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 28, 2003
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 Drive NE 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. [X]

The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 28, 2003, the last business day of the registrant's most
recently completed second fiscal quarter, was $625,820,693, 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 4, 2003 the registrant had 25,951,150 shares of common stock
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement dated December 15, 2003 for the annual meeting
of shareholders to be held January 28, 2004 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 8-15 and "Forward-Looking Statements" on
pages 25-26 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 "2004" mean our fiscal year ending September 26, 2004, references
to "2003" mean our fiscal year ended 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 2003, we shipped 526 million
suspension assemblies of all types. We estimate that our average market share
for 2003 increased to approximately 60% from approximately 55% in 2002. We
supply nearly all domestic and many foreign-based manufacturers of disk drives
and manufacturers of disk drive components, including Alps, Fujitsu, Hitachi
Global Storage Technologies (formerly IBM's hard disk drive division) and its
affiliates, Innovex, Kaifa, K.R. Precision, Maxtor, Pemstar, 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
suspension assemblies to satisfy the changing market demands and performance
standards required by our disk drive industry 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. In 2003, we shipped 453 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 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 consumer electronics applications, historically has fueled
growth in disk drive shipments. After the first-ever decline in unit shipments
of disk drives in calendar 2001 due to weakened demand for personal computers, a
worldwide slowdown in information technology spending and concerns about a
weaker global economy, IDC estimated that unit shipments increased 12% in
calendar 2002 over calendar 2001. Industry observers currently estimate unit
shipments to increase 18% in calendar 2003 over calendar 2002.

For calendar 2004, industry observers estimate that the rebound in disk
drive unit shipments that started in 2002 will continue, with shipments growing
10% over calendar 2003. We expect this growth will be stimulated by the
expansion of storage-intensive data warehousing, internet and intranet
applications and the increasing use of disk drives for consumer electronics
applications such as personal video recorders, gaming consoles, digital cameras,
audio players, guidance systems in automobiles and cell phones. Growth in disk
drive unit shipments beginning at the end of 2002 and through

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2003 resulted in increased demand for suspension assemblies, and we believe
continued growth in 2004 will further increase demand for suspension assemblies.

The demand for suspension assemblies is influenced by multiple factors.
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. Growth
in overall disk drive demand tends to increase demand for suspension assemblies.
In recent years, data density 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, we estimate that the average number of suspension
assemblies required per drive declined from approximately 4.5 in 1999 to
approximately 3.3 in 2000, approximately 2.8 in 2001 and approximately 2.5 in
2002. Our total suspension assembly shipments decreased from 583 million during
1999 to 488 million in 2000, 420 million in 2001 and 398 million in 2002.

With a slowing rate of improvement in data density, we estimate that the
average number of suspension assemblies required per drive was approximately 2.3
in 2003. We shipped 526 million suspension assemblies in 2003, up 32% compared
with 2002. This increase was due to an industry-wide increase in disk drive
shipments, an increase in suspension consumption related to the lower yields
some of our customers continue to experience as they transition to higher
density recording heads and improvements in our market position. Overall
suspension demand also benefited from the slowdown in the rate of improvement in
data density on disk drives in mass production. Although we continue to have
limited visibility for future demand, we expect our shipment volumes for the
first quarter of 2004 to exceed the quarterly levels experienced in 2003
primarily due to continued increases in disk drive demand and this lower rate of
improvement in data density.

Industry transitions in head technology also impact demand for suspension
assemblies. During past industry transitions, such as to higher density
recording heads or to smaller form factors, production yields of head
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. During 2003,
most of our customers continued to transition to higher density recording heads,
and demand for our products increased due to reduced production yields
experienced by these customers. We believe reduced production yields at our
customers may continue to have a positive impact on demand in 2004.

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 expect
that worldwide demand for suspension assemblies will track closely the
anticipated growth for disk drive shipments in 2004, which is currently
forecasted by industry observers to be 11% for 2004. 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 recording heads attached by suspension assemblies to the actuator arm.
Each disk drive contains from one to six disks attached to a motor assembly that
rotates the disks at high speeds in extremely close proximity to the 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 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 and smaller, higher density recording heads.
Technological advances in disk drives generally require suspension assemblies
with lower variability, 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 recording head "flies"
above the disk. Suspension assemblies hold the 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).

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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, higher density recording heads with advanced air
bearing designs and improving other components such as motors and media. We
developed our TSA suspension assemblies, which incorporate electrical conductors
in the suspension itself, to enable drive makers to use higher density 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 2003, 2002 and 2001, 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 and long-lived assets by geographic area for each of
2003, 2002 and 2001. See also Eleven-Year Selected Financial Data.

SUSPENSION ASSEMBLIES

During 2003, we shipped 526 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 density recording heads. We have the
capability to produce multiple variations of suspension assemblies. This
capability permits us to assist customers' design efforts and meet the varied
and changing requirements of specific customers. To help develop prototype
suspension assemblies, we maintain a test laboratory and computerized systems to
predict and modify suspension assembly performance as we develop suspension
assemblies.

TSA Suspension Assemblies -- The disk drive industry has widely adopted our
TSA suspensions. Currently, we estimate that approximately 60% 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 actuator. We believe
features of our current TSA suspensions, such as extended electrical leads, as
well as additional features currently in development, such as electrostatic
protection measures, clad unamount arms and dual stage actuation capabilities,
will result in improved yields and performance for our customers. Because of
these performance advantages, our TSA suspensions command a higher sale price
than our conventional suspensions.

In 2003, we shipped 453 million TSA suspensions. TSA suspensions accounted
for approximately 74% of our 2001 suspension assembly shipments, approximately
83% of our 2002 suspension assembly shipments and approximately 86% of our 2003
suspension assembly shipments. We expect them to account for approximately 85%
to 90% of our total suspension assembly shipments during 2004.

TSA suspension assemblies are adaptable to future developments in disk
drive design and manufacturing. To improve head manufacturers' overall yields as
they transition to higher density recording heads, we have developed anti-static
coatings, 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

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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. We are also developing additional features,
such as plated grounds, polished headlifts, extended arms and limiters for other
TSA suspension products.

Conventional Suspension Assemblies -- In 2003, we shipped 73 million
conventional suspension assemblies, as compared to 70 million in 2002 and 110
million in 2001. Conventional suspension assemblies accounted for approximately
8% of our total revenue, and approximately 14% of our suspension assembly
shipments, in 2003. 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 15% of our total suspension
assembly shipments during 2004.

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 2003, component sales accounted for approximately 7% of our
revenue. We expect our sales of components to account for approximately 3% to 5%
of our revenue during 2004.

Our BioMeasurement Division has developed a medical device called the
InSpectra(TM) Tissue Spectrometer system 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 sold our first units in the United States, and in 2003 we began
to market this device to research-oriented customers interested in participating
in evaluations that are currently in progress to demonstrate the clinical
utility and value of the tissue oxygenation metric provided by the device. We
intend to continue marketing this device in 2004 to customers interested in
participating in the clinical evaluations process. We do not expect to generate
significant revenue from this device during 2004.

We are also engaged in the early development of other products that would
leverage our core competencies. These products are unlikely to generate
significant revenue in 2004.

MANUFACTURING

Our manufacturing strategy focuses on reliably producing suspension
assemblies in high volume 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 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.

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 requirements. 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,
chemical deburring and ultrasonic cleaning. 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, are available from only one supplier,
and the stainless steel, coverlay and copper that meet our strict specifications
are each currently available from only two suppliers. To protect against the
adverse effect of a short-term supply disruption, we maintain several weeks'
supply of these materials.

