HUTCHINSON TECHNOLOGY INC - 10-K Annual Report

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

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 29, 2002
or
[ ] Transition Report Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ________ to ________.

Commission file number 0-14709
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HUTCHINSON TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)

Minnesota 41-0901840
- ------------------------------------------ ------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)

40 West Highland Park 55350
Hutchinson, Minnesota ------------------------------------------
- ------------------------------------------ (Zip code)
(Address of principal executive offices)

(320) 587-3797
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Common Share
Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 28, 2002, the last business day of the registrant's most
recently completed second fiscal quarter, was $524,126,195, based on the closing
sale price for the registrant's common stock on that date. For purposes of
determining this number, all officers and directors of the registrant are
considered to be affiliates of the registrant. This number is provided only for
the purpose of this report on Form 10-K and does not represent an admission by
either the registrant or any such person as to the status of such person.

As of December 5, 2002 the registrant had 25,457,203 shares of common stock
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement dated December 18, 2002 for the annual meeting
of shareholders to be held January 29, 2003 are incorporated by reference in
Part III.

FORWARD-LOOKING STATEMENTS

The information presented in this Annual Report on Form 10-K under the headings
"Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. These statements are subject to risks and uncertainties, including those
discussed under "Risk Factors" on pages 9-15 and "Forward-Looking Statements" on
page 25 of this Annual Report on Form 10-K, that could cause actual results to
differ materially from those projected. Because actual results may differ, we
caution you not to place undue reliance on these forward-looking statements.

PART I

HUTCHINSON TECHNOLOGY INCORPORATED AND SUBSIDIARIES

ITEM 1. BUSINESS

When we refer to "we," "us," the "Company" or "HTI," we mean Hutchinson
Technology Incorporated and its subsidiaries. Unless otherwise indicated,
references to "2003" mean our fiscal year ending September 28, 2003, references
to "2002" mean our fiscal year ended September 29, 2002, references to "2001"
mean our fiscal year ended September 30, 2001, references to "2000" mean our
fiscal year ended September 24, 2000 and references to "1999" mean our fiscal
year ended September 26, 1999.

OVERVIEW

We are the world's leading supplier of suspension assemblies for hard disk
drives. Suspension assemblies are critical components of hard disk drives ("disk
drives") that hold the recording heads in position above the spinning magnetic
disks. We manufacture our suspension assemblies with proprietary technology and
processes to precise specifications with very low part-to-part variation. These
specifications are critical to maintaining the necessary microscopic clearance
between the head and disk and the electrical connectivity between the head and
the drive circuitry. We estimate that we produce a majority of all suspension
assemblies sold to disk drive manufacturers and their suppliers, including
recording head manufacturers, worldwide. During 2002, we shipped approximately
398 million suspension assemblies of all types, which we estimate was
approximately 55% of all suspension assemblies shipped in that period. We
estimate that we gained market share steadily during 2002 and that our market
share was approximately 60% at September 29, 2002. We supply nearly all domestic
and many foreign-based users of suspension assemblies, including Alps, Fujitsu,
IBM and its affiliates, Innovex, Kaifa, Maxtor, Read-Rite, SAE Magnetics/TDK,
Samsung, Seagate Technology, Toshiba and Western Digital.

We incorporated in Minnesota in 1965, and we developed our leadership
position in suspension assemblies through research, development and design
activities coupled with a substantial investment in manufacturing technologies
and equipment. We have maintained this position through multiple technological
transitions in the disk drive industry over the past decade.

We are focused on continuing to develop suspension assemblies that address
the rapidly changing requirements of the disk drive industry. We design our TSA
suspension assemblies to satisfy both the electrical connectivity requirements
of the disk drive industry as well as the changing market demands and
performance standards required by our customers. TSA suspensions incorporate
thin electrical conductors in the suspension itself used to connect the
recording head to the drive's electronic circuitry. Our TSA suspensions have
been widely adopted by the disk drive industry because they have enabled
customers to improve yields and throughput, eliminate manufacturing steps and
adopt automated assembly processes, all of which lower their overall costs of
production and improve production efficiencies. In 2002, we shipped
approximately 328 million TSA suspensions. We also sell TSA components to
competitors who manufacture TSA suspensions under licensing agreements with us.
We believe our TSA suspension has become a disk drive industry standard platform
onto which we can integrate additional value-added features currently in
production, as well as new features currently in development.

INDUSTRY BACKGROUND

The expanding use of enterprise computing and storage, personal computers,
increasingly complex software and the emergence of new applications for disk
storage, such as Internet-related storage and other consumer applications,
historically has fueled growth in disk drive shipments. From calendar 1998 to
calendar 2000, unit shipments of disk drives grew at a compounded annual growth
rate of approximately 18% according to IDC. For calendar 2001, however, IDC
estimated that 196 million disk drive units were shipped, a decline of
approximately 2% from the prior year. In calendar 2002, IDC estimates that unit
shipments of disk drives will rebound somewhat, to 214 million units. We believe
the decline in the growth rate of disk drive shipments is due to a worldwide
slowdown in information technology spending and a weaker global economy.

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For calendar 2003, IDC estimates that the rebound in disk drive unit
shipments that started in 2002 will continue, with shipments growing to 234
million units or 9% over calendar 2002. We expect this return to growth will be
stimulated by the expansion of storage-intensive data warehousing, Internet and
intranet applications and the increasing use of disk drives for non-computer
applications such as digital video recording, information appliances, digital
cameras and gaming consoles. Growth in disk drive unit shipments at the end of
our fiscal 2002 has contributed to increased demand for suspension assemblies,
and we believe continued growth in 2003 will further increase demand for
suspension assemblies in the near term.

Industry transitions in head technology also impact disk drive unit
shipment levels and, consequently, demand for suspension assemblies. During past
industry transitions, such as from thin film inductive recording heads to
magneto-resistive ("MR") and giant magneto-resistive ("GMR") heads, and from
nano heads to smaller pico heads, production yields of head and disk drive
manufacturers initially were reduced. Because a significant portion of head
yield reduction occurs after the head is bonded onto the suspension assembly,
low yields at our customers often result in increased demand for suspension
assemblies in order to achieve desired disk drive shipment levels. As yields at
our customers improved in 1999 and 2000, demand for suspension assemblies
decreased. In the latter part of 2002, some of our customers started to
transition to higher capacity recording heads, and demand for our products
increased due to reduced production yields experienced by these customers.

The demand for suspension assemblies is influenced primarily by two key
factors. First, improvement in data density (the amount of data that can be
stored per square inch of disk surface) tends to decrease demand for suspension
assemblies. Second, growth in overall disk drive demand tends to increase demand
for suspension assemblies. In recent years, data density has improved at a rate
faster than overall disk drive storage demand. Therefore, disk drive makers were
able to meet the market demand with drives that have fewer disks and related
components, including suspension assemblies. As a result, the average number of
suspension assemblies required per drive has declined from approximately 4.5 in
1999 to approximately 3.3 in 2000, approximately 2.8 in 2001 and approximately
2.4 in 2002. Our total suspension assembly shipments have decreased from
approximately 583 million during 1999 to approximately 488 million in 2000,
approximately 420 million in 2001 and approximately 398 million in 2002. We
believe that reduced industry-wide suspension assembly demand in 2002 continued
primarily due to decreases in component counts in disk drives because of data
density improvements. The pace of improvements in data density, however, appears
to have slowed and industry-wide suspension assembly demand is expected to
decline 9% in 2002 as compared with a decline of 15% from 2000 to 2001. We
believe that ongoing technological advances will continue to reduce the average
number of suspension assemblies per drive.

We believe that end user demand for storage capacity will continue to
increase as rapidly evolving technology and computer applications continue to
require storage devices with increased capacity and functionality. We currently
anticipate that overall industry-wide demand for suspension assemblies for the
foreseeable future will remain relatively flat until some combination of the
following events occurs: average component counts within disk drives stabilize
or increase, or overall disk drive demand growth increases. We continually
monitor technological developments in the data storage arena and do not believe
that technology is experiencing a fundamental shift away from disk drive
storage. On an ongoing basis, we review technological threats to the disk drive
market and utilize various universities, consortiums and industry participants
to provide additional third-party insights. We believe disk drives will remain
the dominant data storage technology for the foreseeable future.

All disk drives incorporate the same basic technology. The principal
components of a disk drive are recording disk media, a motor assembly, the
control electronics and a head stack assembly. A head stack assembly consists of
multiple magnetic recording heads attached by suspension assemblies to the
actuator arm. Each disk drive contains from one to six hard disks attached to a
motor assembly that rotates the disks at high speeds in extremely close
proximity to the magnetic recording heads, each of which is attached to a
suspension assembly. In certain low-cost drives, only one side of one disk is
used, resulting in the need for only

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one recording head, and one suspension assembly, in the drive. More typically,
each disk in the drive uses both sides and, therefore, two recording heads and
two suspension assemblies.

Suspension assemblies are critical to disk drive performance and
reliability. We design our suspension assemblies with a focus on the increasing
performance requirements of new disk drives, principally reduced data access
time, increased data density, smaller, higher capacity recording heads and
technology incorporated in the type of recording head used. Technological
advances in disk drives generally require suspension assemblies with specialized
design, expanded functionality and greater precision. One of the major
determinants of disk drive performance and data storage capacity is the
microscopic height at which the magnetic head "flies" above the disk. Suspension
assemblies hold the magnetic recording heads in position and are a significant
factor in controlling the critical flying height of the head above the disk and
maintaining the position of the head on the tracks of data. A typical nominal
flying height is less than one millionth of an inch (a sheet of paper is
approximately 3,000 millionths of an inch thick).

Hard disk drive storage capacity increases as data density increases. The
disk drive industry has improved data density by lowering the fly height of the
recording head, using smaller recording heads with advanced air bearing designs,
improving other components such as motors and media and using MR and GMR
recording head types. We developed our TSA suspension assemblies, which
incorporate electrical conductors in the suspension itself, to enable drive
makers to use higher capacity recording heads that allow for increased data
density.

PRODUCTS

We categorize our current products as either suspension assemblies or other
products, which consist primarily of etched and stamped components used in
connection with, or related to, suspension assemblies.

The following table shows, for each of 2002, 2001 and 2000, the relative
contribution to net sales in millions of dollars and percentages of each product
category:

See Note 12 to the consolidated financial statements contained in Item 15
herein for financial information with respect to our business segments and a
distribution of revenue by geographic area for each of 2002, 2001 and 2000. See
also Eleven-Year Selected Financial Data.

During 2002, we shipped approximately 398 million suspension assemblies of
all types, including TSA and conventional suspension assemblies. We have
developed significant proprietary capabilities in the design and production of
suspension assemblies for both current and emerging disk drive designs. We have
positioned ourselves in the forefront of industry technology transitions by
developing improved suspension assemblies in anticipation of market shifts to
new generations of smaller and higher capacity magnetic heads. We have the
capability to produce multiple variations of suspension assemblies based on
several standard designs. This capability permits us to assist customers' design
efforts and to rapidly modify our standard designs to meet the varied and
changing requirements of specific customers. To help develop prototype
suspension assemblies, we maintain a test laboratory and computerized systems to
simulate and analyze suspension assembly designs. Our ability to predict and
modify suspension assembly performance is especially important in developing
suspension assemblies for high capacity drives and drives with low access times.

TSA Suspension Assemblies -- The disk drive industry has widely adopted our
TSA suspensions. Currently, we estimate that approximately 70% of all
suspensions shipped in the industry are TSA suspensions. These suspensions
integrate into the suspension thin electrical conductors that connect directly
with the recording head. The integral etched copper leads of the TSA suspension
are pre-positioned on the suspension assembly from the head region through the
length of the suspension and, in some cases, along the

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actuator. We believe features of our current TSA suspensions, such as extended
electrical leads (which were incorporated into approximately 74% of our TSA
suspensions in 2002) as well as additional features currently in development,
will result in improved yields and increased throughput for our customers.
Because of these performance advantages, our TSA suspensions command a higher
sale price than our conventional suspensions.

In 2002, we shipped approximately 328 million TSA suspensions. TSA
suspensions accounted for approximately 61% of our 2000 suspension assembly
shipments, approximately 74% of our 2001 suspension assembly shipments and
approximately 83% of our 2002 suspension assembly shipments. We expect them to
account for approximately 80% to 90% of our total suspension assembly shipments
during 2003.

TSA suspension assemblies are adaptable to future developments in disk
drive design and manufacturing. The desire for lower overall storage costs has
resulted in further value-added features for TSA suspensions, such as static
dissipative coatings and switch shunts, which help our customers prevent damage
to sensitive recording heads by reducing the risk of electrostatic discharge.
Variations of TSA suspension assemblies that we have in development also offer
promising solutions to the challenges posed by increasing data density. As the
number of data tracks per disk increases to achieve increased data density,
recording heads must be positioned above data tracks with more precision than
current disk drive technology allows. TSA suspensions allow for dual stage
actuation, which incorporates a second stage actuator on a suspension to improve
head positioning over increasingly tighter data tracks. Similarly, an increase
in data density achieved by increasing the number of data bits recorded per
linear inch on each data track will require improved preamplification methods to
improve data transfer signals as bit density increases. TSA suspensions can be
configured to allow for attachment of preamplifiers near the head to improve
transfer signals. We are also developing additional features and variations for
other TSA suspension products.

Conventional Suspension Assemblies -- In 2002, we shipped approximately 70
million conventional suspension assemblies, as compared to 110 million in 2001
and 189 million in 2000. Conventional suspension assemblies accounted for
approximately 10% of our total revenue, and approximately 17% of our suspension
assembly shipments, in 2002. Conventional suspension assemblies do not provide
the electrical connectivity features of a TSA suspension, but rather an
electrical circuit must be added by the customer. We expect conventional
suspension assemblies to account for approximately 10% to 20% of our total
suspension assembly shipments during 2003.

Other Products -- To further assure customers that the TSA suspensions they
require for their products will be readily available when and where they are
needed, we manufacture and sell to competitive suspension assembly manufacturers
etched and stamped component-level parts, such as flexures and baseplates, for
TSA suspensions. In 2002, component sales accounted for approximately 5% of our
revenue. We expect our sales of components in 2003 to grow, and account for
approximately 5% to 10% of our revenue.

