,156 | )     
|Adjustments:           |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|                       | Amortization of goodwill                                                                                |                    |          |                  |  |               |          | 37,484        |  |   |          |  |  |   |          | 76,654 | 
|                       | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |                    |          |                  |  |               |          | 4,627         |  |   |          |  |  |   |          | 7,989  | 
|                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|Net adjustments        |                                                                                                         |                    |         |                   |  |               | 42,11    |               |  |   |         |   |  |   | 84,643   |       
|                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|Net loss  adjusted    |                                                                                                         | $                  | (163,611 | )                 |  | $             | (123,616 | )             |  | $ | (337,651 | ) |  | $ | (399,513 | )     
|                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       

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MAXTOR CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                       |  |                    |       |                   |  |               |       |               |  |   |       |   |  |   |       |  
|------------------------------------------------------ |  | ------------------ | ----- | ----------------- |  | ------------- | ----- | ------------- |  | - | ----- | - |  | - | ----- | -
|                                                       |  |                    |       |                  
|                                                       |  | Three Months Ended |       | Nine Months Ended
|                                                       |  |                    |       |                  
|                                                       |  | September 28,      |       | September 29,     |  | September 28, |       | September 29,
|                                                       |  | 2002               |       | 2001              |  | 2002          |       | 2001         
|                                                       |  |                    |       |                   |  |               |       |              
|Basic and diluted net loss per share 
    as reported |  | $                  | (0.68 | )                 |  | $             | (0.69 | )             |  | $ | (1.42 | ) |  | $ | (2.46 | )
|Basic and diluted net loss per share 
    adjusted    |  | $                  | (0.68 | )                 |  | $             | (0.52 | )             |  | $ | (1.42 | ) |  | $ | (2.03 | )

15.     Recent
Accounting Pronouncements

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 143
(SFAS 143), Accounting for Asset
Retirement Obligations. This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement applies to all entities.
It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset, except for certain obligations or lessees.
SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 25, 2002. The Company is
currently assessing the impact of SFAS 143 on its financial
statements.

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144
(SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 replaces
SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The
FASB issued SFAS 144 to establish a single accounting
model, based on the framework established in SFAS 121, as
SFAS 121 did not address the accounting for a segment of a
business accounted for as a discontinued operation under
APB 30, Reporting The Results of
Operations  Reporting The Effects of Disposal of a
Segment of a Business, and Extraordinary Unusual and
Infrequently Occurring Events and Transactions.
SFAS 144 also resolves significant implementation issues
related to SFAS 121. Companies are required to adopt
SFAS 144 for fiscal years beginning after December 15,
2001, but early adoption is permitted. The adoption of
SFAS 144 did not have a significant impact on Maxtors
financial statements.

In May 2002, the FASB issued SFAS No. 145,
Rescission of SFAS Nos. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections
(SFAS 145). Among other things, SFAS 145
rescinds various pronouncements regarding early extinguishment
of debt and allows extraordinary accounting treatment for early
extinguishment only when the provisions of Accounting Principles
Board Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are met.
SFAS 145 provisions regarding early extinguishment of debt are
generally effective for fiscal years beginning after
May 15, 2002. The Company is currently assessing the impact
of SFAS 145 on its financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). This Statement addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability
for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the
liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated
after December 31, 2002. The Company is currently assessing
the impact of SFAS 146 on its financial statements.

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Item 2.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in
conjunction with the condensed consolidated financial statements
and the accompanying notes included in Part I. Financial
Information, Item 1. Condensed Consolidated Financial
Statements of this report.

This report contains forward-looking statements
within the meaning of the U.S. federal securities laws that
involve risks and uncertainties. The statements contained in
this report that are not purely historical, including, without
limitation, statements regarding our expectations, beliefs,
intentions or strategies regarding the future, are
forward-looking statements. In this report, the words
anticipate, 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 the
mid-1980s, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive
industry during the 1980s was intensely competitive and
characterized by rapid technological change, rapid rates of
product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant
erosion of average selling prices. In an effort to mitigate the
risks associated with these factors, we pursued all major
product segments in the hard disk drive market, utilizing
multiple product families and technology platforms. This costly
strategy added significant complexity to the business, which
caused us to delay or miss a number of key product introductions
and ultimately led to the deterioration of our overall financial
condition. As a result of this deterioration, we sold 40% of our
outstanding common stock to Hyundai Electronics Industries (now
Hynix Semiconductor Inc.) and its affiliates in 1994.

In early 1996, Hyundai Electronics America (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. Shortly thereafter, Hynix
invested in renewed efforts to revitalize Maxtor. In July 1996,
we hired a new management team, headed by Michael R. Cannon, our
current President and Chief Executive Officer and a 20-year
veteran of the hard drive industry, to lead our turnaround and
capture business at leading desktop computer manufacturers.

In the third quarter of 1998, we completed a
public offering of approximately 49.7 million shares of our
common stock. We received 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. We received net
proceeds of approximately $95.8 million from the offering.
We used a portion of the proceeds from the offering to prepay,
without penalty, outstanding aggregate principal indebtedness of
$55.0 million owing to Hynix under a subordinated note.

In September 1999, we acquired privately held
Creative Design Solutions, Inc. (CDS), a participant
in the emerging network attached storage market. The acquisition
of CDS helped us to transition from only being a supplier of
hard disk drives for the desktop personal computer market to
also being positioned to provide storage solutions that deliver
price and performance values in networked environments.

On April 2, 2001, we completed our
acquisition of Quantum Corporations Hard Disk Drive Group
(Quantum HDD). The primary reason for our
acquisition of the Quantum HDD business was to create a
stronger, more competitive company, with enhanced prospects for
continued viability in the storage industry.

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For additional information regarding the Quantum
HDD acquisition, see note 3 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. For additional information regarding the MMC
acquisition, see note 3 of the Notes to Consolidated
Financial Statements and Related Party Transactions
below.

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. These
repurchased shares are being held as treasury shares. See
Related Party Transactions below. In February 2002,
Hynix distributed all of its remaining Maxtor shares to the
beneficial owners of a trust and is no longer a stockholder of
Maxtor.

On August 15, 2002 we announced our decision
to discontinue the manufacturing and sales 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. Since
our entrance into the network attached storage market in the
fall of 1999, the growth rate of this market has fallen far
short of expectations. Over the same period, the network
attached storage market has become rapidly commoditized by the
entrance of a number of global OEMs with their own branded
products. This has placed us in competition with some of our
largest disk drive customers. We believe exiting the NSG
business will allow us to focus on our core hard disk drive
market, further reduce expenses and accelerate our return to
profitability. The NSG business is 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.

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.                

22



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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 29, 2001.

Effective July 1, 2001, we adopted certain
provisions of SFAS No. 141, and effective December 30,
2001, we adopted the full provisions of SFAS No. 141 and
SFAS No. 142. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the
criteria for recording intangible assets apart from goodwill. We
evaluated our goodwill and intangibles acquired prior to
June 30, 2001 using the criteria of SFAS No. 141,
which resulted in $31.1 million of other intangibles, net
of accumulated amortization of $12.8 million, (comprised
entirely of assembled workforce intangibles) being subsumed into
goodwill at December 30, 2001. SFAS No. 142 requires
that purchased goodwill and certain indefinite-lived intangibles
no longer be amortized, but instead be tested for impairment at
least annually. We evaluated our intangible assets and
determined that all such assets have determinable lives.

SFAS No. 142 prescribes a two-phase
transitional process for impairment testing of goodwill. The
first phase, required to be completed by June 30, 2002,
screens for impairment as of January 1, 2002. The second
phase (if necessary), required to be completed by
December 31, 2002, measures the impairment. We completed
our first phase impairment analysis and found no instances of
impairment of our recorded goodwill; accordingly, the second
testing phase, absent future indicators of impairment, is not
necessary during 2002.

Results of Operations



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

|                                         |  |                    |        |               |  |                   |         |               |  |               |        |        |  |   |         |    |  |   |         |    |  |   |       |  
|---------------------------------------- |  | ------------------ | ------ | ------------- |  | ----------------- | ------- | ------------- |  | ------------- | ------ | ------ |  | - | ------- | -- |  | - | ------- | -- |  | - | ----- | -
|                                         |  |                    |        |               |  |                   |         |              
|                                         |  | Three Months Ended |        |               |  | Nine Months Ended |         |              
|                                         |  |                    |        |               |  |                   |         |              
|                                         |  | September 28,      |        | September 29, |  |                   |         | September 28, |  | September 29, |        |       
|                                         |  | 2002               |        | 2001          |  | Change            |         | 2002          |  | 2001          |        | Change
|                                         |  |                    |        |               |  |                   |         |               |  |               |        |       
|                                         |  |                   
|                                         |  | (Unaudited)       
|                                         |  | (In millions)     
|Total revenue from continuing operations |  | $                  | 819.7  |               |  | $                 | 1,035.2 |               |  | $             | (215.5 | )      |  | $ | 2,741.2 |    |  | $ | 2,694.4 |    |  | $ | 46.8  |  
|Gross profit                             |  | $                  | 57.5   |               |  | $                 | 79.6    |               |  | $             | (22.1  | )      |  | $ | 230.7   |    |  | $ | 243.2   |    |  | $ | (12.5 | )
|Loss from continuing operations          |  | $                  | (105.5 | )             |  | $                 | (153.2  | )             |  | $             | 47.7   |        |  | $ | (264.2  | )  |  | $ | (448.9  | )  |  | $ | 184.7 |  
|As a percentage of revenue:              |  |                    |        |               |  |                   |         |               |  |               |        |        |  |   |         |    |  |   |         |    |  |   |       |  
|Total revenue from continuing operations |  |                    | 100.0  | %             |  |                   | 100.0   | %             |  |               |        |        |  |   | 100.0   | %  |  |   | 100.0   | %  |  |   |       |  
|Gross profit                             |  |                    | 7.0    | %             |  |                   | 7.7     | %             |  |               |        |        |  |   | 8.4     | %  |  |   | 9.0     | %  |  |   |       |  
|Loss from continuing operations          |  |                    | (12.9  | )%            |  |                   | (14.8   | )%            |  |               |        |        |  |   | (9.6    | )% |  |   | (16.7   | )% |  |   |       |  



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

Revenue in the three and nine months ended
September 28, 2002 was $819.7 million and
$2,741.2 million, compared to $1,035.2 million and
$2,694.4 million in the corresponding periods in fiscal
year 2001. Total shipments for the three months ended
September 28, 2002 were 11.7 million units, which was
0.8 million units, or 6.4%, lower as compared to the three
months ended September 29, 2001. The decrease in unit
volume in the three months ended September 28, 2002
compared to the corresponding period in fiscal year 2001
primarily reflected difficulties we encountered in ramping our
new 60GB/80GB per platter products in the quarter ended
September 28, 2002. This transition, which represented a
100% increase in aerial density, reflected issues associated
with the ability of the supply chain to meet the technological
demands of this new aerial density in high volumes, as well as
our difficulties in optimizing drive yield. As a result of these
difficulties, end of life volumes that were planned for the
40GB products were insufficient to support market demand.
We have made good progress in resolving these problems and
expect strong volume recovery in the

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fourth quarter of 2002. Total shipments for the
nine months ended September 28, 2002 were 38.1 million
units, which was 6.7 million units, or 21.3%, higher as
compared to the corresponding period in fiscal year 2001. The
increase in unit volume in the nine months ended
September 28, 2002 compared to the corresponding period in
fiscal year 2001 was primarily due to the acquisition of the
Quantum HDD business offset by the slowdown in demand for PCs
and servers and the resulting reduced demand for hard disk
drives and pressures in the market.


