<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 March 28, 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 May 2, 1997, 13,408,358 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 -- Three Months Ended March 28, 1997
                      and March 29, 1996 ......................................................................        3
                  Condensed Consolidated Balance Sheets -- As of March 28, 1997 and December 31, 1996 .........        4
                  Condensed Consolidated Statements of Cash Flows -- Three Months Ended
                      March 28, 1997 and March 29, 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 .............................................................................        19
     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 .............................................................................        20
     Item 6.   Exhibits and Reports on Form 8-K ..............................................................        20

SIGNATURES ...................................................................................................        21
</TABLE>

                                      -3-
<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
                                                            --------------------------------
                                                            MARCH 28, 1997    MARCH 29, 1996
                                                            --------------    --------------
                                                              (UNAUDITED)       (UNAUDITED)
<S>                                                         <C>               <C>
Net sales                                                      $ 34,100           $61,156
Cost of sales                                                    39,004            44,047
                                                               --------           -------
             Gross profit                                        (4,904)           17,109

Operating expenses:
Research and development                                          3,190             3,708
Selling, general, and administrative                              2,339             2,050
                                                               --------           -------
             Total operating expenses                             5,529             5,758

             Operating earnings (loss)                          (10,433)           11,351

Interest income (expense), net                                     (562)              485
                                                               --------           -------
Earnings (loss) before income tax expense (benefit)             (10,995)           11,836
                                                               --------           -------
Income tax expense (benefit)                                     (1,676)            2,367

Net earnings (loss)                                            $ (9,319)          $ 9,469
                                                               ========           =======
Earnings (loss) per share:

             Primary                                           $  (0.52)          $  0.52
                                                               ========           =======
             Fully diluted                                     $  (0.52)          $  0.52
                                                               ========           =======
Shares used in per share computation:

             Primary                                             17,787            18,305
                                                               ========           =======
             Fully diluted                                       17,787            18,309
                                                               ========           =======
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

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


<TABLE>
<CAPTION>
                                                                        MARCH 28, 1997      DECEMBER 31, 1996
                                                                        --------------      -----------------
                                                                         (UNAUDITED)
<S>                                                                     <C>                 <C>
ASSETS
    Current assets:
      Cash and cash equivalents and short-term investments                 $ 42,219            $ 47,711
      Accounts receivable, less allowances of $1,150 at March 28,
      1977 and $1,177 at December 31, 1996                                   24,916              31,047
      Inventories                                                            14,694              14,848
      Prepaid expenses                                                        6,834               6,794
      Deferred income taxes                                                   2,819               2,819
                                                                           --------            --------
              Total current assets                                           91,482             103,219
    Plant and equipment, net                                                141,083             137,162
    Deferred income taxes                                                        17                  17
    Deposits and other assets                                                 1,434               1,338
                                                                           --------            --------
                                                                           $234,016            $241,736
                                                                           ========            ========
LIABILITIES AND EQUITY
    Current liabilities:
      Trade accounts payable                                               $ 26,696            $ 25,234
      Current portion of long-term debt                                       5,017               5,014
      Accrued salaries and benefits                                           4,759               4,151
      Income taxes payable                                                      932               2,556
      Other accrued expenses                                               $  2,858            $  1,952
                                                                           --------            --------
              Total current liabilities                                      40,262              38,907
      Deferred income taxes                                                     245                 245
      Long-term debt, less current portion                                   45,017              45,024
    Equity:
      Common stock, par value $.013 per share                                   234                 233
      Additional paid-in capital                                            124,936             124,686
      Retained earnings                                                      23,322              32,641
                                                                           --------            --------
              Total equity                                                  148,492             157,560
                                                                           --------            --------
                                                                           $234,016            $241,736
                                                                           ========            ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                      -5-
<PAGE>   5
                     STORMEDIA INCORPORATED AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                       THREE MONTHS ENDED
                                                                               ---------------------------------
                                                                               MARCH 28, 1997     MARCH 29, 1996
                                                                               --------------     --------------
                                                                                (UNAUDITED)         (UNAUDITED)
<S>                                                                            <C>                <C>
OPERATING ACTIVITIES
   Net earnings (loss)                                                           $ (9,319)           $  9,469
   Adjustments to reconcile earnings (loss) to net cash provided
      by operating activities:
   Depreciation and amortization                                                    7,142               3,029
   Net loss on sale of plant and equipment                                            263                  --
   Changes in operating assets and liabilities:
      Accounts receivable                                                           6,131              (9,251)
      Inventories                                                                     154                (546)
      Prepaid expenses                                                                (40)               (689)
      Other assets                                                                    (96)               (219)
      Trade accounts payable                                                        1,462              13,405
      Accrued liabilities                                                           1,514                (577)
      Income taxes payable                                                         (1,624)              2,339
                                                                                 --------            --------
        Net cash provided by operating activities                                   5,587              16,960
                                                                                 --------            --------
INVESTING ACTIVITIES
   Acquisition of plant and equipment                                             (11,325)            (27,909)
   Sale (purchase) of short-term investments, net                                    (250)             12,626
                                                                                 --------            --------
        Net cash used in investing activities                                     (11,575)            (15,283)
                                                                                 --------            --------
FINANCING ACTIVITIES
   Payment of debt obligations                                                         (4)               (106)
   Proceeds from issuance of Class A Common stock, net of
     issuance costs                                                                   250                 173
   Settlement of put options                                                           --                (311)
   Repurchase of Class A Common Stock                                                  --              (7,216)
                                                                                 --------            --------
        Net cash provided by (used in) financing activities                           246              (7,460)
                                                                                 --------            --------
   Decrease in cash and cash equivalents                                           (5,742)             (5,783)
   Cash and cash equivalents at beginning of period                                23,788              37,407
                                                                                 --------            --------
   Cash and cash equivalents at end of period                                    $ 18,046            $ 31,624
                                                                                 ========            ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid for interest                                                        $    566            $     --
                                                                                 ========            ========
   Cash paid for income taxes                                                    $     21            $     --
                                                                                 ========            ========
   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.