We have developed a medical device in our BioMeasurement Division that uses
an optical technology to measure local, rather than systemic, oxygen saturation
of hemoglobin in tissue. The device measures tissue oxygenation non-invasively
and painlessly, at various depths, intermittently or continuously and without
being affected by motion. During 2002, we obtained regulatory clearance from the
United States Food and Drug Administration for our device, called the
InSpectra(TM) Tissue Spectrometer system, and sold our first units in the United
States. Clinical studies for several significant medical applications are
currently in progress to demonstrate the utility and value of the tissue
oxygenation metric provided by the device. We intend to continue marketing this
device in 2003 to research-oriented customers interested in participating in
this clinical evaluation process.

MANUFACTURING

Our manufacturing strategy focuses on enhancing our ability to reliably
produce suspension assemblies in high volume and with the consistent precision
and features required by our customers. We have developed advanced process,
inspection and measurement systems and automated production equipment. We have
adopted an integrated manufacturing approach that closely couples design,
tooling and manufacturing, which has facilitated the development, implementation
and high-volume production of new suspension assembly

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products. We believe that our integrated approach gives us a competitive
advantage in quickly supplying suspension assembly prototypes and commencing
volume manufacturing. This manufacturing approach also allows us to rapidly
shift tooling in our suspension assembly production units to respond to
fluctuating product mix and thereby minimize the size of our finished goods
inventory.

A suspension assembly consists of three to four components that are
laser-welded together. TSA suspension assemblies also incorporate electrical
leads which provide electrical connection from the recording head to the disk
drive's electronic circuitry. Alignment, adjustment and freedom from
imperfections and contaminants are of critical importance. Our products require
several manufacturing processes, each dependent on different technical
disciplines, to ensure the high degree of precision and process control
necessary to meet strict customer tolerances. We have developed sophisticated
proprietary manufacturing processes and controls, and related equipment, which
are essential to the precision and reliability of our products. The
manufacturing processes we employ include photoetching, stamping, automated
optical inspection, plasma etching, plating, precision forming, laser welding
and ultrasonic cleaning. We require each of the processing steps to meet
stringent specifications and controls. We monitor and control these processes
through statistical process analysis to track critical parameters and take
corrective action as required.

Our critical raw material needs are available through multiple sources of
supply, with the following exceptions. Certain types of photoresist, a liquid
compound used in the photoetching process, and the stainless steel, coverlay and
copper that meet our strict specifications, are each currently available from
only one supplier. To protect against the adverse effect of a short-term supply
disruption, we maintain several weeks' supply of these materials.

Our production processes require the storage, use and disposal of a variety
of chemicals that are considered hazardous under applicable federal and state
laws. Accordingly, we are subject to a variety of regulatory requirements for
the handling of such materials. We do not anticipate any material effect on our
capital expenditures, earnings or competitive position due to compliance with
government regulations involving environmental matters.

RESEARCH AND DEVELOPMENT

We participate in an industry that is subject to rapid technological
change, and our ability to remain competitive depends on, among other things,
our ability to anticipate and respond to changes and to continue our close
working relationships with the engineering staffs of our customers. As a result,
we have devoted and will continue to devote substantial resources to product
development and process engineering efforts. As of September 29, 2002, we
employed 513 engineers and technicians who are responsible for implementing new
technologies as well as process and product development and improvements.
Expenditures for these activities in 2002, 2001 and 2000 amounted to
approximately $40,419,000, $55,826,000 and $53,906,000, respectively. Of those
amounts, we classified approximately $17,663,000, $23,241,000 and $21,433,000,
respectively, as research and development expenses, with the remainder, relating
to quality, engineering and manufacturing support, classified as cost of goods
sold.

Our current research and development efforts are principally directed at
continuing to develop our suspension assemblies and related follow-on features
to enable ongoing technological advances in the disk drive industry, including
changing head size, improved data density, performance standards and electrical
connectivity requirements for disk drives, as well as head and drive
manufacturing process improvements. Our dedicated Development Center enables us
to shorten development cycles and achieve high output per manufacturing unit
more quickly.

We have developed a medical device in our BioMeasurement Division that
measures local tissue oxygenation. Our current research and development efforts
in the BioMeasurement Division focus on clinical studies to create a body of
knowledge about the utility and value of the tissue oxygenation metric for
several significant medical applications. In addition, we are continuing to
devote engineering resources to ongoing product development. For 2002, 2001 and
2000, research and development expenses were approximately $1,674,000,
$3,445,000 and $3,102,000, respectively, for the development of these product
opportunities.

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CUSTOMERS AND MARKETING

Our disk drive products are sold principally through our own
eighteen-member account management team operating primarily from our
headquarters in Hutchinson, Minnesota. Through a subsidiary, we have three
account managers and eleven technical representatives in Asia. We sell our
suspension assemblies to original equipment manufacturers for use in their
products and to subassemblers who sell to original equipment manufacturers. We
also sell suspension assembly components to competitors. Our account management
team is organized by individual customer and contacts are typically initiated
with both the customer's purchasing agents and its engineers. Our engineers and
account management team together actively participate in the selling process and
in maintaining customer relationships.

As customers have shifted to build-to-order manufacturing, we have
established "just-in-time" (JIT) inventory hubs near the major production
centers of certain individual customers to assure that we meet the customers'
inventory requirements. During 2002, approximately 63% of our suspension
assembly shipments were distributed to our customers in Hong Kong, the People's
Republic of China and Thailand through our JIT inventory hubs. In 2002, we added
additional JIT inventory hubs in the People's Republic of China and Thailand.

We are a supplier to nearly all domestic and many foreign-based
manufacturers of disk drives and recording heads used in disk drives. The
following table shows our five largest customers for 2002 as a percentage of net
sales.

SAE Magnetics, Ltd./TDK..................................... 25%
Alps Electric Co., Ltd...................................... 21%
Seagate Technology LLC...................................... 15%
IBM and affiliates.......................................... 13%
Read-Rite Corporation....................................... 9%

Sales to our five largest customers constituted 83%, 91% and 87% of net
sales, respectively, for 2002, 2001 and 2000. Significant portions of our
revenue may be indirectly attributable to large manufacturers of disk drives,
such as Maxtor, Samsung, Toshiba and Western Digital, which may purchase
recording head assemblies from several different recording head manufacturers
that utilize our suspension assemblies.

We expect to continue to depend upon a limited number of customers for a
substantial majority of our sales, given the relatively small number of disk
drive and recording head manufacturers. Our results of operations could be
adversely affected by reduced requirements of our major customers.

Sales to foreign-based enterprises totaled $250,478,000, $204,877,000 and
$257,324,000 for 2002, 2001 and 2000, respectively. Sales to foreign
subsidiaries of United States corporations totaled $109,736,000, $179,756,000
and $155,422,000 for 2002, 2001 and 2000, respectively. The majority of these
sales were to the Pacific Rim region. In addition, we have significant sales to
United States corporations which use our products in their offshore
manufacturing sites.

BACKLOG

We generally make our sales pursuant to purchase orders rather than
long-term contracts. Our backlog of purchase orders was approximately
$94,845,000 at September 29, 2002, as compared to $60,874,000 at September 30,
2001. Such purchase orders may be changed or cancelled by customers on short
notice. In addition, we believe that it is a common practice for disk drive
manufacturers to place orders in excess of their needs during growth periods.
Accordingly, we do not believe that backlog should be considered indicative of
sales for any future period.

COMPETITION

We believe that the principal factors of competition in the suspension
assembly market include time to market, product quality, design expertise,
customer service, reliability of volume supply and price. We

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estimate that we produce a majority of all suspension assemblies sold to disk
drive manufacturers and their suppliers, including recording head manufacturers,
worldwide. Our principal competitors are K. R. Precision Co. ("KRP"), Magnecomp
Corporation, Nihon Hatsujo Kabusikigaisha ("NHK") and Suncall Corporation. In
addition, Fujitsu Limited, a drive manufacturer, fabricates some of its own
suspension assemblies for use in some of its own products. The electrical
interconnect features of our TSA suspensions also face competition from
alternative interconnect technologies, such as deposition circuitry and flexible
circuitry, which are being used in drive production. Although we cannot be sure
that the number of competitors will not increase in the future or that users of
suspension assemblies will not develop internal capabilities to manufacture
suspension assemblies, we believe that the number of entities that have the
technical capability and capacity for producing precision suspension assemblies
in large volumes will remain small.

Other types of data storage systems, such as semiconductor (flash) memory,
tape memory and optical (DVD and CD) drives, may become competitive with certain
disk drive applications, and thereby affect the demand for our products.
However, given the current state of the technologies, flash memories are not
expected to be price competitive with disk drives, and optical drives and tape
memories are inherently much slower than disk drives. Accordingly, we believe
that these technologies will not materially impact the market for disk drives in
the near future.

INTELLECTUAL PROPERTIES

We regard much of the equipment, processes, information and knowledge that
we generate and use in the manufacture of our products as proprietary and
protectable under applicable trade secret, copyright and unfair competition
laws. In addition, if we develop manufacturing equipment, products and processes
for making products where patents might enhance our position, we have pursued,
and we will continue to pursue, patents in the United States and in other
countries. As of September 29, 2002, we held 110 United States patents and 15
foreign patents, and we had 52 patent applications pending in the United States
and 48 patent applications pending in other countries. Internally, we protect
intellectual property and trade secrets through physical security measures at
our facilities as well as through non-disclosure and non-competition agreements
with all employees, confidentiality policies, and non-disclosure agreements with
consultants, strategic suppliers and customers.

In the past, we have entered into licensing and cross-licensing agreements
under certain of our patents and patent applications allowing some of our
competitors to produce products similar to ours in return for either royalty
payments or cross-license rights. In November 2001, we entered into
cross-license agreements with three suspension assembly suppliers enabling each
of them to offer customers in the disk drive industry TSA suspension assemblies
based on our proprietary technology. The agreements also include cross-licenses
to certain existing and future suspension assembly technology.

From time to time, third parties have asserted patents against us or our
customers that may relate to certain of our manufacturing equipment or products
or to products that include our products as a component. We also have litigated
claims against a competitive supplier alleging infringement of our patents. In
addition, some of our customers have been sued on patents having claims closely
related to products we sell. We expect that, as the number of patents issued
continues to increase, the volume of intellectual property claims could
increase.

EMPLOYEES

As of September 29, 2002, we had 3,336 regular employees, 1,733 of whom
were working at our Hutchinson, Minnesota plant, 548 of whom were working at our
Sioux Falls, South Dakota plant, 894 of whom were working at our Eau Claire,
Wisconsin plant, 137 of whom were working at our Plymouth, Minnesota plant, and
24 of whom were working overseas. The departure of a significant number of our
specialized employees who cannot be replaced by comparable personnel would
impair our ability to conduct our business. The locations of our plants and the
broad span and complexity of technology encompassed by our products and
processes limit the number of qualified engineering and other candidates for key
positions. We expect that we will continue to use internal training for the
development of key employees.

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None of our employees is subject to a collective bargaining agreement, and
we have experienced no work stoppages. We believe that our employee relations
are good.

RISK FACTORS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.

This Annual Report on Form 10-K contains forward-looking statements that we
have made pursuant to the provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are not historical facts, but
rather are based on our current expectations, estimates and projections about
the disk drive industry, and our beliefs and assumptions. We intend words such
as "anticipates," "expects," "intends," "plans," "believes," "estimates" and
similar expressions to identify forward-looking statements. These statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control and are difficult to
predict. These factors could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. We describe
these risks and uncertainties in the following risk factors and elsewhere in
this Annual Report on Form 10-K. We caution you not to place undue reliance on
these forward-looking statements, which reflect our management's view only as of
the date of this Annual Report on Form 10-K. We are not obligated to update
these statements or publicly release the result of any revisions to them to
reflect events or circumstances after the date of this Annual Report on Form
10-K or to reflect the occurrence of unanticipated events.

OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS.

Our past operating results, and our gross margins, have fluctuated from
fiscal period to period. We expect our future operating results and gross
margins will continue to fluctuate from fiscal period to period. The following
factors may cause these fluctuations:

- changes in overall demand for our products
- technological changes that reduce the number of suspension assemblies per
drive required by drive makers
- changes in our manufacturing process, or problems related to our
manufacturing process
- increased costs when we start producing new products, and achieving
high-volume production quickly
- changes in the specific products our customers buy
- changes in our selling prices
- changes in utilization of our production capacity
- changes in our infrastructure costs, and how we control them
- changes in our manufacturing yields
- changes in our production efficiency
- long disruptions in operations at any of our plants for any reason
- changes in the cost of, or limits on, available materials and labor

Since 1999, improvements in data density of disk drives have outpaced disk
drive storage capacity requirements. This enabled disk drive manufacturers to
reduce their costs by using fewer components, including suspension assemblies,
in each drive. Shifts in our position in the marketplace had also, to a lesser
extent, decreased demand for our products. Slower growth of disk drive storage
demand and a weaker global economy also have decreased demand for our products
since 2001. Consequently, our suspension assembly shipments declined from 583
million in 1999 to 398 million in 2002. While improvements in data density and
slower growth of disk drive storage demand continued to reduce our demand in
2002, improvements in our market position increased our demand in the latter
part of 2002. We continue to have limited visibility for future demand. If
customer demand for suspension assemblies weakens, or if one or more customers
reduce, delay or cancel orders, our business, financial condition and results of
operations could be materially adversely affected.

We typically allow customers to change or cancel orders on short notice. We
plan our production and inventory based primarily on forecasts of customer
demand, including forecasts of customer pulls of product out of our
"just-in-time" inventory hubs. Customers typically prefer a dual source supply
and, therefore, they
9

allocate their demand among suppliers. Both customer demand and the resulting
forecasts often fluctuate substantially. These factors, among others, create an
environment where scheduled production and capacity utilization can vary
significantly from week to week, leading to variability in gross margins and
difficulty in estimating our position in the marketplace.

Our selling prices are subject to pricing pressure from our customers and
market pressure from our competitors. Our selling prices also are affected by
changes in overall demand for our products, changes in the specific products our
customers buy and a product's life cycle. A typical life cycle for our products
begins with higher pricing when a product is introduced, decreasing prices when
it is mature, and slightly increasing pricing as it is phased out. To offset
price decreases during a product's life, we rely primarily on higher sales
volume and improving our manufacturing yield and productivity to reduce a
product's cost. If we cannot reduce our manufacturing costs as prices decline
during our products' life cycles, our business, financial condition and results
of operations could be materially adversely affected.

Many of our products are shipped overseas, specifically to the Pacific Rim
region. The income we earn from these products has qualified for favorable tax
treatment. If we stop shipping products overseas, or if the tax laws change to
eliminate the favorable tax treatment to which this income is subject, our
business, financial condition and results of operations could be materially
adversely affected.

