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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

Portions of the registrant's definitive proxy statement for the 2003 Annual Meeting are incorporated by reference into Part III of this report. The registrant's definitive proxy statement will be filed with the SEC on or before April 21, 2003.

In addition to the historical information contained in this document, this report 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. 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. You should carefully consider the risks described below, and other factors as may be identified from time to time in our filings with the Securities and Exchange Commission or in our press releases. If any of these risks should actually occur, our business, prospects, financial condition or results of operations would likely suffer. In such case, the trading price of Exabyte common stock or other securit ies could fall, and you may lose all or part of your investment.

Exabyte intends to periodically update and describe these and future risks in reports filed with the Securities and Exchange Commission. However, you should not assume that we will always update them in a timely manner. We are not undertaking any obligation to update these risks to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

In November 2001, we completed a business combination with Ecrix Corporation. Prior to that transaction, Exabyte and Ecrix were independent companies. Because the transaction resulted in Ecrix becoming a wholly-owned subsidiary of Exabyte, Ecrix's financial results for the period from November 9, 2001 to December 29, 2001 are included in Exabyte's consolidated financial statements and results of operations for fiscal year 2001.

Exabyte Corporation designs, manufactures and markets a range of VXA® and MammothTape™ tape drives as well as VXA®, MammothTape™ and LTO™ (Ultrium™) automated tape libraries. We also provide our own brand of recording media and provide worldwide service and customer support to our customers and end users. We were incorporated in June 1985 under the laws of the State of Delaware.

We focus on the information storage and retrieval tape drive and library market for workstations, midrange computer systems and networks, primarily for data backup and archival applications. Computer manufacturers and resellers require a variety of storage products which vary in price, performance, capacity and form-factor characteristics as their needs for data backup and archival storage increase. Additionally, end users require reliable data backup and archival applications. Our strategy is to offer a number of products to address a broad range of these requirements.

On August 22, 2001 we entered into an Agreement and Plan of Merger with Ecrix Corporation ("Ecrix"), Bronco Acquisition, Inc. (our wholly owned subsidiary formed for the purpose of completing this transaction), certain lenders and certain investors. On November 9, 2001, our stockholders approved this acquisition and we closed the business combination. At the closing of the transaction, Ecrix became a wholly-owned subsidiary of Exabyte and the combined companies have been doing business as Exabyte Corporation since that date. Ecrix Corporation was founded in April 1996 in Boulder, Colorado to commercialize a new family of low-cost, high-capacity, high-performance data storage tape drive products. It began shipping products in May 1999, with general availability in September 1999. Ecrix's tape storage products are based on a technology called VXA® which incorporates variable speed, overscanning technology and discrete packet format. This VXA® architecture incorporates new, patentable technologies th at result in improvements in tape drive reliability and cost-effectiveness.

There were several important changes in our business during fiscal year 2002. Many of them previously have been disclosed in the reports we file from time to time with the SEC on Forms 10-Q and 8-K. However, following is a discussion of certain important events that happened during 2002. Additional information about these and other 2002 events may also be found in our prior filings as well as included elsewhere in this report on Form 10-K.

Our common stock was listed on the Nasdaq National Market. On February 26, 2003, our stock was moved to the Nasdaq SmallCap Market because we failed to meet the minimum bid price requirement necessary to stay listed on the Nasdaq National Market. In September 2002, we received a notice from Nasdaq that we had failed to meet the $1 minimum bid price requirement for continued listing on the Nasdaq National Market. By December 2002, we had not met the minimum bid price requirement, and we received notice from Nasdaq that we would be delisted from the National Market. We appealed this decision and attended a hearing in January 2003. On February 21, 2003, we received Nasdaq's final determination, which included allowing us to apply to the SmallCap Market in order to take advantage of the additional time SmallCap participants have to meet the minimum bid price requirement, a 180 day grace period. As of March 11, 2003, the closing bid price of our common stock was below $1 for 180 trading days. As part of Nasdaq's decision, we had the opportunity to request an additional 180 trading days to meet the minimum bid price requirement, which we did. On March 20, 2003 we received notification that Nasdaq was not granting our request for an additional 180 trading days to meet the minimum bid price requirement because we did not meet the SmallCap core listing requirements. As such, Nasdaq delisted our stock as of March 24, 2003. Our common stock is now traded on the OTC Bulletin Board. We believe that this delisting will further reduce the value of our common stock and its liquidity.

As of December 31, 2002, we are not in compliance with certain financial covenants under our line of credit agreement with Silicon Valley Bank. As a result, we have entered into a forbearance agreement whereby the bank has agreed to forbear from exercising is remedies upon default. The forbearance agreement expires on March 31, 2003 and limits borrowings on the line to $16,000,000. We are also negotiating amended terms to our existing line of credit agreement with Silicon Valley Bank. For more information about this line of credit, see "Liquidity and Capital Resources" under "Exabyte Management's Discussion and Analysis of Financial Condition and Results of Operations" below.

We have recently entered into deferred payment agreements with four of our five largest vendors, and are attempting to secure such an agreement with a fifth vendor. Please see "Information Regarding Our Manufacturing Processes and Partners" below for more information about these agreements.

In January 2002, Mr. William L. Marriner resigned as President, Chief Executive Officer, Chairman of the Board and director of Exabyte. The Board appointed Mr. Juan A. Rodriguez as interim President and Chief Executive Officer and Mr. A. Laurence Jones as non-executive Chairman of the Board while it searched for a new CEO. In June 2002, the Board appointed Mr. Tom W. Ward as President and Chief Executive Officer and Mr. Rodriguez as Chairman of the Board.

We market our products exclusively through resellers, distributors and original equipment manufacturer ("OEM") partners around the world. Our products address the need for reliable, high-performance and affordable data storage in the fastest growing segments of the computer industry - Windows NT, UNIX, MacOS and Linux application and database servers, workstations and computer networks.

We concentrate on the midrange application and database server market, manufacturing tape backup and network storage solutions for small, medium and large businesses. We provide cost-effective solutions incorporating VXA®, MammothTape™ and LTO™ (Ultrium™) technologies.

Throughout the past decade, our products have found widespread use in attended and unattended network backup, automated storage management, near-online storage, archiving, data collection, software distribution and interchange.

We sometimes base our market decisions on forecast reports, which we believe are accurate. If the reports turn out to be inaccurate, it may create insufficient or excessive inventories and disproportionate overhead expenses. Particularly, short order lead-times of reseller sales limit our ability to forecast.

Our tape drives are designed to back up or archive computer data. The primary factors distinguishing our tape drive products from one another are data capacity and transfer rate. Data capacity refers to the total amount of data that can be stored on a single media cartridge. Transfer rate refers to the speed at which data may be transferred to or from the tape drive.

Our tape drives offer data capacities ranging from 20GB to 160GB and transfer rates ranging from 3MB per second to 30MB per second (assuming data compression ratios as stated below).

Sales of tape drive products, including end-of-life drives, represented the following percentages of net revenue:

Following the acquisition of Ecrix in November 2001, we added VXA® technology to our existing MammothTape™ line of products. The following is a discussion on the two types of technologies that we currently produce.

We believe that the VXA® design provides our customers with a low cost, competitive alternative to competing products when compared on the basis of performance, functionality and reliability. The price point and features incorporated in our VXA® technology position it in the DDS (DAT) replacement market.

Our VXA® technology is best understood by contrasting VXA® technology with other existing tape drive technology. The technology used in other tape drives (including our own MammothTape™ tape drives) incorporates a technique known as "streaming." Streaming requires that the system supplying to or accepting data from the tape drive be able to maintain a data stream at or above that specified in the drive's data transfer rate. In streaming drives, data is recorded on tape in "tracks" which must be read from end-to-end in a single pass of a read head. Tape passes over a read head and the read head reads data from the tape. Streaming tape technologies require track-following to maintain proper head-to-track alignment while the tape track is read in its entirety at a fixed tape speed. The drive mechanism and media tolerances must be tightly controlled to maintain a precise alignment between the path of the head and the data tracks written on the tape or data errors can result.

While streaming tape drives are designed to operate efficiently at a constant tape speed and data transfer rate, the host system may not send or receive at the specific fixed rate the tape drive expects. This is because very often data is transmitted in "bursts," resulting in fluctuating transfer rates. Whenever the flow of data is interrupted, the drive stops the tape, backs up, accelerates to the appropriate speed, and then continues the data transfer in the same orientation as before. This process is known as "Backhitching." Backhitching tends to increase the wear and tear on both the media and the drive and slows down the performance of the system.

VXA® incorporates three innovations in tape drive data storage: Discrete Packet Format™, Variable Speed Operation ™and OverScan™ operation.

Discrete Packet Format™. Discrete Packet Format™ organizes each track of the VXA® tape into small digital data packets. Rather than read a track from end-to-end in one pass, Discrete Packet Format™ allows each packet to be read independently and at different times and reassembled later in a data buffer. This data arrangement allows tapes to be read in any sequence.

Variable Speed Operation™. Variable Speed Operation™ enables a drive to adjust the tape drive speed to the host computer's data throughput, eliminating Backhitching and associated delays and wear on media caused by data-rate-matching problems. Variable Speed Operation™ optimizes backup and restore times without compromising data integrity or tape drive reliability.

OverScan™ operation. OverScan™ operation eliminates the drive's dependence on critical alignment geometry between the tape path and the recording head. The area scanned by the heads is greater than the recorded area ensuring that all data packets are read at least once even when the track is not aligned or distorted. This results in a reduction in the number of errors during data retrieval and interchange. OverScan™ operation also makes the drive and alignment systems simpler and easier to manufacture.

In 1996, we began revenue shipments of our Mammoth product to customers. We based it on a new technology platform - a redesigned helical-scan tape drive. Understanding the need for higher reliability, we designed the Mammoth tape drive specifically for the rigors of backup and data storage in the server market.

This technology platform, known as MammothTape™ technology, is an integrated system encompassing both tape drive design and advanced metal evaporated ("AME") media. All aspects of the technology work together to optimize recording performance and to ensure the integrity of vital data.

