<PAGE>   1
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                    FORM 10-Q



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



                For the quarterly period ended September 26, 1997

                         Commission file number 0-25796



                             STORMEDIA INCORPORATED
             (Exact name of registrant as specified in its charter)




             DELAWARE                                       77-0373062
   (State or other jurisdiction                          (I.R.S. Employer
 of incorporation or organization)                    Identification Number)


               385 REED STREET, SANTA CLARA, CALIFORNIA 95050-3118
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (408) 327-8400
              (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 90 days. Yes [X] No [ ]

        As of October 28, 1997, 13,653,038 shares of the Registrant's Class A
Common Stock, $0.013 par value, and 4,362,001 shares of the Registrant's Class B
Common Stock, $0.013 par value, were issued and outstanding.

================================================================================

<PAGE>   2
                     STORMEDIA INCORPORATED AND SUBSIDIARIES
                                      INDEX



<TABLE>
<CAPTION>
                                                                                               PAGE NO.
                                                                                               --------
<S>        <C>                                                                                   <C>
PART I.    FINANCIAL INFORMATION

  Item 1.  Condensed Consolidated Financial Statements (Unaudited)........................        3

           Condensed Consolidated Statements of Operations-- Three and Nine Months Ended
              September 26, 1997 and September 27, 1996...................................        3

           Condensed Consolidated Balance Sheets-- As of September 26, 1997 and
              December 31, 1996...........................................................        4

           Condensed Consolidated Statements of Cash Flows -- Nine Months Ended
              September 26, 1997 and September 27, 1996...................................        5

           Notes to Condensed Consolidated Financial Statements...........................        6

  Item 2.  Management's Discussion and Analysis of Financial Condition and Results 
              of Operations...............................................................        7

PART II.   OTHER INFORMATION

  Item. 1  Legal Proceedings..............................................................       18

  Item. 2  Changes in Securities..........................................................       19

  Item. 3  Defaults Upon Senior Securities................................................       19

  Item. 4  Submission of Matters to a Vote of Securities Holders..........................       19

  Item. 5  Other Information..............................................................       19

  Item. 6  Exhibits and Reports on Form 8-K...............................................       19

SIGNATURES................................................................................       20
</TABLE>




                                       -2-

<PAGE>   3
PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


                     STORMEDIA INCORPORATED AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED               NINE MONTHS ENDED
                                             ----------------------------    -----------------------------
                                             SEPTEMBER 26,  SEPTEMBER 27,    SEPTEMBER 26,   SEPTEMBER 27,
                                                  1997           1996             1997            1996
                                             -------------  -------------    -------------   -------------
                                                      (UNAUDITED)                     (UNAUDITED)
<S>                                            <C>             <C>             <C>             <C>      
Net sales                                      $  22,226       $  41,575       $  88,878       $ 160,383
Cost of sales                                     28,111          44,130         108,339         130,938
                                               ---------       ---------       ---------       ---------
   Gross profit (deficiency)                      (5,885)         (2,555)        (19,461)         29,445
Operating expenses:
Research and development                           4,252           3,945          10,922          12,072
Selling, general and administrative                2,257           3,984           7,077           8,163
Bad debt expense                                      --              --           5,438              --
                                               ---------       ---------       ---------       ---------
   Total operating expenses                        6,509           7,929          23,437          20,235
   Operating earnings (loss)                     (12,394)        (10,484)        (42,898)          9,210
Other income (expense), net                         (907)           (255)         (2,273)          1,057
                                               ---------       ---------       ---------       ---------
Earnings (loss) before income tax expense
   (benefit)                                     (13,301)        (10,739)        (45,171)         10,267
                                               ---------       ---------       ---------       ---------
Income tax expense (benefit)                          --          (1,611)         (1,647)          2,131
Net earnings (loss)                            $ (13,301)      $  (9,128)      $ (43,524)      $   8,136
                                               =========       =========       =========       =========
Earnings (loss) per share:
   Primary                                     $   (0.74)     $   (0.52)       $   (2.44)      $    0.45
                                               =========       =========       =========       =========
   Fully diluted                               $   (0.74)      $  (0.52)       $   (2.44)      $    0.45
                                               =========       =========       =========       =========
Shares used in per share computation:
   Primary                                        17,919          17,414          17,863          18,048
                                               =========       =========       =========       =========
   Fully diluted                                  17,919          17,414          17,863          18,050
                                               =========       =========       =========       =========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.




                                       -3-

<PAGE>   4
                     STORMEDIA INCORPORATED AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                             SEPTEMBER 26,    DECEMBER 31,
                                                                  1997           1996
                                                             -------------    ------------
                                                              (UNAUDITED)
<S>                                                            <C>             <C>      
ASSETS
   Current assets:
     Cash and cash equivalents and short-term investments      $  16,250       $  47,711
     Accounts receivable, less allowances of $7,257 at
       September 26, 1997 and $1,177 at December 31, 1996          9,333          31,047
     Income taxes receivable                                       1,738              --
     Inventories                                                  24,330          14,848
     Prepaid expenses                                              6,922           6,794
     Deferred income taxes                                            --           2,819
                                                               ---------       ---------
           Total current assets                                   58,573         103,219
   Plant and equipment, net                                      136,452         137,162
   Deferred income taxes                                              --              17
   Deposits and other assets                                       1,095           1,338
                                                               ---------       ---------
                                                               $ 196,120       $ 241,736
                                                               =========       =========
LIABILITIES AND EQUITY
   Current liabilities:
     Trade accounts payable                                    $  21,990       $  25,234
     Bank debt                                                    48,334           5,014
     Accrued salaries and benefits                                 5,228           4,151
     Income taxes payable                                             --           2,556
     Other accrued expenses                                        4,632           1,952
                                                               ---------       ---------
           Total current liabilities                              80,184          38,907
   Deferred income taxes                                              --             245
   Long-term debt, less current portion                              132          45,024
   Equity:
     Common stock, par value $0.013 per share                        237             233
     Additional paid-in capital                                  126,450         124,686
     Retained earnings (accumulated deficit)                     (10,883)         32,641
                                                               ---------       ---------
           Total equity                                          115,804         157,560
                                                               ---------       ---------
                                                               $ 196,120       $ 241,736
                                                               =========       =========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.