ALMOST ALL OF OUR SALES DEPEND ON THE DISK DRIVE INDUSTRY.

Sales of suspension assemblies and suspension assembly components accounted
for 99% of our net sales in 2002, 2001 and 2000. The disk drive industry is
intensely competitive and technology changes rapidly. The industry's demand for
disk drive components also fluctuates. The disk drive industry experiences
periods of increased demand and rapid growth followed by periods of oversupply
and subsequent contraction. These cycles may affect suppliers to this industry
because disk drive manufacturers tend to order more disk drive components than
they may need during growth periods, and sharply reduce orders for these
components during periods of contraction.

Industry transitions in head technology also impact disk drive unit
shipment levels and, consequently, demand for suspension assemblies. During past
industry transitions, such as from thin film inductive recording heads to MR and
GMR heads, and from nano heads to smaller pico heads, production yields of head
and disk drive manufacturers initially were reduced. Because a significant
portion of head yield reduction occurs after the head is bonded onto the
suspension assembly, low yields at our customers often result in increased
demand for suspension assemblies in order to achieve desired disk drive shipment
levels. As yields at our customers improved in 1999 and 2000, demand for
suspension assemblies decreased. In the latter part of 2002, some of our
customers started to transition to higher capacity recording heads, and demand
for our products increased due to reduced production yields experienced by these
customers. Our results of operations could be materially adversely affected if
the reduction in the industry's component demand continues long-term or a future
significant slowdown in the industry occurs.

OUR SALES ARE CONCENTRATED IN A SMALL CUSTOMER BASE.

Although we supply nearly all domestic and many foreign-based manufacturers
of disk drives, and manufacturers of recording heads used in disk drives, sales
to our five largest customers constituted 83% of net sales for 2002, 91% of net
sales for 2001 and 87% of net sales for 2000. Over the years, the disk drive
industry has experienced numerous consolidations. These consolidations have
resulted in fewer, but larger, customers for our products. The loss of one or
more of our major customers for any reason, including the development by any one
customer of the capability to produce suspension assemblies in high volume for
their own products, or the failure of a customer to pay their account balance
with us, could have a material adverse effect on our results of operations.

10

TO MEET INDUSTRY REQUIREMENTS, WE MUST DEVELOP AND QUALIFY OUR NEW PRODUCTS AND
FEATURES, WHICH MAY INCREASE OUR MANUFACTURING COSTS.

Our continued success depends on our ability to develop and rapidly bring
to volume production new products that meet increasingly higher performance
specifications. A number of risks are inherent in this process. Increasingly
higher performance specifications, as well as transitions to new product
platforms, initially can lower our overall manufacturing yields and
efficiencies. This in turn can cause us to delay or miss product shipments. We
may also incur higher manufacturing costs or we may need to change or develop
new manufacturing processes. If processes change, we may need to replace, modify
or design, build and install equipment. These changes may require additional
capital.

We may need to increase our research and development and engineering
expenses to support technological advances and to develop and manufacture new
products and product features. We expect these expenses to increase for the
following new products:

- suspension assemblies with higher performance specifications than our
customers currently require
- suspension assemblies that incorporate dual stage actuators to improve
head positioning over increasingly tighter data tracks on each disk
- suspension assemblies on which a preamplifier may be mounted to improve
data transfer signals from the disk
- suspension assemblies for use with new smaller-sized femto heads
- suspension assemblies that incorporate new materials

If we fail to introduce successfully new products or product features on a
regular and timely basis, demand for our existing products could decline, and
our business, financial condition and results of operations could be materially
adversely affected. If a competitor introduced a widely-accepted new suspension
assembly design, and we were not able to respond to the new design effectively,
our business, financial condition and results of operations would be materially
adversely affected.

We must qualify our products with our customers. The qualification process
for disk drive products can be complex and difficult. We cannot be sure that our
suspension assemblies will continue to be selected for design into our
customers' products. If we are unable to obtain additional customer
qualifications, or if we cannot qualify our products for high-volume production
quantities, or at all, our business, financial condition and results of
operations could be materially adversely affected.

We have developed a medical device in our BioMeasurement Division that
measures local tissue oxygenation. Studies to demonstrate its utility and value
in several significant medical applications are currently in progress. Our
efforts, however, to market our product may not generate significant revenue.

WE MAY NOT BE ABLE TO UTILIZE OUR CAPACITY EFFICIENTLY, WHICH MAY NEGATIVELY
AFFECT OUR OPERATING RESULTS.

We have at times increased our production capacity and the overhead that
supports production based on anticipated market demand. Anticipated market
demand, however, has not always developed as expected. As a result, we have
periodically underutilized our capacity. This underutilization decreased our
profitability. In the second half of 1999 and in 2000, reduced demand resulted
in underutilization of our manufacturing capacity, and consequently, lower
profitability. In 2000, we recorded charges of $56,523,000 to write down certain
assets relating to excess TSA suspension assembly manufacturing capacity, and
$6,745,000 in severance charges due to workforce reductions, which adversely
affected our results of operations. Similarly, in 2001, we recorded charges of
$20,830,000 to write down certain assets relating to excess manufacturing
capacity, including an unfinished facility, and $7,045,000 in severance charges
due to additional workforce reductions, which also adversely affected our
results of operations.

The following factors complicate accurate capacity planning for market
demand:

- changes in the specific products our customers buy
- the pace of technological change
- variability in our manufacturing yields and productivity

11

- long lead times for most of our plant and equipment expenditures,
requiring major financial commitments well in advance of actual
production requirements

Our inability to plan our capacity requirements accurately, or our failure
to put in place the technologies and capacity necessary to meet market demand,
could adversely affect our business, financial condition and results of
operations.

WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS EFFICIENTLY DUE TO CHANGES IN
DEMAND OR TECHNOLOGY, OR OTHER UNFORESEEN EVENTS.

We manufacture a wide variety of suspension assemblies with different
selling prices and manufacturing costs. Our product mix varies weekly as market
demand changes. Any substantial variation in product mix can lead to changes in
utilization of our equipment and tooling, inventory obsolescence and
overstaffing in certain areas, all of which could adversely impact our business,
financial condition and results of operations.

Rapid technological change in the disk drive industry has led to numerous
suspension assembly design changes and tighter performance specifications. The
resulting suspension assemblies initially are more difficult to manufacture and
typically require additional capital expenditures, and may require increased
development and support expenses. Manufacturing yields and efficiencies also
vary from product to product. Newer products typically have lower initial
manufacturing yields and efficiencies as we commence volume manufacturing and
thereafter ramp to full production. We cannot be sure that we will attain our
output goals and be profitable with regard to any of our suspension assembly
products, including TSA suspensions with additional features currently in
development.

We may need to transfer production of certain suspension assemblies from
one manufacturing site to another. In the past, such transfers have lowered
initial yields and/or manufacturing efficiencies. This results in higher
manufacturing costs. Our manufacturing plants are located in Minnesota, South
Dakota and Wisconsin, all of which can experience severe weather. Severe weather
has, at times, resulted in lower production and decreased our shipments.

Our ability to conduct business would be impaired if our workforce were to
be unionized or if a significant number of our specialized employees were to
leave and we could not replace them with comparable personnel. Our business may
be adversely affected if we need to adjust the size of our workforce due to
fluctuating demand. The locations of our plants and the broad span and
technological complexity of our products and processes limit the number of
satisfactory engineering and other candidates for key positions.

Our production processes require us to store, use and dispose of chemicals
that are considered hazardous under applicable federal and state laws. We must
handle these chemicals in accordance with a variety of regulatory requirements.
If an accident occurred and resulted in significant personal injury or
environmental damage, our business, financial condition and results of
operations could be materially adversely affected.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.

We attempt to protect our intellectual property rights through patents,
copyrights, trade secrets and other measures. We may not, however, be able to
protect our technology adequately. In addition, competitors may be able to
develop similar technology independently. Our success depends in large part on
trade secrets relating to our proprietary manufacturing processes. We seek to
protect these trade secrets and our other proprietary technology in part by
requiring each of our employees to enter into non-disclosure and non-
competition agreements. In these agreements, the employee agrees to maintain the
confidentiality of all of our proprietary information and, subject to certain
exceptions, to assign to us all rights in any proprietary information or
technology made or contributed by the employee during his or her employment. In
addition, we regularly enter into non-disclosure agreements with third parties,
such as consultants, suppliers and customers. These agreements may, however, be
breached, and we may not have an adequate remedy for any such breach. In
addition, our competitors may otherwise learn or independently develop our trade
secrets.

We believe that the patents we hold and may obtain are valuable, but that
they will not independently determine our success. Moreover, we may not receive
patents for our pending patent applications, and our
12

issued patents may not be broad enough to protect our technology adequately. We
compete in an industry with rapid development and technological innovation. We
cannot be sure that our future technology will be protectable, or that any
patent issued to us will not be challenged, invalidated, circumvented or
infringed. In addition, we have only limited patent rights outside the United
States, and the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the United
States.

We and certain users of our products have received, and may receive,
communications from third parties asserting patents against us or our customers
that may relate to our manufacturing equipment or to our products or to products
that include our products as a component. In addition, certain of our customers
have been sued on patents having claims closely related to products we sell. If
any third party makes a valid infringement claim against us and we are unable to
obtain a license on terms acceptable to us, our business, financial condition
and results of operations could be adversely affected. We expect that, as the
number of patents issued continues to increase, the volume of intellectual
property claims made against us could increase. We may need to engage in
litigation to:

- enforce patents issued or licensed to us
- protect trade secrets or know-how owned by us
- determine the enforceability, scope and validity of the intellectual
property rights of others

We have litigated claims against a competitive supplier alleging
infringement of our patents. We could incur substantial costs in other such
litigation or other similar legal actions, which could have a material adverse
effect on our business, financial condition and results of operations.

WE MAY HAVE DIFFICULTY OBTAINING AN ADEQUATE SUPPLY OF RAW MATERIALS AT
REASONABLE PRICES.

We currently can obtain certain types of photoresist, a liquid compound
used in the photoetching process, and the stainless steel, coverlay and copper
that meet our strict specifications, from only one supplier of each such
material. The supplier of stainless steel periodically resets the price of the
product we purchase based on fluctuations in the value of the Japanese yen. When
it does so, our costs for raw materials may increase. If we could not obtain the
materials referred to above in the necessary quantities, with the necessary
quality and at reasonable prices, our business, financial condition and results
of operations could be materially adversely affected.

COMPETING TECHNOLOGY MAY REDUCE DEMAND FOR OUR PRODUCTS.

Certain of our customers are using alternative interconnect technologies
that compete with the electrical interconnect features of our TSA suspension
assemblies. We cannot be sure that our customers will select TSA suspensions for
design into their products instead of alternative interconnect technologies,
such as deposition circuitry and flexible circuitry. If our customers accept
technologies that compete with TSA suspensions, our business, financial
condition and results of operations may be adversely affected.

Future technological innovations may reduce demand for disk drives. Data
storage alternatives that compete with disk drive-based data storage do exist.
These storage alternatives include semiconductor (flash) memory, tape memory and
optical (DVD and CD) drives. The current core technology for disk drive data
storage has been the dominant technology in the industry for many years. This
technology could be replaced by an alternate technology in the future. Our
business, financial condition and results of operations could be materially
adversely affected if the computer industry adopts technology that replaces disk
drives as a computer data storage medium.

THE MARKET PRICE FOR OUR SECURITIES MAY BE VOLATILE.

The securities of companies in the disk drive industry (including our
securities) generally have volatile market prices. If our revenue or earnings in
any fiscal quarter fail to meet the investment community's expectations, the
market price of our securities could fall. In addition, the market for our
securities has experienced significant price and volume fluctuations that are
unrelated to our operating results. Future announcements about us and general
market conditions may affect the market price of our securities

13

significantly. Future trading prices of our securities may depend on factors
beyond our influence such as perceptions of our business and the disk drive
industry generally, prevailing interest rates and the market for similar
securities. The volatility of market prices for our securities may limit our
ability in the future to raise additional capital.

WE MAY NOT BE ABLE TO OBTAIN THE CAPITAL WE NEED TO MAINTAIN OR GROW OUR
BUSINESS.

While our current capital expenditures are not as high as in previous
years, we may need significant funds over the next several years to achieve our
long-term strategic objectives, and to maintain and enhance our competitive
position. We would likely use these funds for capital expenditures, debt
service, research and development and working capital. Our business is highly
capital intensive. As we moved from conventional suspension assembly production
to high-volume TSA suspension production in 1998 and 1999, we required
particularly high levels of capital expenditures, including substantial
investments in sophisticated manufacturing technologies and automated production
equipment for our suspension assemblies. Our total capital expenditures were
approximately $32,000,000 in 2002, $32,000,000 in 2001 and $65,000,000 in 2000.
We entered into capital leases for production equipment with an estimated fair
value of approximately $12,400,000 in 2000. We also entered into operating
leases for production and other equipment with costs of approximately $5,000,000
in 2002, $7,000,000 in 2001 and $10,000,000 in 2000.

We currently anticipate spending approximately $50,000,000 during 2003
primarily for new program tooling, process technology and capability
improvements and new business systems. We anticipate that we will continue to
make similar capital expenditures beyond 2003 to continue to invest in new
technologies, production capacity and infrastructure to accommodate anticipated
market growth. We will pursue additional debt or equity financing to supplement
our current capital resources if needed beyond 2003. Our ability to obtain
additional financing will depend upon a number of factors, including our future
performance and financial results and general economic and capital market
conditions. We cannot be sure that we will be able to raise additional capital
on reasonable terms or at all, if needed.

Our ability to execute our long-term strategy may depend to a significant
degree on our ability to obtain additional long-term debt and equity capital. We
have no commitments for additional borrowings or for sales of equity. We cannot
determine the precise amount and timing of our funding needs at this time. We
may be unable to obtain future additional financing on terms acceptable to us or
at all. If we fail to comply with certain covenants relating to our
indebtedness, we may need to refinance our indebtedness to repay it. We also may
need to refinance our indebtedness at maturity. We may not be able to obtain
additional capital on favorable terms to refinance our indebtedness.

The following factors could affect our ability to obtain additional
financing on favorable terms, or at all:

- our results of operations
- general economic conditions and conditions in the disk drive industry
- the perception in the capital markets of our business
- our ratio of debt to equity
- our financial condition
- our business prospects
- changes in interest rates

In addition, certain covenants relating to our existing indebtedness impose
certain limitations on additional indebtedness. If we are unable to obtain
sufficient capital in the future, we may have to curtail our capital
expenditures and reduce research and development expenditures. Any such actions
could have a material adverse effect on our business, financial condition and
results of operations.