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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 28, 2003, we
employed 680 engineers and technicians who are responsible for implementing new
technologies as well as process and product development and improvements.
Expenditures for these activities in 2003, 2002 and 2001 amounted to
$37,048,000, $40,419,000 and $55,826,000, respectively. Of these amounts, we
classified $14,945,000, $17,663,000 and $23,241,000, respectively, as research
and development expenses, with the remainder, relating to quality, engineering
and manufacturing support, classified as cost of goods sold. We expect that our
research and development spending will increase in 2004 to levels exceeding
those in both 2003 and 2002.

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 and drive sizes, 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 2003, 2002 and
2001, research and development expenses for the BioMeasurement Division were
approximately $1,899,000, $1,674,000 and $3,445,000, respectively.

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 two subsidiaries, we have three
account managers, eleven technical representatives and five quality coordinators
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 "vendor managed inventory" (VMI) facilities near the major
production centers of certain individual customers to assure that we meet the
customers' inventory requirements. During 2003, approximately 47% of our
suspension assembly shipments were distributed to our customers in Hong Kong,
the People's Republic of China and Thailand through our VMI facilities. In 2003,
we added additional VMI facilities in the People's Republic of China and
Thailand.

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We are a supplier to nearly all domestic and many foreign-based
manufacturers of disk drives and manufacturers of disk drive components. The
following table shows our five largest customers for 2003 as a percentage of net
sales.

Sales to our five largest customers constituted 81%, 83% and 91% of net
sales, respectively, for 2003, 2002 and 2001. Significant portions of our
revenue may be indirectly attributable to large manufacturers of disk drives,
such as Fujitsu, 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 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 at our major customers.

Sales to foreign-based enterprises totaled $392,146,000, $250,478,000 and
$204,877,000 for 2003, 2002 and 2001 respectively. Sales to foreign subsidiaries
of United States corporations totaled $72,202,000, $109,736,000 and $179,756,000
for 2003, 2002 and 2001, 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
$105,625,000 at September 28, 2003, as compared to $94,845,000 at September 29,
2002. 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 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, fabricated some of its own suspension
assemblies for use in some of its own products during 2003. 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.

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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 28, 2003, we held 123 United States patents and 25
foreign patents, and we had 65 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 royalty payments
and/or cross-license rights. In November 2001, we entered into cross-license
agreements with three suspension assembly suppliers, and in October 2003, we
entered into an additional cross-licensing agreement with an additional
suspension assembly supplier, 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 28, 2003, we had 3,446 regular employees, 1,780 of whom
were working at our Hutchinson, Minnesota plant, 564 of whom were working at our
Sioux Falls, South Dakota plant, 911 of whom were working at our Eau Claire,
Wisconsin plant, 164 of whom were working at our Plymouth, Minnesota plant, and
27 of whom were working overseas. In addition, 210 production workers supplied
by temporary staffing agencies worked at our various facilities. 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.

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.

AVAILABLE INFORMATION

Our Website is: http://www.htch.com. We make available, free of charge,
through our Website our Annual Report on Form 10-K, our Quarterly Reports on
Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and
Exchange Commission (the "SEC").

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

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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.

A SLOWDOWN IN DEMAND FOR COMPUTER SYSTEMS AND CONSUMER ELECTRONICS MAY CAUSE A
DECLINE IN DEMAND FOR SUSPENSION ASSEMBLIES.

Our suspension assemblies are components in computers and, increasingly, a
variety of consumer electronics products. The demand for these products can be
volatile. In a weak economy, consumer spending tends to decline and retail
demand for computers and other consumer electronics tends to decrease, as does
business demand for computer systems. Demand for suspension assemblies therefore
may be adversely impacted as a result of a weaker economy. In addition, in the
past, unexpected slowdowns in demand for computer systems and consumer
electronics has caused sharp declines in demand for suspension assemblies,
resulting in periods during which the supply of suspension assemblies exceeded
demand. If an unexpected slowdown in demand for suspension assemblies occurs or
if demand decreases as a result of a weakening economy, our results of
operations will be materially adversely affected as a result of lower revenue
and gross margins.

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;

- changes in the specific products our customers buy;

- changes in our selling prices;

- changes in utilization of our production capacity;

- changes in our manufacturing process, or problems related to our
manufacturing process;

- changes in our infrastructure costs, and how we control them;

- changes in our manufacturing yields;

- changes in our production efficiency;

- increased costs when we start producing new products, and achieving
high-volume production quickly;

- technological changes (such as data density improvements) that reduce the
number of suspension assemblies per drive required by drive makers;

- long disruptions in operations at any of our plants for any reason; and

- changes in the cost of, or limits on, available materials and labor.

Our operating results in 2003 were impacted positively by increased demand
for suspension assemblies, together with high utilization of our manufacturing
capacity, further improvements in our manufacturing productivity and continued
cost control. 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 "vendor
managed inventory" (VMI) facilities. Customers often prefer a dual source supply
and, therefore, may allocate their demand among

9

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 market pressure from our competitors and
pricing pressure from our customers. 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 products are introduced and decreasing prices as
they mature. To offset price decreases during a product's life, we rely
primarily on higher sales volume and improving our manufacturing yield and
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.

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, as was
proposed by federal legislation in calendar years 2002 and 2003, our effective
tax rate could increase significantly and our business, financial condition and
results of operations could be materially adversely affected.

OUR CUSTOMERS MAY RESOLVE MANUFACTURING DIFFICULTIES THEY HAVE RECENTLY
EXPERIENCED, WHICH WILL REDUCE DEMAND FOR OUR SUSPENSION ASSEMBLIES.

We believe that improvements in 2003 in our sales and unit volumes were due
in part to manufacturing difficulties experienced by our customers as they
continue their transition to higher density recording heads. These customers
have experienced higher levels of defective recording heads, which they are
unable to detect until after they have attached the recording heads to our
suspension assemblies. Our customers therefore have required more suspension
assemblies than they will require in the future once defects in recording heads
decrease. Some customers also may pursue development of a process by which they
separate our suspension assemblies from a defective recording head in order to
reuse the suspension assembly. If our customers' production yields improve in
the future or if they succeed in their process development efforts and can
separate and re-use suspension assemblies, overall suspension assembly shipments
will decline and our operating results could be negatively affected.

DATA DENSITY IMPROVEMENTS HAVE REDUCED WORLDWIDE DEMAND FOR SUSPENSION
ASSEMBLIES, AND THESE IMPROVEMENTS ARE EXPECTED TO CONTINUE.

Disk drive manufacturers have been able to steadily increase data density
(the amount of data that can be stored on a disk surface), and we believe that
they will continue to do so for the foreseeable future. Increasing data density
permits drive manufacturers to use fewer disks in each disk drive, which in turn
reduces the number of components they need, including suspension assemblies.
From 1999 through 2002, the rate of improvement in data density exceeded
historical rates, and we estimate that the average number of suspension
assemblies required per drive decreased from approximately 4.5 in 1999 to
approximately 3.3 in 2000, approximately 2.8 in 2001 and approximately 2.5 in
2002. This contributed to a decrease in our total suspension assembly shipments
from 583 million in 1999 to 398 million in 2002. In 2003, we estimate that the
decline in the number of suspension assemblies consumed per disk drive slowed to
approximately 2.3, which benefited demand. The increase in overall demand
exceeded the rate of improvement in data density, which contributed to the
increase in our total suspension assembly shipments to 526 million in 2003. If
improvements in data density again begin to outpace growth in data storage
capacity requirements, then demand for our suspension assemblies may decline and
we may not be able to maintain or expand our suspension assembly business.