Revenues declined in the three months ended
September 28, 2002 compared to the corresponding period in
fiscal year 2001 primarily due to difficulties in ramping our
new products in the third quarter of 2002. Revenue in the nine
months ended September 28, 2002 increased compared to the
corresponding period in fiscal 2001, primarily as a result of
our acquisition of the Quantum HDD business, offset by the
decline in average selling prices in the PC and server markets
as a result of the economic slowdown, and our difficulties in
ramping up production of our new products in the third quarter
of 2002. We expect improved revenue in the fourth quarter
compared to the third quarter as a result of expected strong
recovery in our volume production of our next generation
products and seasonal demand for personal computers.

Revenues on a pro forma basis (as if the Quantum
HDD business had been acquired on January 1, 2001) were
$2,741.2 million and $3,347.4 million for the nine
months ended September 28, 2002 and September 29,
2001, respectively. On a pro forma basis, the percentage
decrease was 18.1% in the nine months ended September 28,
2002 compared to the corresponding period in fiscal year 2001,
primarily reflecting our difficulties in ramping our new
products in the third quarter of 2002, the slowdown in demand
for PCs and the continued pricing pressures in the market.

Sales to the top five customers in the three and
nine months ended September 28, 2002 represented 40.1% and
33.5% of revenue, respectively, compared to 37.0% and 36.4% of
revenue, respectively, in the corresponding periods in fiscal
year 2001. Sales to one customer were 13.0% and 11.5% of revenue
in the three and nine months ended September 28, 2002;
sales to one customer represented 10.9% and 12.7% of total
revenue for the corresponding period in fiscal year 2001, and
there was only one customer with over 10% of revenue in these
periods.

Revenue from sales to original equipment
manufacturers (OEMs) in the three and nine months
ended September 28, 2002 represented 52.0% and 48.4% of
revenue, respectively, compared to 52.8% and 59.7% of revenue,
respectively, in the corresponding period in fiscal year 2001.
The decrease in revenue from sales to the OEM channel in the
three and nine months ended September 28, 2002 compared to
the corresponding periods in 2001 was due to the slowdown in
demand for PCs and servers in the OEM channel and a share loss
as a result of our difficulties in ramping our new products. The
decline in percentage of revenue from OEMs was a result of the
growth of non-branded PC customers market share of the
overall current desktop market and our effort to accommodate
this growth. Revenue from sales to the distribution channel and
retail customers in the three and nine months ended
September 28, 2002 represented 48.0% and 51.6% of revenue,
respectively, compared to 47.2% and 40.3% of revenue,
respectively, in the corresponding period in fiscal year 2001.
The increase in revenue from sales to the distribution channel
in the three months ended September 28, 2002 compared to
the corresponding period in fiscal year 2001 was primarily due
to the growth of non-branded PC customers market share of
the overall current desktop PC market and our effort to
accommodate this growth. The increase in the nine months ended
September 28, 2002 compared to the corresponding period in
fiscal year 2001 was primarily due to our acquisition of the
Quantum HDD business and the growth of non-branded PC
customers market share of the overall current desktop PC
market and our effort to accommodate this growth.

Domestic revenue in the three and nine months
ended September 28, 2002 represented 38.5% and 36.4% of
total sales, respectively, compared to 42.1% and 43.9% of total
sales, respectively, in the corresponding period in fiscal year
2001. International revenue in the three and nine months ended
September 28, 2002 represented 61.5% and 63.6% of total
sales, respectively, compared to 57.9% and 56.1% of total sales,
respectively, in the corresponding period in fiscal year 2001.
Revenue from international sales in the three and nine months
ended September 28, 2002, as a percentage of total revenue,
increased compared to the corresponding periods in fiscal year
2001, primarily as a result of our stronger presence in Europe
and Asia Pacific, as a result of our acquisition of the Quantum
HDD business, and the growth of sales to the non-

24



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##### Table of Contents



branded customers who are primarily located
outside the United States and Canada. In absolute terms,
international sales decreased 15.9% in the three months ended
September 28, 2002 compared to the corresponding period in
fiscal year 2001, primarily due to the difficulties we
encountered in ramping our new products in the third quarter of
2002, resulting in a decline in overall sales. In absolute terms
international sales increased 15.2% in the nine months ended
September 28, 2002 compared to the corresponding period in
fiscal year 2001, due to our stronger presence in Europe and
Asia Pacific and the growth of our sales to non-branded
customers located outside the United States and Canada. We plan
to continue building our sales efforts in Europe and Asia
Pacific over the course of the year.


Sales to Europe in the three months ended
September 28, 2002 and September 29, 2001 represented
29.6% and 29.5% of total revenue, respectively. In absolute
terms, European sales decreased 20.5% compared to the
corresponding period in fiscal year 2001. Sales to Asia Pacific
in the three months ended September 28, 2002 represented
31.4%, or an absolute decrease of 11.7% of total revenue,
compared to 28.2% of total revenue for the corresponding period
in fiscal year 2001. The decreases in the absolute dollar amount
of sales to Europe and Asia Pacific in the three month period
ended September 28, 2002 were mainly due to the
difficulties we encountered in ramping our new 60/80GB per
platter products. The increase as a percentage of total revenue
represented by sales in Asia Pacific in the three months ended
September 28, 2002 compared to the corresponding period in
2001 was due to the growth in sales to non-branded customers who
are primarily located outside the United States and Canada.

Sales to Europe in the nine months ended
September 28, 2002 and September 29, 2001 represented
31.3% and 26.2% of total revenue, respectively. In absolute
terms, European sales increased 21.4% compared to the
corresponding period in fiscal year 2001. Sales to Asia Pacific
in the nine months ended September 28, 2002 represented
31.5%, or an absolute increase of 15.6% of total revenue,
compared to 27.8% of total revenue for the corresponding period
in fiscal year 2001. The increases in the sales to Europe and
Asia Pacific in the nine month period ended September 28,
2002 were primarily due to the acquisition of the Quantum HDD
business and increased sales to non-branded customers who are
primarily located outside of the United States and Canada.



| |             
| | ------------
| | Gross Profit

Gross profit decreased to $57.5 million in
the three months ended September 28, 2002, compared to
$79.6 million for the corresponding period in fiscal year
2001. As a percentage of revenue, gross profit decreased to 7.0%
in the three months ended September 28, 2002 from 7.7% in
the corresponding period of fiscal year 2001. Gross profit
decreased to $230.7 million in the nine months ended
September 28, 2002, compared to $243.2 million for the
corresponding period in fiscal year 2001. The decrease in gross
profit for the three month period was primarily due to lower
sales, difficulties in optimizing drive yield and sales of a
higher proportion of lower-priced single platter products than
in the third quarter of 2001. The decline in gross profit for
the nine month period was also primarily due to the result of
product mix, as well as a more competitive pricing environment.
As a percentage of revenue, gross profit decreased to 8.4% in
the nine months ended September 28, 2002 from 9.0% in the
corresponding period of fiscal year 2001. The decrease in gross
profit as a percentage of revenues for the three months ended
September 28, 2002 compared to the corresponding period in
2001 was primarily due to lower sales as a result of
difficulties in optimizing drive yield. The decrease in gross
profit as a percentage of revenues for the nine months ended
September 28, 2002 compared to the corresponding period in
2001, was primarily due to the result of product mix,
competitive pricing pressures, as well as the negative impact on
gross profit from the transition of the manufacturing of desktop
hard drive products from MKE to the Maxtor Singapore
manufacturing facility.

25



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##### Table of Contents





| |                   
| | ------------------
| | Operating Expenses

|                                                         |  |                    |      |               |  |                   |       |               |  |               |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|-------------------------------------------------------- |  | ------------------ | ---- | ------------- |  | ----------------- | ----- | ------------- |  | ------------- | ----- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                         |  |                    |      |               |  |                   |       |              
|                                                         |  | Three Months Ended |      |               |  | Nine Months Ended |       |              
|                                                         |  |                    |      |               |  |                   |       |              
|                                                         |  | September 28,      |      | September 29, |  |                   |       | September 28, |  | September 29, |       |       
|                                                         |  | 2002               |      | 2001          |  | Change            |       | 2002          |  | 2001          |       | Change
|                                                         |  |                    |      |               |  |                   |       |               |  |               |       |       
|                                                         |  |                   
|                                                         |  | (Unaudited)       
|                                                         |  | (In millions)     
|Research and development                                 |  | $                  | 94.1 |               |  | $                 | 118.6 |               |  | $             | (24.5 | )      |  | $ | 301.2 |   |  | $ | 304.6 |   |  | $ | (3.4  | )
|Selling, general and administrative                      |  | $                  | 34.8 |               |  | $                 | 48.0  |               |  | $             | (13.2 | )      |  | $ | 111.4 |   |  | $ | 174.5 |   |  | $ | (63.1 | )
|Amortization of goodwill and other intangible
    assets |  | $                  | 20.6 |               |  | $                 | 60.8  |               |  | $             | (40.2 | )      |  | $ | 61.7  |   |  | $ | 120.2 |   |  | $ | (58.5 | )
|Restructuring charge                                     |  | $                  | 9.5  |               |  | $                 |      |               |  | $             | 9.5   |        |  | $ | 9.5   |   |  | $ |      |   |  | $ | 9.5   |  
|Purchased in-process research and development            |  | $                  |     |               |  | $                 | 0.4   |               |  | $             | (0.4  | )      |  | $ |      |   |  | $ | 95.1  |   |  | $ | (95.1 | )
|As a percentage of revenue:                              |  |                    |      |               |  |                   |       |               |  |               |       |        |  |   |       |   |  |   |       |   |  |   |       |  
|Research and development                                 |  |                    | 11.5 | %             |  |                   | 11.5  | %             |  |               |       |        |  |   | 11.0  | % |  |   | 11.3  | % |  |   |       |  
|Selling, general and administrative                      |  |                    | 4.2  | %             |  |                   | 4.6   | %             |  |               |       |        |  |   | 4.1   | % |  |   | 6.5   | % |  |   |       |  
|Amortization of goodwill and other intangible
    assets |  |                    | 2.5  | %             |  |                   | 5.9   | %             |  |               |       |        |  |   | 2.3   | % |  |   | 4.5   | % |  |   |       |  
|Restructuring charge                                     |  |                    | 1.2  | %             |  |                   |      |               |  |               |       |        |  |   | 0.3   | % |  |   |      |   |  |   |       |  
|Purchased in-process research and development            |  |                    |     |               |  |                   |      |               |  |               |       |        |  |   |      |   |  |   | 3.5   | % |  |   |       |  



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

R&D expense in the three and nine months
ended September 28, 2002 was $94.1 million, or 11.5%
of revenue and $301.2 million or 11.0% of revenue,
respectively, compared to $118.6 million, or 11.5% of
revenue, and $304.6 million or 11.3% of revenue,
respectively, in the corresponding period in fiscal year 2001.
The decrease in the absolute dollar amount of research and
development expense in the three months ended September 28,
2002 compared to the corresponding period in fiscal year 2001
was primarily due to compensation expenses resulting from
reduced headcount and reduced spending on parts and equipment.
The decrease in the nine months ended September 28, 2002
compared to the corresponding period in fiscal year 2001 was
primarily due to merger-related costs, such as amortization of
stock-based compensation, associated with our acquisition of the
Quantum HDD business incurred during the corresponding period in
2001 and lower compensation expenses resulting from reduced
headcount in 2002. This decrease was offset by the inclusion of
Quantum HDD and MMC expenses and our on-going effort to maintain
leadership products to address the requirements of the PC
desktop.

