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The accompanying notes are an integral part of the consolidated financial statements.

(Unaudited)
(In thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

(Unaudited)
(In thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

(Unaudited)
(In thousands)

The accompanying notes are an integral part of the consolidated financial statements.

(Unaudited)
(In thousands)

The accompanying notes are an integral part of the consolidated financial statements.

The consolidated balance sheet as of September 28, 2002, the consolidated statements of operations for the three and nine months ended September 29, 2001 and September 28, 2002, as well as the consolidated statements of cash flows for the nine months ended September 29, 2001 and September 28, 2002, have been prepared by Exabyte Corporation ("Exabyte" or the "Company") without an audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation thereof, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 29, 2001 annual report to stockholders filed with the Securities and Exchange Commission (the "Commission") as Part II to the Company's Annual Report on Form 10-K. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year.

The Company's financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Certain factors related to the Company's results of operations raise substantial doubt about whether it can continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company has incurred operating losses over the last five years; negative cash flows from operations over the last three years, and had an accumulated deficit of $83,831,000 as of September 28, 2002. As a result of Exabyte's current liquidity constraints, the report of its independent accountants on our consolidated financial statements as of and for the year ended December 29, 2001, contains an explanatory paragraph related to this matter. As of September 28, 2002, the Company had $3,039,000 in cash and cash equivalents and had borrowed t o its full capacity under its line of credit with Silicon Valley Bank.

Based on available cash resources and operating cash flow projections, the Company believes that it will be able to fund its operations through the end of 2002. Factors the Company considered in this assessment include:

      --   its consolidated cash and cash equivalents of $3,039,000 as of September 28, 2002;

      --   projected availability under the Company's line of credit facility;

      --   the anticipated level of capital expenditures during 2002;

      --   the Company's cash flow projections;

      --   achievement of EBITDA positive results during the third quarter of 2002; and

      --   anticipated savings related to restructurings and improved cost controls.

Accounts receivable are summarized as follows:

Inventories, net of reserves for excess of quantities and obsolescence, consist of the following:

Options to purchase 6,939,000 and 13,366,000 shares of common stock were excluded from dilutive stock option calculations for the third quarter of 2001 and 2002, respectively, because their exercise prices were greater than the average fair market value of the Company's stock for the period, and as such they would be anti-dilutive. Excluded from dilutive stock option calculations for the first nine months of 2001 and 2002 were 5,521,000 and 13,335,000 options to purchase common stock, respectively for this same reason.

Additionally, options to purchase 30,000 and 6,274,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share for the third quarter of 2001 and 2002, respectively, as these options are anti-dilutive as a result of the net loss incurred. Excluded from dilutive stock options calculations for the first nine months of 2001 and 2002 were 1,448,000 and 6,305,000 options to purchase common stock, respectively for this same reason.

The assumed conversion of preferred stock, which is both convertible and participating, into 25,045,000 shares of common stock has been excluded from the calculation of basic earnings per share for the third quarter of 2002, as these shares are anti-dilutive as a result of the net loss incurred. In addition, accumulated preferred dividends equal to 581,000 shares of common stock have been excluded from the calculation of diluted earnings per share for the third quarter of 2002, as a result of their anti-dilutive effect. The impact of assumed conversion of preferred stock and dividends has also been excluded from the calculation of diluted earnings per share for the first nine months of 2002.

The Company has not issued any stock options since September 28, 2002.

On September 28, 2002, the Company had 33,196,000 outstanding shares of common stock (which is net of 342,000 shares of treasury stock), 19,640,000 outstanding options to purchase common stock, and 25,045,000 shares of common stock under the assumed conversion of preferred stock. On December 29, 2001, the Company had 32,894,000 outstanding shares of common stock (which is net of 455,000 shares of treasury stock), 11,828,000 outstanding options to purchase common stock, and 10,900,000 shares of common stock under the assumed conversion of preferred stock.

On May 17, 2002, the Company issued 3,901,200 shares of Series I preferred stock at a price of $1.00 per share for cash proceeds of $3,890,000. On July 31, 2002, the Company issued an additional 4,536,300 shares of Series I preferred stock at a price of $1.00 per share in exchange for cash proceeds of $3,459,000 and the conversion of $1,051,000 in bridge loans and accrued interest. Included in the total 8,437,500 shares of Series I preferred stock issued were 37,500 shares issued as an introduction fee. The Series I preferred shares can convert into shares of common stock at a price of $0.5965 per share. The difference between the conversion price of the Series I preferred stock and the fair value of the Company's common stock on May 17, 2002 resulted in a beneficial conversion feature in the amount of $2,639,000 for the shares issued pursuant to the first closing. The difference between the conversion price of the Series I preferred stock and the fair value of the Company's common stock on July 31, 2002 resulted in a beneficial conversion feature in the amount of $1,918,000 for the shares issued pursuant to the second closing. These amounts were calculated in accordance with EITF 98-5 "Accounting for Convertible Securities With Beneficial Conversion Features or Contingently Adjustable Conversion Features" and EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments". The beneficial conversion feature for the first closing was reflected as a deemed dividend in the statement of operations for the second quarter of 2002 and the beneficial conversion feature for the second closing was reflected as a deemed dividend in the third quarter of 2002. The beneficial conversion features for both closings were reflected as a deemed dividend for the nine months ended September 28, 2002. The holders of the Series I preferred stock are entitled to vote with the shares of common stock (and not as a separate class) on an as-converted basis at any annual or special meeting of the Compan y's stockholders; provided, however that without prior written consent of a majority of the outstanding Series I preferred stock, the Company may not take certain actions, including asset transfer or acquisition (which terms are defined in the Certificate of Designation). The Company also has the right, but not the obligation to redeem some or all of the outstanding shares of Series I preferred stock at the earlier of May 17, 2003 or the date of a change in control at a price per share equal to the liquidation value. Series I preferred stock has a liquidation preference ($17,143,000 as of September 28, 2002) over common stock.