ALMOST ALL OF OUR SALES DEPEND ON THE DISK DRIVE INDUSTRY, WHICH IS CYCLICAL AND
SUBJECT TO ONGOING TECHNOLOGICAL INNOVATION.

Sales of suspension assemblies and suspension assembly components accounted
for 99% of our net sales in 2003, 2002 and 2001. 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

10

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 and data density improvements also
impact disk drive unit shipment levels and, consequently, demand for suspension
assemblies. During past industry transitions, such as to higher density
recording heads or to smaller form factors, 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.
During 2003, most of our customers continued to transition to higher density
recording heads, and demand for our products increased due to reduced production
yields experienced by these customers. If our customers improve their production
yields in the future from current rates, demand for our products may decrease.
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.

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
also may 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. In addition, we may incur higher sales returns, or be required to
reimburse customers for product costs relating to the incorporation of defective
suspension assemblies into our customers' products.

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. Our research and development spending will
increase in 2004 to levels exceeding those in both 2003 and 2002. 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 require additional or smaller electrical
conductors;

- suspension assemblies that incorporate dual stage actuators to improve
head positioning over increasingly tighter data tracks on each disk;

- suspension assemblies for use with new smaller-sized femto heads; and

- 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. We do not
expect to generate significant revenue from this device during 2004. We expect
to experience continuing losses in the BioMeasurement Division for the
foreseeable future.

11

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 million 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; and

- 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.

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 81% of net sales for 2003, 83% of net
sales for 2002 and 91% of net sales for 2001. Over the years, the disk drive
industry has experienced numerous consolidations. These consolidations, together
with companies exiting the disk drive industry, result 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 its own products, or a change
in the type of suspension assembly used by a customer, or the failure of a
customer to pay its account balance with us, could have a material adverse
effect on our 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
may require additional capital expenditures and 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. We have experienced sales
returns in the past and as we commence volume manufacturing, or as new features
for our products are introduced, or as new manufacturing processes are
implemented, we also may in the future experience increased sales returns. In
addition, in the future we may be required to reimburse customers for product
costs relating to the incorporation of defective suspension assemblies into our
customers' products. 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.

12

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 may limit the number of
satisfactory engineering and other candidates for key positions.

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 nondisclosure 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 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.

In the past, we have entered into licensing and cross-licensing agreements
relating to certain of our patents and patent applications allowing some of our
competitors to produce products similar to ours in return for royalty payments
and/or cross-license rights. In November 2001, we entered into cross-license
agreements with three suspension assembly suppliers, and in October 2003, we
entered into an additional cross-licensing agreement with an additional
suspension assembly supplier, 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. Should these competitors become
successful at producing TSA suspension assemblies at high volume, our demand
could be reduced and our business, financial condition and results of operations
could be materially adversely affected.

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, we and 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; or

- 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.

13

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, from only one supplier, and the stainless
steel, coverlay and copper that meet our strict specifications, from only two
suppliers. The price we pay for stainless steel periodically is reset and can
fluctuate with changes 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 use, or may consider using, alternative
interconnect technologies that compete with the electrical interconnect features
of our TSA suspension assemblies. We cannot be sure that our customers will
continue to 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.

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

We will 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. Our total capital expenditures were approximately $52,000,000
in 2003, $32,000,000 in 2002 and $32,000,000 in 2001. We also entered into
operating leases for production and other equipment with costs of approximately
$5,000,000 in 2003, $5,000,000 in 2002 and $7,000,000 in 2001. While our capital
expenditures over the past several years have been relatively low, we anticipate
spending approximately $90,000,000 during 2004.

Our capital expenditures in 2003 related primarily to increases in TSA
suspension production capacity, new program tooling, process technology and
capability improvements and new business systems. We anticipate that capital
expenditures in 2004 will increase due to additional spending for TSA suspension
production capacity, process technology and capability improvements, new program
tooling and new business systems. We will pursue additional debt or equity
financing to supplement our current capital resources if needed beyond 2004. 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 maintain
our existing capital or raise additional capital on reasonable terms or at all,
if needed.

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; and

- changes in interest rates.

14

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, other than our existing credit
facility, or for sales of equity, other than under our existing employee benefit
plans. 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.

WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF VIOLATIONS OF OR LIABILITIES
UNDER ENVIRONMENTAL LAWS.

Our operations are subject to laws and regulations relating to the
protection of the environment, including those governing the discharge of
pollutants into the air or water, the management and disposal of hazardous
substances or wastes and the cleanup of contaminated sites. Some of our
operations require environmental permits and controls to prevent and reduce air
and water pollution, and these permits are subject to modification, renewal and
revocation by issuing authorities. We could incur substantial costs, including
cleanup costs, fines and civil or criminal sanctions, and third-party claims for
property damage and personal injury as a result of violations of or liabilities
under environmental laws or non-compliance with environmental permits.

SERVICING OUR EXISTING DEBT MAY CONSTRAIN OUR FUTURE OPERATIONS.

Our ratio of total debt and capital leases to total capitalization at
September 28, 2003 was 25.8%. 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, 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 restrictive
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. All of the training center building is leased to
another party, as we do not intend to utilize this space for the foreseeable
future.

15

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. 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. We plan to develop a portion of this plant for manufacturing in
2004.

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 subsidiaries, 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.

ITEM 3. LEGAL PROCEEDINGS

We and certain users of our products have received, and may receive,
communications from third parties asserting patents against us or our customers
which may relate to certain of our manufacturing equipment or products or to
products that include our Company's 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 and a
license were not available on terms acceptable to us, our operating results
could be adversely affected. We expect that, as the number of patents issued
continues to increase, and as we grow, the volume of intellectual property
claims 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 or
determine the enforceability, scope and validity of the intellectual property
rights of others. We could incur substantial costs in such litigation or other
similar legal actions, which could have a material adverse effect on our results
of operations.

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:

16

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 served as Secretary from January 1992 until
November 2003. 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.

Ms. Graczyk was elected Vice President in May 1990, was Vice President of
Operations and Chief Operating Officer from March 1999 to October 2003, and has
been Vice President of Business Development since October 2003. Ms. Graczyk has
been with HTI since 1970.

Mr. Penn was elected Vice President in January 1996, was Vice President of
Sales and Marketing from 1996 to October 2003, and has been Vice President of
Operations since October 2003. 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. Skarvan was elected Vice President of Sales and Marketing in October
2003. Ms. Skarvan was a strategic business unit director at HTI from September
2002 to October 2003, and a Group Vice President at Phillips Plastics, a
manufacturing company, from March 2000 to August 2002. Ms. Skarvan joined HTI in
1980 and held management positions in manufacturing, human resources,
communications and materials at HTI between 1985 and 2000.

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 4, 2003, our common stock was held by 758 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.

17

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data required pursuant to this Item appears on page
55 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.

GENERAL

Since the late 1980s, we have derived virtually all of our revenue from the
sale of suspension assemblies to a small number of customers. We currently
supply 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, Hitachi Global
Storage Technologies (formerly IBM's hard disk drive division) and its
affiliates, Innovex, Kaifa, K.R. Precision, Maxtor, Pemstar, SAE Magnetics/TDK,
Samsung, Seagate Technology, Toshiba and Western Digital). 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 are affected from time to time due to disk drive industry demand
changes, 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.

