MidgardXXI 10Q 2001 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2001

[ ]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: 0-18033

EXABYTE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware	84-0988566
(State of Incorporation)	(I.R.S. Employer Identification No.)

1685 38th Street
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 442-4333
(Registrant's Telephone Number, including area code)

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 ninety days. [X] Yes [ ] No

As of May 15, 2001, there were 23,232,465 shares outstanding of the Registrant's Common Stock (par value $0.001 per share).

EXABYTE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--March 31, 2001 and December 30, 2000 (Unaudited)	3
Consolidated Statements of Operations--Three Months Ended March 31, 2001 and April 1, 2000 (Unaudited)	4
Consolidated Statements of Cash Flows--Three Months Ended March 31, 2001 and April 1, 2000 (Unaudited)	5-6
Notes to Consolidated Financial Statements (Unaudited)	7-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	12-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	20
PART II. OTHER INFORMATION
Item 5. Other Information	21-32
Item 6. Exhibits and Reports on Form 8-K	33

PART I

Item 1. Financial Statements

Exabyte Corporation and Subsidiaries Consolidated Balance Sheets

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

	March 31, 2001	December 30, 2000
ASSETS
Current assets:
Cash and cash equivalents	$ 2,753	$3,159
Short-term investments	90	90
Accounts receivable, less allowance for doubtful accounts and reserves for customer returns and credits of $5,459 and $7,413, respectively	29,153	37,412
Inventories, net	39,588	40,143
Other current assets	2,208	2,807
Total current assets	73,792	83,611
Property and equipment, net	17,154	18,754
Other long-term assets	998	1,427
	$91,944	$103,792
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including book overdrafts of $1,357 and $2,343, respectively	$ 32,138	$ 26,944
Accrued liabilities	11,390	14,557
Accrued income taxes	605	633
Line of credit	14,544	12,307
Current portion of long-term obligations	2,142	2,147
Total current liabilities	60,819	56,588
Long-term liabilities:
Warranties	8,242	6,679
Other long-term obligations	1,375	1,467
Stockholders' equity:
Preferred stock, $.001 par value; 14,000 shares authorized; no shares issued and outstanding	- --	- --
Common stock, $.001 par value; 50,000 shares authorized; 23,234 shares issued	23	23
Capital in excess of par value	69,154	69,154
Treasury stock, at cost, 455 shares	(2,742)	(2,742)
Accumulated Defecit	(44,927)	(27,377)
Total stockholders' equity	21,508	39,058
	$91,944	$103,792

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

Exabyte Corporation and Subsidiaries Consolidated Statements of Operations

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

	Three Months Ended
	March 31, 2001	April 1, 2000
Net sales	$49,052	$49,576
Cost of goods sold	45,558	39,363

Gross profit	3,494	10,213

Operating expenses:
Selling, general and administrative	11,333	13,436
Research and development	8,901	10,360

Loss from operations	(16,740)	(13,583)
Other income (expense), net	(460)	45

Loss before income taxes	(17,200)	(13,538)
Provision for income taxes	(7)	(42)
Equity interest in net loss of investee	(343)	--

Net loss	$(17,550)	$(13,580)

Basic and diluted net loss per share	$(0.77)	$(0.60)

Common shares used in the calculation of basic and diluted net loss per share	22,779	22,454

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

Exabyte Corporation and Subsidiaries Consolidated Statements of Cash Flows

(Unaudited)
(In thousands)

	Three Months Ended
	March 31, 2001	April 1, 2000
Cash flows from operating activities:
Cash received from customers	$57,290	$62,115
Cash paid to suppliers and employees	(59,433)	(68,971)
Interest received	14	474
Interest paid	(501)	(87)
Income taxes paid	(33)	(64)
Income tax refund received	--	149
Net cash used by operating activities	(2,663)	(6,384)

Cash flows from investing activities:
Purchase of short-term investments	--	(2,050)
Proceeds from the sale of short-term investments	--	6,518
Capital expenditures	(910)	(2,939)
Proceeds from the sale of fixed assets	8	3
Net cash (used) provided by investing activities	(902)	1,532

Cash flows from financing activities:
Proceeds from issuance of common stock	--	354
Cash overdraft	1,357	--
Borrowings under line of credit	55,734	--
Payments on line of credit	(53,497)	--
Principal payments on long-term obligations	(435)	(454)
Net cash provided (used) by financing activities	3,159	(100)

Net decrease in cash and cash equivalents	(406)	(4,952)
Cash and cash equivalents at beginning of period	3,159	25,610

Cash and cash equivalents at end of period	$ 2,753	$20,658

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

Exabyte Corporation and Subsidiaries Consolidated Statements of Cash Flows

(Unaudited)
(In thousands)

	Three Months Ended
	March 31, 2000	April 1, 2000
Reconciliation of net loss to net cash used by operating activities:
Net loss	$(17,550)	$(13,580)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation, amortization and other	2,502	3,794
Provision for losses and reserves on accounts receivable	(151)	2,193
Equity in loss of investee	343	--

Change in assets and liabilities:
Accounts receivable	8,410	10,275
Inventories, net	555	(5,563)
Other current assets	599	159
Other assets	86	229
Accounts payable	3,837	(4,349)
Accrued liabilities	(3,167)	(867)
Accrued income taxes	(28)	88
Other long-term obligations	1,901	1,237

Net cash used by operating activities	$(2,663)	$(6,384)

Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations	$ --	$473

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

Exabyte Corporation and Subsidiaries Notes to Consolidated Financial Statements

(Unaudited)

Note 1--ACCOUNTING PRINCIPLES

The consolidated balance sheet as of March 31, 2001, the consolidated statements of operations for the three months ended March 31, 2001 and April 1, 2000, as well as the consolidated statements of cash flows for the three months ended March 31, 2001 and April 1, 2001, have been prepared by Exabyte Corporation (the "Company") without an audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation thereof, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 30, 2000 annual report to stockholders filed with the Commission as Part II to the Company's Annual Report on Form 10-K. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year.

We have incurred operating losses over the last four years. Additionally, as of March 31, 2001, we had only $5,329,000 of remaining borrowing capacity under our line of credit. As a result, we are currently reassessing our business and investigating various strategic alternatives that could increase our liquidity. These alternatives may include one or more of the following:

- sale of all or part of our operating and off-balance sheet assets;

- restructuring of current operations;

- additional equity infusions; or

- strategic alliance, acquisition or merger.

We have engaged an investment banker to assist in this process and will continue to explore these and other options that would provide additional capital for our objectives and operating needs. Should we be unsuccessful in achieving one or more of these actions, it is possible that we may be unable to achieve our currently contemplated business objectives or establish enough funds to support our operations, which could affect our ability to continue as a going concern. Also, as a result of our current liquidity constraints, the report of our independent accountants on our 2000 consolidated financial statements contains an explanatory paragraph related to this matter.

Note 2--INVENTORIES

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

(In thousands)

	March 31, 2001	December 30, 2000
Raw materials and component parts	$25,267	$23,361
Work-in-process	1,425	1,817
Finished goods	12,896	14,965
	$39,588	$40,143

Note 3--ACCRUED LIABILITIES

Accrued liabilities consist of the following:

(In thousands)

	March 31, 2001	December 30, 2000
Wages and employee benefits	$6,459	$7,610
Warranty and other related costs	3,440	2,676
Other	1,491	4,271
	$11,390	$14,557

Note 4--BASIC AND DILUTED EARNINGS PER SHARE

The calculation of basic and diluted earnings per share ("EPS") is as follows:

(In thousands, except per share data)

	Three Months Ended
	March 31, 2001	April 1, 2000
Basic and diluted EPS computation:
Net loss	$(17,550)	$(13,580)

Common shares outstanding	22,779	22,454

Basic and diluted EPS	$ (0.77)	$ (0.60)

Options to purchase 7,097,000 and 2,032,000 shares of common stock were excluded from dilutive stock option calculations for the first quarter of 2001 and 2000, respectively, because their exercise prices were greater than the average fair market value of the Company's stock for the period and as such, they would be anti-dilutive. Additionally, options to purchase 86,000 and 3,339,000 shares of common stock were excluded from the computation of diluted earnings per share for the first quarter of 2001 and 2000, respectively, as these options are antidilutive as a result of the net loss incurred.

Since March 31, 2001, the Company has issued 345,000 stock options with exercise prices between $0.94 and $1.04, which could have a dilutive effect on future diluted net income per common share.

