<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 27, 1996

                         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)


               390 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 November 1, 1996, 13,071,870 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>
PART I.        FINANCIAL INFORMATION
   Item 1.  Condensed Consolidated Financial Statements (Unaudited)
               Condensed Consolidated Statements of Operations C Three and Nine Months Ended
                 September 27, 1996 and September 29, 1995..............................................       3
               Condensed Consolidated Balance Sheets C As of September 27, 1996 and December 31, 1995...       4
               Condensed Consolidated Statements of Cash Flows C Nine Months Ended
               September 27, 1996 and September 29, 1995................................................       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........................................................................      17
   Item 2.     Changes in Securities....................................................................      17
   Item 3.     Defaults Upon Senior Securities..........................................................      17
   Item 4.     Submission of Matters to a Vote of Securities Holders....................................      17
   Item 5.     Other Information........................................................................      17
   Item 6.     Exhibits and Reports on Form 8-K.........................................................      17

SIGNATURES..............................................................................................      19
</TABLE>


                                      -2-
<PAGE>   3
PART I.


     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 27,   SEPTEMBER 29,    SEPTEMBER 27,   SEPTEMBER 29,
                                                             1996             1995            1996             1995
                                                         -------------   -------------    -------------   -------------
                                                                  (UNAUDITED)                      (UNAUDITED)

<S>                                                       <C>              <C>             <C>              <C>
Net sales                                                 $  41,575        $  45,954       $ 160,383        $ 108,513
Cost of sales                                                44,130           32,579         130,938           80,286
                                                          ---------        ---------       ---------        ---------
  Gross profit                                               (2,555)          13,375          29,445           28,227

Operating expenses:
    Research and development                                  3,945            2,549          12,072            6,244
    Selling, general, and administrative                      3,984            1,442           8,163            3,723
                                                          ---------        ---------       ---------        ---------
  Total operating expenses                                    7,929            3,991          20,235            9,967

  Operating earnings (loss)                                 (10,484)           9,384           9,210           18,260

Interest income (expense), net                                 (255)             400           1,057             (761)
                                                          ---------        ---------       ---------        ---------

Earnings (loss) before income tax expense (benefit)         (10,739)           9,784          10,267           17,499
                                                          ---------        ---------       ---------        ---------

Income tax expense (benefit)                                 (1,611)           2,647           2,131            4,738

  Net earnings (loss)                                     $  (9,128)       $   7,137       $   8,136        $  12,761
                                                          =========        =========       =========        =========

Earnings (loss) per share:
    Primary                                               $   (0.52)       $    0.40       $    0.45        $    0.90
                                                          =========        =========       =========        =========
    Fully diluted                                         $   (0.52)       $    0.40       $    0.45        $    0.89
                                                          =========        =========       =========        =========
Shares used in per share computation:
    Primary                                                  17,414           17,702          18,048           14,252
                                                          =========        =========       =========        =========
    Fully diluted                                            17,414           17,711          18,050           14,285
                                                          =========        =========       =========        =========
</TABLE>


     See accompanying notes to the condensed consolidated financial statements.

                                      -3-
<PAGE>   4
                     STORMEDIA INCORPORATED AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                SEPTEMBER 27, 1996     DECEMBER 31, 1995
                                                                ------------------     -----------------
ASSETS                                                              (UNAUDITED)
<S>                                                             <C>                    <C>
    Current assets:
     Cash and cash equivalents                                       $ 14,324               $ 37,407
     Short-term investments                                            34,672                 18,421
     Accounts receivable, less allowances of $760 at                   34,709                 30,114
        September 27, 1996 and $1,555 at December 31, 1995
     Inventories                                                       13,503                  9,811
     Prepaid expenses                                                   8,069                  4,551
     Deferred income taxes                                              2,015                  2,015
                                                                     --------               --------
              Total current assets                                    107,292                102,319
    Plant and equipment, net                                          133,304                 77,856
    Deferred income taxes                                                 576                    576
    Deposits and other assets                                           1,326                    846
                                                                     --------               --------
                                                                     $242,498               $181,597
                                                                     ========               ========
LIABILITIES, PUT OPTIONS AND EQUITY
    Current liabilities:
     Trade accounts payable                                          $ 25,501               $ 18,997
     Current portion of long-term debt                                     14                     47
     Accrued salaries and benefits                                      5,112                  4,607
     Income taxes payable                                               4,307                  3,407
     Other accrued expenses                                             2,930                  1,209
                                                                     --------               --------
              Total current liabilities                                37,864                 28,267
    Long-term debt, less current portion                               50,027                    111