SERVICING OUR EXISTING DEBT MAY CONSTRAIN OUR FUTURE OPERATIONS.

Our ratio of total debt and capital leases to total capitalization at
September 29, 2002 was 29.8%. Our ability to satisfy our obligations to pay
interest and to repay debt is dependent on our future performance. Our
performance depends, in part, on prevailing economic conditions and financial,
business and other factors,

14

including factors beyond our control. To the extent that we use a substantial
portion of our cash flow from operations to pay the principal of, and interest
on, our indebtedness, that cash flow will not be available to fund future
operations and capital expenditures. Our debt level also may limit our ability
to obtain additional financing to fund future capital expenditures, debt
service, research and development, working capital and other general corporate
requirements. It also could make us more vulnerable to general economic
downturns and competitive pressures. We cannot be sure that our operating cash
flow will be sufficient to fund our future capital expenditure and debt service
requirements or to fund future operations.

OUR FINANCING AGREEMENTS CONTAIN RESTRICTIVE COVENANTS WITH WHICH WE MAY NOT BE
ABLE TO COMPLY.

We have entered into a number of financing agreements that contain
restrictive financial covenants. These covenants require us, among other things,
to maintain specified levels of net income, cash availability, tangible net
worth and leverage ratios, and also impose certain limitations on additional
indebtedness, leases, guarantees and the payment of dividends. Our ability to
comply with restrictive financial covenants depends upon our future operating
performance. Our future operating performance depends, in part, on general
industry conditions and other factors beyond our control. We cannot be sure that
we will be able to comply with these covenants in the future, and we may not be
successful in renegotiating our financing agreements or otherwise obtaining
relief from the covenants. If we default under some or all of our financing
agreements, our lenders may require that we immediately repay the full
outstanding amount we owe to them. In such event, we may have to pursue
alternative financing arrangements. If we are not in compliance with financial
covenants in our financing agreements at the end of any fiscal quarter, our
future results of operations and liquidity could be materially adversely
affected.

ITEM 2. PROPERTIES

We own four buildings on a site of approximately 163 acres in Hutchinson,
Minnesota used by both our Disk Drive Division and our BioMeasurement Division.
This site includes executive offices and a manufacturing plant, development
center and training center, with an aggregate of approximately 751,000 square
feet of floor area. We currently utilize approximately 90% of this space. We
also lease a 20,000 square foot warehouse and a 12,000 square foot fabrication
shop near the Hutchinson site. Approximately 35% of the square footage in the
training center building, which we do not intend to utilize for the foreseeable
future, is leased to another party.

We own a manufacturing plant in Sioux Falls, South Dakota of approximately
300,000 square feet that is used by our Disk Drive Division, approximately 65%
of which we currently utilize. Approximately 15% of the square footage in this
plant, which we do not intend to utilize for the foreseeable future, is leased
to another party.

We operate a manufacturing plant in Eau Claire, Wisconsin used by our Disk
Drive Division, in connection with which we lease a building of approximately
156,000 square feet, approximately 95% of which we currently utilize. We also
own an additional manufacturing plant in Eau Claire of approximately 320,000
square feet, approximately 65% of which we currently utilize for our trace
manufacturing operations. We suspended our photoetching operation in Eau Claire
in April 2000 and consolidated all of our photoetching operations into our
Hutchinson, Minnesota plant. We began construction in 1999 of an additional
manufacturing plant of approximately 232,000 square feet at the Eau Claire site,
but we suspended construction in that year due to decreases in the disk drive
industry's forecasts for components and, as a result, decreases in our forecast
of suspension assembly demand.

We lease a building of approximately 100,000 square feet located in
Plymouth, Minnesota that is used by our Disk Drive Division for stamping
operations and office space, approximately 80% of which we currently utilize,
and we sublease approximately 45,000 square feet of space located in Eden
Prairie, Minnesota, for which we still hold the prime lease.

We lease a business office in the Netherlands used by our BioMeasurement
Division. Through our wholly-owned subsidiary, we also lease offices used by our
Disk Drive Division for customer services and support in Singapore, Japan, the
People's Republic of China and Thailand.

We believe that our existing facilities will be adequate to meet our
currently anticipated requirements.

15

ITEM 3. LEGAL PROCEEDINGS

On October 10, 2001, Ronald A. Smith & Associates commenced a lawsuit
against us in the United States District Court for the Northern District of
California. The lawsuit alleged that certain manufacturing systems we use
infringed one patent. The lawsuit requested damages, including treble damages,
attorneys' fees and an injunction against us.

On August 30, 2002, the parties entered into a settlement agreement under
which the plaintiffs agreed that we had not infringed their patent, we obtained
ownership of the patent, and the lawsuit was dismissed with prejudice.

We are a party to certain claims arising in the ordinary course of
business. In the opinion of management, the outcome of such claims will not
materially affect our current or future financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are as follows:

Mr. Green is one of our co-founders and has served as a director since our
formation in 1965. Mr. Green has been Chairman of the Board since January 1983,
and served as our Chief Executive Officer from January 1983 to May 1996.

Mr. Fortun was elected President and Chief Operating Officer in 1983, Chief
Executive Officer in May 1996, and is now President and Chief Executive Officer.
He has served as a director since 1983. He is also a director of G&K Services,
Inc. and C.H. Robinson Worldwide, Inc. Mr. Fortun has been with HTI since 1975.

Mr. Ingleman was elected Vice President in January 1982, Chief Financial
Officer in January 1988, and Secretary in January 1992. Mr. Ingleman has been
with HTI since 1977.

Ms. Albrecht was elected Vice President in January 1995 and is now Vice
President of Human Resources. Ms. Albrecht has been with HTI since 1983.

16

Ms. Graczyk was elected Vice President in May 1990, and in March 1999 was
elected Vice President and Chief Operating Officer. Ms. Graczyk has been with
HTI since 1970.

Mr. Myers was elected Vice President in January 1988, was Vice President of
Administration from January 1995 until November 2001, and has been Vice
President of Business Development since November 2001. Mr. Myers has been with
HTI since 1977.

Mr. Penn was elected Vice President in January 1996 and is now Vice
President of Sales and Marketing. Mr. Penn has been with HTI since 1981.

Mr. Schaefer was elected Vice President in May 1990 and is now Vice
President and Chief Technical Officer. Mr. Schaefer has been with HTI since
1979.

Ms. Temperante joined HTI in July 2001 as President of our BioMeasurement
Division, and was elected Vice President in November 2001. Prior to joining HTI,
Ms. Temperante was Vice President and General Manager of the Fiber Optic
Division at Medamicus, Inc., a medical device company, from March 1998 through
June 2001. She served as Vice President of Sales, Marketing and Professional
Services with Graseby Medical, Incorporated, also a medical device company, from
August 1996 through January 1998.

Executive officers are elected annually by the Board of Directors and serve
a one-year period or until their successors are elected.

None of the above executive officers is related to each other or to any of
our directors.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our common stock, $.01 par value, trades on The Nasdaq National Market
under the symbol HTCH. For price information regarding our common stock, see
Note 13 to the consolidated financial statements contained in Item 15. As of
December 5, 2002, our common stock was held by 841 shareholders of record.

DIVIDENDS

We have never paid any cash dividends on our common stock. We currently
intend to retain all earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
payment of dividends will depend upon our financial condition and results of
operations and such other factors as are deemed relevant by the Board of
Directors.

We have a loan agreement that contains a covenant limiting, among other
things, our ability to pay cash dividends or make other distributions. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," and Note 3 to the consolidated
financial statements contained in Item 15.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data required pursuant to this Item appears on page
53 of this Annual Report on Form 10-K.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read in conjunction with the selected historical
consolidated financial data and consolidated financial statements and notes
thereto appearing elsewhere in this Annual Report on Form 10-K.

17

GENERAL

Since the late 1980's, we have derived virtually all of our revenue from
the sale of suspension assemblies to a small number of customers. We currently
sell a variety of suspension assemblies and suspension assembly components based
on several standard designs to manufacturers of disk drives and manufacturers of
disk drive components (including Alps, Fujitsu, IBM, Innovex, KRP, Read-Rite,
SAE and Seagate). Suspension assemblies are a critical component of disk drives
and our results of operations are highly dependent on the disk drive industry.
The disk drive industry is intensely competitive and demand for disk drive
components fluctuates. Our results of operations have been adversely affected
from time to time due to disk drive industry slowdowns, technological changes
that impact suspension assembly demand, shifts in our market share and our
customers' market share, our customers' production yields and our own product
transitions.

Since 1999, improvements in data density, the amount of data which can be
stored on magnetic disks, have outpaced disk drive storage capacity
requirements. This enabled disk drive manufacturers to reduce their costs by
using fewer components, including suspension assemblies, in each drive. Shifts
in our position in the marketplace had also, to a lesser extent, decreased
demand for our products. Slower growth of disk drive storage demand and a weaker
global economy have also decreased demand for our products since 2001.
Consequently, our shipments declined from 583 million in 1999 to 398 million in
2002. While improvements in data density and slower growth of disk drive storage
demand continued to reduce our demand in 2002, improvements in our market
position increased our demand in the latter part of 2002.

Our shipments of suspension assemblies for the fourth quarter of 2002 were
111 million, 21% higher than the levels we saw in quarter one of 2002. We expect
our shipments in quarter one of 2003 to be higher than quarter four of 2002 due
to an increase in disk drive production and a temporary increase in TSA
suspension consumption resulting from lower production yields at some of our
customers related to their transition to higher density recording heads. We
continue to have limited visibility for future demand.

Our selling prices are subject to pricing pressure from our customers and
market pressure from our competitors. Our selling prices also are affected by
changes in overall demand for our products, changes in the specific products our
customers buy and a product's life cycle. A typical life cycle for our products
begins with higher pricing when a product is introduced, decreasing prices when
it is mature, and slightly increasing pricing as it is phased out. To offset
price decreases during a product's life, we rely primarily on higher sales
volume and improving our manufacturing yield and production efficiency to reduce
its cost. If we cannot reduce our manufacturing costs as prices decline during
our products' life cycles, our business, financial condition and results of
operations could be materially adversely affected.

We typically allow customers to change or cancel orders on short notice. We
plan our production and inventory based primarily on forecasts of customer
demand, including forecasts of customer pulls of product out of our
"just-in-time" inventory hubs. Customers typically prefer a dual source supply
and, therefore, they allocate their demand among suppliers. Both customer demand
and the resulting forecasts often fluctuate substantially. These factors, among
others, create an environment where scheduled production and capacity
utilization can vary significantly from week to week, leading to variability in
gross margins and difficulty in estimating our position in the marketplace.

Our gross margins have fluctuated and will continue to fluctuate based upon
a variety of factors such as

- changes in demand or customer requirements
- product mix
- selling prices
- the level of utilization of our production capacity
- increases in production and engineering costs associated with production
of new products
- manufacturing yields and production efficiency
- changes in the cost of raw materials

Gross margins were positively impacted in 2002 primarily by cost reduction
efforts completed during 2001 and productivity improvements in 2002.

18

The disk drive industry is intensely competitive, and our customers'
operating results are dependent on being the first-to-market and first-to-volume
with new products at a low cost. Our ability to respond to our customers' needs
for new products and product features on a timely basis is an important factor
in our success. Our dedicated Development Center enables us to shorten
development cycles and achieve high volume output per manufacturing unit more
quickly.

New suspension assembly types have lower manufacturing yields and are
produced in smaller quantities than more mature products. Manufacturing yields
generally improve as the product matures and production volumes increase.
Manufacturing yields also vary depending on the complexity and uniqueness of
product specifications. Because our business is capital intensive and requires a
high level of fixed costs, gross margins are also extremely sensitive to changes
in volume. Small variations in capacity utilization or manufacturing yields
generally have a significant impact on gross margins.

In addition to increases in suspension assembly demand, improvements to our
operating margins depend, in part, on the successful management of our corporate
infrastructure, our suspension assembly production capacity and our workforce.
During the past three years, we consolidated some of our manufacturing
operations to make better use of existing equipment and support staff across all
of our plants and to reduce costs. As part of our efforts to improve our
operating margins through reduced costs and improved efficiency, we reduced our
overall employment level, through workforce reductions and managed attrition,
from 7,701 at the end of 1999 to 3,336 at the end of 2002.

MARKET TRENDS

We expect that the expanding use of enterprise computing and storage,
personal computers, increasingly complex software and the emergence of new
applications for disk storage, such as digital video recording, gaming consoles,
digital cameras and other consumer applications, will increase disk drive demand
and, therefore, suspension assembly demand in the future. We also believe demand
for disk drives will continue to be subject, as it has in the past, to rapid or
unforeseen changes resulting from, among other things, changes in disk drive
inventory levels, technological advances, responses to competitive price changes
and unpredicted high or low market acceptance of new drive models. Improvements
in data density of disk drives, extending from the desktop market to server
drives, have reduced unit shipments of suspension assemblies since the third
quarter of 1999. However, data density improvements have grown at a slower rate
in the past year, and we believe they will continue to grow at a slower rate in
the upcoming year. We expect that world-wide suspension assembly shipments will
remain relatively flat for the foreseeable future until at least one of the
following events occurs: average suspension assembly counts within disk drives
stabilize or increase, or overall disk drive demand growth increases.

As in past years, disk drives continue to be the storage device of choice
for applications requiring low access times and higher capacities because of
their speed and low cost per megabyte of stored data. The cost of storing data
on disk drives continues to decrease primarily due to increasing data density,
thereby increasing storage capacity in disk drives or reducing the number of
components, including suspension assemblies, required in a disk drive.

The continual pursuit of increasing data density and lower storage costs
are leading to further adoption of value-added features for TSA suspensions,
such as extended arms, headlifts, limiters, static dissipative coatings and
switch shunts. TSA suspensions also allow for dual stage actuation, which
incorporates a second stage actuator on the suspension to improve head
positioning over increasingly tighter data tracks. Additionally, TSA suspensions
can be configured to allow for attachment of preamplifiers near the head to
improve data transfer signals.

The introduction of new types or sizes of read/write heads and new disk
drive designs tends to initially decrease customers' yields with the result that
we may experience temporary elevations of demand for some types of suspension
assemblies. We believe reduced yields at some of our customers due to their
transition to higher density recording heads is resulting in increased shipments
of our suspension assemblies in quarter one of 2003. As programs mature, higher
customer yields decrease the demand for suspension assemblies. The advent of new
heads and new drive designs may require rapid development and implementation of
new
19

suspension assembly types which temporarily may reduce our manufacturing yields
and efficiencies. These changes will continue to affect us.