Note 5--RESTRUCTURING

In March 2001, the Company completed a reduction in its workforce in order to reduce expenses, minimize ongoing cash consumption and to simplify management structure. All areas of the Company were impacted by the workforce reduction. These reductions reduced the workforce by approximately 235 persons (211 domestically and 24 in Europe) and resulted in a severance charge to operations in the first quarter of 2001 of approximately $498,000. Of these costs, $223,000 were included in cost of sales, $179,000 were included in selling, general and administrative costs and $96,000 were included in research and development costs. All severance was paid during the first quarter of 2001, and no accruals remain.

During the third quarter of 2000, the Company incurred $3,899,000 in charges related to a restructuring, which will result in the closure of a wholly-owned subsidiary, Exabyte Magnetics GmbH ("EMG"). This restructuring was part of a plan adopted by the Board of Directors on July 24, 2000, which outsourced a number of manufacturing operations to Hitachi Digital Media Products Division of Hitachi, Ltd. ("Hitachi"). The restructuring decision resulted in: (1) an immediate end to the manufacture of M2Ô recording heads by EMG; (2) the termination of M2Ô scanner manufacturing by EMG during April 2001; and (3) the planned shut down of the remaining M1 scanner manufacturing by the end of 2003. No assets were transferred as a result of the decision to outsource M2™ scanner manufacturing to Hitachi and no technology was transferred. In addition, there were no write-offs taken or restructuring charges incurred in connection with the M2Ô scanner outsourcing to Hitachi. There has been no change in the method of accounting for transactions between EMG and the Company and all assets not impacted by the restructuring continue to be depreciated in a consistent manner.

These restructuring charges include employee severance and related costs of $1,613,000, excess facilities costs of $718,000, the write-off of excess inventories of $879,000, the write-off of capital equipment of $389,000 and other costs of $300,000. Workforce reductions involve 93 employees, constituting all employees of EMG. All severance payments for these employees were contractually defined, fixed and communicated during the third quarter of 2000.

Approximately $309,000 in restructuring costs were paid during the first quarter of 2001. Employment at EMG was reduced by 11 employees during the quarter to 42 employees at March 31, 2001. Approximately $1,883,000 of accruals related to this restructuring remain at March 31, 2001. We expect to pay the remainder of these accruals by the end of 2003.

The following table summarizes the activity related to this reserve for 2000 and the first quarter of 2001:

(In thousands)	Severance and Related	Excess Facilities	Inventory Write- Down	Fixed Asset Write Down	Other	Total
Restructuring charges	$1,613	$718	$879	$389	$300	$3,899
Asset write downs	--	--	(879)	--	--	(879)
Loss on sale of assets	--	--	--	(56)	--	(56)
Cash payments	(360)	--	--	--	(139)	(499)
Additional charges/ reclassifications	74	41	- --	(333)	(55)	(273)

Balance, December 30, 2000	$1,327	$759	--	--	$106	$2,192

Cash payments	(232)	(20)	--	--	(57)	(309)

Balance, March 31, 2001	$1,095	$739	--	--	$49	$1,883

Note 6--CONTINGENCIES

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

The Company has entered a development agreement with Hitachi Corporation for the development of certain M3 components and manufacture of engineering prototypes. Under this agreement, we have a maximum obligation of approximately $2,500,000 for development activities, $700,000 for prototype parts and $2,800,000 for tooling costs. No expenses have been incurred under this agreement through March 31, 2001. Under this agreement, which is cancelable by either party by giving notice and without cost or penalty, the Company will retain all technology rights for data storage applications. Neither party is obligated to pay royalties. Amounts are expensed based upon the performance of services by Hitachi or receipt of engineering prototypes.

Note 7--SUBSEQUENT EVENTS

On April 12, 2001, the Company entered into an agreement with a private investor, whereby the Company agreed to issue 1,500,000 shares of Series G preferred stock to the investor for total proceeds of $3,000,000. The dividends accrue at a rate of 9% per annum and are compounded if not paid. Dividends must be paid in cash, except that they may be paid in shares of common stock, at a price of $2.00 per share, if the Company is prohibited from paying cash dividends under any agreement in place as of April 16, 2001. The Company's bank line of credit agreement with Congress Financial Corporation currently prohibits the payment of cash dividends. Series G preferred stock has a liquidation preference over common stock and conversion rights, at the option of the holder, into shares of common stock at a conversion price of $2.40 per share, subject to adjustment. The holder of the Series G preferred stock is entitled to vote with shares of common stock (and not as a separate class) on an as-converted basis at any annual or special meeting of the Company's stockholders; provided, however, that without the prior written unanimous consent of the Series G preferred stock, the Company may not take certain actions, including asset transfer or acquisition (which terms are defined in the Certificate of Designation). The Company has filed an S-1 and are in the process of registering the shares of Series G preferred stock as well as the underlying shares of common stock issuable upon conversion, or payment of dividends when, as and if, declared by the board of directors on the Series G certain permitted issuances, from selling common stock, or securities convertible or exercisable into common stock during the period ended June 15, 2001 for a price per share, or having an exercise or conversion price per share of less than $2.40. In that case, the Company is required to pay an amount in cash equal to the difference between the sale price and $2.40 multiplied by the number of shares of common stock into which the Series G preferred stock is then convertible

As of March 31, 2001, the Company was in violation of the tangible net worth covenant of its line of credit. On April 12, 2001, the Company obtained a waiver from the lender in regard to the current covenant violation.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains forward-looking statements that involve future risks and uncertainties. We may achieve different results than those anticipated in these forward-looking statements. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. We have attempted to identify forward-looking statements in bold print. Additionally, words such as "believes," "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section below entitled "Risk Factors."

Overview and Recent Developments

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

Our tape drive products are based on 8mm and MammothTape™ technologies and our tape library products are based upon 8mm, MammothTapeÔ , AIT, DLTtapeÔ and LTO Ô UltriumÔ technologies.

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

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

- distribution;

- financial terms and conditions;

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

- other value-added products and/or services.

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

- inventory price protections;

- stock rotation obligations;

- short term marketing promotions; and

- customer and consumer rebates.

OEM customers incorporate our products as part of their own systems, which they then sell to their customers under their own brand name. We work closely with our OEM customers during early product development stages to help ensure our products will readily integrate into the OEM's systems.

The sales cycle for an OEM typically covers many months. During this time, the OEM may:

- evaluate the technology;

- qualify the product specifications;

- verify our compliance with product specifications;

- integrate the product into its system; and

- publicly announce the integration. This step typically occurs toward the end of the sales cycle

before volume shipments of our products are made to the OEM.

In March 2001, we entered into a development agreement with Hitachi Digital Media Products Division of Hitachi, Ltd. ("Hitachi"). Under this agreement, we have a maximum obligation of approximately $2,500,000 for development activities, $700,000 for prototype parts and $2,800,000 for tooling costs. No expenses have been incurred under this agreement through March 31, 2001.

Results of Operations

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

	Three Months Ended
	March 31, 2001	April 1, 2000

Net sales	100.0%	100.0%
Cost of goods sold	92.9	79.4

Gross profit	7.1	20.6
Operating expenses:
Selling, general and administrative	23.1	27.1
Research and development	18.1	20.9

Loss from operations	(34.1)	(27.4)
Other income (expense), net	(1.0)	0.1

Loss before income taxes	(35.1)	(27.3)
Provision for income taxes	--	(0.1)
Equity interest in net loss of investee	(0.7)	--

Net loss	(35.8)%	(27.4)%

Net Sales

The following tables present our revenue by product in absolute dollars and as a percentage of sales for each period presented.

