In fiscal 2004, Hutchinson Technology met heightened challenges presented by sharp swings in demand as well as escalating customer requirements for precision and performance in our suspension assembly products. Because of our efforts to better accommodate fluctuations in demand, we operated profitably in every quarter despite weekly unit shipment volumes that swung from a low of approximately 5 million to a high of 16 million. We also continued to strengthen our leadership in suspension assembly design, development and production through increased investments in process capabilities, product features, manufacturing capacity and overall business agility.

Our leadership position generates returns that fund continuing investment in advancing suspension assembly technology, enhancing our process capabilities and expanding our production capacity. Strengthening our leadership position is imperative to our long-term success. In 2005, we will continue to invest aggressively in areas that strengthen our ability to satisfy emerging industry requirements.

Our suspension assembly shipments for fiscal 2004 totaled 538 million, up 2% from 2003. This modest year-over-year growth masked sharp swings in volume from quarter to quarter over the course of the year, as well as a proliferation of new suspension assembly designs to satisfy the needs of application- specific customer disk drive programs.

With respect to volume, demand was strong in the first quarter, weakened in the second and third quarters, then strengthened again in the fourth quarter. We believe the weaker demand we experienced midyear resulted primarily from three factors. First, disk drive makers slowed production for a period in early calendar 2004 to reduce their inventories, reducing suspension assembly consumption. Second, some shifts in market share among the major disk drive makers resulted in declines in demand on certain disk drive programs on which we were the preferred volume supplier. Third, our customers have improved their manufacturing proficiency with higher density recording heads. As a result, fewer suspension assemblies were lost to scrap in their manufacturing processes, dampening suspension demand.

Gross profit margin in 2004 was 28% compared with 31% in 2003. The decline was caused primarily by lower demand in 2004’s second and third quarters and the resulting lower utilization of production capacity, as well as lower average selling prices.

We generated $95.4 million in cash from operations in 2004. At year-end, our cash, cash equivalents and securities held for sale totaled $258.1 million compared with $292.4 million at the end of 2003.

Our 2004 capital spending totaled $93 million, nearly double the 2003 level. Among the year’s major capital investments were expansions of trace manufacturing and assembly operations at our Eau Claire and Hutchinson facilities, expansion of our Development Center’s pre-production operations and other improvements in processes, tooling and equipment.

In July 2004, our board of directors authorized the repurchase of up to two million shares of our common stock. The board believes a share repurchase program is a prudent use of our capital and will enhance shareholder returns over the long term. As of the end of 2004, the company had repurchased a total of 1.7 million shares at an average price of $22.75 per share.

Variety: Another aspect of industry demand is an increase in suspension assembly variety. Disk drive makers continue to expand their product lines to include drives offering performance characteristics optimized for specific applications, including a growing range of consumer electronic applications. This results in a proliferation of individual disk drive programs, each of which may require a different suspension assembly design. For many disk drive programs, the suspension assembly is among the components critical to achieving the desired functionality and performance that differentiate a particular product from another. Each new suspension assembly may also require a higher level of compliance with specific tolerances in order to achieve the customer’s desired product performance and differentiation.

Miniaturization:Along with the proliferation in disk drive programs, the disk drive industry is steadily migrating to smaller and smaller form factors. Smaller read/write heads, continuing improvement in data density and the increasing use of disk drives in consumer electronic applications are among the forces converging to shrink the size of disk drives. Disk drives featuring platters with diameters of one inch or less are now in development or mass production for applications including music players, digital cameras, cell phones and other devices.

Maintaining our market leadership requires continued investment in process capabilities, product features, manufacturing capacity and business agility to satisfy the requirements of our customers. The proliferation of application-specific suspension assembly designs, the further miniaturization of disk drives and short-term fluctuations in demand place increasingly higher importance on all four of these areas.

We continue to develop new suspension assembly features that enable our products to meet customers’ desired tolerances and performance criteria for specific disk drive programs. This work is done primarily in our Development Center, where activity was at record levels throughout 2004. To accommodate the increased demand, we added personnel and equipment that helped us increase our Development Center throughput. The number of programs transitioned from development to volume production doubled in 2004 compared with 2003. We expect another double-digit percentage increase in program transitions in 2005.

Fluctuations in demand from quarter to quarter and the proliferation of suspension assembly designs described above require us to be a more agile business. We must operate efficiently over a wider range of peak volumes and program lives, often producing a wider variety of suspension assemblies in lower volumes. To accommodate these demand dynamics, we are managing inventories to respond to demand swings, adjusting manufacturing capacity to demand and collapsing the time required to transfer a manufacturing unit for a new product from development to volume production.

Our investments in process capabilities, product features, capacity and agility are key to winning lead developer positions on new suspension assembly designs and preferred volume supplier designation for customers’ new products. We continue to benefit from deeper involvement with nearly all of our customers. They and we mutually recognize that working together closely provides the best means to achieve our shared cost, quality and performance goals.

animal studies to pilot human data in January of this year. Shock resuscitation clinical research using our InSpectra™ System at Ryder Trauma Center of the University of Miami was awarded the Alexander Award at the 2004 Eastern Association for the Surgery of Trauma meeting. We recently launched a prospective, multisite clinical trial that aims to produce further statistical evidence of our product’s clinical effectiveness and value.

In early 2004, we formed a Trauma and Critical Care Advisory Board to provide clinical guidance as we develop and document clinical results, and introduce trauma and critical care applications of the InSpectra™ Tissue Spectrometer. The members of the Advisory Board are internationally recognized researchers, clinicians and educators in the fields of trauma and critical care.

For more information on the BioMeasurement Division and its technology, please visit our newly updated website at htibiomeasurement.com.

Our company is the world’s leading provider of suspension assemblies, supplying products for all sizes and types of disk drives. Our TSA platform has become a virtual industry standard and is now in use at all of the leading disk drive makers. To maintain and strengthen our market position, we continue to invest in advancing suspension assembly precision and performance, developing process capabilities our customers require for future products and integrating design, development, manufacturing and support services to offer customers a superior value and complete solution compared with alternatives.

We especially recognize that we can never stand still in the face of our customers’ escalating requirements. Toward that end, in 2004 we formed a new committee of our board of directors – our Competitive Excellence Committee. This committee is charged with overseeing our continuous improvement and innovation performance. The committee will require management to report periodically on improvements accomplished and innovations delivered and may set goals for specific achievements in these areas.

Entering 2005, we are expecting further growth in unit shipments at least through our first quarter as a result of seasonally strong demand and higher volumes with certain customers. As more and more disk drives are built for use in products ultimately intended for consumer markets, this seasonality – evident in relatively stronger fiscal first and fourth quarters – is likely to continue.

We thank our people for their dedication and effort in the past year. We are all looking forward to the new fiscal year with energy and enthusiasm for the opportunity to further improve on our performance and the returns we deliver to our shareholders.

Wayne M. Fortun
President & Chief Executive Officer

John A. Ingleman
Vice President & Chief Financial Officer