                                       -4-

<PAGE>   5



                              STORMEDIA INCORPORATED AND SUBSIDIARIES
                          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                               NINE MONTHS ENDED
                                                                          ---------------------------
                                                                          SEPTEMBER 26, SEPTEMBER 27,
                                                                              1997           1996
                                                                          ------------- -------------
                                                                                   (UNAUDITED)
<S>                                                                         <C>            <C>     
OPERATING ACTIVITIES
   Net earnings (loss)                                                      $(43,524)      $  8,136
   Adjustments to reconcile earnings to net cash (used in)
     provided by operating activities:
   Depreciation and amortization                                              22,144         12,249
   Bad debt expense                                                            5,438             --
   Deferred income taxes                                                       2,591             --
   Net loss on disposition of plant and equipment                                263             --
   Changes in operating assets and liabilities:
     Accounts receivable                                                      16,276         (4,595)
     Inventories                                                              (9,112)        (3,692)
     Prepaid expenses                                                            (21)        (3,518)
     Other assets                                                                242           (480)
     Trade accounts payable                                                   (3,244)         6,504
     Accrued liabilities                                                       3,757          2,226
     Net income taxes payable                                                 (4,294)         1,801
                                                                            --------       --------
       Net cash (used in) provided by operating activities                    (9,484)        18,631
                                                                            --------       --------
INVESTING ACTIVITIES
   Acquisition of plant and equipment                                        (22,166)       (67,695)
   Purchase (sale) of short-term investments                                  23,154        (16,346)
                                                                            --------       --------
       Net cash (used in) provided by investing activities                       988        (84,041)
                                                                            --------       --------
FINANCING ACTIVITIES
   Short-term borrowings                                                          --         10,000
   Repayment of short-term borrowings                                         (1,572)       (10,000)
   Issuance of long-term obligations                                              --         50,000
   Repayment of long-term obligations                                             --           (117)
   Proceeds from issuance of Common stock, net of issuance costs               1,760          1,650
   Settlement of Put Options                                                      --         (1,994)
   Repurchase of Class A Common Stock                                             --         (7,212)
                                                                            --------       --------
       Net cash provided by financing activities                                 188         42,327
                                                                            --------       --------
   Increase (decrease) in cash and cash equivalents                           (8,308)       (23,083)
   Cash and cash equivalents at beginning of period                           23,788         37,407
                                                                            --------       --------
   Cash and cash equivalents at end of period                               $ 15,480       $ 14,324
                                                                            ========       ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid for interest                                                   $  2,720       $    129
                                                                            ========       ========
   Cash paid for income taxes                                               $     70       $     80
                                                                            ========       ========
   Non-cash financing and investing activities:
     Tax benefit arising from early dispositions of stock
       issued upon exercise of stock options                                $     --       $    901
                                                                            ========       ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.




                                       -5-

<PAGE>   6
                     STORMEDIA INCORPORATED AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
       (INFORMATION FOR THREE AND NINE MONTHS ENDED SEPTEMBER 26, 1997 AND
     SEPTEMBER 27, 1996 IS UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 - BASIS OF PRESENTATION

        The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the condensed
consolidated financial statements include all adjustments which are necessary
for a fair presentation. Operating results for the three and nine months ended
September 26, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997 or any other interim period. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements included in
its Annual Report on Form 10-K for the year ended December 31, 1996 which was
filed with the Securities and Exchange Commission on March 25, 1997.

NOTE 2 - NET INCOME (LOSS) PER SHARE

        Net income (loss) per share is computed using the weighted average
number of shares outstanding. Common equivalent shares from stock options (using
the treasury stock method) have been included in the computation only when
dilutive.

        In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings per Share," which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
(loss) per share, the dilutive effect of stock options will be excluded.

NOTE 3 - BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
                                                       SEPTEMBER 26,   DECEMBER 31,
                                                           1997            1996
                                                       -------------   ------------
                                                        (UNAUDITED)
<S>                                                      <C>             <C>      
Inventories:
   Raw materials                                         $   6,363       $   6,586
   Work-in-process                                          12,643           5,638
   Finished goods                                            5,324           2,624
                                                         ---------       ---------
         Total inventories                               $  24,330       $  14,848
                                                         =========       =========
Plant and equipment:
   Land                                                  $     220       $     220
   Building and leasehold improvements                      35,046          32,009
   Machinery and equipment                                 111,747          95,982
   Construction-in-progress                                 33,963          32,161
                                                         ---------       ---------
                                                         $ 180,976       $ 160,372
   Less allowance for depreciation and amortization        (44,524)        (23,210)
                                                         ---------       ---------
         Plant and equipment, net                        $ 136,452       $ 137,162
                                                         =========       =========
</TABLE>




                                       -6-

<PAGE>   7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results" and other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.

OVERVIEW

        During 1996, the Company sold its disks primarily to Seagate Technology,
Inc. ("Seagate") and Maxtor Corporation ("Maxtor"), representing 71% and 25% of
net sales, respectively. In November 1995, the Company entered into a multi-year
Supply Agreement with Maxtor (the "Maxtor Supply Agreement") pursuant to which
Maxtor agreed to purchase specified volumes over a four-year period. In June
1996, Maxtor repudiated the Maxtor Supply Agreement and caused the Company to
experience excess capacity while it sought to qualify its products with new and
existing customers. While Seagate and other customers have taken a portion of
this capacity, during the nine months ended September 26, 1997, the Company
continued to experience excess manufacturing capacity as it sought to qualify
its products in new and existing customers' product programs. During the nine
months ended September 26, 1997, sales to Seagate represented 74% of net sales.
Additionally, during the third quarter of 1997, the disk drive industry
experienced a general slowdown which resulted in weaker demand for the Company's
products.

        Recently, the Company has qualified its products in the product programs
of both new and existing customers. In December 1996, the Company entered into a
multi-year agreement with Micropolis(s) Pte Ltd., a manufacturer of digital
audio/video disk drives (the "Micropolis Agreement"). Under the terms of the
Micropolis Agreement, the Company has set up and begun to operate a 15,000
square foot thin film manufacturing facility (the "Micropolis Facility") within
Micropolis' 400,000 square foot disk drive manufacturing plant in Singapore.
Micropolis has agreed to purchase all of the disks manufactured at the
Micropolis Facility through December 31, 1999. The Company believes that the
Micropolis Agreement will result in savings for both companies in areas such as
packaging, transportation and response time. The Company began furnishing
Micropolis with a portion of its thin film requirements from the Micropolis
Facility during the third quarter of 1997. During the nine months ended
September 26, 1997, sales to Micropolis represented 19% of net sales.
Additionally, the Company recently qualified in certain product programs of
Western Digital Corporation and Samsung Electronics Co. Ltd. While the Company
expanded its customer base during the nine months ended September 26, 1997, some
product qualifications that were expected to be completed were not and, as a
result, net sales were negatively impacted by the decrease in unit volume. The
Company is in various stages of product qualifications with other potential
customers and expects to commence shipping under certain of these programs in
the fourth quarter of 1997 and early 1998. However, the qualification of new
products is a costly and time consuming process and there can be no assurance
that the Company will successfully continue to find new customers or
successfully qualify its products in their product programs on a timely basis.

        While the Company has sought to qualify its products with new and
existing customers, during the third quarter of 1997, there was weakness in
demand for disk drives and a commensurate decrease in demand for thin film
media. The demand for the Company's thin film disk depends solely upon the
demand for such disk drives. The disk drive market is presently characterized by
short product life cycles, rapid technological change and intense pricing
pressures. The disk drive industry has also been characterized by periods of
over supply, reductions in customer forecast, price erosion and reduced
production levels. These cycles are magnified by increasing production capacity
in the disk industry. To the extent industry capacity continues to exceed
demand, the Company will continue to experience increased levels of competition
and over capacity.