PRODUCT MIX TABLES

Dollars in thousands:

	Three Months Ended
	March 31, 2001	April 1, 2000
8mm drives:
Eliant™820, Mammoth- LT, Mammoth and M2Ô	$14,595	$23,314
8mm libraries:
EZ17™, 215M, 220, 430M, X80 and X200	8,275	8,889
DLTtape™ libraries:
17D, 230D and 690D	997	1,572
LTOÔ libraries:
110L and 221L	873	--
Media	19,166	12,857
Service, spares and other	3,301	3,996
End-of-life drives and libraries(x)	236	1,388
Sales allowances	1,609	(2,440)
	$49,052	$49,576

As a percentage of net sales:

	Three Months Ended
	March 31, 2001	April 1, 2000
8mm drives:
Eliant™820, Mammoth LT, Mammoth and M2Ô	29.7%	47.0%
8mm libraries:
EZ17™, 215M, 220, 430M, X80 and X200	16.9	17.9
DLTtape™ libraries:
17D, 230D and 690D	2.0	3.2
LTOÔ libraries:
110L and 221L	1.8	--
Media	39.1	25.9
Service, spares and other	6.7	8.1
End-of-life drives and libraries(x)	0.5	2.8
Sales allowances	3.3	(4.9)
	100.0%	100.0%

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

Our net sales decreased by 1.1% to $49,052,000 in the first quarter of 2001 from $49,576,000 for the first quarter of 2000. In comparing net sales from the first quarter of 2001 to the first quarter of 2000, there were several significant differences:

- Sales of M2Ô tape drives decreased by $5,182,000. We believe this decrease is due to a general economic slowdown in the technology industry, as well as media supply constraints during most of the first quarter of 2001.

- Sales of tape media increased by $6,309,000 as we resolved media supply constraints late in the first quarter of 2001 and were able to fill our backlog of outstanding orders.

- Sales allowances decreased by $4,050,000, which had a positive impact on net sales. The decrease is a result of decreased exposure to inventory stock rotation related to decreased sales volumes to qualifying reseller customers, a decrease in certain marketing related programs and a decrease in rebate incentives.

- Sales of older generation 8mm tape drives (Eliant™820, Mammoth-LT and Mammoth) decreased by $3,538,000 due to product life cycles. Decreases were primarily in the OEM channel.

- Sales of end-of-life drives and libraries decreased by $1,152,000 as we had less inventory in end-of-life status in 2001 compared to 2000.

The following table details our sales to different customer types as a percentage of total net sales for the periods presented:

CUSTOMER MIX TABLE

(As a percentage of net sales)

	Three Months Ended
Customer Type:	March 31, 2001	April 1, 2000
Reseller	66.1%	66.9%
OEM	29.1	28.5
End-user and other	4.8	4.6
	100.0%	100.0%

Sales to reseller customers decreased slightly as a percentage of net sales for the first quarter of 2001 over the same period in 2000, while sales to OEM customers and end-users increased. We believe this shift is a result of the media supply constraints during the first quarter of 2001, which had a greater impact on products being sold through our reseller channel. Also, sales in Europe decreased by approximately $1,549,000 from the first quarter of 2000 to the first quarter of 2001, while North America sales increased by approximately $1,123,000 in the same periods. We believe this resulted from wider domestic product acceptance.

The following table summarizes customers who accounted for 10% or more of our sales in the periods presented:

SALES TO MAJOR CUSTOMERS

(As a percentage of net sales)

	Three Months Ended
Customer:	March 31, 2001	April 1, 2000
Ingram Micro	12.6%	16.4%
Digital Storage	10.4	5.0
IBM	10.1	10.8
Tech Data	9.5	14.4

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

Cost of Sales and Gross Margin

Our cost of sales includes the actual cost of all materials, labor and overhead incurred in the manufacturing and service processes, as well as certain other related costs. Other related costs include primarily warranty accruals and inventory reserves. Our cost of sales for the first quarter of 2001 increased to $45,558,000 from $39,363,000 for the first quarter of 2000. Excluding restructuring charges for the first quarter of 2001, our cost of sales was $45,335,000. Our gross margin percentage decreased to 7.1% in the first quarter of 2001 from 20.6% for the same period in 2000. Excluding restructuring charges for the first quarter of 2001, our gross margin was 7.6%. Gross profit for the first quarter of 2001 was negatively impacted by inventory reserves and rework charges related to our efforts to improve the quality and manufacturing yields of the M2™ drive product and high fixed costs relative to the level of net sales for the quarter.

Operating Expenses

Selling, general and administrative expenses include salaries, sales commissions, advertising expenses and marketing programs. These expenses decreased to $11,333,000 in the first quarter of 2001 from $13,436,000 for the same period in 2000. Without restructuring charges for the first quarter of 2001, these expenses were $11,154,000. The decrease is the result of higher advertising expenses in 2000 over 2001 for the introduction of the M2™ drive and related automation products. During 2001, our product introductions were smaller in scale.

Research and development expenses decreased to $8,901,000 in the first quarter of 2001 from $10,360,000 for the same period in 2000. Excluding restructuring charges for the first quarter of 2001, these expenses were $8,805,000. This decrease is the result of higher costs in 2000 over 2001 for ongoing engineering of the M2™ product, which was released in late 1999.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income and expenses, foreign currency remeasurement and transaction gains and losses and other miscellaneous items. Other expense for the first quarter of 2001 was $460,000 compared to income of $45,000 for the same period in 2000. This change is mainly the result of liquidity constraints which have resulted in borrowings under our line of credit resulting in interest expense during the first quarter of 2001. During the first quarter of 2001, we had net interest expense of approximately $501,000, while we had no net interest expense during the first quarter of 2000.

Taxes

The provision for income taxes for the first quarter of 2001 was (0.0)% of loss before taxes compared to a provision for income taxes of (0.3)% for the same period in 2000. As of the second quarter of 1999 we recorded a deferred tax valuation allowance equal to 100% of total deferred tax assets. Management considered a number of factors, including our cumulative operating losses over the prior three years, short-term projected losses due to the impact of delays in the release of the M2™ product as well as certain offsetting positive factors. Management concluded that a valuation allowance was required for 100% of the total deferred tax assets as it is more likely than not that the deferred tax assets will not be realized.

Liquidity and Capital Resources

During the first three months of 2001, we expended $2,663,000 of cash for operating activities, borrowed a net amount of $2,237,000 against our line of credit, expended $910,000 for capital equipment, expended $435,000 on long-term obligations, received $8,000 from the sale of fixed assets and had cash overdrafts of $1,357,000. Together, these activities decreased our cash and short-term investments by $406,000 to a quarter-ending balance of $2,753,000. Our working capital decreased to $12,972,000 at March 31, 2001 from $27,023,000 at December 31, 2000.

In May 2000, we entered into a bank line of credit agreement with Congress Financial Corporation, a subsidiary of First Union Bank Corporation. This agreement expires in May 2003. Originally, this agreement allowed borrowings up to the lesser of 80% of eligible accounts receivable or $20.0 million. In February 2001, this agreement was amended to increase the borrowing limit to $25.0 million. This amendment also added 25% of eligible finished goods inventory to the borrowing base. Eligible accounts receivable excludes invoices greater than 60 days past due, some foreign receivables and other items identified in the agreement. Eligible finished goods inventory excludes slow moving inventory and other items identified in the agreement. Collateral for this agreement includes accounts receivable and inventory, as well as certain off balance sheet assets.

The line of credit prohibits the payment of dividends without prior bank approval and has a minimum tangible net worth covenant, and certain other covenants. The agreement contains certain acceleration clauses that may cause any outstanding balance to become immediately due in the event of default. The amount available to borrow under the line of credit varies each day based upon the levels of the underlying accounts receivable and inventories. As of March 31, 2001, the overall amount available to borrow was $19,873,000, the Company had $14,544,000 in borrowings outstanding, a remaining borrowing capacity of $5,329,000 and we were in violation of the tangible net worth covenant of the line of credit agreement. On April 12, 2001, the lender waived the covenant violation.

Borrowings under the line of credit bear interest at the lower of the bank's prime rate +1% or "LIBOR" + 3%.As a result, any significant fluctuations in the prime rate or LIBOR would impact our interest expense related to borrowings under this line of credit. Offsetting the amount available under the line of credit is a letter of credit, which collateralizes certain leasehold improvements made by our subsidiary in Germany. This letter is currently for DM 1,000,000 and decreases by DM 100,000 in August of each year until it is fully depleted.

- sale of all or part of our operating and off-balance sheet assets;

- restructuring of current operations;

- additional equity infusions; or

- strategic alliance, acquisition or merger.

We have engaged an investment banker to assist in this process and will continue to explore these and other options that would provide additional capital for our objectives and operating needs.Should we be unsuccessful in achieving one or more of these actions, it is possible that we may be unable to achieve our currently contemplated business objectives or establish enough funds to support our operations, which could affect our ability to continue as a going concern. Also, as a result of our current liquidity constraints, the report of our independent accountants on our 2000 consolidated financial statements contains an explanatory paragraph related to this matter.