As a result our acquisition of the Quantum HDD
business, R&D expense includes stock-based compensation
charges of $0.4 million and $1.4 million in the three
and nine months ended September 28, 2002, respectively, and
$1.3 million and $2.5 million in the three and nine
months ended September 29, 2001, respectively, resulting
from options we issued to Quantum employees who joined Maxtor in
connection with the acquisition on April 2, 2001. R&D
expense in the three and nine months ended September 28,
2002 includes $0 and $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. R&D expense in the three and nine months
ended September 29, 2001 includes $3.0 million and
$22.7 million of stock-based compensation amortization
related to Quantum DSS restricted shares issued to Quantum
employees who

26



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##### Table of Contents



joined Maxtor in connection with the acquisition.
The following table summarizes the effect of these
acquisition-related charges:


|                                              |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ------------- | ----- | ------------- |  | - | ----- | - |  | - | ----- | -
|                                              |  |                    |      |                  
|                                              |  | Three Months Ended |      | Nine Months Ended
|                                              |  |                    |      |                  
|                                              |  | September 28,      |      | September 29,     |  | September 28, |       | September 29,
|                                              |  | 2002               |      | 2001              |  | 2002          |       | 2001         
|                                              |  |                    |      |                   |  |               |       |              
|                                              |  |                   
|                                              |  | (In millions)     
|R&D expense                                   |  | $                  | 94.1 |                   |  | $             | 118.6 |               |  | $ | 301.2 |   |  | $ | 304.6 |  
|Stock-based compensation expense              |  |                    | (0.4 | )                 |  |               | (1.3  | )             |  |   | (1.4  | ) |  |   | (2.5  | )
|Amortization related to DSS restricted shares |  |                    |     |                   |  |               | (3.0  | )             |  |   | (2.8  | ) |  |   | (22.7 | )
|                                              |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  
|                                              |  | $                  | 93.7 |                   |  | $             | 114.3 |               |  | $ | 297.0 |   |  | $ | 279.4 |  
|                                              |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  

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 nine months
ended September 28, 2002 was $34.8 million, or 4.2% of
revenue and $111.4 million, or 4.1% of revenue,
respectively, compared to $48.0 million, or 4.6% of
revenue, and $174.5 million or 6.5% of revenue,
respectively, in the corresponding period in fiscal year 2001.
SG&A expense decreased in absolute dollars and as a
percentage of revenue in the three and nine months ended
September 28, 2002 compared to the corresponding periods in
fiscal year 2001 primarily due to reduced compensation expenses
and payments associated with the Quantum HDD business incurred
subsequent to the acquisition.

As a result of our acquisition of the Quantum HDD
business, SG&A expense includes stock-based compensation
charges of $0.1 million and $0.5 million in the three
and nine months ended September 28, 2002, respectively, and
$0.5 million and $0.9 in the three and nine months ended
September 29, 2001, respectively, resulting from options we
issued to Quantum employees who joined Maxtor in connection with
the acquisition on April 2, 2001. SG&A expense in the
three and nine months ended September 28, 2002 includes $0
and $1.0 million of stock-based compensation amortization
for Quantum DSS restricted shares issued to Quantum employees
who joined Maxtor in connection with the acquisition. SG&A
expense in the three and nine months ended September 29,
2001 includes $1.1 million and $8.1 million of
stock-based compensation amortization related to the 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 |      | Nine Months Ended
|                                              |  |                    |      |                  
|                                              |  | September 28,      |      | September 29,     |  | September 28, |      | September 29,
|                                              |  | 2002               |      | 2001              |  | 2002          |      | 2001         
|                                              |  |                    |      |                   |  |               |      |              
|                                              |  |                   
|                                              |  | (In millions)     
|SG&A expense                                  |  | $                  | 34.8 |                   |  | $             | 48.0 |               |  | $ | 111.4 |   |  | $ | 174.5 |  
|Stock-based compensation expense              |  |                    | (0.1 | )                 |  |               | (0.5 | )             |  |   | (0.5  | ) |  |   | (0.9  | )
|Amortization related to DSS restricted shares |  |                    |     |                   |  |               | (1.1 | )             |  |   | (1.0  | ) |  |   | (8.1  | )
|                                              |  |                    |      |                   |  |               |      |               |  |   |       |   |  |   |       |  
|                                              |  | $                  | 34.7 |                   |  | $             | 46.6 |               |  | $ | 109.9 |   |  | $ | 164.9 |  
|                                              |  |                    |      |                   |  |               |      |               |  |   |       |   |  |   |       |  

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



| |                                                          
| | ---------------------------------------------------------
| | Purchased In-process Research and Development
    (IPR&D)

During September 2001, the Company expensed
IPR&D costs of $0.4 million as a result of the
acquisition of MMC. As a result of the business combination
transaction with Quantum HDD in April 2001, the Company
expensed IPR&D costs of $94.7 million. These amounts
were expensed because the acquired technology had not yet
reached technological feasibility and had no future alternative
uses. For additional information regarding the MMC and Quantum
HDD acquisitions and the costs associated with purchased
in-process research and development, see Note 3 of the
Notes to Condensed Consolidated Financial Statements.

27



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##### Table of Contents





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

During the three month period ended
September 28, 2002, we recorded a restructuring charge of
$9.5 million associated with closure of one of our
facilities located in California. The amount comprised
$8.9 million of future non-cancelable lease payments which
are expected to be paid over several years based on the
underlying lease agreement, and the write-off of
$0.6 million in leasehold improvements.



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

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



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

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

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

|                                       |  |                    |     |                   |  |               |     |               |  |   |     |  |  |   |     | 
|-------------------------------------- |  | ------------------ | --- | ----------------- |  | ------------- | --- | ------------- |  | - | --- |  |  | - | --- | 
|                                       |  |                    |     |                  
|                                       |  | Three Months Ended |     | Nine Months Ended
|                                       |  |                    |     |                  
|                                       |  | September 28,      |     | September 29,     |  | September 28, |     | September 29,
|                                       |  | 2002               |     | 2001              |  | 2002          |     | 2001         
|                                       |  |                    |     |                   |  |               |     |              
|                                       |  |                   
|                                       |  | (In millions)     
|Cost of revenues                       |  | $                  | 0.1 |                   |  | $             | 0.2 |               |  | $ | 0.3 |  |  | $ | 0.5 | 
|Research and development               |  |                    | 0.5 |                   |  |               | 1.4 |               |  |   | 1.8 |  |  |   | 3.0 | 
|Selling, general and administrative    |  |                    | 0.1 |                   |  |               | 0.9 |               |  |   | 1.3 |  |  |   | 2.5 | 
|                                       |  |                    |     |                   |  |               |     |               |  |   |     |  |  |   |     | 
|Total stock-based compensation expense |  | $                  | 0.7 |                   |  | $             | 2.5 |               |  | $ | 3.4 |  |  | $ | 6.0 | 
|                                       |  |                    |     |                   |  |               |     |               |  |   |     |  |  |   |     | 

As of September 28, 2002, $1.8 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 compensation, recorded as prepaid expense, and is
amortized to expenses over the vesting period as the vesting

28



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##### Table of Contents



of the shares are subject to continued employment
with Maxtor. Amortization as of September 28, 2002 was as
follows:


|                                                        |  |                    |   |                   |  |               |     |               |  |   |     |  |  |   |      | 
|------------------------------------------------------- |  | ------------------ | - | ----------------- |  | ------------- | --- | ------------- |  | - | --- |  |  | - | ---- | 
|                                                        |  |                    |   |                  
|                                                        |  | Three Months Ended |   | Nine Months Ended
|                                                        |  |                    |   |                  
|                                                        |  | September 28,      |   | September 29,     |  | September 28, |     | September 29,
|                                                        |  | 2002               |   | 2001              |  | 2002          |     | 2001         
|                                                        |  |                    |   |                   |  |               |     |              
|                                                        |  |                   
|                                                        |  | (In millions)     
|Cost of revenues                                        |  | $                  |  |                   |  | $             | 0.4 |               |  | $ | 0.3 |  |  | $ | 2.7  | 
|Research and development                                |  |                    |  |                   |  |               | 3.0 |               |  |   | 2.8 |  |  |   | 22.7 | 
|Selling, general and administrative                     |  |                    |  |                   |  |               | 1.1 |               |  |   | 1.0 |  |  |   | 8.1  | 
|                                                        |  |                    |   |                   |  |               |     |               |  |   |     |  |  |   |      | 
|Total amortization related to DSS restricted
    shares |  | $                  |  |                   |  | $             | 4.5 |               |  | $ | 4.1 |  |  | $ | 33.5 | 
|                                                        |  |                    |   |                   |  |               |     |               |  |   |     |  |  |   |      | 



| |                                                         
| | --------------------------------------------------------
| | Amortization of Goodwill and Other Intangible
    Assets

Amortization of other intangible assets
represents the amortization of customer list and other current
products and technology, arising from our acquisitions of the
Quantum HDD business in April 2001 and MMC in September 2001.
The net book value of these intangibles at September 28,
2002 was $167.5 million. Amortization of other intangible assets
was $20.6 million and $61.7 million, in the three and nine
months ended September 28, 2002, respectively, compared to
$60.8 million and $120.2 million in the corresponding
period in fiscal year 2001. The decrease was due to the
cessation of the amortization of goodwill and workforce in 2002,
as a consequence of adopting Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). The three and nine months ended
September 29, 2001 reflects $37.5 million and
$76.7 million of goodwill amortization, respectively.

On December 30, 2001, the Company adopted
SFAS 142, which 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. In compliance with SFAS
No. 142:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We reclassified $31.1 million, net of
    accumulated amortization, in workforce assets to goodwill and we
    ceased amortizing the resulting net goodwill balance of
    $846.0 million. Accordingly, there are no charges for the
    amortization of goodwill in 2002 or thereafter.                                                                                                                                                                                                                                                                                                                                   
|
| |  | SFAS No. 142 prescribes a two-phase
    transitional process for impairment testing of goodwill. The
    first phase, required to be completed by June 30, 2002,
    screens for impairment as of January 1, 2002. The second
    phase (if necessary), required to be completed by
    December 31, 2002, measures the impairment. The Company
    completed its first phase impairment analysis during the second
    quarter of 2002 and found no instances of impairment of its
    recorded goodwill; accordingly, the second testing phase, absent
    future indicators of impairment, is not necessary during 2002.
|
| |  | The net book value of goodwill will be reviewed
    for impairment annually and whenever there is indication that
    the value of the goodwill may be impaired. Any resulting
    impairment will be recorded in the income statement in the
    period it is identified and quantified.                                                                                                                                                                                                                                                                                                                                  

Amortization of other intangible assets is
computed over the estimated useful lives of the respective
assets, generally one to seven years. The Company expects
amortization expense on intangible assets to be
$20.6 million for the remainder of fiscal 2002,
$82.2 million in fiscal 2003, $37.0 million in fiscal
2004, $21.9 million in fiscal 2005, and $5.8 million
in fiscal 2006, at which time the intangible assets will be
fully amortized.