The MammothTape™ platform designs are extremely complex, which may result in lower than anticipated manufacturing yields, field reliability issues and increased inventory levels. We experienced such issues with the introduction of our original MammothTape™ drive and were able to successfully address them. We experienced similar issues with the introduction of the M2™ tape drive in 1999. We have made significant progress in addressing these issues as they relate to the M2™ product, and make every effort to assure that we address such issues as quickly as possible. However, we cannot assure that we will completely resolve any of these issues or, if resolved, they will be done in a timely manner.

We believe that the success of our VXA® and M2™ tape drives impacts our success as a company. Various factors determine the success of our tape drives, including:

     -   OEM qualification and adoption;

     -   media availability;

     -   satisfactorily addressing design issues;

     -   customer acceptance of our tape drive formats; and

     -   our ability to develop and introduce future tape drive products.

To the extent we cannot successfully address any of these or other developmental issues, our current and future sales could be negatively impacted, and our competitive and financial positions, as well as our results of operations would be harmed.

Our inability to successfully effect any of these factors could negatively impact our competitive position, which would have a material adverse impact on our results of operations and our financial condition.

In addition to our tape drives, we design, develop, manufacture, sell and support automated tape drive libraries. These libraries incorporate one or more tape drives and multiple media cartridges to provide much higher data capacities than using a single drive and, with more than one drive, higher data transfer rates.

We offer library products incorporating VXA®, MammothTape™ and LTO™ (Ultrium™) tape drives. Our libraries are designed to be scalable, allowing us to develop different sized libraries based on the same model, with room inside each box for expansion. This capability enables our designs to accommodate increases in customers' data storage needs and allows our end users to protect their library investment.

We engineer our library products to satisfy the reliability, service-ability and management requirements of storage networking. They combine the reliability of our robotics with features such as optional Ethernet ports, hot-pluggable tape drive carriers designed to be serviced during library operation, optional bar code scanners and removable magazines.

Sales of library products, including end-of-life, represented the following percentages of net revenues:

We believe that the success of our library products impacts our success as a company. Our ability to succeed in this market will depend upon a number of factors, including:

     -   our ability to successfully sell libraries independent of our tape drives;

     -   availability of media;

     -   introduction of competitive products;

     -   acquiring sufficient market share;

     -   customer acceptance and OEM adoptions; and

     -   compatibility with tape drives used by our customers.

Our inability to successfully effect any of these factors could negatively impact our competitive position, which would have a material adverse impact on our results of operations and our financial condition.

Below is a table showing our current and future product offerings. We cannot assure that any of the current or announced products or services listed below will be successfully developed, made commercially available on a timely basis or achieve market acceptance. We encounter a number of risks in producing and selling our products and services.

As shown in the above table, we provide various types of media cartridges, as well as cleaning cartridges and data cartridge holders, for our tape drive products. The high-quality media, produced by multiple third parties, is available in different lengths to handle various data storage requirements.

Sales of media and media related products represented the following percentages of net revenue, excluding sales allowances:

Media sales represent a significant portion of our total revenues. To the extent media sales decline and are not replaced with additional revenue from our other products or services, our financial results, including our gross margin and revenues, may be adversely affected. We depend on a continuous supply of Advanced Metal Evaporative ("AME") media to use with our VXA® and MammothTape™ products. We cannot sell our products, or grow our product lines without a sufficient supply of AME media. Currently, we obtain AME media from three suppliers:

     -   Matsushita Electric Industrial Co. Ltd. ("MEI");

     -   TDK Corporation ("TDK"); and

     -   Sony Corporation ("Sony").

Formulated specifically for our VXA® and MammothTape™ tape drives, AME tape (also called VXATape® for use with VXA® tape drives) offers expanded recording capacity and low abrasivity, which reduces mechanical wear. AME magnetic material is vertically aligned. This unique orientation and the absence of binder components on the media gives AME higher capacity and superior signal strength. AME's specially formulated backcoating dramatically reduces the buildup of static electricity and debris, greatly reducing the chance of read/write errors.

AME media with SmartClean™ technology is only available for use with M2™ tape drives and includes a section of cleaning tape at the beginning of each data cartridge. We specifically designed this cleaning tape to remove chemical films that can build up on recording heads. These films are caused by organic compounds and cannot be removed by other cleaning methods. The M2™ drive keeps statistics on its own operation and activates the SmartClean™ technology when the drive needs cleaning. With normal use, extra cleaning cartridges are needed less frequently.

We offer a full range of warranty and post-warranty support services for our library, tape drive, and media products. We deliver these services through a worldwide network of service center partners and authorized service providers and support our OEM and reseller customers, as well as end users, in the deployment, operation and maintenance of our products. We also sell spare parts to OEMs and end users.

Revenue from services, spares and support programs represented the following percentages of net revenue:

We market our products worldwide through OEMs, distributors and resellers, and provide services directly to OEMs and to the customers of our distributors and resellers. We typically sell our new products initially to distributors and resellers who are quicker to evaluate, integrate, and adopt new technology. OEM sales generally increase (relative to reseller sales) as the new product successfully completes the necessary qualification process. Over the last several years, our sales have been principally to distribution and reseller customers as compared to OEM customers. We believe we need to increase the number of our OEM customers as well as the volume of products we sell to them in order to be successful.

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 last step typically occurs toward the end of the sales cycle before volume shipments of our products are made to the OEM.

Product sales to OEMs represented the following percentages of net revenue:

Our product sales depend heavily on OEM qualification, adoption and integration. Some of our distributor, reseller and smaller OEM customers delay their orders until key OEMs adopt and integrate our products. Our competitive position and results of operations may be significantly harmed if a key OEM failed to adopt and integrate our products.

We have announced adoption of our products by several OEM customers, but our success depends on additional OEMs adopting our products, particularly the VXA-2® tape drive, as well as existing OEMs increasing their purchases of current products.

Our distributor and reseller customers purchase products for resale. Reseller customers may provide various 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 of these 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 and distributor customers may include:

     -     inventory price protections;

     -     stock rotation obligations;

     -     short term marketing promotions; and

     -     customer and end user rebates.

The distribution and reseller business is also characterized by relatively short order lead times which limit our ability to forecast sales to these customers. Contractually, our distributor and reseller customers may return a portion of their Exabyte product inventory as part of their stock rotation rights, but must also issue a simultaneous offsetting purchase order.

Sales to distributors and resellers represented the following percentages of net revenue:

In the past, we have experienced delays in receiving purchase orders and, on occasion, anticipated orders have either not materialized or been rescheduled because of changes in customer requirements. These types of changes from our key customers may cause our revenue to change significantly from quarter to quarter. If the change involves higher-margin products, then the impact is greater on the results of operations.

We do not sell our products directly to federal, state and local governments. We support our reseller customers that sell directly to the government with various government-directed programs and other sales and marketing services. We believe that the government business generally represents approximately 30% of our total revenues. Even though our sales to the government are indirect, our revenues have previously been adversely impacted by sales to the government that did not materialize for various reasons. Should it happen in the future, our revenues and results of operations would likely be harmed.

We market our products overseas directly to international OEMs and resellers. We also serve OEMs and end users through our international resellers. International resellers, which have rights to sell our products in a country or group of countries, serve each of our international markets. Direct international sales will probably continue to represent a significant portion of our revenue for the foreseeable future. In addition, many of our domestic customers ship a significant portion of our products to their overseas customers.

Direct international sales accounted for the following percentages of net revenue:

Currently, a very small percentage of our international sales are denominated in foreign currencies and are affected by foreign exchange rate fluctuations. This could impact our results of operations. Changes in the foreign exchange rates may adversely affect the volume of sales denominated in U.S. dollars to overseas customers. Our sales are also subject to risks common to export activities, including government regulation or seizure of property, tariffs, and import restrictions, which are discussed in more detail in the section "Information Regarding Foreign Exchange and Import Restrictions" below.

A partial list of our customers includes Apple Computer, Arrow Electronics, Bull, Digital Storage Inc., Fujitsu Siemens Computers, Hewlett Packard, IBM, Ingram Micro, Tech Data, and Toshiba. We have customers who are also competitors, such as IBM with their LTO™ (Ultrium™) tape drive. We have several customers whose sales account for 10% or more of our net revenue. The chart below sets forth the percentages of sales for customers that exceeded 10% of annual sales over the past three years:

We do not require minimum purchase obligations from our customers. They may cancel or reschedule orders at any time, prior to shipment, without significant penalty. Losing one or more key customers would adversely affect our results of operations. Additionally, a key customer canceling orders or decreasing the volume in orders would adversely affect our results of operations.

The data storage market is extremely competitive and subject to rapid technological change. We believe that competition in the data storage market will continue to increase, particularly because manufacturers of all types of storage technologies compete for a limited number of customers. We also believe that our customers consider the following main competitive factors in making their purchase decisions:

     -     storage capacity;

     -     data transfer rate;

     -     price/performance;

     -     innovation;

     -     product quality and reliability;

     -     timing of new product introductions;

     -     volume availability;

     -     customer support; and

     -     the company's financial strength.

Many companies engage in researching, developing and commercially-organizing data storage products (including computer manufacturers, such as IBM and Hewlett-Packard, which incorporate their own storage products into their systems). Many of our current and potential competitors have significantly greater financial, technical, and marketing resources than us. We cannot assure that they will not devote those resources to the aggressive marketing of helical scan, mini cartridge, half-inch cartridge, optical or other storage product technologies. These technologies may be equivalent or superior to our own technologies, or may render some of our products non-competitive or obsolete. In order to compete under these pressures, we must adapt our technologies to these changes in an efficient, cost-effective manner.

Competition can also result in price erosion. Price erosion of our products has occurred in the past and is likely to occur again in the future. We have lost market share to competitors in the past. We may lose additional market share in the future.

Technology typically changes and advances quickly in the high technology industry. In order to successfully compete in this industry, our future products must apply and extend our current technology, as well as keep pace with new technology developments. The rapid development of tape drive technologies directly impacts our ability to compete. Other factors which impact our ability to compete include:

     -   customer and OEM adoption of VXA® and MammothTape™ technology;

     -   integration of our VXA® and MammothTape™ technologies into a compelling tape drive platform;

     -   compatibility of tape drives to other data storage products;

     -   data storage density;

     -   data transfer rate;

     -   customer confidence and familiarity;

     -   product reliability; and

     -   price.