    Put options                                                            --                 20,605

    Equity:
     Common stock, par value $.013 per share                              231                    230
     Additional paid-in capital                                       122,057                108,106
     Retained earnings                                                 32,319                 24,278
                                                                     --------               --------
              Total equity                                            154,607                132,614
                                                                     --------               --------
                                                                     $242,498               $181,597
                                                                     ========               ========
</TABLE>


     See accompanying notes to the 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 27, 1996      SEPTEMBER 29, 1995
                                                                                 ------------------      ------------------
                                                                                    (UNAUDITED)              (UNAUDITED)

<S>                                                                              <C>                      <C>
OPERATING ACTIVITIES
   Net earnings                                                                      $   8,136                $  12,761
   Adjustments to reconcile net earnings to net cash provided by
       operating activities:
   Depreciation and amortization                                                        12,249                    2,715
   Deferred income taxes                                                                    --                        1
   Changes in operating assets and liabilities:
       Accounts receivable                                                              (4,595)                 (10,470)
       Inventories                                                                      (3,692)                  (2,964)
       Prepaid expenses                                                                 (3,518)                    (165)
       Other assets                                                                       (480)                    (348)
       Trade accounts payable                                                            6,504                    6,244
       Accrued liabilities                                                               2,226                    1,470
       Income taxes payable                                                              1,801                    1,018
                                                                                     ---------                ---------
          Net cash provided by operating activities                                     18,631                   10,262
                                                                                     ---------                ---------

INVESTING ACTIVITIES
   Acquisition of plant and equipment                                                  (67,695)                 (31,064)
   Interest capitalized on plant and equipment                                              --                     (197)
   Purchase of short-term investments                                                  (16,346)                 (13,343)
                                                                                     ---------                ---------
          Net cash used in investing activities                                        (84,041)                 (44,604)
                                                                                     ---------                ---------

FINANCING ACTIVITIES
   Short-term borrowings                                                                10,000                       --
   Repayment of short-term borrowings                                                  (10,000)                  (8,783)
   Issuance of long-term obligations                                                    50,000                       --
   Repayment of long-term obligations                                                     (117)                 (17,812)
   Proceeds from sale of Common Stock, net of issuance costs                             1,650                  118,302
   Settlement of Put Options                                                            (1,994)                      --
   Repurchase of Common Stock                                                           (7,212)                      --
   Preferred dividends paid                                                                 --                     (178)
                                                                                     ---------                ---------
          Net cash provided by financing activities                                     42,327                   91,529
                                                                                     ---------                ---------
   Increase (decrease) in cash and cash equivalents                                    (23,083)                  57,187
   Cash and cash equivalents at beginning of period                                     37,407                    2,355
                                                                                     ---------                ---------
   Cash and cash equivalents at end of period                                        $  14,324                $  59,542
                                                                                     =========                =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid for interest                                                            $     129                $   1,826
                                                                                     =========                =========
   Cash paid for income taxes                                                        $      80                $   3,719
                                                                                     =========                =========
   Non-cash financing and investing activities:
       Equipment acquired under capital lease obligations                            $      --                $   2,141
                                                                                     =========                =========
       Equipment acquired under short-term borrowings                                $      --                $   1,500
                                                                                     =========                =========
       Conversion of Preferred Stock to Common Stock                                 $      --                $   4,750
                                                                                     =========                =========
       Tax benefit arising from early dispositions of stock issued
          upon exercise of stock options                                             $     901                $   1,262
                                                                                     =========                =========
</TABLE>

   SEE ACCOMPANYING NOTES TO THE 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 27, 1996
                      AND SEPTEMBER 29, 1995 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
27, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996 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, 1995.


