Hutchinson Technology (HTCH) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedDECEMBER 25, 2005

OR

o 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

HUTCHINSON TECHNOLOGY INCORPORATED

(Exact name of registrant as specified in its charter)

MINNESOTA	41-0901840
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

40 WEST HIGHLAND PARK DRIVE N.E., HUTCHINSON, MINNESOTA	55350
(Address of principal executive offices)	(Zip code)

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

(Former name, address or fiscal year, if changed since last report)

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.

Yesþ       Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ                     Accelerated filero                      Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of January 13, 2006 the registrant had 25,611,454 shares of Common Stock issued and outstanding.

TABLE OF CONTENTS

PART I.FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 6. EXHIBITS
SIGNATURES
INDEX TO EXHIBITS
Rule 13a-14(a)/15d-14(a) Certifications of CEO
Rule 13a-14(a)/15d-14(a) Certifications of CFO
Section 1350 Certifications

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
(In thousands, except shares and per share data)

	December 25,			September 25,
	2005			2005
ASSETS
Current assets:
Cash and cash equivalents	$	21,816		$	33,733
Securities available for sale		139,061			172,778
Trade receivables, net		104,464			85,019
Other receivables		9,909			11,181
Inventories		57,691			54,780
Deferred tax assets (Note 7)		6,676			7,206
Other current assets (Note 8)		7,186			5,430
Total current assets		346,803			370,127
Property, plant and equipment, net		392,856			350,520
Deferred tax assets (Note 7)		61,184			61,078
Other assets (Note 8)		15,403			17,813
	$	816,246		$	799,538
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current liabilities:
Current portion of long-term debt	$	1,187		$	—
Accounts payable		57,650			56,128
Accrued expenses		14,026			13,238
Accrued compensation		22,521			24,873
Total current liabilities		95,384			94,239
Convertible subordinated notes		150,000			150,000
Long-term debt, net of current portion		6,239			—
Other long-term liabilities		2,538			2,760
Shareholders’ investment:
Common stock, $.01 par value, 100,000,000 shares authorized, 25,576,000 and 25,450,000 issued and outstanding		256			254
Additional paid-in capital		394,146			390,680
Accumulated other comprehensive loss		(680	)		(712	)
Accumulated earnings		168,363			162,317
Total shareholders’ investment		562,085			552,539
	$	816,246		$	799,538

See accompanying notes to condensed consolidated financial statements — unaudited.

HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands, except per share data)

	Thirteen Weeks Ended
	December 25,			December 26,
	2005			2004
Net sales	$	184,627		$	145,616
Cost of sales		144,960			104,666
Gross profit		39,667			40,950
Research and development expenses		12,747			7,616
Selling, general and administrative expenses		22,513			18,809
Income from operations		4,407			14,525
Interest and other income, net		3,317			2,450
Interest expense		(501	)		(654	)
Income before income taxes		7,223			16,321
Provision for income taxes		1,177			2,877
Net income	$	6,046		$	13,444
Basic earnings per share	$	0.24		$	0.54
Diluted earnings per share	$	0.22		$	0.47
Weighted average common shares outstanding		25,535			24,757
Weighted average common and diluted shares outstanding		30,798			30,345

See accompanying notes to condensed consolidated financial statements — unaudited.

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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)

	Thirteen Weeks Ended
	December 25,			December 26,
	2005			2004
OPERATING ACTIVITIES:
Net income	$	6,046		$	13,444
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		27,526			12,644
Stock-based compensation		1,140			—
Provision for deferred taxes (Note 7)		405			5,637
Loss (gain) on disposal of assets		61			(17	)
Changes in operating assets and liabilities (Note 10)		(9,365	)		(19,937	)
Cash provided by operating activities		25,813			11,771
INVESTING ACTIVITIES:
Capital expenditures		(73,397	)		(26,759	)
Purchases of marketable securities		(148,583	)		(1,920	)
Sales of marketable securities		182,351			29,495
Cash provided by (used for) investing activities		(39,629	)		816
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		2,328			11,158
Repayment of long-term debt		(429	)		—
Cash provided by financing activities		1,899			11,158
Net increase (decrease) in cash and cash equivalents		(11,917	)		23,745
Cash and cash equivalents at beginning of period		33,733			33,704
Cash and cash equivalents at end of period	$	21,816		$	57,449

See accompanying notes to condensed consolidated financial statements — unaudited.

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HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Columnar dollar amounts in thousands except per share amounts)

Reference to the “Company” means Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to “2006” mean the Company’s fiscal year ending September 24, 2006, references to “2005” mean the Company’s fiscal year ended September 25, 2005, references to “2004” mean the Company’s fiscal year ended September 26, 2004, references to “2003” mean the Company’s fiscal year ended September 28, 2003 and references to “2002” mean the Company’s fiscal year ended September 29, 2002.

(1) BASIS OF PRESENTATION

The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. The quarterly results are not necessarily indicative of the actual results that may occur for the entire fiscal year.

(2) ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision to Statement of Financial Accounting Standards 123, “Share-Based Payment” (“SFAS 123(R)”). The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. SFAS 123(R) eliminates the alternative method of accounting for employee share-based payments previously available under Accounting Principles Board Opinion No. 25 (“APB 25”). In April 2005, the FASB delayed the effective date of SFAS 123(R) to fiscal years beginning after June 15, 2005. Effective September 26, 2005, the Company adopted the provisions of SFAS 123(R) using the modified-prospective transition method. As a result of adopting SFAS 123(R), the Company recognized $1,140,000 of compensation expense for the thirteen weeks ended December 25, 2005. Results for prior periods have not been restated. Refer to footnote 11 in the Notes to Condensed Consolidated Financial Statements.

(3) BUSINESS AND CUSTOMERS

The Company is the world’s leading supplier of suspension assemblies for hard disk drives. Suspension assemblies hold the recording heads in position above the spinning magnetic disks in the drive and are critical to maintaining the necessary microscopic clearance between the head and disk. The Company developed its leadership position in suspension assemblies through research, development and design activities coupled with a substantial investment in manufacturing technologies and equipment. The Company is focused on continuing to develop suspension assemblies which address the rapidly changing requirements of the hard disk drive industry. To further assure a readily available supply of products to its customers, the Company sells etched and stamped component-level suspension assembly parts, such as flexures and baseplates, to competing suspension assembly manufacturers. The Company also is engaged in the development and production of products for the medical device market, but does not expect to generate significant revenue from these products during 2006.

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A breakdown of customer sales is as follows:

	Thirteen Weeks Ended
	December 25,			December 26,
Percentage of Net Sales	2005			2004
Five Largest Customers		87	%		91	%
Sales to Major Customers
SAE Magnetics, Ltd./TDK		28	%		31	%
Alps Electric Co., Ltd.		22			22
Western Digital Corporation		17			22
Seagate Technology LLC		12			5
Innovex, Inc.		8			8
Fujitsu Limited		6			8

(4) 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 $104,464,000 at December 25, 2005 and $85,019,000 at September 25, 2005 are net of allowances of $1,303,000 and $1,212,000, respectively. As of December 25, 2005, allowances of $1,303,000 consisted of a $845,000 allowance for doubtful accounts and a $458,000 allowance for sales returns. As of September 25, 2005, allowances of $1,212,000 consisted of a $616,000 allowance for doubtful accounts and a $596,000 allowance for sales returns.