On April 12, 2001, we entered into an agreement with a private investor, whereby we agreed to issue 1,500,000 shares of Series G preferred stock to the investor for total proceeds of $3,000,000. The dividends accrue at a rate of 9% per annum and are compounded if not paid. Dividends must be paid in cash, except that they may be paid in shares of common stock, at a price of $2.00 per share, if we are prohibited from paying cash dividends under any agreement in place as of April 16, 2001. Our bank line of credit agreement with Congress Financial Corporation currently prohibits the payment of cash dividends. Series G preferred stock has a liquidation preference over common stock and conversion rights, at the option of the holder, into shares of common stock at a conversion price of $2.40 per share, subject to adjustment. The holder of the Series G preferred stock is entitled to vote with shares of common stock (and not as a separate class) on an as-converted basis at any annual or special meeting of the Company's stockholders; provided, however, that without the prior written unanimous consent of the Series G preferred stock, we may not take certain actions, including asset transfer or acquisition (which terms are defined in the Certificate of Designation). We have filed an S-1 and are in the process of registering the shares of Series G preferred stock as well as the underlying shares of common stock issuable upon conversion, or payment of dividends when, as and if, declared by the board of directors on the Series G preferred stock. The terms of the Series G share purchase agreement prohibit us, except for certain permitted issuances, from selling common stock, or securities convertible or exercisable into common stock during the period ended June 15, 2001 for a price per share, or having an exercise or conversion price per share of less than $2.40. In that case, we are required to pay an amount in cash equal to the difference between the sale price and $2.40 multiplied by the number of shares of common stock into which the Series G preferred stock is then convertible.

Restructuring Charges

In March 2001, the Company completed a reduction in its workforce in order to reduce expenses, minimize ongoing cash consumption and to simplify its management structure. All areas of the Company were impacted by the workforce reduction. These reductions reduced the workforce by approximately 235 persons (211 domestically and 24 in Europe) and resulted in a severance charge to operations in the first quarter of 2001 of approximately $498,000. Of these costs, $223,000 were included in cost of sales, $179,000 were included in selling, general and administrative costs and $96,000 were included in research and development costs. All severance was paid during the first quarter of 2001, and no accruals remain.

During the third quarter of 2000, we incurred $3,899,000 in charges related to a restructuring, which will ultimately result in the closure of our wholly owned subsidiary, EMG. This restructuring was part of a plan adopted by our Board of Directors on July 24, 2000, which outsourced a number of manufacturing operations to Hitachi in order to reduce our cost structure. The restructuring decision resulted in: (1) an immediate end to the manufacture of M2™ recording heads by EMG; (2) the termination of M2™ scanner manufacturing by EMG during April 2001; and (3) the planned shut down of the remaining M2™ scanner manufacturing by the middle of 2002. No assets were transferred as a result of the decision to outsource M2™ scanner manufacturing to Hitachi and no technology was transferred. In addition, there were no write-offs taken or restructuring charges incurred in connection with the M2™ scanner outsourcing to Hitachi. There has been no change in the method of accounting for transactions between EMG and the Company and all assets not impacted by the restructuring continue to be depreciated in a consistent manner.

Approximately $309,000 in restructuring costs were paid during the first quarter of 2001. Employment at EMG was reduced by 11 employees during the quarter to 42 employees at March 31, 2001. This amount will be reduced to 27 by mid 2001 as a result of these outsourcing efforts. Approximately $1,883,000 of accruals related to this restructuring remain at March 31, 2001. We anticipate future annual savings of approximately $3.4 million related to this restructuring. We further anticipate that most of the remaining amounts owed will be paid by the end of 2003.

The following table summarizes our restructuring reserve activity for 2000 and the first quarter of 2001:

(In thousands)	Severance and Related	Excess Facilities	Inventory Write- Down	Fixed Asset Write Down	Other	Total
Restructuring charges	$1,613	$718	$879	$389	$300	$3,899
Asset write downs	--	--	(879)	--	--	(879)
Loss on sale of assets	--	--	--	(56)	--	(56)
Cash payments	(360)	--	--	--	(139)	(499)
Additional charges/ reclassifications	74	41	- --	(333)	(55)	(273)

Balance, December 30, 2000	$1,327	$759	--	--	$106	$2,192

Cash payments	(232)	(20)	--	--	(57)	(309)

Balance, March 31, 2001	$1,095	$739	--	--	$49	$1,883

Market Risk

In the ordinary course of our operations, we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates. Uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax, other regulatory or credit risks are not included in the following assessment of our market risks.Our exposure to fluctuations in the dollar/yen exchange rate is expected to increase as a result of outsourcing certain manufacturing to Hitachi.Our borrowings under our line of credit agreement expose us to changes in interest rates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information concerning the Company's market risk is incorporated by reference from Item 2 above, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption, "Market Risk".

PART II.

Item 5. Other Information

These risk factors supercede any risk factors we may have previously filed with the Securities and Exchange Commission.

Risk Factors

Following is a discussion of certain risks that may impact our business. If any of the following risks actually occurs, our business could be harmed. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business.

1. General information about these risk factors and our company.

1.1 These risk factors contain important information about our business and you should read them carefully

You should carefully consider the risks described below. If any of the following risks should actually occur, our business, prospects, financial condition or results of operations would likely suffer. In such case, the trading price of our common stock or other securities could fall, and you may lose all or part of the money you paid to buy our securities. We furnish you these risk factors to describe how you may be financially hurt by owning our securities rather than how you may be financially benefited by taking a short position in our securities or by taking any other position which results in profits upon a drop in the securities price. If you are in a short position you face different risks that are not contemplated in this document.

1.2 You should read these risk factors together.

You should look at all of the risk factors in total. Some risk factors may stand on their own. Some risk factors may affect (or be affected by) other risk factors. For example, the risk factor relating to our possible inability to properly forecast our customer demand would likely result in excess inventory, which is another risk factor. You should not assume we have identified these connections.

1.3 We may not update these risk factors in a timely manner.

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

2. We need additional funding to support our operations. Our inability to obtain additional funding may harm our ability to continue as a going concern.

Our cash balance has declined over the last few years primarily because of:

- losses in the first quarter of 2001 of $17,550,000, in 2000 of $41,268,000; in 1999 of $88,407,000; and an accumulated deficit at March 31, 2001 of $44,927,000;

- expenditures for new products and products under development; and

- other capital expenditures.

Due to ongoing operating losses and resulting liquidity restraints, we are currently reassessing our business and investigating various strategic alternatives that would result in increased liquidity. These alternatives may include one or more of the following:

- sale of all or part of our operating assets and off-balance sheet assets;

- restructuring of current operations;

- additional equity infusions; or

- strategic alliance, acquisition or merger.

We have engaged an investment banker to assist in this process and will continue to explore these and other options that would provide additional capital for our objectives and operating needs. Should we be unsuccessful in achieving one or more of these actions, it is possible that we may be unable to achieve our currently contemplated business objectives or establish enough funds to support our operations, which could effect our ability to continue as a going concern. Also, as a result, the report of our independent accountants on our consolidated financial statements contains an explanatory paragraph related to this matter.

Such an opinion by our independent accountants may impact our dealings with third parties, such as customers, suppliers and creditors, because of concerns about our financial condition. Any such impact could have a material adverse effect on our business and results of operations.

On April 12, 2001, the Company entered into an agreement with a private investor, whereby the Company agreed to issue 1,500,000 shares of Series G preferred stock to the investor for total proceeds of $3,000,000. The preferred stock is convertible, at the option of the holder, into a number of shares of common stock equal to the original issue price of the preferred, $2.00, divided by the conversion price of $2.40, subject to adjustment. The dividends accrue at a rate of 9% per annum and are compounded if not paid. Dividends are cumulative and payable in arrears on April 16 of each year, when and if declared by the board, and must be paid in cash, except that they may be paid in shares of common stock, at a price of $2.00 per share, if we are prohibited from paying cash dividends under any agreement in place as of April 16, 2001. Our bank line of credit agreement with Congress Financial Corporation currently prohibits the payment of cash dividends.

3. General information and risk factors.

3.1 Our success depends on many factors, the most significant of which is our ability to successfully transition ourselves into a strong automation company.

We believe that our future success depends largely upon the success of our library products. We are currently transitioning into a more significant participant in the growing tape library market. However, our ability to be successful in this market will depend upon a number of factors, including:

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

- availability of media;

- introduction of competitive products;

- acquiring sufficient market share;

- customer acceptance and OEM adoptions;

- compatibility with tape drives used by our customers; and

- ability to service and support our library products.

