<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 For the period ended September 26, 1998 or 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 For the transition period from ______________ to ______________

Commission file Number:      0-14016
                       --------------------

                               MAXTOR CORPORATION
             ------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                 Delaware                                 77-0123732
       -------------------------------                 ----------------
       (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)

      510 Cottonwood Drive, Milpitas, CA                     95035
   ----------------------------------------                ----------
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

      Registrant's telephone number, including area code:  (408) 432-1700

       Securities registered pursuant to Section 12(b) of the Act:  None

          Securities registered pursuant to Section 12(g) of the Act:
          5.75% Convertible Subordinated Debentures, due March 1, 2012

Indicate by checkmark 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
                                            ------    ------

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
          ------


As of November 9, 1998, 94,271,911 shares of the registrant's Common Stock,
$.01 par value, were outstanding.

<PAGE>   2

                               MAXTOR CORPORATION

                                    FORM 10-Q

                               SEPTEMBER 26, 1998

                                      INDEX


PART I.      FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                                    PAGE
                                                                                    ----
<S>                                                                                <C>
ITEM 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                            


             Condensed Consolidated Balance Sheets -
                September 26, 1998 and December 27, 1997                              3

             Condensed Consolidated Statements of Operations -
                Three months and nine months ended
                September 26, 1998, and September 27, 1997                            4

             Condensed Consolidated Statements of Cash Flows -
                Nine months ended September 26, 1998,
                and September 27, 1997                                              5 - 6

             Notes to Condensed Consolidated Financial Statements                   7 - 11

ITEM 2.      Management's Discussion and analysis of
             Financial Condition and Results of Operations                         12 - 27


PART II.     OTHER INFORMATION


ITEM 1.      LEGAL PROCEEDINGS

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K


SIGNATURE PAGE
</TABLE>


                                                                               2

<PAGE>   3

PART I.     FINANCIAL INFORMATION

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MAXTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                       September 26,        December 27,
ASSETS                                                                                      1998                1997
                                                                                         ---------           ---------
                                                                                       (Unaudited)
<S>                                                                                      <C>                 <C>      
Current assets:
   Cash and cash equivalents                                                             $ 162,225           $  16,925
   Accounts receivable, net of allowance for doubtful accounts
     of $5,935 at September 26, 1998 and $3,573 at December 27, 1997                       279,367             241,777
   Accounts receivable from affiliates                                                       4,170               5,870
   Inventories                                                                             151,952             155,312
   Prepaid expenses and other                                                               22,245              20,814
                                                                                         ---------           ---------
       Total current assets                                                                619,959             440,698
Net property, plant and equipment                                                          112,008              99,336
Other assets                                                                                11,201              15,438
                                                                                         ---------           ---------
                                                                                         $ 743,168           $ 555,472
                                                                                         =========           =========

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
   Short-term borrowings including current portion of long term debt                     $   5,261           $ 100,057
   Short-term borrowings due to affiliates                                                      --              65,000
   Accounts payable                                                                        371,677             206,563
   Accounts payable to affiliates                                                              153              25,022
   Accrued and other liabilities                                                           100,608             155,563
                                                                                         ---------           ---------
         Total current liabilities                                                         477,699             552,205
Long-term debt due to affiliates                                                            55,000                  --
Long-term debt and capital lease obligations due after one year                             90,051             224,313
                                                                                         ---------           ---------
Total liabilities                                                                          622,750             776,518
                                                                                         ---------           ---------

Commitments and contingencies (Note 7)                                                          --                  --
Stockholders' deficit:
   Series A Preferred Stock, $0.01 par value, 95,000,000 shares authorized; all
     outstanding shares converted into 44,029,850 shares of common stock at
     August 5, 1998. 88,059,701 shares issued and outstanding at December 27,
     1997; aggregate liquidation value $590,000 at December 27, 1997                                               880
   Common Stock, $0.01 par value, 250,000,000 shares authorized;
     94,257,739 shares issued and outstanding at September 26, 1998,
       and 7,563 shares issued and outstanding at December 27, 1997                            943                  --
   Additional paid-in capital                                                              878,019             534,765
    Cumulative other comprehensive income - unrealized gain
     on investments in equity securities                                                    13,234              16,262
   Accumulated deficit                                                                    (771,778)           (772,953)
                                                                                         ---------           ---------
         Total stockholders' equity                                                        120,418            (221,046)
                                                                                         ---------           ---------
                                                                                         $ 743,168           $ 555,472
                                                                                         =========           =========
</TABLE>

See accompanying notes.


                                                                               3
<PAGE>   4

MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share amounts)
(Unaudited)


<TABLE>
<CAPTION>
                                                                Three months                            Nine months
                                                                  ended                                    ended
                                                      --------------------------------        --------------------------------
                                                      September 26,       September 27,       September 26,       September 27,
                                                           1998               1997                1998                1997
                                                      ------------        ------------        ------------        ------------
<S>                                                   <C>                 <C>                 <C>                 <C>         
Revenue                                               $    599,165        $    383,363        $  1,674,482        $    895,381

Revenue from affiliates                                        632               8,863               6,197              26,947
                                                      ------------        ------------        ------------        ------------
   Total revenue                                           599,797             392,226           1,680,679             922,328
                                                      ------------        ------------        ------------        ------------

Cost of revenue                                            525,933             362,659           1,477,510             880,489
Cost of revenue from affiliates                                667               8,020               5,241              24,633
                                                      ------------        ------------        ------------        ------------
   Total cost of revenue                                   526,600             370,679           1,482,751             905,122
                                                      ------------        ------------        ------------        ------------

Gross profit                                                73,197              21,547             197,928              17,206
                                                      ------------        ------------        ------------        ------------
Operating expenses:
     Research and development                               40,189              26,714             110,285              78,631
     Selling, general and administrative                    18,643              15,536              52,958              45,944
     Stock compensation expense                              1,160                  --              11,068                  --
                                                      ------------        ------------        ------------        ------------
Total operating expenses                                    59,992              42,250             174,311             124,575
                                                      ------------        ------------        ------------        ------------

Income (loss) from operations                               13,205             (20,703)             23,617            (107,369)

Interest expense                                            (6,573)            (10,856)            (24,109)            (27,480)
Interest and other income                                    1,537                 395               3,936               2,592
                                                      ------------        ------------        ------------        ------------

Income (loss) before provision for income taxes              8,169             (31,164)              3,444            (132,257)
Provision for income taxes                                   2,091                 199               2,269                 700
                                                      ------------        ------------        ------------        ------------
Net income (loss)                                            6,078             (31,363)              1,175            (132,957)
                                                      ------------        ------------        ------------        ------------

Other comprehensive income:
Unrealized gain (loss) on investments in equity
    securities                                             (11,688)                 --              (3,028)                 --
                                                      ------------        ------------        ------------        ------------
Comprehensive loss                                    $     (5,610)       $    (31,363)       $     (1,853)       $   (132,957)
                                                      ============        ============        ============        ============


Net income per share - basic (note 2)                 $       0.10        $         --        $       0.06        $         --

Net income per share - diluted                        $       0.08        $         --        $       0.02        $         --

Shares used in per share calculation
         - basic                                        59,515,691                  --          19,991,259                  --
         - diluted                                      76,860,814                  --          55,491,542                  --
</TABLE>


See accompanying notes.




                                                                              4
<PAGE>   5

MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share and per share amounts)
(Unaudited)


<TABLE>
<CAPTION>
                                                                                 Nine months
                                                                                    ended
                                                                          ---------------------------
                                                                         September 26,    September 27,
                                                                             1998             1997
                                                                          ---------        --------- 
<S>                                                                       <C>              <C>       
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net income (loss)                                                     $   1,175        $(132,957)
                                                                          ---------        --------- 
    Adjustments to reconcile net income (loss)
        Net cash provided by (used in) operating activities:
         Depreciation and amortization                                       48,454           41,108
         Stock compensation expense                                          11,068
         Inventory reserves for lower of cost or market                       7,852          (10,446)
         Loss (gain) on disposal of property, plant and equipment             5,897               --
         Other                                                                   --             (128)
         Changes in assets and liabilities:
             Accounts receivable                                              8,908          (91,457)
             Accounts receivable from affiliates                              4,509              516
             Inventories                                                     (4,492)         (51,182)
             Prepaid expenses and other                                      (4,459)            (606)
             Accounts payable                                               157,710           89,060
             Accounts payable to affiliates                                 (24,869)           6,610
             Accrued and other liabilities                                   10,362            7,485
                                                                          ---------        --------- 
    Total adjustments                                                       220,940          (49,329)
                                                                          ---------        --------- 
    Net cash provided by (used in) operating activities                     222,115         (141,997)
                                                                          ---------        --------- 

Cash flows from investing activities:
    Proceeds from sale of property and equipment                              3,059               --
    Purchase of property, plant and equipment                               (61,600)         (23,955)
    Other assets                                                              3,175            3,082
                                                                          ---------        --------- 
    Net cash used in investing activities                                   (55,366)         (20,873)
                                                                          ---------        --------- 

Cash flows from financing activities:
    Proceeds from issuance of debt, including short-term borrowings          69,775          194,370
    Principal payments on debt, including short-term borrowings            (308,849)             (64)
    Net payments under accounts receivable securitization                  (111,816)         (40,289)
    Proceeds from issuance of common stock                                  329,441               --
                                                                          ---------        --------- 
    Net cash provided by (used in) financing activities                     (21,449)         152,067
                                                                          ---------        --------- 

Net change in cash and cash equivalents                                     145,300            2,679
Cash and cash equivalents at beginning of period                             16,925           31,313
                                                                          ---------        --------- 
Cash and cash equivalents at end of period                                $ 162,225        $  33,992
                                                                          =========        ========= 
</TABLE>


See accompanying notes.




                                                                               5
<PAGE>   6


MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)


<TABLE>
<CAPTION>
                                                                                      Nine months
                                                                                         ended
                                                                              -----------------------------
                                                                              September 26,   September 27,
                                                                                  1998            1997
                                                                              -------------   -------------
<S>                                                                             <C>             <C>     
Supplemental disclosures of cash flow information:

Cash paid during the period for:
   Interest                                                                     $ 24,047        $ 17,792
   Income taxes                                                                      985             832

Supplemental information on noncash investing and financing activities:
   Purchase of property, plant and equipment financed by accounts payable          7,404             (64)
   Purchase of property, plant and equipment financed by capital leases               16             620
   Unrealized gain on equity securities                                           (3,028)             --
   Stock compensation reimbursement due from an affiliate                          2,809              --
   Short-term Borrowings from affiliate exchanged for note                        55,000              --
</TABLE>



See accompanying notes.