29



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##### Table of Contents



The following tables present the impact of SFAS
142 on net loss and net loss per share had the standard been in
effect for the three and nine months ended September 29,
2001 (in thousands, except per share amounts):

|                                                                                  |                                                                                                         |                    |          |                    |  |               |          |               |  |   |          |   |  |   |          |        | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------ | -------- | ------------------ |  | ------------- | -------- | ------------- |  | - | -------- | - |  | - | -------- | ------ | 
|                                                                                  |                                                                                                         |                    |          |                   
|                                                                                  |                                                                                                         | Three Months Ended |          | Three Months Ended
|                                                                                  |                                                                                                         |                    |          |                   
|                                                                                  |                                                                                                         | September 28,      |          | September 29,      |  | September 28, |          | September 29,
|                                                                                  |                                                                                                         | 2002               |          | 2001               |  | 2002          |          | 2001         
|                                                                                  |                                                                                                         |                    |          |                    |  |               |          |              
|Net loss from continuing operations 
    as reported                             |                                                                                                         | $                  | (105,470 | )                  |  | $             | (153,177 | )             |  | $ | (264,150 | ) |  | $ | (448,908 | )     
|Adjustments:                                                                      |                                                                                                         |                    |          |                    |  |               |          |               |  |   |          |   |  |   |          |       
|                                                                                  | Amortization of goodwill                                                                                |                    |          |                   |  |               |          | 35,800        |  |   |          |  |  |   |          | 71,601 | 
|                                                                                  | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |                    |          |                   |  |               |          | 4,591         |  |   |          |  |  |   |          | 7,881  | 
|                                                                                  |                                                                                                         |                    |          |                    |  |               |          |               |  |   |          |   |  |   |          |       
|                                                                                  | Net adjustments                                                                                         |                    |          |                   |  |               |          | 40,391        |  |   |          |  |  |   |          | 79,482 | 
|                                                                                  |                                                                                                         |                    |          |                    |  |               |          |               |  |   |          |   |  |   |          |       
|Net loss from continuing operations 
    adjusted                                |                                                                                                         | $                  | (105,470 | )                  |  | $             | (112,786 | )             |  | $ | (264,150 | ) |  | $ | (369,426 | )     
|                                                                                  |                                                                                                         |                    |          |                    |  |               |          |               |  |   |          |   |  |   |          |       
|Basic and diluted net loss per share from
    continuing operations  as reported |                                                                                                         | $                  | (0.44    | )                  |  | $             | (0.64    | )             |  | $ | (1.11    | ) |  | $ | (2.28    | )     
|Basic and diluted net loss per share from
    continuing operations  adjusted    |                                                                                                         | $                  | (0.44    | )                  |  | $             | (0.47    | )             |  | $ | (1.11    | ) |  | $ | (1.88    | )     

|                                                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |        | 
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------------ | -------- | ----------------- |  | ------------- | -------- | ------------- |  | - | -------- | - |  | - | -------- | ------ | 
|                                                       |                                                                                                         |                    |          |                  
|                                                       |                                                                                                         | Three Months Ended |          | Nine Months Ended
|                                                       |                                                                                                         |                    |          |                  
|                                                       |                                                                                                         | September 28,      |          | September 29,     |  | September 28, |          | September 29,
|                                                       |                                                                                                         | 2002               |          | 2001              |  | 2002          |          | 2001         
|                                                       |                                                                                                         |                    |          |                   |  |               |          |              
|Net loss  as reported                                 |                                                                                                         | $                  | (163,611 | )                 |  | $             | (165,727 | )             |  | $ | (337,651 | ) |  | $ | (484,156 | )     
|Adjustments:                                           |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|                                                       | Amortization of goodwill                                                                                |                    |          |                  |  |               |          | 37,484        |  |   |          |  |  |   |          | 76,654 | 
|                                                       | Amortization of acquired workforce intangibles
    previously classified as purchased intangible assets |                    |          |                  |  |               |          | 4,627         |  |   |          |  |  |   |          | 7,989  | 
|                                                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|                                                       | Net adjustments                                                                                         |                    |          |                  |  |               |          | 42,111        |  |   |          |  |  |   |          | 84,643 | 
|                                                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|Net loss  adjusted                                    |                                                                                                         | $                  | (163,611 | )                 |  | $             | (123,616 | )             |  | $ | (337,651 | ) |  | $ | (399,513 | )     
|                                                       |                                                                                                         |                    |          |                   |  |               |          |               |  |   |          |   |  |   |          |       
|Basic and diluted net loss per share 
    as reported |                                                                                                         | $                  | (0.68    | )                 |  | $             | (0.69    | )             |  | $ | (1.42    | ) |  | $ | (2.46    | )     
|Basic and diluted net loss per share 
    adjusted    |                                                                                                         | $                  | (0.68    | )                 |  | $             | (0.52    | )             |  | $ | (1.42    | ) |  | $ | (2.03    | )     



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

|                            |  |                    |     |               |  |                   |      |               |  |               |     |        |  |   |      |   |  |   |      |   |  |   |       |  
|--------------------------- |  | ------------------ | --- | ------------- |  | ----------------- | ---- | ------------- |  | ------------- | --- | ------ |  | - | ---- | - |  | - | ---- | - |  | - | ----- | -
|                            |  |                    |     |               |  |                   |      |              
|                            |  | Three Months Ended |     |               |  | Nine Months Ended |      |              
|                            |  |                    |     |               |  |                   |      |              
|                            |  | September 28,      |     | September 29, |  |                   |      | September 28, |  | September 29, |     |       
|                            |  | 2002               |     | 2001          |  | Change            |      | 2002          |  | 2001          |     | Change
|                            |  |                    |     |               |  |                   |      |               |  |               |     |       
|                            |  |                   
|                            |  | (Unaudited)       
|                            |  | (In millions)     
|Interest expense            |  | $                  | 7.1 |               |  | $                 | 6.2  |               |  | $             | 0.9 |        |  | $ | 20.2 |   |  | $ | 14.7 |   |  | $ | 5.5   |  
|Interest and other income   |  | $                  | 2.9 |               |  | $                 | 2.8  |               |  | $             | 0.1 |        |  | $ | 8.3  |   |  | $ | 20.6 |   |  | $ | (12.3 | )
|Other income (loss)         |  | $                  | 0.6 |               |  | $                 | (0.5 | )             |  | $             | 1.1 |        |  | $ | 2.2  |   |  | $ | (1.1 | ) |  | $ | 3.3   |  
|As a percentage of revenue: |  |                    |     |               |  |                   |      |               |  |               |     |        |  |   |      |   |  |   |      |   |  |   |       |  
|Interest expense            |  |                    | 0.9 | %             |  |                   | 0.6  | %             |  |               |     |        |  |   | 0.7  | % |  |   | 0.5  | % |  |   |       |  
|Interest and other income   |  |                    | 0.4 | %             |  |                   | 0.3  | %             |  |               |     |        |  |   | 0.3  | % |  |   | 0.8  | % |  |   |       |  
|Other loss                  |  |                    | 0.1 | %             |  |                   |     |               |  |               |     |        |  |   | 0.1  | % |  |   |     |   |  |   |       |  

30



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

Interest expense increased $0.9 million and
$5.5 million for the three and nine months ended
September 28, 2002, respectively, as compared to the
corresponding periods in fiscal year 2001. The increase in
interest expense for the three months ended September 28,
2002 compared to the corresponding period in fiscal year 2001
was primarily due to the debt assumed in conjunction with the
acquisition of MMC on capital equipment loan and leases. The
increase in interest expense for the nine months ended
September 28, 2002 compared to the corresponding period in
fiscal year 2001 was primarily due to the debt assumed in
conjunction with the acquisition of MMC on capital equipment
loan and leases, the obligation to reimburse for the interest
due on the Quantum HDD pro rata portion of Quantums
convertible subordinated notes, and the monthly accretion of
interest expense related to facility exit costs in connection
with our acquisition of the Quantum HDD business. Total
short-term and long-term outstanding borrowings were
$251.4 million as of September 28, 2002 compared to
$299.5 million as of September 29, 2001.



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

Interest and other income increased $0.1 and
decreased $12.3 million for the three and nine-month
periods ended September 28, 2002, respectively, compared to
the corresponding periods in fiscal year 2001. The decrease in
interest and other income for the nine months of fiscal 2002
compared to the corresponding period in 2001 was largely due to
reductions in cash equivalents and marketable securities. Total
cash and cash equivalents, restricted cash and marketable
securities were $410.5 million as of September 28,
2002 compared to $645.1 million as of September 29,
2001. See the Liquidity and Capital Resources
discussion for further information.



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

|                                                                      |  |                    |        |               |  |                   |        |               |  |               |      |        |  |   |        |   |  |   |        |   |  |   |       |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | ------------- |  | ----------------- | ------ | ------------- |  | ------------- | ---- | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                                                                      |  |                    |        |               |  |                   |        |              
|                                                                      |  | Three Months Ended |        |               |  | Nine Months Ended |        |              
|                                                                      |  |                    |        |               |  |                   |        |              
|                                                                      |  | September 28,      |        | September 29, |  |                   |        | September 28, |  | September 29, |      |       
|                                                                      |  | 2002               |        | 2001          |  | Change            |        | 2002          |  | 2001          |      | Change
|                                                                      |  |                    |        |               |  |                   |        |               |  |               |      |       
|                                                                      |  |                   
|                                                                      |  | (Unaudited)       
|                                                                      |  | (In millions)     
|Loss from continuing operations before provision
    for income taxes |  | $                  | (104.9 | )             |  | $                 | (152.0 | )             |  | $             | 47.1 |        |  | $ | (262.8 | ) |  | $ | (446.5 | ) |  | $ | 183.7 |  
|Provision for income taxes                                            |  | $                  | 0.5    |               |  | $                 | 1.1    |               |  | $             | (0.6 | )      |  | $ | 1.3    |   |  | $ | 2.4    |   |  | $ | (1.1  | )

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 its 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 our acquisition
of the Quantum HDD business, Maxtor, as successor to Quantum
HDD, and Quantum are allocated their share of Quantums
income tax liability for periods before the split-off,
consistent with past practices and as if the Quantum HDD and
Quantum DSS business divisions had been separate and independent
corporations. To

31



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##### Table of Contents



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 the split-off, limited in the aggregate to
$142.0 million plus 50% of any excess over
$142.0 million, excluding any required gross-up payment.
The Company recorded approximately $142.0 million in other
liabilities associated with Maxtors agreement to reimburse
Quantum Corporation for income tax liabilities for certain years
prior to the acquisition of the Quantum HDD business by Maxtor.


We purchased a $340.0 million insurance
policy covering the risk that the split-off of the Quantum HDD
business 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 split-off 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 split-off. 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 split-off 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 the acquisition of
the Quantum HDD business in April 2001. The deferred taxes were
recorded principally to reflect the taxes which would become
payable upon the repatriation of the earnings which was invested
abroad by Quantum HDD as of April 1, 2001.



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

On August 15, 2002, we announced our
decision to discontinue the manufacturing and sales of our
MaxAttachTM branded network attached storage
products. 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 operations for all periods
presented. Our liabilities (no remaining assets) have been
segregated from continuing operations in the accompanying
consolidated balance sheet as of September 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 nine months ended
September 28, 2002 and September 29, 2001 are as
follows (in millions):

|                                     |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                     |  |                    |         |                  
|                                     |  | Three Months Ended |         | Nine Months Ended
|                                     |  |                    |         |                  
|                                     |  | September 28,      |         | September 29,     |  | September 28, |         | September 29,
|                                     |  | 2002               |         | 2001              |  | 2002          |         | 2001         
|                                     |  |                    |         |                   |  |               |         |              
|Revenue from discontinued operations |  | $                  | 1,363   |                   |  | $             | 9,827   |               |  | $ | 20,384  |   |  | $ | 23,040  |  
|Loss from discontinued operations    |  | $                  | (58,141 | )                 |  | $             | (12,550 | )             |  | $ | (73,501 | ) |  | $ | (35,248 | )

Included in the 2002 loss from the NSG
discontinued operations are the following significant charges
(in millions):

|                                          |  |   |      | 
|----------------------------------------- |  | - | ---- | 
|Personnel related                         |  | $ | 13.0 | 
|Goodwill and other intangibles write-offs |  |   | 32.5 | 
|Non-cancelable purchase commitments       |  |   | 4.2  | 

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Liquidity and Capital Resources



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

Cash, cash equivalents, marketable securities and
restricted cash were $410.5 million at September 28,
2002 compared to $645.8 million at December 29, 2001.
Our restricted cash balance at September 28, 2002 and
December 29, 2001 was $56.5 million and $98.6 million,
respectively, which is pledged as collateral for certain
stand-by letters of credit issued by commercial banks. The
reduction of cash security required for a letter of credit
during the third quarter accounted for the decrease in
restricted cash of $42.2 million from the previous quarter.
We have a net deferred tax liability of $196.4 million,
which could become payable upon repatriation of the earnings
invested abroad.

Operating activities used cash of
$68.8 million in the nine months ended September 28,
2002. Uses of cash from operating activities reflect our net
loss of $264.2 million, excluding discontinued operations.
This was offset by adjustments for depreciation of
$112.9 million, amortization of intangible assets of
$61.7 million, restructuring charge of $9.5 million
related to the closure of one of our facilities and
$7.5 million of other non-cash adjustments.