In connection with the issuance of the Series I preferred stock, the holders of the Series I preferred stock received the right to receive, for no additional consideration, warrants to purchase shares of common stock. The warrants are issuable upon any redemption or other involuntary retirement of Series I preferred stock by Exabyte (other than pursuant to a conversion of shares of Series I preferred stock or a reclassification or exchange of such shares for other securities that preserve in all respects the benefits of the conversion rights of the Series I preferred stock). The number of shares of common stock issuable upon exercise of the warrants will be equal to the number of shares of common stock issuable upon conversion of the Series I preferred stock redeemed at a per-share exercise price equal to the conversion price in effect on the date of such redemption. The issuance of these warrants represents a contingent beneficial conversion feature in accordance with EITF 98-5. Should the warrants be is sued, the difference between the effective conversion price of the Series I preferred stock and the fair value of common stock will be recorded as a deemed dividend.

Holders of the outstanding shares of Series I preferred stock, in preference to the holders of Exabyte's other preferred and common stock, will be entitled to receive, when, as and if declared by the board of directors, dividends in an amount per share calculated at a compound annual rate of 12% of the original issue price of the Series I preferred stock. All dividends will be cumulative, whether or not declared, and will be payable quarterly in arrears. Commencing on the earlier of January 1, 2007 or the date of a change in control, the dividend rate will increase to 15% per annum. Upon conversion of any shares of Series I preferred stock, any accrued but unpaid dividends shall be paid in cash or, at the option of the holder, in shares of common stock at the conversion price per common share.  The conversion of the dividends into common stock represents a contingent beneficial conversion feature in accordance with EITF 98-5. Should the dividends be converted into shares of common stock in conjunctio n with the conversion of Series I preferred stock, the difference between the effective conversion price of the Series I preferred stock and the fair value of common stock will be recorded as a deemed dividend.

During the third quarter of 2002, the Company issued a dividend of 70,000 shares of common stock valued at $56,000 to Series G shareholders. This dividend was authorized by the Company's Board of Directors on September 11, 2002 and was calculated in accordance with the Series G Certificate of Designation and subsequent related agreements.

On April 23, 2002, the Company received a $1,000,000 bridge loan from a current investor in the Company, Meritage Private Equity Fund, L.P. The bridge loan accrued interest at a rate of 18% per annum and matured on July 31, 2002. Pursuant to the bridge loan, the Company issued Meritage Private Equity Funds a warrant, with a ten-year life, to purchase 100,000 shares of common stock at an exercise price of $0.83 per share. The Company valued the warrants using a Black-Scholes valuation model with the following assumptions: 133% expected volatility, a 5% risk-free interest rate, a 10 year expected term, and no estimated dividends. The Company recorded $541,000 of debt discount related to the value of the warrants and the resultant beneficial conversion feature. The beneficial conversion feature was calculated in accordance with EITF 98-5 "Accounting for Convertible Securities With Beneficial Conversion Features or Contingently Adjustable Conversion Features" and EITF 00-27 "Application of Issue No . 98-5 to Certain Convertible Instruments". The Company amortized $516,000 of debt discount to interest expense in the second quarter of 2002. The remaining debt discount of $25,000 was amortized to interest expense on July 31, 2002 when the bridge loan converted into Series I preferred stock as part of the second closing of the Series I offering.

During the third quarter of 2000, the Company incurred $3,899,000 in charges related to a restructuring adopted by the Board of Directors on July 24, 2000, which outsourced a number of manufacturing operations to Hitachi Digital Media Products Division of Hitachi, Ltd. ("Hitachi"), and will result in the closure of a wholly-owned subsidiary, Exabyte Magnetics GmbH ("EMG"). These restructuring charges include employee severance and related costs of $1,613,000, excess facilities costs of $718,000, the write-off of excess inventories of $879,000, the write-off of capital equipment of $389,000 and other costs of $300,000. Workforce reductions involved 93 employees, constituting all employees of EMG. All severance payments for these employees were contractually defined, fixed and communicated during the third quarter of 2000.

Approximately $647,000 of these restructuring costs were paid during the third quarter of 2002. Approximately $462,000 of accruals related to this restructuring remain at September 28, 2002 and are expected to be paid by the end of 2002.

The following table summarizes the activity to date related to the restructuring which occurred in the third quarter of 2000:

During the first quarter of 2002, the Company incurred $4,363,000 in charges related to a restructuring which will result in the closure of its service and final assembly facility in Scotland, the closure of its service depots in Australia and Canada, acceleration of the previously announced closure of EMG and a reduction in its U.S. workforce. The revised closure date for EMG is currently the fourth quarter of 2002, and the Company increased its accrual for unused facilities, which it had originally recorded as part of its third quarter 2000 restructuring, as a result. The plan for this restructuring was adopted by the Board of Directors on January 20, 2002.

These restructuring charges include the write-off of leasehold improvements and capital equipment taken out of service of $1,905,000, employee severance and related costs of $1,345,000, the write-off of excess inventories of $652,000, excess facilities costs of $307,000 and other costs of $154,000. Workforce reductions will involve 200 employees worldwide, of which 184 are eligible to receive severance payments. All severance payments for these employees were contractually defined and communicated to the affected employees during the first quarter of 2002. This includes employees from all functional areas of the Company with approximately 96 employees in Scotland, 92 in the U.S., six in Australia, four in Canada and two in Singapore.