From 1999 to 2002, improvements in data density, the amount of data which
can be stored on magnetic disks, 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. We
estimate that the average number of suspension assemblies required per drive
decreased from approximately 4.5 in 1999 to approximately 3.3 in 2000,
approximately 2.8 in 2001 and approximately 2.5 in 2002. 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
had also decreased demand for our products since 2001. Consequently, our
shipments declined from 583 million in 1999 to 398 million in 2002.

Our shipments of suspension assemblies in 2003 were 526 million, 32% higher
than our shipments in 2002. This increase was due to an increase in disk drive
demand, an increase in suspension consumption related to lower yields some of
our customers continue to experience as they transition to higher density
recording heads and improvements in our market position. During the transition
to higher density recording heads, some customers have experienced higher levels
of defective recording heads, which they are unable to detect until after they
have attached the recording heads to our suspension assemblies. In addition,
with a slowing rate of improvement in data density, we estimate that the average
number of suspension assemblies required per drive was approximately 2.3 in
2003, down from 2.5 in 2002. Although we continue to have limited visibility for
future demand, we expect our shipment volumes for the first quarter of 2004 to
exceed the quarterly levels experienced in 2003 primarily due to continued
increases in disk drive demand and this lower rate of improvement in data
density.

Our selling prices are subject to market pressure from our competitors and
pricing pressure from our customers. 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 products are introduced and decreasing prices as
they mature. To offset price decreases during a product's life, we rely
primarily on higher sales volume and improving our manufacturing yield and
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 "vendor
managed inventory" (VMI) facilities. Customers often prefer a dual source supply
and, therefore, may allocate their demand among suppliers. Both customer demand
and the resulting forecasts often fluctuate substantially. These factors, among
others,

18

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;

- utilization of our production capacity;

- infrastructure costs;

- production and engineering costs associated with production of new
products;

- manufacturing yields or efficiencies; and

- costs of materials.

Gross margins improved in 2003 primarily due to increased suspension
assembly demand, increased utilization of our manufacturing capacity, improved
productivity and continued cost controls.

In 2000 and 2001, as a result of industry forecasts of slower growth for
disk drive storage demand and a significant decrease in our long-term forecast
for suspension demand, we recorded asset impairment charges totaling $56,523,000
and $20,830,000, respectively. As a result of these charges we estimated annual
savings in depreciation and lease costs of approximately $12,000,000, $9,000,000
and $5,000,000 in our fiscal years 2003, 2004 and 2005, respectively, and
thereafter an aggregate of $8,000,000 in additional savings. Since 2001 actual
demand and our long-term forecast for demand for suspension assemblies has
improved due to an increase in disk drive demand, an increase in suspension
consumption related to lower yields some of our customers continue to experience
as they transition to higher density recording heads, improvements in our market
position and a slowdown in the rate of improvement in data density on disk
drives in mass production. Consequently, the majority of the previously impaired
assets were placed back in service during 2003. As a result, operating results
and gross margins have and will continue to be impacted favorably by lower
depreciation and lease expenses as a result of these previous charges.

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. Small variations in manufacturing yields generally have
a significant impact on gross margins. Because our business is capital intensive
and requires a high level of fixed costs, gross margins are also sensitive to
changes in volume and capacity utilization.

In addition to increases in suspension assembly demand, improvements to our
operating margins depend, in part, on the successful management of our corporate
infrastructure and our suspension assembly production capacity. 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. Our overall employment level has increased to 3,446 at the end of
2003, and we have an additional 210 production workers supplied by temporary
staffing agencies working at our various facilities, due to increased demand.

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 personal video recorders, gaming
consoles, digital cameras, audio players, guidance systems in automobiles and
cell phones 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

19

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, across all disk drive market segments, have reduced unit
shipments of suspension assemblies since the third quarter of 1999. However,
data density has improved at a slower rate in the past year, and we believe it
will continue to improve at a slower rate in the upcoming year.

Worldwide suspension assembly shipments increased in 2003 due to overall
growth in disk drives shipped, increased consumption of suspension assemblies
resulting from lower yields some customers are experiencing because of the
continuing challenges posed by the use of higher density recording heads, and an
increase in our market share. We believe that worldwide suspension assembly
shipments are likely to track more closely with the growth in industry-wide disk
drive shipments, which is currently forecasted by industry observers to be 11%
for 2004. We continue to have limited visibility for future demand.

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 gigabyte 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 features for suspensions, such as dampers,
extended arms, polished headlifts, limiters, anti-static coatings and plated
grounds. Our suspension assemblies also allow for dual stage actuation, which
incorporates a second stage actuator on the suspension to improve head
positioning over increasingly tighter data tracks.

The introduction of new types or sizes of read/write heads and disk drives
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 has resulted in increased shipments
of our suspension assemblies in 2003 and may continue to have a positive impact
on demand in 2004. 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 suspension assembly
types which temporarily may reduce our manufacturing yields and efficiencies.
These changes will continue to affect us.

2003 OPERATIONS TO 2002 OPERATIONS

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

20

Net sales for 2003 were $498,946,000, an increase of $108,252,000 or 28%
compared to 2002. Suspension assembly sales increased $90,774,000 or 25%
compared to 2002, primarily as a result of a 32% increase in unit shipments.
Additionally, sales of suspension assembly components to other suspension
assembly manufacturers increased $15,362,000 or 80% compared to 2002. Both of
these increases were due to an increase in disk drive shipments, an increase in
the consumption of suspension assemblies resulting from lower yields some of our
customers are experiencing because of the continuing challenges posed by the use
of higher density recording heads and an increase in our market share. The
increase in suspension assembly volume was partially offset by a 5% decline in
average selling prices for our suspension assemblies.

Gross profit for 2003 was $154,658,000, compared to $90,417,000 for 2002.
The increase was primarily due to the increase in net sales discussed above.
Gross profit as a percent of net sales increased from 23% to 31%, primarily due
to higher demand for suspension assemblies, increased utilization of our
manufacturing capacity, improved productivity and continued cost controls.

Research and development expenses for 2003 were $14,945,000 compared to
$17,663,000 for 2002. This decrease was primarily due to a $2,464,000 increase
in customer funding of certain advanced suspension assembly development costs.
Research and development expenses as a percent of net sales decreased from 5% in
2002 to 3% in 2003.

Selling, general and administrative expenses for 2003 were $58,230,000, an
increase of $7,269,000 or 14% from 2002. The increase was due primarily to a
$6,650,000 increase in incentive compensation costs resulting from improved
profitability compared to 2002. Selling, general and administrative expenses
also increased by $1,428,000 due to increases in our sales, marketing and
regulatory efforts for our BioMeasurement Division, and by $1,051,000 related to
the design of our new ERP business system. Expenses for on-site service and
engineering support to our customers in Asia increased by $963,000. These
overall increases were partially offset by a $2,465,000 reduction in legal fees,
primarily due to reduced patent litigation defense costs and a $1,902,000
reduction in bad debt expense, as we collected certain customer accounts that
were previously deemed uncollectible. Selling, general and administrative
expenses as a percent of net sales decreased from 13% in 2002 to 12% in 2003.

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
another party and insurance proceeds related to litigation defense costs. See
Note 9, "Litigation Settlement," in the notes to the consolidated financial
statements.