2002 OPERATIONS TO 2001 OPERATIONS

The following table sets forth our consolidated statements of operations as
a percentage of net sales from period to period.

Net sales for 2002 were $390,694,000, a decrease of $10,542,000 or 3%
compared to 2001. Suspension assembly sales decreased $29,605,000 compared to
2001, primarily due to a 5% decrease in suspension assembly sales volume and
declining average selling prices for suspension assemblies. These decreases were
partially offset by a $17,701,000 increase in suspension assembly component
sales.

Gross profit for 2002 was $90,417,000, compared to $36,724,000 for 2001,
and gross profit as a percent of net sales increased from 9% to 23%. This
increase was primarily due to the cost reduction efforts completed during 2001
and productivity improvements in 2002. Labor and benefits expenses were reduced
by $26,956,000 as a result of workforce reductions and productivity
improvements, and depreciation decreased $26,861,000 as a result of the asset
impairment charges recorded in 2001 and lower capital expenditures in 2001 and
2002. Inventory scrap costs were also reduced by $6,856,000 in 2002. These
improvements were partially offset by the lower suspension assembly sales volume
and lower average selling prices noted above.

Research and development expenses for 2002 were $17,663,000 compared to
$23,241,000 for 2001. The decrease was primarily due to customer funding of a
portion of our advanced suspension assembly development costs and reduced
product development costs in our BioMeasurement Division. Suspension assembly
product and process development accounted for $15,989,000 of such expenses, and
the remaining $1,674,000 was used for ongoing product development and clinical
research related to the medical device developed by our BioMeasurement Division.
As a percent of net sales, research and development expenses decreased from 6%
in 2001 to 5% in 2002.

Selling, general and administrative expenses for 2002 were $50,961,000, an
increase of $722,000 or 1% compared to 2001. The increase was due primarily to a
$6,030,000 increase in incentive compensation costs, and to a lesser extent,
higher bad debt expenses. These increases were partially offset by a $1,846,000
reduction in legal and professional fees and a $1,295,000 reduction in labor and
benefits expenses and, to a lesser extent, lower depreciation and lease
expenses, reduced recruitment and relocation expenses, and lower travel and
training costs. As a percent of net sales, selling, general and administrative
expenses increased from 12% in 2001 to 13% in 2002.

20

During the first quarter of 2002, we recorded an increase to operating
income of $2,632,000 as a result of a reimbursement of legal expenses from a
third party and insurance proceeds related to litigation defense costs. See Note
9, "Litigation Settlement," in the notes to the consolidated financial
statements.

Other income, net, for 2002 was $8,271,000, a decrease of $6,242,000
compared to 2001. Other income, net, primarily consisted of interest income,
royalty income and rental income. Interest income decreased from $13,788,000 in
2001 to $6,950,000 in 2002 as a result of lower investment yields.

During the fourth quarter of 2002, we extinguished $26,557,000 of senior
unsecured notes and $6,500,000 of 6% convertible subordinated notes before their
maturity. In connection with these transactions, we recorded a $1,267,000
pre-tax loss on debt extinguishment. See Note 3, "Financing Arrangements," in
the notes to the consolidated financial statements.

Interest expense for 2002 was $13,780,000, a decrease of $2,310,000
compared to 2001, primarily due to carrying a lower amount of outstanding debt
and fewer capitalized leases.

The income tax provision for 2002 was based on an estimated effective tax
rate for the fiscal year of 15%, which is below the statutory federal rate
primarily due to the benefit derived from the Extraterritorial Income Exclusion
provisions related to export of U.S. products.

Net income for 2002 was $15,002,000, compared to a net loss of $56,277,000
for 2001. Our improved profitability was primarily due to cost reduction efforts
completed during 2001 and productivity improvements in 2002. Net income for 2002
included the above-mentioned increase to operating income and loss on debt
extinguishment. The 2001 net loss included charges of $27,875,000 for asset
write-downs and severance costs. Excluding these items, net income (loss) as a
percent of net sales, increased from (8)% in 2001 to 4% in 2002.

2001 OPERATIONS TO 2000 OPERATIONS

Net sales for 2001 were $401,236,000, a decrease of $58,336,000 or 13%
compared to 2000. This decrease was primarily due to a decrease in suspension
assembly sales volume of 68 million, partially offset by higher average selling
prices of $0.02 per part.

Gross profit for 2001 was $36,724,000, compared to $36,149,000 for 2000,
and gross profit as a percent of net sales increased from 8% to 9%. This
increase was primarily due to lower manufacturing labor and benefits expenses as
a result of the workforce reductions that occurred during 2000 and 2001 and
lower depreciation expense, offset primarily by the lower suspension assembly
sales volume noted above.

Research and development expenses for 2001 were $23,241,000, compared to
$21,433,000 for 2000. Suspension assembly product and process development
accounted for $19,796,000 of such expenses, and the remaining $3,445,000 was
used for the development of our biomeasurement device.

During fiscal 2001, we recorded charges of $27,875,000 to write down
certain assets and record severance costs for approximately 850 terminated
employees. Components of the charges included $20,830,000 of asset write-downs
of impaired manufacturing equipment and an unfinished facility in Eau Claire,
Wisconsin, and $7,045,000 of severance costs. See Note 2, "Asset Impairment and
Restructuring Charges," in the notes to the consolidated financial statements.

Our financial results for subsequent years will be impacted favorably by
lower depreciation, lease and labor expenses as a consequence of these charges.
The charges taken in 2001 and in 2000 are expected to produce an estimated
annual labor savings of approximately $125,000,000. The charges taken in 2001
and in 2000 also are expected to produce savings of depreciation and lease costs
of approximately $15,000,000, $12,000,000, $9,000,000 and $5,000,000 for the
fiscal years 2002 through 2005, respectively, and thereafter an aggregate of
$8,000,000 in additional savings. We will continue to have excess capacity until
some combination of the following events occurs: average component counts within
disk drives stabilize or increase, or overall disk drive demand growth increases
or our share of certain drive programs increases.

Selling, general and administrative expenses for 2001 were $50,239,000, an
increase of $375,000 or 1% compared to 2000. The increased expenses were due
primarily to increased legal and professional fees of

21

$4,145,000. This increase was offset partially by the absence of $1,900,000 of
charges, recorded in the comparable period in 2000, as a result of the
difference between payments made to purchase certain leased equipment over the
fair market value of such equipment, together with decreased bad debt expenses
of $1,127,000 and decreased health and dental expenses of $850,000. As a percent
of net sales, selling, general and administrative expenses increased from 11% to
12%.

Other income, net, for 2001 was $14,513,000, an increase of $941,000
compared to 2000. The increase was primarily due to a $463,000 decrease in
losses on disposals of assets and a $419,000 development subsidy.

Interest expense for 2001 was $16,090,000, an increase of $2,785,000
compared to 2000, primarily due to an increase of approximately $2,516,000 of
interest expense on capitalized leases.

The income tax benefit for 2001 was based on an estimated effective tax
rate for the fiscal year of 15%, which is below the statutory federal rate
primarily due to the uncertainty related to our ability to offset future income
with net operating losses.

The net loss for 2001 was $56,277,000, compared to a net loss of
$73,612,000 for 2000. The 2001 and 2000 net losses included the above-mentioned
asset write-down and severance costs. Excluding these costs, the net loss as a
percent of net sales increased from (6)% for 2000 to (8)% for 2001.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash and cash equivalents,
securities available for sale, cash flow from operations and additional
financing capacity. Our cash and cash equivalents decreased from $113,313,000 at
September 30, 2001 to $57,852,000 at September 29, 2002. Our securities
available for sale increased from $131,454,000 to $151,257,000 during the same
period. Overall, this reflects a $35,658,000 decrease in our cash and cash
equivalents and securities available for sale, primarily due to a prepayment of
certain expenses made in the second quarter of 2002 related to a technology and
development agreement and an extinguishment of certain debt instruments in the
fourth quarter of 2002. We generated cash from operating activities of
$48,091,000 in 2002, $61,463,000 in 2001 and $69,679,000 in 2000.

As of September 29, 2002, our $50,000,000 credit facility had a borrowing
base of $48,031,000, secured by our accounts receivable and inventory. Letters
of credit and loans outstanding under this facility totaled $5,407,000 as of
such date, including $4,282,000 issued in connection with obligations under
equipment leases. The amount we can borrow under this credit facility is limited
by the levels of our accounts receivable and inventory balances. As of September
29, 2002, $42,624,000 of borrowing capacity remained available to us.

Cash used for capital expenditures totaled $31,916,000 in 2002 compared to
$32,047,000 in 2001 and $64,657,000 in 2000. The capital expenditures for 2002
were primarily for new program tooling and process technology and capability
improvements. We expect total capital expenditures to be approximately
$50,000,000 during 2003 primarily for new program tooling, process technology
and capability improvements and new business systems. Financing of these capital
expenditures will be principally from internally generated funds, cash and cash
equivalents and securities available for sale.

During the fourth quarter of 2002, we extinguished $26,557,000 of senior
unsecured notes before their maturity at a pre-tax loss of $1,341,000. These
notes accrued interest at rates ranging from 7.96% to 8.57% and were due in July
through October of 2003. We also repurchased $6,500,000 of 6% convertible
subordinated notes at a pre-tax gain of $74,000. These notes had a maturity date
of March 15, 2005. Subsequent to our fiscal year-end, we repurchased an
additional $10,971,000 of 6% convertible subordinated notes at a pre-tax gain of
$221,000. The total extinguishment of $44,028,000 of debt will reduce our
interest expense in 2003 by approximately $2,437,000. Our debt-to-equity ratio
improved from 61 percent at the end of 2001 to 42 percent at the end of 2002.

Certain of our existing financing agreements contain financial covenants
and covenants which, among other things, restrict our ability to pay dividends
to our shareholders and may restrict our ability to enter into

22

certain types of financing. As of September 29, 2002, we were in compliance with
all such covenants. If, however, we are not in compliance with financial
covenants in our financing agreements at the end of any future quarter and
cannot obtain amendments on terms acceptable to us, our future financial results
and liquidity could be materially adversely affected.

We currently believe that our cash and cash equivalents, securities
available for sale, cash generated from operations and credit facility will be
sufficient to meet our operating expenses, debt service requirements and capital
expenditures through 2003. We will pursue additional debt or equity financing to
supplement our current capital resources if needed beyond 2003. Our ability to
obtain additional financing will depend upon a number of factors, including our
future performance and financial results and general economic and capital market
conditions. We cannot be sure that we will be able to raise additional capital
on reasonable terms or at all, if needed.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
estimation and judgment that affect the reported amounts of revenues, expenses,
assets, and liabilities. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Following are our most critical accounting policies that affect
significant areas and involve judgment and estimates. If these estimates differ
materially from actual results, the impact to the consolidated financial
statements may be material.

Revenue Recognition -- In recognizing revenue in any period, we apply the
provisions of SEC Staff Accounting Bulletin 101, "Revenue Recognition." We
recognize revenue from the sale of our products when persuasive evidence of an
arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured.

For all sales, we use a binding purchase order as evidence of an
arrangement. Delivery generally occurs when product is delivered to a common
carrier. Certain of our products are delivered on an FOB destination basis. We
defer our revenue associated with these transactions until the delivery has
occurred to the customers' premises.

We also store inventory in warehouses (JIT hubs) that are located close to
the customer's manufacturing facilities. Revenue is recognized on sales from JIT
hubs upon the transfer of title and risk of loss, following the customer's
acknowledgement of the receipt of the goods.

We also enter into reimbursement arrangements with customers that provide
for reimbursement of guaranteed capacity. We recognize the associated revenue
over the life of the program for which the capacity is guaranteed.

Accounts Receivable -- We are dependent on a limited number of customers,
and as a result, our trade accounts receivable is highly concentrated. We
establish an allowance for doubtful accounts by analyzing specific customer
accounts and assessing the risk of uncollectability based on past transaction
history with the customer and the customer's financial condition. While we
perform ongoing credit reviews of our customers and have established an
allowance for doubtful accounts, a significant deterioration in the financial
condition of any significant customer may result in additional charges to
increase the allowance for doubtful accounts or to write off certain accounts.

We record a provision against revenue for estimated sales returns on sales
of products in the same period that the related revenues are recognized. We base
the allowance on historical returns as well as existing product return
notifications.

Inventory Valuation -- Inventories are valued at the lower of cost
(first-in, first-out method) or net realizable value by analyzing market
conditions, current sales prices, inventory costs and inventory balances.

23

We are dependent on a limited number of customers and a limited number of
product programs for each customer. Because our products are custom-built, we
typically cannot shift work-in-process or finished goods from customer to
customer, or from one program to another for a particular customer. We evaluate
inventory balances for excess quantities and obsolescence on a regular basis by
analyzing backlog, estimated demand, inventory on hand, sales levels and other
information. We write down excess and obsolete inventory to the lower of cost or
market based on the analysis.

Long-Lived Assets -- We evaluate the carrying value of long-lived assets,
consisting primarily of property, plant and equipment, whenever certain events
or changes in circumstances indicate that the carrying amount of these assets
may not be recoverable. Such events or circumstances include, but are not
limited to, a prolonged industry downturn or significant reductions in projected
future cash flows. In assessing the recoverability of long-lived assets, we
compare the carrying value to the undiscounted future cash flows the assets are
expected to generate. If the total of the undiscounted future cash flows is less
than the carrying amount of the assets, the assets will be written down based on
the excess of the carrying amount over the fair value of the assets. Fair value
would generally be determined by calculating the discounted future cash flows
using a discount rate based upon our weighted average cost of capital.
Significant judgments and assumptions are required in the forecast of future
operating results used in the preparation of the estimated future cash flows.
Changes in these estimates could have a material effect on the assessment of
long-lived assets.

Income Taxes -- We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our current tax exposure together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or change this allowance in a period, we must include an expense or a
benefit within the tax provision in our statement of operations.

Significant judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against our deferred tax assets. We have recorded a valuation allowance
of $57,735,000 as of September 29, 2002, due to the uncertainty of realizing the
benefits of certain tax credits and net operating loss carryforwards before they
expire. The valuation allowance is based on our estimates of taxable income by
each jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may need to
establish an additional valuation allowance, which could materially impact our
financial position and results of operations.

OTHER MATTERS

We are involved in certain legal matters which may result in additional
future cash requirements. See the discussion of these matters in Note 7,
"Commitments and Contingencies," in the notes to the consolidated financial
statements.