        The Company's gross margins have fluctuated and will continue to
fluctuate quarterly and annually based upon a variety of factors such as the
level of utilization of the Company's production capacity, changes in product
mix, average selling prices, demand or manufacturing yields, increases in
production and engineering costs associated with initial production of new
programs, changes in the cost of or limitations on availability of materials and
labor shortages. During 




                                       -7-

<PAGE>   8
1996 and the nine months ended September 26, 1997, the Company reported a gross
margin of 17.3% and (21.9%), respectively. The Company's gross margins were
lower during the nine months ended September 26, 1997 from levels experienced in
1996 primarily due to the continuing under-utilization of production capacity
from previous levels.

        The Company expects that a substantial portion of the Company's
shipments in the remainder of 1997 will be of new products, including high
performance magneto resistive (MR) disks. Generally, new products have higher
average selling prices than more mature products but initially have lower
manufacturing yields and generally are initially produced in lower quantities
than more mature products. The Company's gross margins have been negatively
impacted and expect margins to continue to be negatively impacted by the
introduction of new products for the remainder of 1997.

RESULTS OF OPERATIONS

        The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:


                              STORMEDIA INCORPORATED AND SUBSIDIARIES
                          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED              NINE MONTHS ENDED
                                           -----------------------------    -------------------------------
                                           SEPTEMBER 26,   SEPTEMBER 27,    SEPTEMBER 26,     SEPTEMBER 27,
                                                1997            1996             1997              1996
                                           -------------   -------------    -------------     -------------
<S>                                            <C>              <C>              <C>              <C>   
Net sales                                      100.0%           100.0%           100.0%           100.0%
Cost of sale                                   126.5%           106.1%           121.9%            81.6%
                                               -----            -----            -----            -----
   Gross profit (deficiency)                   (26.5)%           (6.1)%          (21.9)%           18.4%
Operating expenses:
Research and development                        19.1%             9.5%            12.3%             7.5%
Selling, general and administrative             10.2%             9.6%             8.0%             5.1%
Bad debt expense                                 0.0%             0.0%             6.1%             0.0%
                                               -----            -----            -----            -----
   Total operating expenses                     29.3%            19.1%            26.4%            12.6%
   Operating earnings (loss)                   (55.9)%          (25.2)%          (48.3)%            5.7%
Other income (expense), net                     (4.1)%           (0.6)%           (2.6)%            0.7%
                                               -----            -----            -----            -----
Earnings (loss) before income                                                                       
   tax expense                                 (59.9)%          (25.8)%          (50.9)%            6.4%
                                               -----            -----            -----            -----
Income tax expense (benefit)                     0.0%            (3.9)%           (1.9)%            1.3%
Net earnings (loss)                            (59.9)%          (21.9)%          (49.0)%            5.1%
                                               =====            =====            =====            =====
</TABLE>




                                       -8-

<PAGE>   9
1997 COMPARED TO 1996

Net sales

        Net sales decreased 46.5% to $22.2 million for the three months ended
September 26, 1997 from $41.6 million for the three months ended September 27,
1996. For the nine months ended September 26, 1997, net sales decreased 44.6% to
$88.9 million from $160.4 million for the nine months ended September 27, 1996.
The decrease in net sales was primarily due to a decrease in unit volume and
secondarily due to a slight decrease in average selling prices. The Company's
customers during the nine months ended September 26, 1997 were Seagate
Technology, Inc. ("Seagate") and Micropolis (S) Pte Ltd. ("Micropolis"). The
Company's customers for the nine months ended September 27, 1996 were Seagate
and Maxtor Corporation ("Maxtor").

        Net sales for the nine months ended September 26, 1997 as compared to
the nine months ended September 27, 1996 were negatively impacted by the failure
of Maxtor and Hyundai to purchase the volumes committed under the Maxtor Supply
Agreement. In June 1996, Maxtor notified the Company that it did not intend to
purchase the full committed volumes required by the Maxtor Supply Agreement.
Maxtor subsequently repudiated the Maxtor Supply Agreement. However, in the
third quarter of 1996 the Company continued to ship products to Maxtor (although
in lesser volumes and at lower average selling prices than in the second quarter
of 1996 and the comparable prior year quarter). In September 1996, the Company
filed a lawsuit in the United States District Court of Northern California, San
Jose Division, against Hyundai Electronics Industries Co., Ltd., seeking damages
caused by Hyundai's alleged breach of the volume purchase contract among the
Company, Hyundai, and its wholly-owned subsidiary, Maxtor Corporation. The
Company is seeking additional customers to utilize the manufacturing capacity as
it seeks to qualify its products in new and existing customers' product
programs.

        Although the Company expanded its customer base during the nine months
ended 1997, some product qualifications that were expected to be completed were
not. As a result, net sales were further negatively impacted by the delay in new
product qualifications. In addition, results for the nine months ended were
negatively impacted by continued weakness in demand in the disk drive industry.
Expansion of net sales depends on industry demand improving and the Company
successfully qualifying products with new and existing customers.

Gross profit (deficiency)

        The Company's gross profit (deficiency) decreased 130.3% to $(5.9)
million for the three months ended September 26, 1997 from $(2.6) million for
the three months ended September 27, 1996. For the nine months ended September
26, 1997, gross profit (deficiency) decreased to $(19.5) million from the $29.4
million for the nine months ended September 27, 1996. Gross profit (deficiency)
as a percentage of net sales for the three months ended September 26, 1997 was
(26.5)% as compared to (6.1)% for the three months ended September 27, 1996. The
principal factors contributing to the decrease in gross profit (deficiency) were
decreased unit volumes as a result of the failure of Maxtor to purchase the
volumes committed to under the Maxtor Supply Agreement, as well as weakness in
demand in the disk drive industry and the resulting under-utilization of
production capacity. While the Company has taken actions to reduce its costs and
expenses, including rotating shutdowns of all of its media plants, the Company
expects gross margins in 1997 will remain at levels below those experienced in
1995 and the first half of 1996. The Company expects that a substantial portion
of its shipments in 1997 will be of new products. New products often initially
have lower manufacturing yields, initially are produced in lower quantities than
more mature products and, as a result, initially have lower gross margins.
Manufacturing yields and gross margins generally improve as the product matures
and production volumes increase.




                                      -9-
<PAGE>   10
Research and development

        Research and development expenses increased 7.8% to $4.3 million for the
three months ended September 26, 1997 from $3.9 million for the three months
ended September 27, 1996, increasing as a percentage of net sales to 19.1% for
the three months ended September 27, 1996 from 9.5% for the comparable prior
year three-month period. For the nine months ended September 26, 1997, research
and development expenses decreased 9.5% to $10.9 million from $12.1 million for
the nine months ended September 27,1996, increasing as a percentage of net sales
to 12.3% for the nine months ended September 26, 1997 from 7.5% for the
comparable prior year nine month period. The decrease in research and
development expense for the nine month period ended September 26, 1997 was due
principally to the reduction in the volume of samples produced.