                                      -6-
<PAGE>   6
                     STORMEDIA INCORPORATED AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (INFORMATION FOR THREE MONTHS ENDED MARCH 28, 1997 AND MARCH 29. 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 months ended March 28, 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 - BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
                                                          MARCH 28, 1997          DECEMBER 31, 1996
                                                          --------------          -----------------
<S>                                                       <C>                     <C>
Inventories:
    Raw materials                                           $   5,518                 $  6,586
    Work-in-process                                             4,213                    5,638
    Finished goods                                              4,963                    2,624
                                                            ---------                 --------
                  Total inventories                         $  14,694                 $ 14,848
                                                            =========                 ========
Plant and equipment:
    Land                                                    $     220                 $    220
    Building and leasehold improvements                        32,689                   32,009
    Machinery and equipment                                   102,449                   95,982
    Construction-in-progress                                   35,690                   32,161
                                                            ---------                 --------
                                                            $ 171,048                 $160,372
    Less allowance for depreciation and
           amortization                                       (29,965)                 (23,210)
                                                            ---------                 --------
                  Plant and equipment, net                  $ 141,083                 $137,162
                                                            =========                 ========
</TABLE>

                                      -7-
<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 72% and 24% 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 in additional products
with new and existing customers. While Seagate and other customers have taken a
portion of this capacity, during the first quarter of 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 three
months ended March 28, 1997, sales to Seagate represented 56% of net sales.

      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 will 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. The Company believes that the Micropolis Agreement
will result in savings for both companies in areas such as packaging, transport
and response time. The Company expects that the Micropolis Facility will begin
furnishing Micropolis with a portion of its thin film requirements in the third
quarter of 1997. In addition, the Company has agreed to supply Micropolis with
specified volumes of products from its other facilities until the Micropolis
Facility is completed. During the three months ended March 28, 1997, sales to
Micropolis represented 21% of net sales. The Company also qualified a product
with Iomega Corporation ("Iomega"), and sales of this product represented 14%
of net sales for the three months ended March 28, 1997. While the Company
expanded its customer base during the first quarter of 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 second
quarter of 1997. 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.

      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 1996 and the three months ended March 28, 1997, the Company
reported a gross margin of 17.3% and (14.4%), respectively. The Company's gross
margins were lower during the first quarter of 1997 from levels experienced in
1996 primarily due to the continuing under-utilization of production capacity
from previous levels, the Seagate Supply Agreement, which is calculated based
upon a pricing formula which results in gross margins that are capped, and the
increase in capacity due to the Company's Singapore manufacturing facility which
is dedicated to manufacturing products for Seagate (the "Dedicated Facility")
becoming fully operational.

      The Company expects that a substantial portion of the Company's shipments
in the first half 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

                                      -8-
<PAGE>   8
quantities than more mature products. There can be no assurance that the
Company's gross margins will not be negatively impacted by the introduction of
these and other new products in the first half of 1997.