Income from operations for 2003 was $81,483,000, compared to $24,425,000
for 2002. The increase was primarily due to the increase in net sales discussed
above, increased utilization of our manufacturing capacity, improved
productivity and continued cost controls. Income from operations for 2003
included a $5,979,000 loss from operations for our BioMeasurement Division
segment, compared to a $4,682,000 loss for 2002.

Interest expense for 2003 was $6,713,000, a decrease of $7,067,000 from
2002, primarily due to a lower average amount of outstanding debt, a lower
interest rate resulting from refinancing our 6% Convertible Subordinated Notes
due 2005 (the "6% Convertible Notes") and fewer capitalized leases.

Interest income for 2003 was $6,015,000, a decrease of $935,000 from 2002.
This was primarily a result of lower investment yields, offset partially by a
higher average investment balance.

During the first and second quarters of 2003, we retired $143,500,000 of
our 6% Convertible Notes before their maturity. In connection with these
transactions, we recorded a $3,265,000 pre-tax loss on debt extinguishment in
2003. During the fourth quarter of 2002, we extinguished $26,557,000 of senior
unsecured notes and $6,500,000 of our 6% Convertible Notes before their
maturity. In connection with these transactions, we recorded a $1,267,000
pre-tax loss on debt extinguishment in 2002. See Note 3, "Financing
Arrangements," in the notes to the consolidated financial statements.

Other income, net of other expenses, for 2003 was $2,112,000, an increase
of $791,000 from 2002, primarily due to increased royalty income and increased
rental income from leasing portions of our facilities that we do not intend to
utilize for the foreseeable future.

The income tax provision for 2003 was based on an estimated effective tax
rate for the fiscal year of 19%, which is below the statutory federal rate
primarily due to our estimate of the benefit derived from the Foreign Sales
Corporation ("FSC") Repeal and Extraterritorial Income Exclusion Act of 2000
("ETI") provisions related to export of U.S. products and

21

our estimate of our utilization of net operating loss carryforwards. The
increase in our effective tax rate, from 15% in 2002 to 19% in 2003, is
primarily due to a reduction in the estimated benefit that we may derive from
the ETI provisions in proportion to the growth in our pre-tax income.

Net income for 2003 was $64,502,000 or 13% of net sales, compared to net
income of $15,002,000 or 4% of net sales for 2002. Our improved profitability
was primarily due to the increase in net sales, increased utilization of our
manufacturing capacity, improved productivity and continued cost controls noted
above. Net income for 2003 included the above-mentioned loss on debt
extinguishment. Net income for 2002 included the increase in operating income
from a reimbursement of legal expenses and insurance proceeds related to
litigation defense costs, and the loss on debt extinguishment, noted above.

2002 OPERATIONS TO 2001 OPERATIONS

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.

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.

22

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 ETI 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.

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 increased from $57,852,000 at
September 29, 2002 to $67,505,000 at September 28, 2003. Our securities
available for sale increased from $151,257,000 to $224,860,000 during the same
period. Overall, this reflects an $83,256,000 increase in our cash and cash
equivalents and securities available for sale, primarily due to improved
profitability in 2003 and the net proceeds from the sale of our 2.25%
Convertible Subordinated Notes due 2010 (the "2.25% Convertible Notes") and the
redemption of our 6% Convertible Notes mentioned below. We generated cash from
operating activities of $131,618,000 in 2003.

As of September 28, 2003, our $50,000,000 credit facility had a borrowing
base of $35,774,000, secured by our eligible accounts receivable and inventory.
Letters of credit outstanding under this facility totaled $1,400,000 and fees
due totaled $17,000 as of such date. The amount we can borrow under this credit
facility is limited by the levels of our eligible accounts receivable and
inventory balances. As of September 28, 2003, $34,357,000 of borrowing capacity
remained available to us.

Cash used for capital expenditures totaled $52,023,000 for 2003 compared to
$31,916,000 in 2002 and $32,047,000 in 2001. The capital expenditures during
2003 were primarily for increases in TSA suspension production capacity, new
program tooling, process technology and capability improvements and new business
systems. We anticipate capital expenditures to be approximately $90,000,000 in
2004 primarily for TSA suspension production capacity, process technology and
capability improvements, new program tooling 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 first quarter of 2003, we repurchased $10,971,000 of our 6%
Convertible Notes at a pre-tax gain of $221,000. On March 26, 2003, we redeemed
the remaining $132,529,000 of our 6% Convertible Notes at a pre-tax loss of
$3,486,000. The pre-tax loss consisted of a $2,266,000 redemption premium and a
$1,220,000 write-off of unamortized debt issuance costs associated with the 6%
Convertible Notes. These notes had a maturity date of March 15, 2005. Prior to
the redemption of our 6% Convertible Notes, in February 2003, we issued and sold
$150,000,000 aggregate principal amount of 2.25% Convertible Notes to Salomon
Smith Barney Inc. and Needham & Company, Inc., which resold the 2.25%
Convertible Notes to qualified institutional buyers, and outside the United
States in accordance with Regulation S under the Securities Act of 1933, as
amended. We used net proceeds of $145,478,000 from the issuance and sale of the
2.25% Convertible Notes primarily to redeem our 6% Convertible Notes, with the
remaining proceeds intended to be used for general corporate purposes. In
connection with the issuance and sale of the 2.25% Convertible Notes, we
incurred and capitalized debt issuance costs of $4,522,000, which will be
amortized over the term of the 2.25% Convertible Notes. Beginning in the third
quarter of 2003, the redemption of the 6% Convertible Notes, combined with the
issuance and sale of the 2.25% Convertible Notes, has reduced our interest
expense by $1,140,000 per quarter.

Certain of our existing financing agreements contain financial covenants as
well as covenants which, among other things, restrict our ability to pay
dividends to our shareholders and restrict our ability to enter into certain
types of financing. As of September 28, 2003, we were in compliance with all
such covenants. If, however, we are not in compliance with the 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 our credit facility will
be sufficient to meet our operating expenses, debt service requirements and
capital expenditures through 2004. Our ability to obtain additional financing,
if needed, will depend upon a number of factors, including our

23

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.
Amounts billed to customers for shipping and handling costs associated with
products sold are classified as revenue.

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 ("vendor managed inventory" (VMI)
facilities) that are located close to the customer's manufacturing facilities.
Revenue is recognized on sales from VMI facilities upon the transfer of title
and risk of loss, following the customer's acknowledgement of the receipt of the
goods.

We also enter into arrangements with customers that provide us with
reimbursement for guaranteed capacity. We recognize the associated revenue over
the estimated 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 our products in the same period that the related revenues are recognized. We
base the allowance on historical returns as well as existing product return
authorizations.

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

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

24

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 $49,021,000 as of September 28, 2003, 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 historical taxable income and
our estimates of future taxable income in each jurisdiction in which we operate
and the period over which our deferred tax assets will be recoverable.
Management will continue to assess the likelihood that the deferred tax asset
will be realizable and the valuation allowance will be adjusted accordingly. To
the extent that operating results continue to be favorable in 2004 and
management anticipates favorable operating results beyond 2004, the valuation
allowance may be materially reduced. Such adjustment may significantly reduce
our reported income tax provision in the period of adjustment, and may increase
our reported income tax provision in subsequent periods. Management continually
evaluates this information and in the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
adjust the 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.