3.2 Any shortfall in media sales could harm our results of operations.

Sales of media accounted for approximately 39% of our net revenue during the first quarter of 2001. To the extent media sales decline and are not replaced with additional revenue from our other products or services, our financial results, including our gross margin and revenues, may be adversely affected.

3.3 We have encountered difficulties manufacturing M2™ because of its complex design, which has harmed our ability to produce and sell the product. Our inability to successfully resolve these issues may harm our operating results.

The MammothTape™ platform designs are extremely complex, which may result in lower than anticipated manufacturing yields, field reliability issues and increased inventory levels. We experienced these issues with the introduction of M2™. We experienced similar issues with the introduction of our original MammothTape™ drive and were able to successfully address them. Although we have made significant progress in addressing these issues as they relate to M2™, we cannot assure that we will resolve any of these issues or, if resolved, they will be done in a timely manner. In addition, when we encounter these kinds of manufacturing problems, we must make changes to the product design. Implementing these changes can be troublesome and costly and could cause additional design or manufacturing flaws. Any difficulties manufacturing our products or designing our products for manufacturing could harm our results of operations.

3.4 Our inability to obtain enough media from three suppliers has in the past and could in the future inhibit our production and sales of our tape drives and associated libraries.

We depend on a continuous supply of AME media to use with our products. We cannot sell our products, or grow our product lines without a sufficient supply of AME media. Currently, we obtain AME media from three suppliers:

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

- TDK Corporation ("TDK"); and

- Sony Corporation ("Sony").

If these suppliers cannot provide us with enough high-quality, competitively priced media, we may have to delay or cancel product shipments and/or orders. We may also have to delay future product introductions. We have recently encountered difficulties obtaining enough media from our suppliers to fill orders. This inability to fill orders for media cartridges adversely affected our results of operations during 2000. Should we continue to experience problems with our media suppliers, our future results of operations, as well as our ability to sell or introduce products, could be harmed. Any inability to sell or introduce our products would materially and adversely affect our competitive position as well as our results of operations.

Our M2™ tape drives and associated libraries specifically depend on AME media with SmartClean™ technology. Even with multiple media suppliers, we may not receive enough AME media with SmartClean™ to fill current or backlog orders for products and media. Should this happen, we may have to delay or cancel M2™ tape drive and/or library shipments and orders. This would materially and adversely affect our results of operations.

3.5 In addition to our ability to successfully transition to an automation company, we also believe that our success depends on our ability to produce and sell our M2™ tape drive.

We believe that our success currently depends in part on our M2™ tape drive. In turn, the success of M2™ depends, among other things, on:

- increasing the throughput of our manufacturing;

- satisfactorily addressing design issues;

- customer acceptance;

- supply capacity;

- customers transitioning from our earlier products to M2™;

- OEM qualification and adoption; and

- media availability.

3.6 We previously experienced problems introducing our original MammothTape™ tape drive on time. If we experience similar problems with introducing future produces, we could experience losses in market share and credibility, which would harm our operating results.

As previously stated, we brought our original MammothTape™ tape drive to market late and as a result lost market share and credibility with our customers. We may experience development and/or manufacturing problems with our future MammothTape™ products that would delay their introduction. A late introduction for any future tape drive may again affect our market share position and/or credibility.

We are currently addressing issues regarding the manufacturability of our M2™ tape drive. We must adequately address these issues before we can produce our M3™ tape drive. Our inability to address these issues in a timely manner may delay the introduction of our M3™ tape drive.

3.7 Managing our inventory levels is important to us because excess inventory reduces cash available to us for funding our operations, or may cause us to write off excess inventory, negatively impacting our operating results.

It is important for us to maintain appropriate levels of inventory. Excessive amounts of inventory tends to reduce our cash available for operations and may cause us to write-off a significant amount as excess or obsolete. Inadequate inventory levels may make it difficult for us to meet customer demand, resulting in lost revenues. Factors that impact our ability to adequately manage our inventory are discussed below.

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

- keeping inventory levels low;

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

- meeting changing product demands;

- transitioning our product lines effectively; and

- successfully introducing new products.

Particularly, introducing new products (by us or our competitors) may negatively affect our product inventory value by requiring us to write down or make allowances for inventory devaluation, which may materially affect our results of operations. In the past we have experienced special charges and write downs which harmed our results of operations. To date, we have experienced increased inventory levels in connection with the introduction of our M2™ tape drives. In the future we may again incur special charges or make allowances for an inventory devaluation that will materially affect our results of operations.

3.8 Maintaining inventory on behalf of our customers at a third party warehouse has increased and may continue to increase our overhead costs. We may be unable to pass these cost increases on to our customers.

Some of our customers have in the past and may again require us to maintain inventory for them at a third-party warehouse. We would own this inventory until the supplier physically pulled it from the inventory stock. This has in the past and may continue to increase our overhead costs, including additional costs for:

- shipping the product to the warehouse;

- maintaining the inventory stock; and

- paying any carrying costs required to store our inventory in the warehouse.

We may be unable to pass these costs to the customer. Absorbing the additional costs would harm our results of operations.

We may have to increase our own inventory levels to comply with customers' inventory requirements. We may be unable to adequately manage any of these increased inventory levels, which may cause us to incur special charges, take an inventory write-down or establish additional inventory reserves. Doing so would adversely affect our results of operations.

3.9 If companies introduce new technologies, such as optical disk, optical tape or DVD, into the data storage market, our tape products may become obsolete.

Technology usually changes and advances quickly in the high technology industry. In order to successfully compete in this industry, our future products must apply and extend our current technology, as well as keep pace with new technology developments.

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

- Optical Disk (including three dimensional Optical Disk)

- Optical Tape

- DVD

- Holographic Storage

- Magnetic Optics

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

If any new technology offers users the same or greater benefits than tape, tape technology could become obsolete. In order to compete under market pressures, we must be able to adapt our technologies to changes in an efficient, cost-effective manner. Our inability to adapt would severely harm our competitive position and our results of operations.

3.10 If we do not enhance our tape technology to keep pace with our competitors, our products will not remain competitive.

Our ability to compete with other tape drive manufacturers is directly impacted by the rapid development of tape drive technologies. Our ability to compete with other tape drive technologies is impacted by, among other things:

- customer and OEM adoption of MammothTape™ technology;

- compatibility of tape drives to other data storage products;

- data storage density;

- data transfer rate;

- customer confidence and familiarity; and

- price.

3.11 We must accurately time the introduction and withdrawal of our products into and out of the data storage market because it affects our revenue and inventory levels.

Accurately timing the release of new products is important to the sales of existing products. Likewise, prematurely withdrawing an existing product could result in revenue loss from that product, and delaying the withdrawal of a product could result in excess product inventory. We continually evaluate our product life cycles. Any timing mistakes or inability to successfully introduce a new product could adversely affect our results of operations.

3.12 We must continue to develop and introduce technologically compelling automated library products which automate competitive storage technologies, such as AIT, LTO™ Ultrium™, or DLTtape™, or other future non-tape technologies, in order for us to improve or maintain our sales and revenues.

We believe our future success depends on future library and other products and services. The success of these future products depends, among other things, on:

- timely development;

- customer acceptance;

- supply capacity;

- customer transition to these future products;

- OEM qualification and adoption; and

- media availability.

3.13 We experience many risks regarding our efforts to outsource tape drive manufacturing to Hitachi and library manufacturing to Shinei Sangyo, including our inability to obtain enough product from these sole source suppliers, maintaining a duplicate manufacturing infrastructure during the transition phase, and timely implementing engineering product changes.

We are currently outsourcing portions of our manufacturing process to Hitachi and Shinei Sangyo. We plan to complete the outsourcing by July 2001. We successfully outsourced the manufacturing of our first tape drive products to Sony. While we were successful with that outsourcing effort, we may be unsuccessful with our current outsourcing effort. For example, we were unsuccessful last year when we outsourced our worldwide repair services to Magnetic Data Technologies, LLC and have now brought that service function back in-house.

Outsourcing our manufacturing to a third party takes many months and involves, among other details, extensive employee training. Due to the time and expenses involved, and the inability to easily move the manufacturing to another party, we heavily depend on our existing third party manufacturers for our products. If Hitachi or Shinei Sangyo cannot meet our product demand, our results of operations would be harmed. If Hitachi or Shinei Sangyo cannot or will not implement product changes on a timely basis, we would be unable to fill customer orders. This would materially and adversely affect our results of operations. Our dependence on third party manufacturers can also adversely affect our ability to negotiate the terms of our future business relationships with these parties.