                                      -9-
<PAGE>   9
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
                                                                                  ------------------------------------
                                                                                  MARCH 28, 1997        MARCH 29, 1996
                                                                                  --------------        --------------
<S>                                                                               <C>                   <C>
Net sales......................................................................        100.0%               100.0%
Cost of sales..................................................................        114.4                 72.0
                                                                                       -----                -----
         Gross profit..........................................................        (14.4)                28.0
Operating expenses:
Research and development.......................................................          9.3                  6.1
Selling, general, and administrative...........................................          6.9                  3.4
                                                                                       -----                -----
         Total operating expenses..............................................         16.2                  9.4
                                                                                       -----                -----
         Operating earnings (loss).............................................        (30.6)                18.6
Interest income (expense) net..................................................         (1.6)                 0.8
                                                                                       -----                -----
Earnings (loss) before income tax expense......................................        (32.2)                19.4
Income tax expense (benefit)...................................................         (4.9)                 3.9
                                                                                       -----                -----
Net earnings (loss)............................................................        (27.3%)               15.5%
                                                                                       =====                =====
</TABLE>

1997 COMPARED TO 1996

Net Sales

      Net sales decreased 44.2% to $34.1 million for the three months ended
March 28, 1997 from $61.2 million for the three months ended March 29, 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
principal customers during the first quarter of 1997 were Seagate Technology,
Inc. ("Seagate"), Micropolis (S) Pte Ltd. ("Micropolis") and Iomega Corporation
("Iomega") sales to which represented 56%, 21% and 14%, respectively, of
net sales. The Company's customers during the first quarter of 1996 were
Seagate and Maxtor.

      Net sales for the three months ended March 28, 1997 as compared to the
three months ended March 29, 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 terminated the Maxtor Supply Agreement. 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 continues to seek additional customers to utilize the
manufacturing capacity as it seeks to qualify its products in additional product
programs of both new and existing customers.

      Although the Company expanded its customer base during the first quarter
of 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. These qualification problems are being addressed and the
Company expects to increase net sales during the remainder of 1997.

                                      -10-
<PAGE>   10
Gross Profit

      The Company's gross profit decreased 128.7% to $(4.9) million for three
months ended March 28, 1997 from $17.1 million for the three months ended March
29, 1996. Gross profit as a percentage of net sales for the three months ended
March 28, 1997 was (14.4%) as compared to 28.0% for the three months ended March
29, 1996.

      The principal factors contributing to the decrease in gross profit for
three months ended March 28, 1997 as compared to the three months ended March
29, 1996 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, the
introduction of new products with lower manufacturing yields contributed to
lower gross margins. The Company expects gross margins in 1997 will remain at
levels below those experienced in 1995 and the first half of 1996. Additionally,
the purchase price of disks under the Seagate Supply Agreement is calculated
based upon a pricing formula which have resulted in capped 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
termination, the Company has been accelerating qualification and production of
new products with significantly lower yields and lower gross margins. The
Company expects that a substantial portion of its shipments in 1997 will be of
new products. New products, including high performance MR disks, 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.

Research and Development

      Research and development expenses decreased 14.0% to $3.2 million for the
three months ended March 28, 1997 from $3.7 million for the three months ended
March 29, 1996, increasing as a percentage of net sales to 9.3% for the three
months ended March 28, 1997 from 6.1% for the three months ended March 29,
1996. The decrease in research and development expense was due principally to
the reduction of experimentation related to first and second generation MR
disks. The increase as a percentage of net sales was due primarily to the
reduced level of net sales.

Selling, General & Administrative Expenses

      Selling, general & administrative expenses increased 14.1% to $2.3
million for the three months ended March 28, 1997 from $2.1 million for the
three months ended March 29, 1996, increasing as a percentage of net sales to
6.9% for the three months ended March 28, 1997 from 3.4% for the three months
ended March 29, 1996. The increase in selling, general & administrative expense
is due principally to the expanded operations in Singapore and higher legal
fees.  The increase as a percentage of net sales was due primarily to the
reduced level of net sales.

Interest, Net

      Interest, net for the three months ended March 28, 1997 was $0.6 million
expense compared to $0.5 million income for the three months ended March 29,
1996. The change was primarily attributable to lower net cash levels during the
three months ended March 28, 1997 as compared to the three months ended March
29, 1996.

