<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 OCTOBER 2, 1999

                                       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)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      77-0123732
(STATE OR OTHER JURISDICTION OF INCORPORATION       (I.R.S. EMPLOYER IDENTIFICATION NO.)
               OR ORGANIZATION)
      510 COTTONWOOD DRIVE, MILPITAS, CA                           95035
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE

          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 [ ]

     As of November 12, 1999, 113,231,782 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                               MAXTOR CORPORATION

                                   FORM 10-Q
                                OCTOBER 2, 1999

                                     INDEX

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
<S>      <C>                                                           <C>
                    PART I. FINANCIAL INFORMATION
Item 1.  Condensed Consolidated Financial Statements

         Condensed Consolidated Balance Sheets -- October 2, 1999 and
         December 26, 1998...........................................    3

         Condensed Consolidated Statements of Operations -- Three
         months and nine months ended October 2, 1999, and September
         26, 1998....................................................    4

         Condensed Consolidated Statements of Cash Flows -- Nine
         months ended October 2, 1999, and September 26, 1998........    5

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

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................   11

                     PART II. OTHER INFORMATION

Item 1.  Legal Proceedings...........................................   26

Item 2.  Changes in Securities and Use of Proceeds...................   27

Item 4.  Submission of Matters to a Vote of Security Holders.........   27

Item 6.  Exhibits and Reports on Form 8-K............................   28

Signature Page.......................................................   29
</TABLE>

                                        2
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               MAXTOR CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              OCTOBER 2,     DECEMBER 26,
                                                                 1999            1998
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
Current assets:
  Cash and cash equivalents.................................  $  171,811      $ 214,126
  Marketable securities.....................................     113,205         13,503
  Accounts receivable, net of allowance of doubtful accounts
     of $10,959 at October 2, 1999 and $8,409 at December
     26, 1998...............................................     219,187        317,758
  Inventories, net..........................................     123,490        153,192
  Prepaid expenses and other................................      17,849         45,198
                                                              ----------      ---------
          Total current assets..............................     645,542        743,777
Property, plant and equipment, net..........................     146,259        108,290
Goodwill, net...............................................      47,654             --
Other intangible assets, net................................      10,079             --
Other assets................................................      12,806         11,346
                                                              ----------      ---------
          Total assets......................................  $  862,340      $ 863,413
                                                              ==========      =========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings, including current portion of
     long-term debt.........................................  $    9,770      $   5,261
  Accounts payable..........................................     374,382        427,737
  Accrued and other liabilities.............................     114,647        115,937
                                                              ----------      ---------
          Total current liabilities.........................     498,799        548,935
Long-term debt due affiliate................................          --         55,000
Long-term debt..............................................     113,173         90,046
                                                              ----------      ---------
          Total liabilities.................................     611,972        693,981
Commitments and contingencies
Common stock, $0.01 par value, 250,000,000 shares
  authorized; 113,231,782 shares issued and outstanding at
  October 2, 1999 and 94,293,499 shares issued and
  outstanding at December 26, 1998..........................       1,117            943
Additional paid-in capital..................................   1,042,246        880,175
Accumulated deficit.........................................    (795,922)      (741,780)
Cumulative other comprehensive income -- unrealized gain on
  investments in equity securities..........................       2,927         30,094
                                                              ----------      ---------
          Total stockholders' equity........................     250,368        169,432
                                                              ----------      ---------
          Total liabilities and stockholders' equity........  $  862,340      $ 863,413
                                                              ==========      =========
</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 ENDED             NINE MONTHS ENDED
                                         ----------------------------   ----------------------------
                                          OCTOBER 2,    SEPTEMBER 26,    OCTOBER 2,    SEPTEMBER 26,
                                             1999           1998            1999           1998
                                         ------------   -------------   ------------   -------------
<S>                                      <C>            <C>             <C>            <C>
Total revenue..........................  $    589,321    $   599,797    $  1,795,499    $ 1,680,679
  Total cost of revenue................       575,488        526,600       1,678,916      1,482,751
                                         ------------    -----------    ------------    -----------
  Gross profit.........................        13,833         73,197         116,583        197,928
Operating expenses:
  Research and development.............        46,472         40,189         141,897        110,285
  Selling, general and
     administrative....................        21,092         18,643          63,211         52,958
  Stock compensation expense...........           520          1,160           2,017         11,068
  Acquired in-process technology.......         7,028             --           7,028             --
  Amortization of goodwill and other
     intangible assets.................           598             --             598             --
                                         ------------    -----------    ------------    -----------
          Total operating expenses.....        75,710         59,992         214,751        174,311
                                         ------------    -----------    ------------    -----------
Income (loss) from operations..........       (61,877)        13,205         (98,168)        23,617
Interest expense.......................        (3,349)        (6,573)         (9,970)       (24,109)
Interest and other income..............         3,088          1,537          11,508          3,936
Gain on sale of investment.............        21,995             --          44,120             --
                                         ------------    -----------    ------------    -----------
Income (loss) before income taxes......       (40,143)         8,169         (52,510)         3,444
Provision for income taxes.............           132          2,091           1,632          2,269
                                         ------------    -----------    ------------    -----------
Net income (loss)......................       (40,275)         6,078         (54,142)         1,175
Unrealized gain (loss) on investments
  in equity securities.................           187        (11,688)         16,831         (3,028)
Less: reclassification adjustment for
  gain included in net loss............       (21,995)            --         (44,120)            --
                                         ------------    -----------    ------------    -----------
Comprehensive income (loss)............  $    (62,083)   $    (5,610)   $    (81,431)   $    (1,853)
                                         ============    ===========    ============    ===========
Net income (loss) per share -- basic...  $      (0.38)   $      0.10    $      (0.53)   $      0.06
Net income (loss) per
  share -- diluted.....................  $      (0.38)   $      0.08    $      (0.53)   $      0.02
Shares used in per share calculation
  -- basic.............................   106,713,093     59,515,691     102,890,681     19,991,259
  -- diluted...........................   106,713,093     76,860,814     102,890,681     55,491,542
</TABLE>

                            See accompanying notes.
                                        4
<PAGE>   5

                               MAXTOR CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                              --------------------------
                                                              OCTOBER 2,   SEPTEMBER 26
                                                                 1999          1998
                                                              ----------   -------------
<S>                                                           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...........................................  $ (54,142)     $   1,175
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
  Depreciation and amortization.............................     58,295         48,454
  Amortization of goodwill and other intangible assets......        598             --
  Acquired in-process technology............................      7,028             --
  Stock compensation expense................................      2,017         11,068
  Inventory reserves for lower of cost or market............         --          7,852
  Loss (gain) on sale of property, plant and equipment and
    other assets............................................       (596)         5,897
  Gain on sale of investment................................    (44,120)            --
  Change in assets and liabilities:
    Accounts receivable.....................................     99,683         13,417
    Inventories.............................................     29,950         (4,492)
    Other current assets....................................     (4,857)        (4,459)
    Accounts payable........................................    (54,835)       132,841
    Accrued and other liabilities...........................     (6,275)        10,362
                                                              ---------      ---------
         Net cash provided by operating activities..........     32,746        222,115
                                                              ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment.........        316          3,059
Purchase of property, plant and equipment...................    (95,523)       (61,600)
Cash acquired from acquisition..............................        710             --
Purchase of marketable securities...........................    (99,702)            --
Proceeds from sale of investment............................     44,404             --
Other.......................................................     (1,566)         3,175
                                                              ---------      ---------
         Net cash used in investing activities..............   (151,361)       (55,366)
                                                              ---------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, including short-term
  borrowings................................................     28,175         69,775
Principal payments of debt, including short-term
  borrowings................................................    (55,280)      (308,849)
Principal payments under capital lease obligations..........        (27)            --
Net payments under accounts receivable securitization.......         --       (111,816)
Proceeds from issuance of common stock from public offering,
  employee stock purchase plan and stock options
  exercised.................................................    103,432        329,441
                                                              ---------      ---------
      Net cash provided by (used in) financing activities...     76,300        (21,449)
                                                              ---------      ---------
Net change in cash and cash equivalents.....................    (42,315)       145,300
Cash and cash equivalents at beginning of period............    214,126         16,925
                                                              ---------      ---------
Cash and cash equivalents at end of period..................  $ 171,811      $ 162,225
                                                              =========      =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest..................................................  $   7,636      $  24,047
  Income taxes..............................................  $     122      $     985
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property, plant and equipment financed by
  accounts payable..........................................  $      --      $   7,404
Purchase of property, plant and equipment financed by
  capital leases............................................  $      --      $      16
Decrease in receivable from affiliates......................  $  (3,563)     $      --
Retirement of debt in exchange for bond redemption..........  $   5,000      $      --
Decrease in unrealized gain on investments in equity
  securities................................................  $ (27,167)     $  (3,028)
Common stock issued for acquisition.........................  $      81      $      --
</TABLE>

                            See accompanying notes.
                                        5
<PAGE>   6

                               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. All adjustments of a normal
recurring nature which, in the opinion of management, are necessary for a fair
statement 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 26, 1998 incorporated in the Company's annual
report on Form 10-K. Interim results are not necessarily indicative of the
operating results expected for later quarters or the full fiscal year.