Selling, general and administrative

        Selling, general and administrative expenses decreased 43.3% to $2.3
million for the three months ended September 26, 1997 from $4.0 million for the
three months ended September 27, 1996, increasing as a percentage of net sales
to 10.2% for the three months ended September 26, 1997 from 9.6% for the
comparable prior year three month period. For the nine months ended September
26, 1997, selling, general and administrative expenses decreased 13.3% to $7.1
million from $8.2 million for the nine months ended September 27, 1996,
increasing as a percentage of net sales to 8.0% for the nine months ended
September 26, 1997 from 5.1% for the comparable prior year nine month period.
Included in selling, general and administrative expenses for the three months
ended September 27, 1996 was a one-time charge of $2.2 million, principally
related to the write-off of loans due from a supplier of plated and polished
substrates to the Company.

Other income (expense), net

        Other income (expense), net for the three months ended September 26,
1997 was $0.9 million expense compared to $0.3 million expense for the three
months ended September 27, 1996. Other income (expense), net for the nine months
ended September 26, 1997 was $2.3 million expense compared to $1.1 million
income for the comparable prior year nine-month period. The change was
principally attributable to a decrease in interest income as a result of lower
net cash levels during the three and nine months ended September 26, 1997 as
compared to the comparable prior year three and nine month periods.

Income tax expense

        The Company's effective tax rate (which includes federal and state
income tax expense) for the three and nine months ended September 27, 1996 were
15% and 20.8%, respectively. The Company has been granted a seven-year tax
holiday in Singapore which expires in 2005. The Company's tax benefit recorded
for the nine months ended September 26, 1997 approximates expected
recoverability on previously paid taxes.

LIQUIDITY AND CAPITAL RESOURCES

        Cash and cash equivalents and short-term investments of $16.3 million as
of September 26, 1997 decreased $31.4 million from December 31, 1996 primarily
due to the net loss and acquisition of plant and equipment offset by
depreciations and changes in working capital.

        During the nine months ended September 26, 1997, the Company used $9.5
million in operating activities. Principal uses included $43.5 million of net
loss, $9.1 million increase in inventory, offset by $22.1 million of
depreciation and amortization and a $16.3 million decrease in accounts
receivable.

        For the nine months ended September 26, 1997, the Company used $22.2
million in investing activities for capital expenditures primarily for
facilities expansion at its Singapore operations, including its substrate
facility, offset by $7.0 million sale of short-term investments. While the
Company has invested $22.2 million in acquisition of plant and equipment for the
nine months ended September 26, 1997, capital expenditures continue to be
reduced to better align resources and




                                      -10-
<PAGE>   11
expenses with sales expectations. Capital expenditures are expected to
approximate $25 million during 1997. The Company had $6.5 million of
noncancellable purchase commitments for plant and equipment outstanding at
September 26, 1997.

        The Bank Group led by CIBC Wood Gundy, an affiliate of Canadian Imperial
Bank of Commerce and Banque National de Paris (the "Banks") funded the $50.0
million Term Loan Facility in August 1996. The Term Loan Facility has a
three-year term, bears an interest rate of LIBOR plus 3% and is secured by the
Company's assets located in Singapore and is guaranteed by the parent. In July
1997, the Company terminated its $25.0 million Revolving Credit Facility with
the Banks. In the past, the Banks have granted the Company waivers of certain
financial covenants and subsequently amended certain covenants of the Term Loan
Facility. The Company is currently in violation of certain financial covenants
of the Term Loan Facility but remains current on debt service and interest
payments and has not been declared to be in default under its Term Loan
Facility. The Company is currently in discussions with the Banks to waive or
revise certain covenants under an amendment to the Term Loan Facility. There can
be no assurance that the Banks will continue to provide such waivers or amend
the Term Loan Facility. The inability to receive waivers or amendments could
cause the Banks to declare a default under the Term Loan Facility and accelerate
payments due thereunder. Such an acceleration would have a material effect on
the Company's business, results of operations and financial condition.

        The Company's principal sources of liquidity at September 26, 1997
consisted of $16.3 million of cash and cash equivalents and short-term
investments. The Company is implementing various cost savings measures in order
to meet its ongoing liquidity requirements. In addition, the Company intends to
raise additional working capital in order to fund the Company's desired level of
operations and is currently reviewing additional debt and/or equity financing
alternatives. While the Company believes it will acquire the necessary capital,
there can be no assurance that such financing will be available or will be
available on terms which are not dilutive to current shareholders or will be
available on terms favorable to the Company or its shareholders. The Company's
failure to raise working capital when required would have a material adverse
effect on the Company's operations, financial condition and competitive
position.

FACTORS AFFECTING OPERATING RESULTS

        Dependence on a Limited Number of Customers. During 1996, the Company
sold its disks primarily to Seagate Technology, Inc. ("Seagate") and Maxtor
Corporation ("Maxtor"). Aggregate shipments to Seagate and Maxtor in 1995 and
1996 represented 99% and 98% respectively, of net sales. During the nine months
ended September 26, 1997, shipments to Seagate and Micropolis represented 74%
and 19%, respectively, of net sales. As discussed above, Maxtor has terminated
the Maxtor Supply Agreement. The Company continues to seek additional customers
to utilize the manufacturing capacity in which it has been manufacturing
products for Maxtor. While Seagate and other customers have taken a portion of
this capacity, the Company continues to have excess manufacturing capacity as it
seeks to qualify its products in additional product programs of both new and
existing customers. Qualification is a costly and time consuming process and
there can be no assurance that the Company will continue to qualify products
with its present customers, successfully find new customers or successfully
qualify its products in their product programs on a timely basis or with
acceptable yields. Accordingly, the Company expects Maxtor's failure to purchase
committed volumes and its termination of the Maxtor Supply Agreement to continue
to negatively impact its results of operation's at least through the end of
1997.

        Given the relatively small number of independent high performance disk
drive manufacturers, the Company's dependence on a few customers will continue
in the future. The Company's existing and several of its potential customers are
expanding their ability to produce thin film disks internally and, as a result,
could reduce the level of purchases or cease purchasing from the Company, could
sell thin film disks in competition with the Company or might not sustain or
increase their level of orders as the Company increases its capacity. The
significant reduction in purchases by Maxtor and its repudiation of the Maxtor
Supply Agreement has and will materially adversely affect the Company's
operating results at least through the end of 1997. The loss of any of the
Company's current customers or of any significant future customer, the inability
to design into new customers' products, or a significant reduction in the level
of orders for any reason would materially adversely affect the Company's
business, operating results and financial condition. Additionally, due to the
lengthy product qualification process, changes in customers or product mix could
have a material adverse effect on the Company's business, results of operations
and financial condition during any such transition. Consequently, the loss of
Seagate or one or more of the Company's current or potential customers through
consolidations, adverse financial or market 




                                      -11-
<PAGE>   12
circumstances or otherwise, would have a material adverse effect on the
Company's business, results of operations and financial condition.

        Specifically, Seagate currently produces a portion of its own thin film
disk requirements internally and historically has produced a majority of its
requirements. Seagate's expressed corporate strategy has been to significantly
increase its internal capacity to manufacture disks through construction of a
disk manufacturing facility in Singapore, which was completed in September 1996.
In February 1996, Seagate also completed its merger with Conner Peripherals,
Inc. ("Conner") and acquired Conner's internal disk production capacity, which
supplied substantially all of Conner's disk requirements. Seagate's increased
internal disk manufacturing capacity as described above may reduce Seagate's
disk needs from external suppliers. If Seagate were to reduce the level of
orders from the Company as a result of the expansion of its internal disk
production, an acquisition of, or the establishment of a strategic relationship
with, another disk supplier or otherwise, or if Seagate were to begin selling
disks in competition with the Company, the Company's business, results of
operations and financial condition would be materially adversely affected.