Income Tax Expense (Benefit)

      The Company's effective tax rate (which includes federal and state income
tax expense) decreased to 15.0% for the three months ended March 28, 1997 from
20.0% for the three months ended March 29, 1996, primarily due to increased
earnings in Singapore. The Company has been granted a seven year tax holiday in
Singapore which expires in 1999, 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 tax rate.

Liquidity and Capital Resources

      Cash and cash equivalents and short-term investments of $42.2 million as
of March 28, 1997 decreased $5.5 million from December 31, 1996, primarily due
to acquisition of plant and equipment offset by changes in working capital.

                                      -11-
<PAGE>   11
      During the three months ended March 28, 1997, the Company generated $5.6
million from operating activities. Sources included $7.1 million of depreciation
and amortization, $6.1 million decrease in accounts receivable, offset by a net
loss of $9.3 million. The decrease in accounts receivable was principally due to
lower net sales level for the three months ended March 28, 1997.

      The Company used $11.6 million in investing activities for the three
months ended March 28, 1997. Investing activities consisted primarily of
investments of $11.3 million for capital expenditures for facilities expansion
for its Singapore operations, including its substrate facility.

      Capital expenditures are expected to approximate $35 million during 1997,
primarily for the completion of the substrate facility in Singapore and
maintenance capital in both Singapore and Santa Clara. The Company had
approximately $6.1 million of noncancelable purchase commitments for plant and
equipment outstanding at March 28, 1997.

      The Company's principal sources of liquidity at March 28, 1997 consisted
of $42.2 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"), all of which were available to be borrowed at March 28,
1997. The Banks funded a $50.0 million Term Loan Facility in August 1996. The
facility has a three-year term and is secured by the Company's assets located in
Singapore and guaranteed by the parent. 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 would 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 its revolving credit facility with the
Banks will be sufficient to meet the Company's operating and capital expenditure
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 may require additional debt or equity financing. There can be
no assurance that such 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 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 first
quarter of 1997, shipments to Seagate, Micropolis and Iomega represented 56%,
21% and 14%, 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 for the first
half 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

                                      -12-
<PAGE>   12
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 first half 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 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. In addition, prior to
the merger, Conner had stated its intention to double its internal disk capacity
through a newly established facility in Singapore and this facility has begun
producing disks. 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.

      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, Micropolis and Iomega represented approximately 56%, 21% and 14% of
net sales respectively. In addition, the Company's unit sales of MR disks
represented 0% of units sold in the first 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. The Company is seeking 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 and results of operations.

      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,
during 1995 Maxtor was acquired by Hyundai, which is buildup a manufacturing
facility to manufacture disks for Maxtor disk drives.

                                      -13-
<PAGE>   13
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.

        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 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. During the first quarter of 1997, the levels purchased
from Seagate dropped and Seagate shifted its purchases to the Dedicated Facility
because of the favorable pricing provisions of the Seagate Supply Agreement
which resulted in significant excess capacity. To the extent that purchases from
Seagate do not increase from its current levels, particularly as it increases
its own internal disk manufacturing capacity, the Seagate Supply Agreement and
Dedicated Facility has not resulted in increased sales to Seagate and absent
additional orders from other customers to replace volumes shifted from other
facilities, has resulted in significant excess capacity for the Company with
resulting adverse impacts on the Company's results of operations. If the Company
fails to replace volumes in its other facilities with purchases from other
customers, the Company's business results of operations and financial condition
would 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 will 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 three months ended March 28, 1997, sales to
Micropolis represented 14% of net sales. The Company believes that the
Micropolis Agreement will result in savings for both companies in areas such as
packaging, transport 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
Company expects that the Micropolis Facility will begin furnishing Micropolis
with a portion of its thin film requirements in 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 first quarter of 1997, the Company reported a gross margin of 27.0%,
17.3% and (14.4)%, respectively. The Company's gross margins in the first
quarter of 1997 continued to be lower than the levels experienced in 1995 and
1996 primarily due to Maxtor's termination 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. Operating below capacity has had a significant
impact on gross margins. Additionally, the purchase price of disks under the
Seagate Supply Agreement is calculated based upon a pricing

                                      -14-
<PAGE>   14
formula which have resulted in capped gross margins that are generally lower
than the gross margins previously experienced by the Company. Accordingly,
because output from the Dedicated Facility has accounted for an increasing
portion of the Company's total revenues and the Company has continued to have
excess production capacity, the Company's overall gross margins have declined.
This adverse impact is exacerbated by Seagate's shift of its purchase orders to
the Dedicated Facility from the Company's other facilities rather than increases
its level of purchases from the Company. If sales form the Dedicated Facility
continue to account for an increasing portion of the Company's total revenues
and the Company continues to have excess production capacity, the Company's
business, results in operations and financial condition would 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, 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."