2. INVENTORIES

<TABLE>
<CAPTION>
                                                              OCTOBER 2,    DECEMBER 26,
                                                                 1999           1998
                                                              ----------    ------------
<S>                                                           <C>           <C>
Inventories comprised (in thousands):
  Raw materials.............................................   $ 31,381       $ 51,680
  Work-in-process...........................................      3,774          6,308
  Finished goods............................................     88,335         95,204
                                                               --------       --------
                                                               $123,490       $153,192
                                                               ========       ========
</TABLE>

3. STOCKHOLDERS' EQUITY

     In February 1999, the Company completed a secondary public offering of 7.8
million shares of the Company's common stock. The Company received net proceeds
of approximately $95.8 million from the offering, after deducting the
underwriting discounts and estimated expenses payable by the Company. A portion
of the proceeds from the secondary offering were used to prepay without penalty
outstanding aggregate principal indebtedness of $55.0 million owing to Hyundai
Electronics America under a subordinated note due July 31, 2001 (see Note 10).

     In June 1999, the Board of Directors amended the Company's Amended and
Restated 1996 Stock Option Plan (the "Amended Option Plan"), subject to
shareholder approval, to (1) increase the maximum number of shares issuable
under the Amended Option Plan by 3,676,367 shares, to a total of 17,475,685
shares, and (2) permit the award of restricted stock grants. In connection
therewith, the Board of Directors granted a total of 1,680,000 shares of
restricted stock to certain executive officers and key employees under the
Amended Option Plan. Restricted stock awarded under this plan vests three years
from the date of grant and is subject to forfeiture in the event of termination
of employment with the Company. Compensation cost based on the fair market value
of the Company's stock at the date of grant is reported as compensation expense
on a ratable basis over the vesting periods. The Company's stockholders approved
the amendments to the Amended Option Plan at the Company's Annual Meeting of
Stockholders on August 11, 1999.

4. ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.

     During the quarter ended October 2, 1999, the Company acquired all the
outstanding common stock of Creative Design Solutions, Inc. ("CDS"), in exchange
for 8,129,682 shares of the Company's stock and assumption of outstanding CDS
stock options for an aggregate purchase price of approximately $57.6 million,
including acquisition expenses.

                                        6
<PAGE>   7
                               MAXTOR CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the acquisition date of September 10, 1999.
Approximately $2.7 million of the aggregate recognized purchase price was
allocated to net tangible assets consisting primarily of cash, accounts
receivable, inventory, prepaids, and property, plant and equipment, and $10.4
million to short-term borrowings, accounts payable, accrued liabilities and
deferred revenue. The historical carrying amounts of such net assets
approximated their fair values. Approximately $7 million was allocated to
acquired in-process technology and was immediately charged to operations at the
acquisition date because it had no alternative future use. Approximately $10.3
million was allocated to current products and technology, workforce and customer
list, which are amortized over their estimated useful lives ranging from 1 to 7
years. The purchase price in excess of the fair value of identified tangible and
intangible assets and liabilities assumed in the amount of $48.1 million was
allocated to goodwill and is being amortized over its estimated useful life of 7
years. The Company will evaluate the periods of amortization continually to
determine whether later events and circumstances warrant revised estimates of
useful lives.

     The following unaudited pro forma consolidated amounts give effect to the
acquisition of CDS as if it had occurred on December 28, 1997 by consolidating
the results of operations of CDS with the results of the Company for the three
and nine months ended October 2, 1999 and September 26, 1998, respectively:

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED                NINE MONTHS ENDED
                                      -----------------------------    -----------------------------
                                       OCTOBER 2,     SEPTEMBER 26,     OCTOBER 2,     SEPTEMBER 26,
                                          1999            1998             1999            1998
                                      ------------    -------------    ------------    -------------
                                                               (UNAUDITED)
<S>                                   <C>             <C>              <C>             <C>
Revenues............................  $    589,657     $   600,001     $  1,796,022     $ 1,681,084
Net income (loss)...................       (38,593)          1,393          (67,284)        (18,522)
Net income (loss) per share:
  Basic.............................         (0.34)           0.02            (0.64)          (0.66)
  Diluted...........................         (0.34)           0.02            (0.64)          (0.66)
Shares used in per share calculation
  Basic.............................   112,877,358      67,645,373      104,945,436      28,120,941
  Diluted...........................   112,877,358      84,990,496      104,945,436      28,120,941
</TABLE>

     The above unaudited pro forma consolidated amounts are not necessarily
indicative of the actual results of operations that would have been reported if
the event described above had occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
the Company's future operations. In the opinion of management, all adjustments
necessary to present fairly such pro forma amounts have been made.

5. GAIN ON SALE OF INVESTMENTS

     In September 1999, the Company sold its remaining equity investment in
Celestica Inc. resulting in approximately a $22 million gain, which was included
in other income for the quarter and for the nine months ended October 2, 1999.

6. NET INCOME (LOSS) PER SHARE

     In accordance with the disclosure requirements of Statements of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", a reconciliation of
the numerator and denominator of the basic and

                                        7
<PAGE>   8
                               MAXTOR CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

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
                                      -----------------------------    -----------------------------
                                       OCTOBER 2,     SEPTEMBER 26,     OCTOBER 2,     SEPTEMBER 26,
                                          1999            1998             1999            1998
                                      ------------    -------------    ------------    -------------
                                                               (UNAUDITED)
<S>                                   <C>             <C>              <C>             <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)...................  $    (40,275)    $     6,078     $    (54,142)    $     1,175
                                      ============     ===========     ============     ===========
Net income (loss) available to
  common stockholders...............  $    (40,275)    $     6,078     $    (54,142)    $     1,175
                                      ============     ===========     ============     ===========
DENOMINATOR
Basic weighted average common shares
  outstanding.......................   106,713,093      59,515,691      102,890,681      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............................   106,713,093      76,860,814      102,890,681      55,491,542
                                      ============     ===========     ============     ===========
Basic net income (loss) per share...  $      (0.38)    $      0.10     $      (0.53)    $      0.06
                                      ============     ===========     ============     ===========
Diluted net income (loss) per
  share.............................  $      (0.38)    $      0.08     $      (0.53)    $      0.02
                                      ============     ===========     ============     ===========
</TABLE>

     The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED                NINE MONTHS ENDED
                                      -----------------------------    -----------------------------
                                       OCTOBER 2,     SEPTEMBER 26,     OCTOBER 2,     SEPTEMBER 26,
                                          1999            1998             1999            1998
                                      ------------    -------------    ------------    -------------
                                                               (UNAUDITED)
<S>                                   <C>             <C>              <C>             <C>
Convertible preferred stock.........            --      16,144,342               --      34,768,959
Common stock options................       432,269       1,200,781        2,164,073         731,324
</TABLE>

7. CONTINGENCIES

     The Company is currently involved in a dispute with StorMedia Incorporated
("StorMedia"), which arose out of an agreement among Maxtor, StorMedia and
Hyundai Electronics Industries Co. Ltd. ("HEI") which became effective on
November 17, 1995. In that agreement, StorMedia agreed to supply disk media to
Maxtor. StorMedia's disk media did not meet our specifications and functional
requirements as required by the agreement and we ultimately terminated the
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 agreement, StorMedia sued HEI, Mong Hun
Chung (HEI's chairman), Dr. Chong Sup Park (Hyundai Electronics America's
("HEA") President and the individual who signed the StorMedia Agreement on
behalf of Maxtor) and K.S. Yoo (the individual who signed the StorMedia
Agreement on behalf of HEI) (collectively the "Original Defendants") in federal
court (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 it committed to purchase, and that
failure to do so caused damages to StorMedia in excess of $206 million.

                                        8
<PAGE>   9
                               MAXTOR CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     In December 1996, we 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 a
California state court for $206 million, alleging fraud and deceit against the
Original Defendants and negligent misrepresentation against HEI and Maxtor (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against Maxtor since it filed for bankruptcy protection.

     We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we 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 our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
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 our
business, financial position and results of operations.