NOTE 2 - BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
                                                            SEPTEMBER 27, 1996      DECEMBER 31, 1995
                                                            ------------------      -----------------
                                                                (UNAUDITED)

<S>                                                         <C>                     <C>
Inventories:
    Raw material                                                 $   6,123              $   4,167
    Work-in-process                                                  4,979                  4,368
    Finished goods                                                   2,401                  1,276
                                                                 ---------              ---------
   Total inventories                                             $  13,503              $   9,811
                                                                 =========              =========
Plant and equipment:
    Leasehold improvements                                       $  27,022              $   8,379
    Machinery and equipment                                         87,638                 37,381
    Construction-in-progress                                        35,120                 36,695
                                                                 ---------              ---------
                                                                 $ 149,780              $  82,455
    Less allowance for depreciation and amortization               (16,476)                (4,599)
                                                                 ---------              ---------
     Plant and equipment, net                                    $ 133,304              $  77,856
                                                                 =========              =========
</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 1995 and the nine months ended September 27, 1996, the Company sold
its disks primarily to Seagate Technology, Inc. ("Seagate") and Maxtor
Corporation ("Maxtor"), with sales to Maxtor representing 45% and 33% and sales
to Seagate representing 54% and 66% of net sales during these periods,
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 notified the Company that it did not intend to purchase the full
committed volumes for the second quarter of 1996 as required by the Maxtor
Supply Agreement. Maxtor subsequently repudiated the Maxtor Supply Agreement.
During the third quarter, the Company continued to ship products to Maxtor,
although in substantially lesser volumes than in the quarter ended June 28,
1996. As a consequence of Maxtor's actions, the Company has reduced its work
force in its Santa Clara, California facility and taken other steps to reduce
its costs in Singapore and in the United States. In September, the Company filed
a lawsuit in the United States District Court for the Northern District of
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. As a result of Hyundai and Maxtor's failure to purchase the volumes
of disks called for under the contract, the Company's Tuas facility in Singapore
is currently idle and was significantly underutilized during the third quarter.
In an effort to replace these lost volumes, the Company has accelerated
qualification and production of new products with significantly lower yields and
gross margins. The Company is seeking additional customers to utilize the
manufacturing capacity in which it has been manufacturing products for Maxtor.
While the Company expects Seagate may take a portion of this capacity, the
Company will have excess manufacturing capacity as it seeks to qualify its
products in new and existing customers' product programs. The qualification of
new products 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. Accordingly,
the Company expects Maxtor's failure to purchase committed volumes and its
repudiation of the Maxtor Supply Agreement to negatively impact its results of
operations, at least for the remainder of 1996.

      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 and for the nine months ended September 27, 1996, the
Company reported a gross margin of 27% and 18%, respectively. The Company
expects its gross margins to be lower during the fourth quarter of 1996 than
levels experienced in 1995 and the first half of 1996 due to continuing lower
utilization of production capacity than levels experienced in 1995 and in the
first half of 1996. Additionally, the purchase price of disks under the
Company's Supply Agreement with Seagate is calculated based upon a pricing
formula which results in gross margins that are generally lower than the gross
margins experienced by the Company in 1995 and in the first half of 1996. During
the third quarter of 1996, the Company's Singapore manufacturing facility which
is dedicated to manufacturing products for Seagate (the "Dedicated Facility")
became fully operational and accounted for a increased portion of the Company's
total net sales. This negatively impacted the Company's gross margins somewhat
during the third quarter. The Company expects this adverse impact to continue
causing the Company's overall gross margins to be lower than levels experienced
in 1995 and in the first half of 1996. This adverse impact will be exacerbated
to the extent that Seagate shifts its purchase orders to the Dedicated Facility
from the Company's other facilities rather than increases its level of purchases
from the Company.

      The Company expects that a substantial portion of its shipments in the
fourth quarter of 1996 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. Manufacturing yields generally improve as the product matures and
production volume increases. There can be no assurance that the Company's gross
margins will not be negatively impacted by the introduction of new products in
the fourth quarter of 1996.