                                                                               6
<PAGE>   7



                               MAXTOR CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated financial
statements include the accounts of Maxtor Corporation ("Maxtor" or the
"Company") and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. From January 1996 through
July 30, 1998, Maxtor Corporation operated as a majority-owned subsidiary of
Hyundai Electronics America ("HEA"). HEA is a subsidiary of Hyundai Electronics
Co. Ltd. ("HEI"), a Korean corporation. On August 5, 1998, the Company closed
its Initial Public Offering of its Common Stock (the "Offering") which reduced
the ownership interest of HEA to approximately 48% (see Note 3). All adjustments
of a normal recurring nature which, in the opinion of management, are necessary
for a fair presentation of the results for the interim periods have been made.
It is recommended that the interim financial statements be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
for the fiscal year ended December 27, 1997 incorporated in the Company's annual
report on Form 10-K, as amended. The balance sheet as of December 27, 1997 is
derived from the Company's audited financial statements and does not include all
of the related disclosures. Interim results are not necessarily indicative of 
the operating results expected for later quarters or the full fiscal year.

2.    NET INCOME (LOSS) PER SHARE

In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted net income (loss) per share
calculations is provided as follows (in thousands, except share and per share
amounts):


<TABLE>
<CAPTION>
                                                            Three Months Ended               Nine Months Ended
                                                     -------------------------------     -------------------------------
                                                     September 26,     September 27,     September 26,     September 27,
                                                         1998              1997              1998              1997
                                                     -------------     -------------     -------------     -------------
<S>                                                   <C>               <C>               <C>               <C>         
NUMERATOR - BASIC AND DILUTED
Net income (loss) .............................       $     6,078       $   (31,363)      $     1,175       $  (132,957)
                                                      ===========       ===========       ===========       ===========
Net income (loss) available to common
     stockholders .............................       $     6,078       $   (31,363)      $     1,175       $  (132,957)
                                                      ===========       ===========       ===========       ===========

DENOMINATOR
Basic weighted average common shares
     outstanding ..............................        59,515,691                --        19,991,259                --
Effect of dilutive securities
     Common stock options .....................         1,200,781                --           731,324                --
     Convertible preferred stocks .............        16,144,342                --        34,768,959                --
                                                      -----------       -----------       -----------       -----------

Diluted weighted average common
     shares ...................................        76,860,814                --        55,491,542                --
                                                      -----------       -----------       -----------       -----------
Basic net income (loss) per share .............       $      0.10       $        --       $      0.06       $        --
                                                      ===========       ===========       ===========       ===========
Diluted net income (loss) per share ...........       $      0.08       $        --       $      0.02       $        --
                                                      ===========       ===========       ===========       ===========
</TABLE>


For the three and nine month periods ended September 27, 1997, the Company
operated as a wholly owned subsidiary with no common stock outstanding.



                                                                               7
<PAGE>   8

Pro forma net income (loss) per share information reflecting the 44,029,850
shares of convertible preferred stock as if it had converted at the beginning of
the earliest period presented is as follows:


<TABLE>
<CAPTION>
                                                                   Three Months Ended                 Nine Months Ended
                                                            ------------------------------     ------------------------------
                                                            September 26,    September 27,     September 26,    September 27,
                                                                1998             1997              1998             1997
                                                            -------------    -------------     -------------    -------------
<S>                                                         <C>              <C>               <C>              <C>          
NUMERATOR - BASIC AND DILUTED
Net income ............................................     $      6,078     $    (31,363)     $      1,175     $   (132,957)
                                                            ============     ============      ============     ============
Net income (loss) available to
     common stockholders ..............................     $      6,078     $    (31,363)     $      1,175     $   (132,957)
                                                            ============     ============      ============     ============

DENOMINATOR - PRO FORMA
Pro forma basic weighted average
     common shares outstanding ........................       75,660,033       44,029,850        54,760,218       44,029,850
Effect of dilutive common stock options ...............        1,200,781               --           731,324               --
                                                            ------------     ------------      ------------     ------------
Pro forma diluted weighted average
     common shares ....................................       76,860,814       44,029,850        55,491,542       44,029,850
                                                            ------------     ------------      ------------     ------------

Pro forma basic net income (loss) per share ...........     $       0.08     $      (0.71)     $       0.02     $      (3.02)
                                                            ============     ============      ============     ============
Pro forma diluted net income (loss) per share .........     $       0.08     $      (0.71)     $       0.02     $      (3.02)
                                                            ============     ============      ============     ============
</TABLE>


3.   COMMON STOCK:

Reverse Stock Split

On May 29, 1998, the Board approved a one-for-two reverse split of the Company's
outstanding common stock, which became effective upon the Company's filing of an
amended and restated certificate of incorporation in Delaware on July 24, 1998.
All references in the financial statements to the number of the Company's common
shares and price per share amounts, as well as the conversion ratio of preferred
shares, have been retroactively restated to reflect the reverse split. The Board
of Directors also approved the increase of the Company's authorized common stock
to 250,000,000 shares.

Initial Public Offering

On August 5, 1998, the Company completed the issuance of 49,731,225 shares of
its common stock in an initial public offering. The Company received
approximately $329.4 million net of issuance costs and underwriters'
commissions. Approximately $200.0 million of the proceeds have been used for
repayment of certain outstanding indebtedness under credit facilities due to
various banks (see Note 6). Upon closing of the Offering, all outstanding shares
of the Series A Preferred Stock converted into 44,029,850 shares of common
stock.


4.   SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)


<TABLE>
<CAPTION>
                                        September 26, 1998     December 27, 1997
                                        ------------------     -----------------
<S>                                    <C>                    <C>   
     Inventories:
         Raw materials                        33,887                 48,834
         Work-in process                      14,109                 15,177
         Finished goods                      103,956                 91,301
                                            --------               --------
                                            $151,952               $155,312
                                            ========               ========
</TABLE>



                                                                               8
<PAGE>   9


5.   RECLASSIFICATIONS

Certain reclassifications have been made to prior year financial statements to
conform to current classifications. These reclassifications had no impact on any
prior years or the Company's net assets or results of operation.

6.   SHORT AND LONG-TERM BORROWINGS

On July 31, 1998, the Company entered into a three year agreement with Fleet
Bank for a $200.0 million asset securitization program. This program replaces
the previous Citicorp program which was terminated on July 31, 1998 and, unlike
the Citicorp program, it does not require any support from HEA or any of HEA's
affiliates. Under the Fleet program, the Company sells all of its eligible trade
accounts receivable on a non-recourse basis through a special purpose vehicle.
The Company has arranged for a $204.0 million back-up liquidity facility to
support the program. As of September 26, 1998, $125.0 million of accounts
receivable was securitized under the program.

On July 31, 1998, the Company replaced its short-term borrowings from HEA of
$55.0 million with a three year subordinated note due July 31, 2001. This note
bears interest at six month LIBOR plus 2.0% which is payable semi-annually. As
of September 26, 1998, $55.0 million was outstanding on this note.

At June 27, 1998, the Company had two uncollateralized, syndicated lines of
credit through Citibank, N.A., both of which were guaranteed by HEI and amounted
to $129.0 million and $31.0 million. In August 1998, both of these lines of
credit were paid off and all related agreements were terminated. At June 27,
1998, in addition to the Citibank facilities, the Company had approximately
$40.0 million in borrowings under other credit facilities from two banks. In
August 1998, these facilities were also paid down and the related agreements
terminated.

7.   CONTINGENCIES

STORMEDIA LITIGATION

The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
HEI which became effective on November 17, 1995 (the "StorMedia Agreement").
Pursuant to the StorMedia Agreement, StorMedia agreed to supply disk media to
the Company. StorMedia's disk media did not meet the Company's specifications
and functional requirements as required by the StorMedia Agreement and the
Company ultimately terminated the StorMedia Agreement. After a class action
securities lawsuit was filed against StorMedia by certain of its shareholders in
September 1996 which alleged, in part, that StorMedia failed to perform under
the StorMedia Agreement, StorMedia sued HEI, Mong Hun Chung (HEI's chairman),
Dr. Chong Sup Park (HEA's President and then President of the Company who signed
the StorMedia Agreement on behalf of the Company) and K.S. Yoo (the individual
who signed the StorMedia Agreement on behalf of HEI) (collectively the "
Original Defendants") in the U.S. District Court for the Northern District of
California (the "Federal Suit"). In the Federal Suit, StorMedia alleged that at
the time HEI entered into the StorMedia Agreement, it knew that it would not and
could not purchase the volume of products which it committed to purchase, and
that failure to do so caused damages to StorMedia in excess of $206 million.

In December 1996, the Company filed a complaint against StorMedia and William
Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado state
court seeking approximately $100 million in damages and alleging, among other
claims, breach of contract, breach of implied warranty of fitness and fraud
under the StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed
pending resolution of the Federal Suit. The Federal Suit was permanently
dismissed early in February 1998. On February 24, 1998, StorMedia filed a new
complaint in Santa Clara County Superior Court for the State of California for
$206 million, alleging fraud and deceit against the Original Defendants and
negligent misrepresentation against HEI and the Company (the "California Suit").
On May 18, 1998, the stay on the Colorado Suit was lifted by the Colorado state
court. On September 9, 1998, the California Suit was stayed. On October 11,
1998, Stormedia filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Act in the United States Bankruptcy Court in the Northern District of
California.

The Company believes that it has meritorious defenses against the claims alleged
by StorMedia and intends to defend itself vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After consideration of the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the



                                                                               9
<PAGE>   10


Company's management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
results of operations. However, the results of these proceedings, including any
potential settlement, are uncertain and there can be no assurance that they will
not have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, the Company does not believe that
resolution of these matters will have a material adverse effect on the Company's
business, financial condition or results of operations. No amounts related to
any claims or actions have been reserved in the Company's financial statements.

8.    RECENT ACCOUNTING PRONOUNCEMENTS

During the quarter ended March 28, 1998 the Company adopted the Financial
Accounting Standards Board Statement SFAS No. 130, "Reporting Comprehensive
Income." In accordance with SFAS No. 130, the Company has disclosed
comprehensive income and restated the prior periods. Comprehensive income
generally represents all changes in stockholders' equity except those resulting
from investments or contributions by stockholders.

In June 1997, the Financial Accounting Standards Board issued Statement SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for disclosure about operating segments in
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The
new standard becomes effective for fiscal years beginning after December 15,
1997 and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirement of SFAS No. 131 and the effects, if any on the Company's current
reporting and disclosures.

In June 1998, the Financial Accounting Standards Board issued statement of
Accounting Standards No. 133 (SFAS 133). "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives which are not hedges
must be adjusted to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
SFAS 133 is effective for years beginning after June 15, 1999, but companies can
early adopt as of the beginning of any fiscal quarter that begins after June
1998. The Company is evaluating the requirements of SFAS 133, but does not
expect this pronouncement to materially impact the Company's results of
operations.