When we complete the outsourcing of tape drive manufacturing to Hitachi, they will be our sole source manufacturer for our tape drives. Their inability to successfully manufacture the tape drives or manufacture enough tape drives to meet our customer demand would adversely affect our results of operations.

If Hitachi cannot successfully manufacture our tape drives, bringing the manufacturing process back to Exabyte or outsourcing to another third party manufacturer would negatively impact our ability to fill customer orders and would harm our results of operations.

When we complete the manufacturing outsourcing to Shinei Sangyo, they will manufacture some of our tape libraries, making them our sole source manufacturer for these libraries. The same risks we incur with Hitachi (set out above) apply to our sole-source manufacturing relationship with Shinei Sangyo.

During the transition period, we must maintain redundant manufacturing capability at our Boulder, Colorado facilities, the Hitachi facilities in Japan and the Shinei Sangyo facilities in Singapore. There are several factors that would increase our expenses during the transition period, including:

- maintaining a double infrastructure;

- creating additional tooling;

- adding additional technical personnel; and

- creating additional inventory.

Expense increases for these or any other reasons could harm our results of operations. Upon completion of the outsourcing to these third parties, we may be unsuccessful in reducing our infrastructure costs at our facilities, which would cause us to incur higher total operation costs.

We highly value our proprietary information, including trade secrets, patents and manufacturing processes. We make substantial efforts to protect these assets. Outsourcing our manufacturing to a third party requires us to share some of this proprietary information with our third party manufacturer. Although these parties would generally enter into agreements intended to protect our proprietary information, we can not assure that these agreements will provide adequate protection. This would weaken our protection of our proprietary information and could harm our future results of operations.

3.14 We automated competitive DLT technology late and may experience market share loss if we cannot automate in a timely manner new competitive technology developed in the future.

We lost market share in the library market because we delayed our decision to automate competitive DLT technologies. Our inability to successfully automate future technologies could again negatively affect our library market share position.

3.15 Any inability to obtain components, such as scanners or recording heads, from our suppliers would affect our ability to manufacture our products.

We obtain all the components to make our products from third parties. A shortage of any component would directly affect our ability to manufacture the product. Some key components, such as scanners and recording heads, are developed and manufactured to our specifications, which limits our ability to quickly find another supplier for these components if we experience a supply shortage. There are long lead-times associated with the availability of many components that make obtaining these components sometimes difficult. For example, the ASIC chips we use in our MammothTape™ products are produced from several suppliers. However, because it takes many months to qualify suppliers to produce ASIC chips for us, any shortfall or inability to obtain an adequate supply of ASIC chips from any of our current suppliers would adversely affect our results of operations.

3.16 Our dependencies on sole-source suppliers may cause a reduction in our level of control over delivery, quantity, quality and cost of the product.

We rely heavily on sole-source suppliers (one supplier providing us with one or more components) to develop and/or manufacture critical components to use in our tape drives or libraries. If a sole-source supplier is unable to provide us with a sufficient supply of their components we may be unable to manufacture the drive or library. This could cause us to delay or cancel shipments, which would adversely affect our results of operations.

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

- delivering components on schedule;

- manufacturing a high number of components for delivery;

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

- managing the costs of manufacturing the components.

Hitachi is one of our primary sole source suppliers. They supply us with many key components for our M2™ and Eliant™820 tape drives. We have contracts with Hitachi to develop, manufacture and supply these components. However, the contracts do not necessarily guarantee that the components will be continuously supplied to us at a reasonable cost. Additionally, if Hitachi makes an error in manufacturing a component, we may be unable to incorporate the components into our drives. If any of these or other problems arise, we may experience difficulties developing and/or successfully introducing our future MammothTape™ tape drives. We may also be unable to manufacture our M2™ or Eliant™820 tape drives. Any material issues that may arise with Hitachi could adversely affect our sales and therefore our results of operations.

3.17 We rely on third party manufacturers, which may weaken our intellectual property protection, create a reliance on the manufacturers to produce our products, or expose us to market risks associated with foreign manufacturers .

We rely on a number of third party manufacturers for various stages of our manufacturing process, particularly the early stages. This practice may impair our ability to establish, maintain or achieve adequate product design standards or product quality levels.

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

Our third party manufacturers may develop processes related to manufacturing our products independently or jointly with us. This would increase our reliance on these manufacturers or may require us to obtain a license from them. We may be unable to obtain a license on terms acceptable to us, if at all.

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

- political instability;

- currency controls and fluctuations;

- tariffs, customs and other duties;

- reduced intellectual property protections; and

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

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

3.18 We may be unable to increase our production to meet sudden, unexpected demands by OEM customers.

Demand by OEMs for our M2™ tape drives could increase suddenly. We, our suppliers, and third party manufacturers may be limited in our ability to meet a sudden significant increase in demand due to limitations in manufacturing capacity and long lead times to acquire certain parts. If our suppliers and third party manufacturers are not able to meet the increased demand, our inability to fulfill our customers' orders could adversely affect our results of operations.

3.19 The storage backup market is very competitive and may cause us to decrease our product pricing or affect our product sales.

The tape storage market is highly competitive and subject to rapid technological changes. We currently expect competition to increase. The tape storage market has experienced a number of consolidations, increasing our competitive pressures. Competitive pressures impact us in many ways, including:

Price Erosion. Price erosion of our products has occurred in the past and is likely to occur again in the future.

Loss of Market Share. We have lost market share to competitors in the past. We may lose additional market share in the future.

Additionally, some of our competitors have financial, technical, manufacturing and marketing resources that are much greater than our own. These competitors may devote their superior resources to aggressively marketing their own storage technologies. These technologies may be equivalent or superior to our own technologies, or may render some of our products non-competitive or obsolete. In order to compete under these pressures, we must adapt our technologies to these changes in an efficient, cost-effective manner.

Our M2™ tape drive faces significant competition from current and announced tape drive products offered by Quantum, Tandberg, Sony and the LTOÔ Consortium (IBM, Hewlett Packard and Seagate). The specifications of some of the announced drives show greater data capacities and transfer rates than M2™.

Our other tape drives and automated tape libraries face competition from companies offering 8mm, half-inch, 4mm and mini-cartridge products. Significant competition may also develop from companies offering erasable and non-erasable optical disks.

3.20 We rely on the sales to a small number of customers for a large portion of our overall sales.

The following chart expresses the sales percentages of our three largest customers for the quarter ended March 31, 2001:

Ingram Micro	13%
Digital Storage	10%
IBM	10%
	33%

We have customers who are also competitors, including IBM with their LTOÔ Ultrium™ tape drive and ADIC with their library products.

We do not require minimum purchase obligations from our customers. They may also cancel or reschedule orders at any time, prior to shipment, without significant penalty. Losing one or more key customers would adversely affect our results of operations. A key customer canceling orders or decreasing the volume in orders would adversely affect our results of operations. Contractually, our reseller customers may return a portion of their Exabyte product inventory as part of their stock rotation rights, but must issue a simultaneous offsetting purchase order.

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

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

We have announced adoption of M2™ by several OEM customers, but our success depends on additional OEMs adopting M2™.

3.21 We rely on the information technology markets for workstations, mid-range computer systems and network systems to create demand for our products. Any slowing of these markets would adversely affect sales of our products.

Our product demand depends substantially on the purchases and use of work stations, mid-range computer systems and network servers. These markets tend to be volatile and subject to market shifts, which we may be unable to determine in advance. A slowdown in the demand for these types of products could materially affect our business. Any demand weakness affecting sales in the reseller channel, which generally represents higher margin sales, could have a greater impact on our results of operations.

Rapid business and product transitions could create a strain on our resources. We are experiencing a period of rapid business and product transition. We must address the complexities of developing, manufacturing and servicing multiple products. Our products incorporate several different technologies and are sold through multiple marketing channels.

Dealing with this transition has placed a significant strain on our management, operational and financial resources. We will probably continue to see a strain on our management, operational and financial resources because of these transitional issues. We must continually implement and improve our operational, financial and information systems to manage our business transition. We must also effectively and efficiently train and manage our employees.