Over the course of the last three years, the World Trade Organization
("WTO") has ruled that the FSC provisions of the United States Internal Revenue
Code ("IRC"), and the replacement provisions contained in the ETI, are
prohibited export subsidies under the rules of the WTO. Federal legislation
introduced in both calendar 2002 and 2003 has proposed the repeal of ETI. Until
such legislation is signed into law, we expect to earn a net benefit under the
ETI provisions similar to that previously earned under the FSC provisions of the
IRC. If such legislation is signed into law, our effective tax rate could
increase significantly and our business, financial condition and results of
operations could be materially adversely affected.

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," "-- Competition" and "-- Risk Factors" 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" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" about our future
operating results and the statements under the heading

25

"Business -- Research and Development" and "-- Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" about capital expenditures,
including research and development spending, and capital resources, are
forward-looking statements based on current expectations. These statements are
subject to risks and uncertainties, including a slowdown in demand for computer
systems and consumer electronics, changes in market consumption of disk drives
or suspension assemblies, faster or slower improvements in disk drive data
densities which affect suspension assembly and component demand, slower or
faster customer acceptance and adoption of new product features, fluctuating
order rates, 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 28, 2003,
there were no outstanding borrowings under the credit facility.

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 28, 2003, we had fixed rate debt of $150,000,000.

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. Certain sales transactions in our BioMeasurement
Division may be denominated in foreign currencies.

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

On June 13, 2002, the Audit Committee of our Board of Directors approved
discontinuing the engagement of Arthur Andersen LLP as our independent auditors
and engaging Deloitte & Touche LLP to serve as the independent auditors for the
fiscal year ended September 29, 2002. Arthur Andersen LLP's reports on our
consolidated financial statements for the fiscal year ended September 30, 2001
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audits for the fiscal year ended September 30, 2001 and
through June 13, 2002, there were no disagreements between HTI and Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures which disagreements, if
not resolved to Arthur Andersen LLP's satisfaction, would have caused Arthur
Andersen LLP to make reference to the subject matter of the disagreements in
connection with Arthur Andersen LLP's report on our consolidated financial
statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K promulgated under the Exchange Act. During
the fiscal year ended September 30, 2001 and through June 13, 2002, we did not
consult Deloitte & Touche LLP with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events listed in Items
304(a)(2)(i) and (ii) of Regulation S-K.

The firm of Deloitte & Touche LLP, independent public accountants, has been
our independent auditors since June 13, 2002.

26

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on this evaluation, the principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms. There was no
change in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

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
15, 2003. See also Part I of this Annual Report on Form 10-K under the heading
"Item X. Executive Officers of the Registrant."

Incorporated into this item by reference is the information regarding our
audit committee financial expert set forth in the section entitled "Election of
Directors", pages 4-6, in our Proxy Statement dated December 15, 2003.

On November 19, 2003, the Company adopted a Code of Ethics applicable to
the chief executive officer, chief financial officer, controller and other
employees performing similar functions as designated by the Company's chief
executive officer. A copy of the Code of Ethics is filed as Exhibit 14.1 to this
Annual Report on Form 10-K and will be available on the Company's Website at
http://www.htch.com. The Company intends to post on its Website any amendments
to, or waivers from, its Code of Ethics within two days of any such amendment or
waiver.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated into this item by reference is the information appearing under
the headings "Summary Compensation Table" and "Option Tables," pages 12-14, and
the information regarding compensation of non-employee directors on page 6, in
our Proxy Statement dated December 15, 2003.

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 15, 2003.

27

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of September 28, 2003 for
compensation plans under which securities may be issued:

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

(1) Includes securities available for future issuance under the 1996 Incentive
Plan other than upon the exercise of an outstanding option, warrant or
right.

(2) Includes securities available for future issuance under our Second Amended
and Restated Patent and Trade Secret Recognition Plan.

EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS

Our Second Amended and Restated Patent and Trade Secret Recognition Plan
(the "Recognition Plan") was adopted in its current form by the Board on March
29, 2002. The Recognition Plan in its current form replaced an amended
recognition plan originally adopted by the Board on November 19, 1992. The
purpose of the Recognition Plan is to recognize and reward employees for their
efforts in creating and developing new technologies by providing for the
possibility of awards, including grants of Common Stock, to such employees for
these efforts. The Recognition Plan authorizes the issuance of an aggregate of
30,000 shares in award grants. The award of grants of Common Stock under the
Recognition Plan is at the sole discretion of the Compensation Committee of our
Board of Directors upon the recommendation of our Technology Review Board. As of
September 28, 2003, 11,824 shares of Common Stock were available for awards
under the Recognition Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated into this item by reference is the information under the
headings "Audit Fees," "Audit-Related Fees," "Financial Information Systems
Design and Implementation Fees," "Tax Fees," "All Other Fees" and "Approval of
Independent Auditor Services and Fees," pages 7-8, in our Proxy Statement dated
December 15, 2003.

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 28, 2003, September 29, 2002 and September 30, 2001

Consolidated Balance Sheets as of September 28, 2003 and September
29, 2002

28

Consolidated Statements of Cash Flows for the fiscal years ended
September 28, 2003, September 29, 2002 and September 30, 2001

Consolidated Statements of Shareholders' Investment for the fiscal
years ended September 28, 2003, September 29, 2002 and September
30, 2001

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 SEC 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 SEC
pursuant to the Exchange Act, are located under SEC file number 0-14709.

3.1 Amended and Restated Articles of Incorporation of HTI
(incorporated by reference to Exhibit 3.1 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/29/02).
3.2 Restated By-Laws of HTI (incorporated by reference to
Exhibit 4.2 to HTI's Registration Statement on Form S-3,
Registration No. 333-104074).
4.1 Instruments defining the rights of security holders,
including an indenture. The Registrant agrees to furnish the
SEC upon request copies of instruments with respect to
long-term debt.
4.2 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).
4.3 Indenture dated as of 2/24/03 between HTI and LaSalle Bank
National Association, as Trustee (incorporated by reference
to Exhibit 4.5 to HTI's Registration Statement on Form S-3,
Registration No. 333-104074).
4.4 Purchase Agreement dated 2/18/03 by and among HTI, Salomon
Smith Barney Inc. and Needham & Company, Inc. (incorporated
by reference to Exhibit 4.6 to HTI's Registration Statement
on Form S-3, Registration No. 333-104074).
4.5 Registration Rights Agreement dated as of 2/24/03 by and
among HTI, Salomon Smith Barney Inc. and Needham & Company,
Inc. (incorporated by reference to Exhibit 4.7 to HTI's
Registration Statement on Form S-3, Registration No.
333-104074).
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 Hutchinson Technology Incorporated 1988 Stock Option Plan,
as amended.
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 Hutchinson Technology Incorporated 1996 Incentive Plan, as
amended.
#10.7 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).

29

#10.8 Description of Fiscal Year 2003 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 12/29/02).
#10.9 Description of Fiscal Year 2003 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
12/29/02).
14.1 Code of Ethics for Senior Financial Management.
16.1 Letter from Arthur Andersen LLP to the SEC, 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.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32 Section 1350 Certifications.

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

# 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

We filed the following Current Report on Form 8-K during the thirteen
weeks ended September 28, 2003:

1. Current Report on Form 8-K dated July 22, 2003 reporting under Item
7 ("Financial Statements and Exhibits") of Form 8-K, the Company's third
quarter earnings press release dated July 22, 2003.

30

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 15, 2003.

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 15, 2003.

/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

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 discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's 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 affects the reported
amounts of revenues, expenses, assets and liabilities. The Company's estimates
are based 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. If these estimates differ
materially from actual results, the impact to the consolidated financial
statements may be material.