                                      -7-
<PAGE>   8
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                      --------------------------------     ------------------------------
                                                      SEPTEMBER 27,      SEPTEMBER 29,     SEPTEMBER 27,    SEPTEMBER 29,
                                                          1996               1995              1996              1995
                                                      -------------      -------------     -------------    -------------

<S>                                                   <C>                <C>               <C>              <C>
Net sales ..................................              100.0%             100.0%            100.0%            100.0%
Cost of sales ..............................              106.1               70.9              81.6              74.0
                                                         ------             ------            ------            ------
    Gross profit ...........................               (6.1)              29.1              18.4              26.0
Research and development ...................                9.5                5.5               7.5               5.8
Selling, general and administrative ........                9.6                3.2               5.1               3.4
                                                         ------             ------            ------            ------
    Total operating expenses ...............               19.1                8.7              12.6               9.2
                                                         ------             ------            ------            ------
    Operating earnings (loss) ..............              (25.2)              20.4               5.7              16.8
Interest income (expense), net .............               (0.6)               0.9               0.7              (0.7)
                                                         ------             ------            ------            ------
Earnings before income tax expense (benefit)              (25.8)              21.3               6.4              16.1
Income tax expense (benefit) ...............               (3.9)               5.8               1.3               4.3
                                                         ------             ------            ------            ------
    Net earnings ...........................              (21.9)%             15.5%              5.1%             11.8%
                                                         ======             ======            ======            ======
</TABLE>

Net Sales

      Net sales decreased 9.5% to $41.6 million for the three months ended
September 27, 1996 from $46.0 million for the three months ended September 29,
1995. For the nine months ended September 27, 1996, net sales increased 47.8% to
$160.4 million from $108.5 million for the nine months ended September 29, 1995.
The decrease in net sales for the three months ended September 27, 1996 from the
comparable prior year three month period was principally due to the failure of
Hyundai and Maxtor to purchase the volumes committed under the Maxtor Supply
Agreement and to a lesser extent, reductions in average selling prices.
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 the Company continued to ship products to Maxtor (although in
lesser volumes and at lower average selling prices than in the quarter ended
June 28, 1996 and the comparable prior year three month period). In September,
the Company filed a lawsuit in the United States District Court for the Northern
District of 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 increase in net sales for the nine months
ended September 27, 1996 from the comparable prior year nine month period was
primarily due to an increase in unit volume offset by a slight decrease in
average selling price. The principal factors contributing to the increase in
unit volumes were the additional capacity provided by the Company's facilities
in Singapore and the introduction of new products.

Gross Profit

The Company's gross profit decreased 119.1% to $(2.6) million for the three
months ended September 27, 1996 from $13.4 million for the three months ended
September 29, 1995. For the nine months ended September 27, 1996, gross profit
increased 4.3% to $29.4 million from $28.2 million for the nine months ended
September 29, 1995. Gross profit as a percentage of net sales for the three and
nine months ended September 27, 1996 were (6.1)% and 18.4%, respectively, as
compared to 29.1% and 26.0%, respectively, for the three and nine months ended
September 29, 1995. The principal factors contributing to the decrease in gross
margin for the three and nine months ended September 27, 1996 from the
comparable prior year three and nine month periods were decreased unit volumes
as a result of the failure of Maxtor to purchase the volumes committed to under
the Maxtor Supply Agreement and the resulting under-utilization of production
capacity. In addition, reductions in average selling prices of products and the
introduction of new products at lower yields contributed to lower gross
margins. As a result of Maxtor's failure to purchase committed volumes, the
Company's Tuas facility in Singapore was significantly underutilized during the
third quarter. The Company expects gross margins will remain at levels below
those experienced in 1995 and the first half of 1996 at least through the
remainder of 1996. Additionally, the purchase price of disks under the Seagate
Supply Agreement is calculated based upon a pricing formula which results in
gross margins that are generally lower than the Company's gross margins
experienced in 1995 and in the first half of 1996. In an effort to replace the
volume created by Hyundai's repudiation, the Company accelerated qualification
and production of new products during the third quarter with significantly
lower yields and gross margins. The Company expects that a substantial portion
of its shipments in the fourth quarter of 1996 will be of new products.
New products often initially have lower

                                      -8-
<PAGE>   9
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. 