The Company generally warrants that the goods sold by it will be free from defects in materials and workmanship for a period of one year or less following delivery to the customer. Upon determination that the goods sold are defective, the Company typically 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:

	Increases in the		Reductions in the
	allowance related		allowance for
September 25,	to warranties		returns under			December 25,
2005	issued		warranties			2005
$596	$	769	$	(907	)	$	458

(5) 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 December 25, 2005 and September 25, 2005:

	December 25,		September 25,
	2005		2005
Raw materials	$	18,792	$	15,410
Work in process		14,824		13,780
Finished goods		24,075		25,590
	$	57,691	$	54,780

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(6) EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed under the treasury stock method for outstanding stock options and the if-converted method for the convertible subordinated notes and is calculated to compute the dilutive effect of potential common shares using net income available to common shareholders. A reconciliation of these amounts is as follows:

	Thirteen Weeks Ended
	December 25,			December 26,
	2005			2004
Net income	$	6,046		$	13,444
Plus: interest expense on convertible subordinated notes		1,008			1,008
Less: additional profit sharing expense and income tax provision		(342	)		(261	)
Net income available to common shareholders	$	6,712		$	14,191
Weighted average common shares outstanding		25,535			24,757
Dilutive potential common shares — stock options		236			561
Dilutive potential common shares — convertible subordinated notes		5,027			5,027
Weighted average common and diluted shares outstanding		30,798			30,345
Basic earnings per share	$	0.24		$	0.54
Diluted earnings per share	$	0.22		$	0.47

(7) INCOME TAXES

The following table details the significant components of the Company’s deferred tax assets:

	December 25,			September 25,
	2005			2005
Current deferred tax assets:
Receivable allowance	$	476		$	443
Inventories		3,188			2,997
Accruals and other reserves		3,012			3,766
Total current deferred tax assets		6,676			7,206
Long-term deferred tax assets:
Property, plant and equipment		21,253			19,782
Deferred income		1,032			208
Tax credits		18,899			18,370
Net operating loss carryforwards		25,167			27,763
Valuation allowance		(5,167	)		(5,045	)
Total long-term deferred tax assets		61,184			61,078
Total deferred tax assets	$	67,860		$	68,284

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 December 25, 2005, the Company’s deferred tax assets included $18,899,000 of unused tax credits, $5,357,000 of which can be

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carried forward indefinitely and $13,542,000 of which begin to expire at various dates beginning in 2009. At December 25, 2005, the Company’s balance sheet included $25,167,000 of deferred tax assets related to net operating loss (“NOL”) carryforwards which will begin to expire in 2018. As of December 25, 2005 we had an estimated NOL carryforward of approximately $65,976,000 for United States federal tax return purposes. A portion of the credits and NOL carryforwards may be subject to an annual limitation under United States Internal Revenue Code (“IRC”) Section 382. A valuation allowance of $5,167,000 has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefits of certain tax credits and NOL carryforwards before they expire.

During the third quarter of 2005, based on a court decision, the Company was awarded a refund, with interest, of certain Minnesota corporate income taxes paid for the years 1995 through 1999. As a result of the court’s decision, the Company also reversed a related contingency tax reserve. These items were partially offset by an adjustment to the carrying value of future tax benefits on certain NOL carryforwards. These items resulted in a net income tax benefit of $1,676,000 for 2005.

During the first quarter of 2006, the Company settled a state income tax audit for fiscal years 1991 through 1993, resulting in a net refund of income taxes and interest. As a result of the settlement, a net income tax benefit of $386,000 was recognized for the thirteen weeks ended December 25, 2005.

(8) OTHER ASSETS

During the second quarter of 2002, the Company prepaid $26,000,000 related to a technology and development agreement. As of December 25, 2005, the unamortized portion of the prepayment was $13,917,000, of which $3,811,000 was included in “Other current assets” and $10,106,000 was included in “Other assets” on the accompanying condensed consolidated balance sheet. The unamortized portion is being amortized over the remaining term of the agreement which ends in 2010.

(9) SHAREHOLDERS’ EQUITY

In July 2004, the Company’s Board of Directors authorized the repurchase of up to two million shares of its common stock from time to time in the open market or through privately negotiated transactions, subject to market conditions, share price and other factors. In 2004, the Company repurchased a total of 1,722,500 shares for a total cost of $39,252,000. The average price paid per share was $22.75. In 2005, the Company repurchased a total of 206,000 shares for a total cost of $5,747,000. The average price paid per share was $27.86. No shares were repurchased during the thirteen weeks ended December 25, 2005. The Company may still repurchase up to 71,500 shares under this repurchase program.

(10) SUPPLEMENTARY CASH FLOW INFORMATION

	Thirteen Weeks Ended
	December 25,			December 26,
	2005			2004
Changes in operating assets and liabilities:
Receivables, net	$	(18,173	)	$	(27,823	)
Inventories		(2,911	)		4,171
Other assets		(1,756	)		1,268
Accounts payable and accrued expenses		13,697			2,544
Other non-current liabilities		(222	)		(97	)
	$	(9,365	)	$	(19,937	)
Cash paid for:
Interest (net of amount capitalized)	$	—		$	—
Income taxes		6			1
Non-cash investing activities:
Capital expenditures in accounts payable	$	14,087		$	7,132

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Capitalized interest for the thirteen weeks ended December 25, 2005 was $657,000 compared to $375,000 for the thirteen weeks ended December 26, 2004. 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 the thirteen weeks ended December 25, 2005 was primarily for increases in both TSA suspension and TSA+ suspension production capacity, process technology and capability improvements, new program tooling, new business systems and facility construction.

During the first quarter of 2006, the Company purchased the assembly manufacturing building (which it previously leased) at its Eau Claire, Wisconsin manufacturing site, together with related equipment, for $12,924,000 which included the assumption of a mortgage by the Company.

Purchase price of building and related equipment acquired	$	12,924
Cash paid for building and related equipment		(5,069	)
Mortgage assumed	$	7,855

(11) 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 options have been granted to employees, 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 were granted. Options under one plan are no longer granted because the maximum number of shares available for option grants under such plan has been reached. Under the other plan, options also 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 prior to November 2005 generally are exercisable one year from the date of grant. Options granted under the plans in November 2005 are exercisable two to three years from the date of grant.

Effective September 26, 2005, the Company adopted SFAS 123(R) which requires all share-based payments, including grants of stock options, to be recognized in the statement of operations as an operating expense, based on their fair values over the requisite service period. The Company elected to utilize the modified-prospective transition method as permitted by SFAS 123(R). Under this transition method, stock-based compensation expense for the thirteen weeks ended December 25, 2005 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of September 25, 2005, based on grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”; and (b) compensation expense for all stock-based compensation awards granted subsequent to September 25, 2005, based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recorded $1,140,000 of related stock-based compensation expense, included in general and administrative expense, for the thirteen weeks ended December 25, 2005. In accordance with SFAS 123(R), there was no tax benefit from recording this non-cash expense as such benefits will be recorded upon utilization of the Company’s NOLs. The compensation expense reduced both basic and diluted earnings per share by $0.02. In accordance with the modified-prospective transition method of SFAS 123(R), results for prior periods have not been restated.

As of December 25, 2005, $5,901,000 of unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately thirty-five months.

Prior to adopting SFAS 123(R), the Company accounted for stock-based compensation under APB 25. The following table illustrates the effect

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on net income and earnings per share if the fair value based method had been applied to the year-ago period.

	Thirteen Weeks Ended
	December 26, 2004
Net income – as reported	$	13,444
Stock-based employee compensation determined under the fair value based method, nets of related tax effects		(1,241	)
Net income – pro forma	$	12,203
Income per common equivalent share:
Basic – as reported	$	0.54
Diluted – as reported	$	0.47
Basic – pro forma	$	0.48
Diluted – pro forma	$	0.42

The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The weighted average fair value of options granted during the thirteen weeks ended December 25, 2005 and December 26, 2004 were $13.89 and $14.98, respectively. The fair value of options at the date of grant and the weighted-average assumptions utilized to determine such values are indicated in the following table:

	Thirteen Weeks Ended
	December 25,			December 26,
	2005			2004
Risk-free interest rate		4.4	%		3.9	%
Expected volatility		45	%		41	%
Expected life (in years)		7.3			6.0
Dividend yield		—			—

The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The Company used an outside valuation advisor to assist in more accurately projecting expected stock price volatility. The Company considered both historical data and observable market prices of similar equity instruments. The Company estimated the expected life of stock options and stock option forfeitures based on historical experience.

Option transactions during the thirteen weeks ended December 25, 2005 are summarized as follows:

	Number of			Weighted Average
	Shares			Exercise Price
Outstanding at September 25, 2005		2,790,631		$	24.38
Granted		435,000			27.46
Exercised		(94,135	)		16.43
Canceled		(4,100	)		31.49
Outstanding at December 25, 2005		3,127,396			25.03
Options exercisable at December 25, 2005		2,673,396			24.57

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The following table summarizes information concerning currently outstanding and exercisable stock options.