We are subject to certain recent accounting pronouncements. See the
discussion of these matters in Note 1, "Summary of Significant Accounting
Policies," in the notes to the consolidated financial statements.

In accordance with Section 10A of the Securities Exchange Act of 1934, as
amended by Section 202 of the Sarbanes-Oxley Act of 2002, non-audit services
approved in the fourth quarter by the Audit Committee of our Board of Directors
and to be performed by Deloitte & Touche LLP, our independent auditors, are as
follows: (i) tax compliance services, (ii) tax planning services, and (iii) tax
controversy services.

24

INFLATION

Management believes inflation has not had a material effect on our
operations or on our financial condition. We cannot be sure that our business
will not be affected by inflation in the future.

FORWARD-LOOKING STATEMENTS

The statements under the headings "Business -- Industry Background,"
"-- Products" and "-- Competition" about demand for and shipments of disk
drives, suspension assemblies, including TSA suspensions, and suspension
assembly components and disk drive and TSA suspension technology and
development, the statements under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General" and
"-- Market Trends" about demand for and shipments of disk drives and suspension
assemblies, including TSA suspensions, the statements under the heading
"Business -- Risk Factors" about our future operating results, and the
statements under the headings "Business -- Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" about capital expenditures and
capital resources, are forward-looking statements based on current expectations.
These statements are subject to risks and uncertainties, including slower or
faster customer acceptance and adoption of new product features, fluctuating
order rates, faster or slower improvements in disk drive data densities which
affect suspension assembly and component demand, changes in market consumption
of disk drives or suspension assemblies, difficulties in producing our TSA
suspensions, difficulties in managing capacity, changes in manufacturing
efficiencies and the other risks and uncertainties discussed above. These
factors may cause our actual future results to differ materially from historical
earnings and from the financial performance we presently anticipate.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our credit facility with The CIT Group/Business Credit, Inc. carries
interest rate risk, in connection with certain borrowings under the working
capital line it provides, that is generally related to either LIBOR or the prime
rate. If either of these rates were to change while we had such borrowings
outstanding under the working capital line provided by the credit facility,
interest expense would increase or decrease accordingly. At September 29, 2002,
there was $18,000 in outstanding borrowings under the working capital line
provided by the credit facility. Our variable rate demand note ("Note") also
carries interest rate risk that is generally related to the 91-day United States
treasury bill interest rate. At September 29, 2002, the outstanding principal
amount of the Note was $400,000 which was subject to an interest rate of 1.70%.

We have no earnings or cash flow exposure due to market risk on our other
debt obligations which are subject to fixed interest rates. Interest rate
changes, however, would affect the fair market value of this fixed rate debt. At
September 29, 2002, we had fixed rate debt of $143,724,000.

We do not enter into derivative or other financial instruments or hedging
transactions for trading or speculative purposes. All of our sales transactions
are denominated in United States dollars and thus are not subject to risk due to
currency exchange fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and notes thereto required pursuant to this Item
begin on page 32 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Incorporated into this item by reference is the information regarding our
discontinuance of the engagement of Arthur Andersen LLP and our engagement of
Deloitte & Touche LLP, under the heading "Relationship With and Appointment of
Independent Auditors" on page 25 in our Proxy Statement dated December 18, 2002.

25

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated into this item by reference is the information appearing under
the headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," pages 4-6 and 16, in our Proxy Statement dated December
18, 2002. See also Part I of this Annual Report on Form 10-K under the heading
"Item X. Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

Incorporated into this item by reference is the information appearing under
the headings "Summary Compensation Table," "Equity Compensation Plan
Information," "Equity Compensation Plans Not Approved by Security Holders," and
"Option Tables," pages 12-14 and 16, and the information regarding compensation
of non-employee directors on pages 5-6, in our Proxy Statement dated December
18, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Incorporated into this item by reference is the information appearing under
the heading "Security Ownership of Principal Shareholders and Management," pages
2-3, and the information appearing in the tables and notes on pages 13-14, in
our Proxy Statement dated December 18, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
were effective as of the date of such evaluation to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls. As a
result, no corrective actions were required or undertaken.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements:

Consolidated Statements of Operations for the fiscal years ended
September 29, 2002, September 30, 2001 and September 24, 2000

Consolidated Balance Sheets as of September 29, 2002 and September
30, 2001

Consolidated Statements of Cash Flows for the fiscal years ended
September 29, 2002, September 30, 2001 and September 24, 2000

26

Consolidated Statements of Shareholders' Investment for the fiscal
years ended September 29, 2002, September 30, 2001 and September 24,
2000

Notes to Consolidated Financial Statements

Independent Auditors' Report and Report of Independent Public
Accountants

2. Financial Statement Schedules:

Schedule II -- Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.

(b) Exhibits:

Unless otherwise indicated, all documents incorporated into this Annual
Report on Form 10-K by reference to a document filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
are located under SEC file number 0-14709.

3.1 Restated Articles of Incorporation of HTI, as amended by
Articles of Amendment dated 1/27/88 and as amended by
Articles of Amendment dated 1/21/97 (incorporated by
reference to Exhibit 3.1 to HTI's Quarterly Report on Form
10-Q for the quarter ended 6/29/97).
3.2 Restated By-Laws of HTI (incorporated by reference to
Exhibit 3.2 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 12/29/96) and Amendments to Restated By-Laws
of HTI dated 7/19/00 (incorporated by reference to Exhibit
3.2 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 6/25/00).
4.1 Instruments defining the rights of security holders,
including an indenture. The Registrant agrees to furnish the
Securities and Exchange Commission upon request copies of
instruments with respect to long-term debt.
4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank
National Association, as Trustee (incorporated by reference
to Exhibit 4.6 to HTI's Registration Statement on Form S-3,
Registration No. 333-50143).
4.3 Purchase Agreement dated 3/12/98 by and among HTI,
NationsBanc Montgomery Securities LLC and First Chicago
Capital Markets, Inc. (incorporated by reference to Exhibit
4.7 to HTI's Registration Statement on Form S-3,
Registration No. 333-50143).
4.4 Shelf Registration Agreement dated as of 3/18/98 by and
among HTI, NationsBanc Montgomery Securities LLC and First
Chicago Capital Markets, Inc. (incorporated by reference to
Exhibit 4.8 to HTI's Registration Statement on Form S-3,
Registration No. 333-50143).
4.5 Share Rights Agreement dated as of 7/19/00, between HTI and
Wells Fargo Bank Minnesota, N.A., as Rights Agent
(incorporated by reference to Exhibit 1 to HTI's
Registration Statement on Form 8-A, dated 7/24/00).
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and
HTI, Lessee, dated 12/29/95 (incorporated by reference to
Exhibit 10.2 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 3/24/96), and First Amendment to
Office/Warehouse Lease dated 4/30/96 (incorporated by
reference to Exhibit 10.2 to HTI's Quarterly Report on Form
10-Q for the quarter ended 6/23/96).
#10.2 Directors' Retirement Plan effective as of 1/1/92
(incorporated by reference to Exhibit 10.12 to HTI's Annual
Report on Form 10-K for the fiscal year ended 9/27/92) and
Amendment effective as of 11/19/97 (incorporated by
reference to Exhibit 10.5 to HTI's Quarterly Report on Form
10-Q for the quarter ended 12/28/97).
#10.3 1988 Stock Option Plan (incorporated by reference to Exhibit
10.8 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/25/88), Amendment to the 1988 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to HTI's Annual
Report on Form 10-K for the fiscal year ended 9/26/93), and
Amendment to the 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to HTI's Quarterly Report on Form
10-Q for the quarter ended 3/26/95).

27

10.4 Patent License Agreement, effective as of 9/1/94, between
HTI and International Business Machines Corporation
(incorporated by reference to Exhibit 10.11 to HTI's
Quarterly Report on Form 10-Q/A for the quarter ended
6/25/95).
10.5 Lease Agreement between Meridian Eau Claire LLC and HTI,
dated 5/1/96 (incorporated by reference to Exhibit 10.10 to
HTI's Quarterly Report on Form 10-Q for the quarter ended
6/23/96) and First Amendment to Lease (incorporated by
reference to Exhibit 10.6 to HTI's Annual Report on Form
10-K for the fiscal year ended 9/24/00).
10.6 Master Lease Agreement dated as of 12/19/96 between General
Electric Capital Corporation, as Lessor ("GE"), and HTI, as
Lessee (incorporated by reference to Exhibit 10.11 to HTI's
Quarterly Report on Form 10-Q for the quarter ended
12/29/96), Amendment dated 6/30/97 to the Master Lease
Agreement between GE and HTI (incorporated by reference to
Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 12/28/97), letter amendment dated 3/5/98 to
the Master Lease Agreement between GE and HTI (incorporated
by reference to Exhibit 10.11 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 3/29/98), letter amendment
dated 9/25/98 to the Master Lease Agreement between GE and
HTI (incorporated by reference to Exhibit 10.11 to HTI's
Annual Report on Form 10-K for the fiscal year ended
9/27/98), letter amendment dated 1/11/00, effective as of
12/22/99, to the Master Lease Agreement between GE and HTI
(incorporated by reference to Exhibit 10.1 to HTI's
Quarterly Report on Form 10-Q for the quarter ended
12/26/99), and letter amendment dated 8/31/00 to the Master
Lease Agreement between GE and HTI (incorporated by
reference to Exhibit 10.7 to HTI's Annual Report on Form
10-K for the fiscal year ended 9/24/00).
#10.7 Hutchinson Technology Incorporated 1996 Incentive Plan
(incorporated by reference to Exhibit 10.12 to HTI's
Quarterly Report on Form 10-Q for the quarter ended
12/29/96).
#10.8 Hutchinson Technology Incorporated Incentive Bonus Plan
(incorporated by reference to Exhibit 10.13 to HTI's
Quarterly Report on Form 10-Q for the quarter ended
12/28/97).
#10.9 Description of Fiscal Year 2002 Management Bonus Plan of
Hutchinson Technology Incorporated (incorporated by
reference to Exhibit 10.9 to HTI's Quarterly Report on Form
10-Q for the quarter ended 12/30/01).
#10.10 Description of Fiscal Year 2002 BioMeasurement Division
Bonus Plan of Hutchinson Technology Incorporated
(incorporated by reference to Exhibit 10.10 to HTI's
Quarterly Report on Form 10-Q for the quarter ended
12/30/01).
16.1 Letter from Arthur Andersen LLP to the Securities and
Exchange Commission, dated 6/14/02 (incorporated by
reference to Exhibit 16.1 to HTI's Current Report on Form
8-K dated 6/13/02).
21.1 List of Subsidiaries.
23.1 Independent Auditors' Consent.
23.2 Notice Regarding Consent of Arthur Andersen LLP.
99 Certification under Section 906 of the Sarbanes-Oxley Act of
2002.

- ---------------

# Management contract, compensatory plan or arrangement required to be filed as
an exhibit to this Annual Report on Form 10-K.

(c) Reports on Form 8-K

None.

28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on December 17, 2002.

HUTCHINSON TECHNOLOGY INCORPORATED

BY /s/ WAYNE M. FORTUN
------------------------------------
Wayne M. Fortun,
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on December 17, 2002.

/s/ WAYNE M. FORTUN
--------------------------------------
Wayne M. Fortun,
President and Chief Executive Officer
(Principal Executive Officer) and
Director

/s/ JOHN A. INGLEMAN
--------------------------------------
John A. Ingleman,
Vice President and Chief Financial
Officer
(Principal Financial Officer
and Principal Accounting Officer)

/s/ W. THOMAS BRUNBERG
--------------------------------------
W. Thomas Brunberg, Director

/s/ ARCHIBALD COX, JR.
--------------------------------------
Archibald Cox, Jr., Director

/s/ JEFFREY W. GREEN
--------------------------------------
Jeffrey W. Green, Director

/s/ RUSSELL HUFFER
--------------------------------------
Russell Huffer, Director

/s/ R. FREDERICK MCCOY, JR.
--------------------------------------
R. Frederick McCoy, Jr., Director

/s/ WILLIAM T. MONAHAN
--------------------------------------
William T. Monahan, Director

/s/ RICHARD B. SOLUM
--------------------------------------
Richard B. Solum, Director

29

CERTIFICATIONS

I, Wayne M. Fortun, Chief Executive Officer of Hutchinson Technology
Incorporated, certify that:

1. I have reviewed this annual report on Form 10-K of Hutchinson
Technology Incorporated;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,
as amended) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

Date: December 17, 2002

/s/ WAYNE M. FORTUN
--------------------------------------
Wayne M. Fortun
President and Chief Executive Officer

30

CERTIFICATIONS

I, John A. Ingleman, Chief Financial Officer of Hutchinson Technology
Incorporated, certify that:

1. I have reviewed this annual report on Form 10-K of Hutchinson
Technology Incorporated;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,
as amended) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

Date: December 17, 2002

/s/ JOHN A. INGLEMAN
--------------------------------------
John A. Ingleman
Vice President and Chief Financial
Officer

31

CONSOLIDATED STATEMENTS OF OPERATIONS

Hutchinson Technology Incorporated and Subsidiaries

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

32

CONSOLIDATED BALANCE SHEETS

Hutchinson Technology Incorporated and Subsidiaries

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

33

CONSOLIDATED STATEMENTS OF CASH FLOWS

Hutchinson Technology Incorporated and Subsidiaries

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

34

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT

Hutchinson Technology Incorporated and Subsidiaries

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

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries
(Columnar dollar amounts in thousands except per share amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hutchinson
Technology Incorporated and its subsidiaries (the "Company"), all of which are
wholly-owned. All significant intercompany accounts and transactions have been
eliminated in consolidation.

USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Ultimate results could differ from those
estimates.

ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") and amends Accounting Principles Board Opinion No. 30, "Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." FAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less costs to sell. FAS 144 retains the fundamental
provisions of FAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used, and (b) measurement of long-lived assets
to be disposed of by sale. The Company is required to adopt FAS 144 on September
30, 2002. The adoption of FAS 144 is not expected to have a material impact on
the Company's consolidated balance sheet or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145"). FAS 145 rescinds
Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," which required all gains and losses from
extinguishment of debt to be classified as an extraordinary item. FAS 145 is
effective for fiscal years beginning after May 15, 2002, with early adoption
encouraged. The Company adopted FAS 145 as of July 1, 2002, at which time it
began classifying gains and losses resulting from the extinguishment of debt as
a separate component in income from continuing operations. The adoption of FAS
145 did not have an impact on the Company's results of operations or liquidity.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS 146"). FAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3. The Company will be required to adopt FAS 146
effective for any exit or disposal activities that are initiated after December
31, 2002. The adoption of FAS 146 is not expected to have a material impact on
the Company's consolidated balance sheet or results of operations.