If we do not continually enhance our tape technology to keep pace with our competitors, our products will not remain competitive. If any new technology offers users the same or greater benefits than tape, tape technology could become obsolete. In order to compete under market pressures, we must be able to adapt our technologies to changes in an efficient, cost-effective manner. Our inability to adapt would severely harm our competitive position and our results of operations. The success of any future products depends on:

     -   timely development;

     -   customer acceptance;

     -   supply capacity;

     -   customer transition to these future products;

     -   OEM qualification and adoption; and

     -   media availability.

Although tape has historically been the preferred medium for data storage backup, companies are developing new technologies for this market. Some of the new technologies are:

     -   Optical Disk

     -   Optical Tape

     -   DVD

     -   Holographic Storage

     -   Magneto-optics

We may also experience competition from new storage architectures, such as SANs, network attached storage and virtual storage.

Our VXA® and M2™ tape drives face significant competition from current and announced tape drive products manufactured by Quantum, Hewlett Packard, Seagate, Sony and the LTO™ Consortium. The specifications of some of these drives show greater data capacities and transfer rates than our tape drive products. We believe that our VXA® tape drives are a low cost, competitive alternative to competing products when compared on the basis of performance, functionality and reliability. In turn, we offer LTO™ (Ultrium™) technology through our library products.

Our library products face competition from companies such as Advanced Digital Information Corporation ("ADIC"), Quantum Corporation/ATL, Overland Data, StorageTek and QualStar. Significant competition may also develop from companies offering erasable and non-erasable optical disks, as well as other technologies.

We are currently outsourcing much of our manufacturing process, including most of our tape drives and library products, and all of our media. Those products that we still manufacture ourselves have reached their end-of-life cycle. As a result, we anticipate that we will no longer manufacture any products ourselves by mid-2003.

Outsourcing our manufacturing to a third party takes many months and involves many details. Due to the time and expense involved, and the inability to easily move the manufacturing to another party, we heavily depend on our existing third party manufacturers for our products.

Our manufacturers rely in part on volume in order to create efficiencies in their manufacturing processes. If our sales do not increase to a volume level that enables our manufacturers to capitalize on these efficiencies, they may not be able to manufacture the product at a commercially viable cost to them, and could terminate their manufacturing and supply agreement with us. In addition, the cost to us for terminating one of these supply agreements could be significant, which would have a materially adverse impact on our results of operations and financial condition.

If any of our manufacturing partners cannot meet our product demand, or cannot or will not implement product changes on a timely basis, we would be unable to fill customer orders and our results of operations and financial condition would be materially and adversely impacted. Additionally, should any of our manufacturing partners be unable to produce the product at a commercially reasonable cost to us, our margins would be negatively impacted, which would result in material harm to our results of operations and financial condition. Our dependence on third party manufacturers can also adversely affect our ability to negotiate the terms of our future business relationships with these parties.

If our outsourcing efforts are unsuccessful for any reason, bringing the manufacturing process back to Exabyte or outsourcing to another third party manufacturer could negatively impact our ability to fill customer orders and could harm our results of operations.

We obtain components for our products from sole-source suppliers. We have executed master purchase agreements with some of our sole-source suppliers and conduct business with the rest of our suppliers on a purchase order basis. We rely heavily on our suppliers to produce the components for our products, or the products themselves. Reliance on sole-source suppliers can result in possible shortages or discontinuance of key components.

In addition, by relying on sole-source suppliers, we may see a reduction in our level of control over many items, including:

     -   delivering components on schedule;

     -   manufacturing a high number of components for delivery;

     -   maintaining the highest possible quality when manufacturing the components; and

     -   managing the costs of manufacturing the components.

We believe that every component, large and small, is important to manufacture our products. A shortage of any component would directly affect our ability to produce the product. Some of the components are developed and manufactured to our specifications, which further limits our ability to quickly find another supplier if we experience a supply shortage. There are long lead-times associated with the availability of many components that make obtaining them sometimes difficult.

We are currently experiencing liquidity constraints which affect the amount of cash available to pay our vendors and suppliers pursuant to our contractual obligations. This constraint has in the past and will likely in the future cause our vendors to restrict shipments of key components necessary to build and sell our products. We attempted to address this problem with our largest vendors by entering into deferred payment agreements with four of our five largest vendors. We continue to negotiate a similar arrangement with a fifth major supplier and have entered into a letter of credit arrangement with this supplier to assure product shipment to us while we negotiate the terms of the deferred payment agreement. We cannot assure that we will successfully enter into such an arrangement, or that the terms of the arrangement will be beneficial to us. These agreements have been structured in a way that allows us to continue to receive shipments from these vendors while paying down the amounts we owe each of the m. The subjects covered by these agreements are similar. Each sets forth a repayment schedule that outlines how and when we will repay the amount we owe each vendor, as well as specific payment terms for payments on purchases made subsequent to the agreement. Although we believe that these agreements adequately address the liquidity issue with our largest vendors, we cannot assure that these vendors will not withhold shipments from us in the future.

Any inability to obtain key components in a timely manner, regardless of the reason, will restrict our ability to ship products and, as a result, harm our revenues and results of operations and financial condition.

We, our suppliers, and our third party manufacturers may be limited in our ability to meet a sudden significant increase in demand due to limitations in manufacturing capacity and long lead times to acquire certain parts. If our suppliers and third party manufacturers are not able to meet the increased demand, our inability to fulfill our customers' orders could adversely affect our results of operations.

Hitachi Ubiquitous Company ("Hitachi") supplies us with VXA®-1, VXA®-2 and M2™ tape drives. We outsourced the manufacturing of the M2™ tape drive to Hitachi over the 2001-2002 period, and transferred the manufacturing of the VXA® drives to them following the acquisition of Ecrix in 2001 and completed that transfer in 2002.

The supply of our M2™ tape drives is governed by a manufacturing and supply agreement. Although we believe we have adequate protection for the continuous supply of the products, our intellectual property, and other important matters, we cannot assure that Hitachi will abide by the terms of the agreement or that the terms provide us with adequate protection.

We do not have an executed agreement for the manufacture and supply of the VXA® tape drives. However, we believe we are close to executing that agreement and are currently doing business in accordance with the material terms of this draft agreement. We cannot assure that we will finalize the terms of this agreement, which could subject us to several risks, including an inability to obtain VXA® drives or lack of adequate remedy for failure to supply us with drives. Further, we cannot assure that all of the terms of any finalized agreement will be favorable to us, or will sufficiently protect our interests.

We have entered into discussions with Hitachi for the joint development of future tape drive products. We cannot assure that any such joint development will occur or succeed. Further, we cannot assure that we will enter into an agreement for this development, or that the terms of any agreement will be favorable to us or sufficiently protect our interests, which could impact the development of our future drives.

Many of the risks associated with our other suppliers apply to our relationship with Hitachi. Specifically, regardless of whether we have the proper agreements in place for the manufacture and supply of tape drives, we cannot assure that Hitachi will continue to supply us products or that they will be available at appropriate supply levels or competitive prices. Our inability to obtain products at a commercially reasonable cost would cause a significant delay or even termination of the production of some of our tape drive products, and would materially and adversely harm our competitive position and our results of operations.

Should Hitachi terminate its relationship with us for any reason, we would be forced to bring manufacturing operations back to Exabyte or outsource to another third party, which would be prohibitively difficult for us to accomplish without significant impact to our customer relationships, revenue and results of operations.

Our VXA®-1 tape drive was previously manufactured by AIWA Co. Ltd. ("AIWA"). As part of the transfer of that manufacturing relationship, we entered into a technology transfer and license agreement with AIWA, whereby AIWA granted us a non-exclusive license to utilize certain AIWA related VXA® technologies related to design and production of the VXA®-1 and VXA®-2 tape drives for a royalty based on the invoice price to us of each VXA®-1 and VXA®-2 drive we purchase from another manufacturer. To the extent that AIWA decides to no longer license this technology to us, we will be unable to produce these drives without considerable time and engineering effort. Even with this development effort, we can not assure that we would be able to duplicate this technology. Additionally, the license agreement with AIWA does not indemnify us for infringement of this technology on someone else's proprietary rights.

Shinei International, a Solectron company ("Shinei"), supplies us with many of our libraries, including all of our LTO libraries. We outsourced this manufacturing to them in 2001 and completed the effort in 2002. We currently do business with Shinei under several agreements. The purchase agreement provides for the supply of these libraries to us. We also have a supplier managed inventory agreement that governs how Shinei delivers the libraries to our Hubs (see "Hubbing and Logistic Services Relationships" below). Although we believe we have adequate protection for the continuous supply of these products, our intellectual property, and other important matters, we cannot assure that Shinei will abide by the terms of the agreement or that the terms provide us with adequate protection.

Many of the risks associated with our other suppliers, including Hitachi, also apply to our relationship with Shinei. Specifically, we cannot assure that Shinei will continue to supply us products or that they will be available at appropriate supply levels or competitive prices. Our inability to obtain products at a commercially reasonable cost would cause a significant delay or even termination of the production of some of our tape drive products, and would materially and adversely harm our competitive position and our results of operations.

Our agreements with Shinei provide for termination by either party upon adequate notice or the occurrence of certain events. Should Shinei terminate its relationship with us for any reason, we would be forced to bring manufacturing operations back to Exabyte or outsource to another third party, which would be prohibitively difficult for us to accomplish without significant impact to our customer relationships, revenue and results of operations.