	Options Outstanding						Options Exercisable
			Weighted-Average
			Remaining
Range of	Number		Contractual		Weighted-Average		Number		Weighted-Average
Exercise Prices ($)	Outstanding		Life (yrs.)		Exercise Price ($)		Exercisable		Exercise Price ($)
14.81 to 15.44		11,500		5.0		15.30		11,500		15.30
17.02 to 17.33		286,455		0.9		17.33		286,455		17.33
18.75		308,330		3.9		18.75		308,330		18.75
19.05 to 19.13		288,210		4.9		19.12		288,210		19.12
20.19 to 21.64		323,765		5.9		21.64		323,765		21.64
23.29 to 24.77		594,657		5.4		24.70		594,657		24.70
27.00 to 30.28		628,694		7.9		28.13		193,694		29.65
32.05 to 45.06		685,785		8.2		32.78		666,785		32.74
14.81 to 45.06		3,127,396		6.0		25.03		2,673,396		24.57

(12) LEGAL CONTINGENCIES

Securities Litigation

As reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2005, the Company and three of its present executive officers, two of whom are also directors, were named as defendants in two virtually identical actions,Robert J. Averdick v. Hutchinson Technology, Inc., Wayne M. Fortun, John A. Ingleman, and Jeffrey W. GreenandSam Somyoy Poovakaw v. Hutchinson Technology, Inc., Wayne M. Fortun, John A. Ingleman, and Jeffrey W. Green.The Company and six of the Company’s present executive officers, two of whom are directors, also were named in a third virtually identical action,Michael Huefner v. Hutchinson Technology, Jeffrey W. Green, Wayne M. Fortun, John A. Ingleman, Richard J. Penn, R. Scott Schaefer and Beatrice A. Graczyk.Each action was filed between September 9, 2005 and October 11, 2005 in the U.S. District Court for the District of Minnesota, and each action is a purported class action brought on behalf of all persons (except defendants) who purchased stock in the open market between October 4, 2004 and August 29, 2005. The complaints allege that the defendants made false and misleading public statements about the Company, and its business and prospects, in filings with the SEC and press releases, and that the market price of its stock was artificially inflated as a result. The complaints allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The plaintiffs in all three cases seek compensatory damages on behalf of the alleged class, an award of attorneys’ fees and costs of litigation and unspecified equitable/injunctive relief. On November 8, 2005, motions were filed by two competing sets of plaintiffs and their respective counsel seeking to consolidate all of the actions and to appoint a lead plaintiff and lead counsel, and a hearing on the motions was held on December 1, 2005. The Company expects that, as a result of the motions, the court will consolidate the actions, appoint a lead plaintiff and one or more lead counsel and set a deadline for the lead plaintiff to file and serve a consolidated amended complaint.

The Company believes that it, and the other defendants, have meritorious defenses to the claims made in the complaints and the Company intends to contest the lawsuits vigorously. The Company is not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive. The total costs may not be reasonably estimated at this time. Securities class action litigation can result in substantial costs and divert the Company’s management attention and resources, which may have a material adverse effect on its business and results of operations, including the Company’s cash flows.

Derivative Litigation

The Company, as a nominal defendant, all of its present directors and one of its officers were named as defendants in a purported derivative action,Saul Kopelowitz v. Wayne Fortun, et al., that was filed on December 14, 2005 in the U.S. District Court for the District of Minnesota. In the complaint, the shareholder-plaintiff alleges claims of

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breach of fiduciary duty, waste of corporate assets, unjust enrichment and misappropriation of information against the individual defendants arising out of the same events that are alleged in the federal securities actions that are described above. Essentially, the complaint asserts that breaches of duty by the individual defendants resulted in the Company making false and misleading public statements, which in turn led to the Company getting sued for federal securities fraud, which in turn has caused the Company to suffer damages. The complaint seeks compensatory damages from the individual defendants for the loss allegedly sustained by the Company, restitution and disgorgement of all profits, benefits and other compensation obtained by the individual defendants and an award of attorneys’ fees and costs of litigation. The defendants have not yet responded to the complaint. The Company is not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive.

Other Litigation

The Company and certain users of the Company’s products have from time to time received, and may in the future receive, communications from third parties asserting patents against the Company or its customers which may relate to certain of the Company’s manufacturing equipment or products or to products that include the Company’s products as a component. In addition, certain of the Company’s 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.

(13) OTHER MATTERS

The American Jobs Creation Act of 2004 (“AJCA”) was signed into law on October 22, 2004. The AJCA contained two provisions that affect the Company. The first provision is the repeal of the Extraterritorial Income Exclusion Act of 2000 (“EIE”), which will be phased out on a calendar year basis with the benefit ending December 31, 2006. Due to the new law, the Company expects to have a decreased benefit from EIE.

The second provision of the AJCA that affects the Company is the introduction of a deduction for a percentage of income from domestic production activities. The deduction is limited in any fiscal year in which a taxpayer uses NOLs. For the Company’s fiscal year ending September 24, 2006, the Company does not expect any benefit from this deduction, as the Company will use NOLs. The deduction is phased in on a fiscal year basis and will be fully phased in for the Company’s fiscal year ending September 25, 2011.

(14) 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 considers its chief operating decision-maker to be the Chief Executive Officer.

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The Company has determined that it has two reportable segments: the Disk Drive Components Division and the BioMeasurement Division. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s most recent Annual Report on Form 10-K.

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

	Thirteen Weeks Ended
	December 25,			December 26,
	2005			2004
Net sales:
Disk Drive Components Division	$	184,574		$	145,478
BioMeasurement Division		53			138
	$	184,627		$	145,616
Income (loss) from operations:
Disk Drive Components Division	$	7,242		$	16,181
BioMeasurement Division		(2,835	)		(1,656	)
	$	4,407		$	14,525

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

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HUTCHINSON TECHNOLOGY INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

When we refer to “we,” “us,” “HTI” or the “Company,” we mean Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to “2008” mean HTI’s fiscal year ending September 28, 2008, references to “2007” mean HTI’s fiscal year ending September 30, 2007, references to “2006” mean HTI’s fiscal year ending September 24, 2006, references to “2005” mean HTI’s fiscal year ended September 25, 2005, references to “2004” mean HTI’s fiscal year ended September 26, 2004, references to “2003” mean HTI’s fiscal year ended September 28, 2003, references to “2002” mean HTI’s fiscal year ended September 29, 2002, references to “2001” mean HTI’s fiscal year ended September 30, 2001, and references to “2000” mean HTI’s fiscal year ended September 24, 2000.

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 to nearly all manufacturers of disk drives and manufacturers of disk drive components for all sizes of disk drives. 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, adjustments in inventory levels throughout the disk drive supply chain, technological changes that impact suspension assembly demand, shifts in our market position and our customers’ market position, our customers’ production yields and our own product transitions and production capacity utilization.

Our shipments of suspension assemblies in 2005 were 719 million, 34% higher than our shipments in 2004. This increase was due to strong demand for suspension assemblies resulting from increased shipments for disk drives, demand for data storage outpacing the rate of improvement in data density for disk drives in mass production and our share positions on types of disk drives in particularly high demand.

For calendar 2005, IDC has estimated that disk drive shipments would reach 374 million units, an increase of about 22% from calendar 2004. The growth in disk drive shipments is resulting from increased demand for data storage in traditional computing applications as well as in consumer electronics applications.

In calendar 2005, demand for storage outpaced the rate of improvement in data density for disk drives in mass production. The rate of data density improvement in calendar 2005 remained about flat with the prior year at approximately 20%. As a result, achieving the higher storage capacities necessary for many disk drive applications required using both sides of a single disk in a disk drive or adding disks. We estimate this caused the number of suspension assemblies required per disk drive to increase from an average of about 2.4 in calendar 2004 to an average of about 2.8 in calendar 2005. In contrast, when the rate of data density improvement outpaces demand for storage, the average number of suspension assemblies required per disk drive decreases. For example, from calendar 1999 to 2002, the average number of suspension assemblies required per disk drive declined from approximately 4.5 to approximately 2.3.

Our suspension assembly shipments in 2005 also benefited from our share positions on customer disk drive programs currently ramping to volume. These included higher capacity disk drives for computing applications such as near-line storage, as well as consumer electronics applications such as personal video recorders.

Shipments of suspension assemblies in the first three quarters of 2005 were 175 million, 181 million and 188 million, respectively. Our shipments increased by about 25 million suspension assemblies in the first quarter of 2005 over the prior quarter, primarily from an increase in demand and an increase in the average number of suspension assemblies per disk drive. During the second and third quarters of 2005, shipments continued to increase due to strong demand for suspension assemblies for higher capacity disk drives used in server and consumer electronics applications, such as

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personal video recorders. During the fourth quarter of 2005, we shipped 175 million suspension assemblies as some customers reduced their demand due to their excess suspension assembly inventory levels.

During the first quarter of 2006, we shipped 207 million suspension assemblies, an increase of 19% over the comparable 2005 period due to overall growth in storage demand, growth in disk drive shipments and our share positions on customer disk drive programs currently ramping to volume. We anticipate shipments to range from 210 million to 225 million units for the second quarter of 2006. We continue to have limited visibility for future demand.