Sources of cash from operating activities in the
nine months ended September 28, 2002 include a
$67.2 million decrease in accounts receivable due to the
decline in sales activity and a $71.2 million increase in
accounts payable primarily due to a shift to vendors with longer
payment terms and $4.0 million decrease in other assets.
This was offset by a $116.0 million decrease in accrued and
other liabilities primarily due to the satisfaction of
warranty-related obligations of $61.2 million, change in
the balance of accrued expenses of $23.9 million primarily
due to acquisition-related facilities expenses,
$15.7 million primarily due to acquisition-related
severance expenses, $9.5 million due to the closure of one
of our facilities and $5.7 million in income taxes payable
and other adjustments. In addition, sources of cash from
operating activities was offset by $22.6 million increase
in inventory and other current assets due to increased factory
volumes as a result of the transition to our Singapore
manufacturing facility and difficulties encountered in ramping
up production of new products. We have made good progress in
resolving our manufacturing issues related to our new products.

Net cash provided by investing activities was
$19.0 million in the nine months ended September 28,
2002. Investing activities primarily reflects $95.4 million
in net proceeds from marketable securities (net of purchases)
and a decrease in restricted cash of $42.2 million due to
the reduction of cash security required for a letter of credit
during the third quarter offset by investments made in property,
plant and equipment of $118.7 million.

Net cash used in financing activities was
$20.1 million for the nine months ended September 28,
2002. This was primarily attributable to the repayment of debt
and capital lease obligations, including the payment in full of
the principal balance owed to Hynix in April 2002 and the
repayments of capital lease obligations described under
 Related Party Transactions, and purchase
of publicly traded debt in the aggregate amount of
$42.4 million, offset by proceeds from employee stock
purchases and stock options exercised of $22.9 million.

Net cash used in discontinued operations was
$27.6 million for the nine months ended September 28,
2002, compared to $33.6 million for the nine months ended
September 29, 2001.

We believe that our existing cash and cash
equivalents, short term investment and capital resources,
together with cash generated from operations and available
borrowing capacity will be sufficient to fund our operations
through at least the next twelve months. We require substantial
working capital to fund our business, particularly to finance
accounts receivable and inventory, and to invest in property,
plant and equipment. During 2002, capital expenditures are
expected to be in the range of $160 million to
$180 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. However, 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.

33



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

Future payments due under debt and capital lease
obligations as of September 28, 2002 are reflected in the
following table (in thousands):

|                              |  |              |        |               |  |                   |       |              |  |           |        |       |  |   |        |  |  |   |        |  |  |   |         | 
|----------------------------- |  | ------------ | ------ | ------------- |  | ----------------- | ----- | ------------ |  | --------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|                              |  |              |        |               |  | Pro Rata          |       |              |  |           |        |      
|                              |  |              |        | Economic      |  | Portion           |       |              |  |           |        |      
|                              |  |              |        | Development   |  | of Quantum        |       |              |  |           |        |      
|                              |  | 5.75%        |        | Board of      |  | Corporations 7%  |       |              |  | Equipment |        |      
|                              |  | Subordinated |        | Singapore     |  | Subordinated      |       |              |  | Loans and |        |      
|                              |  | Debentures   |        | Loan Due      |  | Convertible Notes |       |              |  | Capital   |        |      
|                              |  | Due 2012(1)  |        | March 2004(2) |  | Due 2004(3)       |       | Mortgages(4) |  | Leases(5) |        | Total
|                              |  |              |        |               |  |                   |       |              |  |           |        |      
|Fiscal Year Ending            |  |              |        |               |  |                   |       |              |  |           |        |       |  |   |        |  |  |   |        |  |  |   |         | 
|2002 (remaining three months) |  | $            |       |               |  | $                 |      |              |  | $         |       |       |  | $ | 341    |  |  | $ | 7,163  |  |  | $ | 7,504   | 
|2003                          |  |              | 5,000  |               |  |                   | 6,455 |              |  |           |       |       |  |   | 1,444  |  |  |   | 23,356 |  |  |   | 36,255  | 
|2004                          |  |              | 5,000  |               |  |                   | 3,227 |              |  |           | 95,833 |       |  |   | 1,583  |  |  |   | 11,577 |  |  |   | 117,220 | 
|2005                          |  |              | 5,000  |               |  |                   |      |              |  |           |       |       |  |   | 1,734  |  |  |   | 6,538  |  |  |   | 13,272  | 
|2006                          |  |              | 5,000  |               |  |                   |      |              |  |           |       |       |  |   | 30,847 |  |  |   |       |  |  |   | 35,847  | 
|Thereafter                    |  |              | 41,327 |               |  |                   |      |              |  |           |       |       |  |   |       |  |  |   |       |  |  |   | 41,327  | 
|                              |  |              |        |               |  |                   |       |              |  |           |        |       |  |   |        |  |  |   |        |  |  |   |         | 
|Total                         |  | $            | 61,327 |               |  | $                 | 9,682 |              |  | $         | 95,833 |       |  | $ | 35,949 |  |  | $ | 48,634 |  |  | $ | 251,425 | 
|                              |  |              |        |               |  |                   |       |              |  |           |        |       |  |   |        |  |  |   |        |  |  |   |         | 



---



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | For the remainder of fiscal year 2002 through
    fiscal year 2012, we will make interest payments of
    $26.6 million.          
|   
|(2) | For the remainder of fiscal year 2002 through
    fiscal year 2004, we will make interest payments of
    $0.3 million.           
|   
|(3) | For the remainder of fiscal year 2002 through
    fiscal years 2003 and 2004, we will make interest payments of
    $12.3 million.
|   
|(4) | For the remainder of fiscal year 2002 through
    fiscal year 2006, we will make interest payments of
    $12.3 million.          
|   
|(5) | For the remainder of fiscal year 2002 through
    fiscal years 2003 and 2004, we will make interest payments of
    $4.5 million. 

The Company did not enter into any significant
operating lease obligations related to principal facilities or
machinery and equipment during the three and nine month periods
ended September 28, 2002. For additional information
regarding the Companys operating lease obligations, see
the Companys Annual Report on Form 10-K for the
fiscal year ended December 29, 2001.

In July 1998, we entered into an accounts
receivable securitization program (the Program) with
a group of commercial banks (the Banks). On
November 15, 2001, we amended and restated the Program,
extending the Program for another three years and increasing the
available size of the Program from $200 million to
$300 million. Under the Program, we sell our U.S. and
Canadian accounts receivable via a special purpose entity,
Maxtor Receivables Corporation (MRC). MRC, our
wholly-owned subsidiary, sells the Banks an ownership interest
in our accounts receivable on a revolving basis, in an amount
determined by an eligible pool of receivables. The
Banks purchases of interests in our accounts receivable
results in the amount of the purchases being excluded from our
consolidated accounts receivable, and the proceeds of the sale
being included in our consolidated cash balance. The Banks had
purchased a $45.0 million interest in our accounts
receivable under this Program at September 28, 2002.

We are subject to certain defined
Liquidation Events under this Program, including a
minimum tangible net worth test and a requirement to maintain a
specified minimum unrestricted cash balance. Our Singapore Loan
is subject to two financial covenants, including a minimum
tangible net worth test, the calculation of which is the same as
defined in the Program, and a minimum consolidated cash balance
requirement. As of December 29, 2001, we concluded that we
would not be in compliance with our tangible

34



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net worth covenant under the Program and under
the Singapore loan. We were, however, in compliance with the
minimum cash balance requirements under the Program and the
Singapore loan.


On February 15, 2002, we received a waiver
and amendment from the lender for the Singapore loan relating to
the tangible net worth covenant. On the same date, the Banks
participating in the Program agreed to a first amendment through
May 15, 2002 to the Program. In each case, the definition
for calculating tangible net worth was amended to include an
adjustment associated with the purchase price accounting for the
acquisition of the Quantum HDD business. After giving effect to
this first amendment, we were in compliance with the tangible
net worth covenant.

On March 15, 2002, the first amendment was
superceded by a second amendment reflecting the terms of the
first amendment and extending the terms of the first amendment
for the duration of the Program. At this time the Program was
reduced from $300 million to $210 million due to the
withdrawal of one participating bank. In 2002, the Banks
monthly purchases of interests in our receivables under the
Program has fluctuated between $35.5 million and
$90.7 million and averaged $55.8 million during the
nine months ended September 28, 2002.

On May 28, 2002, the banks participating in
the Program approved a third amendment, which modified the
tangible net worth covenant and the minimum unrestricted cash
requirement. On June 20, 2002, our Singapore loan was
amended to the same effect. After giving effect to the third
amendment and the amendment of the Singapore loan, the Company
was in compliance with all covenants.

As of September 28, 2002, we concluded that
we would not be in compliance with the tangible net worth
covenant under the Program and the Singapore loan. On
October 22, 2002, we received a waiver of the default as to
the tangible net worth covenant for the quarter ended
September 28, 2002 from the lender of the Singapore loan.
After giving effect to this waiver, we were in compliance with
the tangible net worth covenant under the Singapore loan. On
October 21, 2002, the Banks participating in the Program
agreed to waive a violation of the tangible net worth covenant
for the period ended September 30, 2002 on condition that
we are able to comply with a lower tangible net worth covenant.
After giving effect to the waiver, we were in compliance under
the Program. Pursuant to the fourth amendment on
November 5, 2002, we and the Banks agreed to reduce the
Program size from $210 million to $100 million, cap
the purchase limit at $45 million and extend the liquidity
agreement to December 13, 2002, in anticipation of a new
program to be in place by December 13, 2002. We do not
expect the reduction in the size of the Program will have a
material adverse impact on our liquidity.

We are in discussions with lenders regarding a
possible replacement facility for the Program of up to
$100 million; however, we do not have a commitment letter
for such replacement facility at this time. We believe that if
we receive a commitment for such a replacement facility, the
Banks will extend the Program as amended for a reasonable period
beyond December 13, 2002 to permit us to negotiate a
definitive agreement for such facility. If, however, we do not
receive a commitment on terms acceptable to us, or at all, or
the Banks decline to extend the program beyond December 13,
2002, there could be a liquidation event under the Program in
the quarter ending December 29, 2002, and we will not have
access to the Program beyond that date.

If a liquidation event or termination of the
Program were to occur, the Banks would be entitled to all cash
collections on our accounts receivables in the United States
until their net investment had been recovered. We do not expect
that such an event by itself would have a significant adverse
impact on our liquidity, given the fact that we believe the
Banks net investment would be satisfied shortly following
such liquidation event or termination, based on our historical
collection rate of receivables. However, we would no longer have
access to the Program following such liquidation event or
termination. We do not expect that the unavailability of the
Program would have a material adverse effect on our liquidity.

We may not satisfy the minimum tangible net worth
covenant under the Singapore loan at the end of the quarter
ending December 29, 2002. There can be no assurance that
the Singapore lender will agree to any amendments or provide a
waiver for any such covenant violation. In the event that a
default occurs in a financial covenant under our Singapore loan,
and we do not receive a waiver, we may be required to repay the

35



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loan earlier than anticipated; however, we do not
expect that such an earlier repayment of the Singapore loan
would have a material adverse effect on our liquidity.


Our failure to meet the tangible net worth
covenant under the Program and the Singapore loan may adversely
impact our ability in the future to borrow funds on as favorable
terms, or at all.



| |                           
| | --------------------------
| | Related Party Transactions

In 1994, Hyundai Electronics Industries
HEI and certain of its affiliates had purchased 40%
of our outstanding common stock for $150.0 million in cash.
In early 1996, Hynix, formerly Hyundai Electronics America, or
HEA, acquired all of the remaining shares of our common stock in
a tender offer and merger for $215.0 million in cash and
also acquired all of our common stock held by HEI and its
affiliates. We operated as a wholly-owned subsidiary of Hynix
until completion of our initial public offering on July 31,
1998, which reduced the ownership interest of Hynix to below
50%. In April 2001 as a result of our acquisition of the Quantum
HDD business, Hynixs ownership in Maxtor was reduced to
approximately 17% of the outstanding common stock. As described
below, Hynix sold Maxtor shares to the public and to us in
October 2001, reducing Hynixs ownership to 5.17% at
December 29, 2001 and distributed the balance of Maxtor
shares to the beneficiaries of the DECS Trust in February 2002,
and accordingly is no longer an investor in Maxtor.