We currently have relationships with various hubbing and logistic services partners ("Hubs") around the world. Our largest Hub is located in California. These Hubs generally receive product from us or directly from our manufacturers and store it until they receive orders from us to ship the product to a particular destination. These types of relationships benefit us in that we do not have to maintain, staff and pay for a large warehouse facility. Also, we do not retain title for some of the products, which limits our liability in the case of loss. However, there are also some risks involved in maintaining a relationship with Hubs. We maintain title to some product while it sits in a Hub warehouse. This exposes us to liability for loss of product. We may also experience a reduction in control over inventory levels and product quality during storage. Additionally, the Hubs may not clear customs for us, which could leave us exposed to import and export liabilities (see " Information Regarding Foreign Exchange And Import Restrictions" below). Also, although our shipping instructions generally call for the product to be pulled from their warehouse stock and shipped to the customer on the same day, we do not have direct control over this process, which could impact our revenues and results of operations if the Hubs do not ship in accordance with our instructions.

The market for data storage devices is highly competitive. We believe that this competition will increase as new technology increases speed and reliability of storage products while at the same time reduces the cost of those products. With this in mind, we have concentrated our research and development on enhancing existing products and developing new products that will improve the performance and cost of current tape drives we offer. Our research and development expenses were approximately $36.5 million, $25.2 million, and $23.7 million in 2000, 2001 and 2002, respectively.

We rely on a combination of patents, copyright and trade secret protections, non-disclosure agreements, and licensing arrangements to establish and protect our proprietary rights. As of March 7, 2003, we held a total of 100 patents and 33 pending applications in the United States, of which 10 were issued in 2002, all relating to technologies and other aspects of our tape drive and automated tape library products. However, we believe that, because of the rapid pace of technological change in the tape storage industry, factors such as knowledge, ability and experience of our employees, new product introductions and frequent product enhancements are often more significant than patent and trade secret protection.

Although we file patent applications for our products when appropriate, patents may not result from these applications, or they may not be broad enough to protect our technology. Someone may also challenge, invalidate or circumvent our patents. Sometimes other companies and individuals assert that our patents infringe their proprietary rights. Occasionally, third parties ask us to indemnify them from infringement claims. We intend to defend ourselves against infringement claims. Defending these infringement claims may result in long and costly litigation, and could potentially invalidate a patent. We may attempt to secure a license from third parties to protect our technology but cannot assure that we would succeed. This may adversely affect our ability to use such technology and, as a result, our results of operations. Some foreign laws may not fully protect our intellectual property rights.

We designed our own mechanized deck assembly incorporated in our MammothTape™ products. Because we did not obtain the design of this deck from a third party, we do not benefit from supplier indemnification should an infringement claim arise. Manufacturing and/or selling our MammothTape™ drives may infringe on someone else's proprietary rights, even though we believe we have taken appropriate measures to avoid it.

Much of our third party manufacturing utilizes proprietary technology. To protect our proprietary information, we may extend licenses to our third party manufacturers. However, we cannot assure that our third party manufacturers will adhere to the limitations or confidentiality restrictions of their license.

Additionally, we have granted manufacturing licenses to certain customers which allow them to manufacture and sell our products should specific events occur, such as our inability to perform our supply obligations. This practice may impair our ability to establish, maintain or achieve adequate product design standards or product quality levels.

We enter into joint development agreements with third parties for the development of product components. Under these agreements, the third parties generally have joint ownership of certain technologies related to the component being developed. This could increase our reliance on these manufacturers or may require us to obtain a license from them. We may be unable to obtain a license on terms acceptable to us, if at all.

Many of these types of contracts are with manufacturers outside the United States. In addition to typical market risks associated with utilizing third party manufacturers, contracting with foreign manufacturers subjects us to additional exposures, including:

     -   political instability;

     -   currency controls and fluctuations;

     -   tariffs, customs and other duties;

     -   reduced intellectual property protections; and

     -   import controls, trade barriers and other trade restrictions and regulations.

Additionally, U.S. federal and state agency restrictions imposed by the Buy American Act or the Trade Agreement Act may apply to our products manufactured outside the United States.

Backlog consists of purchase orders for which a delivery schedule within six months has been specified by the customer. Our total backlog as of December 29, 2001 and December 28, 2002 totaled approximately $7.8 million and $9.3 million, respectively. Our customers typically are not obligated to purchase minimum quantities of our products. Lead times for the release of purchase orders depend upon the scheduling practices of each customer. We believe that, based upon past order histories, the rate of new orders will vary significantly from month to month. Customers may cancel or reschedule orders without penalty. In addition, our actual shipments depend upon our production capacity and component availability. For these reasons, our backlog as of any particular date may not be indicative of our actual sales for any succeeding fiscal period.

We strive to maintain appropriate levels of inventory. Excessive amounts of inventory reduces our cash available for operations and may cause us to write-off a significant amount as excess or obsolete. Inadequate inventory levels may make it difficult for us to meet customer product demand, resulting in lost revenues.

We face many challenges in effectively managing our inventory, which may materially affect our results of operations if we do not manage them properly. These challenges include:

     -   keeping inventory levels low;

     -   managing unexpected increases in inventory due to stock rotation obligations or cancelled orders;

     -   meeting changing product demands;

     -   transitioning our product lines effectively; and

     -   successfully introducing new products.

Particularly, introducing new products may negatively affect our product inventory value by requiring us to write down or make allowances for inventory devaluation, which may materially affect our results of operations. In the past we have experienced special charges and write downs which harmed our results of operations. In the future we may again incur special charges or make allowances for an inventory devaluation that will materially affect our results of operations and financial condition.

We must accurately time the introduction and end-of-life of our products into and out of the data storage market because it affects our revenue and inventory levels. Accurately timing the release of new products is important to the sales of existing products. Prematurely taking an existing product into an end-of-life cycle could result in revenue loss from that product, and delaying the withdrawal of a product could result in excess product inventory and subsequent inventory write-downs. We continually evaluate our product life cycles. Any timing mistakes or inability to successfully introduce a new product could adversely affect our results of operations.

We manufacture (or have manufactured for us) many of our key components and products overseas in countries such as Japan, Germany, China, Singapore, Indonesia and Malaysia, which could impact our operating results. Because we depend on foreign sourcing for our key components, products and subassemblies, our results of operations may be materially affected by:

     -   fluctuating currency exchange rates;

     -   foreign government regulations;

     -   foreign exchange control regulations;

     -   import/export restrictions;

     -   foreign economic instability;

     -   political instability; and

    -    tariffs, trade barriers and other trade restrictions by the U.S. government on products or components shipped from foreign sources.

Our international involvement is also subject to other risks common to foreign operations, including government regulations, foreign exchange or import restrictions or tariffs imposed by the U.S. Government on products or components shipped from another country. Additionally, the sale of our products to domestic federal or state agencies may be limited by the Buy America Act or the Trade Agreement Act to the extent that we incorporate components produced overseas into our products.

Our functional currency and the functional currency of our subsidiaries is the U.S. dollar. However, our subsidiaries located in The Netherlands, Japan and Singapore also enter into transactions in their respective local currencies. As a result, any amounts payable to a subsidiary or owed by a subsidiary are subject to the foreign exchange rate applicable between the U.S. dollar and the local currency and could materially and adversely affect our results of operations. These subsidiaries also operate under their respective local law. This may complicate enforcing our legal rights in these countries.

Several factors may increase our subsidiary costs and affect our results of operations, including:

     -   fluctuating currency exchange rates;

     -   foreign government regulations;

     -   difficulties in collecting international accounts receivable; and

     -   difficulties in enforcing intellectual property rights.

Tax regulations in the United States and those foreign countries where we operate require transactions between us and our subsidiaries to take place in an arm's-length manner. The IRS and its foreign counterparts have increased their focus on this issue in recent years. Penalties arising from misapplying these laws are material. Consequently, we have performed numerous formal transfer pricing studies to ensure the documentation supporting our intercompany dealings is adequate. The IRS has audited our tax records through 1997 and had not proposed any adjustments in the way we structure our arm's-length transactions. However, foreign taxing authorities could examine these same transactions and assert that we have not complied with their tax laws relating to intercompany transfer pricing. As a result, we could be required to pay potentially significant taxes and penalties, as a result of our past or future intercompany transactions.

Regulations by the U.S. or foreign governments may obligate us to obtain licenses, pay fees and/or taxes, or otherwise delay or increase the costs of international transactions. These regulations may include without limitation:

     -   U.S. government sanctions that prohibit trade with certain parties that may include our
                 customers and suppliers;

     -   U.S. and other government restrictions on the export or import of certain technologies
                 (including our products and materials necessary for our products), for reasons that may
                 include national security, foreign policy, short supply, environmental or other national or
                 international concerns;

     -   U.S. and other government tariffs (e.g., duties) or non-tariff barriers (e.g., quotas or
                 other restrictions) that may restrict or prohibit cross border transactions, including fund
                 transfers and commodity exports and imports; and

     -   U.S. and other government restrictions or taxes on currency transfers and currency conversion
                 that may impact our ability to receive or make payments, make investments, etc.

As of March 13, 2003, we had 349 full-time and part-time employees worldwide, consisting of:

Our employees are not represented by a labor union.

In January 2002, we announced a corporate restructuring that resulted in the closing of our service and final assembly facility in Scotland and our service depots in Canada and Australia, as well as a reduction in our workforce of approximately 180 persons worldwide, comprised of regular full-time employees. In July 2002, we again announced further reductions resulting in elimination of approximately 100 full- and part-time employees. In the first quarter of 2003, we terminated another 52 full- and part-time employees. Although each reduction in force implemented over the past year has been designed to reduce costs, the latest reduction was designed specifically to help bring our current cost and personnel structure in line with current revenues. We believe that the Company is now appropriately structured, but we cannot assure that we will not reduce our workforce again in the future. Continued losses could cause us to enact further reductions in our workforce.

With a slowdown in the labor market, the competition for key employees is somewhat lessened. Despite this slowdown, our success continues to depend significantly upon our ability to attract, retain and motivate key engineering, marketing, sales, manufacturing, support and executive personnel. We compete for qualified employees with other high technology companies and other employers in Colorado. Competition for key employees is based upon, among other factors, base salary, stock-based compensation, ownership investment and high turnover rates in technology and other companies generally. As a result, we may lose or fail to recruit needed employees. Losing or failing to recruit a key employee could:

We will make available free of charge through our website, http://www.exabyte.com, this annual report, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission.