Research and Development

      Research and development expenses increased 54.8% to $3.9 million for the
three months ended September 27, 1996 from $2.5 million for the three months
ended September 29, 1995, increasing as a percentage of net sales to 9.5% for
the three months ended September 27, 1996 from 5.5% for the comparable prior
year three month period. For the nine months ended September 27, 1996, research
and development expenses increased 93.3% to $12.1 million from $6.2 million for
the nine months ended September 29, 1995, increasing as a percentage of net
sales to 7.5% for the nine months ended September 27, 1996 from 5.8% for the
comparable prior year nine month period. The principal factors contributing to
the increase in research and development expense were increased staffing and
spending on development work related to the volume manufacturing of MR disks,
alternative substrates, new magnetic alloys and sputtering techniques.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 176.3% to $4.0 million
for the three months ended September 27, 1996 from $1.4 million for the three
months ended September 29, 1995, increasing as a percentage of net sales to
9.6% for the three months ended September 27, 1996 from 3.2% for the comparable
prior year three month period. Included in selling, general and administrative
expense 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. For the nine months ended
September 27, 1996, selling, general and administrative expenses increased
119.3% to $8.2 million from $3.7 million for the nine months ended September
29, 1995, increasing as a percentage of net sales to 5.1% for the nine months
ended September 27, 1996 from 3.4% for the comparable prior year nine month
period. In addition to the one-time charge, the increase in selling, general &
administrative expense, on an absolute dollar basis, is due primarily to
increased staffing due primarily to the expanded operations in Singapore.

Interest, Net

      Interest, net for the three months ended September 27, 1996 was $(0.3)
million expense as compared to $0.4 million income for the three months ended
September 29, 1995. Interest, net for the nine months ended September 27, 1996,
was $1.1 million income as compared to $(0.8) million expense for the comparable
prior year nine month period. The decrease for the three months ended September
27, 1996 as compared to the prior year three month period was primarily
attributable to increased borrowings and decreased investments in cash and cash
equivalents and short term investments, due primarily to the Company's
completion of an equity financing in July 1995. Interest income increases during
the nine months ended September 27, 1996 as compared to the nine months ended
September 29, 1995 were primarily attributable to higher net cash levels during
such period. 

Income Tax Expense

      The Company's effective tax rate (which includes federal and state income
tax expense) decreased to 15% and 20.8%, respectively, for the three and nine
months ended September 27, 1996 from 27% for both the three and nine months
periods ended September 29, 1995, primarily due to increased earnings in
Singapore. The Company has been granted a seven year tax holiday in Singapore,
which expires in 2001, with the possibility of a three year extension. The
benefit of the Company's income tax holiday in Singapore is the primary factor
contributing to the lower effective tax rate. The Company expects its effective
tax rate to fluctuate in subsequent quarters as earnings in Singapore vary as
a percentage of consolidated earnings.

LIQUIDITY AND CAPITAL RESOURCES

      Cash and cash equivalents and short-term investments of $49.0 million as
of September 27, 1996, decreased $6.8 million from December 31, 1995 primarily
due to acquisition of plant and equipment, repurchase of Class A Common Stock 
and the settlement of put options, offset by changes in working capital and 
issuance of long term debt.

      During the nine months ended September 27, 1996, the Company generated
$18.6 million from operating activities. Sources included net earnings of $8.1
million and a $8.7 million increase in trade accounts payable and accrued
liabilities, offset by an increase of $4.6 million in accounts receivable, an
increase of $3.7 million in inventories and an increase of $3.5 million

                                      -9-
<PAGE>   10
in prepaid expenses. The increase in accounts payable and accrued liabilities is
primarily attributed to the increased deposits placed for the continuation and
completion of facilities expansion, principally in Singapore, including deposits
for equipment for the Company's substrate facility. The increase in accounts
receivable is primarily due to the timing of payments received from its major
customer within one week of the Company's quarter end. The increase
in inventories is primarily due to greater production levels, primarily due to
the commencement of production at the substrate facility and the Dedicated
Facility.

      The Company used $84.0 million in investing activities during the nine
months ended September 27, 1996. Investing activities consisted primarily of
investments of $67.7 million for capital expenditures for facilities expansion
for its Singapore operations, including its substrate facility, and purchase of
short-term investments of $16.3 million. Capital expenditures are expected to
approximate $85 million during 1996 primarily for expansion of facilities
including investments in the Dedicated Facility, the substrate facility in
Singapore and other capital expenditures. Of such amount, $67.7 million had been
spent as of September 27, 1996. The Company had $16.8 million of noncancellable
purchase commitments for plant and equipment outstanding at September 27, 1996. 
 