        Recently, there has been a slowdown in demand for disk drive products
and a commensurate decrease in demand for thin film media. To the extent that a
decrease in demand has created excess industry capacity, customers, such as
Seagate, who have developed an internal supply of disks are likely to utilize
their internal capacity prior to purchasing disks from independent suppliers
such as the Company.

        Rapid Changes in Customer and Product Mix. Due to the rapid and frequent
development of new disk drive products, it is common in the industry for the
relative mix of customers and products to change rapidly, even from quarter to
quarter. For example, in the fourth quarter of 1996 sales to Seagate represented
approximately 95% of net sales, while in the first quarter of 1997 sales to
Seagate and Micropolis represented approximately 56% and 21% of net sales,
respectively. In addition, the Company's unit sales of MR disks represented 0%
of units sold in the second quarter of 1996 compared to 70% of units sold for
the comparable quarter of 1997. At any one time the Company typically supplies
disks in volume for only five to ten disk drive products, with the mix of such
products shifting continually. Disk drive manufacturers demand a variety of thin
film disks with differing design, performance and cost characteristics. Thin
film disk suppliers, such as the Company, are required to work closely with such
manufacturers in order to develop products that will be used in the
manufacturers' designs. Thin film disk suppliers seek to have their products
"designed in" to a particular disk drive and to be qualified as a primary
supplier for new programs. The design-in process is ongoing, lengthy and
frequent and the Company must compete for participation in each product program
including those of existing customers. As discussed above, Maxtor has terminated
the Maxtor Supply Agreement and the Company continues to seek additional
customers to utilize the manufacturing capacity in which it had been
manufacturing products for Maxtor. While Seagate and other customers have taken
a portion of this capacity, the Company continues to have excess manufacturing
capacity as it seeks to qualify its products in product programs of both new and
existing customers. Qualification is a costly and time consuming process and
there can be no assurance that the Company will successfully find new customers
or successfully qualify its products in their product programs on a timely basis
or with acceptable yields. In the event the Company's products do not become
designed into or qualified in a particular disk drive program on a timely basis,
the Company could be excluded as a supplier of disks for such program entirely
or could become a secondary source of supply for such program, which typically
results in lower sales and lower gross margins. Consistent inability to become
designed into a disk drive program would have a material adverse effect on the
Company's business results of operations and financial condition.

        Dependence on Intensely Competitive Hard Disk Drive Industry; Risk of
Excess Industry Capacity. The demand for the Company's thin film disks depends
solely upon the demand for hard disk drives. This market is characterized by
short product life cycles and rapid technological change and has experienced
large fluctuations in product demand. The disk drive industry also has been
characterized by periods of oversupply, reductions in customer forecasts, price
erosion and reduced production levels. The effect of these cycles on suppliers,
including thin film disk manufacturers, has been magnified by hard disk drive
manufacturers' practice of ordering components in excess of their needs during
periods of rapid growth, which increases the severity of the drop in the demand
for components during periods of contraction. The effect of these cycles may be
magnified by increased disk production capacity. Over the past year, the
Company's principal 




                                      -12-
<PAGE>   13
customers and many of its competitors and potential customers engaged in
substantial efforts to increase disk manufacturing capacity in light of the
imbalance between previously existing levels of demand for disks and existing
industry capacity. These efforts are resulting in significant additional
capacity in the industry. To the extent industry capacity exceeds demand, the
Company will continue to experience increased levels of competition which could
materially adversely impact the Company's business, results of operations, and
financial condition. In addition, in the event of an oversupply of disks,
customers who have developed an internal supply of disks are likely to utilize
their internal capacity prior to purchasing disks from independent suppliers
such as the Company.

        Uncertainties Associated with Supply Agreement with Seagate. In June
1995, the Company entered into a Supply Agreement with Seagate (the "Seagate
Supply Agreement,") pursuant to which the Company has established the Dedicated
Facility in Singapore to manufacture disks for Seagate. The Company has expended
significant financial and management resources to construct and operate at such
facility. While Seagate was required to purchase the disks manufactured at the
Dedicated Facility through March 31, 1999, Seagate and the Company recently
amended the Seagate Supply Agreement (the "Amended Agreement") to allow the
Company to manufacture disks for Seagate at any one of its three facilities. The
Amended Agreement also eliminates the pricing formula of the Seagate Supply
Agreement. All of the products manufactured under the Amended Agreement must
still be qualified by Seagate before products can be delivered to Seagate. As a
result, while Seagate continues to be obligated to purchase certain volumes and
continues to be a significant customer, the volumes purchased are not sufficient
to fill plants and the Company has been operating with excess capacity. To the
extent the Company continues to operate at less than full capacity, the
Company's business, results of operating and financial condition will continue
to be materially adversely affected. See "--Variability in Gross Margins and
Operating Results."

        Uncertainties Associated with Agreement with Micropolis. In December
1996, the Company entered into a multi-year agreement with Micropolis, a
manufacturer of digital auto/video disk drives. Under the terms of the
Micropolis Agreement, the Company agreed to set up and operate a 15,000 square
foot thin film manufacturing facility (the "Micropolis Facility") within
Micropolis' 400,000 square foot disk drive manufacturing plant in Singapore.
Micropolis has agreed to purchase all of the disks manufactured at the
Micropolis Facility through December 31, 1999. In addition, the Company has
agreed to supply Micropolis with specified volumes from its other facilities
until the Micropolis Facility is completed. During the nine months ended
September 26, 1997, sales to Micropolis represented 19% of net sales. The
Company believes that the Micropolis Agreement will result in savings for both
companies in areas such as packaging, transportation and response time. While
the Company has set up two other manufacturing facilities in Singapore, this
will be the first time in the industry and for the Company to build a
manufacturing facility in a customer's manufacturing plant and each product must
still be qualified by Micropolis. The Micropolis Facility began furnishing
Micropolis with a portion of its thin film requirements during the third quarter
of 1997. While construction of the Micropolis Facility to date has been on
schedule, there can be no assurance that the Company will be able to complete
the Micropolis Facility within budget or on a timely basis. Additionally, the
Company currently has manufacturing capacity located in Singapore that is
under-utilized. To the extent that the Company continues to build additional
facilities, the under-utilized capacity for the Company will not be reduced
unless the Company significantly increases its sales. Continued under-utilized
capacity will adversely impact the Company's gross profits and results of
operations.