The executive officers of the Company and their ages as of March 28, 2003, are as follows:

Mr. Juan A. Rodriguez, age 62, has served as a director and Chief Technologist of Exabyte since November 2001, was its interim President and Chief Executive Officer from January 2002 until June 2002, and has served as its Chairman of the Board and Chief Technologist since June 2002. Mr. Rodriguez co-founded Ecrix Corporation in 1996 and was its Chairman of the Board and Chief Executive Officer since 1996. Mr. Rodriguez co-founded Storage Technology Corporation in 1969 after several years as an IBM tape technology engineer. While at Storage Technology Corporation, he served in vice presidential and general manager roles over Engineering, Hard Disk Operations and Optical Disk Operations. In 1985, Mr. Rodriguez co-founded Exabyte Corporation, where he held the positions of chairman, president and CEO. Mr. Rodriguez is a professor for the University of Colorado Bankers College of Engineering and Applied Science.

Mr. Tom Ward, age 46, joined Exabyte as its President, Chief Executive Officer and a director in June 2002. Mr. Ward founded Data Storage Marketing, a distributor of storage products, in 1987 and sold the company to General Electric in 1997. Mr. Ward founded Canicom in 1997, a call center company, which he sold to Protocol Communications, an integrated direct marketing company, in 2000, assuming the position of Chief Operating Officer until June 2001. Mr. Ward began his career with Storage Technology Corporation serving in several roles in engineering and marketing. He later joined MiniScribe as Director of Sales for High Performance Products.

Mr. Craig G. Lamborn, age 49, has served as Vice President, Chief Financial Officer since November 2001, when he was appointed in connection with the acquisition of Ecrix. Prior to that, he served as Ecrix's Vice President of Finance and CFO since 1998. Before joining Ecrix, Mr. Lamborn spent seven years as CFO of Kentek Information Systems, a manufacturer of high speed printers. Prior to Kentek, Mr. Lamborn held financial positions with McData Corporation and Union Pacific Corporation. Mr. Lamborn is a certified public accountant.

Executive officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors and officers.

Our corporate offices, including our research and development and manufacturing facilities, are located in Boulder, Colorado, in leased buildings aggregating approximately 276,738 square feet, which includes 55,726 square feet of space in two buildings formerly occupied by Ecrix, which are currently unoccupied. The lease terms on these facilities expire on various dates ranging from 2004 to 2006. Although we do not currently anticipate expanding our operations, we believe that we have enough space available if further expansion becomes necessary. The following chart identifies the location and type of each Exabyte property:

We are subject to incidental litigation risks in the ordinary course of our business. We are not currently the subject of any material pending legal proceeding.

Not Applicable.

Exabyte's common stock has been traded in the over-the-counter market and has been quoted in the National Market System of the Nasdaq Stock Market ("Nasdaq") under the symbol EXBT from our initial public offering on October 19, 1989 until February 26, 2003, at which time it began trading on the Nasdaq SmallCap Market. For the calendar quarters indicated, the following table shows the high and low bid prices of our common stock as reported on Nasdaq.

On March 20, 2003, we had 567 holders of record of our common stock. The reported closing price of the common stock was $0.20. We have never paid cash dividends on our common stock. We presently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We are prohibited under the terms of our line of credit agreement with Silicon Valley Bank from declaring or setting aside any cash dividends.

As an inducement to have Tom Ward serve as our President and Chief Executive Officer, we agreed to grant stock options to Mr. Ward pursuant to a Nonstatutory Stock Option Agreement, dated June 3, 2002 between Exabyte and Mr. Ward (the "Plan"). The Plan is independent of our existing Stock Option Plans and was approved by stockholders at a meeting on July 30, 2002. The terms of the Plan were also approved by our Compensation Committee.

Under the Plan, as of the commencement of Mr. Ward's employment with us, he was granted an option to purchase 3,000,000 shares of our common stock. The option has an exercise price equal to the common stock's closing price on the Nasdaq National Market on the date of the stockholder approval of the Plan. This option contains our normal vesting terms, providing for vesting during Mr. Ward's employment at the rate of 2% per month, except that any remaining unvested options will be deemed to be fully vested as of December 30, 2005.

Also, in accordance with the Plan, Mr. Ward received an additional option to purchase 4,000,000 shares of our common stock with a vesting schedule which accelerates based upon the market price for our common stock. The additional option was granted with an exercise price equal to the common stock's closing price on the Nasdaq National Market on the date of the stockholder approval of the Plan. This option will vest as follows:

        --   All shares will be deemed to be fully vested as of June 5, 2007, provided that Mr. Ward is
                     employed as the President and Chief Executive Officer of Exabyte at such time;

        --   Mr. Ward will qualify for an accelerated vesting schedule (for such additional options) as
                     follows, provided he is employed as the President and Chief Executive Officer of Exabyte at
                     the time of any such acceleration event:

               -   1,000,000 shares at such time as our stock price closes at or above $2.00 for 30
                           consecutive trading days;

               -   1,000,000 shares at such time as our stock price closes at or above $4.00 for 30
                           consecutive trading days;

               -   1,000,000 shares at such time as our stock price closes at or above $5.00 for 30
                           consecutive trading days; and

               -   1,000,000 shares at such time as our stock price closes at or above $6.00 for 30
                           consecutive trading days.

All stock prices and option strike prices will be appropriately adjusted for stock splits, a stock dividend, a merger or similar events. Unless terminated earlier as provided in the Plan, both of Mr. Ward's options will expire on June 2, 2012. Options granted under the Plan will terminate 90 days after termination of employment with Exabyte for any reason except in limited circumstances, including disability or death, in which case the term of the options continues for an additional period of time. Mr. Ward's employment with Exabyte may be terminated by Exabyte or him at any time for any reason.

The issuance of options was exempt from registration under the Securities Act of 1933 as a non-public offering pursuant to Section 4(2) of the Act. We based our reliance on this exemption on the facts of the transaction, including that the issuance and offering of the options was made only to a person who became our President, who in negotiating his employment with us had access to information about Exabyte and who has indicated that he will hold the securities for investment without a view to distribution.

The above summary descriptions of these documents are qualified in their entirety by reference to such documents which have been filed with the Securities and Exchange Commission.

The selected financial data set forth below with respect to our consolidated statements of operations for the fiscal years ended January 2, 1999, January 1, 2000, December 30, 2000, December 29, 2001 and December 28, 2002 and with respect to the consolidated balance sheets as of January 2, 1999, January 1, 2000, December 30, 2000, December 29, 2001 and December 28, 2002 are derived from audited consolidated financial statements. The consolidated financial statements as of December 29, 2001 and December 28, 2002, and for the three years ended December 28, 2002 are included elsewhere in this report on Form 10-K and the selected financial data shown below are qualified by reference to such financial statements. There were 52 weeks in 1998, 1999, 2000, 2001 and 2002.

(In thousands, except per share data)

(1)  The Company recorded restructuring charges in 1999, 2000, 2001 and 2002, totaling $2,446,000, $3,899,000, $498,000 and $4,791,000, respectively. See Note 8 of Notes to Consolidated Financial Statements.

(2)  The Company recorded a full valuation allowance on all existing deferred tax assets in 1999. See Note 9 of Notes to Consolidated Financial Statements.

(3)  See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing net loss per share.

The following tables set forth unaudited operating results for each quarter of fiscal 2001 and 2002. This information has been prepared on the same basis as the audited financial statements and, in the opinion of management, contains all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation thereof. These unaudited quarterly results should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this annual report on Form 10-K. The operating results for any quarter are not necessarily indicative of results for any future period.

(In thousands, except per share data)

(1)   In the quarter ended March 31, 2001, the Company recorded restructuring charges of $498,000 related to a reduction in its workforce in order to reduce expenses, minimize ongoing cash consumption and to simplify the management structure. See Note 8 of Notes to Consolidated Financial Statements.

(1) In the quarter ended March 30, 2002, the Company recorded restructuring charges of $4,363,000 related to a reduction in its workforce, the closure of its service and final assembly facility in Scotland and the closure of its service depots in Australia and Canada. In the quarter ended September 28, 2002, the Company recorded restructuring charges of $428,000 related to a further reduction in its workforce. See Note 8 of Notes to Consolidated Financial Statements.

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® and MammothTape™ technologies and our tape library products are based upon VXA®, MammothTapeÔ and LTOÔ (UltriumÔ) 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 to do so, 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.

Due to ongoing operating losses, declining revenues and resulting liquidity restraints, we continue to reassess our business and investigate various strategic alternatives that would result in increased liquidity. These alternatives may include one or more of the following:

     -     sale of all or part of our operating assets;

     -     restructuring of current operations;

     -     additional equity infusions;

     -     strategic alliance, acquisition or business combination; or

     -     refinancing of accounts payable to certain suppliers.

We will continue to explore these and other options that would provide additional capital for longer-term objectives and current operating needs. It will be necessary for us to take one or more of these actions in order to have sufficient funds to support our operations. Should we not be successful in achieving one or more of these actions, it is possible that we may not be able to continue as a going concern. Currently, our liquidity is dependent on our line of credit with Silicon Valley Bank, the vendor deferred payment arrangements (described in Note 17 to the Notes to Consolidated Financial Statements) and cash from operations. As a result of our current liquidity constraints, the report of our independent accountants on our consolidated financial statements contains an explanatory paragraph related to this matter.

During the first quarter of 2003, we terminated employment of 52 full- and part-time employees. Although our prior reductions in force over the past year were designed to reduce costs, this most recent reduction was made to reduce our current cost and personnel structure in order to bring it more in line with forecasted revenues. We believe that we are now appropriately cost structured, but we cannot assure that we will not reduce our workforce again in the future. Continued losses could cause us to enact further reductions in our workforce.

In January 2002, William Marriner resigned as Chief Executive Officer and Chairman of the Board and a Director of Exabyte. The Board appointed Juan Rodriguez interim President and Chief Executive Officer and A. Laurence Jones as non-executive Chairman of the Board while it searched for a new CEO. In June 2002, the Board appointed Tom Ward as President and Chief Executive Officer and Juan Rodriguez as Chief Technologist and Chairman of the Board.