During the first quarter of 2002, approximately $3,737,000 of these costs were included in cost of sales, $509,000 were included in selling, general and administrative costs and $117,000 were included in research and development costs.

Approximately $194,000 of severance costs and $26,000 of excess facilities costs were paid during the third quarter of 2002. Approximately $280,000 of accruals related to this restructuring remain at September 28, 2002. We anticipate these restructuring activities will be completed by the end of the fourth quarter of 2002.

The following table summarizes the activity to date related to the restructuring which occurred in the first quarter of 2002:

The Company also incurred special charges of $3,421,000 during the first quarter of 2002, which do not qualify as restructuring charges. These charges include $4,621,000 of fixed asset and inventory write-offs related to a downsizing and to changes in the product roadmap net of income of $1,200,000 related to the sale of certain technology. Of these costs, $3,675,000 were included in cost of sales, $262,000 were included in selling, general and administrative costs, and $684,000 were included in research and development expenses.

In July 2002, the Company completed a reduction in its workforce in order to reduce expenses and minimize ongoing cash consumption. All areas of the Company were impacted by the workforce reduction. This reduction reduced the domestic workforce by approximately 104 persons and resulted in a severance charge to operations in the third quarter of 2002 of approximately $428,000. Of these costs, $121,000 were included in cost of sales, $179,000 were included in selling, general and administrative costs and $128,000 were included in research and development costs. All severance was paid during the third quarter of 2002, and no accruals remain. 

Since 1998 all operations of the Company are considered one operating segment. Therefore, no segment disclosures have been presented. The Company will continue to review the internal reporting structure for future changes that could result in disclosure of additional segments.

The following table details revenues from external customers by geographic area (foreign revenue is based on the country in which the customer is located):

The following table presents revenue by product line:

The following table summarizes sales to major customers:

No other customers accounted for 10% or more of sales in any of these periods.

No other customers accounted for 10% or more of sales in any of these periods.

The following table details long-lived asset information by geographic area:

On November 9, 2001, the Company completed a business combination with Ecrix Corporation ("Ecrix"). The aggregate purchase price paid for the acquisition was $10,015,000. The excess of the purchase price over the amounts allocated to tangible assets acquired, less liabilities assumed, of $10,149,000 was recorded as goodwill. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("FAS 142"), which became effective for the Company on January 1, 2002. Under FAS 142, goodwill is no longer amortized. Rather, it is tested for impairment upon adoption and on an annual basis. The Company adopted FAS 142 on January 1, 2002. As the business combination was completed after June 30, 2001, no amortization of goodwill was recorded in 2001. The Company has determined that it has one reporting unit under this pronouncement and there is no impairment of the Company's goodwill as of the date of adoption.

Upon the merger with Ecrix, the Company assumed a liability to Aiwa CO., LTD., ("Aiwa") for parts and equipment that were either purchased or committed to by Ecrix. On July 12, 2002, the Company renegotiated this agreement due to disagreements between the parties related to the value of certain inventory and equipment. The Company agreed to pay $2,000,000 to settle the amount due, of which $1,000,000 was paid in October, and the remainder is due in installments in the amount of $250,000 payable November 30, 2002, March 31, 2003, June 30, 2003, and September 30, 2003. The reduction in the settlement value of $2,721,000 was recorded as a decrease to the goodwill related to the merger with Ecrix during the third quarter of 2002.

The Company is, from time to time, subjected to certain claims, assertions or litigation by outside parties as part of its ongoing business operations. The outcomes of any such contingencies are not expected to have a material adverse impact on the consolidated financial condition, results of operations or cash flows of the Company.

The Company entered into a development agreement with Hitachi Ltd. on March 1, 2001 for the development of certain M3™ components and manufacture of engineering prototypes. In an agreement between the parties dated March 28, 2002, costs for development and tooling under this agreement were finalized at 300,500,000 Yen. This yen amount is valued at $2,415,000 on September 28, 2002 and is recorded in accrued liabilities ($2,208,000) and accounts payable ($207,000). Approximately $876,000 was capitalized as fixed assets and $1,388,000 was expensed to cost of goods sold, including $660,000, $252,000 and $476,000 during the first, second and third quarters of 2002, respectively. Expenses include engineering costs of $309,000, expensed equipment that will not be used in operations of $1,079,000 and translation adjustments of $151,000.

On December 21, 2001, the Company entered into an agreement with SCI Systems, Inc. to purchase certain inventory. The Company's obligation of $1,402,000 has been recorded ($702,000 in accounts payable and $700,000 in accrued liabilities) as of September 28, 2002.

On June 28 2002, Exabyte sold its remaining ownership interest in CreekPath Systems, Inc. and received total proceeds of $1,500,000, resulting in a gain of $1,500,000. The Company recorded this investment under the equity method, and losses during 2000 and 2001 had resulted in a carrying amount of $0 since the first quarter of 2001.

During the third quarter of 2001, the Company entered into a Technology and Manufacturing license agreement with Plasmon LMS, Inc. ("Plasmon"), whereby the Company granted Plasmon a non-exclusive license to manufacture certain LTO, AIT and DTLtape libraries. All terms of the agreement were met by the end of the first quarter of 2002, and fees of $1,200,000 related to this agreement were received and recognized as other income.

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146"). This statement requires costs associated with exit or disposal activities, such as lease termination or employee severance costs, to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 replaces Emerging Issues Task Force 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)," which previously provided guidance on this topic. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management believes that the adoption of FAS 146 will not have a significant effect on the Company's results of operations or its financial position.

The following discussion contains forward-looking statements that involve future risks and uncertainties. We may achieve different results than those anticipated in these forward-looking statements. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. We have attempted to identify forward-looking statements in bold print. Additionally, words such as "believes," "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the "Risk Factors" sections of our filings currently on file with the Securities and Exchange Commission, incl uding but not limited to the Form S-3/A filed with the Commission on August 5, 2002.