      In October 1995, the Company's Board of Directors authorized a share
repurchase program. Pursuant to this program, the Company sold put options for
$1.9 million in private placements during October 1995. The put options granted
the holder the right to require the Company to repurchase up to 500,000 shares
of its Class A Common Stock at an aggregate price of $20.6 million, of which the
Company repurchased 175,000 shares at an aggregate cost of $7.2 million. The
Company closed the remaining 325,000 put options by cash settlement at an
aggregate cost of $2.0 million in January and April 1996.

      The Company's principal sources of liquidity at September 27, 1996
consisted of $49.0 million in cash and cash equivalents and short-term
investments and a $25.0 million revolving credit facility with a bank group led
by CIBC Wood Gundy, an affiliate of Canadian Imperial Bank of Commerce, and
Banque Nationale de Paris (the "Banks"). The Banks funded the $50.0 million Term
Loan Facility in August 1996. The facility has a three year term and 
replaced the credit facility with Bank of America. In August 1996, Bank
of America amended its unsecured revolving credit facility agreement dated
December 1, 1995. Under the amendment, the Company was permitted to borrow up to
$10.0 million on a revolving basis through August 30, 1996. The Company fully
repaid the Bank of America credit facility plus accrued interest upon funding by
the Banks. From time to time, the Company has been granted waivers of certain
financial covenants from the Banks. There can be no assurance that the Banks
will continue to provide such waivers. Should the Company be in noncompliance
with such financial covenants in the future, the inability to receive such
waivers could put the Company in default under its Bank facilities. A default
under its Bank facilities could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company believes
that the existing cash balances, cash flow from operations and funds available
under the revolving credit facility with the Banks will be sufficient to meet
the Company's operating and capital expenditures requirements for the next
twelve months. If the Company decides to expand its facilities further or sooner
than presently contemplated or requires capital for other purposes, it would
require additional debt or equity financing. There can be no assurance that such
additional funds will be available to the Company or, if available, will be
available on favorable terms. If the Company is unable to obtain sufficient
capital, it could be required to curtail its capital equipment, working capital
and research and development expenditures which could adversely affect the
Company's future years' operations and competitive position. 

FACTORS AFFECTING OPERATING RESULTS

      Dependence on a Limited Number of Customers. During 1995 and the nine
months ended September 27, 1996, the Company sold its disks primarily to Seagate
and Maxtor, with sales to Maxtor representing 45% and 33% of net sales during
these periods, respectively. Aggregate shipments to Seagate and Maxtor in
1993,1994,1995 and the first nine months of 1996 represented 52%, 91%, 99% and
98%, respectively, of net sales. As discussed above, Maxtor has repudiated the
Maxtor Supply Agreement. The Company is seeking additional customers to utilize
the manufacturing capacity in which it has been manufacturing products for
Maxtor. While Seagate has taken a portion of this capacity, the Company has had
excess manufacturing capacity as it seeks to qualify its products in new and
existing customers' product programs. 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. Accordingly, the
Company expects Maxtor's failure to purchase committed volumes and its
repudiation of the Maxtor Supply Agreement to negatively impact its results of
operation at least for the remainder of 1996. 

      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 for the remainder of 1996. The loss of Seagate as a
customer or the loss of any significant future customer, or a significant
reduction in the level of orders for any reason including, through
consolidations, adverse financial or market circumstances or otherwise, would
materially adversely affect the Company's business, operating results and
financial condition. Additionally, due to the lengthy 



                                      -10-
<PAGE>   11
product qualification process, any change in customers or product mix could 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 is to significantly
increase its internal capacity to manufacture disks through construction of a
disk manufacturing facility in Singapore, which had been completed as of
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. In
addition, prior to the merger, Conner had stated its intention to double its
internal disk capacity through a newly established facility in Singapore. This
facility has begun producing disks and is expected to be completed in 1997.
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.

      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 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,
Maxtor was recently acquired by Hyundai, which has announced its intention to
manufacture disks for Maxtor disk drives internally. 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 largely dependent on
Seagate, the loss of, or the reduction in orders by, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

      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 begin operations
at such facility. While Seagate will be required to purchase the disks
manufactured at the Dedicated Facility through March 31, 1999, each of the
products manufactured at the Dedicated Facility must be qualified by Seagate
before products can be delivered to Seagate. To date, the Company has qualified
all three lines in the Dedicated Facility. Additionally, there is no requirement
that Seagate's purchases from the Dedicated Facility must be in addition to the
level of purchases presently being made by Seagate from the Company's other
facilities. The pricing provisions of the Seagate Supply Agreement
could incentivize Seagate to shift its purchases to the Dedicated Facility. To
the extent that Seagate shifts the manufacture of its current level of purchase
orders to the Dedicated Facility from the Company's other facilities, the
Seagate Supply Agreement and Dedicated Facility may not result in increased
sales to Seagate and could, absent additional orders from other customers,
result in significant excess capacity for the Company with resulting adverse
impacts on the Company's results of operations. This risk is exacerbated as
Seagate continues to increase its own internal disk manufacturing capacity. See
"-Variability in Gross Margins and Operating Results."