On September 11, 2002, the EITF reached a consensus on Issue No. 02-15,
"Determining Whether Certain Conversions of Convertible Debt to Equity
Securities are Within the Scope of FASB Statement No. 84, Induced Conversions of
Convertible Debt." The EITF deliberated this issue because of diversity in
practice in the accounting for conversions of convertible debt to equity
initiated by the debt holder. The EITF concluded that FASB Statement No. 84
applies to conversions of convertible debt when the offer for

36

consideration in excess of the original conversion terms is made by the
bondholder. The EITF concluded that this guidance should be followed for
transactions completed after September 12, 2002. The Company does not expect
EITF Issue No. 02-15 to have a significant impact on its future results of
operations.

FISCAL YEAR
The Company's fiscal year is the fifty-two/fifty-three week period ending
on the last Sunday in September. The fiscal years ended September 29, 2002 and
September 24, 2000 are fifty-two week periods and the fiscal year ended
September 30, 2001 is a fifty-three week period.

REVENUE RECOGNITION
In recognizing revenue in any period, the Company applies the provisions of
SEC Staff Accounting Bulletin 101, "Revenue Recognition." The Company recognizes
revenue from the sale of its products when persuasive evidence of an arrangement
exists, the product has been delivered, the fee is fixed and determinable and
collection of the resulting receivable is reasonably assured.

For all sales, the Company uses a binding purchase order as evidence of an
arrangement. Delivery generally occurs when product is delivered to a common
carrier. Certain of the Company's products are delivered on an FOB destination
basis. The Company defers its revenue associated with these transactions until
the delivery has occurred to the customers' premises.

The Company also stores inventory in warehouses (JIT hubs) that are located
close to the customer's manufacturing facilities. Revenue is recognized on sales
from JIT hubs upon the transfer of title and risk of loss, following the
customer's acknowledgement of the receipt of the goods.

The Company also enters into reimbursement arrangements with customers that
provide for reimbursement of guaranteed capacity. The Company recognizes the
associated revenue over the life of the program for which the capacity is
guaranteed.

CASH AND CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of ninety days or less.

SECURITIES AVAILABLE FOR SALE
The Company accounts for securities available for sale in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). FAS 115 requires that
available for sale securities are carried at fair value, with unrealized gains
and losses reported as other comprehensive income within shareholders'
investment, net of applicable income taxes. Realized gains and losses and
decline in value deemed to be other-than-temporary on available for sale
securities are included in other income. Fair value of the securities is based
upon the quoted market price on the last business day of the fiscal year. The
cost basis for realized gains and losses on available for sale securities is
determined on a specific identification basis. At September 29, 2002, the
Company's securities available for sale consisted of U.S. government securities
and corporate debt securities with a cost of $150,504,000 and a fair value of
$151,257,000.

TRADE RECEIVABLES
The Company grants credit to customers, but generally does not require
collateral or any other security to support amounts due. Trade receivables of
$51,363,000 at September 29, 2002 and $43,747,000 as of September 30, 2001 are
net of allowances of $3,662,000 and $3,679,000, respectively.

INVENTORIES
Effective September 27, 1999, the Company changed its method of inventory
accounting from the last-in, first-out method to the first-in, first-out
("FIFO") method for determining the cost of inventories. This change was made
due to significant permanent declines in inventory conversion costs over the
life cycle of substantially all of the Company's products. The permanent
declines arise primarily due to technological advances that affect the Company's
conversion costs due to productivity gains. In addition, substantially all of

37

the Company's peer group utilizes the FIFO method of accounting for their
inventories. The pre-tax cumulative effect of the accounting change was $165,000
and was included in cost of sales on the accompanying consolidated statement of
operations for 2000. The effect of this accounting change was not material to
the Company's results of operations; therefore, pro forma earnings per share
information has not been presented.

Inventories are valued at the lower of cost (FIFO) or net realizable value
by analyzing market conditions, current sales prices, inventory costs and
inventory balances. Inventories consisted of the following at September 29, 2002
and September 30, 2001:

PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. Costs of renewals and
betterments are capitalized and depreciated. Maintenance and repairs are charged
to expense as incurred.

Buildings and leasehold improvements are depreciated on a straight-line
basis and equipment is depreciated using a 150% declining balance method for
financial reporting purposes. Property is depreciated using primarily
accelerated methods for tax reporting purposes. Estimated useful lives for
financial reporting purposes are as follows:

Buildings............................................. 25 to 35 years
Leasehold improvements................................ 5 to 10 years
Equipment............................................. 2 to 8 years

ENGINEERING AND PROCESS DEVELOPMENT
The Company's engineers and technicians are responsible for the
implementation of new technologies as well as process and product development
and improvements. Expenditures related to these activities totaled $40,419,000
in 2002, $55,826,000 in 2001 and $53,906,000 in 2000. Of these amounts,
$17,663,000 in 2002, $23,241,000 in 2001 and $21,433,000 in 2000 are classified
as research and development expenses, with the remainder, relating to quality,
engineering and manufacturing support, classified as cost of goods sold.

INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." As part
of the process of preparing its consolidated financial statements, the Company
is required to estimate its income taxes in each of the jurisdictions in which
it operates. This process involves estimating the current tax exposure together
with assessing temporary differences resulting from differing treatment of items
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within the Company's consolidated balance
sheet. The Company must then assess the likelihood that its deferred tax assets
will be recovered from future taxable income and to the extent the Company
believes that recovery is not likely, it must establish a valuation allowance.
To the extent the Company establishes a valuation allowance or changes this
allowance in a period, it must include an expense or a benefit within the tax
provision in the statement of operations.

Significant judgment is required in determining the Company's provision for
income taxes, its deferred tax assets and liabilities and any valuation
allowance recorded against its deferred tax assets. The Company has recorded a
valuation allowance of $57,735,000 as of September 29, 2002, due to the
uncertainty of realizing the benefits of certain tax credits and net operating
loss carryforwards before they expire. The valuation allowance is based on the
Company's estimates of taxable income by each jurisdiction in which it operates
and the period over which its deferred tax assets will be recoverable. In the
event that actual results
38

differ from these estimates or the Company adjusts these estimates in future
periods, it may need to establish an additional valuation allowance which could
materially impact its financial position and results of operations.

EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share is computed under
the treasury stock method and is calculated to compute the dilutive effect of
potential common shares. A reconciliation of these amounts is as follows:

Potential common shares of 5,289,000 related to the Company's outstanding
convertible subordinated notes were excluded from the computation of diluted
earnings per share for 2002, as inclusion of these shares would have been
antidilutive. Potential common shares of 5,291,000 related to the Company's
outstanding convertible subordinated notes were excluded from the computation of
diluted loss per share for 2001 and 2000, as inclusion of these shares would
have been antidilutive. Potential common shares of 217,000 and 315,000 related
to the Company's outstanding stock options were excluded from the computation of
diluted loss per share for 2001 and 2000, as inclusion of these shares would
have been antidilutive.

2. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

FISCAL 2001 CHARGE
During it fiscal fourth quarter of 2001, the Company's long-term forecast
for suspension assembly demand decreased significantly due to industry forecasts
indicating slower growth projections for disk drive storage demand. The Company
prepared analyses in accordance with FAS 121 to determine if there was
impairment of certain excess manufacturing equipment and buildings. The analyses
resulted in impairment charges based on the difference between the carrying
value and the estimated fair value of these assets. Fair value was based on
discounting estimated future cash flows for assets grouped at the lowest level
for which there were identifiable cash flows at a discount rate commensurate
with the risks involved. As a result of the decreases in the industry's forecast
for disk drive storage and a resulting lower forecast for suspension assembly
demand, the Company reduced its workforce by approximately 850 employees during
2001, including positions in its manufacturing, development and manufacturing
support areas at all plant sites. Based on its analyses, the Company recorded
charges in 2001 of $20,830,000 for impaired assets and $7,045,000 for severance
costs related to the workforce reduction described above. As of September 29,
2002, all identified positions have been eliminated and the full amount of these
severance costs has been paid.

FISCAL 2000 CHARGE
During 2000, the Company's forecast of suspension assembly demand decreased
significantly due to industry forecasts indicating decreases in component counts
as a result of data density improvements, extending from the desktop market to
server drives. Significant decreases in the industry's forecast for components
and a resulting lower forecast for suspension assembly demand caused the Company
to reduce its workforce by approximately 1,200 employees, including direct
positions at its Eau Claire site and indirect positions in its administrative,
development and manufacturing support areas at all plant sites, and to suspend
photoetching operations at its Eau Claire, Wisconsin plant and consolidate these
operations into its Hutchinson, Minnesota plant. As a result of these events,
the Company prepared analyses in accordance with FAS 121 to determine if there
was impairment of certain excess manufacturing equipment and tooling,

39

primarily for TSA suspensions. The analyses resulted in impairment charges based
on the difference between the carrying value and the estimated fair value of
these assets. Fair value was based on discounting estimated future cash flows
for assets grouped at the lowest level for which there were identifiable cash
flows at a discount rate commensurate with the risks involved. The Company
recorded charges in 2000 of $56,523,000 for impaired assets and $6,745,000 for
severance costs due to the workforce reduction described above. As of September
29, 2002, all identified positions have been eliminated and the full amount of
these severance costs has been paid.

These charges are reflected on the accompanying statements of operations as
"Asset impairment and restructuring charges."

3. FINANCING ARRANGEMENTS

LONG-TERM DEBT

In March 1998, the Company completed a private placement of $150,000,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2005 (the
"Convertible Notes") with interest payable semiannually commencing September 15,
1998. The Convertible Notes are convertible, at the option of the holder, into
Common Stock of the Company at any time prior to their stated maturity, unless
previously redeemed or repurchased, at a conversion price of $28.35 per share.
Beginning March 20, 2001, the Convertible Notes were redeemable, in whole or in
part, at the option of the Company at 103.43% of their principal amount, and
thereafter at prices declining to 100% at any time on and after March 15, 2005.
In addition, upon the occurrence of certain events, each holder of the
Convertible Notes may require the Company to repurchase all or a portion of such
holder's Convertible Notes at a purchase price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest and liquidated
damages, if any, to the date of the repurchase.

The Convertible Notes were issued by the Company and were sold in
transactions exempt from registration under the Securities Act of 1933, as
amended. The Company filed a Registration Statement registering the Convertible
Notes and the shares of Common Stock of the Company into which the Convertible
Notes are convertible.

The Company's financing agreements contain certain restrictive covenants
which require the Company, among other things, to maintain specified levels of
net income, cash availability, tangible net worth and leverage ratios, and also
impose certain limitations on additional indebtedness, leases, guarantees and
the payment of dividends. The Company was in compliance with the covenants as of
September 29, 2002.

During the fourth quarter of 2002, the Company extinguished $26,557,000 of
senior unsecured notes before their maturity at a pre-tax loss of $1,341,000.
These notes accrued interest at rates ranging from 7.96% to 8.57% and were due
in July through October of 2003. The Company also repurchased $6,500,000 of the
Convertible Notes at a pre-tax gain of $74,000. The Convertible Notes had a
maturity date of March 15, 2005.

Subsequent to its fiscal year-end, the Company repurchased an additional
$10,971,000 of the Convertible Notes at a pre-tax gain of $221,000. The total
debt extinguishment of $44,028,000 will reduce the Company's interest expense in
2003 by approximately $2,437,000.

40

Maturities of long-term debt subsequent to September 29, 2002 are as
follows:

2003..................................................... $ 253
2004..................................................... 255
2005..................................................... 143,557
2006..................................................... 59
--------
$144,124
========

4. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

The deferred provision (benefit) is composed of the following:

A reconciliation of the federal statutory tax rate to the effective tax
rate is as follows:

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At September 29, 2002,
the Company's deferred tax assets included unused tax credits of $12,386,000, of
which $3,079,000 can be carried forward indefinitely and $9,307,000 of which
begin to expire at various dates beginning in 2010. At September 29, 2002, the
Company's deferred tax assets also included $71,801,000 of net operating loss
carryforwards that will begin to expire in 2018. A portion of the credits and
net operating loss carryforwards are subject to an annual limitation under the
United States Internal Revenue Code ("IRC") Section 382. A valuation allowance
of $57,735,000 has been recognized to offset the related deferred tax assets

41

due to the uncertainty of realizing the benefits of certain tax credits and net
operating loss carryforwards. The following is a table of the significant
components of the Company's deferred tax assets:

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

CASH AND CASH EQUIVALENTS
The fair value is based on quoted market prices.

SECURITIES AVAILABLE FOR SALE
The fair value of these instruments is based on quoted market prices.

LONG-TERM DEBT
The fair value of the Company's long-term debt, except for the Convertible
Notes, is estimated based on the discounted value of the future cash flows
expected to be paid on the loans. The discount rate used to estimate the fair
value of the loans is the rate currently available to the Company for loans with
similar terms and maturities. The fair value of the Company's Convertible Notes
is estimated based on the closing market price of the Convertible Notes as of
the end of the year.

The estimated fair values of the Company's financial instruments are as
follows:

6. EMPLOYEE BENEFITS

STOCK OPTIONS
The Company has two stock option plans under which up to 6,000,000 common
shares are reserved for issuance and of which options representing 5,418,235
common shares have been granted as of September 29, 2002. Under both plans,
options may be granted to any employee, including officers and directors of the

42

Company, and certain non-employees, at a price not less than the fair market
value of the Company's common stock at the date the options are granted. Options
generally expire ten years from the date of grant or at an earlier date as
determined by the committee of the Board of Directors that administers the
plans. Options granted under the plans generally are exercisable one year from
the date of grant.

A summary of the status of the Company's two stock option plans as of
September 24, 2000, September 30, 2001 and September 29, 2002 and changes during
the years ending on those dates is presented below:

The following table summarizes information about stock options outstanding
at September 29, 2002:

The Company follows Accounting Principles Board Opinion No. 25, under which
no compensation cost has been recognized in connection with stock option grants
pursuant to the stock option plans. Had compensation cost been determined
consistent with Statement of Financial Accounting Standards No. 123,

43

"Accounting for Stock-Based Compensation," ("FAS 123"), the Company's pro forma
net income (loss) and pro forma net income (loss) per share would have been as
follows:

In determining compensation cost pursuant to FAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
various grants in 2002: risk-free interest rate of 4.6%; expected life of six
years; and expected volatility of 85%. The following weighted average
assumptions were used for various grants in 2001: risk-free interest rate of
5.8%; expected life of six years; and expected volatility of 86%. The following
weighted average assumptions were used for various grants in 2000: risk-free
interest rate of 6.2%; expected life of six years; and expected volatility of
78%.

EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan covering its employees. The
Company's contributions to the plan were $7,092,000 in 2002, $6,723,000 in 2001
and $10,375,000 in 2000.

The Company sponsors a self-insured comprehensive medical and dental plan
for qualified employees that is funded by contributions from both the Company
and plan participants. Contributions are made through a Voluntary Employee's
Benefit Association Trust. The Company recognized expense related to these plans
of $13,645,000 in 2002, $17,339,000 in 2001 and $19,403,000 in 2000.

7. COMMITMENTS AND CONTINGENCIES

OPERATING AND CAPITAL LEASES
The Company is committed under various operating lease agreements. Total
rent expense under these operating leases was $11,307,000 in 2002, $15,012,000
in 2001 and $23,474,000 in 2000.

The Company also leases some manufacturing equipment under agreements that
transfer ownership of the equipment by the end of the lease terms. As a result,
the present value of the remaining future minimum lease payments has been
recorded as a capitalized lease asset and related capitalized lease obligation.
Assets under these capital leases are included in the accompanying consolidated
balance sheets.

44

Future minimum payments for all operating leases and capital leases with
initial or remaining terms of one year or more subsequent to September 29, 2002
are as follows:

LEGAL PROCEEDINGS
On October 10, 2001, Ronald A. Smith & Associates commenced a lawsuit
against the Company in the United States District Court for the Northern
District of California. The lawsuit alleged that certain manufacturing systems
used by the Company infringed one patent. The lawsuit requested damages,
including treble damages, attorneys' fees and an injunction against the Company.
On August 30, 2002, the parties entered into a settlement agreement under which
the plaintiffs agreed that the Company had not infringed their patent, the
Company obtained ownership of the patent, and the lawsuit was dismissed with
prejudice.

The Company and certain users of the Company's products have from time to
time received, and may in the future receive, communications from third parties
asserting patents against the Company or its customers which may relate to
certain of the Company's manufacturing equipment or products or to products that
include the Company's products as a component. In addition, certain of its
customers have been sued on patents having claims closely related to products
sold by the Company. If any third party makes a valid infringement claim and a
license were not available on terms acceptable to the Company, the Company's
operating results could be adversely affected. The Company expects that, as the
number of patents issued continues to increase, and as the Company grows, the
volume of intellectual property claims could increase. The Company may need to
engage in litigation to enforce patents issued or licensed to it, protect trade
secrets or know-how owned by it or determine the enforceability, scope and
validity of the intellectual property rights of others. The Company could incur
substantial costs in such litigation or other similar legal actions, which could
have a material adverse effect on its results of operations.

The Company is a party to certain claims arising in the ordinary course of
business. In the opinion of management, the outcome of such claims will not
materially affect the Company's current or future financial position or results
of operations.

OTHER MATTERS
Over the course of the last two years, the World Trade Organization ("WTO")
has ruled that the Foreign Sales Corporation ("FSC") provisions of the IRC, and
the FSC's replacement provisions contained in the Extraterritorial Income
Exclusion Act of 2002 ("ETI"), are prohibited export subsidies under the rules
of the WTO. Federal legislation recently has been proposed that includes a
provision to repeal the ETI. Until the proposed legislation repealing the ETI is
signed into law, the Company expects to earn a net benefit under the ETI
provisions similar to that previously earned under the FSC provisions of the
IRC.

45

8. SUPPLEMENTARY CASH FLOW INFORMATION

Capitalized interest was $779,000 in 2002, $979,000 in 2001 and $2,817,000
in 2000.

9. LITIGATION SETTLEMENT

During the first quarter of 2002, the Company recorded an increase to
operating income of $2,632,000 as a result of a reimbursement of legal expenses
from a third party and insurance proceeds related to litigation defense costs.
The reimbursement of legal expenses is to be paid in installments through 2006
and is recorded at the net present value of the remaining payments.

10. OTHER ASSETS

During the second quarter of 2002, the Company prepaid $26,000,000 related
to a technology and development agreement. As of September 29, 2002, the
unamortized portion of the prepayment was $23,620,000, of which $3,174,000 was
included in "Prepaid taxes and other" and $20,446,000 was included in "Other
assets" on the accompanying balance sheet. The unamortized portion will be
amortized on a straight-line basis through the remaining term of the agreement
which ends in 2010.

11. SHARE RIGHTS PLAN

In July 2000, the Board of Directors of the Company declared a dividend of
one common share purchase right on each outstanding share of common stock of the
Company held by shareholders of record as of the close of business on August 10,
2000. Under certain conditions, each right may be exercised to purchase one-
tenth of a share of common stock at an exercise price of $10, subject to
adjustment. The rights generally will become exercisable after any person or
group acquires beneficial ownership of 15% or more of the Company's common stock
or announces a tender or exchange offer that would result in that person or
group beneficially owning 15% or more of the Company's common stock. If any
person or group becomes a beneficial owner of 15% or more of the Company's
common stock, each right will entitle its holder (other than the 15% owner) to
purchase, at an adjusted exercise price equal to ten times the previous purchase
price, shares of the Company's common stock having a value of twice the right's
adjusted exercise price.

The rights, which do not have voting rights, expire in 2010 and may be
redeemed by the Company at a price of $0.001 per right, subject to adjustment,
at any time prior to their expiration or a person's or group's acquisition of
beneficial ownership of at least 15% of the Company's common stock. In certain
circumstances, at the option of the Board of Directors, the Company may exchange
the rights for shares of its common stock, delay or temporarily suspend the
exercisability of the rights, or reduce the stock-ownership threshold of 15% to
not less than 10%.

In the event that the Company is acquired in certain merger or other
business-combination transactions, or sells 50 percent or more of its assets or
earnings power, each holder of a right shall have the right to receive,

46

at the right's adjusted exercise price, common shares of the acquiring company
having a market value of twice the right's adjusted exercise price.

12. SEGMENT REPORTING

The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures about
its products, services, geographic areas and major customers. The method for
determining what information to report is based upon the way management
organizes the operating segments within the Company for making operating
decisions and assessing financial performance. The Company's chief operating
decision-maker is considered to be the Chief Executive Officer.

The Company has determined that it has two reportable segments: the Disk
Drive Division and the BioMeasurement Division. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.

The following table represents net sales and operating income (loss) for
each reportable segment.

Assets of the BioMeasurement Division are not relevant for management of
the BioMeasurement Division segment or significant for disclosure.

Sales to foreign locations were as follows:

The majority of these foreign location sales were to the Pacific Rim
region. In addition, the Company had significant sales to U.S. corporations that
used the Company's products in their offshore manufacturing sites.

47

Revenue and long-lived assets by geographic area are as follows:

Sales to customers in excess of 10% of net sales are as follows:

Sales to the Company's five largest customers constituted 83%, 91% and 87%
of net sales for 2002, 2001 and 2000, respectively.

13. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)

The following table summarizes unaudited financial data for 2002 and 2001.

48

The price range per share, reflected above, is the highest and lowest bids
as quoted on The Nasdaq National Market during each quarter.
- ---------------

(1) Includes $2,632,000 for litigation settlement proceeds.

(2) Includes (net of tax) $2,237,000 for litigation settlement proceeds.

(3) Includes $1,267,000 for loss on debt extinguishment.

(4) Includes (net of tax) $1,077,000 for loss on debt extinguishment.

(5) Includes $2,364,000 for restructuring charges.

(6) Includes (net of tax) $2,128,000 for restructuring charges.

(7) Includes $25,511,000 for asset impairment and restructuring charges.

(8) Includes (net of tax) $21,684,000 for asset impairment and restructuring
charges.

49

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Hutchinson Technology Incorporated
Hutchinson, Minnesota

We have audited the accompanying consolidated balance sheet of Hutchinson
Technology Incorporated and Subsidiaries (the Company) as of September 29, 2002,
and the related consolidated statement of operations, shareholders' investment,
and cash flows for the year then ended. Our audit also included the financial
statement schedule listed in Item 15(a)2. These financial statements and
financial statements schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. The financial
statements of the Company as of and for the year ended September 30, 2001 and
for the year ended September 24, 2000, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated November 1, 2001.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of September 29, 2002, and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota
October 31, 2002

50

NOTICE: THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP. THIS REPORT RELATES TO PRIOR YEARS' FINANCIAL STATEMENTS. THIS
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Hutchinson Technology Incorporated:

We have audited the accompanying consolidated balance sheets of Hutchinson
Technology Incorporated (a Minnesota corporation) and Subsidiaries as of
September 30, 2001 and September 24, 2000, and the related consolidated
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended September 30, 2001. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hutchinson Technology
Incorporated and Subsidiaries as of September 30, 2001 and September 24, 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2001 in conformity with generally
accepted accounting principles generally accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

/s/ Arthur Andersen LLP

Minneapolis, Minnesota
November 1, 2001

51

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

Hutchinson Technology Incorporated and Subsidiaries

- ---------------

(1) Uncollectible accounts receivable written off, net of recoveries.

(2) Returns honored and credit memos issued.

(3) Severance charges paid.

52

ELEVEN-YEAR SELECTED FINANCIAL DATA

Hutchinson Technology Incorporated and Subsidiaries

53

EXHIBIT INDEX

Unless otherwise indicated, all documents incorporated into this Annual
Report on Form 10-K by reference to a document filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
are located under SEC file number 0-14709.

3.1 Restated Articles of Incorporation of HTI, as amended by Articles
of Amendment dated 1/27/88 and as amended by Articles of Amendment
dated 1/21/97 (incorporated by reference to Exhibit 3.1 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 6/29/97).

3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2
to HTI's Quarterly Report on Form 10-Q for the quarter ended
12/29/96) and Amendments to Restated By-Laws of HTI dated 7/19/00
(incorporated by reference to Exhibit 3.2 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 6/25/00).

4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and
Exchange Commission upon request copies of instruments with
respect to long-term debt.

4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.6
to HTI's Registration Statement on Form S-3, Registration No.
333-50143).

4.3 Purchase Agreement dated 3/12/98 by and among HTI, NationsBanc
Montgomery Securities LLC and First Chicago Capital Markets, Inc.
(incorporated by reference to Exhibit 4.7 to HTI's Registration
Statement on Form S-3, Registration No. 333-50143).

4.4 Shelf Registration Agreement dated as of 3/18/98 by and among HTI,
NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc. (incorporated by reference to Exhibit 4.8 to HTI's
Registration Statement on Form S-3, Registration No. 333-50143).

4.5 Share Rights Agreement dated as of 7/19/00 between HTI and
Wells Fargo Bank Minnesota, N.A., as Rights Agent (incorporated by
reference to Exhibit 1 to HTI's Registration Statement on Form
8-A, dated 7/24/00).

10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI,
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2
to HTI's Quarterly Report on Form 10-Q for the quarter ended
3/24/96), and First Amendment to Office/Warehouse Lease dated
4/30/96 (incorporated by reference to Exhibit 10.2 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 6/23/96).

#10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated by
reference to Exhibit 10.12 to HTI's Annual Report on Form 10-K for
the fiscal year ended 9/27/92) and Amendment effective as of
11/19/97 (incorporated by reference to Exhibit 10.5 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 12/28/97).

#10.3 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8
to HTI's Annual Report on Form 10-K for the fiscal year ended
9/25/88), Amendment to the 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to HTI's Annual Report on Form 10-K for
the fiscal year ended 9/26/93), and Amendment to the 1988 Stock
Option Plan (incorporated by reference to Exhibit 10.5 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 3/26/95).

10.4 Patent License Agreement, effective as of 9/1/94, between
HTI and International Business Machines Corporation (incorporated
by reference to Exhibit 10.11 to HTI's Quarterly Report on Form
10-Q/A for the quarter ended 6/25/95).

10.5 Lease Agreement between Meridian Eau Claire LLC and HTI, dated
5/1/96 (incorporated by reference to Exhibit 10.10 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 6/23/96) and
First Amendment to Lease (incorporated by reference to Exhibit
10.6 to HTI's Annual Report on Form 10-K for the fiscal year ended
9/24/00).

10.6 Master Lease Agreement dated as of 12/19/96 between General
Electric Capital Corporation, as Lessor ("GE"), and HTI, as Lessee
(incorporated by reference to Exhibit 10.11 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/29/96), Amendment
dated 6/30/97 to the Master Lease Agreement between GE and HTI
(incorporated by reference to Exhibit 10.11 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/28/97), letter
amendment dated 3/5/98 to the Master Lease Agreement between GE
and HTI (incorporated by reference to

54

Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 3/29/98), letter amendment dated 9/25/98 to the
Master Lease Agreement between GE and HTI (incorporated by
reference to Exhibit 10.11 to HTI's Annual Report on Form 10-K for
the fiscal year ended 9/27/98), letter amendment dated 1/11/00,
effective as of 12/22/99, to the Master Lease Agreement between GE
and HTI (incorporated by reference to Exhibit 10.1 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 12/26/99), and
letter amendment dated 8/31/00 to the Master Lease Agreement
between GE and HTI (incorporated by reference to Exhibit 10.7 to
HTI's Annual Report on Form 10-K for the fiscal year ended
9/24/00).

#10.7 Hutchinson Technology Incorporated 1996 Incentive Plan
(incorporated by reference to Exhibit 10.12 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/29/96).

#10.8 Hutchinson Technology Incorporated Incentive Bonus Plan
(incorporated by reference to Exhibit 10.13 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/28/97).

#10.9 Description of Fiscal Year 2002 Management Bonus Plan of
Hutchinson Technology Incorporated (incorporated by reference to
Exhibit 10.9 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 12/30/01).

#10.10 Description of Fiscal Year 2002 BioMeasurement Division Bonus Plan
of Hutchinson Technology Incorporated (incorporated by reference
to Exhibit 10.10 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 12/30/01).

16.1 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission, dated 6/14/02 (incorporated by reference to Exhibit
16.1 to HTI's Current Report on Form 8-K dated 6/13/02).

21.1 List of Subsidiaries..........................Filed Electronically

23.1 Independent Auditors' Consent.................Filed Electronically

23.2 Notice Regarding Consent of
Arthur Andersen LLP...........................Filed Electronically

99 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002....................Filed Electronically

55