        Variability in Gross Margins and Operating Results. The Company's gross
margins have fluctuated and will continue to fluctuate quarterly and annually
based upon a variety of factors such as the level of utilization of the
Company's production capacity, changes in product mix, average selling prices,
demand or manufacturing yields, increases in production and engineering costs
associated with initial production of new programs, changes in the cost of or
limitations on availability of materials and labor shortages. During 1995, 1996,
and the nine months ended September 26, 1997, the Company reported a gross
margin of 27.0%, 17.3% and (21.9)%, respectively. The Company's gross margins in
the nine months ended September 26, 1997 continued to be lower than the levels
experienced in 1995 and 1996 primarily due to Maxtor's termination of the Maxtor
Supply Agreement, decline in demand in the disk drive industry and the continued
resulting under-utilization of production capacity. While the Company has taken
steps to better align its resources and expenses with sales expectations and
reduce its costs and expenses, its operations have a high level of fixed costs
and expenses. Despite 




                                      -13-
<PAGE>   14
rotating shutdowns of its facilities, continuing operations below capacity has
had a significant impact on gross margins. If the Company continues to have
excess production capacity, the Company's business, results in operations and
financial condition will continue to be materially adversely affected.

        Generally, new products, which have been designed into its customers'
products, have higher average selling prices than more mature products.
Therefore, the Company's ability to introduce new products, which have been
designed into its customers' products, in a timely fashion is an important
factor in its ability to maintain gross and operating margins. Moreover,
manufacturing yields and production capacity utilization impact the Company's
gross margins. New products often initially have lower manufacturing yields, are
produced in lower quantities than more mature products and generally have lower
gross margins. The Company expects that a substantial portion of its shipments
in the first half of 1997 will be of new products and will negatively impact the
Company's overall yield at least for that period. Manufacturing yields also vary
depending on the complexity and uniqueness of product specifications. Because
the thin film disk industry is capital intensive and requires a high level of
fixed costs, gross margins are also extremely sensitive to changes in volume.
Assuming fixed product prices, small variations in manufacturing yields and
productivity generally have a significant impact on gross margins. Additionally,
decreasing demand for the Company's products generally results in reduced
average selling prices and low capacity utilization which, in turn, adversely
affects gross margins and operating results. Despite the Seagate Supply
Agreement and the Amended Agreement, a significant portion of the Company's
business is also characterized by short term orders and shipment schedules which
typically can be modified or rescheduled without significant penalty to the
customer. Therefore, the Company typically plans its production and inventory
based on forecasts of customer demands, which often fluctuate substantially.
These factors have caused and will continue to cause fluctuations in the
Company's gross margins and results of operations. See "--Dependence on a
Limited Number of Customers" and "Uncertainties Associated With Agreement With
Micropolis."

        Rapid Technological Change. The thin film disk industry is characterized
by rapid technological change, short product life cycles, and price erosion.
Product lives are typically six to twelve months in duration. Although the
Company is continually developing new products and production techniques, there
can be no assurance that the Company will be able to anticipate technological
advances and develop products incorporating such advances in a timely manner,
with acceptable yields or to compete effectively against competitors' new
products. In addition, there can be no assurance that the Company's new products
can be produced in full volume at reasonable yields or that the Company will
develop new products or processes which ultimately are adopted by the industry.
The Company's operating results and financial condition could be materially
adversely affected if these efforts are not successful or if the technologies
that the Company has chosen not to develop prove to be competitive alternatives.
See "--Variability in Gross Margins and Operating Results."

        Intense Competition. The disk drive industry and thin film disk industry
are both characterized by intense competition. The Company's primary competitors
are Akashic Memories Corporation, Fuji Electric Company Ltd., HMT Technology
Corporation, Hoya Corporation, Komag Incorporated, Mitsubishi Kasei Corporation
and Showa Denko K.K. among independent disk manufacturers. Most of these
companies have significantly greater financial, technical and marketing
resources than the Company. IBM and several disk drive manufacturers, including
Seagate and Western Digital Corporation, currently produce thin film disks
internally for their own use. Seagate's expressed corporate strategy is to be
vertically integrated for a majority of its disk drive components and to pursue
sales to third parties of its disk drive components. Hyundai is building a
manufacturing facility for use in Maxtor disk drives supplementing Maxtor's
current supplier base. These companies could increase their internal production
to supply their requirements and cease purchasing from independent disk
suppliers. Moreover, these companies could make their products available for
distribution in the market as direct competitors of the Company. Additionally,
other disk drive manufacturers, such as Quantum, may decide to produce disks for
internal use. Any of these changes would reduce the already small number of
current and potential customers and increase competition for the remaining
market. Such competition could materially adversely affect the Company's
business and results of operations. See "-- Dependence on a Limited Number of
Customers" and "-- Consolidation Within the Disk Drive Industry."

        Consolidation Within the Disk Drive Industry. Consolidation within the
disk drive industry has reduced the number of potential customers to whom the
Company could market its products. In addition to the Seagate acquisition of
Conner, Quantum Corporation ("Quantum") closed all of its manufacturing
operations in the United States and overseas and 




                                      -14-
<PAGE>   15
transferred all manufacturing production to Matsushita Kotobuki Electronics of
Japan ("MKE"), its long-term contract manufacturing partner. While Quantum was a
customer of the Company in 1994, MKE has never been a significant customer of
the Company. Additionally, during 1995 Maxtor was acquired by Hyundai, which is
building a manufacturing facility to manufacture disks for Maxtor disk drives.
Given the relatively small number of independent hard disk drive manufacturers
who require an independent source of thin film disks, as well as the
consolidations and changes which have occurred and are continuing to occur in
the industry, there can be no assurance that the Company's efforts to diversify
its customer base will be successful. If they are not successful, the Company
will continue to be dependent on a relatively limited number of customers, the
loss of, or the reduction in orders by, any one of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

        Dependence on Suppliers. The Company relies on a limited number of
suppliers and, in some cases, a sole supplier, for certain materials used in its
manufacturing processes, including glass/ceramic substrates, plating chemicals,
tapes, slurries, certifier beads, sputter targets and certain other materials.
In addition, the Company relies on a single source for most of its equipment. In
the past, the Company has had to provide financial assistance to equipment
vendors in order to maintain sources for such equipment. Shortages may occur in
the future or supplies could be available only with lead times of approximately
three to six months. Changing suppliers for certain materials such as the lube
or buffing tape used in the Company's products would require that the product be
requalified with each customer. Requalification could prevent early design-in
wins or could prevent or delay continued participation in disk drive programs
into which the Company's products have been qualified. In addition, long lead
times of three to six months are required to obtain many materials. Regardless
of whether these materials are available from established or new sources of
supply, these lead times could impede the Company's ability to respond quickly
to changes in demand. Any limitations on the supply of components, materials or
equipment could disrupt or limit the Company's production volume and could have
a material adverse effect on the Company's business, results of operations and
financial condition. Further, a significant increase in the price of one or more
of these components could adversely affect the Company's results of operations.

        Risks Associated With New Substrate Facility. The Company's substrate
manufacturing facility in Singapore became fully operational during the third
quarter of 1997. This facility continues to require the expenditure of
significant management resources. In addition to the usual risks of establishing
a new manufacturing facility, such as the completion of the buildings,
installation of equipment, implementation of systems, procedures and controls
and the hiring and training of qualified personnel, there are unique risks
associated with this facility. First, the Company is vertically expanding its
business to include the process of grinding aluminum blanks which occurs prior
to the nickel plating process. While the Company believes it has the expertise
to establish this process, it has incurred delays and lower yields than expected
during its start-up phase. Second, the facility is being established in
Singapore and will be the first facility of this type in Singapore. There can be
no assurance that the facility will produce high quality and low cost aluminum
substrates. Manufacturing and other problems which occur in connection with the
commencement and expansion of operations at this facility could materially
adversely affect the Company's results of operations and financial condition.