      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 and
for the nine months ended September 27, 1996, the Company reported a gross
margin of 27.0% and 18.4%, respectively. The Company expects its gross margins
to decline from levels experienced in 1995 and in the first half of 1996 due to
Maxtor's repudiation

                                      -11-
<PAGE>   12
of the Maxtor Supply Agreement and the resulting under-utilization of production
capacity. While the Company has taken steps to reduce its costs and expenses,
its operations have a high level of fixed costs and expenses. Therefore,
operating below capacity will have a significant impact on gross margins.
Additionally, the purchase price of disks under the Seagate Supply Agreement is
calculated based upon a pricing formula which results in gross margins that are
generally lower than the gross margins experienced by the Company in 1995 and
the first half of 1996. Accordingly, to the extent output from the Dedicated
Facility accounts for an increasing portion of the Company's total net sales,
the Company's overall gross margins will declined. This adverse impact will be
exacerbated to the extent that Seagate shifts its purchase orders to the
Dedicated Facility from the Company's other facilities rather than increase its
level of purchases from the Company.

      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. New products
however, often initially have lower manufacturing yields, are produced in lower
quantities than more mature products and generally have lower gross margins.
Manufacturing yields and gross margins generally improve as the product matures
and production volumes increase. Manufacturing yields and production capacity
utilization impact the Company's gross margins. The Company expects that a
substantial portion of its shipments in the fourth quarter of 1996 will be of
new products and will negatively impact the Company's overall yield for the
quarter. 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, 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."

      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 twelve months,
the Company's principal customers and many of its competitors and potential
customers engaged in substantial efforts to increase disk manufacturing capacity
in light of the previously existing imbalance between current 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.

      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."

      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 first quarter of 1995 sales to Seagate and Maxtor
represented approximately 41% and 55% of net sales,

                                      -12-
<PAGE>   13
respectively, while in the second quarter of 1995 sales to Seagate and Maxtor
represented approximately 68% and 31% of net sales, respectively. In addition,
in the fourth quarter of 1995 and the first and second quarter of 1996, 3%, 15%
and 8%, respectively, of the Company's unit sales were of 2 1/2 inch disks. The
Company expects a substantial portion of its shipments in the fourth quarter to
be of new products, including high performance magneto resistive (MR) disks. 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. In
the event the Company's products do not become designed into 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 results of operations.

Intense Competition. The disk drive industry and thin film disk industry are
both characterized by intense competition. The Company's primary competitors
are Komag Incorporated, HMT Technology Corporation, Akashic Memories
Corporation, Showa Denko K.K., Mitsubishi Kasei Corporation and Fuji Electric
Company Ltd. among independent disk manufacturers. With respect to disks based
on glass/ceramic substrates, the Company's principal competitor is Hoya Corp.
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, currently produce thin film disks
internally for their own use. Seagate's expressed corporate strategy is to be a
vertically integrated disk drive manufacturer and to pursue sales to third
parties of its disk drive components. Hyundai recently announced its intention
to develop and manufacture disks 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."

      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, texturizers,
plating chemicals, tapes, slurries, certifier heads, sputter targets and certain
other materials. In addition, the Company relies on a single source to build and
supply some portions of its customized sputtering 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 began operations
at its substrate manufacturing facility in Singapore. This facility requires the
expenditure of significant financial and 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 never
engaged in this process before and this will be the Company's first substrate
facility. 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 it will
be completed in a timely, cost-effective manner or that it 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.