In March 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 provides guidance on when costs related
to software developed or obtained for internal use should be capitalized or
expensed. The SOP is effective for transactions entered into for fiscal years
beginning after December 15, 1998. The Company has reviewed the provisions of
the SOP and does not believe adoption of this standard will have a material
effect upon its results or operations, financial position or cash flows.

9.    RELATED PARTY TRANSACTION

HEI (or one of its affiliates) had served as guarantor for the Company's
borrowings under various revolving bank credit facilities from August 1996 until
its termination in August 1998. Presently, none of the Company's debt is
guaranteed by HEI or any of its affiliates.

The cost of revenue includes certain component parts purchased from MMC
Technology, Inc. ("MMC"), a wholly owned subsidiary of HEA, amounted to $95.0
million during the nine months and $33.8 million during the three months ended
September 26, 1998. The Company signed a Supply Agreement with MMC effective on
August 18, 1998, with respect to pricing of future purchases and secures a
supply of product from MMC. (Exhibit 10.167)





                                                                              10
<PAGE>   11


10.    STOCK COMPENSATION

In 1996 the Company adopted the 1996 Stock Option Plan (the "Plan"), pursuant to
which substantially all of the Company's domestic employees and certain
international employees received options which were required to be accounted for
as variable options. These options, which were granted between May 1996 and
October 1997, required remeasurement of any intrinsic compensation element each
reporting date determined by the difference between the estimated current fair
value of the Company's stock and the exercise price of the options. In the first
quarter of 1998, the Company amended and restated the Plan to remove the
variable features and all grants subsequent to October 1997 have been subject to
fixed terms. In the second quarter of 1998, the Company offered and re-issued
new fixed award options in exchange for options previously issued under variable
terms, thereby eliminating the requirement to remeasure these options in
subsequent periods. Compensation expense has been reflected in the Company's
financial statements in accordance with Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Appreciation Rights and Other Variable
Stock Option or Award Plans." Accordingly, the Company recorded non-cash
compensation expense of $1.2 million and $11.1 million, respectively, for the
three and nine month periods ended September 26, 1998. The remaining
unrecognized compensation element will be reflected in quarterly charges,
decreasing sequentially from the third quarter of 1998, through the second
quarter of 2001. During 1997, the Company also granted options to the employees
of MMC Technology, Inc. ("MMC"), a wholly owned subsidiary of HEA. MMC has
agreed to reimburse the Company for any compensation expense arising from such
grants.

The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123. "Accounting for Stock-Based Compensation."

On May 29, 1998 the Company adopted the 1998 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 1.7 million shares of Common Stock have been
reserved for issuance under the Purchase Plan, none of which were issued as of
September 26, 1998. The Purchase Plan permits eligible employees to purchase
Common Stock at a discount, but only through accumulated payroll deductions,
during sequential 6-month offering periods. Participants will purchase shares on
the last day of each offering period. In general, the price at which shares are
purchased under the Purchase Plan is equal to 85% of the lower of the fair
market value of a share of Common Stock on (a) the first day of the offering
period, or (b) the purchase date. The initial offering period under the Purchase
Plan commenced on the closing of the Company's public offering on August 5,
1998.

On May 29, 1998 the Company adopted the 1998 Restricted Stock Plan (the
"Restricted Stock Plan"), which provides for awards of shares of Common Stock to
employees. The Board of Directors of the Company has the authority to amend or
terminate the Restricted Stock Plan. The Restricted Stock Plan's maximum share
reserve is 390,000 shares of Common Stock, all of which were awarded in June
1998. All unvested shares of restricted stock are forfeited in the event of
termination of employment with the Company. The restricted stock shares vest and
are released from the forfeiture provision three years from the date of the
restricted stock award. Vesting of these shares is subject to acceleration upon
the occurrence of a change of control.





                                                                              11
<PAGE>   12


This Report on Form 10-Q contains forward-looking statements within the meaning
of the U. S. federal securities laws that involve risks and uncertainties. The
statements contained in this Report on Form 10-Q that are not purely historical,
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future are forward-looking
statements. In the Report on Form 10-Q, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions also identify
forward-looking statements. The Company makes these forward-looking statements
based upon informations available on the date hereof, and assumes no obligation
to update any such forward-looking statements. The Company's actual results
could differ materially from those anticipated in this Report on Form 10-Q as a
result of certain factors including, but not limited to, those set forth in the
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations "Certain Factors Affecting Future Performance" and elsewhere in
this Report on Form 10-Q.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the condensed
consolidated financial statements and related note include elsewhere in this
report.


RESULTS OF OPERATIONS


Revenue and Gross Profit (Loss)


<TABLE>
<CAPTION>
                                                 Three Months Ended                               Nine Months Ended
                                     -------------------------------------------    --------------------------------------------
(In millions)                        September 26,  September 27,                   September 26,    September 27,
Fiscal quarter ended                     1998           1997           Change           1998            1997           Change
                                     -------------  -------------  -------------    -------------    ------------- -------------
                                                                             (unaudited)
<S>                                    <C>            <C>             <C>            <C>               <C>            <C>     
Revenue                                $  599.8       $  392.2        $  207.6       $  1,680.7        $  922.3       $  758.4

Gross profit (loss)                    $   73.2       $   21.5        $   51.7       $    197.9        $   17.2       $  180.7
     As a percentage of revenue            12.2%           5.5%                            11.8%            1.9%

Net income (loss)                      $    6.1       $  (31.4)       $   37.5       $      1.2        $ (133.0)      $  134.2
     As a percentage of revenue             1.0%          (8.0%)                            0.1%          (14.4%)
</TABLE>


Revenue. Between the three months ended September 27, 1997 ("Q397") and the
three months ended September 26, 1998 ("Q398") revenue grew from $392.2 million
to $599.8 million or 52.9%. Between the first nine months of 1997 and the first
nine months of 1998, the Company's revenue grew by 82.2%, increasing from $922.3
million in the first nine months of 1997 to $1,680.7 million the first nine
months of 1998. The increases in revenue for these periods is attributable
primarily to an increase in unit shipments arising from improved time-to-market
entry and time-to-volume production and a shift in the Company's customer base
to Personal Computer ("PC") original equipment manufacturings ("OEMs"). Revenue
growth from increased unit shipments was partially offset by continued price
erosion in the HDD market as a whole, which resulted in declining average
selling prices ("ASPs") throughout the period. The Company believes that the
effect of HDD market ASP declines on the Company's ASPs was contained partially
by the Company's improved time-to-market entry and time-to-volume production and
by a Company trend toward shipping higher-capacity HDDs, which tend to have
higher initial ASPs.

From Q397 to Q398, revenue from sales to PC OEMs increased from 64.6% to 77.8%
of the Company's revenue. During this period, sales to three of the largest PC
OEMs, Dell Computer Corporation, International Business Machine Corporation, and
Compaq Computer Corporation increased from 34.4% to 54.5% of the Company's
revenue. From the first nine months of 1997 to the first nine months of 1998,
revenue from sales to PC OEMs increased from 57.5% to 75.4% of the Company's
revenue. During this period, sales to three of the largest PC OEMs, Dell
Computer Corporation, International Business Machine Corporation, and Compaq
Computer Corporation increased from 28.3% to 53.5% of the Company's revenue.




                                                                              12
<PAGE>   13

Gross Profit (Loss). Gross profit improved from $21.5 million for Q397 to $73.2
million in Q398; and gross profit improved from $17.2 million for the first nine
months of 1997 to $197.9 million in the first nine months of 1998. Gross margin
increased from 5.5% in Q397 to 12.2% in Q398; and gross margin increased from
1.9% in the first nine months of 1997 to 11.8% in the first nine months of 1998.
The improvement in gross margin during these periods is due to the timely
introduction of new, higher margin products which achieved market acceptance and
higher manufacturing yields. During these periods gross margin also was
favorably affected by improved product designs which led to improved
manufacturing yields and lower component costs. During these periods growth of
the Company's gross margin, however, was constrained partially by continued
rapid price erosion in the HDD market as a whole, which resulted in declining
ASPs for the Company's products.


OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                 Three Months Ended                               Nine Months Ended
                                     -------------------------------------------    --------------------------------------------
(In millions)                        September 26,  September 27,                   September 26,    September 27,
                                          1998           1997          Change            1998            1997          Change
                                     -------------  -------------  -------------    -------------    ------------- -------------
                                                                            (unaudited)
<S>                                    <C>            <C>             <C>            <C>               <C>            <C>     

Research and development                $ 40.2         $ 26.7         $ 13.5            $110.3           $ 78.6        $ 31.7
    As a percentage of revenue             6.7%           6.8%                             6.6%             8.5%

Selling, general and administrative     $ 18.6         $ 15.5         $  3.1            $ 53.0           $ 45.9        $  7.1
     As a percentage of revenue            3.1%           4.0%                             3.2%             5.0%

Stock compensation expense              $  1.2         $   --         $  1.2            $ 11.1           $   --        $ 11.1
     As a percentage of revenue            0.2%                                            0.7%
</TABLE>



Research and Development Expense. R&D expense as a percentage of revenue
decreased from 6.8% in Q397 to 6.7% in Q398, while the absolute dollar level of
R&D spending during the same periods increased from $26.7 million to $40.2
million. Further, R&D expense as a percentage of revenue decreased from 8.5% in
the first nine months of 1997 to 6.6% in the first nine months of 1998, while
the absolute dollar level of R&D spending during the same periods increased from
$78.6 million to $110.3 million. The increase in absolute dollars during these
periods was due to the Company's efforts to develop new products for the desktop
PC market and future products in other HDD market segments.

Selling, General and Administrative Expense. SG&A expense as a percentage of
revenue declined from 4.0% in Q397 to 3.1% in Q398, while the absolute dollar
level of SG&A increased from $15.5 million to $18.6 million, respectively.
Further, SG&A expense as a percentage of revenue declined from 5.0% in the first
nine months of 1997 to 3.2% during the first nine months of 1998, while the
absolute dollar level of SG&A expenses increased slightly from $49.5 million to
$53.0 million, respectively. The decrease in SG&A expenses as a percentage of
revenue between these periods was due to the increase in the Company's revenue
combined with the Company's ongoing cost control efforts.