     We were sued in the United States District Court for the Northern District
of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst")
claiming infringement of a number of hard disk drive motor patents. The lawsuit
alleges infringement of 15 of the hard disk drive motor patents, which relate to
motors that we purchase from motor vendors and the use of such motors in hard
disk drives. We filed our Answer and Counterclaim on May 19, 1999, alleging
defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others. We have also filed a motion
to bifurcate for early discovery the license, exhaustion and misuse defenses. At
hearing on July 21, 1999, the Court stayed further action in the case pending
the outcome of a motion filed by Papst on July 13, 1999, seeking coordination
and transfer of this case with several other actions involving Papst patents.
This motion was filed with the Judicial Panel on Multidistrict Litigation in
Washington, D.C. The motion was granted October 12, 1999, and the case has been
transferred to the Eastern District of Louisiana for coordinated or consolidated
pre-trial proceedings with three other actions involving Papst patents. No
proceedings have been scheduled as yet in that court. While the final outcome of
these claims cannot be determined at this time, we believe that resolution of
these claims will not have a material adverse effect on our business, financial
condition or results of operations. This statement should be read in conjunction
with our Registration Statement on Form S-3 as well as our periodic reports
filed with the SEC.

     No amounts have been reserved in the accompanying condensed consolidated
financial statements for any legal claims or actions.

8. LOAN AGREEMENT

     In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd
entered into a 4-year loan agreement with the Economic Development Board (the
"Board") of Singapore for SGD48 million, which will amortize in 7 equal
semi-annual installments beginning March 2001. Interest will be charged by the
Board at

                                        9
<PAGE>   10
                               MAXTOR CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

1% above the prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year. This loan requires a guarantee which is supported by a
2-year guarantee from the Bank of Nova Scotia at an interest rate of 0.15% per
year.

9. RECLASSIFICATIONS

     Certain reclassifications have been made to prior year balances to conform
to current year classifications.

10. RELATED PARTY TRANSACTION

     During the quarter ended April 3, 1999, the Company paid off a $55.0
million note payable to HEA and incurred $2.3 million of interest expense
related to the note (see Note 3). As of October 2, 1999, the Company has no
outstanding indebtedness to HEA.

     The cost of revenue includes certain component parts purchased from MMC
Technology, Inc., a wholly owned subsidiary of HEA, amounting to $42 million for
the quarter ended October 2, 1999 and $121.3 million for the nine months ended
October 2, 1999. The cost of component parts purchased from MMC was $33.8
million for the quarter ended September 26, 1998 and $95 million for the nine
months ended September 26, 1998. The cost of revenue also includes certain
component parts purchased from HEI which to date have not been significant.

     This report 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 that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations: "Results of Operations"; "Liquidity and
Capital Resources"; "Certain Factors Affecting Future Performance"; and
elsewhere in this report. In this report, the words "anticipate," "believe,"
"expect," "intend," "future" and similar expressions also identify forward-
looking statements. We make these forward-looking statements based upon
information available on the date hereof, and we have no obligation to update
any such forward-looking statements. Our actual results could differ materially
from those anticipated in this report as a result of certain factors including,
but not limited to, those set forth in the following risk factors and elsewhere
in this report.

     Maxtor(R) and No Quibble(R) are registered trademarks of Maxtor. The Maxtor
logo, DiamondMax(TM), Formula 4(TM) and MaxAttach(TM) are trademarks of Maxtor.
All other brand names and trademarks appearing in this report are the property
of their respective holders.

                                       10
<PAGE>   11

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 the accompanying notes included in Part I.
Financial Information, Item 1. Condensed Consolidated Financial Statements of
this report.

     ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.

     The Company acquired privately held Creative Design Solutions, Inc.
("CDS"), a leading participant in the emerging network attached storage market,
in the third quarter of 1999. The Company is transitioning from being solely a
supplier of hard disk drives for the desktop personal computer market to a
company positioned to provide storage solutions in networked environments. See
Note 4 to the Condensed Consolidated Financial Statements.

     Maxtor has formed its Maxtor Network Systems Group ("MNSG") around CDS.
MNSG will concentrate in the near future on products and offerings in or related
to the Network Attached Storage ("NAS") market segment. NAS is defined as:

    "A specialized, network-based hardware device designed to perform a single
    or specialized set of server functions and characterized by running a
    minimal operating architecture, requiring no per-seat network operating
    system license and client access independent of any operating system or
    proprietary protocol. In addition, the device is a 'closed box' delivering
    extreme ease of installation, minimal maintenance and can be managed
    remotely by the client via a Web browser." (Source: Dataquest/Gartner)

     In October, Maxtor announced MaxAttach(TM), MNSG's first NAS product. The
MaxAttach network storage appliance is a network file sharing solution for a
broad range of office and workgroup environments.

     The CDS acquisition has been accounted for using the purchase method of
accounting. A portion of the purchase price has been allocated to the tangible
and identifiable intangible assets acquired and liabilities assumed based on the
respective fair values on the acquisition date. Identifiable intangible assets
include (i) amounts allocated to acquired in-process technology and immediately
charged to operations; (ii) amounts allocated to current products and
technologies and amortized on a straight-line basis over the estimated useful
lives of the technology, which ranges from 1 to 3.5 years; and (iii) amounts
allocated to workforce and customer list and amortized on a straight-line basis
over the estimated period of benefit, which ranges from 6 to 7 years. The
portion of the purchase price in excess of tangible and identifiable intangible
assets and liabilities assumed has been allocated to goodwill and amortized on a
straight line basis over 7 years. The results of operations of CDS are
consolidated with those of the Company as of the date the Company acquired
effective control of the entity, which occurred upon the formal legal closing of
the transaction.

     REVENUE AND GROSS PROFIT

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED                     NINE MONTHS ENDED
                                   --------------------------             --------------------------
                                   OCTOBER 2,   SEPTEMBER 26,             OCTOBER 2,   SEPTEMBER 26,
                                      1999          1998        CHANGE       1999          1998        CHANGE
                                   ----------   -------------   ------    ----------   -------------   ------
                                          (UNAUDITED)                            (UNAUDITED)
                                                                 (IN MILLIONS)
<S>                                <C>          <C>             <C>       <C>          <C>             <C>
Total revenue....................    $589.3        $599.8       $(10.5)    $1,795.5      $1,680.7      $114.8
Gross profit.....................    $ 13.8        $ 73.2       $(59.4)    $  116.6      $  197.9      $(81.3)
Net Income (loss)................    $(40.3)       $  6.1       $(46.4)    $  (54.1)     $    1.2      $(55.3)
AS A PERCENTAGE OF REVENUE:
Total revenue....................     100.0%        100.0%                    100.0%        100.0%
Gross profit.....................       2.3%         12.2%                      6.5%         11.8%
Net Income (loss)................      (6.8)%         1.0%                     (3.0)%         0.1%
</TABLE>

                                       11
<PAGE>   12

  Revenue

     Total revenue for the third quarter of fiscal year 1999 decreased 1.8%
compared to the same quarter in fiscal year 1998 primarily due to the continuing
decrease in average unit prices, partially offset by an increase in total units
shipped during the third fiscal quarter of 1999. Total shipments for the third
fiscal quarter 1999 were 5.9 million units, which was 1.6 million units or 36.3%
higher compared to the third fiscal quarter a year ago. Maxtor remains focused
on OEM customers. Revenue from the OEM channel for the quarter ended October 2,
1999 represented 76.2% of total revenue compared to 77.8% for the corresponding
quarter in 1998. Revenue from the distribution and retail channel represented
23.7% of total revenue for the third quarter in 1999 compared to 22.2% for the
same quarter in fiscal year 1998.

     For the nine months ended October 2, 1999, total revenue increased by 6.8%
compared to the nine months ended September 26, 1998. Revenue and unit volume
growth in 1999 were favorably impacted by better time to market performance,
expansion of the OEM customer base, and increased penetration of the
distribution channel, offset by the continuing decline in average unit prices
from $139 in the third quarter of fiscal 1998 to $100 in the current quarter.

  Gross Profit

     Gross profit as a percentage of revenue decreased to 2.3% in the third
quarter of 1999 from 12.2% in the same quarter of 1998, and gross profit for the
first nine months of 1999 declined to 6.5% compared to 11.8% million for the
same period a year ago. The continuing decrease in gross profit is due mainly to
the deterioration in average unit selling prices throughout the first three
quarters of fiscal year 1999. The rapid price erosion is partially offset by the
increase in unit volumes and the timely introduction of new, higher margin
products such as MaxAttach(TM), which achieved market acceptance and higher
manufacturing yields. Gross margin was also favorably affected by improved
product designs, which led to improved manufacturing yields and lower component
costs. We expect to continue volume growth for the remainder of the fiscal year
based on the strength of the OEM portion of our business and the market
acceptance of our new products.