                                      -13-
<PAGE>   14
      Future Capital Needs. The Company believes that in order to achieve its
expansion objectives, it will need significant additional financial resources
over the next several years for capital expenditures, working capital and
research and development. The Company expects to spend approximately $85 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. The Company believes it will be able to fund these
expenditures from a combination of debt financing, existing cash balances and
cash from operations. If the Company decides to expand its facilities further or
sooner than presently contemplated or requires capital for other purposes, it
will require additional debt or equity financing. There can be no assurance that
such additional funds will be available to the Company or, if available, will be
available on favorable terms. If the Company is unable to obtain sufficient
capital, it could be required to curtail its capital equipment, working capital
and research and development expenditures which could adversely affect the
Company's future operations and competitive position. Conversely, overexpansion
due to the failure to accurately predict future demand for its products could
have a material adverse effect on the Company's future operating results and
could cause fluctuations in the Company's results of operations. 

      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,
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 will be 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 four U.S. patents issued to it, has an
additional application allowed and has fifteen additional patent applications
(three of which are provisional applications) 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,

                                      -14-
<PAGE>   15
however, that IBM will not pursue its claim. The Company has also been contacted
by Virgle L. Hedgcoth alleging infringement by the Company of certain disk
preparation techniques allegedly patented by Mr. Hedgcoth (the "Hedgcoth
Patents"). 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 elect to continue 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. 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, including potential indemnification of its
customers, and possibly 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, handling, 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 and for the nine months
ended September 27, 1996, international sales (sales delivered to customers in
the Far East, including foreign subsidiaries of domestic companies) accounted
for over 95% 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 will be the first
substrate manufacturer with facilities 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, volume purchase agreements, announcements of new
facilities, 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, general conditions in the
computer industry, revised earnings estimates, 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 in some future period the Company's

                                      -15-
<PAGE>   16
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.


                                      -16-
<PAGE>   17
                     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 on the other hand. Prior to such notification, Maxtor had failed to
purchase in the Company's second quarter of 1996 the discs required to be
purchased by it under the Volume Purchase Agreement. As a consequence of Maxtor
and Hyundai's repudiation of the Volume Purchase Agreement, the Company on
September 5, 1996 filed suit in the United States District Court for the
Northern District of California against Hyundai, alleging breach of the Volume
Purchase Agreement and fraud. The Complaint seeks damages in excess of $206
million. The Company intends to vigorously prosecute its claims.

WEREZBERGER, ET AL. V. STORMEDIA INCORPORATED

      On September 18, 1996, a purported securities class action complaint,
Werezberger, et al. v. StorMedia Incorporated., 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 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. The action is purportedly brought on behalf of all persons who
purchased StorMedia stock during that period. Plaintiffs are currently amending
their Complaint. The Complaint seeks an unspecified amount of damages.
Defendants intend to defend the case vigorously.

ITEM 2.    CHANGES IN SECURITIES

      None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

      None.

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.

           10.40   Addendum "A" to lease dated September 1, 1996 for property
                   at 365 Reed Street, Santa Clara, California.

           10.41   Addendum "A" to lease dated September 1, 1996 for property at
                   340 Martin Avenue, Santa Clara, California.

           11.1    Statement regarding computation of  earnings (loss) per share

           27.1    Financial Data Schedule

                                      -17-
<PAGE>   18
      b.   Reports on Form 8-K

           During the third quarter of 1996, the Company filed the following
           Current Reports on Form 8-K.

           99.1    Cautionary statements for purposes of the "Safe Harbor"
                   provisions of the Private Securities Litigation Reform Act
                   of 1995 (July 23, 1996).

           99.1    Text of Press Release dated June 21, 1996 (July 17, 1996).

           99.2    Text of Press Release dated June 24, 1996 (July 17, 1996).


                                      -18-
<PAGE>   19
                                   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 12, 1996      By: /s/ Stephen M.  Abely
                                 -------------------------
                                      Stephen M. Abely, Vice President and Chief
                                      Financial Officer (Principal Financial and
                                      Accounting Officer)


                                INDEX TO EXHIBITS


   EXHIBIT                                                              
   -------                                                               

    10.40     Addendum "A" to lease dated September 1, 1996 for
              property at 365 Reed Street, Santa Clara, California.      


    10.41     Addendum "A" to lease dated September 1, 1996 for
              property at 340 Martin Avenue, Santa Clara, California.

    11.1      Statement regarding computation of earnings (loss) per-share

    27.1      Financial Data Schedule


                                      -19-