Our selling prices are subject to market pressure from our competitors and pricing pressure from our customers. In 2004, our average selling prices declined as a result of planned price reductions triggered by higher volumes of certain suspension assemblies, as well as changes in the mix of products we sold. In 2005, our average selling prices increased as a result of ramp ups on new customer programs and a mix of products richer in value-added features. We anticipate relatively flat to slightly higher pricing through 2006 based upon a greater mix of products with finer electrical conductors and value-added features, such as dual stage actuation, clad unamount arms, plated grounds, electrostatic protection measures, formed and polished headlifts, a variety of limiter configurations, dampers and laminated loadbeams. 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 yields and efficiencies to reduce our 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. Certain agreements with our customers provide that we maintain minimum finished goods inventory levels. Due to the higher demand we experienced during the first three quarters of 2005, our finished goods inventory levels were low. Although we have been able to maintain our finished goods inventory at an acceptable level since the fourth quarter of 2005 (by building additional suspension assemblies beyond our customers’ immediate demand), we currently forecast our finished goods inventory levels to decrease through the second quarter of 2006. Our 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, 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;

• manufacturing yields or efficiencies;

• utilization of our production capacity;

• production and engineering costs associated with production of new products and features;

• product and feature mix;

• depreciation expense associated with adding production capacity;

• selling prices;

• infrastructure and expedited production and shipping costs; and

• costs of materials.

Gross margins were 28% in both 2004 and 2005. Higher production efficiencies during the first half of 2005 were offset by lower production efficiencies during the second half of the year resulting from a shift in product mix toward advanced suspension assembly products that are typically more costly to produce in the ramp up to higher volume. Our gross margin for the first quarter of 2006 was 21% due to the continuing shift in our product mix toward more advanced products, and an increase in depreciation, material costs and labor expenses. Although we

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continue to have limited visibility for future demand, we expect our gross margin to range from 21% to 23% of net sales for the second quarter of 2006.

Our gross margins are typically better when customer demand is slightly below our full production capacity. Customer demand for particular products changes frequently, and when we run production at full capacity as we did in the first three quarters of 2005, we may not be able to run each production unit long enough on a single product to reach peak production efficiency. In addition, production inefficiencies often occur when we lose the flexibility to use excess capacity for tooling and equipment changes. These inefficiencies at peak production capacity result in somewhat lower gross margins.

Our suspension assembly business is capital intensive. During the first quarter of 2006, our production output reached more than 18 million suspension assesmblies per week, which enabled us to meet substantially all customer demand in the quarter. We continue to add capacity to attain, by the end of 2006, an improved level of flexibility to accommodate increased customer demand and expected shifts in product mix. We currently believe this requires equipment capacity that exceeds suspension assembly demand by 10% to 15%. In addition, we are expanding our manufacturing facility located in Eau Claire, Wisconsin by approximately 70,000 square feet. For 2005, capital expenditures for the year totaled $197,123,000. During the first quarter of 2006, our capital expenditures were $73,397,000. We currently expect our capital expenditures to total approximately $280,000,000 in 2006 primarily for additions to both TSA suspension and TSA+ suspension manufacturing capacity, facilities and tooling, and for the development of new process technology. We expect to fund these expenditures with cash generated from operations, our current cash, cash equivalents, securities available for sale, our credit facility and additional financing.

Our capital expenditures are planned based on anticipated customer demand for our suspension assembly products, market demand for disk drives, process improvements to be incorporated in our manufacturing operations, and the rate at which our customers adopt new generations of higher performance disk drives and smaller read/write heads which may require new or improved process technologies. Anticipated capital expenditures may be adjusted during a fiscal year.

Our operating results and gross margins have been, and will continue to be, impacted by increasing depreciation and lease expenses due to our capital expenditures. Our increased depreciation and lease expenses, however, have been, and will be, offset in part as a result of asset impairment charges in 2000 and 2001 totaling $56,523,000 and $20,830,000, respectively. Commencing in 2003, consumption of suspension assemblies has exceeded the industry estimates for long-term suspension assembly demand used in determining the impairment charges and a majority of the previously impaired assets have been placed back in service. We estimate our annual savings in depreciation and lease costs due to these asset impairment charges were approximately $5,000,000 in 2005 and will total an aggregate of approximately $8,000,000 in additional savings in future years.

In 2005, we significantly increased our research and development spending over the prior year to develop new process technologies for next-generation products and equipment. We spent $36,829,000 on research and development in 2005 compared to $28,258,000 in 2004. During the first quarter of 2006, we spent $12,747,000 on research and development. 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 development efforts typically enable us to shorten development cycles and achieve high volume output per manufacturing unit more quickly than our competitors, and are an important factor in our success. The next generation of smaller disk drives and next-generation read/write head sizes will require finer electrical conductors on the suspension assembly. We are continuing to invest in extending the capabilities of our existing processes and adding associated capital equipment for manufacturing TSA suspension assemblies to meet escalating customer requirements for precision and performance. As of December 25, 2005, we held 158 United States patents and 48 foreign patents, and we had 79 patent applications pending in the United States and 24 patent applications pending in other countries.

We are developing an additive process and adding associated capital equipment for producing future generations of suspension assemblies, known as TSA+ suspension assemblies. Additive processing involves depositing a thin seed layer of copper onto a polyimide surface and then imaging and chemically plating up that seed layer to form the suspension’s electrical conductors. Our ability to develop this process to accommodate further conductor miniaturization, and the rate at which our customers adopt smaller next-generation read/write heads, will largely

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determine the pace of our transition to an additive process and the volume of products we manufacture using the process. We do not expect to begin volume production of TSA+ suspension assemblies during 2006. In the interim, if any of our customers require that the suspension assembly used in their products contain flexures manufactured through additive processing, we will purchase these components. If our development of additive process capabilities is delayed for any reason or if suspension assemblies cannot be produced profitably in the quantities and to the specifications required by our customers, we also may need to purchase some components manufactured through additive processing.

New manufacturing processes for advanced suspension assembly features and suspension assembly types, such as those currently under development, initially have lower manufacturing yields than those for more mature products and processes. Manufacturing yields generally improve as the process and product matures and production volumes increase. Manufacturing yields also vary depending on the complexity and uniqueness of products. Small variations in manufacturing yields can have a significant impact on gross margins.

We are in the process of implementing a new enterprise resource planning (“ERP”) system throughout our company and have experienced some delays, extra costs and inefficiency. We anticipate that, once implemented, this system will allow us to better manage our production capacity and respond more quickly to changes in demand. We expect this implementation to be substantially complete during 2008. Because ERP systems are highly complex, implementation and the transition to the new system has been costly and may initially result in additional unexpected cost or difficulties, including failure or inefficient operation of the new system. A failure in the new system could impair our ability to access certain business and financial information. In addition, we may experience difficulties in the transition to our new ERP system that could affect our internal control systems, processes and procedures. We will continue to assess and mitigate these potential risks; however, should we experience such difficulties as a result of our new ERP system, our business, financial condition and results of operations could be materially adversely affected.

In addition to increases in suspension assembly demand, improvements to our gross margins and operating margins will depend, in part, on the successful management of our corporate infrastructure and our suspension assembly production capacity. Our business is capital intensive and requires a high level of fixed costs. Our margins are sensitive to our level of fixed costs as well as changes in volume, product mix and capacity utilization. As part of our efforts to improve our operating results, we may need to increase or decrease our overall employment level to meet customer requirements. Our overall employment level was 3,850 at the end of 2004 and increased to 5,310 at the end of 2005 and 5,547 at the end of the first quarter of 2006. We increased the number of additional production workers supplied by temporary staffing agencies from 61 at the end of 2004 to 148 at the end of 2005 and 146 at the end of the first quarter of 2006.

RESULTS OF OPERATIONS

Thirteen Weeks Ended December 25, 2005 vs. Thirteen Weeks Ended December 26, 2004.

Net sales for the thirteen weeks ended December 25, 2005 were $184,627,000, an increase of $39,011,000 or 27% from the thirteen weeks ended December 26, 2004. Suspension assembly sales increased $31,861,000 from the thirteen weeks ended December 26, 2004, as a result of a 19% increase in suspension assembly unit shipments and a 3% increase in average selling prices for our suspension assemblies. The increase in unit shipments was due to overall growth in storage demand, growth in disk drive shipments and our share positions on customer disk drive programs currently ramping to volume. Sales of suspension assembly components to other suspension assembly manufacturers were $8,113,000, an increase of $6,467,000 from the thirteen weeks ended December 26, 2004.

Gross profit for the thirteen weeks ended December 25, 2005 was $39,667,000, compared to $40,950,000 for the thirteen weeks ended December 26, 2004. Gross profit as a percent of net sales decreased from 28% to 21%. The decrease in gross profit as a percent of net sales was primarily due to lower production efficiencies resulting from a shift in product mix toward advanced suspension assembly products that are typically more costly to produce in the ramp up to higher volume, as well as increases in depreciation, material costs and labor expenses.