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. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K, beginning on page F-1.

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. 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 resellers is subject to agreements allowing certain limited rights of return, marketing related rebates and pr ice 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 judgments 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," 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. For 2002, we have concluded that we have no goodwill impairment.

The Financial Accounting Standards Board has recently issued certain accounting pronouncements that may impact our business. For a complete discussion of these accounting pronouncements, see Note 1 in Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K, beginning on page F-7.

The following tables set forth items in the Exabyte Corporation and Subsidiaries (the "Company") Consolidated Statements of Operations for the three years ended December 30, 2000, December 29, 2001 and December 28, 2002.

(As a percentage of net sales)

(In thousands)

(x)Prior year amounts and percentages reflect current year classifications of end-of-life products.

(As a percentage of net sales)

No other customers accounted for 10% or more of sales in any of these periods. We cannot guarantee that sales to these or any other customers will continue to represent the same percentage of our revenues in future periods. Our customers also sell competing products and continually review new technologies, which causes our sales volumes to vary from period to period.

Our net sales decreased by 15.9% from $158,438,000 in 2001 to $133,191,000 in 2002. We believe this decrease is due to a general slowdown in the technology industry, competition, decreasing OEM sales and other factors described below. In comparing net sales from 2001 to 2002, there were several significant differences:

     -   Sales of older generation tape drives, including Mammoth, Eliant™820 and others, decreased
                 by $12,364,000 due to product life cycles. Decreases were primarily in the OEM channel,
                 where we sell the majority of these drives, and sales are expected to continue to decrease
                 in 2003 as the product is approaching end of life status.

     -   Sales of M2™ tape drives decreased $3,284,000 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. Also because of the M2™ reliability issues, sales of
                 library products containing M2™ tape drives have been negatively impacted. 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 end-of-life drives (Eliant™820, Mammoth-LT, and other 8mm tape drives) decreased
                 by $7,508,000. The majority of the decrease occurred in the Eliant™820 drive, which entered
                 end-of-life status in the second quarter of 2002.

     -   Partially offsetting the decreases in drive sales were increases in both the VXA®-1 and
                 VXA®-2 tape drives. VXA®-1 sales were $8,453,000 and VXA®-2 sales were $4,256,000 in
                 2002. For 2001 there were minimal sales of VXA®-1 drives, as we acquired the VXA®
                 technology on November 9, 2001 through the Ecrix acquisition. We first shipped the
                 VXA®-2 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 tape libraries decreased by $11,325,000. 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 end-of-life tape libraries decreased by $7,069,000. The majority of the decrease
                 occurred in our 220 library, DLTtape™ libraries, and Advanced Intelligent Tape™ libraries.
                 The 220 and DLTtape™ libraries entered end-of-life status in 2001 while the Advanced
                 Intelligent Tape™ libraries entered end-of-life status in 2002.

     -   Partially offsetting the decreases in library sales were increases in sales of LTO™ (Ultrium™)
                 tape libraries (110L, 221L, and Magnum20). Sales increased by $6,004,000 from 2001 to
                 2002.  We believe this increase is due to wider acceptance of the LTO™ (Ultrium™) tape
                 format, as it becomes a more recognized technology. Additionally, Magnum20, a newly
                 released line of tape libraries, generated sales of $1,658,000 in 2002. For 2001, there were no
                 comparable sales of Magnum20 libraries. We expect to see continued growth in Magnum20 as
                 both the LTO™ (Ultrium™) and the library gain customer acceptance and market share.

     -   In addition, partially offsetting the decreases in library sales were increases in our VXA®
                 libraries (Autopak 1x15, Autopak 1x10 and Autopak 1x7). Sales increased by $3,504,000.
                 We first shipped the Autopak 1x10 and the Autopak 1x7 in 2002, and only recorded one and
                 one half months of sales in 2001 for the Autopak 1x15, as the VXA® technology was acquired
                 November 9, 2001. We expect to see continued growth as both the products and the
                 VXA® technology gain customer acceptance and market share.

     -   Sales of service and spare parts decreased $2,396,000. 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
                 2002 compared to 2001. Also, we believe that outside competition in the repair business has
                 adversely affected sales of service and spare parts.

     -   Sales allowances increased by $2,287,000, which had a negative impact on net sales. We had
                 charges related to stock rotations during 2002 while we had a credit for these programs during
                 2001. Exposure to qualifying sales under this program remained relatively stable in 2002
                 compared to 2001. However, during 2001, exposure to qualifying sales decreased.
                 Additionally, there were increases in certain marketing related programs for 2002.

     -   Media sales remained relatively flat from 2001 to 2002. We believe that the media sales
                 remained constant due to the fact that media demand remained strong for previously sold
                 drives and libraries. We believe that customers are purchasing media for existing products as
                 they defer investments in new equipment. Additionally, media sales included VXA® tape
                 sales in 2002, with little or no comparable amounts in 2001. We expect to see growth in
                 media sales as the VXA® technology gains customer acceptance and market share.

     -   2002 sales were negatively impacted by a significant decrease in fourth quarter sales in our
                 government sector business and by the deferral into the first quarter of 2003 of revenues we
                 were not able to recognize in the fourth quarter.

Sales to reseller and end-user customers increased as a percentage of sales from 70.8% in 2001 to 75.6% in 2002. Sales to OEM customers decreased as a percentage of sales from 23.6% in 2001 to 18.6% in 2002. We believe these shifts are a result of wider acceptance of our newer generation products through the reseller channel, and slower acceptance of the M2™ and VXA® technologies in the OEM channel. OEM customers have a long qualification, adoption and integration time before purchasing new products. We expect to see continued OEM growth as both the products and the VXA® technology gain customer acceptance and market share.

Geographically, sales are attributed to the customer's location. Sales to domestic customers increased from 71.4% of net sales in 2001 to 72.5% in 2002. Sales to international customers decreased from 28.6% of net sales in 2001 to 27.5% in 2002. Comparing 2001 to 2002, sales to domestic customers decreased by $16,348,000, sales to European customers decreased by $5,381,000 and sales to Pacific Rim customers decreased by $1,925,000. We believe these decreases resulted from a worldwide economic slowdown, particularly in the technology industry, as well as the factors listed above.

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 decreased from $132,143,000 in 2001 to $110,948,000 in 2002. Our gross margin percentage increased from 16.6% in 2001 to 16.7% in 2002. Excluding restructuring charges, our cost of sales decreased from $131,920,000 in 2001 to $107,091,000 in 2002, and our gross margin percentage increased from 16.7% to 19.6%, respectively. Gross margins for 2002 were favorably impacted by decreases in fixed costs due to reduced headcount, 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 $36,759,000 and 23.2% of sales in 2001 to $27,316,000 and 20.5% of sales in 2002. Excluding restructuring charges for both periods, these expenses were $36,580,000 or 23.1% of sales for 2001 and $26,628,000 or 20.0% of sales for 2002. This decrease was the result of headcount reductions as part of our restructurings in the first and third quarters of 2002 and continued cost control efforts during 2002. In addition, advertising expenses decreased in 2002 due to fewer product launches. Partially offsetting these expense decreases was the write-down of certain assets during the first quarter of 2002.

Research and development expenses include salaries, third party development costs and prototype expenses. These expenses decreased from $25,184,000 in 2001 to $23,713,000 in 2002, but as a percentage of sales, increased from 15.9% to 17.8% for the same periods. Excluding restructuring charges for both periods, these expenses decreased from $25,087,000 in 2001 to $23,468,000 in 2002, but as a percentage of sales, increased from 15.9% to 17.6% for the same periods. Research and development expenses were favorably impacted by lower automation development costs in 2002 compared to 2001 due to a larger number of product introductions in 2001. Partially offsetting the decrease in expenses was the write-down of certain assets during the first quarter of 2002

Other income (expense), net consists primarily of income and expense from the sale of an investment, a one-time sale of technology, interest income and expense, foreign currency remeasurement and transaction gains and losses and other miscellaneous items. Interest income decreased from $86,000 for 2001 to $27,000 in 2002. This is due to the sales of most of our interest bearing assets by the end of the second quarter of 2002. We expect to record little or no interest income in 2003. Interest expense increased from $1,715,000 for 2001 to $2,051,000 for 2002. Interest expense for 2002 was impacted by a non-cash interest charge of $541,000 related to the beneficial conversion feature of a bridge loan and the value of the related warrants. Other income (expense) items other than interest income and expense decreased from income of $2,181,000 for 2001 to income of $1,336,000 for 2002. A $1,719,000 gain on the sale of our investment in Sun Microsystems favorably impacted 2001. In June 2002, Exaby te sold its remaining ownership interest in CreekPath Systems, Inc. for total proceeds of $1,500,000, resulting in a gain of $1,500,000 due to the interest in CreekPath Systems, Inc. previously being written down to zero. 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. Fluctuations in the dollar/Yen and dollar/Euro exchange rates resulted in $124,000 of income in 2001 and $803,000 of expense in 2002. The expenses incurred in 2002 resulted from the dollar weakening against the Yen and Euro. For a discussion of our risks related to foreign currency exchange rates, see "Market Risk" section below.

For 2002, we recorded a benefit from income taxes in the amount of $402,000, primarily as a result of a Federal income tax refund received in the amount of $453,000. This refund was for a prior year filing and pertained to issues for which tax expense had previously been recorded. For 2001, we recognized $6,000 of income tax benefit. Based on cumulative operating losses over the prior five years and future profitability uncertainty, we continue to reserve 100% of our deferred tax assets. We believe a 100% valuation allowance will be required until the Company attains a consistent and predictable level of profitability.

At December 28, 2002, we had domestic net operating loss carry forwards of approximately $172,000,000, which expire between 2005 and 2022, available to offset future taxable income. Under the Tax Reform Act of 1986, the amount of and the benefit from net operating losses that can be carried forward may be impaired in certain circumstances. Events that may cause changes in our tax carryovers include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. A portion of Exabyte's and all of Ecrix's pre-business combination tax carryovers that can be utilized in any one taxable year for federal tax purposes have been limited by one or more of such ownership changes. Future ownership changes could further limit the utilization of our net operating loss carry forwards.