We are a leading provider of information storage products, including tape drive products, automated tape libraries and recording media. Our strategic focus is data backup and archival applications for workstations, midrange computer systems and networks. Computer manufacturers and resellers require a variety of storage products, which vary in price, performance, capacity and form-factor characteristics as their needs for reliable data backup and archival storage increase. Our strategy is to offer a number of products to address a broad range of these requirements.

Our tape drive products are based on VXA®, 8mm and MammothTape™ technologies and our tape library products are based upon VXA®, 8mm, MammothTapeÔ , LTOÔ UltriumÔ and Advanced Intelligent Tape™ (AIT™) technologies.

We market our products worldwide to resellers and original equipment manufacturers ("OEMs"). We also provide repair services directly to OEMs and to our resellers' customers.

Our reseller channel customers purchase products for resale and they may provide services to their customers, such as:

     -    distribution;

     -    financial terms and conditions;

     -    pre-sales, sales and/or post-sales system upgrades; or

     -    other value-added products and/or services.

Even though we have no obligation, we support some reseller channel customers by providing marketing and technical support directly to them or their consumers. As a result, we may incur certain additional costs for these sales. Other costs and risks associated with our reseller channel customers may include:

     -    inventory price protections;

     -    stock rotation obligations;

     -    short term marketing promotions; and

     -    customer and consumer rebates.

OEM customers incorporate our products as part of their own systems, which they then sell to their customers under their own brand name. We work closely with our OEM customers during early product development stages to help ensure our products will readily integrate into the OEM's systems. The sales cycle for an OEM typically covers many months. During this time, the OEM may:

     -     evaluate the technology;

     -     qualify the product specifications;

     -     verify our compliance with product specifications;

     -     integrate the product into its system; and

     -     publicly announce the integration. This step typically occurs toward the end of the sales cycle before volume shipments of our products are made to the OEM.

The following table sets forth our operating results as a percentage of sales for each period presented.

The following tables present our revenue by product in absolute dollars and as a percentage of sales for each period presented.

As a percentage of net sales:

Our net sales increased by 7.7% from $34,268,000 in the third quarter of 2001 to $36,904,000 in the third quarter of 2002. In comparing net sales from the third quarter of 2001 to the third quarter of 2002, there were several significant differences:

     --   Sales of tape media increased by $7,835,000. This increase was due to media demand increasing
           for previously sold drives and libraries. We believe customers are purchasing media for existing
           products as they defer investments in equipment. Additionally, media sales included VXA® tape
           sales in the third quarter of 2002, with no comparable amounts in the third quarter of 2001.

      --   Sales of older generation 8mm tape drives (Mammoth-LT and Mammoth) decreased by
           $1,825,000 as a result of these products approaching the end of their product life cycles.
           Decreases in Mammoth drives primarily occurred in the OEM channel.

      --   Sales of M2™ tape drives decreased $2,201,000 due to the general slowdown in the economy as
           well as past reliability issues which have resulted in M2™ tape drives not achieving the market
           momentum that was expected and may also have impacted the sales of library products containing
           M2™ tape drives. We have focused considerable attention addressing both hardware and
           firmware issues. We believe these efforts have resulted in a much-improved version of the tape
           drive, which is currently being marketed.

      --   Sales of VXA®-1 and VXA®-2 tape drives were $3,920,000. VXA® technology was acquired
           in the November 9, 2001 business combination with Ecrix Corporation. There is no comparable
           amount in the third quarter of 2001. We first shipped the VXA®-2 tape drives in the second
           quarter of 2002 and expect to see continued growth as the product gains customer acceptance
           and market share.

      --   Sales of M2™ and Mammoth 8mm libraries decreased $2,791,000. We believe these decreases are
           due to these products entering the later stages of normal product life cycles and the general
           slowdown in the economy, which resulted in customer deferrals of investments in this type of
           equipment.

      --   Sales of VXA®-1 8mm libraries were $1,006,000. VXA® technology was acquired in the
           November 9, 2001 business combination with Ecrix Corporation. There is no
           comparable amount in the third quarter of 2001.

      --   Sales of LTO™ Ultrium™ tape libraries (110L, 221L, and Magnum) increased by $1,122,000.
           We believe this increase is due to wider acceptance of the LTO™ Ultrium™ tape format as it
           becomes a more recognized technology. Additionally, Magnum is a newly released line of tape
           libraries and there are no comparable amounts in the third quarter of 2001.

      --   Sales of end-of-life drives and libraries decreased by $3,750,000. The majority of this decrease
           is related to decreased sales of our Eliant™820 drives and our DLTtape™ libraries. These
           products entered end-of-life status in the second quarter of 2002 and the fourth quarter of 2001,
           respectively.

      --   Sales of service and spare parts decreased $772,000. This decrease relates to a decreasing
           installed base of our product which is a result of general declines in sales since the end of 1998.
           There are fewer drives and libraries outside of their three year warranty to service in the third
           quarter of 2002 compared to the third quarter of 2001.

Our net sales decreased by 11.1% from $122,732,000 in the first nine months of 2001 to $109,159,000 in the first nine months of 2002. In comparing net sales from the first nine months of 2001 to the first nine months of 2002, there were several significant differences:

      --   Sales of tape media increased by $7,725,000. This increase was due to media demand increasing
           for previously sold drives and libraries. We believe customers are purchasing media for existing
           products as they defer investments in equipment. Additionally, media sales included VXA® tape
           sales in the third quarter of 2002, with no comparable amounts in the third quarter of 2001.