On September 2, 2001, we completed our
acquisition of MMC which had previously been 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 constituted 95% of
MMCs annual revenues. The primary business reason for our
acquisition of MMC was to provide us with a reliable source of
supply of media for hard disk drives. A fairness opinion was
delivered to Maxtors Board of Directors by a nationally
recognized investment banking firm in connection with the MMC
acquisition. The fairness opinion concluded that the
consideration to be paid by Maxtor for MMC was fair to Maxtor,
from a financial point of view. The acquisition of MMC was
approved by the Maxtor Boards Affiliated Transactions
Committee and was determined by the Committee to be fair to and
in the best interests of Maxtor and its stockholders. The
Affiliated Transactions Committee was comprised entirely of
directors with no relationship with Hynix and its affiliates.
The acquisition was accounted for as a purchase with a total
cost of $17.9 million, which consisted of cash
consideration of $1 million, $16 million of loan
forgiveness, and $0.9 million of direct transaction costs.
In connection with the acquisition, we also assumed liabilities
of $105.7 million. As part of these liabilities, we assumed
a note for $7.3 million owing to Hynix, which bore no
interest through March 31, 2002; thereafter, unpaid
principal amounts bore interest at 9% per annum (the
Maxtor Note). On January 5, 2001, Hynix issued
a promissory note to Maxtor for $2 million in principal
amount, representing Hynixs share of a settlement relating
to litigation between Maxtor, Hynix and Stormedia. This note
bore interest at 9% per annum, with the payment of principal and
interest due on December 31, 2001 (the Hynix
Note). Hynix and Maxtor agreed that the principal and
accrued interest on the Hynix Note as of December 28, 2001
was offset against the principal amount of the Maxtor Note, such
that the Hynix Note was fully paid and the Maxtor Note had a
principal amount of approximately $5.1 million as of
December 29, 2001; the outstanding balance under the Maxtor
Note was fully paid on April 5, 2002. As a result of the
MMC acquisition, MMCs results of operations are included
in our financial statements from the date of acquisition.

In October 2001, Hynix sold approximately
23.3 million shares of Maxtor common stock in a registered
public offering. At the same time as Hynixs sale of Maxtor
common stock to the public, we purchased an additional
5.0 million shares of its common stock from Hynix. Our
purchase of our shares from Hynix was on the same terms as
Hynixs sale of shares to the public at $4 per share for an
aggregate purchase price of $20.0 million. The repurchase
of our shares was intended to improve our capital structure,
increase shareholder returns, and increase the price of our
stock. The repurchase of the shares from Hynix was approved by
the Maxtor Boards Affiliated Transaction Committee and
determined to be in the best interest of Maxtor and its
stockholders. As a result of Hynixs sale of its Maxtor
shares to the public and to Maxtor, Hynixs ownership in
Maxtor was reduced to 5.17% of the outstanding common stock as
of December 29, 2001. In February 2002, Hynix distributed
all of its remaining shares of Maxtor common stock to the
beneficiaries of the DECS trust and thus is no longer a
stockholder of Maxtor.

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In connection with the acquisition of MMC, we
assumed equipment loans and capital leases. As of June 29,
2002, there was $47.6 million outstanding under these
obligations, which have maturity dates ranging from December
2001 to October 2004 and interest rates averaging 9.9%. Hynix is
continued as a guarantor on these leases. As a result of the MMC
acquisition, MMCs results of operations are included in
our financial statements from the date of acquisition.

Our cost of revenue includes certain component
parts Maxtor purchased from MMC. These purchases amounted to
$27 million and $99 million for the two and eight
months ended September 1, 2001, respectively. In August
1998, Maxtor entered into an agreement with MMC with respect to
the pricing of future purchases that provided for pricing
discounts in return for a purchase volume commitment based on a
percentage of our total media purchases through
September 30, 2001. The pricing discounts generally ranged
from 2% to 4% off of competitive prices. As described above,
Maxtor completed its acquisition of MMC on September 2,
2001.

Our cost of revenue also includes certain DRAM
chip purchases from Hynix Semiconductor, Inc., HSI,
formerly HEI. Hynix is treated identically to its competitors in
the process by which commodity electronics, principally DRAMs,
are selected, qualified, and purchased; pricing is negotiated
with selected suppliers on the basis of suppliers bids and
market information. Our purchases from HSI totaled
$26.5 million in fiscal year 1999, $41.6 million in
fiscal year 2000 and $19.3 million in fiscal year 2001.

Pursuant to a sublicense agreement with HEI, we
are obligated to pay a portion of an IBM license royalty fee
otherwise due from HEI. Such payments are due in annual
installments through 2007, and are based upon the license fee
separately negotiated on an arms length basis between HEI
and IBM. For the years ended January 1, 2000,
December 30, 2000 and December 29, 2001, we recorded
$1.9 million of expenses each year in connection with this
obligation.

Hynix was an unconditional guarantor of one of
our facilities leases in Milpitas, California. The aggregate
rent under the lease was $3.24 million per annum in each of
the years ended January 1, 2000, December 30, 2000 and
December 29, 2001. The lease rate was established by
arms length negotiations with the lessor based on
applicable market rates. The lease expired on March 31,
2002 and was not extended.

Recent Accounting Pronouncements

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 143
(SFAS 143), Accounting for Asset
Retirement Obligations. This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement applies to all entities.
It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset, except for certain obligations or lessees.
SFAS 143 is effective for financial statements issued for fiscal
years beginning after June 25, 2002. The Company is
currently assessing the impact of SFAS 143 on its financial
statements.

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144
(SFAS 144), Accounting for the Impairment
or Disposal of Long-lived Assets. SFAS 144 replaces
SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The
FASB issued SFAS 144 to establish a single accounting
model, based on the framework established in SFAS 121, as
SFAS 121 did not address the accounting for a segment of a
business accounted for as a discontinued operation under
APB 30, Reporting The Results of Operations-Reporting
The Effects of Disposal of a Segment of a Business, and
Extraordinary Unusual and Infrequently Occurring Events and
Transactions. SFAS 144 also resolves significant
implementation issues related to SFAS 121. Companies are
required to adopt SFAS 144 for fiscal year beginning after
December 15, 2001, but early adoption is permitted. The
adoption of SFAS 144 did not have a significant impact on
Maxtors financial statements.

On December 30, 2001, 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

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assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be
indefinite.


The Company ceased amortizing goodwill totaling
$846.0 million as of the beginning of fiscal 2002,
including $31.1 million, net of accumulated amortization,
of acquired workforce intangibles previously classified as
purchased intangible assets.

Purchased intangible assets are carried at cost
less accumulated amortization. Amortization is computed over the
estimated useful lives of the respective assets, generally one
to seven years. The Company expects amortization expense on
purchased intangible assets to be $20.6 million for the
fourth quarter of fiscal 2002, $82.2 million in fiscal
2003, $37.0 million in fiscal 2004, $21.9 million in
fiscal 2005, and $5.8 million in fiscal 2006, at which time
purchased intangible assets will be fully amortized.

In May 2002, the FASB issued SFAS No. 145,
Rescission of SFAS Nos. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections
(SFAS 145). Among other things, SFAS 145
rescinds various pronouncements regarding early extinguishment
of debt and allows extraordinary accounting treatment for early
extinguishment only when the provisions of Accounting Principles
Board Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions are met. SFAS 145 provisions
regarding early extinguishment of debt are generally effective
for fiscal years beginning after May 15, 2002. The Company
is currently assessing the impact of SFAS 145 on its
financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). This Statement addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability
for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the
liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated
after December 31, 2002. The Company is currently assessing
the impact of SFAS 146 on its financial statements.

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CERTAIN FACTORS AFFECTING FUTURE
PERFORMANCE

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

We have a history of significant losses and may
not achieve profitability. In the last five fiscal years, we
were profitable in only fiscal years 1998 and 2000 and Quantum
HDD was profitable only in fiscal year 1997. In the three and
nine month periods ended September 28, 2002, our net loss
was $163.6 million, and $337.7 million, respectively,
which included $20.6 million and $61.7 million,
respectively, for the amortization of intangible assets, charges
of $0.6 million and $6.1 million, respectively, for
stock-based compensation related to the Quantum HDD acquisition,
and restructuring charges related to facilities closures of
$9.5 million and $9.5 million, respectively. In
addition, the net loss in the three and nine months ended
September 28, 2002 included losses of $58.1 million
and $73.5 million, respectively, related to the
discontinuation of our network attached storage business in the
quarter ended September 28, 2002.

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 increase in the
industry 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 has caused us in the past several
quarters 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 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
segment 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, IBM, Samsung, Seagate Technology, and Western
Digital. Hitachi and IBM have recently announced a plan to merge
their hard disk drive businesses into a single joint venture.
Many of our competitors historically have had a number of
significant advantages, including larger market shares, a
broader array of product lines, 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
    among themselves to lower their product costs or to otherwise
    compete more effectively against us;
|
| |  | lower their product prices to gain market share;                                                                                                           
|
| |  | bundle their products with other products to
    increase demand for their products; or                                                                    
|
| |  | develop new technology which would significantly
    reduce the cost of their products.                                                                    

In addition some of our competitors produce
complete computer systems that contain hard disk drives; these
competitors may price a system in a manner which results in
sales of hard disk drives at below cost, or enter into
agreements with customers to supply hard disk drive requirements
as part of a larger supply agreement.

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Increasing competition could reduce the demand
for our products and/or the prices of our products by
introducing 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 from period-to-period by our
    primary customers, including actions by our customers canceling,
    rescheduling or deferring orders;                                                         
|
| |  | changes in product and customer mix;                                                                                                                                                                                 
|
| |  | actions by our competitors, including
    announcements of new products or technological innovations;                                                                                                                
|
| |  | our ability to execute future development and
    production ramps and utilize manufacturing assets efficiently;                                                                                                     
|
| |  | 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. As a result, 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
IT spending, particularly personal 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 impact on our
sales.

Most 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 capacity 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. If we miss a qualification
opportunity, we

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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 or products with higher capacity 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 29, 2001,
one customer, Dell Computer Corporation, accounted for
approximately 11.3% of our total revenue, and our top five
customers accounted for approximately 33.8% of our revenue. We
expect that a relatively small number of customers will continue
to account for a significant portion of our revenue, and the
proportion of our revenue from these customers could continue to
increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial
demands on us. Even if we successfully qualify a product for a
given customer, the customer generally will not be obligated to
purchase any minimum volume of products 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. For
example, Hewlett-Packard and Compaq, both of which have been key
customers, recently merged. As a combined entity,
Hewlett-Packard and Compaq may not purchase as many hard disk
drives from us in the future as they purchased in the aggregate
prior to their merger. In addition, another of our significant
customers, IBM, recently announced that it has agreed to merge
its hard disk drive business with the hard disk drive business
of Hitachi through the formation of a new entity with which IBM
has entered into a multi-year purchase agreement. As a result,
IBM may decrease its purchases from us in favor of the
newly-formed entity.

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 distribution channels continue to increase, we may
experience problems typically associated with distribution
channels such as unstable pricing, increased return rates and
other logistical

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difficulties. Our distributors also sell products
manufactured by our competitors. If our distributors favor our
competitors products over our products for any reason,
they may fail to market our products effectively or continue to
devote the resources necessary to provide us with effective
sales and, as a result, our operating results could suffer.