Basic and diluted net loss per share decreased from $1.47 per share in 2001 to $1.02 per share for 2002. Included in the 2002 per share loss amount is a deemed dividend in the amount of $4,557,000, or $0.14 per share, related to the beneficial conversion feature of the Company's Series I preferred stock. Included in the 2001 and 2002 per share loss amounts are restructuring charges of $0.02 and $0.15 per share, respectively.

Our net sales decreased by 28.6% from $221,742,000 in 2000 to $158,438,000 in 2001. We believe this decrease is primarily due to a general economic slowdown in the technology industry, competition and decreasing OEM sales. In comparing net sales from 2000 to 2001, there were several significant differences:

     -   Sales of older generation 8mm tape drives (Eliant™820, Mammoth-LT, and Mammoth)
                 decreased by $26,659,000 due to these products approaching the end of their product life
                 cycles.

     -   Sales of certain 8mm tape libraries (EZ17, X80, and X200) decreased by $17,934,000. We
                 believe this decrease is due to the general slowdown of the economy.

     -   Sales of M2™ tape drives decreased by $9,621,000. We believe this decrease resulted from a
                 combination of (1) a general slowdown of the economy; (2) initial stocking orders for the
                 M2™ tape drives which occurred in early 2000; (3) media supply constraints in the first
                 quarter of 2001 which limited our ability to sell tape drives; and (4) reliability issues which
                 have resulted in M2™ tape drives not achieving the market momentum that was expected
                 and that may also have impacted the sales of library products containing M2™ tape drives.
                 Throughout 2000 and 2001, we focused considerable attention addressing both hardware
                 and firmware issues.

     -   Sales of newer generation 8mm tape libraries (EZ17A, 215, 215A, 430 and 430A) increased by
                 $5,763,000. This increase is due to the fact that these products did not begin shipping until
                 late in 2000.

     -   Sales of LTO™ (Ultrium™) tape libraries (110L and 221L) increased by $4,554,000. This
                 increase is due to the fact that these products did not begin shipping until late in the third
                 quarter of 2000.

     -   During 2001, we sold our first VXA®-1 tape drives and related Autopak autoloaders,
                 technology acquired in the November 9, 2001 business combination with Ecrix Corporation.
                 Sales were $1,594,000 in 2001 after the business combination date with no comparable
                 amount in 2000.

     -   Sales of end-of-life drives and libraries decreased by $27,037,000. The majority of this
                 decrease is due to the sales related to our DLTtape™ libraries and our 220 library, which
                 entered end-of-life status in 2001.

     -   Sales of media increased by $2,818,000 as a result of our resolution of media supply
                 constraints in 2001, which existed at the end of 2000. Additionally, a large installed base of
                 drives and libraries continues to provide demand for media.

     -   Service revenue decreased by $2,970,000. We believe outside competition in the repair
                 business has had a negative impact on these revenues. Additionally, declining product sales
                 over the last three years have resulted in a declining installed based of our product and lower
                 service revenue.

     -   Sales allowances decreased by $6,187,000, which had a positive impact on net sales. This
                 decrease is the result of decreased exposure to inventory stock rotation as a result of decreased
                 sales volumes to qualifying reseller customers and a decrease in certain marketing related
                 programs.

Sales to reseller and end-user customers increased as a percentage of net sales from 2000 to 2001, while sales to OEM customers decreased. We believe this shift is a result of wider acceptance of our newer generation products through the reseller channel, and slower acceptance of M2™ technology in the OEM channel. OEM customers have a long qualification, adoption and integration time before purchasing new products.

Geographically, sales are attributed to the customer's location. Sales to domestic customers increased from 70.7% of net sales in 2000 to 71.4% in 2001. Sales to international customers decreased from 29.3% of net sales in 2000 to 28.6% in 2001. Comparing 2000 to 2001, sales to European customers decreased by $15,283,000 and sales to Pacific Rim customers decreased by $2,198,000. We believe these decreases resulted from a worldwide economic slowdown, particularly in the technology industry, coupled with quality issues related to our M2™ product.

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 decreased from $172,085,000 in 2000 to $132,143,000 in 2001. Our gross margin percentage decreased from 22.4% in 2000 to 16.6% in 2001. Excluding restructuring charges for both periods, our cost of sales decreased from $169,372,000 in 2000 to $131,920,000 in 2001, and our gross margin percentage decreased from 23.6% to 16.7%. Gross margins in 2001 were negatively impacted by (1) high fixed costs relative to the level of net sales; and (2) inventory reserves and rework charges related to our efforts to improve the quality and manufacturing yields of the M2™ drive product. In general, drive average unit prices decreased slightly between 2000 and 2001. Cost of sales for libraries increased from 2000 to 2001 as a result of a higher percentage of sales of M2™ technology libraries, which utilize higher priced M2™ tape drives. In addition, we estimate that due to differences in dollar/yen exchange rates, 2000 gross margins were negatively impacted by $761,000 and 2001 gross margins were favorably impacted by approximately $3,334,000.

Selling, general and administrative expenses include salaries, sales commissions, advertising expenses and marketing programs. These expenses decreased from $54,709,000 and 24.7% of sales in 2000 to $36,759,000 and 23.2% of sales in 2001. Excluding restructuring charges, these expenses for 2001 were $36,580,000 and 23.1% of sales. This decrease is the result of our restructuring in the first quarter of 2001, as well as other general cost control efforts. Additionally, advertising expenses decreased from 2000 to 2001, as the introduction of the M2™ drive and related automation products occurred in the early part of 2000. During 2001, our product introductions were smaller in scale.

Research and development expenses include salaries, third party development costs and prototype expenses. These expenses decreased from $36,530,000 and 16.4% of sales in 2000 to $25,184,000 and 15.9% of sales in 2001. Excluding restructuring charges for both periods, these expenses decreased from $35,345,000 and 15.9% of sales in 2000 to $25,087,000 and 15.8% of sales in 2001. This decrease is the result of our restructuring in the third quarter of 2000 and first quarter of 2001, offset by higher costs for ongoing engineering of the M2™ product in 2000 over 2001.

During 2001, we contracted with Hitachi for the development of technology and for manufacturing related to future generations of MammothTape™ drives. During 2000, we incurred expenses related to a previous contract with Hitachi for development and for manufacturing of the M2™ drive. During 2000 and 2001, we incurred $3,512,000 and $2,315,000, respectively, of engineering charges under these contracts.

Other income (expense), net consists primarily of gains from the sale of an investment, interest income and expense, foreign currency remeasurement and translation gains and losses and other miscellaneous items. A $1,719,000 gain on the sale of an investment has favorably impacted these expenses for 2001. Interest income and expense were negatively impacted by liquidity constraints which resulted in decreases to cash balances available for investment, and increases to borrowings under our line of credit. These changes increased interest expense and decreased interest income from 2000 to 2001. Net foreign exchange losses related to remeasurements of foreign subsidiary accounts to U.S. dollars were $860,000 in 2000 and $438,000 in 2001. Net foreign exchange (gains)/losses related to foreign currency transactions were $1,163,000 in 2000 and $(562,000) in 2001.

The provision for income taxes for 2000 was 3.7% of loss before income taxes compared to 0.0% for 2001. In the second quarter of 1999, we recorded a deferred tax valuation reserve for 100% of total gross deferred tax assets. Management considered a number of factors, including 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.

At December 29, 2001, we had domestic net operating loss carry forwards of $154,550,000, which expire between 2005 and 2021, available to offset future taxable income. Under the Tax Reform Act of 1986, the amount of and the benefit from net operating losses that can be carried forward may be impaired in certain circumstances. Events that may cause changes in our tax carryovers include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Certain of Exabyte's and all of Ecrix's pre-business combination tax carryovers that can be utilized in any one taxable year for federal tax purposes have been limited by one or more of such ownership changes.

Basic and diluted net loss per share for 2000 decreased from $1.83 per share in 2000 to $1.47 per share for 2001. Included in the 2000 and 2001 per share loss amounts are restructuring charges of $0.17 and $0.02 per share, respectively.

We have incurred operating losses and declining revenues over the last five years. As of December 28, 2002, we have $664,000 in cash and cash equivalents and negative working capital of $5,199,000. Additionally, we had borrowed up to the maximum level under our line of credit. From 2001 to 2002, our cash and cash equivalents decreased $1,533,000 due to $13,267,000 expended from operating activities, $2,054,000 expended from investing activities and $13,788,000 generated from financing activities. Cash expended from operating activities is primarily attributable to our net loss of $29,072,000, but positively impacted from a $13,843,000 increase in accounts payable. Cash expended from investing activities is primarily from capital expenditures of $3,903,000 offset by $1,590,000 in cash proceeds from sales of investments. Cash generated from financing activities is primarily a result of $7,081,000 from the issuance of stock, $1,000,000 from a bridge loan, net borrowings of $6,269,000 on our li ne of credit and principal payments of $1,013,000 on long-term debt obligations. We currently expect to purchase approximately $2,300,000 of fixed assets during 2003.

Our cash from operations can be affected by the risks involved in our operations, including whether we achieve significant sales growth of VXA® drives, revenue growth of our existing products, the successful introduction and sales of our future tape drives and cost containment. For 2003, it is important that we generate cash from operations through profitability. Specifically, during the first quarter of 2003, we reduced our workforce by 52 persons. Also during the first quarter of 2003, we entered into deferred payment plans with four of our five largest vendors. In 2003, we will also continue to seek external financing through debt or equity.

During 2002, we completed a preferred stock offering and issued 8,438,000 shares of Series I preferred stock at a price of $1.00 per share for net cash proceeds of $6,956,000 and the conversion of $1,051,000 in bridge loans and accrued interest. The Series I preferred shares are convertible into common stock shares 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 our common stock on the issuance dates resulted in a beneficial conversion feature in the amount of $4,557,000. We have reported this amount as a deemed dividend in the Statement of Operations for 2002, and increased our net loss for 2002 of $29,072,000 to a net loss available to common stockholders in the amount of $33,629,000. (See Note 6 of Notes to Consolidated Financial Statements.)