Stock Compensation Expense. In 1996 the Company adopted the 1996 Stock Option
Plan (the "Plan"), pursuant to which substantially all of the Company's domestic
employees and certain international employees received options which were
required to be accounted for as variable options. These options, which were
granted between May 1996 and October 1997, required remeasurement of any
intrinsic compensation element each reporting date determined by the difference
between the estimated current fair value of the Company's stock and the exercise
price of the options. In the first quarter of 1998, the Company amended and
restated the Plan to remove the variable features and all grants subsequent to
October 1997 have been subject to fixed terms. In the second quarter of 1998,
the Company offered and re-issued new fixed award options in exchange for
options previously issued under variable terms, thereby eliminating the
requirement to remeasure these options in subsequent periods. Compensation
expense has been reflected in the Company's financial statements in accordance
with Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Appreciation Rights and Other Variable Stock Option or Award Plans."
Accordingly, the Company recorded non-cash compensation expense of $1.2 million
and $11.1 million, respectively, for the three and nine month periods ended
September 26, 1998. The remaining



                                                                              13
<PAGE>   14

unrecognized compensation element will be reflected in quarterly charges,
decreasing sequentially from the third quarter of 1998, through the second
quarter of 2001. During 1997, the Company also granted options to the employees
of MMC Technology, Inc. ("MMC"), a wholly owned subsidiary of HEA. MMC has
agreed to reimburse the Company for any compensation expense arising from such
grants.


INTEREST EXPENSE AND INTEREST INCOME

<TABLE>
<CAPTION>
                                          Three Months Ended                             Nine Months Ended
                             -------------------------------------------     -------------------------------------------
(In millions)                September 26,   September 27,                   September 26,   September 27,
                                  1998            1997          Change            1998            1997        Change
                             -------------   -------------  -------------    -------------   ------------- -------------
                                                                    (unaudited)
<S>                             <C>            <C>             <C>              <C>             <C>            <C>     
Interest expense                $  6.6         $  10.9         $ (4.3)          $  24.1         $  27.5        $ (3.4)

Interest and other income       $  1.5         $    .4         $  1.1           $   3.9         $   2.6        $  1.3
</TABLE>



Interest Expense. Interest expense as a percentage of revenue declined from 2.8%
in Q397 to 1.1% in Q398, while the absolute dollar level of interest expense
decreased from$10.9 million in Q397 to $6.6 million in Q398; and declined from
3.0% in the first nine months of 1997 to 1.4% in the first nine months of 1998,
while the absolute dollar level of interest expense decreased from $27.5 million
in the first nine months of 1997 to $24.1 million in the first nine months of
1998. The decrease in the absolute dollar amount of the Company's interest
expense between the first nine months of 1997 and the first nine months of 1998
was due primarily to the retirement of $200.0 million of debt in August, 1998.
The Company had $349.2 million of short-term and $224.0 million of long-term
credit borrowings outstanding at September 27, 1997, as compared to $5.3 million
current portion of long term debt and $145.1 million of long-term borrowings
outstanding at September 26, 1998.

Interest and other income. Interest and other income increased from $0.4 million
in Q397 to $1.5 million in Q398; and increased from $2.6 million to $3.9 million
between the first nine months of 1997 and the first nine months of 1998. The
increase between Q397 and Q398 was primarily due to the increase in cash and
cash equivalents generated from the initial public offering.

PROVISION FOR INCOME TAXES

<TABLE>
<CAPTION>
                                          Three Months Ended                             Nine Months Ended
                             -------------------------------------------     -------------------------------------------
(In millions)                September 26,   September 27,                   September 26,   September 27,
                                  1998            1997          Change            1998            1997         Change
                             -------------   -------------  -------------    -------------   ------------- -------------
                                                                    (unaudited)
<S>                              <C>            <C>            <C>                <C>             <C>           <C>     
Provision for income taxes       $  2.1         $  0.2         $  1.9             $  2.3         $  0.7         $  1.6
</TABLE>


The provision for income taxes consists primarily of federal alternative minimum
tax and foreign taxes. The increase of $1.9 million is due to federal
alternative minimum tax on repatriation of foreign earnings in 1998.


INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE

YEAR 2000 COMPLIANCE

Year 2000 Issue Described: Many currently installed computer systems and
software products are coded to accept, store, or report only two digit entries
in date code fields. Beginning in the Year 2000, these date code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. This is the Year 2000 Issue. As a result, computer systems and/or
software used by many companies, including Maxtor and its vendors and customers,
will need to be upgraded to comply with such Year 2000 requirements. Maxtor
could be impacted by Year 2000 issues occurring in its own infrastructure or
faced by its major distributors, suppliers, customers, vendors and financial
service organizations. Such Year 2000 issues could include errors in
information, significant information system failures, or failures of equipment,
vendors, suppliers, or customers. Any disruption in Maxtor's operations as a
result of Year 2000 noncompliance, whether by Maxtor or a third party, could
have a material adverse effect on Maxtor's business, financial condition and
results of operations.



                                                                              14
<PAGE>   15

Maxtor's Hard Disk Drives Comply: Maxtor hard disk drives are able to operate in
the Year 2000 and beyond. The Year 2000 issue is only relevant to hardware and
software components that use or affect time and date data or system settings. In
the case of Maxtor's hard disk drives, the ability to operate correctly in the
next century is dependent on the software and programming loaded on to Maxtor's
hard disk drives by the system. Since Maxtor's hard disk drives have no inherent
time or date function, they will not determine whether or not a given system, or
any software on a given system, will operate correctly or incorrectly in the
next century. As a result, all Maxtor hard disk drives are able to receive,
store, and retrieve data and operate with a system or software that is Year 2000
compliant without modification.

Maxtor's State of Readiness: 1. Overview. To address Maxtor-wide internal Year
2000 readiness activities, Maxtor has implemented a corporate program to
coordinate efforts across all business functions and geographic areas, which
includes addressing risks associated with business partners and other
third-party relationships. The following four-step process is being followed to
prepare internally for the Year 2000: 1) Awareness, 2) Inventory, 3) Assessment,
and 4) Resolution. Maxtor is in the "inventory" or "assessment" phase, except
for core information technology ("IT") systems, which are being addressed
through the implementation of the SAP System (see below). Maxtor expects to have
substantially completed all four steps company-wide by the end of 1999.
Additionally, Maxtor is in the process of forming a Year 2000 Project Office to
coordinate the foregoing corporate program. Maxtor is also considering engaging
external Year 2000 consultants to assist with methodology and process of the
inventory, assessment, and resolution phases. Maxtor targets substantial
completion of "inventory" and "assessment" by the end of 1998. There can be no
assurance that Maxtor will be able to complete the four-step process or that the
process will adequately address the Year 2000 Issue.

2. Core IT Systems. Maxtor is implementing the R3 system from SAP A.G. (the "SAP
System"). The SAP System is designed to automate more fully Maxtor's business
processes, is certified by SAP A.G. as Year 2000 compliant, and has already
affected most functional areas, including, without limitation, finance,
procurement, inventory control, collections, order processing and manufacturing.
Historically, there have been substantial delays in the implementation of such
systems at other companies. The initial step of the implementation was completed
October 2, 1998, and affected all of the above-mentioned functional areas.
Additional phases of implementation are scheduled for the remainder of 1998 and
the first half of 1999 to stabilize and enhance the phase one implementation. In
connection with the implementation of the SAP System, Maxtor may experience
functional and performance problems, including problems relating to the SAP
System's response time and data integrity. There can be no assurance that Maxtor
will be able to continue to implement the SAP System successfully and on a
timely and cost effective basis or that the SAP System will not fail or prove to
be unsuitable for Maxtor's needs.

3. Other IT Systems. Maxtor's other IT systems include factory information and
control systems, computer aided design systems, banking interface systems,
electronic data interchange systems, credit card processing, customer call
management, human resources systems, non-U.S. payroll processing, and shipment
and just in time delivery management systems. Inventory of Maxtor's other IT
systems is believed to be complete. Maxtor has determined that most human
resources systems, factory information systems, call management system,
non-United States payroll processing and supplier just in time delivery
management systems are not Year 2000 compliant, but the assessment of other IT
systems has not yet been completed.

4. Non-IT Systems. Maxtor's non-IT systems include departmental and personal
automated applications used in all functional areas of Maxtor, building systems
such as heating, cooling, and air purification, component and hard disk drive
test equipment, and manufacturing equipment. Inventory of Maxtor's non-IT
systems is underway. Assessment will include determination of the level of risk
of business interruption associated with a failure of the non-IT system and
assignment of priority to resolution activities. Resolution priority will be
assigned to repair or replacement of items that affect new product development,
volume production and distribution.

5. Vendors and Suppliers. Maxtor's vendors and suppliers include the sources of
materials used in Maxtor's hard disk drives, the sources of the equipment and
supplies used by Maxtor in the conduct of its business, as well as Maxtor's
landlord's, financial institutions, and other service providers. Inventory of
Maxtor's suppliers is underway. Assessment will include determination of the
level of risk of business interruption associated with a failure of a vendor or
supplier because of the Year 2000 Issue and assignment of priority to resolution
activities.. It is Maxtor's intent to seek written assurance from its vendors
and suppliers of their capability to support Maxtor properly in and after the
Year 2000.

6. Customers. Maxtor's assessment of its Year 2000 issues with its customers
will dovetail with similar activities which Maxtor's customers will engage in
with respect to Maxtor. Several Maxtor customers, including Maxtor's three
largest original equipment manufacturer customers, Compaq, Dell, and IBM, have
begun the process of



                                                                              15
<PAGE>   16

asking Maxtor for written assurances that Maxtor hard disk drives do not have
Year 2000 issues and that Maxtor's business will not be affected by the Year
2000 issue.

The Costs to Address Maxtor's Year 2000 Issue: Maxtor has not determined
historic or period costs which may have been incurred in connection with the
resolution of Year 2000 issues. Maxtor does not have any projections of costs
which may be incurred in future periods to resolve Year 2000 issues. It has not
been determined whether such costs would be material.

The Risks of Maxtor's Year 2000 Issues: Resolution of the foregoing has been and
will be complex, expensive and time intensive and could be adversely affected by
various risk factors, including without limit: (i) any failure to provide
adequate training to employees; (ii) any failure to retain skilled members of
the implementation team or find suitable replacements for such personnel; (iii)
the scope of the implementation plan being expanded by unanticipated changes in
Maxtor's business or findings in Maxtor's awareness, inventory or assessment of
risk; (iv) any failure to devise and run appropriate testing procedures that
accurately reflect the demands that will be placed on new systems following
implementation; (v) any failures by vendors or other third parties to accurately
assess their own Year 2000 readiness or the Year 200 readiness of their
respective vendors and other third parties and any resulting failures; and (vi)
any failure to develop and implement adequate fall-back, work around or other
contingency plans in the event that difficulties or delays arise. It has been
widely predicted that a significant amount of litigation surrounding business
interruptions will arise out of Year 2000 Issues. It is uncertain whether, or to
what extent, Maxtor may be affected by such litigation. Because Maxtor's hard
disk drives are able to operate in the Year 2000 and beyond, Maxtor does not
anticipate exposure to material product defect or similar litigation. There can
be no assurance, however, that any such litigation will not be brought or will
not have material effect. There is no assurance that Maxtor could receive any
assistance, damages or other relief as a result of its initiation of any
litigation related to the Year 2000 Issue. The inability of Maxtor to implement
its Year 2000 plans or to otherwise address Year 2000 Issues in a timely manner
could have a material adverse effect on Maxtor's business, financial condition
and results of operations.