We sometimes base our market demand decisions on market demand forecast reports, which may or may not be accurate. This may create insufficient or excessive inventories and disproportionate overhead expenses. Particularly, short order lead-times of reseller sales limit our ability to forecast.

3.22 Third parties may bring claims against us for monetary damages suffered as a result of our products failing to backup or restore data. These monetary damages could be significant.

Our products provide end users the ability to backup their data. If the tape backup fails, the end user could suffer a significant loss of operations. We carry error and omission liability insurance coverage to protect us from the financial risks of this type of claim by our end users. However, if a claim exceeded our insurance coverage, it could adversely impact our operating results. The failure of our products to properly back up an end user's data could also create a loss of confidence in our products and adversely impact the sale of current and future products.

3.23 We may lose our entire investment in CreekPath should they fail to succeed or if the market in which CreekPath participates cannot sustain CreekPath's growth.

In December 1999, we formed a wholly-owned subsidiary, CreekPath Systems, Inc., to leverage our investments and expertise in SANs, Fibre Channel and Java-based software for storage resource management. In December 2000 and January 2001, in order for CreekPath to utilize outside financing, rather than our own capital, CreekPath completed a $17 million convertible preferred stock financing. As a result of that financing, we currently hold 39.9% of the voting capital stock.

To date, we have invested approximately $5.4 million in CreekPath. Because of losses in CreekPath's financial results, we expensed our remaining $343,000 of carrying value during the first quarter of 2001, and at March 31, 2001 the carrying value on our books was $0. Our shares of CreekPath capital stock are not registered with the Securities and Exchange Commission under the Securities Act of 1933. Furthermore, we are contractually limited in our ability to sell them to a third party. As a result, even if CreekPath is successful, we may be unable to liquidate our investment. Furthermore, the value of our interest in CreekPath depends on its success, which in turn depends upon a number of factors, including, the following:

- CreekPath has limited operating and financial history;

- CreekPath may require additional outside financing, which it may not be able to obtain;

- The storage service provider (SSP) market in which CreekPath competes is new and may not grow or be sustainable;

- CreekPath has never been profitable and may never become profitable;

- CreekPath has fixed expenses, and expects to continue incurring significant expenses

- CreekPath may suffer damage from disasters or other unanticipated problems at its data center partners;

- A breach of security would cause harm to CreekPath's reputation and results of operations;

- CreekPath's services can be affected by errors or defects in the infrastructure and technology for the services;

- CreekPath faces direct and indirect competition;

- CreekPath's success depends in part on developing strategic alliances with key Internet data centers and others;

- Changing or new standards or technology may render CreekPath's services obsolete;

- CreekPath's success depends on hiring qualified employees in sales and other areas; and

- CreekPath anticipates consolidations of the SSP market which may cause a decline in fees.

3.24 Our compliance with financial loan covenants under our loan agreement with Congress Financial Corporation may affect our ability to borrow under the line of credit and our own liquidity.

In May 2000, we entered into a new bank line of credit agreement with Congress Financial Corporation. This agreement was amended in February 2001. Currently, we can borrow up to the lesser of 80% of eligible accounts receivable plus 25% of eligible finished goods inventory (as defined in the agreement and amendment) or $25.0 million. This loan is secured by our accounts receivable and inventory, as well as certain off balance sheet assets. The agreement contains a number of covenants that, among other things:

- restrict certain financial and other activities;

- requires us to maintain a minimum net worth; and

- eliminates the borrowing line if we experience any material adverse change.

Any breach of a covenant or default can materially and adversely affect our liquidity and our financial condition. Because of the covenants and conditions to borrowing, our line of credit may not always be available to us.

3.25 The labor market in the high technology industry and Boulder, Colorado is competitive and we may have difficulty recruiting or keeping key, qualified employees.

There is intense competition for qualified employees. Competition for employees is based upon, among other factors, base salary, stock-based compensation, ownership investment and high turnover rates in technology and other companies generally. As a result, we may lose or fail to recruit needed employees.

Losing or failing to recruit a key employee could:

- delay product development schedules;

- interrupt team continuity;

- result in losing proprietary information to competitors or other third parties;

- increase our administrative costs; and

- adversely affect our results of operations.

We have lost key employees and applicants for key positions to our competitors (including to local start-up companies) and other companies. We expect to lose key employees in the future, despite implementing incentive programs designed to retain and recruit employees.

3.26 Factors such as variations in our quarterly results of operations, progress in addressing issues with producing our M2™ tape drives and competitive press announcements may cause our stock price to fluctuate.

The price and value of high technology stock fluctuates greatly. Many high technology companies experience drastic changes in market price and volume, often unrelated or disproportionate to the company's operating performances.

Our stock has experienced these wide fluctuations, and they will likely continue in the future. We believe the reasons for fluctuations include:

- overall economic and market conditions;

- quarterly variations in operating results;

- progress or lack of progress in developing our M2™ and follow-on tape drives;

- announcements of technological innovations or new products by us or our competitors; and

- CreekPath's performance and perceived valuation.

The market value of our stock has dramatically fluctuated in the past and is likely to fluctuate in the future, particularly when the expectations of investors and market analysts fall below or above their outlook. Our results of operations in the past have been both below and above investor's and market analyst's expectations. Any deviation had and could again have an immediate and significant impact on the market price of our stock.

Factors that could have an immediate and significant impact on the market price of our common stock include:

- disclosing our business prospects assessment;

- our competitors announcing new products;

- fluctuating conditions in the computer market; and

- liquidity issues.

Additional risks associated with an investment in our securities are described under Section 4 below.

3.27 Factors such as economic conditions, industry or market shifts, or product price erosion may cause our quarterly results of operations to fluctuate.

Our future operating results may fluctuate from quarter to quarter for various reasons. For example, the markets we serve are subject to substantial market shifts. We may be unable to determine these market shifts in advance.

In addition, our operations and revenues experience substantial fluctuations from period to period because of:

- delays in product or service introductions;

- industry shifts;

- product price erosion; and

- general economic conditions affecting our customers' orders.

3.28 SEC and FASB interpretations may cause us to restate how we report our earnings.

During the last several years the Securities and Exchange Commission, the SEC, and Financial Accounting Standards Board, FASB, have issued a number of new accounting rule interpretations. These interpretations have addressed such topics as:

- revenue recognition;

- accounting for stock options and stock-based compensation; and

- accounting for derivatives or hedging instruments.

These interpretations have dramatically impacted some companies which were forced to restate previously reported results of operations because the interpretations required changes in their previous accounting practices. In some cases, the company's stock price decreased significantly as a result.

We continually review new interpretations as they are introduced. We believe our current accounting practices are unaffected by recent interpretations. However, if our current accounting practices conflict with any new or future interpretations we may have to restate our earnings. We recently restated our financial statements for 1999 in order to reflect a full valuation reserve for certain deferred tax assets in the second quarter of that year.

3.29 Foreign taxing authorities may assert that intercompany transactions between us and our subsidiaries were not in accordance with their tax laws, and they may try to assess material penalties against us for these alleged violations.

We have subsidiaries located in Scotland, The Netherlands, Germany, Singapore, Japan and Canada. Tax regulations in the United States and these foreign countries require transactions between us and our subsidiaries to take place in an arm's-length manner. The IRS and its foreign counterparts have increased their focus on this issue in recent years. Penalties arising from misapplying these laws are material. Consequently, we have performed numerous formal transfer pricing studies to ensure the documentation supporting our intercompany dealings is adequate. The IRS has audited our tax records through 1997 and had not proposed any adjustments in the way we structure our arm's-length transactions. However, foreign taxing authorities could examine these same transactions and assert that we have not complied with their tax laws relating to intercompany transfer pricing.

3.30 Even though we take many steps to protect our proprietary rights, such as filing patents and executing non-disclosure agreements, our proprietary rights may not be fully protected. Additionally, someone may infringe on our proprietary rights, or we may infringe on someone else's proprietary rights, which could lead to costly and potentially damaging litigation.

We rely on a combination of methods to protect our proprietary rights, including:

- patents;

- copyrights;

- trade secret protections;

- non-disclosure agreements; and

- license agreements.

Although we file patent applications for our products, patents may not result from these applications, or they may not be broad enough to protect our technology. Someone may also challenge, invalidate or circumvent our patents. Sometimes other companies and individuals assert that our patents infringe their proprietary rights. Occasionally, third parties ask us to indemnify them from infringement claims. Defending these infringement claims may result in long and costly litigation, and potentially invalidate a patent.