      --   Sales of older generation 8mm tape drives (Mammoth-LT and Mammoth) decreased by
           $10,845,000 as a result of these products approaching the end of their product life
           cycles. Decreases were primarily in the OEM channel.

      --   Sales of M2™ tape drives decreased $3,784,000 due to the general slowdown in the economy as
           well as past reliability issues which have resulted in M2™ tape drives not achieving the market
           momentum that was expected and may also have impacted the sales of library products containing
           M2™ tape drives. We have focused considerable attention addressing both hardware and
           firmware issues. We believe these efforts have resulted in a much improved version of the tape
           drive which is currently being marketed.

      --   Sales of VXA®-1 and VXA®-2 tape drives were $9,010,000. VXA® technology was acquired
           in the November 9, 2001 business combination with Ecrix Corporation. There is no comparable
           amount in the first nine months of 2001. We first shipped the VXA®-2 tape drives in the
           second quarter of 2002 and expect to see continued growth as the product gains customer
           acceptance and market share.

      --   Sales of M2™ and Mammoth 8mm libraries decreased $6,915,000. We believe these decreases
           are due to these products entering the later stages of normal product life cycles and the general
           slowdown in the economy, which resulted in customer deferrals of investments in this type of
           equipment.

      --   Sales of VXA®-1 8mm libraries were $2,448,000. VXA® technology was acquired in the
           November 9, 2001 business combination with Ecrix Corporation. There is no
           comparable amount in the third quarter of 2001.

      --   Sales of LTO™ Ultrium™ tape libraries (110L, 221L, and Magnum ) increased by $4,978,000.
           We believe this increase is due to wider acceptance of the LTO™ Ultrium™ tape format as it
           becomes a more recognized technology. Additionally, Magnum is a newly released line of tape
           libraries and there are no comparable amounts in the third quarter of 2001.

      --  Sales allowances increased by $3,356,000, which had a negative impact on net sales. We had
           charges related to stock rotations during the first nine months of 2002 while we had a credit for
           these programs during the same period in 2001. Exposure to qualifying sales under this
           program remained relatively stable in the first nine months of 2002 compared to the same period in
           2001. However, during the first nine months of 2001, exposure to qualifying sales decreased.
           Additionally, there were increases in certain marketing related programs for 2002.

      --   Sales of end-of-life drives and libraries decreased by $11,311,000. The majority of this decrease is
           related to decreased sales of our Eliant™820 drives, 220 libraries and our DLTtape™ libraries.
           These products entered end-of-life status in the second quarter of 2002, the second quarter of 2001
           and the fourth quarter of 2001, respectively.

      --   Sales of service and spare parts decreased $2,275,000 from the first nine months of 2001 to the
           first nine months of 2002. The majority of the decrease relates to decreasing annual incremental
           installments of our product that has occurred since the end of 1998. There are fewer drives and
           libraries outside of their three year warranty to service in the third quarter of 2002 compared to the
           third quarter of 2001.

Sales to reseller customers and end-users increased as a percentage of net sales from the third quarter as well as the first nine months of 2001 to the same period in 2002, while sales to OEM customers decreased (see Note 8 of Notes to Consolidated Financial Statements). We believe this shift is the result of difficulties in obtaining OEM acceptance of M2™. We believe that the improvements to M2™ as well as the release of VXA®-2 will increase future OEM acceptance and market share related to our current products.

Sales to North America increased as a percentage of sales from the third quarter and the first nine months of 2001 to the same period in 2002, while sales to international locations decreased as a percentage of sales (see Note 8 of Notes to Consolidated Financial Statements. We believe this is due to our continued strong focus on the domestic reseller channel.

Our cost of sales includes the actual cost of all materials, labor and overhead incurred in the manufacturing and service processes, as well as certain other related costs. Other related costs include primarily provisions for warranty repairs and inventory reserves. Our cost of sales increased from $24,798,000 for the third quarter of 2001 to $26,319,000 for the third quarter of 2002. In addition, our cost of sales for the first nine months of 2001 and 2002 decreased from $101,519,000 to $89,412,000, respectively. Our gross margin percentage increased from 27.6% in the third quarter of 2001 to 28.7% in the third quarter of 2002, and increased from 17.3% for the first nine months of 2001 to 18.1% for the first nine months of 2002. Excluding restructuring charges for the third quarter of 2002, our cost of sales was $26,198,000, and our gross margin percentage was 29.0%. Excluding restructuring charges for the first nine months of 2001 and 2002, respectively, our cost of sales decreased from $101, 296,000 to $85,555,000, respectively, and our gross margin percentage increased from 17.5% to 21.6%, respectively. Gross margins for the third quarter and first nine months of 2002 were favorably impacted by decreases in fixed costs due to reduced headcount, a higher mix of media sales, lower warranty expense due to improved M2™ reliability, product cost improvements and a VAT refund of $580,000. Partially offsetting these favorable impacts were increased inventory reserves related to manufacturing outsourcing and product roadmap decisions and the write-down of certain assets, primarily M3™ tooling.

Selling, general and administrative expenses include salaries, sales commissions, advertising expenses and marketing programs. These expenses decreased from $7,493,000 in the third quarter of 2001 to $5,968,000 for the same period in 2002. For the first nine months of 2001 and 2002, these expenses decreased from $28,339,000 to $21,835,000, respectively. Without restructuring charges for the third quarter of 2002, these expenses were $5,790,000. Without restructuring charges for the first nine months of 2001 and 2002, respectively, these expenses were $28,160,000 and $21,148,000. These decreases are the result of headcount reductions in 2002, as well as a decrease in product related spending on sales and marketing programs and advertising. Partially offsetting these favorable impacts was the write-down of certain assets during the first quarter of 2002.