Maxtor's Contingency Plans: As part of the four-step process outlined above,
specific contingency plans will be developed in connection with the assessment
and resolution to the risks identified. Maxtor has currently established certain
IT contingency plans, and it is continuing to develop such plans regarding each
specific area of risk associated with the Year 2000 Issue There is no assurance
that Maxtor will complete contingency plans that address risks which actually
arise or that any such contingency plans will properly address their intended
purposes if they are implemented. In addition, Maxtor does not have and does not
anticipate obtaining any policy of insurance which contains material coverage
for potential injuries or damages related to or caused by the Year 2000 Issue.

Summary: Maxtor's operations may be disrupted if Maxtor itself or Maxtor's
vendors, suppliers, or customers fail adequately to address the Year 2000 issue.
Any such disruption in Maxtor's operations as a result of Year 2000
noncompliance, whether by Maxtor or a third party, could have a material adverse
effect on Maxtor's business, financial condition and results of operations,
including without limit potential loss of revenue, increased costs, or delays in
product development, production, or distribution.





                                                                              16
<PAGE>   17


LIQUIDITY AND CAPITAL RESOURCES

At September 26, 1998, the Company had $162.2 million in cash and cash
equivalents as compared to $16.9 million at December 27, 1997. Operating
activities provided net cash of $222.1 million for the nine month period ended
September 26, 1998 as compared to utilizing net cash of $142.0 million for the
nine month period ended September 27, 1997. Cash provided by operating
activities for the nine months ended September 26, 1998 was generated
principally by operations and a decrease in working capital. The increase in
cash generated from operations was primarily due to increased sales and improved
margins. The Company used $55.3 million in investing activities during the nine
months ended September 26, 1998, principally for the purchase of plant and
equipment. In this period the Company reduced short and long-term debt by $239.1
million using proceeds from the Initial Public Offering and cash from
operations..

On August 5, 1998, the Company completed the issuance of 49,731,225 shares of
its common stock in an initial public offering. The Company received $329.4
million net of offering costs and underwriters' commissions. Approximately
$200.0 million of these proceeds were used in August 1998 for repayment of
certain outstanding indebtedness under credit facilities due to various banks.
Upon closing of the Offering, all outstanding shares of the Series A Preferred
Stock converted into 44,029,850 shares of common stock. At September 26, 1998
the Company had a total of 94,257,739 shares of common stock outstanding.

At September 26, 1998, the Company had approximately $145.0 million of long-term
unsecured debt and $5.3 million in current portion of long term debt which were
comprised of $55.0 million of a three year note from HEA and $95.0 million of
publicly-traded Subordinate Debentures. The Company's outstanding 5.75%
Subordinated Debentures due March 1, 2012 are entitled to annual sinking fund
payments of $5.0 million which commenced March 1, 1998.

The Company also has a $200.0 million asset securitization program under which
the Company sells its eligible accounts receivable on a non-recourse basis. At
September 26, 1998, $125.0 million of accounts receivable was securitized under
the program.


CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE

HISTORY OF OPERATING AND NET LOSSES; ACCUMULATED DEFICIT

During each of the 19 consecutive quarters ended September 27, 1997, the Company
incurred significant operating losses ranging from $125.5 million to $3.1
million per quarter, with net losses ranging from $130.2 million to $4.5
million, primarily as a result of delayed product introductions, product
performance and quality problems, low manufacturing yields and under-utilization
of manufacturing capacity, high operating expenses and overall market conditions
in the HDD industry, including fluctuations in demand and declining average
selling prices ("ASPs"). As of December 27, 1997, the Company had an accumulated
deficit of approximately $773.0 million and as of September 26, 1998, the
Company had an accumulated deficit of approximately $771.8 million. While the
Company achieved operating profits and net income for the quarter ended December
27, 1997, it recorded operating and net losses for the fiscal year ended
December 27, 1997. There can be no assurance that the factors that led to the
Company's history of operating losses have been overcome or that the Company
will achieve profitability on either an operating or net income basis in any
future quarterly or annual periods. Consequently, recent operating results
should not be considered indicative of future financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."






                                                                              17
<PAGE>   18



POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; AVERAGE SELLING PRICE EROSION;
MANAGEMENT OF GROWTH

The Company has experienced, and expects to continue to experience, fluctuations
in sales and operating results from quarter-to-quarter. As a result, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful, and that such comparisons cannot be relied upon as
indicators of future performance. The Company's operating results may be subject
to significant quarterly fluctuations as a result of a number of factors,
including: (i) the Company's ability to be among the first-to-volume production
with competitive products; (ii) fluctuations in HDD product demand as a result
of the cyclical and seasonal nature of the personal computer ("PC") industry;
(iii) the availability and extent of utilization of manufacturing capacity; (iv)
changes in product or customer mix; (v) entry of new competitors; (vi) the
complex and difficult process of qualifying the Company's products with its
customers; (vii) cancellation or rescheduling of significant orders; (viii)
deferrals of customer orders in anticipation of new products or enhancements;
(ix) the impact of price protection measures and return privileges granted by
the Company to certain distributors and retailers; (x) component and raw
material costs and availability, particularly with respect to components
obtained from sole or limited sources; (xi) the availability of adequate capital
resources; (xii) increases in research and development expenditures to maintain
the Company's competitive position; (xiii) changes in the Company's strategy;
(xiv) personnel changes; and (xv) other general economic and competitive
factors. Moreover, since a large portion of the Company's operating expenses,
including rent, salaries, capital lease and debt payments and equipment
depreciation, are relatively fixed and difficult to reduce or modify, the
adverse effect of any decrease in revenue as a result of fluctuations in product
demand or otherwise will be magnified by the fixed nature of such operating
expenses and could have a material adverse effect on the Company's business,
financial condition and results of operations.

In addition, the HDD industry is characterized by rapidly declining ASPs over
the life of a product even for those products which are competitive and
timely-to-market. The Company anticipates that this market characteristic will
continue for the foreseeable future. The Company expects ASPs to continue to
decline for the remainder of the year and through the second quarter of 1999.
This continuing price erosion could have a material adverse effect on the
Company's business, financial condition and results of operations.

In July 1996, the Company began to modify its management and operational
structures. From the first quarter of 1997 to the first quarter of 1998, and
again in the third quarter of 1988, the Company's timely introduction and volume
production of competitive products resulted in quarterly revenue growth. Such
restructuring activities and revenue growth placed and are expected in the
future to place a significant strain on the Company's personnel and resources.
The Company's ability to maintain the advantages of the restructuring and to
manage future growth, if any, will depend on its ability to: (i) continue to
implement and improve its operational, financial and management information and
control systems on a timely basis; (ii) hire, train, retain and manage an
expanding employee base; and (iii) maintain effective cost controls, all while
being among the first-to-volume production with competitive products. The
inability of the Company's management to maintain the advantages of the
restructuring, to manage future growth effectively and to continue to be among
the first-to-volume production with competitive products could have a material
adverse effect on the Company's business, financial condition and results of
operations.

See "-- Risks of Failed Execution; Changing Customer Business Models" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."



                                                                              18
<PAGE>   19


RISKS OF FAILED EXECUTION; CHANGING CUSTOMER BUSINESS MODELS

PC original equipment manufacturers ("OEMs") compete in a market that is
consolidating market share among the top ten PC OEMs, which accounted for
greater than 50% of all PC units shipped during 1997 and the first nine months
of 1998. A majority of the Company's HDDs are sold to PC OEMs, which accounted
for 77.8% of the Company's revenues for the third quarter of 1998. The process
of qualifying the Company's products with these PC OEM customers can be complex
and difficult. These PC OEMs use the quality, storage capacity and performance
characteristics of HDDs to select their HDD providers. A HDD provider must
consistently execute on its product development and manufacturing processes in
order to be among the first-to-market entry and first-to-volume production at
leading storage capacity per disk with competitive prices. Once a PC OEM has
chosen its qualified HDD vendors for a given PC product, it generally will
purchase HDDs from those vendors for the life of that product. If a
qualification opportunity is missed, the Company may not have another
opportunity to do business with that PC OEM until the next generation of the
Company's products is introduced. The effect of missing a product qualification
opportunity is magnified by the limited number of high volume PC OEMs. Failure
to reach the market on time or to deliver timely volume production usually
results in significantly decreased gross margins due to rapidly declining ASPs
and dramatic losses in market share. Failure to obtain significant PC OEM
customer qualifications for new or existing products in a timely manner would
have a material adverse effect on the Company's business, financial condition
and results of operations.

In addition to developing and qualifying new products, the Company must address
the increasingly changing and sophisticated business needs of its customers. For
example, PC OEMs and other PC suppliers are starting to adopt build-to-order
manufacturing models which reduce their component inventories and related costs
and enable them to tailor their products more specifically to the needs of their
customers. Various PC OEM customers also are considering or have implemented a
"channel assembly" model in which the PC OEM ships a minimal computer system to
the dealer or other assembler, and component suppliers (including HDD
manufacturers such as the Company) ship parts directly to the dealer or other
assembler for installation at its location. Finally, certain PC suppliers have
adopted just-in-time inventory management processes which require component
suppliers to maintain inventory at or near the PC supplier's production
facility. Together, these changing models increase the Company's capital
requirements and costs, complicate the Company's inventory management
strategies, and make it more difficult to match manufacturing plans with
projected customer demand, thereby increasing the risk of inventory obsolescence
and ASP erosion as a result of later shipments to customers. The Company's
failure to manage its manufacturing output or inventory in response to these new
customer demands and other similar demands that may arise in the future as
customers further change their ordering and assembly models could lead to a
decline in the demand for the Company's products and a loss of existing or
potential new customers and could have a material adverse effect on the
Company's business, financial condition and results of operations.

See "-- Customer Concentration" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

HIGHLY COMPETITIVE INDUSTRY

Although the Company's share of the desktop HDD market has increased steadily
since the first quarter of 1997, this market segment and the HDD market in
general are intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of ASPs.
Consequently, there can be no assurance that the Company will be able to improve
on, or prevent the erosion of, the Company's present share of the desktop HDD
market.