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Research and development expenses for the thirteen weeks ended December 25, 2005 were $12,747,000 compared to $7,616,000 for the thirteen weeks ended December 26, 2004. The increase was attributable to $3,434,000 of higher prototype production and supply costs, primarily related to TSA+ suspension assembly development, and $902,000 of higher labor expenses due to the hiring of additional personnel to support increased customer-specific suspension assembly development efforts and to develop process technologies for next-generation products. As a percent of net sales, research and development expenses increased from 5% in the first quarter of 2005 to 7% in the first quarter of 2006.

Selling, general and administrative expenses for the thirteen weeks ended December 25, 2005 were $22,513,000, an increase of $3,704,000 or 20% from the thirteen weeks ended December 26, 2004. The increase was attributable to $1,378,000 in higher professional services expenses, $1,140,000 in non-cash stock-based compensation expenses and $1,089,000 of higher labor expenses. Overall, selling, general and administrative expenses as a percent of net sales decreased from 13% in the first quarter of 2005 to 12% in the first quarter of 2006.

Income from operations for the thirteen weeks ended December 25, 2005 was $4,407,000, compared to $14,525,000 for the thirteen weeks ended December 26, 2004. The lower operating income was due to higher research and development expenses and increased selling, general and administrative expenses, discussed above. Income from operations for the thirteen weeks ended December 25, 2005 included a $2,835,000 loss from operations for our BioMeasurement Division segment, compared to a $1,656,000 loss from BioMeasurement operations for the thirteen weeks ended December 26, 2004.

Interest income for the thirteen weeks ended December 25, 2005 was $2,065,000, an increase of $843,000 from the thirteen weeks ended December 26, 2004. The increase was primarily due to interest receivable on a tax refund noted below.

Interest expense for the thirteen weeks ended December 25, 2005 was $501,000, a decrease of $153,000 from the thirteen weeks ended December 26, 2004. The reduction was due to an increase in the amount of interest expense capitalized on higher capital expenditures during the first quarter of 2006.

Other income, net of other expenses, for the thirteen weeks ended December 25, 2005 was $1,252,000, an increase of $24,000 from the thirteen weeks ended December 26, 2004. Other income consists primarily of royalty income.

The income tax provisions for the thirteen weeks ended December 25, 2005 and December 26, 2004 were based on estimated effective tax rates for each fiscal year of 27% and 23%, respectively. These rates are below the statutory federal rate primarily due to our estimate of the benefit derived from the EIE provisions related to export of U.S. products. The estimated annual effective tax rate of 27% for the thirteen weeks ended December 25, 2005 was reduced by approximately 11% for the quarter by certain discrete items during the quarter, primarily the settlement of a state income tax audit of fiscal years 1991 through 1993, resulting in a 16% estimated effective tax rate reflected on the December 25, 2005 statement of operations.

Net income for the thirteen weeks ended December 25, 2005 was $6,046,000, compared to net income of $13,444,000 for the thirteen weeks ended December 26, 2004. The lower net income primarily was due to lower production efficiencies resulting from a shift in product mix toward advanced suspension assembly products that are typically more costly to produce in the ramp up to higher volume, higher research and development expenses, and increased selling, general and administrative expenses, discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash and cash equivalents, securities available for sale, cash flow from operations and additional financing capacity. Our cash and cash equivalents decreased from $33,733,000 at September 25, 2005 to $21,816,000 at December 25, 2005. Our securities available for sale decreased from $172,778,000 to $139,061,000 during the same period. Overall, this reflects a $47,584,000 decrease in our cash and

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cash equivalents and securities available for sale, primarily due to capital expenditures of $73,397,000 partially offset by $25,813,000 generated from operations.

On December 21, 2005, we entered into an amended and restated Loan Agreement with LaSalle Bank National Association, increasing our $10,000,000 unsecured credit facility to a $50,000,000 unsecured credit facility, which provides both revolving loans and letters of credit. As of December 25, 2005, we had no outstanding loans under this facility. Letters of credit outstanding under this facility totaled approximately $1,764,000 as of such date, resulting in approximately $48,236,000 of remaining availability under the facility.

Cash used for capital expenditures totaled $73,397,000 for the thirteen weeks ended December 25, 2005, compared to $26,759,000 for the thirteen weeks ended December 26, 2004. We currently anticipate capital expenditures to total approximately $280,000,000 in 2006 primarily for both TSA suspension and TSA+ suspension manufacturing capacity, facilities and tooling, and for the development of new process technology. Financing of these capital expenditures will be principally from internally generated funds, cash and cash equivalents, securities available for sale, our credit facility and new financing.

Our capital expenditures are planned based on anticipated customer demand for our suspension assembly products, market demand for disk drives, process improvements to be incorporated in our manufacturing operations, and the rate at which our customers adopt new generations of higher performance disk drives and smaller read/write heads which may require new or improved process technologies. Anticipated capital expenditures may be adjusted during a fiscal year.

On July 15, 2005, our Board of Directors approved an expansion of our manufacturing facility located in Eau Claire, Wisconsin. We plan to add up to 70,000 square feet to our manufacturing facility and expect the expansion to cost between $25,000,000 and $30,000,000. We currently expect to complete this expansion in July 2006.

During the first quarter of 2006, we purchased the assembly manufacturing building (which we previously leased) at our manufacturing site in Eau Claire, Wisconsin, together with related equipment, for $12,924,000, including $5,069,000 paid in cash and the remainder by our assumption of a mortgage with a 7.15% interest rate that matures in April 2011.

In July 2004, our Board of Directors authorized the repurchase of up to two million shares of our common stock from time to time in the open market or through privately negotiated transactions, subject to market conditions, share price and other factors. In 2004, we repurchased a total of 1,722,500 shares for a total cost of $39,252,000. The average price paid per share was $22.75. In 2005, we repurchased a total of 206,000 shares for a total cost of $5,747,000. The average price paid per share was $27.86. We did not repurchase any shares during the first quarter of 2006. We may still repurchase up to 71,500 shares under this repurchase program.

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 December 25, 2005, 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, our credit facility and additional financing will be sufficient to meet our operating expenses, debt service requirements and capital expenditures through 2006. Our ability to obtain additional financing will depend upon a number of factors, including our future performance and financial results and general economic and capital market conditions. We cannot be sure that we will be able to raise additional capital on reasonable terms or at all, if needed.

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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 (“SAB”) No. 101, “Revenue Recognition,” as amended and codified by SAB No. 103, “Update and Codification of Staff Accounting Bulletins” (Codification of Staff Accounting Bulletins, Topic 13, “Revenue Recognition”), as amended by SAB No. 104, “Revision of Topic 13” (Codification of Staff Accounting Bulletins, Topic 13: “Revenue Recognition,” Section A–“Selected Revenue Recognition Issues”). 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 product has been delivered 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 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

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levels and other information. We write down excess and obsolete inventory to the lower of cost or market based on the analysis.

Long-Lived Assets

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

Income Taxes

We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary 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 will continue to assess the likelihood that the deferred tax assets will be realizable and the valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements are set forth in Note 2 to our unaudited condensed consolidated financial statements and are incorporated herein by reference.

MARKET TRENDS

We expect that the expanding use of enterprise computing and storage, desktop and mobile computers, increasingly complex software and the growth of new applications for disk storage, such as personal video recorders, audio

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players and digital cameras, together with emerging opportunities in cell phones, guidance systems for automobiles and other consumer electronics applications, will increase disk drive demand and, therefore, suspension assembly demand in the future. We also believe demand for disk drives will continue to be subject, as it has in the past, to rapid or unforeseen changes resulting from, among other things, changes in disk drive inventory levels, technological advances, responses to competitive price changes and unpredicted high or low market acceptance of new drive models.

Increased demand for higher capacity drives, coupled with a slower rate of improvement in data density, tends to result in more disks, heads and suspension assemblies per disk drive. Industry analysts continue to expect disk drive shipments for calendar 2006 to grow about 14% to 427 million units compared with calendar 2005. In addition, we expect the average number of suspension assemblies used per disk drive to remain about flat with calendar 2005 at approximately 2.8 per drive in calendar 2006 and, as a result, expect industry-wide suspension assembly demand in 2006 to track the anticipated growth in disk drive shipments.