If we do not expand into new hard drive market
segments, or continue to maintain our presence in the hard 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 laptop computers or handheld
consumer products 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 anticipated 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 competitors
technology or feature development to remain competitive in the
hard disk drive industry. We cannot assure you that we will
successfully or timely develop or 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 the personal
computer manufacturers. This exposes us to increased credit risk
because these subcontractors are generally less capitalized than
the personal computer manufacturers themselves, 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, we may incur additional
costs.

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 aerial density,
we may have excess

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inventory. Excess inventory could materially
adversely affect our operating results and cause our operating
results to suffer.


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

Unlike some of our competitors, we do not
manufacture any of the parts used in our products, other than
media as a result of our acquisition of MMC. Instead, our
products incorporate parts and components designed by and
purchased from third party suppliers. Both we and 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 three
sources, digital signal processor/controllers from two sources
and spin/servo integrated circuits from one source. Although our
purchase of our primary supplier of media, 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 a limited number of outside
sources. As we have experienced in the past, some required parts
may be periodically in short supply. As a result, we will have
to allow for significant ordering lead times for some
components. In addition, we may have to pay significant
cancellation charges to suppliers if we cancel orders for
components because we reduce production due to market
oversupply, reduced demand, transition to new products or
technologies or for other reasons. We order the majority of our
components on a purchase order basis and we have limited
long-term volume purchase agreements with only some of our
existing suppliers. In the event that these suppliers cannot
qualify to new leading-edge technology specifications, our ramp
up of production for the new products will be delayed, and our
business, operating results and financial condition will be
adversely affected.

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

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

If we are unable to acquire needed additional
manufacturing capacity, or MKE does not meet our manufacturing
requirements, or if 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 facility in Singapore and our
relationship with MKE for the manufacture of 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. The purchase
agreement has been extended pursuant to an agreement in
principle through November 2, 2002. If we are not able to
negotiate a mutually acceptable replacement purchase agreement,
we will likely be able to continue to purchase by purchase
order, but such purchases may not be in adequate volumes or on
terms advantageous to us. In these cases, our revenue may be
lower than projected and our operating results would suffer.

We will have to negotiate pricing arrangements
with MKE on a quarterly basis. Because pricing may be fixed for
a quarter, intra quarter improvements in MKEs costs may
not be shared with us as they occur, which would negatively
impact our operating results. Any failure to reach an agreement
on competitive pricing arrangements would also negatively impact
our operating results.

If we are unable to reach agreement with MKE on
mutually acceptable purchase order terms for the manufacture of
enterprise hard disk drives, we will need to arrange for
alternative manufacturing capacity for our enterprise products.
If we fail to make such arrangements in a timely manner, in
adequate volumes or on acceptable terms, our revenue might be
lower than projected and our business, financial condition and
operating results would suffer. In addition, we will need to
acquire additional manufacturing capacity in the

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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.


In addition, our entire volume manufacturing
operations, and a portion of MKEs, are based in Singapore.
A flood, earthquake, political instability, act of terrorism or
other disaster or condition in Singapore that adversely affects
our or MKEs 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 three 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 generally
establish and, prior to the acquisition, Quantum HDD
established, a warranty provision at the time of product
shipment in an amount equal to estimated warranty expenses. We
determined that there were issues with certain Quantum HDD
products that we acquired in the acquisition, and which are no
longer being manufactured. We have established a warranty
provision for these products and have increased goodwill
associated with the acquisition to reflect pre-acquisition
contingencies related to these issues. We may incur additional
operating expenses if these steps do not reflect the actual cost
of resolving such issues; and if these 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. Quantum has also asserted
additional claims which we are evaluating. Although we believe
that we will be successful in asserting or defending these
claims in the aggregate, an unfavorable resolution of such
claims in the aggregate could harm our business, financial
condition and operating results.

If Quantum incurs non-insured tax as a result
of its split-off of Quantum HDD, our financial condition and
operating results could be negatively affected.

In connection with our acquisition of the Quantum
HDD business, we agreed to indemnify Quantum for the amount of
any tax payable by Quantum as a result of the separation of the
Quantum HDD business from Quantum Corporation (referred to as a
split-off) to the extent such tax is not covered by insurance,
unless imposition of the tax is the result of Quantums
actions, or acquisitions of Quantum stock, after the split-off.
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 split-off and the
circumstances giving rise to the tax are covered by our
indemnification obligations, we will be required to pay Quantum
the amount of the tax at that time, whether or not reimbursement
may be allowed under the insurance policy. Even if a claim is
available, made and pending under the tax opinion insurance
policy, there may be a substantial period after we pay Quantum
for the tax before the outcome of the insurance claim is finally
known, particularly if the claim is denied by the insurance
company and the denial is disputed by us and/or Quantum.
Moreover, the insurance company could prevail in a coverage
dispute. In any of these circumstances, we would have to either
use our

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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.


Our ability to use our equity for financings
or acquisitions and our attractiveness as an acquisition target
could be limited until April 3, 2003 due to restrictions we
must comply with to mitigate the risk of triggering a tax
obligation to Quantum for which we are indemnitor.

Under the federal tax rules applicable to the
treatment of our acquisition of the Quantum HDD business as a
tax-free split-off, the following events occurring during the
two-year period after the merger may cause the split-off to
become taxable to Quantum under circumstances in which the tax
opinion insurance policy will not cover the tax:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | we issue our equity securities to acquire other
    businesses or to raise financing; and
|
| |  | a 50% or greater interest in us is acquired by
    another party.                        

In addition, these restrictions could discourage
potential acquisition proposals and could delay or prevent a
change of control of the company, including offers at a price
above the then-current market price for our common stock.

We may need additional capital in the future
which may not be available on favorable terms or at all and our
ability until April 3, 2003 to issue equity securities has
been severely limited by our acquisition of Quantum
HDD.

Our business is capital intensive and we may need
more capital in the future. Our future capital requirements will
depend on many factors, including:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate of our sales growth;                                                                                                               
|
| |  | the level of our profits or losses;                                                                                                         
|
| |  | the timing and extent of our spending to expand
    manufacturing capacity, support facilities upgrades and product
    development efforts;
|
| |  | the timing and size of business or technology
    acquisitions; and                                                                         
|
| |  | the timing of introductions of new products and
    enhancements to our existing products.                                                  

To mitigate the risk of triggering a tax
obligation of Quantum for which we have indemnification
obligations as a result of our acquisition of the Quantum HDD
business, we are restricted in our ability to issue additional
equity securities to raise capital for two years after the
split-off and merger, or until April 3, 2003. In the event
we decide to raise capital by issuing equity securities, such
financing will decrease the percentage equity ownership of our
stockholders and may, depending on the price at which the equity
is sold, result in significant economic dilution to them. Our
board of directors is authorized under our charter documents to
issue preferred stock with rights, preferences or privileges
senior to those of the common stock without stockholder approval.

If we have a default under the tangible net
worth covenant for our asset securitization program and our
Singapore loan, we may be required to repay the Singapore loan
earlier than expected and may not have access to our asset
securitization program or alternative capital on as favorable
terms, or at all.

As of September 28, 2002, we concluded that
we would not be in compliance with the tangible net worth
covenant under the Program and the Singapore loan. On
October 22, 2002, we received a waiver of the default as to
the tangible net worth covenant for the quarter ended
September 28, 2002 from the lender of the Singapore loan.
After giving effect to this waiver, we were in compliance with
the tangible net worth covenant under the Singapore loan. On
October 21, 2002, the Banks participating in the Program
agreed to waive a violation of the tangible net worth covenant
for the period ended September 30, 2002 on condition that
we are able to comply with a lower tangible net worth covenant.
After giving effect to the waiver, we were in

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compliance under the Program. Pursuant to the
fourth amendment on November 5, 2002, we and the Banks
agreed to reduce the Program size from $210 million to
$100 million, cap the purchase limit at $45 million
and extend the liquidity agreement to December 13, 2002, in
anticipation of a new program to be in place by
December 13, 2002. We do not expect the reduction in the
size of the Program will have a material adverse impact on our
liquidity.


We are in discussions with lenders regarding a
possible replacement facility for the Program of up to
$100 million; however, we do not have a commitment letter
for such replacement facility at this time. We believe that if
we receive a commitment for such a replacement facility, the
Banks will extend the Program as amended for a reasonable period
beyond December 13, 2002 to permit us to negotiate a
definitive agreement for such facility. If, however, we do not
receive a commitment on terms acceptable to us, or at all, or
the Banks decline to extend the program beyond December 13,
2002, there could be a liquidation event under the Program in
the quarter ending December 29, 2002 and we will not have
access to the Program beyond that date.

If a liquidation event or termination of the
Program were to occur, the Banks would be entitled to all cash
collections on our accounts receivables in the United States
until their net investments had been recovered. We do not expect
that such an event by itself would have a significant adverse
impact on our liquidity, given the fact that we believe the
Banks net investment would be satisfied shortly following
such liquidation event or termination, based on our historical
collection rate of receivables. However, we would no longer have
access to the Program following such liquidation event or
termination. We do not expect that the unavailability of the
Program would have a material adverse effect on our liquidity.

We may not satisfy the minimum tangible net worth
covenant under the Singapore loan at the end of the quarter
ending December 29, 2002. There can be no assurance that
the Singapore lender will agree to any amendments or provide a
waiver for any such covenant violation. In the event that a
default occurs in a financial covenant under our Singapore loan,
and we do not receive a waiver, we may be required to repay the
loan earlier than anticipated; however, we do not expect that
such an earlier repayment of the Singapore loan would have a
material adverse effect on our liquidity.

Our failure to meet the tangible net worth
covenant under the Program and the Singapore loan may adversely
impact our ability in the future to borrow funds on as favorable
terms, or at all.

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.

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

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. The Papst
complaints assert claims to an unspecified dollar amount of
damages. 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. Accordingly, a litigation
outcome favorable to Papst could harm 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
both our and MKEs principal manufacturing operations are
located. Such concentration of operations in Singapore will
likely magnify the effects on us of any disruptions or disasters
relating to Singapore. 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 terrorist activity;                                                                    
|
| |  | economic slowdown and/or downturn in the foreign
    markets;                                                                                         
|
| |  | international currency fluctuations;                                                                                                                  
|
| |  | political and economic uncertainty caused by
    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;
|
| |  | general strikes or other disruptions in working
    conditions;                                                                                       
|
| |  | labor shortages;                                                                                                                                      
|
| |  | political instability;                                                                                                                                
|
| |  | trade restrictions;                                                                                                                                   

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| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | 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;                                
|
| |  | restrictions on our ability to use cash in other
    parts of our operations due to adverse tax consequences;
|
| |  | difficulty in obtaining export licenses and other
    trade barriers;                                        
|
| |  | seasonality;                                                                                                 
|
| |  | increased transportation/shipping costs; and                                                                 
|
| |  | credit and access to capital issues faced by our
    international customers.                                

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

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 have 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 environment
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.

48



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

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



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

Anti-takeover provisions in our certificate of
incorporation could discourage potential acquisition proposals
or delay or prevent a change of control.

We have a number of protective provisions in
place designed to provide our board of directors with time to
consider whether a hostile takeover is in our best interests and
that of our stockholders. For example, in connection with our
acquisition of the Quantum HDD business, we amended our
certificate of incorporation to eliminate temporarily the
requirement that our three classes of directors be reasonably
equal in number. As a result of this amendment, a person could
not take control of the board until the third annual meeting
after the closing of the merger, since a majority of our
directors will not stand for election until that third annual
meeting. This and other 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.

49



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##### Table of Contents






Item 3.     Quantitative
and Qualitative Disclosures about Market Risk

Derivatives

We enter into foreign exchange forward contracts
to manage foreign currency exchange risk associated with our
operations primarily in Singapore and Switzerland. 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.

Investment

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 paper.