The Company competes primarily with manufacturers of 3.5-inch HDDs, including
Fujitsu Limited ("Fujitsu"), Quantum Corporation ("Quantum"), Samsung Company
Limited ("Samsung"), Seagate Technology, Inc. ("Seagate") and Western Digital
Corporation ("Western Digital"), many of which have a larger share of the
desktop HDD market than the Company. Other companies, such as International
Business Machines Corporation ("IBM"), will be significant competitors of the
Company in one or more of the markets into which the Company plans to expand its
product portfolio, and could be significant competitors of the Company in its
current market should they choose to commit significant resources to providing
desktop HDDs.





                                                                              19
<PAGE>   20


Most of the Company's competitors offer a broader array of product lines and
have significantly greater financial, technical, manufacturing and marketing
resources than the Company. Unlike the Company, certain of the Company's
competitors manufacture a significant number of the components used in their
HDDs and thus may be able to achieve significant cost advantages over the
Company. Certain competitors have preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, and other
significant advantages over the Company. In addition, such competitors may
determine, for strategic reasons or otherwise, to consolidate, lower the prices
of their products or bundle their products with other products. The Company's
competitors have established and may in the future establish financial or
strategic relationships among themselves or with existing customers, resellers
or other third parties. New competitors or alliances could emerge and rapidly
acquire significant market share.

The Company believes that important competitive factors in the HDD market are
quality, storage capacity, performance, price, time-to-market entry,
time-to-volume production, PC OEM product qualifications, breadth of product
lines, reliability, and technical service and support. The Company believes it
generally competes favorably with respect to these factors. The failure of the
Company to develop and market products that compete successfully with those of
other suppliers in the HDD market would have a material adverse effect on the
Company's business, financial condition and results of operations.

FLUCTUATION IN PRODUCT DEMAND; FOCUS ON SINGLE MARKET

The Company presently offers a single product family which is designed for the
desktop PC segment of the HDD industry. The demand for the Company's HDD
products is therefore dependent to a large extent on the overall market for
desktop PCs which, in turn, is dependent on PC life cycles, demand by end-users
for increased PC performance and functionality at lower prices (including
increased storage capacity), availability of substitute products, including
laptop PCs, and overall foreign and domestic economic conditions. The desktop PC
and HDD markets are characterized by periods of rapid growth followed by periods
of oversupply, and by rapid price and gross margin erosion. This environment
makes it difficult for the Company and its PC OEM customers to reliably forecast
demand for the Company's products. The Company does not enter into long-term
supply contracts with its PC OEM customers, and such customers often have the
right to defer or cancel orders with limited notice and without significant
penalty. If demand for desktop PCs falls below the customers' forecasts, or if
customers do not manage inventories effectively, they may cancel or defer
shipments previously ordered from the Company. Moreover, while there has been
significant growth in the demand for desktop PCs over the past several years,
according to International Data Corporation ("IDC"), the growth rate in the
desktop PC market has slowed in recent quarters. Because of the Company's
reliance on the desktop segment of the PC market, the Company will be more
strongly affected by changes in market conditions for desktop PCs than would a
company with a broader range of products. Any decrease in the demand for desktop
PCs could lead in turn to a decrease in the demand for the Company's HDD
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.

Although the desktop PC segment is currently the largest segment of the HDD
market, the Company believes that over time, market demand may shift to other
market segments that may experience significantly faster growth. In addition,
the Company believes that to remain a significant provider of HDDs to major PC
OEMs, the Company will need to offer a broader range of HDD products for the
existing and new product categories of its PC OEM customers. For these reasons,
the Company will need to develop and manufacture new products which address
additional HDD market segments and emerging technologies to remain competitive
in the HDD industry. Examples of potentially important market segments that the
Company's current products are not positioned to address include: (i) the
client-server market, which may continue to grow in part as a result of the
emerging market trend toward "network computers" (which utilize central servers
for data storage and thereby reduce the need for desktop storage); (ii) lower
cost (typically below $1,000), lower performance PC systems principally for the
consumer marketplace; and (iii) laptop PCs. Significant technological innovation
and re-engineering will be required for the Company to produce products that
effectively compete in these and other new or growing segments of the HDD
market, and there can be no assurance that the Company will be able to design or
produce such new products on a timely or cost-effective basis, if at all, while
maintaining the required product quality or that such products or other future
products will attain market acceptance. Certain of the Company's competitors
have significant advantages over the Company in one or more of these and other
potentially significant new or growing market segments.

See "-- Highly Competitive Industry," "-- Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."




                                                                              20
<PAGE>   21


RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT

The HDD industry is characterized by rapid technological change, rapid rates of
product and technology obsolescence, changing customer requirements, dramatic
shifts in market share and significant erosion of ASPs, any of which may render
the Company's products obsolete. The Company's future results of operations will
depend on its ability to enhance current products and to develop and introduce
volume production of new competitive products on a timely and cost-effective
basis. To succeed, the Company also must keep pace with and correctly anticipate
technological developments and evolving industry standards and methodologies.

Both in the desktop HDD market for which the Company's current products are
designed and in any other HDD market segments in which the Company may compete
in the future, advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could result in the creation of
competitive products that have better performance and/or lower prices than the
Company's products. Examples of such new technologies include "giant
magneto-resistive" ("GMR") head technology and optically-assisted recording
technologies which technologies have either already been introduced or are being
developed currently by other companies. Currently, the Company intends to
incorporate GMR head technology into future products and is evaluating the
various approaches to and timing of such a transition. The Company has decided
not to pursue optically-assisted recording technologies at this time.

There can be no assurance that the Company's existing markets will not be eroded
by technological developments; that the Company will be successful in
developing, manufacturing and marketing product enhancements or new products
that respond to and anticipate technological change, such as the transition to
GMR head technology and changing customer requirements; or that its new products
and product enhancements will be introduced or manufactured in volume on a
timely basis and will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. Inability to introduce or
achieve volume production of competitive products on a timely basis has in the
past and could in the future have a material adverse effect on the Company's
business, financial condition and results of operations.

Unlike some of its competitors, the Company does not manufacture any of the
components used in its HDDs, including key components such as heads, disks and
PCBs. The Company's product development process therefore involves incorporating
components designed by and purchased from third party suppliers. As a
consequence, the success of the Company's products is in great part dependent on
the Company's ability to gain access to and integrate components which utilize
leading-edge technology. The successful management of these integration projects
depends on the timely availability and quality of key components, the
availability of appropriately skilled personnel, the ability to integrate
different products from a variety of vendors effectively, and the management of
difficult scheduling and delivery problems. There can be no assurance that the
Company will be able to manage successfully the various complexities encountered
in integration projects. The Company's success will depend in part on its
relationships with key component suppliers, and there can be no assurance that
such relationships will develop, that the Company will identify the most
advantageous suppliers with which to establish such relationships, or that
existing or future relationships with component suppliers will continue for any
significant time period.

See "-- Dependence on Suppliers of Components and Sub-Assemblies" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."





                                                                              21
<PAGE>   22


CONTROL BY AND DEPENDENCE ON HYUNDAI

Four out of the seven members of the Company's Board of Directors (the "Board")
are currently employees of HEA or one of its affiliates. HEA currently has the
contractual right to designate one person for nomination to serve as a director
in each of the three classes of the Board. Accordingly, HEA will be able to
influence or control major decisions of corporate policy and to determine the
outcome of any major transaction or other matter submitted to the Company's
stockholders or directors, including borrowings, issuances of additional Common
Stock and other securities of the Company, the declaration and payment of any
dividends on Common Stock, potential mergers or acquisitions involving the
Company, amendments to the of Incorporation (the "Amended and Restated
Certificate of Incorporation") and Bylaws (the "Bylaws") and other corporate
governance issues. In particular, the affirmative vote of two-thirds of the
outstanding voting stock is required to approve certain types of amendments to
the Amended and Restated Certificate of Incorporation. Consequently, HEA will be
able to block approval of any such amendments that may be proposed in the future
as long as it owns at least one-third of the Common Stock and may be able to
make it difficult to achieve approval of any such amendment for as long as it
owns a significant amount of Common Stock even if its ownership falls below
one-third. The Company has granted HEA the contractual right to maintain its
ownership interest at 30% through 2000. Stockholders other than HEA therefore
are likely to have little or no influence on decisions regarding such matters.
HEA and the Company have entered into a Stockholder Agreement under which the
Company has granted HEA certain rights to require the Company to register HEA's
shares of Common Stock and the right to designate for nomination up to three
members of the Board so long as ownership by HEA and certain of its affiliates
is between 50% and 10% of the outstanding voting securities of the Company. HEA
has also agreed to certain restrictions on its rights to solicit proxies, to
acquire additional shares of Common Stock and to compete with the Company.

Conflicts of interest may arise from time to time between the Company and HEA or
its affiliates in a number of areas relating to their past and ongoing
relationships, including potential competitive business activities, corporate
opportunities, tax matters, intellectual property matters, indemnity agreements,
registration rights, sales or distributions by HEA of all or any portion of its
ownership interest in the Company or HEA's ability to control the management and
affairs of the Company. There can be no assurance that HEA and the Company will
be able to resolve any potential conflict or that, if resolved, the Company
would not receive more favorable resolution if it were dealing with an
unaffiliated party. The Amended and Restated Certificate of Incorporation
specifies certain circumstances in which a transaction between the Company and
HEA or an affiliated entity will be deemed fair to the Company and its
stockholders, and prescribes guidelines under which HEA and its affiliates will
be deemed not to have breached any fiduciary duty or duty of loyalty to the
Company, or to have usurped a corporate opportunity available to the Company, if
specified conditions are met. The Board of Directors has established an
Affiliated Transaction Committee comprised entirely of directors not affiliated
with HEA or its affiliates. The charter of the committee is to review all
material transactions between the Company and HEA and or its affiliates.

HEA could decide to sell or otherwise dispose of all or a portion of its shares
of Common Stock at some future date, and there can be no assurance that HEI or
HEA will maintain any past or future relationships or arrangements with the
Company following any transfer by HEA of a controlling or substantial interest
in the Company or that other holders of Common Stock will be allowed to
participate in such transaction. Sales by HEA of substantial amounts of Common
Stock in the public market could adversely affect prevailing market prices for
the Common Stock.

HEI and IBM are parties to a patent cross license agreement (the "IBM License
Agreement"), under which HEI and its subsidiaries, including the Company, are
licensed with respect to certain IBM patents. Under the IBM License Agreement,
if Maxtor ceases to be a majority-owned subsidiary of HEA, the Company can
obtain a royalty-free license under the same terms from IBM upon the joint
request of HEI and the Company and the fulfillment of certain conditions.
Pursuant to the Sublicense Agreement, HEI has agreed to cooperate to obtain such
a license for the Company once the Company ceases to be a majority-owned
subsidiary, and the Company has agreed to continue to pay IBM the Company's
allocated portion of the license fee following the grant of such a license from
IBM. The Company is in the process of obtaining such a license. HEI and the
Company have indemnified each other for certain liabilities arising from their
acts or omissions relating to the IBM License Agreement.