In April 2002, we 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, 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. We valued the warrant using a Black-Scholes valuation model and recorded $541,000 of debt discount related to the value of the warrant and the resultant beneficial conversion feature. We amortized $516,000 of debt discount to interest expense in the second quarter of 2002. On July 31, 2002, the bridge loan converted into Series I preferred stock as part of the second closing of the Series I. As of that date, we amortized the remaining $25,000 of debt discount to interest expense.

In June 2002, we entered into a $25,000,000 credit facility with Silicon Valley Bank ("SVB") that expires in June 2005. This credit facility replaced a line of credit facility with Congress Financial Corporation. The SVB line of credit 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 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.

Borrowings under the line of credit vary each day based on the levels of accounts receivable and inventory, and bear interest at the bank's prime rate + 1.25%. As of December 28, 2002, the Company is at the maximum borrowing level under the line, which includes $18,560,000 in outstanding borrowings and $414,000 reserved under an outstanding letter of credit.

The line of credit agreement prohibits payment of dividends without prior bank approval, and contains certain covenants for minimum quarterly revenue, maximum monthly net loss and minimum tangible net worth. The agreement contains certain acceleration clauses that may cause any outstanding balance to become immediately due in the event of a default. As of December 28, 2002, the Company is not in compliance with the minimum quarterly revenue and minimum tangible net worth covenants, and is in default. In February 2003, SVB agreed to forbear from exercising all remedies as a result of the default, and in conjunction with the forbearance agreement, we paid SVB a fee of $125,000. This forbearance agreement expires on March 31, 2003, and limits borrowings on the line to $16,000,000. Effective February 27, 2003, we are paying a default interest rate on all borrowings of SVB's prime rate + 5.25%.

We are committed to make certain payments under long-term and other obligations. Our cash payments due under contractual obligations as of December 28, 2002 are as follows:

We expect to fund these obligations through cash generated from operations and external debt or equity financings.

As a consequence of our continued liquidity problems, we have been unable to comply with payment terms with many of our vendors. This has resulted in our accounts payable to vendors increasing to $30,624,000 at December 28, 2002 - an increase of $13,843,000 from 2001. Accordingly during 2003, we have entered into formalized payment plans with four of our five largest suppliers. We continue to negotiate for a similar arrangement with a fifth major supplier, and as an interim measure, we have entered into with this supplier a $500,000 letter of credit. These plans convert amounts due to these suppliers as of December 31, 2002 to note agreements that require full payment of all amounts due on specified dates over the period from June 2003 through December 2004. The total of the notes is approximately $20,900,000, of which, approximately $14,900,000 and $4,000,000 is included in accounts payable and accrued liabilities, respectively, at December 28, 2002. In addition, one of the notes includes a purchase commitment entered into in 2003 of approximately $2,000,000, which is not reflected in our balance sheet at December 28, 2002. The notes bear interest ranging from zero to 5.0%.

During the first quarter of 2002, we incurred $4,363,000 in charges related to a restructuring. The Board of Directors adopted the plan for this restructuring on January 20, 2002. As a result of this restructuring, we have closed our service and final assembly facility in Scotland and our service depots in Australia and Canada, and have further reduced our U.S workforce. In addition, we accelerated the closure of EMG and increased our accrual for unused lease facilities at EMG, which was originally recorded as part of its third quarter 2000 restructuring.

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. During the first quarter of 2002, we recorded approximately $3,736,000 of these charges to cost of sales, $509,000 to selling, general and administrative expenses and $117,000 to research and development expenses. During 2002, we paid approximately $1,446,000 of these restructuring costs, of which approximately $1,311,000 is severance and related. At December 28, 2002, approximately $20,000 for severance pay and $174,000 of an excess facilities obligation remain, which we paid in February 2003.

Workforce reductions involve approximately 200 employees worldwide, of which 184 were eligible to receive severance payments. All severance payments for these employees were contractually defined and communicated during the first quarter of 2002. The affected employees are 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.

The following table summarizes the activity to date related to this restructuring:

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 a downsizing and to changes in the product roadmap, net of income of $1,200,000 related to the sale of certain technology. During the first quarter of 2002, we recorded $3,675,000 of these special charges to cost of sales, $262,000 to selling, general and administrative expenses, and $684,000 to research and development expenses.

In July 2002, we completed an additional reduction in our workforce in order to reduce expenses and minimize ongoing cash consumption. The workforce reduction impacted all areas of the Company. We reduced our domestic workforce by approximately 104 persons and recorded a severance charge to operations in the third quarter of 2002 of approximately $428,000. We recorded $121,000 of this severance charge to cost of sales, $179,000 to selling, general and administrative expenses and $128,000 to research and development expenses. In addition, we paid all severance during the third quarter of 2002. 

In March 2001, we completed a reduction in our workforce in order to reduce expenses, minimize ongoing cash consumption and to simplify management structure. The reduction in workforce impacted all areas of the Company, resulted in the termination of approximately 235 persons (211 domestically and 24 in Europe) and resulted in the Company recording a severance charge to operations of approximately $498,000. For this severance charge, we recorded $223,000 to cost of sales, $179,000 to selling, general and administrative expenses and $96,000 to research and development expenses, and paid all severance amounts during the first quarter of 2001.

During the third quarter of 2000, we incurred $3,899,000 in restructuring charges related to the planned closure of a wholly-owned subsidiary, Exabyte Magnetics GmbH ("EMG"). This restructuring was part of a plan adopted by the Board of Directors on July 24, 2000, which outsourced a number of manufacturing operations to Hitachi . The restructuring decision resulted in: (1) an immediate end to the manufacture of M2™ recording heads by EMG; (2) the termination of M2 scanner manufacturing by EMG during April 2001; and (3) the shut down of the remaining M1 scanner manufacturing during the fourth quarter of 2002. No assets were transferred as a result of the decision to outsource M2 scanner manufacturing to Hitachi and no technology was transferred. In addition, there were no write-offs taken or restructuring charges incurred in connection with the M2 scanner outsourcing to Hitachi.

The restructuring charges included 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.

During 2000, approximately $2,713,000 of these costs were included in cost of sales and $1,186,000 were included in research and development expenses. Approximately $1,268,000 of the total restructuring costs, which relate to the write-off of excess inventories and capital equipment, did not involve future cash payments.

We paid approximately $499,000, $651,000 and $1,034,000 of these restructuring costs during 2000, 2001 and 2002, respectively. Workforce reductions for these same periods were 40, 24 and 29. During 2001, we reduced our excess facilities exposure and other related costs by $235,000 with the signing of a new lease. At December 28, 2002, approximately $267,000 of an excess facilities obligation remains, which we paid in February 2003.

The following table summarizes the activity to date related to this restructuring:

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 (See Note 1 of Notes to Consolidated Financial Statements). 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 December 28, 2002, 2.5% of our total assets were denominated in foreign currencies. During 2002, 0.5% of revenue and 10.3% 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 Europe, 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 fu ture operating 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 December 28, 2002, and of exposure from anticipated foreign revenue, and operating expenses in 2003 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 2002 year end rates could have a $177,000 impact on net assets, a $66,000 impact on net sales and a $523,000 impact on operating expenses. These risks are materially similar to the risks presented in the prior year, and could have a material effect on our results of operations, cash flows or financial condition for the next year.

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 year end rate, and projected 2003 purchases denominated in yen, we estimate a potential $2,246,000 impact on 2003 purchases. The impact could affect a combination of net income and inventory, and could have a material effect on our results of operations, cash flows or financial condition for the next year.

At December 28, 2002, we had $18,560,000 outstanding against our line of credit. As of December 28, 2002, our interest rate on the line was 5.25%. Effective February 27, 2003 with our revised credit line terms, we are paying interest at the rate of 9.50% (this represents 5.25% over the bank's prime rate). 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 with respect to our current rate of 9.50% could have a $238,000 impact on results of operations. This risk is materially similar to the interest risk presented in the prior 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 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation," under the caption, "Market Risk."

The financial statements required pursuant to this item are included in of this Annual Report on Form 10-K and begin on page F-1. The supplementary financial information required by this item is included in "Item 6: Selected Financial Data" under the subsection titled "Quarterly Results of Operations / Supplementary Financial Information."

None reported.

For Part III, the information set forth in the Company's definitive Proxy Statement for the Company's 2003 Annual Meeting of Stockholders, to be filed within 120 days after December 28, 2002, the close of its fiscal year, is hereby incorporated by reference.

Management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), have reviewed and evaluated the Company's disclosure controls and procedures within 90 days of the filing date of this Annual Report. Disclosure controls and procedures address the quality and timeliness of the disclosures made in the Company's periodic reports. The SEC requires that disclosure controls and procedures be designed to ensure that the information required to be disclosed by a company is recorded, processed, summarized and reported in a timely manner. This includes controls and procedures designed to ensure that the information to be disclosed is accumulated and communicated to the company's management, including the CEO and the CFO, in order to allow timely decisions on the required disclosure.

After review and evaluation, management has concluded 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.

There were no significant changes in our internal controls and no other factors that could significantly affect these controls subsequent to our most recent evaluation. We did not need to implement any corrective actions with regard to any significant deficiency or material weakness in our internal controls.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Immediately following the Signatures section of this Annual Report there are certifications of the CEO and CFO. These certifications are required by Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report contains information regarding the disclosure controls and procedures referred to in certifications. These certifications should be read in conjunction with this section for a more complete understanding of the topics presented.

Years ended December 30, 2000, December 29, 2001 and December 28, 2002.

All other schedules are omitted because they are inapplicable, not required under the instructions, or the information is included in the financial statements or notes thereto.

To the Board of Directors and Stockholders of Exabyte Corporation

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)1 on page 44 present fairly in all material respects, the financial position of Exabyte Corporation and its subsidiaries at December 29, 2001 and December 28, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the consolidated financial statement schedule listed in the index appearing under Item 15(a)2 on page 44 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated deficit of $91,937,000 at December 28, 2002. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Denver, Colorado
February 21, 2003, except for Note 17, as to which the date is March 5, 2003

(In thousands, except per share data)

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

(In thousands, except per share data)