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

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

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

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

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

(Unaudited)
(In thousands)

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

(Unaudited)
(In thousands)

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

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

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

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

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

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

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

      --   the anticipated level of capital expenditures during 2002;

      --   the Company's cash flow projections;

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

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

Accounts receivable are summarized as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The following table presents revenue by product line:

The following table summarizes sales to major customers:

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

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

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

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

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

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

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

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

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

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

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146"). This statement requires costs associated with exit or disposal activities, such as lease termination or employee severance costs, to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," which previously provided guidance on this topic. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management believes that the adoption of FAS 146 will not have a significant effect on the Company's results of operations or its financial position.

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

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

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

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

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

     -    distribution;

     -    financial terms and conditions;

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

     -    other value-added products and/or services.

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

     -    inventory price protections;

     -    stock rotation obligations;

     -    short term marketing promotions; and

     -    customer and consumer rebates.

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

     -     evaluate the technology;

     -     qualify the product specifications;

     -     verify our compliance with product specifications;

     -     integrate the product into its system; and

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

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