                                                                              22
<PAGE>   23

As discussed more fully above in "-- Transition to and Dependence on Information
Systems; Year 2000 Problem," the Company is preparing to implement the SAP
System. The Company's rights to the SAP System are governed by a license
agreement between Hyundai Information Technology Co., Ltd. ("HIT"), an affiliate
of HEI, and SAP, which provides that the Company will have the right to use
existing software releases so long as the Company remains an affiliate of HIT.
The Company currently is discussing with SAP the terms under which the Company
could obtain a direct license with SAP. In the event the Company is no longer a
majority-owned subsidiary of HEA and is not able to obtain a direct license with
SAP, the Company will not be entitled to receive new releases of SAP's
information system software or expand the system for other functions. As a
result, the Company would not be able to effectively utilize its new information
system in the future, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

See "-- Single Manufacturing Facility; Future Need for Additional Capacity."


SINGLE MANUFACTURING FACILITY; FUTURE NEED FOR ADDITIONAL CAPACITY

The Company's volume manufacturing operations currently are based in a single
facility in Singapore. A fire, flood, earthquake or other disaster or condition
affecting the Company's facility could disable such facility. Any damage to, or
condition interfering with the operation of, the Company's manufacturing
facility could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company anticipates that it may need additional manufacturing capacity as
early as the beginning of the year 2000. In anticipation of that need, in the
summer of 1997, HEI began construction of a 450,000 square foot manufacturing
facility in Dalian, China (the "Dalian Facility") for the purpose of making
additional manufacturing capacity available to Maxtor. The Dalian Facility is
only partially completed and construction is continuing at a reduced pace. HEI
has expended approximately $23.0 million on the construction to date. An
additional estimated $60.0 million investment will be required to complete the
Dalian Facility to the point where manufacturing lines can be installed, and an
estimated additional $25.0 million of machinery and equipment will be required
to make the facility ready for its initial phase of operation. The Company and
HEI have agreed to discuss the terms under which the Dalian Facility will be
completed and by which the Company would either buy or lease the Dalian Facility
from HEI, and the Company intends to utilize the Dalian Facility if acceptable
terms can be agreed upon. There can be no assurance that the Company will be
able to successfully negotiate any such agreement with HEI or that the Dalian
Facility will be completed by the time Maxtor requires additional capacity. The
terms of any agreement with regard to the Dalian Facility are subject to the
approval of the Affiliated Transactions Committee of the Board. Moreover, any
such agreement would be conditioned on the transfer of HEI's business license
for the Dalian Facility and the transfer of HEI's tax holiday status and other
regulatory concessions in Dalian to the Company. If the Company is unable to
reach agreement with HEI on acceptable terms or obtain the tax holiday status
and other regulatory concessions and the applicable business license, the
Company may need to acquire additional manufacturing capacity at other sites. In
addition to the Dalian Facility, the Company currently is investigating other
manufacturing facilities within Asia. Although the Company believes that
alternative manufacturing facilities will be available, a failure by the Company
to obtain, on a timely basis, a facility or facilities which allow the Company
to meet its customers' demands will limit the Company's growth and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company is experiencing space constraints at its Longmont, Colorado facility
and is exploring opportunities to obtain additional space at a new facility in
the Longmont area. There can be no assurance that the Company will be able to
obtain additional space that can accommodate its needs or that, if obtained,
such additional space will be available to the Company on terms at least as
favorable as the terms governing its current lease.

See "-- Need for Additional Capital," "-- Dependence on International Operation;
Risks from International Sales" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."


                                                                              23
<PAGE>   24

NEED FOR ADDITIONAL CAPITAL

The HDD industry is capital intensive. The Company will require substantial
additional working capital to fund its business. The Company's future capital
requirements will depend on many factors, including the rate of sales growth, if
any, the level of profitability, if any, the timing and extent of spending to
support facilities upgrades and product development efforts, the timing and size
of business or technology acquisitions, the timing of introductions of new
products and enhancements to existing products. Any future equity financing will
decrease existing stockholders' percentage equity ownership and may, depending
on the price at which the equity is sold, result in significant economic
dilution to such stockholders. Moreover, in connection with future equity
offerings, the Company may issue preferred stock with rights, preferences or
privileges senior to those of the Common Stock. Pursuant to the Amended and
Restated Certificate of Incorporation, the Board has authority to issue up to 95
million shares of preferred stock and to fix the rights, preferences and
privileges of such shares (including voting rights) without any further action
or vote by the stockholders.

In the future the Company may require alternative sources of liquidity. The
unavailability of, or delays in obtaining, any necessary financing could prevent
or delay the continued development and marketing of the Company's products and
may require curtailment of various operations of the Company and, if adequate
funds were not available from operating profits, would have a material adverse
effect on the Company's business, financial condition and results of operations.

See "-- Control by and Dependence on Hyundai," "-- Single Manufacturing
Facility; Future Need for Additional Capacity" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

CUSTOMER CONCENTRATION

The Company focuses its marketing efforts on and sells its HDDs to a limited
number of PC OEMs, distributors and retailers. During the nine months ended
September 26, 1998, three customers, accounted for approximately 27%, 16% and
10% respectively, of the Company's revenues, and the Company's top ten customers
accounted for approximately 83% of the Company's revenue. During the fiscal year
ended December 27, 1997, two PC OEM customers, accounted for approximately 21%
and 10%, respectively, of the Company's revenue, and the Company's top ten
customers accounted for approximately 60% of the Company's revenue. The Company
anticipates that a relatively small number of customers will continue to account
for a significant portion of its revenue for the foreseeable future, and that
the proportion of its revenue derived from such customers may continue to
increase in the future. The ability of the Company to maintain strong
relationships with its principal customers, including in particular its PC OEM
customers, is essential to the ongoing success and profitability of the Company.
Although the Company believes its relationships with key customers generally are
good, in order to maintain its customer relationships, particularly with PC
OEMs, the Company must be among the first-to-volume production with competitive
products. The concentration of sales in a relatively small number of major
customers represents a business risk that loss of one or more accounts, or a
decrease in the volume of products sold to such accounts, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Due to the intense competition in the HDD market, customers may choose from
various suppliers and therefore can make substantial demands on their chosen
suppliers. The Company's customers generally are not obligated to purchase any
minimum volume and generally are able to terminate their relationship with the
Company at will. Consequently, major customers have significant leverage over
the Company and may attempt to change the terms, including pricing and delivery
terms, upon which the Company sells its products. Moreover, as the Company's PC
OEM, distributor and retail customers are pressured to reduce prices in response
to competitive factors, the Company may be required to reduce the prices of its
products before it knows how, or if, internal cost reductions can be obtained.
If the Company is forced to change the terms, including pricing, upon which the
Company sells its products or is unable to achieve required cost reductions in
connection with reductions in the prices of its products, the Company's
operating margins could decline and such decline could have a material adverse
effect on the Company's business, financial condition and results of operations.

See "-- Risks of Failed Execution; Changing Customer Business Models," "-
Fluctuation in Product Demand; Focus on a Single Market" and "-- Dependence on
International Operations; Risks from International Sales."



                                                                              24
<PAGE>   25


DEPENDENCE ON SUPPLIERS OF COMPONENTS AND SUB-ASSEMBLIES

The Company does not manufacture any of the components used in its HDDs and
therefore is dependent on qualified suppliers for the components that are
essential for manufacturing the Company's products, including heads, head stack
assemblies, media and integrated circuits. A number of the key components used
by the Company in its products are available from only one or a limited number
of outside suppliers. Currently, the Company purchases DSP/controller and
spin/servo integrated circuits only from Texas Instruments, Inc. ("TI") and
purchases channel integrated circuits only from Lucent Technologies, Inc.
("Lucent"). Some of the components required by the Company may periodically be
in short supply, and the Company has, on occasion, experienced temporary delays
or increased costs in obtaining components. As a result, the Company must allow
for significant lead times when procuring certain components. In addition,
cancellation by the Company of orders for components due to cut-backs in
production precipitated by market oversupply, reduced demand, transition to new
products or technologies or otherwise can result in payment by the Company of
significant cancellation charges to suppliers. The Company orders the majority
of its components on a purchase order basis and only has limited long-term
volume purchase agreements with certain existing suppliers. Any inability of the
Company to obtain sufficient quantities of components meeting the Company's
specifications, or to develop in a timely manner alternative sources of
component supply if and as required in the future, could adversely affect the
Company's ability to manufacture its products and deliver them on a timely
basis, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

Because the Company does not manufacture any of the components used in its HDDs,
the Company's product development process involves incorporating components
designed by and purchased from third party suppliers. As a consequence, the
success of the Company's products is in great part dependent on the Company's
ability to gain access to and integrate components which utilize leading-edge
technology. The successful management of these integration projects depends on
the timely availability and quality of key components, the availability of
appropriately skilled personnel, the ability to integrate different products
from a variety of vendors effectively, and the management of difficult
scheduling and delivery problems. There can be no assurance that the Company
will be able to manage successfully the various complexities encountered in
integration projects. The Company's success will depend in part on its
relationships with key component suppliers, and there can be no assurance that
such relationships will develop, that the Company will identify the most
advantageous suppliers with which to establish such relationships, or that
existing or future relationships with component suppliers will continue for any
significant time period.

See "-- Rapid Technological Change and Product Development."

LIMITED PROTECTION OF INTELLECTUAL PROPERTY; RISK OF THIRD PARTY CLAIMS OF
INFRINGEMENT

The Company has patent protection on certain aspects of its technology and also
relies on trade secret, copyright and trademark laws, as well as contractual
provisions to protect its proprietary rights. There can be no assurance that the
Company's protective measures will be adequate to protect the Company's
proprietary rights; that others, including competitors with substantially
greater resources, have not developed or will not independently develop or
otherwise acquire equivalent or superior technology; or that the Company will
not be required to obtain licenses requiring it to pay royalties to the extent
that the Company's products may use the intellectual property of others,
including, without limitation, Company products that may also be subject to
patents licensed by the Company. There can be no assurance that any patents will
be issued pursuant to the Company's current or future patent applications, or
that patents issued pursuant to such applications or any patents the Company
owns or has licenses to use will not be invalidated, circumvented or challenged.
Moreover, there can be no assurance that the rights granted under any such
patents will provide competitive advantages to the Company or be adequate to
safeguard and maintain the Company's proprietary rights. Litigation may be
necessary to enforce patents issued or licensed to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of the Company or others. The
Company could incur substantial costs in seeking enforcement of its issued or
licensed patents against infringement or the unauthorized use of its trade
secrets and proprietary know-how by others or in defending itself against claims
of infringement by others, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the laws of certain countries in which the Company's products are manufactured
and sold, including various countries in Asia, may not protect the Company's
products and intellectual property rights to the same extent as the laws of the
United States, and there can be no assurance that such laws will be enforced in
an effective manner. The failure of the Company to enforce and protect its
intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations.