The following table presents the hypothetical
changes in fair values in the financial instruments held
September 28, 2002 that are sensitive to changes in
interest rates. These instruments are not leveraged and are held
for purposes other than trading. The hypothetical changes assume
immediate shifts in the U.S. Treasury yield curve of plus or
minus 50 basis points (bps), 100 bps, and
150 bps.

|                      |  |      |        |      |  |     |        |               |  |         |        |          |  |          |        |  |  |  |        |   |  |  |        |   |  |  |        |  
|--------------------- |  | ---- | ------ | ---- |  | --- | ------ | ------------- |  | ------- | ------ | -------- |  | -------- | ------ |  |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                      |  |      |        |      |  |     |        | Fair Value    |  |         |        |          |  |         
|                      |  |      |        |      |  |     |        | as of         |  |         |        |          |  |         
|                      |  |      |        |      |  |     |        | September 28, |  |         |        |          |  |         
|                      |  | +150 |        | +100 |  | +50 |        | 2002          |  |         |        |          |  |         
|                      |  | bps  |        | bps  |  | bps |        | ($000)        |  | -50 bps |        | -100 bps |  | -150 bps
|                      |  |      |        |      |  |     |        |               |  |         |        |          |  |         
|Financial Instruments |  |      | 70,662 |      |  |     | 70,972 |               |  |         | 71,284 |          |  |          | 71,600 |  |  |  | 71,923 |   |  |  | 72,241 |   |  |  | 72,560 |  
|% Change              |  |      | (1.31  | )%   |  |     | (0.88  | )%            |  |         | (0.44  | )%       |  |          |        |  |  |  | 0.45   | % |  |  | 0.90   | % |  |  | 1.34   | %

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      |  |  |       |    |  | 
|                             |  |                                |       | September 28, |  |                               
|                             |  | Valuation of Security Given X% |       | 2002          |  | Valuation of Security Given X%
|                             |  | Decrease in the Security Price |       | ($000)        |  | Increase in the Security Price
|                             |  |                                |       |               |  |                               
|                             |  |                                |       |               |  |                                |       |            |  | 
|Corporate equity investments |  |                                | 2,293 |               |  |                                | 3,440 |            |  |  | 3,898 |    |  |  | 4,586 |  |  |  | 5,274 |   |  |  | 5,733 |   |  |  | 6,879 |  
|% Change                     |  |                                | (50   | )%            |  |                                | (25   | )%         |  |  | (15   | )% |  |  |       |  |  |  | 15    | % |  |  | 25    | % |  |  | 50    | %




Item 4.     Controls
and Procedures

(a) Under the supervision and with the
participation of our management, including our principal
executive officer and principal financial officer, we conducted
an evaluation of our disclosure controls and procedures, as such
term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures are effective.

(b) There have been no significant changes
(including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in
paragraph (a) above.

50



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PART II.     OTHER
INFORMATION




Item 1.     Legal
Proceedings

Prior to our acquisition of the Quantum HDD
business, we, on the one hand, and Quantum and MKE, on the other
hand, were sued by Papst Licensing, GmbH, a German corporation,
for infringement of a number of patents that relate to hard disk
drives. Papsts complaint against Quantum and MKE was filed
on July 30, 1998, and Papsts complaint against Maxtor
was filed on March 18, 1999. Both lawsuits, filed in the
United States District Court for the Northern District of
California, were transferred by the Judicial Panel on
Multidistrict Litigation to the United States District Court for
the Eastern District of Louisiana for coordinated pre-trial
proceedings with other pending litigations involving the Papst
patents (the MDL Proceeding). The matters will be
transferred back to the District Court for the Northern District
of California for trial. Papsts infringement allegations
are based on spindle motors that Maxtor and Quantum purchased
from third party motor vendors, including MKE, and the use of
such spindle motors in hard disk drives. We purchased the
overwhelming majority of the spindle motors used in our hard
disk drives from vendors that were licensed under the Papst
patents. Quantum purchased many spindle motors used in its hard
disk drives from vendors that were not licensed under the Papst
patents, including MKE. As a result of our acquisition of the
Quantum HDD business, we assumed Quantums potential
liabilities to Papst arising from the patent infringement
allegations Papst asserted against Quantum. We filed a motion to
substitute 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.

Papst and MKE recently 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 are currently proceeding
in the District 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. The Papst
complaints assert claims to an unspecified dollar amount of
damages. 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. Accordingly, a litigation
outcome favorable to Papst could harm 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. 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. On September 9, 2002, Philips
filed responsive pleadings. 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

51



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Item 3.     Defaults
Upon Senior Securities

None




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

None




Item 5.     Other
Information

None




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits.

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Maxtor Corporation Amended and Restated 1996
    Stock Option Plan (Fourth Amendment Approved on October 3,
    2000 and Amended and Restated on May 2, 2001).                                                                                                                                                                                                                                                                                                                                     
|10.2 |  | Maxtor Corporation Amended and Restated Executive
    Deferred Compensation Plan effective April 2, 2001.                                                                                                                                                                                                                                                                                                                                                                                          
|10.3 |  | Maxtor Corporation Restricted Stock Unit Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.4 |  | Form of Restricted Stock Unit Award Agreement
    between the Registrant and Michael R. Cannon
    (200,000 shares), Paul J. Tufano
    (140,000 shares), Victor B. Jipson (100,000 shares),
    Michael Cordano (70,000 shares), K.H. Teh
    (70,000 shares), Pantelis S. Alexopoulos
    (70,000 shares), Phillip C. Duncan
    (50,000 shares), Glenn H. Stevens
    (50,000 shares), David L. Beaver (50,000 shares),
    Misha Rozenberg (50,000 shares), each dated as of
    June 10, 2002.
|10.5 |  | Bank Guarantee Facility of SGD 17,250,000,
    Waiver of the Consolidated Tangible Net Worth Covenant for 3rd
    Quarter Ended 28 September 2002, dated as of
    October 22, 2002, by and among the Bank of Nova Scotia and
    Maxtor Peripherals(s) Pte Ltd.                                                                                                                                                                                                                                   
|10.6 |  | Revolving Bank Guarantee Facility of
    SGD 666,000, Waiver of the Consolidated Tangible Net Worth
    Covenant for 3rd Quarter Ended 28 September 2002, dated as
    of October 22, 2002, by and among the Bank of Nova Scotia
    and Maxtor Peripherals(s) Pte Ltd.                                                                                                                                                                                                                            
|10.7 |  | Fourth Amendment to Amended and Restated
    Receivables Purchase Agreement and Amendment to Fee Letter,
    dated as of November 5, 2002, by and among Maxtor
    Receivables Corporation, Maxtor Corporation, the Committed
    Purchasers, the Conduit Purchasers, the Agents, and Fleet
    National Bank.                                                                                                                                                                                     
|10.8 |  | Amendment to Liquidity Agreement, dated as of
    November 5, 2002 by and among Blue Keel Funding, LLC, the
    Liquidity Institutions, and Fleet National Bank.                                                                                                                                                                                                                                                                                                                                   
|10.9 |  | Waiver, dated as of October 21, 2002, by and
    among Maxtor Receivables Corporation, Maxtor Corporation, the
    Conduit Purchasers, the Committed Purchasers, the Agents, and
    Fleet National Bank.                                                                                                                                                                                                                                                                                          
|99.1 |  | Certification of Michael R. Cannon, President and
    Chief Executive Officer of the Registrant pursuant to
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                        
|99.2 |  | Certification of Paul J. Tufano, Executive
    Vice President, Chief Operating Officer and Chief Financial
    Officer of the Registrant pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                               

(b) Reports on Form 8-K.

Maxtor filed a Current Report on Form 8-K on
August 13, 2002 in which it reported in Item 9 that
both Michael J. Cannon, President and Chief Executive Officer of
Maxtor, and Paul J. Tufano, Executive Vice President, Chief
Operating Officer and Chief Financial Officer of Maxtor, filed
certifications with the Securities and Exchange Commission (the
Commission) pursuant to Order No. 4-460. Both
certifications conformed exactly to the form prescribed by the
Commission in Exhibit A to Order No. 4-460, without
qualification or modification.

Maxtor filed a Current Report on Form 8-K on
August 19, 2002 in which it reported in Item 5 that it
is discontinuing the manufacturing and sales of its
MaxAttachTM branded network attached storage products.

52



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SIGNATURES

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



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



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

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

Date: November 12, 2002

53



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I, Michael R. Cannon, certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Maxtor Corporation;                                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this quarterly report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002



| |                                          
| | -----------------------------------------
| | /s/ MICHAEL R. CANNON                    
| |                                          
| | Michael R. Cannon                        
| | President and Chief Executive
    Officer

54



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##### Table of Contents



I, Paul J. Tufano, certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Maxtor Corporation;                                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this quarterly report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002



| |                            
| | ---------------------------
| | /s/ PAUL J. TUFANO         
| |                            
| | Paul J. Tufano             
| | Executive Vice-President,  
| | Chief Operating Officer and
| | Chief Financial Officer    

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EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 10.1 |             |  | Maxtor Corporation Amended and Restated 1996
    Stock Option Plan (Fourth Amendment Approved on October 3,
    2000 and Amended and Restated on May 2, 2001).                                                                                                                                                                                                                                                                                                                                     
|        | 10.2 |             |  | Maxtor Corporation Amended and Restated Executive
    Deferred Compensation Plan effective April 2, 2001.                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.3 |             |  | Maxtor Corporation Restricted Stock Unit Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.4 |             |  | Form of Restricted Stock Unit Award Agreement
    between the Registrant and Michael R. Cannon
    (200,000 shares), Paul J. Tufano
    (140,000 shares), Victor B. Jipson (100,000 shares),
    Michael Cordano (70,000 shares), K.H. Teh
    (70,000 shares), Pantelis S. Alexopoulos
    (70,000 shares), Phillip C. Duncan
    (50,000 shares), Glenn H. Stevens
    (50,000 shares), David L. Beaver (50,000 shares),
    Misha Rozenberg (50,000 shares), each dated as of
    June 10, 2002.
|        | 10.5 |             |  | Bank Guarantee Facility of SGD 17,250,000,
    Waiver of the Consolidated Tangible Net Worth Covenant for 3rd
    Quarter Ended 28 September 2002, dated as of
    October 22, 2002, by and among the Bank of Nova Scotia and
    Maxtor Peripherals(s) Pte Ltd.                                                                                                                                                                                                                                   
|        | 10.6 |             |  | Revolving Bank Guarantee Facility of
    SGD 666,000, Waiver of the Consolidated Tangible Net Worth
    Covenant for 3rd Quarter Ended 28 September 2002, dated as
    of October 22, 2002, by and among the Bank of Nova Scotia
    and Maxtor Peripherals(s) Pte Ltd.                                                                                                                                                                                                                            
|        | 10.7 |             |  | Fourth Amendment to Amended and Restated
    Receivables Purchase Agreement and Amendment to Fee Letter,
    dated as of November 5, 2002, by and among Maxtor
    Receivables Corporation, Maxtor Corporation, the Committed
    Purchasers, the Conduit Purchasers, the Agents, and Fleet
    National Bank.                                                                                                                                                                                     
|        | 10.8 |             |  | Amendment to Liquidity Agreement, dated as of
    November 5, 2002 by and among Blue Keel Funding, LLC, the
    Liquidity Institutions, and Fleet National Bank.                                                                                                                                                                                                                                                                                                                                   
|        | 10.9 |             |  | Waiver, dated as of October 21, 2002, by and
    among Maxtor Receivables Corporation, Maxtor Corporation, the
    Conduit Purchasers, the Committed Purchasers, the Agents, and
    Fleet National Bank.                                                                                                                                                                                                                                                                                          
|        | 99.1 |             |  | Certification of Michael R. Cannon, President and
    Chief Executive Officer of the Registrant pursuant to
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                        
|        | 99.2 |             |  | Certification of Paul J. Tufano, Executive
    Vice President, Chief Operating Officer and Chief Financial
    Officer of the Registrant pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                               

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