As in past years, disk drives continue to be the storage device of choice for applications requiring shorter 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 is leading to suspension assemblies with finer electrical conductors and further adoption of value-added features for suspension assemblies, such as clad unamount arms, plated grounds, electrostatic protection measures, formed and polished headlifts, a variety of limiter configurations, dampers and laminated loadbeams. 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 miniaturization of disk drives, the development of smaller read/write heads, continuing improvement in data density and the increasing use of disk drives in consumer electronics applications will require even finer electrical conductors on the suspension assembly. Newer disk drives also may require additional electrical conductors. Our current TSA suspensions are produced using a subtractive process, and we are investing in extending our current process capabilities and in developing a new additive process and equipment to meet emerging industry specifications. While we do not expect to generate revenue from suspension assemblies produced utilizing an additive process in 2006, we will invest significantly in developing this capability and related capital equipment.

The introduction of new types or sizes of read/write heads and disk drives tends to initially decrease our 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 resulted in increased shipments of our suspension assemblies in 2003 and the first half of 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 increase our development spending and reduce our manufacturing yields and efficiencies. These changes will continue to affect us.

OTHER MATTERS

The American Jobs Creation Act of 2004 (“AJCA”) was signed into law on October 22, 2004. The AJCA contained two provisions that affect us. The first provision is the repeal of the EIE, which will be phased out on a calendar year basis with the benefit ending December 31, 2006. Due to the new law, we expect to have a decreased benefit from EIE.

The second provision of the AJCA that affects us is the introduction of a deduction for a percentage of income from domestic production activities. The deduction is limited in any fiscal year in which a taxpayer uses NOLs. For our fiscal year ending September 24, 2006, we do not expect any benefit from this deduction, as we will use NOLs.

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The deduction is phased in on a fiscal year basis and will be fully phased in for our fiscal year ending September 25, 2011.

CONTRACTUAL OBLIGATIONS

The following table presents our contractual obligations at December 25, 2005 (in thousands):

	Payments due by period
			Less Than		One to		Three to		More Than
	Total		One Year		Three Years		Five Years		Five Years
Long-term debt	$	157,426	$	1,198	$	2,667	$	153,076	$	485
Interest expense		16,291		3,867		7,462		4,955		7
Operating leases		27,456		11,230		13,882		2,344		—
Total	$	201,173	$	16,295	$	24,011	$	160,375	$	492

At December 25, 2005, we were not party to any significant purchase obligations for goods or services.

OFF-BALANCE SHEET ARRANGEMENTS

Our unsecured credit facility with LaSalle Bank National Association provides for letters of credit. Any letters of credit outstanding under this facility will not be included on our balance sheet unless and until the beneficiary of the letter of credit draws upon it. Letters of credit outstanding under this facility totaled approximately $1,764,000 as of December 25, 2005, none of which have been drawn upon.

We currently have no unconsolidated special purpose entity arrangements.

FORWARD-LOOKING STATEMENTS

The statements above under the headings “General” and “Market Trends” about demand for and shipments of disk drives and suspension assemblies, the number of suspension assemblies used per disk drive, research and development spending and capital expenditures and disk drive and suspension assembly technology and development, the statements under the heading “General” about our average selling prices, inventory levels, gross margins, expected savings in depreciation and lease costs, our manufacturing capacity and funding of capital expenditures, facilities expansion, implementation of our new ERP system and our operating results, the statements above under the heading “Other Matters” about expected tax benefits, the statements above under the heading “Liquidity and Capital Resources” about capital expenditures, facilities expansion, capital resources and share repurchases, the statements below under the heading “Legal Proceedings” about securities and derivative litigation and intellectual property matters and the statements below under the heading “Risk Factors” about demand for and shipments of disk drives, suspension assemblies and suspension components, development of and investment in process capability and disk drive and suspension assembly technology and development, the development of new process capabilities and purchases of components, our future operating results, capital expenditures, including research and development spending, capital resources and the impact of changes in tax laws, 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, slower or faster customer acceptance and adoption of new product features, process capabilities, fluctuating order rates, faster or slower improvements in disk drive data densities and other technological advances which affect suspension assembly and component demand, changes in market consumption of disk drives or suspension assemblies, difficulties in producing our suspensions or suspension features at levels of precision, quality, variety, value and cost our customers require, difficulties in managing capacity, changes in required investment to increase manufacturing capacity, changes in product mix, changes in manufacturing efficiencies, changes in tax laws 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our credit facility with LaSalle Bank National Association carries interest rate risk, in connection with certain borrowings for which 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 credit facility, interest expense would increase or decrease accordingly. At December 25, 2005, 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 December 25, 2005, we had fixed rate debt of $157,425,000.

We have not entered into derivative or other financial instruments for trading or speculative purposes or hedging transactions, other than four currency options, the largest of which was $450,000, to minimize our exposure to potential currency fluctuations associated with the underlying operating expenses of some of our offices overseas. All of our sales transactions in our Disk Drive Components Division 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.

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ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our 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.

Changes in Internal Control Over Financial Reporting.

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.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SECURITIES LITIGATION

As reported in our Annual Report on Form 10-K for the fiscal year ended September 25, 2005, our company and three of our present executive officers, two of whom are also directors, were named as defendants in two virtually identical actions,Robert J. Averdick v. Hutchinson Technology, Inc., Wayne M. Fortun, John A. Ingleman, and Jeffrey W. GreenandSam Somyoy Poovakaw v. Hutchinson Technology, Inc., Wayne M. Fortun, John A. Ingleman, and Jeffrey W. Green.Our company and six of our present executive officers, two of whom are directors, also were named in a third virtually identical action,Michael Huefner v. Hutchinson Technology, Jeffrey W. Green, Wayne M. Fortun, John A. Ingleman, Richard J. Penn, R. Scott Schaefer and Beatrice A. Graczyk.Each action was filed between September 9, 2005 and October 11, 2005 in the U.S. District Court for the District of Minnesota, and each action is a purported class action brought on behalf of all persons (except defendants) who purchased stock in the open market between October 4, 2004 and August 29, 2005. The complaints allege that the defendants made false and misleading public statements about our company, and our business and prospects, in filings with the SEC and press releases, and that the market price of our stock was artificially inflated as a result. The complaints allege claims under Sections 10(b) and 20(a) of the Exchange Act. The plaintiffs in all three cases seek compensatory damages on behalf of the alleged class, an award of attorneys’ fees and costs of litigation and unspecified equitable/injunctive relief. On November 8, 2005, motions were filed by two competing sets of plaintiffs and their respective counsel seeking to consolidate all of the actions and to appoint a lead plaintiff and lead counsel, and a hearing on the motions was held on December 1, 2005. We expect that, as a result of the motions, the court will consolidate the actions, appoint a lead plaintiff and one or more lead counsel and set a deadline for the lead plaintiff to file and serve a consolidated amended complaint.

We believe that we, and the other defendants, have meritorious defenses to the claims made in the complaints and we intend to contest the lawsuits vigorously. We are not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive. The total costs may not be reasonably estimated at this time. Securities class action litigation can result in substantial costs and divert our management’s attention and resources, which may have a material adverse effect on our business and results of operations, including our cash flows.

DERIVATIVE LITIGATION

Our company, as a nominal defendant, all of our present directors and one of our officers were named as defendants in a purported derivative action,Saul Kopelowitz v. Wayne Fortun, et al., that was filed on December 14, 2005 in the U.S. District Court for the District of Minnesota. In the complaint, the shareholder-plaintiff alleges claims of breach of fiduciary duty, waste of corporate assets, unjust enrichment and misappropriation of information against the individual defendants arising out of the same events that are alleged in the federal securities actions that are described above. Essentially, the complaint asserts that breaches of duty by the individual defendants resulted in our company making false and misleading public statements, which in turn led to our company getting sued for federal securities fraud, which in turn has caused our company to suffer damages. The complaint seeks compensatory damages from the individual defendants for the loss allegedly sustained by our company, restitution and disgorgement of all profits, benefits and other compensation obtained by the individual defendants and an award of attorneys’ fees and costs of litigation. The defendants have not yet responded to the complaint. We are not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive.

OTHER LITIGATION

We and certain users of our products have from time to time received, and may in the future 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 products as a component. In addition, certain of our customers have been sued on patents having claims closely related to products sold by us. 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,

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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 our management, the outcome of such claims will not materially affect our current or future financial position or results of operations.

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ITEM 1A. RISK FACTORS

RISK FACTORS

Almost all of our sales depend on the disk drive industry, which is cyclical, subject to ongoing technological innovation and subject to intense price competition.

Sales of suspension assemblies and suspension assembly components accounted for 99% of our net sales in 2005, 2004 and 2003. The disk drive industry is intensely competitive and technology changes rapidly, such as during past industry transitions to smaller disks or higher density read/write heads. 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, as in our fourth quarter of 2005, and subsequent contraction. These cycles may affect suppliers to this industry because disk drive manufacturers tend to order more disk drive components than they may need during growth periods, and sharply reduce orders for these components during periods of contraction.