                                                                              25
<PAGE>   26

As a majority-owned subsidiary of HEA, the Company has had the benefit of
certain third party intellectual property rights on terms that may have been
more favorable than would have been available to the Company if it were not a
majority-owned subsidiary of HEA. There can be no assurance that the Company
will be able to obtain similar rights in the future on terms as favorable as
those currently available to it.

The HDD industry, like many technology-based industries, is characterized by
frequent claims and litigation involving patent and other intellectual property
rights. The Company, its component suppliers and certain users of the Company's
products have from time to time received, and may in the future receive,
communications from third parties asserting patent infringement against the
Company, its component suppliers or its customers which may relate to certain of
the Company's products. If the Company is notified of such a claim, it may have
to obtain appropriate licenses or cross-licenses, modify its existing technology
or design non-infringing technology. There can be no assurance that the Company
can obtain adequate licenses or cross-licenses on favorable terms or that it
could modify its existing technology or design non-infringing technology and, in
either case, the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company to date has not been a party to any material intellectual property
litigation, certain of its competitors have been sued on patents having claims
related to HDDs and there can be no assurance that third parties will not
initiate infringement actions against the Company or that the Company could
defend itself against such claims. If there is an adverse ruling against the
Company in an infringement lawsuit, it could result in the issuance of an
injunction against the Company or its products and/or the payment of monetary
damages equal to a reasonable royalty or recovered lost profits or, in the case
of a finding of a willful infringement, treble damages. Accordingly, such an
adverse ruling could have a material adverse effect on the Company's business,
financial condition and results of operations.

Similar to certain other providers of HDDs, the Company has received
correspondence from Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of at least 13 HDD motor patents. The patents
relate to motors that the Company purchases from motor vendors and the use of
such motors in HDDs. While the Company believes that it has meritorious defenses
against a lawsuit if filed, the results of litigation are inherently uncertain
and there can be no assurance that Papst will not assert other infringement
claims relating to current patents, pending patent applications and future
patents or patent applications; will not initiate a lawsuit against the Company;
or that the Company will be able to successfully defend itself against such a
lawsuit. A favorable outcome for Papst in such a lawsuit could result in the
issuance of an injunction against the Company or its products and/or the payment
of monetary damages equal to a reasonable royalty or recovered lost profits or,
in the case of a finding of a willful infringement, treble damages and could
have a material adverse effect on the Company's business, financial condition
and results of operations.

See "-- Dependence on International Operations; Risks of International Sales."

DEPENDENCE ON INTERNATIONAL OPERATIONS; RISKS FROM INTERNATIONAL SALES

The Company conducts all of its volume manufacturing and testing operations and
purchases a substantial portion of its key components outside of the U.S. In
addition, the Company derives a significant portion of its revenue from sales of
its products to foreign distributors and retailers. Dependence on revenue from
international sales and managing international operations each involve a number
of inherent risks, including economic slowdown and/or downturn in the computer
industry in such foreign markets, international currency fluctuations, general
strikes or other disruptions in working conditions, political instability, trade
restrictions, changes in tariffs, the difficulties associated with staffing and
managing international operations, generally longer receivables collection
periods, unexpected changes in or impositions of legislative or regulatory
requirements, reduced protection for intellectual property rights in some
countries, potentially adverse taxes, delays resulting from difficulty in
obtaining export licenses for certain technology and other trade barriers.
International sales also will be impacted by the specific economic conditions in
each country. For example, the Company's international contracts are denominated
primarily in U.S. dollars. Significant fluctuations in currency exchange rates
against the U.S. dollar, particularly the recent


                                                                              26
<PAGE>   27

significant depreciation in the currencies of Japan, Korea, Taiwan and Singapore
relative to the U.S. dollar, have caused the Company's products to become
relatively more expensive to distributors and retailers in those countries, and
thus have caused, and may continue to cause, deferrals, delays and cancellations
of orders. The Company attempts to minimize the impact of foreign currency
exchange rate changes on certain underlying assets, liabilities and anticipated
cash flows for operating expenses denominated in foreign currencies by entering
into short-term, foreign exchange (primarily forward purchase and sale)
contracts. There can be no assurance that all foreign currency exposures will be
adequately covered, and these factors, as well as other unanticipated factors,
could have a material adverse effect on future international sales of the
Company's products and consequently, on the Company's business, financial
condition and results of operations. 

See "-- Dependence on Suppliers of Components and Sub-Assemblies" and 
"-- Limited Protection of Intellectual Property; Risk of Third Party Claims of 
Infringement."



                                                                              27
<PAGE>   28


                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

STORMEDIA LITIGATION

The Company currently is involved in a dispute with StorMedia, which arises out
of an agreement among the Company, StorMedia and HEI which became effective on
November 17, 1995. Pursuant to the StorMedia Agreement, StorMedia agreed to
supply disk media to the Company. StorMedia's disk media did not meet the
Company's specifications and functional requirements as required by the
StorMedia Agreement and the Company ultimately terminated the StorMedia
Agreement. After a class action securities lawsuit was filed against StorMedia
by certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the StorMedia Agreement, StorMedia sued the
Original Defendants in the U.S. District Court for the Northern District of
California. In the Federal Suit, StorMedia alleged that at the time HEI entered
into the StorMedia Agreement, it knew that it would not and could not purchase
the volume of products which it committed to purchase, and that failure to do so
caused damages to StorMedia in excess of $206 million.

In December 1996, the Company filed a complaint against StorMedia and William
Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado state
court seeking approximately $100 million in damages and alleging, among other
claims, breach of contract, breach of implied warranty of fitness and fraud
under the StorMedia Agreement. This proceeding was stayed pending resolution of
the Federal Suit. The Federal Suit was permanently dismissed early in February
1998. On February 24, 1998, StorMedia filed a new complaint in Santa Clara
County Superior Court for the State of California for $206 million, alleging
fraud and deceit against the Original Defendants and negligent misrepresentation
against HEI and the Company. On May 18, 1998, the stay on the Colorado Suit was
lifted by the Colorado state court. On September 9, 1998, the California Suit
was stayed. On October 11, 1998, Stormedia filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Act in the United States Bankruptcy Court in
the Northern District of California.

The Company believes that it has meritorious defenses against the claims alleged
by StorMedia and intends to defend itself vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After consideration of the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the
Company's management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
results of operations. However, the results of these proceedings, including any
potential settlement, are uncertain and there can be no assurance that they will
not have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, the Company does not believe that
resolution of these matters will have a material adverse effect on the Company's
business, financial condition and results of operations. No amounts related to
any claims or actions have been reserved in the Company's financial statements.


                                                                              28
<PAGE>   29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, NOT
        APPLICABLE.


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

The Company's annual meeting was held July 17, 1998, at which its stockholders
reelected Michael R. Cannon and C. S. Park as Class III directors to hold office
for a three-year term, and ratified the appointment of PricewaterhouseCoopers &
Lybrand L.L.P. as the Company's independent accounting firm for the
Corporation's fiscal year ending December 26, 1998.

Messrs. Cannon and Park received the following votes for and against:


<TABLE>
<CAPTION>
                                  For               Withheld          Abstain
                                  ---               --------          -------
<S>                          <C>                    <C>              <C>
      Michael R. Cannon       88,148,190                0                0
      C. S. Park              88,148,190                0                0
</TABLE>


The ratification of the appointment of PricewaterhouseCoopers & Lybrand L.L.P.
received the following votes for and against:

<TABLE>
<CAPTION>
                               For          Against        Abstain
                               ---          -------        -------
<S>                        <C>              <C>           <C>
                           88,144,190          0            4,000    (pre-split)
</TABLE>

The following directors' terms of office continue until the Annual Meeting
indicated: C. S. Chung, Charles Hill and Philip S. Paul (Class I term expires at
the 1999 Annual Meeting); Charles F. Christ and Y. H. Kim (Class III term
expires at the 2000 Annual Meeting).

Also effective July 17, 1998, the Company's stockholders approved by written
consent the Company's Amended and Restated Certificate of Incorporation (the
"Certificate") authorizing a two-for-one reverse stock split of the Common
Stock, eliminating the right of stockholders to act by written consent,
eliminating the right of stockholders to call special meetings of stockholders,
clarifying the exclusive right of the Board of Directors to fill vacancies and
new directorships, providing that certain provisions of the Certificate may be
amended only by the affirmative vote of two-thirds of the outstanding voting
stock and regulating the approval required for corporate opportunities and
related party transactions. Also approved by written consent were certain
amendments to the Company's Amended and Restated 1996 Stock Option Plan (the
"Plan"), including a 7,727,832-share (pre-split) increase in the share reserve
for the Plan, with such reserve to be increased to 15 percent of the number of
shares of Common Stock issued and outstanding on the closing date of the
Company's Offering (a total post-split reserve of 13,798,181 shares of Common
Stock). Stockholders representing 88,059,701 shares of Preferred Stock and
73,489 (pre-split) shares of Common Stock voted in favor of the amendments to
the Certificate; and stockholders representing 88,059,701 shares of Preferred
Stock and 88,489 (pre-split) shares of Common Stock voted in favor of the
amendment of the Plan.


ITEMS 2 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(SEE INDEX TO EXHIBITS ON PAGE 31 OF THIS REPORT.)

There were no reports filed on Form 8-K during the reporting period ended
September 26, 1998.



                                                                              29
<PAGE>   30

                                   SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.



                                                   MAXTOR CORPORATION

                                           By /s/  Paul J. Tufano
                                              --------------------------------
                                                   Paul J. Tufano
                                                   Vice President, Finance and
                                                   Chief Financial Officer
Date:    November 10, 1998





                                                                              30
<PAGE>   31


                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit No.       Description
-----------       -----------
<S>               <C>
10.167            Supply Agreement, dated as of August 18, 1998, between Maxtor
                  Corporation and MMC Technology, Inc.

10.168            Purchase and Sale Agreement, dated as of July 31, 1998,
                  between Maxtor Corporation and Maxtor Receivables Corporation
                  58 - 105

10.169            Receivables Purchase Agreement, dated as of July 31, 1998,
                  among Maxtor Receivables Corporation and Maxtor Corporation
                  and Blue Keel Funding, LLC and Fleet National Bank

10.170            Appendix A to the Receivables Purchase Agreement, dated as of
                  July 31, 1998, among Maxtor Receivables Corporation, Maxtor
                  Corporation, Blue Keel Funding, LLC and Fleet National Bank

27                Financial Data Schedule
</TABLE>




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