        Future Capital Needs. The disk industry is capital intensive and the
Company expects to require significant additional financial resources over the
next several years for capital expenditures, working capital and research and
development. The Company spent approximately $78.1 million on capital
expenditures during 1996 for expansion of its facilities including investments
in the Dedicated Facility, the new Singapore substrate facility and other
capital expenditures. Capital expenditures are expected to approximate $25
million during 1997, primarily for the maintenance capital in Singapore and
Santa Clara, California. The Company intends to raise additional working capital
in order to fund the Company's desired level of operations and is currently
reviewing additional debt and/or equity financing alternatives. While the
Company believes it will acquire the necessary capital, there can be no
assurance that such financing will be available. The Company's failure to raise
working capital when required would have a material adverse effect on the
Company's operations, financial condition and competitive position.

        Dependence on Personnel. The Company's future operating results depend
in significant part upon the continued contributions of its officers and
personnel, many of whom would be difficult to replace. At present the Company
does not have employment agreements with any employee. The Company maintains a
$4.0 million key person life insurance policy (with $3.0 million of proceeds
payable to the Company) on the life of its Chairman of the Board and Chief
Executive Officer, 




                                      -15-
<PAGE>   16
William J. Almon, but not on the lives of other key persons. The loss of any of
its officers or other key personnel could have a material adverse effect on the
business, financial condition and results of operations of the Company. In
addition, the production of thin film disks requires employees skilled in highly
technical and precise production processes with expertise specific to thin film
disk production. The Company's future operating results depend in part upon its
ability to attract, train, retain and motivate other qualified management,
technical, manufacturing, sales and support personnel for its operations both in
California and in Singapore. Competition for such personnel is intense,
especially since many of the Company's competitors are located near the
Company's facilities in Santa Clara, California. There can be no assurance that
the Company will be successful in attracting or retaining such personnel. Hiring
qualified personnel in Singapore is made more difficult because Singapore has
substantially full employment at the present time and because the Company was
the first manufacturer of thin film disks and is the first manufacturer of
substrates with operations in Singapore. The loss of the services of existing
personnel as well as the failure to recruit, train and retain additional
personnel in a timely manner could have a material adverse effect on the
Company's business, results of operations and financial condition.

        Intellectual Property and Proprietary Rights. The Company regards
elements of its manufacturing process, product design and equipment as
proprietary and seeks to protect its proprietary rights through a combination of
employee and third party non-disclosure agreements, internal procedures and,
increasingly, patent protection. The Company has had seven U.S. patents issued
to it, and has fourteen additional patent applications (one of which is a
provisional application) pending in the United States. The Company intends to
file additional U.S. applications as appropriate for patents covering its
products and manufacturing processes. There can be no assurance that patents
will be issued with respect to any of the Company's allowed patent applications,
that patents will be issued or be allowed with respect to any of the Company's
other pending applications, or that claims allowed on any existing or future
patents will be sufficiently broad to protect the Company's technology. There
can also be no assurance that any patents now or hereafter held by the Company
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company. In addition, the
laws of certain foreign countries may not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Although the
Company continues to implement protective measures and intends to defend its
proprietary rights, there can be no assurance that these measures will be
successful. The Company believes, however, that, because of the rapid pace of
technological change in the disk and disk drive industries, the legal
protections for its products are less significant factors in the Company's
success than the innovative skills, experience and technical competence of its
employees.

        The Company has from time to time been notified of, or has otherwise
been made aware of, claims that it may be infringing upon patents or other
proprietary intellectual property owned by others. If it appears necessary or
desirable, the Company may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses, no
assurance can be given that licenses under such patents or proprietary
intellectual property will be offered or that the terms of any offered licenses
will be acceptable to the Company. The Company has been contacted by IBM
concerning the Company's interest in licensing a patent. Based upon an opinion
of its patent counsel, the Company believes that no license is required because
the Company does not believe that it is practicing any invention covered by the
IBM patent. There can be no assurance, however, that IBM will not pursue its
claim. Additionally, Virgle L. Hedgcoth has allegedly patented certain disk
preparation techniques (the "Hedgcoth Patents") and has asserted that the
Company is infringing such patents. Mr. Hedgcoth has since asserted patent
infringement claims against certain disk drive manufacturers, including one
customer of the Company who has demanded that the Company defend and indemnify
it in the patent litigation. The Company believes that the Hedgcoth Patents are
not valid because of prior commercial activities by other companies utilizing
the technology covered. However, should Mr. Hedgcoth prevail in such litigation
and elect to pursue the Company, the Company would be forced to either litigate
any infringement claims, execute a license, if available, or design around the
patents, which the Company believes is possible, and may be required to
indemnify its customers. The failure to obtain a key patent license or a license
to key proprietary intellectual property from a third party could cause the
Company to incur substantial liabilities and possibly to suspend the manufacture
of the products utilizing the patented or proprietary invention either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition.

        Environmental Issues. The Company's operations and manufacturing
processes are subject to certain federal, state, local and foreign environmental
protection laws and regulations. These laws and regulations relate to the
Company's use, 




                                      -16-
<PAGE>   17
handing, storage, discharge and disposal of certain hazardous materials and
wastes, the pre-treatment and discharge of process waste waters, and the control
of process air pollutants. The Company has from time to time been notified of
minor violations concerning its waste water discharge permits, air quality
regulations and hazardous material regulations. The Company has implemented
corrective action plans to remedy these violations and has put in place
procedures to effectuate continued compliance with these laws and regulations.
The Company has also initiated safety programs and training of personnel on safe
storage and handling of hazardous materials and wastes. The Company believes
that it is in compliance in all material respects with applicable environmental
regulations and does not anticipate any material capital expenditures for
environmental related matters. Environmental laws and regulations, however, may
become more stringent over time and there can be no assurances that the
Company's failure to comply with either present or future regulations would not
subject the Company to significant compliance expenses, production suspensions
or delay, restrictions on expansion at its present locations or the acquisition
of costly equipment.

        The Company's Santa Clara, California facility is located near major
earthquake faults. Disruption of operations at any of the Company's production
facilities for any reason, including work stoppages or natural disasters such as
fire, floods or earthquakes, would cause delays in or an interruption of
production and shipment of products and would negatively affect the Company's
business, results of operations and financial condition.