Research and development expenses increased from $5,492,000 in the third quarter of 2001 to $5,700,000 for the same period in 2002. Without restructuring charges for the third quarter of 2002, these expenses were $5,572,000. This increase is the result of additional costs incurred developing our new VXA-2 and automation products. For the first nine months of 2001 and 2002, these expenses decreased from $19,684,000 to $19,341,000, respectively. Excluding restructuring charges for both periods, these expenses were $19,588,000 in the first nine months of 2001 and $19,095,000 in the first nine months of 2002. These costs were favorably impacted by lower costs for automation development in 2002 over 2001 due to a larger number of product introductions in 2001 related to the release of a major family of libraries. Partially offsetting these favorable impacts was the write-down of certain assets during the first quarter of 2002.

Other income (expense), net consists primarily of income from the sales of our ownership interests in other companies, a one-time sale of technology, interest income and expense, foreign currency remeasurement and transaction gains and losses and other miscellaneous items. A $1,719,000 gain on the sale of our investment in Sun Microsystems favorably impacted the first nine months of 2001. On June 28, 2002, Exabyte sold its remaining ownership interest in CreekPath Systems, Inc. for total proceeds of $1,500,000, resulting in a gain of $1,500,000. During the first quarter of 2002, we received and recognized $1,200,000 related to a Technology and Manufacturing license agreement with Plasmon LMS, Inc. ("Plasmon") where we granted Plasmon a non-exclusive license to manufacture certain LTO, AIT and DLTtape libraries. Interest expense decreased from $431,000 in the third quarter of 2001 to $379,000 for the same period in 2002. In addition, interest expense increased from $1,345,000 for the first nine months of 2001 to $1,694,000 for the first nine months of 2002. Interest expense for the first nine months of 2002 was impacted by interest expense of $541,000 related to the beneficial conversion feature of a bridge loan and the value of the related warrants. Other income/(expense) decreased from $249,000 of income during the third quarter of 2001 to $55,000 of income for the same period in 2002. Other expense for the first nine months of 2001 was $988,000 compared to income of $71,000 for the same period in 2002. These fluctuations are mainly the result of changes in the dollar/Yen and dollar/Euro exchange rates. For a discussion of our risks related to foreign currency exchange rates, see "Market Risk" section below.

As of the second quarter of 1999, we recorded a deferred tax valuation allowance equal to 100% of total deferred tax assets. Management considered a number of factors, including our cumulative operating losses over the prior three years, short-term projected losses due to the impact of delays in the release of the M2™ product as well as certain offsetting positive factors. Management has concluded that a valuation allowance is required for 100% of the total deferred tax assets as it is more likely than not that the deferred tax assets will not be realized. Accordingly, no tax benefit has been recognized for the net operating loss generated in 2002. During the first quarter of 2002, we recorded the benefit of a tax refund related to certain amended prior years' tax returns.

During the first nine months of 2002, our activities increased our cash and short-term investments by $842,000 to a quarter-ending balance of $3,039,000. During the first nine months of 2002, we expended $10,843,000 of cash for operating activities, expended $3,331,000 for capital equipment and expended $941,000 on long-term obligations. Offsetting these expenditures, we borrowed a net amount of $5,609,000 against our line of credit, received $8,132,000 from the issuance of stock, received $1,590,000 from the sale of investments, received $175,000 from the sale of fixed assets and had a decrease in restricted cash of $451,000.

Our working capital decreased from $11,266,000 at December 29, 2001 to $3,642,000 at September 28, 2002. Our accounts receivable increased from $26,428,000 at December 29, 2001 to $36,011,000 at September 28, 2002 due to a high percentage of our sales occurring late in the quarter. For this same period, our inventories decreased from $29,305,000 to $19,087,000 due to lower required balances as we outsource manufacturing. Our accounts payable increased from $16,781,000 to $24,962,000 for this same period due to slower payment of vendor invoices and invoicing related to our obligations with Aiwa. Additionally, our accrued liabilities decreased over this period from $17,145,000 to $14,243,000 due mainly to decreases in current warranty obligations.

During 2002, we completed a private equity funding through a Series I preferred stock offering (see Note 4 of Notes to Consolidated Financial Statements). On April 23, 2002, we received a $1,000,000 bridge loan from a current investor, Meritage Private Equity Fund, L.P. The bridge loan accrued interest at a rate of 18% per annum and matured on July 31, 2002. Pursuant to the bridge loan, we issued Meritage Private Equity Funds a warrant, with a ten-year life, to purchase 100,000 shares of common stock at an exercise price of $0.83 per share.

In May 2002, we received $3,890,100 of cash for the first closing of Series I convertible stock. In July 2002, we received an additional $3,509,900 of cash for the second closing of Series I convertible preferred stock, and the bridge loan plus accrued interest converted to Series I convertible preferred stock.

On June 18, 2002, we entered into a $25,000,000 line of credit facility with Silicon Valley Bank, which expires in June 2005. It allows for borrowings for up to 75% of eligible accounts receivable plus the lesser of (1) 25% of eligible finished goods inventory; (2) 50% of the appraised forced liquidation value of eligible finished goods inventory, (3) $2,500,000 or (4) 15% of our eligible accounts receivable. Eligible accounts receivable excludes invoices greater than 60 days past due, some foreign receivables and other items identified in the agreement. Eligible finished goods inventory excludes slow moving inventory and other items identified in the agreement. Collateral for this agreement includes accounts receivable, inventory, fixed assets and other assets. We are currently in compliance with all covenants related to this line of credit.

The amount available to borrow under the line of credit varies each day based upon the levels of the underlying accounts receivable and inventories. As of September 28, 2002, we had borrowed our maximum available amount of $17,900,000. An additional $393,000 is being utilized to satisfy a letter of credit obligation.