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 ("APB") 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 adopted
FAS 144 on September 30, 2002. The adoption of FAS 144 did not 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 was
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 a material impact on the Company's consolidated balance sheet
or results of operations.

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 the FASB's Emerging
Issues Task Force ("EITF") Issue No. 94-3. The Company adopted FAS 146 on
January 1, 2003. The adoption of FAS 146 did not have a material impact on the
Company's consolidated balance sheet or results of operations.

In September 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 consideration in
excess of the original conversion terms is made by the debt holder. The EITF
36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

concluded that this guidance should be followed for transactions completed after
September 12, 2002. The Company adopted EITF Issue No. 02-15 on September 13,
2002. The adoption of EITF Issue No. 02-15 did not have a material impact on the
Company's consolidated balance sheet or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain issued
and outstanding guarantees. The Company adopted the recognition and measurement
provisions of FIN 45 on January 1, 2003, and adopted the disclosure provisions
of FIN 45 effective for the quarter ended December 29, 2002. The Company has
provided the disclosures in Note 1 (under the heading "Trade Receivables") to
the consolidated financial statements. The adoption of FIN 45 did not have a
material impact on the Company's consolidated balance sheet or results of
operations.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("FAS 148"), which amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require more
prominent and more frequent disclosures in financial statements of the effects
of stock-based compensation. The transition guidance and annual disclosure
provisions of FAS 148 are effective for fiscal years ending after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002. The Company adopted the disclosure provisions of FAS 148 in
the second quarter of 2003 and has provided the annual disclosures in Note 6 to
the consolidated financial statements. The adoption of FAS 148 did not have a
material impact on the Company's consolidated balance sheet or results of
operations as the Company continues to account for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") as permitted by FAS 148.

In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 addresses the consolidation of
variable interest entities, including entities commonly referred to as special
purpose entities. The Company adopted the provisions of FIN 46 that relate to
new variable interest entities created or acquired after January 31, 2003 during
the fourth quarter of 2003. The FASB issued a deferral of the effective date of
FIN 46 as it relates to variable interest entities created or acquired prior to
February 1, 2003, until the first interim or annual period ending after December
15, 2003. The adoption of FIN 46, as it relates to activities occurring after
January 31, 2003, did not have a material impact on the Company's consolidated
balance sheet or results of operations. The adoption of FIN 46, as it relates to
activities prior to February 1, 2003, is not expected to have a material impact
on the Company's consolidated balance sheet or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("FAS 149"), which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FAS 149 was effective for contracts entered into or modified after
June 30, 2003 except for the provisions that were cleared by the FASB in prior
pronouncements. The adoption of FAS 149 did not have a material impact on the
Company's consolidated balance sheet or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. In accordance with FAS 150,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. FAS 150 was effective for financial instruments
entered into or modified after May 31, 2003, and was otherwise effective for the
Company during the fourth quarter of 2003. The adoption of FAS 150 did not have
a material impact on the Company's consolidated balance sheet or results of
operations.

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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 28, 2003 and
September 29, 2002 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
Securities and Exchange Commission 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. Amounts billed to customers for shipping and handling costs
associated with products sold are classified as revenue.

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 (vendor managed inventory
("VMI") facilities) that are located close to the customer's manufacturing
facilities. Revenue is recognized on sales from VMI facilities 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 arrangements with customers that provide us
with reimbursement for guaranteed capacity. The Company recognizes the
associated revenue over the estimated 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 28, 2003, the
Company's securities available for sale consisted of U.S. government securities,
mortgage-related securities issued by government agencies and corporate debt
securities with a cost of $224,179,000 and a fair value of $224,860,000.

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
$59,822,000 at September 28, 2003 and $51,363,000 at September 29, 2002 are net
of allowances of $2,194,000 and $3,662,000, respectively. The allowances of
$2,194,000 as of September 28, 2003 consisted of a $1,097,000 allowance for
doubtful accounts and a $1,097,000 allowance for sales returns. The allowances
of $3,662,000 as of September 29, 2002 consisted of a $2,999,000 allowance for
doubtful accounts and a $663,000 allowance for sales returns.

The Company warrants that the goods sold by it will be free from defects in
materials and workmanship for a period of 60 days following delivery to the
customer. Upon determination that the goods sold are defective, the Company
typically
38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

accepts the return of such goods and refunds the purchase price to the customer.
The Company records a provision against revenue for estimated returns on sales
of its products in the same period that the related revenues are recognized. The
Company bases the allowance on historical product returns, as well as existing
product return authorizations. The following table reconciles the changes in the
Company's allowance for sales returns under warranties:

INVENTORIES

Inventories are valued at the lower of cost (first in, first-out method) or
market by analyzing market conditions, current sales prices, inventory costs and
inventory balances. Inventories consisted of the following at September 28, 2003
and September 29, 2002:

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................................................... 1 to 10 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 $37,048,000
in 2003, $40,419,000 in 2002 and $55,826,000 in 2001. Of these amounts,
$14,945,000 in 2003, $17,663,000 in 2002 and $23,241,000 in 2001 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

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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 $49,021,000 as of September 28, 2003, 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 historical taxable income and its estimates of future taxable income
in each jurisdiction in which it operates and the period over which its deferred
tax assets will be recoverable. Management will continue to assess the
likelihood that the deferred tax asset will be realizable and the valuation
allowance will be adjusted accordingly. To the extent that operating results
continue to be favorable in 2004 and management anticipates favorable operating
results beyond 2004, the valuation allowance may be materially reduced. The
Company continually evaluates this information and in the event that actual
results differ from these estimates or the Company adjusts these estimates in
future periods, it may need to adjust the 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 for stock options and the if-converted method for
convertible debt 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 and 5,291,000, related to the
Company's outstanding convertible subordinated notes, were excluded from the
computation of diluted earning per share for 2002 and 2001, respectively, as
inclusion of these shares would have been antidilutive. Potential common shares
of 217,000 related to the Company's outstanding stock options were excluded from
the computation of diluted loss per share for 2001, as inclusion of these shares
would have been antidilutive.

2. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

During the 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

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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 had been eliminated
and the full amount of these severance costs had been paid. These charges are
reflected on the accompanying statements of operations as "Asset impairment and
restructuring charges."

3. FINANCING ARRANGEMENTS

LONG-TERM DEBT

During the first quarter of 2003, the Company repurchased $10,971,000 of
its 6% Convertible Notes at a pre-tax gain of $221,000. This extinguishment of
debt reduced the Company's interest expense in 2003 by approximately $648,000.

On March 26, 2003, the Company redeemed the remaining $132,529,000 of its
6% Convertible Notes at a pre-tax loss of $3,486,000. The pre-tax loss consisted
of a $2,266,000 redemption premium paid by the Company and a $1,220,000
write-off of unamortized debt issuance costs associated with the 6% Convertible
Notes.

Prior to the redemption of the Company's 6% Convertible Notes, in February
2003, the Company issued and sold $150,000,000 aggregate principal amount of
2.25% Convertible Subordinated Notes due 2010 (the "2.25% Convertible Notes") to
Salomon Smith Barney Inc. and Needham & Company, Inc., which resold the 2.25%
Convertible Notes to qualified institutional buyers, and outside the United
States in accordance with Regulation S under the Securities Act of 1933, as
amended (the "Securities Act"). The 2.25% Convertible Notes pay interest
semi-annually, commencing September 15, 2003, and 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 $29.84 per share. Beginning March 20, 2008, the 2.25% Convertible Notes
are redeemable, in whole or in part, at the option of the Company at 100.64% of
their principal amount, and thereafter at prices declining to 100% on March 15,
2010. In addition, upon the occurrence of certain events, each holder of the
2.25% Convertible Notes may require the Company to repurchase all or a portion
of such holder's 2.25% 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 but excluding the date of the repurchase.