     OPERATING EXPENSES

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED                    NINE MONTHS ENDED
                                      --------------------------            --------------------------
                                      OCTOBER 2,   SEPTEMBER 26,            OCTOBER 2,   SEPTEMBER 26,
                                         1999          1998        CHANGE      1999          1998        CHANGE
                                      ----------   -------------   ------   ----------   -------------   ------
                                             (UNAUDITED)                           (UNAUDITED)
                                                                    (IN MILLIONS)
<S>                                   <C>          <C>             <C>      <C>          <C>             <C>
Research and development............    $46.5          $40.2       $ 6.3      $141.9        $110.3       $31.6
Selling, general and
  administrative....................    $21.1          $18.6       $ 2.5      $ 63.2        $ 53.0       $10.2
Stock compensation expense..........    $ 0.5          $ 1.2       $(0.7)     $  2.0        $ 11.1       $(9.1)
Acquired in-process technology......    $ 7.0          $  --       $ 7.0      $  7.0        $   --       $ 7.0
Amortization of goodwill and other
  intangible assets.................    $ 0.6          $  --       $ 0.6      $  0.6        $   --       $ 0.6
AS A PERCENTAGE OF REVENUE:
Research and development............      7.9%           6.7%                    7.9%          6.6%
Selling, general and
  administrative....................      3.6%           3.1%                    3.5%          3.2%
Stock compensation expense..........      0.1%           0.2%                    0.1%          0.7%
Acquired in-process technology......      1.2%            --                     0.4%           --
Amortization of goodwill and other
  intangible assets.................      0.1%            --                     0.0%           --
</TABLE>

  Research and Development (R&D)

     R&D expense as a percentage of revenue increased to 7.9% in the third
quarter of 1999 compared to 6.7% for the same quarter in 1998. Similarly, R&D
expense for the nine months ended October 2, 1999 as a percentage of revenue
increased to 7.9% compared to 6.6% for the same period a year ago. The absolute
dollar level of R&D expenditures increased significantly due primarily to our
efforts to develop new products for the
                                       12
<PAGE>   13

desktop computer market, including our efforts to transition from the
magneto-resistive head technology to the giant magneto-resistive head
technology, as well as new market segments. Over the past nine months, we have
introduced several hard disk drive products including the DiamondMax Plus 5120
and 6800 series, and the cost-optimized DiamondMax VL Lines.

  Selling, General and Administrative (SG&A)

     SG&A expense increased, in terms of absolute dollars and as a percentage of
revenue, both for the third quarter of 1999 and the first nine months of fiscal
1999 when compared to the same periods of fiscal year 1998. The increase is
primarily due to the costs associated with supporting Maxtor's higher sales
volume.

  Stock Compensation

     In 1996 we adopted the 1996 Stock Option Plan (the "Plan"), pursuant to
which substantially all of our 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 at each reporting
date determined by the difference between the estimated current fair value of
our stock and the exercise price of the options. In the first quarter of 1998,
we 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, we 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. In connection
therewith, we recorded compensation expense related to the difference between
the estimated fair market value of our stock as of March 28, 1998 and the stated
value of our options. Compensation cost was reflected in accordance with
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
Accordingly, we recorded non-cash compensation expense of $11.1 million in the
first nine months of 1998 and $2 million in the first nine months of 1999. The
remaining unrecognized compensation element will be reflected in quarterly
charges, decreasing sequentially through the second quarter of 2001.

  Acquired in-process technology

     The acquired in-process technology charge of $7 million resulted from the
acquisition of CDS. The value of the acquired in-process technology was
determined using a combination of risk-adjusted income approaches and an
independent valuation. The total amount of $7 million was charged to operations
as the technology had not reached the stage of technological feasibility at the
date of acquisition and had no future alternative use to the Company.

  Amortization of goodwill and other intangible assets

     Amortization of goodwill and other intangible assets also includes
workforce, customer list and other current products and technology in the amount
of $0.6 million, which results from the acquisition of CDS.

                                       13
<PAGE>   14

     INTEREST EXPENSE, INTEREST INCOME AND GAIN ON SALE OF INVESTMENT

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED                    NINE MONTHS ENDED
                                      --------------------------            --------------------------
                                      OCTOBER 2,   SEPTEMBER 26,            OCTOBER 2,   SEPTEMBER 26,
                                         1999          1998        CHANGE      1999          1998        CHANGE
                                      ----------   -------------   ------   ----------   -------------   ------
                                             (UNAUDITED)                           (UNAUDITED)
                                                                    (IN MILLIONS)
<S>                                   <C>          <C>             <C>      <C>          <C>             <C>
Interest expense....................    $(3.3)         $(6.6)      $ 3.3      $(10.0)       $(24.1)      $14.1
Interest and other income...........    $ 3.1          $ 1.5       $ 1.6      $ 11.5        $  3.9       $ 7.6
Gain on sale of investment..........    $22.0          $  --       $22.0      $ 44.1        $   --       $44.1
AS A PERCENTAGE OF REVENUE:
Interest expense....................     (0.6)%         (1.1)%                  (0.6)%        (1.4)%
Interest and other income...........      0.5%           0.3%                    0.6%          0.2%
Gain on sale of investment..........      3.7%            --                     2.5%           --
</TABLE>

  Interest Expense

     Interest expense as a percentage of revenue declined from 1.1% in the third
quarter of 1998 to 0.6% in the third quarter of 1999, and from 1.4% in the first
nine months of 1998 to 0.6% in the first nine months of 1999. In absolute dollar
terms, interest expense decreased by $3.3 million in the third quarter of 1999
and decreased by $14.1 million for the first nine months of 1999. The decrease
in interest expense was due primarily to the retirement of debt as a result of
proceeds generated from our public offerings in July 1998 and February 1999. Our
total short-term and long-term outstanding borrowings were $150.3 million as of
September 26, 1998 and $123.1 million as of October 2, 1999.

  Interest and Other Income

     Interest and other income in the third quarter of 1999 and the first nine
months of 1999 increased in both absolute dollar amount and as a percentage of
revenue when compared to the third quarter of 1998 and to first nine months of
1998. The increase was primarily due to the increase in total cash and cash
equivalents and marketable securities, which were generated from our public
offerings in July 1998 and February 1999. Our total cash and cash equivalents
and marketable securities were $162.2 million as of September 26, 1998 compared
to $285 million as of October 2, 1999.

  Gain on Sale of Investment

     In September 1999, the Company sold its remaining equity investment in
Celestica Inc. resulting in approximately a $22 million gain. For the nine
months ended October 2, 1999, total gain from the sale of investment amounted to
$44.1 million.

     PROVISION FOR INCOME TAXES

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                    NINE MONTHS ENDED
                                     --------------------------            --------------------------
                                     OCTOBER 2,   SEPTEMBER 26,            OCTOBER 2,   SEPTEMBER 26,
                                        1999          1998        CHANGE      1999          1998        CHANGE
                                     ----------   -------------   ------   ----------   -------------   ------
                                            (UNAUDITED)                           (UNAUDITED)
                                                                   (IN MILLIONS)
<S>                                  <C>          <C>             <C>      <C>          <C>             <C>
Income (loss) before provision for
  income taxes.....................    $(40.1)        $8.2        $(48.3)    $(52.5)        $3.4        $(55.9)
Provision for income taxes.........    $  0.1         $2.1        $ (2.0)    $  1.6         $2.3        $ (0.7)
</TABLE>

     The provision for income taxes consists primarily of federal alternative
minimum tax and foreign taxes. Due to our net operating losses (NOL), NOL
carryforwards and favorable tax status in Singapore, we have not incurred any
significant foreign, U.S. federal, state or local income taxes for prior fiscal
periods. Future tax benefits from current operating losses have not been
recognized in the current year because of the uncertainty concerning their
realization.

                                       14
<PAGE>   15

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 our vendors and customers, will need to be
upgraded to comply with such Year 2000 requirements. We could be impacted by
Year 2000 Issues occurring in our own infrastructure or faced by our major
distributors, suppliers, customers, vendors and financial service organizations.
Such Year 2000 Issues could include information errors, significant information
system failures, or failures of equipment, vendors, suppliers or customers. Any
disruption in our operations as a result of Year 2000 Issues, whether by us or a
third party, could have a material adverse effect on our business, financial
condition and results of operations.

     OUR PRODUCTS COMPLY

  Hard Disk Drives

     Our 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 our hard disk
drives, the ability to operate correctly in the next century is dependent on the
software and programming loaded on our hard disk drives by the system. Since our
hard disk drives have no inherent time or date function, they will not determine
whether a given system, or any software on a given system, will operate
correctly or incorrectly in the next century. As a result, all of our 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.

  MaxAttach Products

     Our new Network Attached Systems ("NAS") products (developed by the
recently acquired Creative Design Solutions, Inc. -- CDS company) are also Y2K
compliant and not affected by the actual turn of the century. Our NAS operating
system software uses ANSI C time specifications, which stores time as number of
seconds since January 1, 1970 using a signed 32-bit number, which is unaffected
in or by the Year 2000, but which will roll over in the Year 2038.