Industry transitions in head technology and data density improvements impact demand for suspension assemblies. During past industry transitions 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, as in 2003, in order to achieve desired disk drive shipment levels. When our customers improve their production yields, as in 2004, overall demand for our products may be negatively impacted. Our results of operations could be materially adversely affected if a reduction in the industry’s component demand continues long-term or a future significant slowdown in the industry occurs.

During periods of slowing technological advances, disk drive manufacturers may compete more aggressively on price and exert downward price pressure on component suppliers. In addition, in order for drives to be more widely used in consumer electronics applications, drive manufacturers may seek to reduce the cost of disk drives, which also may result in downward price pressure for component suppliers, including suppliers of suspension assemblies. If there is continued downward pressure on prices of disk drive components, our operating results could be negatively affected.

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 have 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.

To meet industry requirements, we must extend our existing process capabilities and develop new products and features, which will increase our operating costs.

Our continued success depends on our ability to develop and rapidly bring to volume production new products and product features that meet increasingly tighter performance specifications. A number of risks are inherent in this process. Increasingly tighter performance specifications, as well as transitions to new product platforms, initially can make suspension assemblies more difficult to manufacture and 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. For example, in the second half of 2005,

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a shift in product mix toward advanced suspension assembly products that are typically more costly to produce in the ramp up to higher volume resulted in lower production efficiencies and lower gross profit as compared to the first half of 2005. We also are developing an additive process and adding associated capital equipment for producing future generations of suspension assemblies. If processes change, we may need to replace, modify or design, build and install equipment. These changes may require additional capital expenditures and increased development and support expenses, which may adversely impact our operating results.

Disk drive makers continue to expand their product lines to include drives offering performance characteristics optimized for specific applications, including a variety of consumer electronics applications. This is resulting in a proliferation of individual disk drive programs, each of which may require a different suspension assembly to meet a customer’s specific performance criteria. We expect to increase our research and development expenses in 2006 to approximately $50,000,000 to $60,000,000 from $36,829,000 in 2005 primarily due to investments in the development of new process capabilities and new products and product features. We expect these expenses to increase for the following new products:

• suspension assemblies with tighter performance specifications than our customers currently require;

• suspension assemblies that incorporate new materials, such as thinner laminates which are more difficult to handle in the manufacturing process;

• suspension assemblies that require additional or smaller electrical conductors;

• suspension assemblies for use with next-generation read/write heads; and

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

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.

Our investment in developing new process capabilities to produce suspension assemblies will result in significant increases in our operating expenses and may not result in a product that is acceptable to our customers.

Rapid technological change in the disk drive industry, as well as the expanding use of disk drives in a growing range of consumer electronics applications, has led to numerous suspension assembly design changes and tighter performance specifications. To maintain our position in the disk drive industry, we need to develop new process capabilities that we believe will be needed to achieve the ever increasing performance requirements of our customers. We are investing a substantial amount of engineering, financial, management and manufacturing resources to develop process capabilities, including additive processing of suspension assemblies, to meet these emerging specifications. Additive processing involves depositing a thin seed layer of copper onto a polyimide surface, then imaging and chemically plating up that seed layer in the shape of the desired circuitry to form the suspension’s electrical conductors. We do not expect to begin volume production of TSA+ suspensions using an additive process during 2006, and we may not be able to achieve volume production on a profitable basis, if at all.

Our development of additive process capabilities may require more capital investment than we currently anticipate, which will adversely impact our operating results. If our development of additive process capabilities is delayed for any reason, or if suspension assemblies cannot be produced profitably in the quantities or to the specifications required by customers, we may need to purchase components manufactured through additive processing and our results of operations could be materially adversely affected. We may not be able to purchase such components on terms acceptable to us or at all. The introduction of new process capabilities for our products increases the likelihood of unexpected quality concerns, which may negatively impact our ability to bring products to market on time and at acceptable costs. Further, most of our current competitors use components produced through additive

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processing for volume production of suspension assemblies, which may give them an advantage in developing and qualifying new products with our customers.

We may not be able to manufacture our products efficiently due to changes in product mix or technology, or other unforeseen events.

We manufacture a wide variety of suspension assemblies with different selling prices and manufacturing costs. Disk drive makers continue to expand their product lines to include drives offering performance characteristics optimized for specific applications, including consumer electronics applications, which has resulted in a proliferation of individual disk drive programs. Our product mix varies weekly as market demand changes. In the third and fourth quarters of 2005, our mix changed to include a higher proportion of products that are more difficult to produce. 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.

Manufacturing yields, efficiencies and processing operations vary from product to product. Newer products often require new or additional manufacturing process steps and typically have lower initial manufacturing yields and efficiencies as we ramp up manufacturing. As a result, new products are frequently more expensive to produce and may not be profitable. We will use new manufacturing processes to produce additive suspensions, which may cause us to experience inefficiencies and lower yields. We have experienced sales returns in the past and as we ramp up manufacturing of new products, 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.

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

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

We may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our operating results.

We have at times in the past increased our production capacity and the overhead that supports production based on anticipated market demand, and in 2004, 2005 and in the first quarter of 2006 we added production capacity based on expected future demand. Anticipated market demand, however, has not always developed as expected or remained at a consistent level. As a result, we have underutilized our capacity in the past, and in 2000 and 2001, had asset impairment charges of $56,523,000 and $20,830,000, respectively, and we may underutilize our production capacity in the future. This underutilization decreases our profitability.

     The following factors complicate accurate capacity planning for market demand:

• changes in the mix of specific products our customers buy and the features they require;

• the ability to add and train staff to operate our production equipment in advance of demand;

• the pace of technological change;

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• 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 and efficiently utilize our production capacity, or our failure to put in place the technologies and capacity necessary to meet market demand, could adversely affect our business, financial condition and results of operations.

We may experience difficulties in the implementation of and transition to our new ERP system.

We are in the process of implementing a new ERP system throughout our company and have experienced some delays, extra costs and inefficiency. Because ERP systems are highly complex, implementation and the transition to the new system has been costly and may initially result in additional unexpected cost or difficulties, including failure or inefficient operation of the new system. A failure in the new system could impair our ability to access certain business and financial information. In addition, we may experience difficulties in the transition to our new ERP system that could affect our internal control systems, processes and procedures. Should we experience such difficulties as a result of our new ERP system, our business, financial condition and results of operations could be materially adversely affected.

Our sales are concentrated in a small customer base.

Although we supply nearly all domestic and foreign-based manufacturers of disk drives and manufacturers of disk drive components, sales to our five largest customers constituted 87% of net sales for the first quarter of 2006, 89% of net sales for 2005, 85% of net sales for 2004 and 81% of net sales for 2003. Over the years, the disk drive industry has experienced numerous consolidations. In December 2005, our customer Seagate Technology announced plans to acquire our customer Maxtor Corp. These consolidations, together with companies exiting the disk drive industry, result in fewer, but larger, customers for our products. The loss of market share by one of our major customers or 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, 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.

Our business is capital intensive and 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 growth objectives. We would likely use these funds for capital expenditures, research and development, debt service and working capital. Our business is highly capital intensive. Our total capital expenditures were $73,397,000 for the first quarter of 2006, and $197,123,000 in 2005, $93,085,000 in 2004 and $52,023,000 in 2003. We currently anticipate spending approximately $280,000,000 on capital expenditures during 2006. In addition, research and development expenses were $36,829,000 in 2005, and we expect that they will total approximately $50,000,000 to $60,000,000 in 2006. The 2005 increases in capital expenditures and research and development expenses were primarily related to expansions of trace and photoetch manufacturing and investments in processes, tooling, equipment and facilities along with expenses related to customer-specific development efforts and process improvements.

Our capital expenditures are planned based on anticipated customer demand for our suspension assembly products, market demand for disk drives, process improvements to be incorporated in our manufacturing operations, and the rate at which our customers adopt new generations of higher performance disk drives and smaller read/write heads which may require new or improved process technologies. Anticipated capital expenditures may be adjusted during a fiscal year.

In December 2005, we amended and restated our loan agreement with LaSalle Bank National Association to increase our $10,000,000 unsecured credit facility to a $50,000,000 unsecured credit facility. We may pursue additional debt or equity financing or other forms of financing to supplement our current capital resources if needed

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in 2006 and beyond. 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 adequate 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.

Our ability to execute our long-term strategy depends 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 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.

Demand for our suspension assemblies will decline if we are unable to qualify our products in disk drive programs.

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.