Although we may try to secure a license from third parties to protect our technology, we may not succeed. This may adversely affect our results of operations.

We implement measures to protect our proprietary rights. We intend to defend ourselves against infringement claims. However, protecting these rights is sometimes difficult. Some foreign laws may not fully protect these rights.

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

When CreekPath began operating as a wholly-owned subsidiary, we provided them with certain intellectual property pertaining specifically to its operations. The valuation of CreekPath depends, in part, on its ownership of this intellectual property.

3.31 Any lawsuits by shareholders, which may allege claims such as we failed to adequately disclose material facts associated with our business, could lead to costly litigation or unfavorable settlement terms.

Many companies, directors, and officers in our industry have been subjected to class action and shareholder derivative suits filed in federal and state courts. These suits generally allege that the defendants failed to adequately disclose certain risks associated with their business. Our involvement in a class action or shareholder derivative suit could materially affect our results of operations, specifically because of large legal costs incurred defending such actions. Other factors affecting our results of operations include:

- diverting management's attention from the business to the suit; or

- paying a judgment or settlement arising from the suit.

In 1993, we successfully defended a series of class actions at an immaterial cost. We believe there are no pending or threatened securities related actions against Exabyte at this time.

3.32 Obtaining some of our product components from foreign business, such as Hitachi and Shinei Sangyo, exposes us to risks on the import of our components, such as fluctuating currency exchange rates, particularly an adverse exchange movement of the U.S. dollar versus the Japanese yen, foreign government exchange control regulations or U.S. tariffs and trade restriction.

Our future operating results depend on key components, products and subassemblies that are or may be manufactured in Japan, Germany, The Netherlands, China, Singapore, Indonesia, or Malaysia. Because we depend on foreign sourcing for our key components, products and subassemblies, our results of operations may be materially affected by:

- fluctuating currency exchange rates;

- Europe's conversion to the euro;

- foreign government regulations;

- foreign exchange control regulations;

- import/export restrictions;

- foreign economic instability;

- adverse exchange movement of the U.S. dollar versus the Japanese yen or other currency; and

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

We sometimes enter into contractual arrangements which may expose us to foreign exchange rate risks.

3.33 Foreign exchange rate fluctuations may harm our international sales, which represent almost one-third of our total revenue.

Our international sales make up approximately 29% of our total revenue as of the last fiscal year. Direct international sales will probably continue to represent a significant portion of our revenue. In addition, many of our domestic customers ship a significant portion of our products to their customers in foreign countries.

Although a very small percentage of these sales are denominated in foreign currencies, they are subject to foreign exchange rate fluctuations. This could impact our results of operations. Currency fluctuations may also affect the volume of sales denominated in U.S. dollars to overseas foreign customers because the exchange rates affect the costs of our products to foreign customers.

3.34 Regulations by the U.S. and other governments may impact our ability to trade with certain parties and/or export or import goods and services.

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

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

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

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

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

3.35 Some of our subsidiaries operate in foreign countries. This could expose us to risks, such as adverse foreign exchange rate fluctuations or an inability to enforce our legal rights in those countries.

We have subsidiaries in The Netherlands, Germany, Japan, Canada and Singapore. These subsidiaries operate under their respective local currencies. Consequently, foreign exchange rates between the U.S. dollar and the local currency affect any amounts paid or owed to a subsidiary. These subsidiaries also operate under their respective local law. This may complicate enforcing our legal rights in these countries.

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

- fluctuating currency exchange rates;

- foreign government regulations;

- difficulties in collecting international accounts receivable; and

- difficulties in enforcing intellectual property rights.

3.36 We have taken measures to deter a hostile takeover or adverse change in control, including adopting a shareholder rights plan.

We have taken a number of actions which may deter a hostile takeover or delay or prevent a change in control, even one that could result in a premium payment to the stockholders for their shares or that might otherwise benefit the stockholders.

We have adopted a stockholder rights plan that may substantially dilute the stock ownership position of a person attempting to acquire Exabyte on terms our Board of Directors does not approve. In addition, our Restated Certificate of Incorporation and By-laws contain provisions which may delay or prevent a change in control. These provisions include:

- classifying the Board into three tiers;

�� - authorizing the Board to issue preferred stock without stockholder approval,

- authorizing the Board to determine voting rights and other provisions of the preferred stock;

- requiring stockholders actions take place at a meeting of stockholders and not by written consent;

- requiring advance notice of stockholder proposals and director nominations;

- providing that only the Board may increase the authorized number of directors; and

- requiring that special stockholder meetings may be called only by the Chairman of the Board, President or majority of directors.

On January 26, 1996, the Compensation Committee approved, and the Board adopted, a severance compensation program ("Severance Program") giving officers and other key employees severance payments if they are dismissed within one year after certain changes in control occurred. The Severance Program provides for a severance payment in varying amounts, not to exceed 12 months of compensation, depending upon the time of the change in control and the position level of the terminated officer or employee.

The Severance Program further allows, in certain circumstances, accelerating the vesting of outstanding and unexercised stock options held by the officer or employee.

3.37 We rely on our IT systems to operate our businesses. There are significant costs associated with upgrading and maintaining our IT systems.

We rely on certain information technology (IT) systems and resources to operate our critical business processes, including:

- engineering design process;

- manufacturing and services;

- sales orders, shipping, customer information, technical support and other sales related processes;

- financial activities, including general ledger and budget reporting; and

- general day-to-day activities.

We are currently transitioning most of our IT functions to newer generation IT systems. To date we have spent approximately $1.1 million in license and service fees related to the acquisition and implementation of new systems. We currently expect to invest significant financial and other resources to upgrade certain existing IT functions that will not be addressed by our new systems. We currently expect to spend in excess of $400,000 during the next 6 months to upgrade existing systems. We may not be able to successfully implement new IT systems. If the new systems can not be properly implemented, we would expect to incur additional expenses in excess of $425,000 to upgrade and improve all of our IT functions. The failure or interruption in service of any of the IT systems supporting these functions could significantly impact our business operations.

4. The absence of a public market for our securities could reduce the price at which they may be sold and the ability to sell them.

4.1 There is currently no public market for our preferred stock.

Unlike our common stock, our preferred stock is not included on any exchange or over-the-counter market, and we do not have any intent to apply for inclusion. As a result, a holder of our preferred stock may be unable to dispose of those shares. In addition to many of the risks associated with an investment in our common stock, an investment in our preferred stock is subject to the risk that a holder may be unable to find a market for those shares.

4.2 Nasdaq could delist our common stock if we do not continue to meet Nasdaq's financial, corporate governance, and other standards for continued listing

Our common stock is listed on the Nasdaq National Market. In order to maintain our listing on Nasdaq we must meet minimum financial and other requirements. Among the continued listing requirements are the maintenance of a minimum amount of net tangible assets, a $1 minimum closing bid price for our common stock, and currency in filing various reports with the SEC, as well as other requirements. There are also circumstances where Nasdaq may exercise broad discretionary authority for continued inclusion. If our common stock were delisted from Nasdaq for any reason, it would seriously reduce the value of our common stock and its liquidity as there would be no effective way to buy or sell our common stock on a public market. Even the notice of a possible delisting would likely affect the stock price. Nasdaq has in the past notified us of a possible delisting as a result of our failure to timely file our Annual Report on Form 10-K for the 2000 fiscal year. Although we have since remedied the noticed deficiency, we cannot assure that we will not again receive future delisting notifications.

Item 6. Exhibits and Reports on Form 8-K

(a)	None

(b)	Reports on Form 8-K:

	(1) We filed a report on Form 8-K on February 2, 2001 to update 1999 financial statements for an emphasis of matter paragraph in the independent accountants' report and footnote disclosure related to the Company's liquidity and financial condition.
	(2) We filed a report on Form 8-K on February 2, 2001 to describe our common stock.
	(3) We filed a report on Form 8-K on February 2, 2001 to describe the preferred share purchase rights that trade with our common stock.
	(4) We filed a report on Form 8-K on February 9, 2001 to file a press release dated February 9, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized.

			EXABYTE CORPORATION
			Registrant
Date	May 15, 2001	By	/s/ Stephen F. Smith
			Stephen F. Smith Vice President, Chief Financial Officer, General Counsel & Secretary (Principal Financial and Accounting Officer)

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MidgardXXI (MGXX) Inactive 10-Q2001 Q1 Quarterly report

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