     OUR STATE OF READINESS

     Overview. To address Year 2000 readiness, we have 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. Our internal Year 2000 readiness program is
separated into four phases: (1) Awareness, (2) Inventory, (3) Assessment and (4)
Resolution. Additionally, we have formed a Year 2000 Program Office to
coordinate the foregoing corporate program and also have engaged external Year
2000 consultants to assist with methodology and process of the inventory,
assessment and resolution phases. There can be no assurance that we will be able
to complete all four phases in a timely manner, or that the process will
adequately address the Year 2000 Issue.

     Core IT Systems. We have implemented the R3 system from SAP A.G. The SAP
system is designed to automate more fully our business processes and is
certified by SAP A.G. as Year 2000 compliant. The SAP implementation is now
complete for all SAP modules, with the implementation of the SAP Human Resources
module for the US and Singapore in July.

     Other Information Technology Systems. Our other information technology
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-United
States payroll processing, and shipment and just in time delivery management
systems. SAP A.G. software supports all of our human resources systems, call
management system, non-United States payroll

                                       15
<PAGE>   16

processing and supplier just-in-time delivery management systems which, as a
result, are now Year 2000 compliant. The inventory and assessment portion of our
networked PC's has been completed and we are now in the remediation stage for
the hardware and software applications. We will assign the highest resolution
priority to repair or replace items that affect new product development, volume
production and distribution.

     Networking Systems. In a recent corporate level business decision, we
concluded that instead of upgrading our current Banyan Vines based networking
system, it would be much more beneficial to us if we implemented NT-servers and
Microsoft Exchange Mailman System. The NT-server/Microsoft Exchange migration
was completed by September 30th 1999 (according to plan) and, as a result, all
our network attached PC user systems are now Y2K ready.

     Non-Information Technology Systems. Our non-information technology systems
include departmental and personal automated applications used in all of our
functional areas, building systems such as heating, cooling, and air
purification, component and hard disk drive test equipment, and manufacturing
equipment. We have completed the assessment of all our non-information
technology systems as of June 30th of this year.

     Vendors and Suppliers. Our vendors and suppliers include the sources of
materials used in our hard disk drives, the JIT (Just In Time) and forward
carrier logistics operations, the sources of the equipment and supplies used by
us in the conduct of our business, as well as our landlords, financial
institutions, and other service providers. Inventory of our material suppliers
has been completed and on site assessments of our logistics suppliers have been
completed for our disk drive products. The Maxtor Year 2000 Program Office has
created an extensive repository of detailed data and information collected from
our inventory and remediation activities as well as our supplier assessments.
Assessments 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.

     Maxtor Network Storage Group ("MNSG"). MNSG is Maxtor's internal
designation for the newly acquired CDS company. The Y2K Program Office has
already assessed MNSG's PCs and Embedded Systems and recommended that a number
of PCs be upgraded to newer Y2K compliant models. This capital request has been
approved and is in the process of being implemented. In addition, all the
mission critical software applications are based on Microsoft Windows 95/98 and
Windows NT and, as a result, are Y2K ready. The Embedded Systems in the MNSG
facility were assessed to not have a Y2K dependency.

     Customers. Our assessment of our Year 2000 issues with our customers will
dovetail with similar activities which our customers will engage in with respect
to Maxtor. Several of our customers, Dell and IBM for example, have requested
written and/or in person assurances that our ability to supply product to them
in volume will not be affected by the Year 2000 Issue. At this time we have
completed several on site audits and responded to a number of follow up
questionnaires. We are still receiving occasional Y2K questionnaires from
primarily Asian customers.

     THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES

     We made capital expenditures of approximately $33.0 million and incurred
related expenses of approximately $7.5 million in fiscal 1998 in connection with
our implementation of the SAP system. For our Y2K program we initially estimated
capital expenditures of approximately $10.0 million and expenses of
approximately $4.0 million in fiscal 1999 in connection with the resolution of
our Year 2000 issues. During the first ten months ended October 30, 1999, we
incurred approximately $1.5 million in capital expenditures and approximately
$3.0 million in expenses related to our Year 2000 issues. Considering that we
are about six weeks away from the actual transition, we do not expect that these
costs will not change significantly. No significant system projects have been
deferred due to Year 2000 issues. In addition, our cost estimates do not include
potential costs related to any customer or other claims resulting from our
failure to adequately correct our Year 2000 issues.

                                       16
<PAGE>   17

     THE RISKS OF OUR YEAR 2000 ISSUES

     We believe that resolution of our Year 2000 Issues has been and will be
complex, expensive and time intensive. In addition, resolution of our Year 2000
Issues could be adversely affected by various risk factors, including without
limit:

     - any failure to provide adequate training to employees;

     - any failure to retain skilled personnel to implement the SAP system or
       find suitable replacements for such personnel;

     - any expansion of the scope of the implementation plan due to
       unanticipated changes in our business;

     - any failure to devise and run appropriate testing procedures that
       accurately reflect the demands that will be placed on new systems
       following implementation;

     - any failures by vendors or other third parties to accurately assess their
       own Year 2000 readiness or the Year 2000 readiness of their respective
       vendors and other third parties and any resulting failures;

     - any failures by the power companies to supply power to our plans and
       facilities; and

     - 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, we may be affected by such litigation. Because our
hard disk drives and network storage appliance products are able to operate in
the Year 2000 and beyond, we do not anticipate exposure to material product
defect or similar litigation. Any such litigation, however, could have a
material adverse effect on our business, financial condition and results of
operations. We also may not receive any assistance, damages or other relief as a
result of our initiation of any litigation related to the Year 2000 Issue. Our
inability to implement our Year 2000 plans or to otherwise address Year 2000
Issues in a timely manner could have a material adverse effect on our business,
financial condition and results of operations.

     OUR CONTINGENCY PLANS

     As part of the four-step process outlined above, 51 specific contingency
plans have been developed in connection with the assessment and resolution of
the risks identified. These plans cover information technology, material
shortages and logistics related delays, which we identified as potential
occurrences as a result of our on-site supplier assessments. We have also
developed a Command Center plan, which will serve as a communications center for
the entire company on Y2K related events occurring during the actual transition
to the new year, that could affect Maxtor's business. There is no assurance that
our contingency plans will address risks which may actually arise or that any
such contingency plans will properly address their intended purposes if they are
implemented. In addition, we do not have and do not anticipate obtaining any
insurance policy to provide material coverage for potential injuries or damages
related to or caused by the Year 2000 Issue.

LIQUIDITY AND CAPITAL RESOURCES

     As of October 2, 1999, we had $285 million in cash and cash equivalents and
marketable securities as compared to $227.6 million as of December 26, 1998. In
February 1999, we completed an underwritten secondary public offering of
7,800,000 newly-issued shares of our common stock and received $95.8 million,
net of offering costs and expenses.

     Operating activities provided net cash of $32.7 million for nine months
ended October 2, 1999. The cash provided from operating activities was
principally generated from collection of accounts receivable and decreases in
inventory purchases, which was partially offset by the decrease in accounts
payable, accrued expenses. We used $151.4 million in investing activities during
the first nine months of 1999, principally for the purchase of marketable
securities and property, plant and equipment. During the nine months ended
October 2, 1999, we reduced short and long-term debt by $60.0 million using
approximately $55.0 million of the proceeds from our February 1999 public
offering and cash from operations.
                                       17
<PAGE>   18

     In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd
entered into a 4-year term loan agreement with the Economic Development Board of
Singapore for SGD48 million, which will amortize in 7 equal semi-annual
installments beginning March 2001. This loan requires a guarantee which is
supported by a 2-year guarantee from the Bank of Nova Scotia.

     As of October 2, 1999, our outstanding debt comprised primarily $90.0
million of publicly-traded Subordinated Debentures, due March 1, 2012. Our
outstanding 5.75% Subordinated Debentures are entitled to annual sinking fund
payments of $5.0 million, which commenced March 1, 1998. These debentures are no
longer convertible into our common stock or any other security of the Company.

     We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. As of October 2, 1999,
$100.0 million of accounts receivable was securitized under the program and
excluded from our accounts receivable balance.

     We believe the existing capital resources, together with cash generated
from operations and borrowing capacity, will be sufficient to fund our
operations through at least the next 12 months. We require substantial working
capital to fund our business, particularly to finance accounts receivable and
inventory, and to invest in property, plant and equipment. During 1999, capital
expenditures are expected to be between approximately $120.0 million and $125.0
million, to be used principally for adding manufacturing capacity and
implementing new and updating existing information technology systems. We intend
to seek financing arrangements, including a line of credit, to fund our future
capacity expansion plans, as necessary. However, our ability to generate cash
will depend on, among other things, demand in the desktop hard disk drive market
and pricing conditions. If we need additional capital, there can be no assurance
that such additional financing can be obtained, or, if obtained, that it will be
available on satisfactory terms. See discussion below under the heading "Certain
Factors Affecting Future Performance".

CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $795.9 MILLION

     We have a history of significant losses. During each of the 19 consecutive
quarters ended September 27, 1997, we 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. These losses were primarily a result of the
following:

     - delayed product introductions;

     - product performance and quality problems;

     - low manufacturing yields and under-utilization of manufacturing capacity;

     - high operating and interest expenses; and

     - overall market conditions in the hard disk drive industry, including
       fluctuations in demand and declining average selling prices.

     We also had a net loss of $40.3 million for the quarter ended October 2,
1999 due primarily to a significant decrease in average unit selling prices.

OUR AVERAGE SELLING PRICES ARE DECLINING

     We anticipate that average selling prices in the hard disk drive industry
will continue to decline for the foreseeable future. The average selling price
of a hard disk drive rapidly declines over its commercial life due to
technological enhancement, productivity improvement, and also increase in
industry supply. This is true even for those products that are competitive and
introduced into the market in a timely manner. Average selling prices decline
even further when competitors lower prices to absorb excess capacity, liquidate
excess inventories, restructure or attempt to gain market share. These factors
make it very challenging to achieve and maintain profitability and revenue
growth in the hard disk drive industry.

                                       18
<PAGE>   19

UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES

     Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of that product line. If we miss a
qualification opportunity, we may not have another opportunity to do business
with that manufacturer until we introduce our next generation of products. The
effect of missing a product qualification opportunity is magnified by the
limited number of high volume manufacturers of personal computers. If we do not
reach the market or deliver volume production in a timely manner, we may lose
opportunities to qualify our products, our gross margins probably will decline
due to rapidly declining average selling prices, and we probably will lose
market share.

SUBSTANTIAL DEPENDENCE ON THE DESKTOP COMPUTER MARKET

     While there has been significant growth in the demand for desktop computers
over the past several years, according to International Data Corporation, the
growth rate in the desktop computer market has slowed in recent quarters.
Because of our reliance on the desktop segment of the personal computer market,
we will be affected more by changes in market conditions for desktop computers
than would a company with a broader range of products. Any decrease in the
demand for desktop computers could cause a decrease in the demand for our
products.

     Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:

     - the client-server market;

     - lower cost, lower performance personal computer systems (typically below
       $699); and

     - laptop personal computers.

To specifically address these or additional market segments, we would have to
reengineer some of our existing technology and develop new technology. Certain
of our competitors have significant advantages over us in one or more of these
and other potentially significant new or growing market segments. Any failure by
us to successfully develop and introduce new products to address specifically
these additional market segments could have a material adverse effect on our
business, financial condition and results of operations.

A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS

     We sell most of our products to a limited number of customers. During the
nine months ended October 2, 1999, two customers, Dell and IBM, accounted for
approximately 25.4% and 9.0%, respectively, of our revenue, and our top ten
customers accounted for approximately 67.2% of our revenue. During the nine
months ended September 26, 1998, two customers, Dell and IBM, accounted for
approximately 27.0% and 16.2%, respectively, of our revenue, and our top ten
customers accounted for approximately 79.7% of our revenue.

     We believe that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future, and
that the proportion of our revenue from such customers could

                                       19
<PAGE>   20

continue to increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial demands on us. Even
if we successfully qualify a product for a given customer, such customer
generally is not obligated to purchase any minimum volume of products from us
and generally is able to terminate its relationship with us at any time. Our
ability to maintain strong relationships with our principal customers is
essential to our future performance. If we lose a key customer or if any of our
key customers reduce their orders of our products or require us to reduce our
prices before we are able to reduce costs, our business, financial condition and
results of operations could be materially and adversely affected.

OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY

     Our quarterly results may not be indicative of our future performance. Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate significantly in the future. Our future performance will depend on
many factors, including the following:

     - our ability to be consistently among the first to volume-production with
       competitive products;

     - the average unit selling price of our products;

     - fluctuations in the demand for hard disk drives as a result of the
       cyclical and seasonal nature of the desktop computer industry;

     - the availability of and efficient use of manufacturing capacity;

     - changes in product or customer mix;

     - our existing competitors introducing better products at competitive
       prices before we do;

     - new competitors entering our market;

     - our ability to manage successfully the complex and difficult process of
       qualifying our products with our customers;

     - our customers canceling, rescheduling or deferring significant orders for
       our products, particularly in anticipation of new products or
       enhancements from us or our competitors;

     - the ability of certain of our distribution and retail customers to return
       unsold products for credit;

     - the ability of certain of our distribution and retail customers to
       receive lower prices retroactively on their inventory of our products
       when we lower prices on our products;

     - our ability to purchase enough components and raw materials at
       competitive prices which allows us to make a profit;

     - the availability of adequate capital resources;

     - increases in research and development expenditures, particularly as a
       percentage of revenue, required to maintain our competitive position;

     - changes in our strategy;

     - personnel changes; and

     - other general economic and competitive factors.

     Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.

     As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.

                                       20
<PAGE>   21

OUR CUSTOMERS ARE PLACING NEW AND COSTLY DEMANDS ON US

     Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of our largest personal computer manufacturing
customers, are starting to adopt build-to-order manufacturing models that reduce
their component inventories and related costs and enable them to tailor their
products more specifically to the needs of their customers.

     Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers such as us) ship parts
directly to the dealer or other assembler for installation at its location.
Finally, certain of our manufacturing customers have adopted just-in-time
inventory management processes that require component suppliers to maintain
inventory at or near the customer's production facility. These new business
models require us to hold our products in inventory longer, which increases our
risk of inventory obsolescence and average selling price decline. These changing
models also increase our capital requirements and costs, complicate our
inventory management strategies, and make it difficult for us to match our
manufacturing plans with projected customer demand.

THE HARD DISK DRIVE MARKET IS HIGHLY COMPETITIVE

     The hard disk drive market in general is intensely competitive even during
periods when demand is stable. We compete primarily with manufacturers of
3.5-inch hard disk drives for the personal computer industry, including:

     - Fujitsu Limited;

     - Quantum Corporation;

     - Samsung Electronic Company Limited;

     - Seagate Technology, Inc.; and

     - Western Digital Corporation.

     We also could face significant competition from other companies, such as
International Business Machines Corporation, in our current markets or in other
markets into which we may expand our product portfolio.

     Many of our competitors have a number of significant advantages over us,
including:

     - a larger market share;

     - a broader array of product lines;

     - preferred vendor status with some of our customers;

     - extensive name recognition and marketing power; and

     - significantly greater financial, technical and manufacturing resources.

     Unlike us, some of our competitors make many of their own components which
may provide them with certain benefits including lower costs. Our competitors
also may:

     - consolidate or establish strategic relationships among themselves to
       lower their product costs or to otherwise compete more effectively
       against us;

     - lower their product prices to gain market share; or

     - bundle their products with other products to increase demand for their
       products.

In addition, new competitors could emerge and rapidly capture market share.

                                       21
<PAGE>   22

     If we fail to compete successfully against current or future competitors,
our business, operating results and financial condition may be materially and
adversely affected.

DEMAND FOR OUR PRODUCTS FLUCTUATES

     We currently offer a single product family that is designed for desktop
computers. As a result, the demand for our products depends on the overall
demand for desktop computers. The desktop computer and hard disk drive markets
tend to go through periods of rapid growth followed by periods of oversupply and
rapid price and gross margin erosion. This environment makes it difficult for us
and our customers to reliably forecast demand for our products. We do not have
long-term supply contracts with our customers, and our customers often can defer
or cancel orders with limited notice and without significant penalty.

WE MUST EFFECTIVELY RESPOND TO CHANGING TECHNOLOGY; WE MUST EFFECTIVELY
TRANSITION TO GIANT MAGNETO-RESISTIVE HEAD TECHNOLOGY

     Our future performance will depend on our ability to enhance current
products and to develop and introduce volume production of new competitive
products on a timely and cost-effective basis. We also must keep pace with and
correctly anticipate technological developments and evolving industry standards
and methodologies. Advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could lead to new competitive products
that have better performance and/or lower prices than our products. Examples of
such new technologies include giant magneto-resistive head technology (which
already has been introduced by IBM and Fujitsu and which Western Digital
reportedly will use in its products under an agreement with IBM) and
optically-assisted recording technologies (which currently are being developed
by companies such as TeraStor Corporation and Seagate). We have incorporated
giant magneto-resistive head technology into our newest product. We have decided
not to pursue optically-assisted recording technologies at this time. Our
inability to introduce or achieve volume production of new competitive products,
(regardless of whether they include giant magneto-resistive head technology) on
a timely and cost-effective basis has in the past and in the future could have a
material adverse effect on our business, financial condition and results of
operations.