      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 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.

      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."

                                      -15-
<PAGE>   15
      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."

      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 has begun
operations at its substrate manufacturing facility in Singapore and expects it
to become fully operational in early 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 Company will not continue to
experience delays and other start-up difficulties or that once the facility is
fully operational 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.

      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 $35
million during 1997, primarily for the completion of the substrate facility, the
Micropolis Facility and maintenance capital in Singapore and Santa Clara,
California. The Company believes it will be able to fund these expenditures from
a combination of existing debt financing, cash balances and cash from
operations. If these funds are insufficient to finance the Company's
requirements, the Company would be required to seek additional debt

                                      -16-
<PAGE>   16
or equity financing. There can be no assurance that such financing will be
available to the Company or, if available, will be available on favorable terms.

      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 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 five U.S. patents issued to 
it, and has seventeen 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, 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

                                      -17-
<PAGE>   17
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, 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
first quarter of 1997, international sales (sales delivered to customers in the
Far East and Ireland, 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 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, 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, 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

                                      -18-
<PAGE>   18
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.

                                      -19-
<PAGE>   19
                     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. The Court denied motions to dismiss filed by defendants Park and Yoo,
each of whom is expected therefore to answer the complaint. Defendants Hyundai
and Chang have moved to dismiss for insufficient service of process. The court
is scheduled to hear that motion on June 20, 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.

      WEREZBERGER, 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 and, in particular, 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. The action is
purportedly brought on behalf of all persons who purchased StorMedia stock
during that period. The Complaint seeks an unspecified amount of damages. The
court granted Mr. Almon's demurrer and denied the Company's demurrer. The Court
of Appeals has accepted a writ petition challenging the Superior Court's denial
of the Company's demurrer. Defendants intend to continue 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

                                      -20-
<PAGE>   20
      a.   On April 24, 1997, the Annual Meeting of Stockholders of the Company
           was held in Santa Clara, California. An election of Directors was
           held with a slate of four candidates, William J. Almon, John A.
           Downer, Francis J. Lunger and Mark S. Rossi being elected to the
           Board of Directors of the Company. The slate of candidates received
           11,085,286 affirmative votes of shares represented and voting, 21,030
           shares were instructed and 47,350 shares were withheld from all
           nominees. Votes withheld from any nominee and broker non-votes were
           counted for purposes of determining the presence or absence of a
           quorum.

           Additionally, the stockholders ratified the appointment of KPMG Peat
           Marwick LLP as independent auditors of the Company for the fiscal
           year ending December 31, 1997. There were 11,142,127 shares voted in
           favor of the ratification, 6,550 shares voted against the
           ratification and 4,989 shares abstained. The affirmative vote of the
           holders of a majority of the Class A Common Stock represented in
           person or by proxy and entitled to vote at the Annual Meeting ("Votes
           Cast") was needed in order to approve the foregoing proposals. Votes
           Cast against the proposals were counted for purposes of determining
           (i) the presence of absence of a quorum for the transaction of
           business and (ii) the number of Votes Cast with respect to each such
           proposal. An abstention had the same effect as a vote against the
           proposal. Broker non-votes were counted for purposes of determining
           the presence or absence of a quorum, but were not counted as Votes
           Cast.

ITEM 5.    OTHER INFORMATION

      None.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

      a.  Exhibits.

          10.44*      Agreement dated December 17, 1996 between the Company and
                      Micropolis (S) Pte Ltd.

          11.1        Statement regarding computation of earnings (loss) per
                      share

          27.1        Financial Data Schedule

      *   Confidential treatment has been requested.

      b.  Reports on Form 8-K

          None

                                      -21-
<PAGE>   21
                                   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: May 12, 1997                      By:  /s/ Stephen M.  Abely
                                          -------------------------------------
                                                Stephen M. Abely, Vice President
                                                and Chief Financial Officer
                                                (Principal Financial and
                                                Accounting Officer)

                                      -22-
<PAGE>   22
                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
     EXHIBIT                                                                                                  PAGE
     -------                                                                                                  ----
<S>                                                                                                           <C>
         10.44    Agreement dated December 17, 1996 between the Company and Micropolis (S) Pte Ltd. .......
         11.1     Statement regarding computation of per-share earnings ...................................
         27.1     Financial Data Schedule .................................................................
</TABLE>

                                      -23-