        Risks of International Sales and Manufacturing. In 1995, 1996 and the
nine months ended September 26, 1997, international sales (sales delivered to
customers in the Far East and Ireland, including foreign subsidiaries of
domestic companies) accounted for over 90% of the Company's net sales, and the
Company anticipates that international sales will continue to represent the
substantial majority of its net sales. Accordingly, the Company's operating
results are subject to the risks inherent in international sales, including
compliance with or changes in the law and regulatory requirements of foreign
jurisdictions, fluctuations in exchange rates, tariffs or other barriers,
exposure to taxes in multiple jurisdictions and transportation delays and
interruptions. Although presently all of the Company's sales are made in U.S.
dollars, including sales from its Singapore facility, a portion of the Company's
expenses must be paid in Singapore dollars. Future international sales may be
denominated in foreign currencies. Gains and losses on the conversion to U.S.
dollars of accounts receivable and accounts payable arising from international
operations may contribute to fluctuations in the Company's results of
operations. Additionally, the Company's international business may be materially
adversely affected by fluctuations in currency exchange rates, increases in duty
rates, exchange or price controls or other restrictions on foreign currencies
and difficulties in obtaining export licenses. Moreover, the Company's efforts
to expand its manufacturing operations are concentrated in Singapore. This
expansion requires the Company to implement and monitor new systems, procedures
and controls and to attract, train, motivate and manage qualified employees
effectively. These risks are exacerbated by the distance of the Singapore
facilities from the Company's California headquarters, the fact that the Company
was the first thin film disk manufacturer and is the first substrate
manufacturer with a facility in Singapore and the fact that Singapore has
substantially full employment. These risks will increase as production increases
at the Singapore facilities. Due to the anticipated expansion of the Company's
manufacturing operations in Singapore, the impact of the foregoing factors on
the Company's business, results of operations and financial condition could be
material and adverse.

        Volatility of Stock Price. The trading price of the Company's Class A
Common Stock has been volatile since the Company's initial public offering in
May 1995 and has been and is likely to continue to be subject to wide
fluctuations in response to a variety of factors, including quarterly variations
in operating results, revised earnings estimates, general conditions in the disk
drive or computer industry, volume purchase agreements, announcements of changes
in capacity, new customers, consolidations in the industry, technological
innovations or new products by the Company or its competitors, developments in
patents or other intellectual property rights,comments or recommendations issued
by analysts who follow the Company, its competitors or the disk drive industry
and general economic and market conditions. In addition, it is possible that
from time to time the Company's operating results may be below the expectations
of public market analysts and investors. In such event, the price of the
Company's Class A Common Stock could be materially adversely affected.
Additionally, the stock market in general, and the market for technology stocks
in particular, have experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market prices
of many technology companies for reasons unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations could
have a significant impact on the market price of the Class A Common Stock.




                                      -17-
<PAGE>   18
                     STORMEDIA INCORPORATED AND SUBSIDIARIES

PART II.       OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        STORMEDIA INCORPORATED V. HYUNDAI ELECTRONICS INDUSTRIES CO., ET AL.

        On July 23, 1996, the Company was informed by Maxtor Corporation that it
intended to terminate a November 17, 1995 Volume Purchase Agreement between
Maxtor and Hyundai Electronics Industries Co. Ltd., on the one hand, and the
Company. Prior to such notification, Maxtor had failed to purchase in the
Company's second quarter the disks required to be purchased by it under the
Volume Purchase Agreement. As a consequence of Maxtor and Hyundai's breach of
the Volume Purchase Agreement, the Company on September 25, 1996 filed suit in
the United States District Court for the Northern District of California against
Hyundai, C.S. Park, K.S. Yoo and Mong Hun Chung alleging breach of the Volume
Purchase Agreement and fraud. The Complaint seeks damages in excess of $206
million. Defendants Park and Yoo have answered the Complaint, and the parties
are currently engaged in discovery. The Court denied the motion to dismiss the
Complaint for insufficient service of process filed by defendants Chung and
Hyundai, but Hyundai and Chung have each moved to dismiss the complaint on other
grounds. Maxtor has moved to intervene in the action. Each of these motions are
set for hearing on December 19, 1997. The Company intends to vigorously
prosecute its claim.

        MAXTOR CORPORATION V. STORMEDIA, INC., ET AL.

        On December 19, 1996, Maxtor Corporation filed an action in Colorado
state court for the County of Boulder against the Company, its subsidiary,
StorMedia International Limited, and William J. Almon alleging breach of
contract, breach of warranty, fraud and negligent misrepresentation. The action
alleges that the Company's products failed to meet certain of Maxtor's
requirements under the November 17, 1995 Volume Purchase Agreement. The action
seeks compensatory damages of $100 million. The Colorado state court stayed all
proceedings in that action in favor of the above-described federal action
against Hyundai.








                                      -18-
<PAGE>   19
        WERCZBERGER, ET AL. V. STORMEDIA INCORPORATED

        On September 18, 1996, a purported securities class action complaint,
Werczberger, et al. v. StorMedia, Inc. et al., No. CV760825, was filed in the
Superior Court of the State of California in the County of Santa Clara. The
complaint alleges that StorMedia and certain of its officers and directors
violated California state securities laws by making false and misleading
statements of material fact about StorMedia's prospects between November 27,
1995 and August 9, 1996. Plaintiff purports to represent a class of persons who
purchased StorMedia stock during this period. In particular, the complaint
alleges that the StorMedia defendants made allegedly false statements regarding
volumes of disks to be purchased by Maxtor and Hyundai pursuant to the contract
that is the subject of the two above-described actions. On August 19, 1997, the
California Supreme Court granted review of the Superior Court's order overruling
the defendants' demurrer. In addition, on June 18, 1997, a federal securities
action, Werczberger v. StorMedia, et al., C-97 20538, was filed against the same
defendants in the United States District Court for the Northern District of
California, San Jose Division. The federal complaint alleges violations of
federal securities laws and contains virtually identical allegations to those in
the state court complaint. Defendants intend to continue to defend these cases
vigorously.

ITEM 2. CHANGES IN SECURITIES

        None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        The Company is currently in violation of certain financial covenants of
the Term Loan Facility but remains current on debt service and interest payments
and has not been declared to be in default under its Term Loan Facility. The
Company is currently in discussions with the Banks to waive or revise certain
covenants under an amendment to the Term Loan Facility. There can be no
assurance that the Banks will continue to provide such waivers or amend the Term
Loan Facility. The inability to receive waivers or amendments could cause the
banks to declare a default under the Term Loan Facility and accelerate payments
due thereunder.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

ITEM 5. OTHER INFORMATION

        None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a.  Exhibits.

         11.1     Statement regarding computation of  earnings (loss) per share

         27.1     Financial Data Schedule

     b.  Reports on Form 8-K

         On October 22, 1997, the Company filed a Current Report on Form 8-K
         reporting its press release dated October 22, 1997.





                                      -19-
<PAGE>   20
                                   SIGNATURES


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


                                                STORMEDIA INCORPORATED
                                                       (Registrant)



Date:  November 10, 1997         By:    /s/ STEPHEN M.  ABELY
                                    --------------------------------------------
                                    Stephen M. Abely, Vice President and
                                    Chief Financial Officer (Principal Financial
                                    and Accounting Officer)








                                      -20-
<PAGE>   21
                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>
    EXHIBIT                                                                                  PAGE
   --------                                                                                 ------
<S>                <C>                                                                      <C>
     11.1         Statement regarding computation of per-share earnings...................
     27.1         Financial Data Schedule.................................................
</TABLE>











                                      -21-