TO DEVELOP NEW PRODUCTS, WE MUST EFFECTIVELY INTEGRATE PARTS FROM THIRD PARTIES

     Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third parties. Consequently, the success of our products depends
on our ability to gain access to and integrate parts that use leading-edge
technology. To successfully manage these integration projects we must:

     - obtain high quality parts;

     - hire skilled personnel;

     - effectively integrate different products from a variety of vendors; and

     - manage difficult scheduling and delivery problems.

Our success will depend on our ability to develop and maintain relationships
with key suppliers.

WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS

     A number of the parts used in our products are available from only one or a
limited number of outside suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies Inc. As we have experienced in the past, some of the parts we
require may periodically be in short supply. As a result, we must allow for
significant ordering lead times for certain parts. In addition, we may have to
pay significant cancellation charges to suppliers if we cancel orders for parts
because we reduce production due to production cut-backs caused by market
oversupply, reduced demand, transition to new products or technologies or for
other reasons. We order the majority of our parts on a purchase order basis and
only have limited long-term

                                       22
<PAGE>   23

volume purchase agreements with certain existing suppliers. If we cannot obtain
sufficient quantities of high quality parts when we need them, our business,
financial condition and results of operations could be materially and adversely
affected.

WE DEPEND ON OUR KEY PERSONNEL

     Our success depends upon the continued contributions of our key employees,
many of whom would be extremely difficult to replace. We also do not have key
person life insurance on any of our personnel. Most of our senior management and
a significant number of our other employees have been with us for less than
three years. Worldwide competition for skilled employees in the hard disk drive
industry is extremely intense. We believe that some of our competitors recently
have made targeted efforts to recruit employees from us and such efforts have
resulted in us losing some skilled managers. There is no guarantee that we will
be successful in retaining our key employees. If we are unable to retain our
existing employees or to hire and integrate new employees, our business,
financial condition and results of operations could be materially and adversely
affected.

WE HAVE ONLY ONE MANUFACTURING FACILITY AND WILL NEED ADDITIONAL CAPACITY IN THE
FUTURE

     Our volume manufacturing operations currently is based in one facility in
Singapore. A fire, flood, earthquake or other disaster or condition affecting
our facility could have a material adverse effect on our business, financial
condition and results of operations. Although we have taken steps to ensure that
manufacturing facilities will be available, our inability to obtain a facility
or facilities which allow us to meet our customers' demands in a timely manner
will limit our growth and could have a material adverse effect on our business,
financial condition and results of operations.

WE MAY NEED MORE CAPITAL IN THE FUTURE BECAUSE THE HARD DISK DRIVE BUSINESS IS
CAPITAL INTENSIVE

     Our business is capital intensive, and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:

     - the rate of our sales growth;

     - the level of our profits or losses;

     - the timing and extent of our spending to support facilities upgrades and
       product development efforts;

     - the timing and size of business or technology acquisitions; and

     - the timing of introductions of new products and enhancements to our
       existing products.

     We may issue additional equity to raise capital. 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. Furthermore, our board of directors is
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of our common stock without
stockholder approval.

     While we currently do not have a revolving credit facility, it is our goal
to obtain one in the near future. However, we believe that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, that for various reasons the number of potential lenders
actively providing credit facilities to companies in the data storage industry
has decreased recently, and that the terms on which the remaining potential
lenders are willing to offer such facilities, in many cases, are restrictive
and/or costly. Consequently, the terms and conditions under which we might
obtain such a facility are uncertain. Any failure to obtain adequate credit
facilities on acceptable terms could have a material and adverse effect on our
business, financial condition and results of operations.

                                       23
<PAGE>   24

PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE FACE RISK OF THIRD PARTY
CLAIMS OF INFRINGEMENT

     We have patent protection on some of our technology. We may not receive
patents for our current or future patent applications, and any patents that we
have or that are issued to us may be invalidated, circumvented or challenged.
Moreover, the rights granted under any such patents may not provide us with any
competitive advantages. Finally, our competitors may develop or otherwise
acquire equivalent or superior technology.

     We also rely on trade secret, copyright and trademark laws, as well as the
terms of our contracts to protect our proprietary rights. We may have to
litigate to enforce patents issued or licensed to us, to protect trade secrets
or know-how owned by us or to determine the enforceability, scope and validity
of our proprietary rights and the proprietary rights of others. Enforcing or
defending our proprietary rights could be expensive and might not bring us
timely and effective relief.

     We may have to obtain licenses of other parties' intellectual property and
pay royalties. If we are unable to obtain such licenses, we may have to stop
production of our products or alter our products. In addition, the laws of
certain countries in which we sell and manufacture our products, including
various countries in Asia, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our
protective measures in these countries may be inadequate to protect our
proprietary rights. Any failure to enforce and protect our intellectual property
rights could have a material adverse effect on our business, financial condition
and results of operations.

     When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. We may not
be able to obtain similar rights in the future on terms as favorable.

     We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of a number of hard disk drive motor patents. The
lawsuit, which was filed in the United States District Court for the Northern
District of California, has been transferred to the United States District Court
for the Eastern District of Louisiana for coordination or consolidation with
pre-trial proceedings with three other actions involving Papst patents. The
alleged infringement claimed by Papst involves 15 of the hard disk drive motor
patents referenced above and relates to motors that we purchase from motor
vendors and the use of such motors in hard disk drives. While we believe that we
have valid defenses to the Papst claim, the results of any litigation are
inherently uncertain and there is no assurance that Papst will not assert other
infringement claims relating to current patents, pending patent applications and
future patents or patent applications. Additionally, there is no assurance that
we will be able to successfully defend ourselves against any such lawsuit. A
favorable outcome for Papst in the lawsuit could result in the issuance of an
injunction against us or our 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 our business, financial condition and results of operations.

WE ARE DEPENDENT ON OUR INTERNATIONAL OPERATIONS; WE FACE RISKS FROM OUR
INTERNATIONAL SALES

     We conduct most of our manufacturing and testing operations and purchase a
substantial portion of our key parts outside the U.S. We also sell a significant
portion of products to foreign distributors and retailers.

     Our dependence on revenue from international sales and our need to manage
international operations each involves 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;
                                       24
<PAGE>   25

     - changes in tariffs;

     - the difficulties associated with staffing and managing international
       operations;

     - generally longer periods to collect receivables;

     - unexpected changes in or impositions of legislative or regulatory
       requirements;

     - reduced protection for intellectual property rights in some countries;

     - potentially adverse taxes; and

     - delays resulting from difficulty in obtaining export licenses for certain
       technology and other trade barriers.

     The specific economic conditions in each country will impact our
international sales. For example, our international contracts are denominated
primarily in U.S. dollars. Significant downward fluctuations in currency
exchange rates against the U.S. dollar could cause our products to become
relatively more expensive to distributors and retailers in those countries. In
addition, we attempt to manage the impact of foreign currency exchange rate
changes by entering into short-term, foreign exchange contracts. If we do not
effectively manage the risks associated with international operations and sales,
our business, financial condition and results of operations could be materially
and adversely affected.

WE HAVE EXPOSURE FROM OUR WARRANTIES

     Our products may contain defects. We generally warrant our products for
three years. Our standard warranty contains a limit on damages and an exclusion
of liability for consequential damages and for negligent or improper use of the
product. We establish a reserve, at the time of product shipment, in an amount
equal to our estimated warranty expenses. We had warranty reserves of $45.9
million as of October 2, 1999 and $31.6 million as of September 26, 1998. While
we believe that our warranty reserves will be sufficient, the failure to
maintain sufficient warranty reserves or the unenforceability of our liability
limitations could have a material adverse effect on our business, financial
condition and results of operations.

OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE

     Our stock price and the number of shares traded each day has varied
greatly. We expect these fluctuations to continue due to factors including:

     - quarterly fluctuations in operating results;

     - announcements of new products by us or our competitors;

     - gains or losses of significant customers;

     - changes in stock market analysts' estimates;

     - the presence or absence of short-selling of our common stock; and

     - events affecting other companies that the market deems comparable to us.

     Our stock price also may be affected by events relating to Hyundai
Electronics America and Hyundai Electronics Industries, including sales of our
common stock by Hyundai Electronics America or the perception that such sales
may occur (due to the financial condition of Hyundai Electronics America or
otherwise). There have been reports that Hyundai Electronics Industries is
planning to sell some operations that do not directly relate to its core
semiconductor business. Hyundai Electronics America and Hyundai Electronics
Industries have informed Maxtor that following the closing of its February 1999
public offering and the expiration of the 90-day period during which Hyundai
Electronics America has agreed not to offer or sell additional shares without
the consent of Salomon Smith Barney Inc., they may consider selling additional
Maxtor shares at a time they deem appropriate. Finally, our stock price may be
subject to extreme fluctuations in response to general economic conditions in
the U.S., Korea, Southeast Asia and elsewhere, such as interest rates, inflation
rates, exchange rates, unemployment rates, and trade surpluses and deficits. It
is likely that in
                                       25
<PAGE>   26

some future quarter or quarters our operating results will be below the
expectations of stock market analysts or investors. In such event, our stock
price probably will decline.