The Company used the net proceeds of $145,478,000 from the issuance and
sale of the 2.25% Convertible Notes primarily to redeem its 6% Convertible
Notes, with the remaining proceeds intended to be used for general corporate
purposes. In connection with the issuance and sale of the 2.25% Convertible
Notes, the Company incurred and capitalized debt issuance costs of $4,522,000,
which will be amortized over the term of the 2.25% Convertible Notes. Beginning
in the third quarter of 2003, the redemption of the 6% Convertible Notes,
combined with the issuance and sale of the 2.25% Convertible Notes, has reduced
the Company's interest expense by $1,140,000 per quarter.

The 2.25% Convertible Notes were issued by the Company and were sold in
transactions exempt from registration under the Securities Act. The Company
filed a registration statement registering the 2.25% Convertible Notes and the
shares of Common Stock of the Company into which the 2.25% Convertible Notes are
convertible.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

Certain of the Company's existing financing agreements contain financial
covenants as well as covenants which, among other things, restrict its ability
to pay dividends to its shareholders and restrict its ability to enter into
certain types of financing. As of September 28, 2003, the Company was in
compliance with all such covenants. If, however, the Company is not in
compliance with the covenants in its financing agreements at the end of any
future quarter and cannot obtain amendments on acceptable terms, its future
financial results and liquidity could be materially adversely affected.

Maturities of long-term debt subsequent to September 28, 2003 are as
follows:

2004........................................................ $ --
2005........................................................ --
2006........................................................ --
2007........................................................ --
2008........................................................ --
2009........................................................ --
2010........................................................ 150,000
--------
$150,000
========

4. INCOME TAXES

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

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

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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 28, 2003,
the Company's deferred tax assets included $14,422,000 of unused tax credits, of
which $3,823,000 can be carried forward indefinitely and $10,599,000 of which
begin to expire at various dates beginning in 2010. At September 28, 2003, the
Company's balance sheet included $54,557,000 of deferred tax assets related to
net operating loss carryforwards that will begin to expire in 2018. As of
September 28, 2003, the Company had an estimated federal net operating loss
carryforward of approximately $140,833,000 for United States federal tax return
purposes. A portion of the credits and net operating loss carryforwards are
subject to an annual limitation under United States Internal Revenue Code
("IRC") Section 382. A valuation allowance of $49,021,000 has been recognized to
offset the related deferred tax assets due to the uncertainty of realizing the
benefits of certain tax credits and net operating loss carryforwards before they
expire. The following is a table of the significant components of the Company's
deferred tax assets:

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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 as of September 29, 2002,
except for the 6.0% Convertible Notes, was 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 was the rate currently
available to the Company for loans with similar terms and maturities as of
September 29, 2002. The fair value of the Company's 6.0% Convertible Notes and
the 2.25% Convertible Notes is estimated based on the closing market price of
such 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-BASED COMPENSATION

The Company has an employee stock purchase plan that provides for the sale
of the Company's common stock at discounted purchase prices. The cost per share
under this plan is 85% of the lesser of the fair market value of the Company's
common stock on the first or last day of the purchase period, as defined.

The Company has two stock option plans under which up to 6,750,000 common
shares are reserved for issuance and of which options representing 5,965,927
common shares have been granted as of September 28, 2003. Under both plans,
options may be granted to any employee, including officers and directors of the
Company, at a price not less than the fair market value of the Company's common
stock at the date the options are granted. Under one of the plans, options may
be granted to 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 of the Company that
administers the plans. Options granted under the plans generally are exercisable
one year from the date of grant.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

A summary of the status of the Company's two stock option plans as of
September 30, 2001, September 29, 2002 and September 28, 2003, and changes
during the years ending on those dates, is presented below:

The following table summarizes information about stock options outstanding
at September 28, 2003:

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

The Company follows APB 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 FAS 123, the
Company's pro forma net income (loss) and pro forma earnings (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 2003: risk-free interest rate of 3.45%; expected life of six
years; and expected volatility of 62%. The following weighted average
assumptions were 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%.

EMPLOYEE BENEFIT PLANS

The Company has a defined contribution plan covering its employees. The
Company's contributions to the plan were $7,498,000 in 2003, $7,092,000 in 2002
and $6,723,000 in 2001.

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. The Company recognized expense related to these plans of
$13,083,000 in 2003, $13,645,000 in 2002 and $17,339,000 in 2001.

7. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company is committed under various operating lease agreements. Total
rent expense under these operating leases was $10,751,000 in 2003, $11,307,000
in 2002 and $15,012,000 in 2001.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

Future minimum payments for all operating leases with initial or remaining
terms of one year or more subsequent to September 28, 2003 are as follows:

LEGAL PROCEEDINGS

The Company and certain users of the Company's products have received, and
may 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 three 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 FSC Repeal and
Extraterritorial Income Exclusion Act of 2000 ("ETI"), are prohibited export
subsidies under the rules of the WTO. Federal legislation introduced in both
calendar 2002 and 2003 has proposed the repeal of ETI. Until such legislation 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. If such legislation is signed into law, the Company's effective tax rate
could increase significantly and its business, financial condition and results
of operations could be materially adversely affected.

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

8. SUPPLEMENTARY CASH FLOW INFORMATION

Capitalized interest was $577,000 in 2003, $779,000 in 2002 and $979,000 in
2001. Interest is capitalized using an overall borrowing rate, for assets that
are being constructed or otherwise produced for the Company's own use. Interest
capitalized during 2003 was primarily for increases in TSA suspension production
capacity, new program tooling, process technology and capability improvements
and new business systems.

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 another 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 28, 2003, the
unamortized portion of the prepayment was $20,446,000, of which $3,174,000 was
included in "Prepaid taxes and other" and $17,272,000 was included in "Other
assets" on the accompanying consolidated 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

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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% or more of its assets or
earnings power, each holder of a right shall have the right to receive, 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.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

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 81%, 83% and 91%
of net sales for 2003, 2002 and 2001, respectively.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hutchinson Technology Incorporated and Subsidiaries -- (Continued)

13. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)

The following table summarizes unaudited financial data for 2003 and 2002.

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 $221,000 for gain on debt extinguishment.

(2) Includes (net of tax) $188,000 for gain on debt extinguishment.

(3) Includes $3,486,000 for loss on debt extinguishment.

(4) Includes (net of tax) $2,963,000 for loss on debt extinguishment.

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

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

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

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

51

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Hutchinson
Technology Incorporated and Subsidiaries (the Company) as of September 28, 2003
and September 29, 2002 and the related consolidated statements of operations,
shareholders' investment, and cash flows for the years then ended. Our audit
also included the financial statement schedule listed in Item 15(a)2. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. The consolidated statements of operations,
shareholders' investment and cash flows and the financial statement schedule
listed in Item 15(a)2 of the Company for the year ended September 30, 2001 were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements and stated that such 2001
financial statement schedule 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, in their report dated
November 1, 2001.

We conducted our audits 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, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 28,
2003 and September 29, 2002 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the 2003 and
2002 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, 2003

52

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

53

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.

54

ELEVEN-YEAR SELECTED FINANCIAL DATA

Hutchinson Technology Incorporated and Subsidiaries