The line of credit prohibits the payment of cash dividends without prior bank approval. Borrowings under the line of credit bear interest at the lower of the bank's prime rate +1.25%. As a result, any significant fluctuations in the prime rate would impact our interest expense related to borrowings under this line of credit.

In 2002 we anticipate that we may spend $4,000,000 for the purchase of capital assets. Based on available cash resources and operating cash flow projections, we believe that we will be able to fund our operations through the end of 2002. Factors we considered in this assessment include:

      --   our consolidated cash and cash equivalents of $3,039,000 as of September 28, 2002;

      --   projected availability under our line of credit facility;

      --   the anticipated level of capital expenditures during 2002;

      --   our cash flow projections;

      --   achievement of EBITDA positive results during the third quarter of 2002; and

      --   anticipated savings related to restructurings and improved cost controls.

Our projections for future liquidity needs are anticipated to be covered by cash generated from operations and our line of credit. In the event this is not achieved, we will have to consider other alternatives including, but not limited to, the sale of assets, restructuring, additional equity infusions or strategic alliances.

Borrowings under our line of credit are limited by the values of the underlying collateral. Additionally, we must comply with certain covenants including a minimum quarterly revenue covenant, a maximum monthly loss covenant, and a minimum tangible net worth covenant. As a result of achieving EBITDA positive results during the third quarter of 2002, an additional $2,500,000 became available in October. The agreement contains certain acceleration clauses that may cause any outstanding balance to become immediately due in the event of default.

Certain factors related to our results of operations raise substantial doubt about whether we can continue as a going concern. We have incurred operating losses over the last five years; negative cash flows from operations over the last three years, and had an accumulated deficit of $83,831,000 as of September 28, 2002. As a result of our current liquidity constraints, the report of our independent accountants on our consolidated financial statements as of and for the year ended December 29, 2001 contains an explanatory paragraph related to this matter.

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. We follow the guidance of Staff Accounting Bulletin No. 101 ("SAB 101"), which requires that a series of criteria are met in order to recognize revenue related to product shipment or the performance of repair services. If these criteria are not met, the associated revenue is deferred until the criteria are met. Generally, these criteria are that there be an arrangement to sell the product, we have delivered the product in accordance with that arrangement, the sales price is determinable, and collectibility is reasonably assured. However, there are instances when additional criteria must be satisfied in order to recognize revenue. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. Additionally, revenue from sales to certain res ellers is subject to agreements allowing certain limited rights of return, marketing related rebates and price protection on unsold merchandise held by those resellers. Accordingly, reserves for estimated future returns, marketing rebates and price protection are provided in the period of sale based on contractual terms and historical data. These reserves are subject to estimates by management in accordance with SAB 101. In the event that actual results differ from estimates required by SAB 101, results of future periods may be impacted.

Our inventory is a significant component of our total assets. In addition, the value that we carry such inventory at directly impacts the gross margins that we recognize when we subsequently sell the inventory. Our inventory is valued at the lower of cost or market, cost being determined under the first-in, first-out method. In addition, we must determine if additional reserves are required for surplus or obsolete inventory or future sales, which may result in a loss. This requires significant management judgements of future revenues by product and estimates of product life cycles in a fast-moving technology marketplace. Our inability to make accurate estimates can lead to material inventory write-offs in future periods.

Our business combination with Ecrix in November 2001 resulted in a material amount of goodwill. Under FAS 142, "Goodwill and Other Intangible Assets," this goodwill is not amortized to operations. Instead, we are required to assess this goodwill periodically for potential impairment. In our case, an impairment may be indicated by a significant drop in the trading price of our common stock. If such a drop in our stock price should occur, additional steps are required to determine if the carrying value of the goodwill exceeds its implied fair value. Any impairment write-off indicated by these tests could have a material effect on our future results of operations. These impairment tests require management to make estimates and assumptions which could affect our financial statements.

During the third quarter of 2000, the Company incurred $3,899,000 in charges related to a restructuring adopted by the Board of Directors on July 24, 2000, which outsourced a number of manufacturing operations to Hitachi Digital Media Products Division of Hitachi, Ltd. ("Hitachi"), and will result in the closure of a wholly-owned subsidiary, Exabyte Magnetics GmbH ("EMG").

These third quarter restructuring charges include employee severance and related costs of $1,613,000, excess facilities costs of $718,000, the write-off of excess inventories of $879,000, the write-off of capital equipment of $389,000 and other costs of $300,000. Workforce reductions involved 93 employees, constituting all employees of EMG. All severance payments for these employees were contractually defined, fixed and communicated during the third quarter of 2000.

We paid approximately $647,000 of these restructuring costs during the third quarter of 2002. Approximately $462,000 of accruals related to this restructuring remain at September 28, 2002 and are expected to be paid during 2002.

The following table summarizes the activity to date related to the restructuring which occurred in the third quarter of 2000:

During the first quarter of 2002, we incurred $4,363,000 in charges related to a restructuring which will result in the closure of our service and final assembly facility in Scotland, the closure of our service depots in Australia and Canada, acceleration of the previously announced closure of EMG and a reduction in our U.S. workforce. The revised closure date for EMG is currently the fourth quarter of 2002 and we increased our accrual for unused facilities, which we had originally recorded as part of our third quarter 2000 restructuring, as a result. The plan for this restructuring was adopted by the Board of Directors on January 20, 2002.

These restructuring charges include the write-off of leasehold improvements and capital equipment taken out of service of $1,905,000, employee severance and related costs of $1,345,000, the write-off of excess inventories of $652,000, excess facilities costs of $307,000 and other costs of $154,000. Workforce reductions will involve 200 employees worldwide, of which, 184 are eligible to receive severance payments. This includes employees from all functional areas of the Company with approximately 96 employees in Scotland, 92 in the U.S., six in Australia, four in Canada and two in Singapore. All severance payments for these employees were contractually defined and communicated to the affected employees during the first quarter of 2002.