If the rate of data density improves significantly, demand for suspension assemblies may decrease.

Disk drive manufacturers have been able to steadily increase data density, 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 calendar 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 calendar 1999 to approximately 2.5 in calendar 2002. This contributed to a decrease in our total suspension assembly shipments from 583 million in 1999 to 398 million in 2002. In calendar 2003, we estimate that the average number of suspension assemblies required per disk drive reached a low point of approximately 2.3, and in calendar 2004, we estimate the number increased only slightly to 2.4. In calendar 2005, we estimate it increased to 2.8, which benefited demand. 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.

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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 our manufacturing yields and related scrap recovery;

• changes in our production efficiency;

• changes in utilization of our production capacity;

• increased costs when we start producing new products and features, and ramping high-volume production;

• changes in the specific products our customers buy and features they require;

• depreciation expense associated with adding production capacity;

• changes in our selling prices;

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

• changes in our infrastructure costs and expected production and shipping costs, and how we control them;

• 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 or our customers’ plants for any reason; and

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

Our overall operating results in 2005 were favorably impacted by increased demand for data storage in traditional computing applications as well as in consumer electronics applications, a flat rate of improvement in data density requiring additional disks to achieve the higher storage capacity required for many disk drive applications and our share positions on the types of disk drives in particularly high demand. During the fourth quarter of 2005, however, our operating results were impacted by lighter demand, increased depreciation costs, a shift in product mix toward advanced suspension assembly products that are typically more costly to produce in the ramp-up to higher volume (partially offset by a related increase in our scrap recovery) and increased labor expenses. 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. Certain agreements with our customers provide that we maintain minimum finished goods inventory levels. Due to the higher demand we experienced during the first three quarters of 2005, our finished goods inventory levels were low. Although we have been able to maintain our finished goods inventory at an acceptable level since the fourth quarter of 2005 (by building additional suspension assemblies beyond our customers’ immediate demand), we currently forecast that our finished goods inventory will decrease through the second quarter of 2006. Our 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, 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. For example, in 2004, our average selling prices declined as a result of planned price reductions triggered by higher volumes of certain suspension assemblies, as well as a change in the mix of products we sold. 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 yields and efficiencies to reduce our 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.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our financial condition and results of operation may be negatively impacted. Furthermore, many of our products are shipped overseas, specifically to

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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 we are unable to mitigate the unfavorable tax impact of new tax laws affecting products shipped overseas, our effective tax rate could increase significantly and our business, financial condition and results of operations could be materially adversely affected.

If our customers improve their manufacturing yields, demand for our suspension assemblies may decrease.

We believe that improvements in our sales and unit volumes in 2003 and the first half of 2004 were due in part to manufacturing difficulties experienced by our customers as they transitioned to higher density read/write heads. These customers experienced higher levels of defective read/write heads, which they were unable to detect until after they had attached the read/write heads to our suspension assemblies. Our customers therefore required more suspension assemblies in those years. We believe our customers have improved their manufacturing yields, which resulted in dampening demand growth in 2004. Some of our customers may develop processes by which they either separate our suspension assemblies from a defective read/write head in order to re-use the suspension assembly or test the read/write head to ensure it is not defective before they attach the suspension assembly. If our customers’ production yields continue to improve in the future, or if they succeed in their process development efforts and can separate and re-use suspension assemblies or test the read/write head before attaching suspension assemblies, overall suspension assembly shipments will decline and our operating results could be negatively affected.

We may not be able to adequately protect our intellectual property.

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

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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.

We may have difficulty obtaining an adequate supply of raw materials that meet our strict specifications at reasonable prices.

Certain types of stainless steel, as well as covercoat and liquid photoresist (liquid compounds used in our manufacturing process), are currently single-sourced because the raw materials provided by these sources meet our strict specifications. We have chosen to obtain certain other materials, including a laminate constructed from raw material that contains stainless steel, polyimide and copper, from a limited set of sources because of quality and pricing considerations. If we were not able to obtain an adequate supply of these materials from our current suppliers, we could experience production delays and quality problems. The price we pay for stainless steel and laminate periodically is reset and can fluctuate with changes in the value of the Japanese yen, which will impact our costs. 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 process capabilities and storage 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, produced using an additive process, and flexible circuitry. We are currently developing process capabilities to produce suspension assemblies using an additive process. If we are unable to develop additive process capabilities or qualify this new process capability with our customers in time to meet market requirements or if our customers accept other suspension technologies that compete with TSA suspensions, our business, financial condition and results of operations could be materially 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 data storage in the computing industry has been disk drives for many years. The disk drive could be replaced by an alternate data storage technology in the future. Emerging storage applications, particularly in the consumer electronics sector, may use flash memory instead of disk drives, which would limit growth opportunities for disk drive-based data storage. 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 or if an alternative data storage medium becomes dominant in consumer electronics applications.

Taxation authorities could challenge certain tax positions we have taken.

Although we believe that all tax positions we take in our tax returns are reasonable and appropriate, a taxation authority may challenge those positions in the future. A challenge to certain positions we have taken, if successful

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despite our efforts to defend our original position, could result in our being required to pay additional taxes (including penalties and interest), which could adversely affect our financial condition and results of operations.

We expect that our BioMeasurement Division will continue to experience operating losses.

Our BioMeasurement Division has developed a medical device called the InSpectra system that uses an optical technology to measure local, rather than systemic, oxygen saturation of hemoglobin in tissue. During 2002, we sold our first units, and subsequently we have sold this device to researchers and early adopters in key trauma centers. During 2005, 15 independent clinical studies using the InSpectra system were completed in the United States and Europe. Our current research efforts in the BioMeasurement Division focus on clinical studies. Operating losses for our BioMeasurement Division were $2,835,000 in the first quarter of 2006 and $8,688,000, $6,951,000 and $5,979,000 for 2005, 2004 and 2003, respectively. We do not expect to generate significant revenue from this device during 2006. We expect operating losses in the BioMeasurement Division to continue for the foreseeable future, which will negatively impact our financial condition and results of operations.

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 and repaying our existing debt may constrain our future operations.

Our ratio of total debt to total capitalization at December 25, 2005 and September 25, 2005 was 21.9% and 21.4%, respectively. 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, research and development 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 financing agreements that contain restrictive financial covenants. These covenants require us, among other things, to maintain certain minimum financial ratios, including fixed charge coverage, interest coverage, tangible net worth and leverage ratios, and also impose certain limitations on additional indebtedness, leases, guarantees, share repurchases 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 these 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.

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We have been named as a defendant in securities class action litigation which may result in substantial costs and divert management’s attention and resources.

As described in “Legal Proceedings” in our most recent Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q, a number of shareholder class action suits have been filed naming us and certain of our officers and directors as co-defendants. A related derivative action has been filed naming us, certain of our officers and our directors as co-defendants. As is often the case in securities class action litigation, the SEC has requested information from us with respect to some of the allegations in the litigation. We are not able to predict the ultimate outcome of this litigation. It is possible that this litigation could be resolved adversely to us, could result in substantial costs and could divert management’s attention and resources, which could harm our business.

Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. While we maintain director and officer insurance, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured. We may in the future be the target of additional litigation and this litigation may result in substantial costs and divert management’s attention and resources.

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ITEM 6. EXHIBITS

(A)EXHIBITS:

Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act, as amended, 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 3.2 to HTI’s Quarterly Report on Form 10-Q for the quarter ended 6/27/04).
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).
10	Amended and Restated Loan Agreement dated as of 12/21/05 between HTI and LaSalle Bank National Association (incorporated by reference to Exhibit 10 to HTI’s Current Report on Form 8-K filed 12/28/05).
31.1	Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.
32	Section 1350 Certifications.

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SIGNATURES

Pursuant to the requirements 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.

		HUTCHINSON TECHNOLOGY INCORPORATED
Date: January 18, 2006	By	/s/Wayne M. Fortun
		Wayne M. Fortun
		President and Chief Executive Officer
Date: January 18, 2006	By	/s/John A. Ingleman
		John A. Ingleman
		Vice President and Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit
No.		Page
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).	Incorporated by Reference
3.2	Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2 to HTI’s Quarterly Report on Form 10-Q for the quarter ended 6/27/04).	Incorporated by Reference
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).	Incorporated by Reference
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).	Incorporated by Reference
10	Amended and Restated Loan Agreement dated as of 12/21/05 between HTI and LaSalle Bank National Association (incorporated by reference to Exhibit 10 to HTI’s Current Report on Form 8-K filed 12/28/05).	Incorporated by Reference
31.1	Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.	Filed Electronically
31.2	Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.	Filed Electronically
32	Section 1350 Certifications.	Filed Electronically

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