     In February 1999, DECS Trust IV, a newly-formed trust, sold 12,500,000
DECS. The terms of the DECS provide that DECS Trust IV may distribute shares of
our common stock owned by Hyundai Electronics America on or about February 15,
2002, or upon earlier liquidation of DECS Trust IV under certain circumstances.
We do not know how or whether investors in the DECS offering will resell the
DECS. Any market that develops for the DECS could reduce the demand for our
common stock or otherwise negatively affect the market for our common stock.

UNCERTAINTY AND RISKS RELATING TO INTEGRATION OF CREATIVE DESIGN SOLUTIONS, INC.
AND RISKS RELATING TO ACQUISITIONS GENERALLY

     Part of Maxtor's strategy is to grow through the acquisition of related
businesses, such as the recent acquisition of CDS. This strategy involves a
number of risks, including the substantial management time devoted to such
activities, risks related to the integration of the acquired business,
undisclosed liabilities, and failure to achieve anticipated benefits, such as
cost savings and synergies.

     Maxtor intends to combine CDS' operations with Maxtor's operations as
quickly as practicable. Maxtor and CDS have different systems and procedures in
many operational areas that must be rationalized and integrated. Among other
things, Maxtor must integrate product offerings, and coordinate development and
sales and marketing efforts. There may be substantial difficulties associated
with integrating two separate companies, and there can be no assurance that such
integration will be accomplished expeditiously or successfully. The integration
of certain operations following an acquisition will require the dedication of
management resources that may temporarily detract attention from the day-to-day
business of Maxtor. Any costs associated with this type of integration may have
an adverse effect on Maxtor's operating results in the periods in which they are
incurred. Failure to accomplish the integration of the operations of Maxtor and
CDS, or market place uncertainty regarding the acquisition, could have a
material adverse effect on Maxtor's business, financial condition and results of
operations.

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     As previously reported, we are currently involved in a dispute with
StorMedia Incorporated ("StorMedia"), which arose out of an agreement among
Maxtor, StorMedia and Hyundai Electronics Industries Co. Ltd. ("HEI") in which
StorMedia agreed to supply disk media to the Maxtor. There have been no material
developments in the StorMedia lawsuits during this reporting period.

     We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we 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 our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
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 our
business, financial position and results of operations.

     We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of a number of hard disk drive motor patents. As
previously reported, the lawsuit alleges infringement of 15 of the hard disk
drive motor patents, which relate to motors that we purchase from motor vendors
and the use of such motors in hard disk drives. Our Answer and Counterclaim,
alleging defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others,

                                       26
<PAGE>   27

was filed on May 19, 1999. We also filed a motion to bifurcate for early
discovery the license, exhaustion and misuse defenses. At hearing on July 21,
1999, the Court stayed further action in the case pending the outcome of a
motion filed by Papst on July 13, 1999, seeking coordination and transfer of
this case with several other actions involving Papst patents. This motion was
filed with the Judicial Panel on Multidistrict Litigation in Washington, D.C. On
August 5, 1999, we filed our opposition to the motion. No hearing date has been
set in that proceeding.

     While we believe that our defenses to the Papst claim are valid, the
results of any litigation are inherently uncertain and there is no assurance
that Papst will not assert other infringement claims relating to current
patents, pending patent applications and future patents or patent applications.
Additionally, there is no assurance that we will be able to successfully defend
ourselves against any such lawsuit. A favorable outcome for Papst in the lawsuit
could result in the issuance of an injunction against us or our 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 our business, financial condition
and results of operations.

     No amounts have been reserved in the accompanying condensed consolidated
financial statements for any legal claims or actions.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     USE OF PROCEEDS

     In February 1999, we completed a secondary public offering of 7.8 million
shares of our common stock. We received net proceeds of approximately $95.8
million from the offering, after deducting the underwriting discounts and
estimated expenses payable by the Company. During the nine months ended October
2, 1999, we used approximately $55 million of the proceeds and cash from
operations to reduce short and long-term debt by $60 million. The remaining
proceeds have been applied to working capital.

     RECENT SALES OF UNREGISTERED SECURITIES

     During the quarter ended October 2, 1999, Creative Design Solutions, Inc.
("CDS"), a California corporation merged with and into a wholly owned subsidiary
of Maxtor, which subsidiary then merged with and into Maxtor. We issued
approximately 8,129,700 shares of our common stock in return for all of the
outstanding capital stock of CDS as of the date of the acquisition. The issuance
was deemed to be exempt from registration with the SEC in reliance upon
Regulation D promulgated under the Securities Act of 1933, as amended, based
upon the limited number of persons receiving shares and the knowledge and
experience of such persons or their representatives in evaluating the proposed
investment. In addition, we have reserved approximately 825,000 shares of our
common stock for issuance upon exercise of outstanding stock options of CDS,
which we assumed in the acquisition.

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

     At the annual meeting of stockholders held on August 11, 1999, the
stockholders elected each of the nominees for Class I director on the Board of
Directors. The votes were as follows:

<TABLE>
<CAPTION>
                                                                WITHHELD
                      NOMINEE                FOR                AUTHORITY
                      -------                ---                ---------
                <S>                  <C>                   <C>
                Charles Hill             90,120,528             7,842,567
                C.S. Chung               90,154,534             7,808,561
</TABLE>

     The following directors' terms of office continue until the annual meeting
indicated: Thomas Chun, Roger W. Johnson and Y.H. Kim (Class II term expires at
the 2000 annual meeting); and C.S. Park, Michael R. Cannon and Charles F. Christ
(Class III term expires at the 2001 annual meeting).

                                       27
<PAGE>   28

     The following matters were also submitted to and approved by a vote of the
stockholders with the results of the voting being as shown:

<TABLE>
<CAPTION>
                                                                                         BROKER
                   PROPOSAL                         FOR         AGAINST      ABSTAIN    NON-VOTES
                   --------                      ----------    ----------    -------    ---------
<S>                                              <C>           <C>           <C>        <C>
Approval of the Company's 1996 Stock Option
  Plan, as amended, for the purposes of Section
  162(m) of the Internal Revenue Code, and to
  (i) increase by 3,676,367 the aggregate
  number of shares of Common Stock authorized
  for issuance under the plan, (ii) increase
  the size of certain options granted to
  non-employee directors and (iii) provide for
  the grant of restricted stock................  78,535,122    19,118,139    89,997      219,837
Approval of the Company's 1998 Employee Stock
Purchase Plan, as amended, to increase by
700,000 the aggregate number of shares of
Common Stock authorized for issuance under such
plan...........................................  97,054,081       844,330    64,684           --
Approval and ratification of the selection of
  PricewaterhouseCoopers LLP as independent
  accountants of the Company for the fiscal
  year ending January 1, 2000..................  97,766,731       106,759    89,605           --
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a. See Index to Exhibits on page 30 hereof.

     b. On September 24, 1999, we filed a current report on Form 8-K to report
the completion of a merger pursuant to which CDS became a wholly owned
subsidiary of Maxtor and issuance of Maxtor common stock in exchange for all
outstanding shares of CDS capital stock.

ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

                                       28
<PAGE>   29

                                   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
                                              Senior Vice President, Finance,
                                                Chief Financial Officer and
                                                Principal Accounting Officer

Date: November 15, 1999

                                       29
<PAGE>   30

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                         SEQUENTIALLY
EXHIBIT                                                                    NUMBERED
  NO.                              DESCRIPTION                              PAGES
-------                            -----------                           ------------
<S>        <C>                                                           <C>
10.169     Executive Retention Incentive Agreement between Michael R.
           Cannon and Registrant dated June 23, 1999...................
10.170     Promissory Note between Michael R. Cannon and Registrant
           dated June 23, 1999.........................................
10.171*    Amendment One to Supply Agreement between MMC Technology,
           Inc. and Registrant.........................................
10.172     Capital Assistant Scheme Loan Agreement between Maxtor
           Peripherals (S) Pte Ltd and the Economic Development Board
           of Singapore dated September 9, 1999........................
10.173     Guarantee Facility Agreement between Maxtor Peripherals (S)
           Pte Ltd and the Bank of Nova Scotia, Singapore branch dated
           August 31, 1999.............................................
27         Financial Data Schedule.....................................
</TABLE>

* Indicates confidential treatment has been requested for this exhibit.