During the first quarter of 2002, approximately $3,737,000 of these costs were included in cost of sales, $509,000 were included in selling, general and administrative costs and $117,000 were included in research and development costs. We believe this restructuring will result in approximate annual savings of $17,000,000.

We paid approximately $220,000 of these restructuring costs during the third quarter of 2002. Approximately $280,000 of accruals related to this restructuring remain at September 28, 2002 and are expected to be paid during 2002.

The following table summarizes the activity to date related to the restructuring which occurred in the first quarter of 2002:

We also incurred special charges of $3,421,000 during the first quarter of 2002, which do not qualify as restructuring charges. These charges include $4,621,000 of fixed asset and inventory write-offs related to our downsizing and to changes in our product roadmap net of income of $1,200,000 related to the sale of certain technology. Of these costs, $3,675,000 were included in cost of sales, $262,000 were included in selling, general and administrative costs, and $684,000 were included in research and development expenses.

In July 2002, we completed a reduction in our workforce in order to reduce expenses and minimize ongoing cash consumption. All areas of the Company were impacted by the workforce reduction. This reduction reduced the domestic workforce by approximately 104 persons and resulted in a severance charge to operations in the third quarter of 2002 of approximately $428,000. Of these costs, $121,000 were included in cost of sales, $179,000 were included in selling, general and administrative costs and $128,000 were included in research and development costs. All severance was paid during the third quarter of 2002, and no accruals remain. We believe this restructuring will result in annual savings in excess of $7,000,000.

Information concerning recent accounting pronouncements is incorporated by reference from Item 1 above, "Financial Statements" under Note 12 of Notes to Consolidated Financial Statements.

In the ordinary course of our operations, we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates. Uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax, other regulatory or credit risks are not included in the following assessment of our market risks.

We have foreign subsidiaries whose operations expose us to foreign currency exchange rate changes. Changes in foreign currency exchange rates could impact remeasurement of our foreign denominated assets and liabilities into U.S. dollars and our future earnings and cash flows from transactions denominated in different currencies. At September 28, 2001, 1.8% of our total assets were denominated in foreign currencies. During the first nine months of 2002, 0.6% of revenue and 9.6% of operating expenses were denominated in foreign currencies. Our exposure to currency exchange rate changes is diversified due to the number of different countries in which we conduct business. We have subsidiaries in Germany, The Netherlands, Japan and Singapore whose books of record are maintained in their local currency. Foreign currency gains and losses will continue to result from fluctuations in the exchange rates of these subsidiaries' operations compared to the U.S. dollar thereby impacting future o perating results.

We purchase certain inventory components and services, denominated in yen, from Japanese manufacturers. We settle such payments at the prevailing spot rate. We prepared sensitivity analyses of our exposures from foreign assets as of September 28, 2002, and of exposure from anticipated foreign revenue, and operating expenses in 2002 using historical data and anticipated future activity to assess the impact of hypothetical changes in foreign currency exchange rates. Based upon the results of these analyses, we estimate that a hypothetical 10% unfavorable change in foreign currency exchange rates from the September 28, 2002 rates could have a $136,000 impact on net assets, a $60,000 impact on net sales and a $394,000 impact on operating expenses. These risks are materially similar to the risks presented in the prior periods, and could have a material effect on our results of operations, cash flows or financial condition in the future.

We have also prepared sensitivity analyses of our exposure related to yen denominated purchases. Using a hypothetical 10% unfavorable change in the dollar/yen exchange rate from the September 28, 2002 rate, and projected annual purchases denominated in yen, we estimate a potential $1,694,000 impact on annual purchases. The impact could affect a combination of net income and inventory, and could have a material effect on our future results of operations, cash flows or financial condition.

At September 28, 2002, we had $17,900,000 outstanding against our line of credit. We pay interest on this line of credit at the bank's prime rate +1.25%. As a result, fluctuations in interest rates could impact our interest expense related to this line of credit.

We prepared sensitivity analyses of our exposure to interest rate fluctuations to assess the impact of a hypothetical change in interest rates. Based on the results of these analyses, we estimate that a hypothetical 10% unfavorable change in interest rates from the September 28, 2002 rates could have a $150,000 impact on annual results of operations. This risk is materially similar to the interest risk presented in the past year, and could have a material effect on our results of operations, cash flows or financial condition for the next year.

Information concerning the Company's market risk is incorporated by reference from Item 2 above, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption, "Market Risk".

Management, including our chief executive officer and chief financial officer, have reviewed and evaluated the Company's disclosure controls and procedures within 90 days of the filing date of this Quarterly Report. Based on such review and evaluation, Management believes that the disclosure controls and procedures are designed effectively to accumulate and communicate material information required to be disclosed in the Company's reports to the SEC.

In addition, Management believes that there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

On July 30, 2002, we held a Special Meeting of Stockholders. At the meeting, we asked stockholders to vote upon three proposals:

          Proposal 1:     Ratify and approve the Series I Preferred Stock Purchase Agreement, the issuance of the Series I preferred and related matters.

          Proposal 2:     Remove Section 4.6 of Exabyte's By-laws.

          Proposal 3:     Approve the grant of stock options to Tom Ward, our newly appointed President, Chief Executive Officer and Director, and the plan for the options.

A total of 34,370,448 shares of Common Stock, Series G preferred and Series H preferred, representing approximately 71.33% of the total shares eligible to vote, cast votes at the meeting. The number of votes cast for, against or withheld, as well as abstentions and broker non-votes as to each proposal, are as follows: