STORMEDIA INC, S-1/A, 1996-05-28

STORMEDIA INC
S-1/A, 1996-05-28
MAGNETIC & OPTICAL RECORDING MEDIA

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996

REGISTRATION NO. 333-04225

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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

<TABLE>
<S> <C> <C>
DELAWARE 3695 77-0373062
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>

390 REED STREET
SANTA CLARA, CALIFORNIA 95050
(408) 327-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

WILLIAM J. ALMON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
STORMEDIA INCORPORATED
390 REED STREET
SANTA CLARA, CALIFORNIA 95050
(408) 327-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

---------------------

Copies to:

<TABLE>
<S> <C>
JUDITH MAYER O'BRIEN, ESQ. WILLIAM L. HUDSON, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION SPEAR STREET TOWER
650 PAGE MILL ROAD ONE MARKET PLAZA
PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CALIFORNIA 94105
(415) 493-9300 (415) 442-0900
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

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If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.

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<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectuses: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and the other to be used in connection with a concurrent
international offering (the "International Prospectus"). The two prospectuses
are identical except for the outside front cover page. The form of U.S.
Prospectus outside front cover page is included behind this explanatory note and
is followed by the differing outside front cover page to be used in the
International Prospectus.
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

PROSPECTUS (Subject to Completion)

Issued May 28, 1996

4,500,000 Shares

LOGO

CLASS A COMMON STOCK

OF THE 4,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 3,600,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 900,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 3,600,000 SHARES OF CLASS A COMMON STOCK BEING
OFFERED BY THE U.S. UNDERWRITERS, 2,400,000 SHARES ARE BEING SOLD BY
THE COMPANY AND 1,200,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY THE SELLING STOCKHOLDERS. THE CLASS A COMMON STOCK OF
THE COMPANY IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "STMD." ON MAY 24, 1996, THE LAST SALE PRICE OF THE
CLASS A COMMON STOCK, AS REPORTED ON THE NASDAQ NATIONAL
MARKET, WAS $39 3/4 PER SHARE OR $26 1/2 AS ADJUSTED FOR
THE COMPANY'S THREE-FOR-TWO STOCK SPLIT WHICH WILL BE
EFFECTIVE AT THE CLOSE OF BUSINESS ON MAY 28, 1996.
SEE "PRICE RANGE OF COMMON STOCK."

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THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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PRICE $ A SHARE

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(3).................. $ $ $ $
</TABLE>

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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $300,000.

(3) Certain Selling Stockholders have granted the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to
675,000 additional shares of Class A Common Stock at the price to public
less underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total price to public, underwriting discounts and
commissions and proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriters."

------------------------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Brobeck, Phleger & Harrison LLP, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1996 at the
offices of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in immediately available funds.
------------------------

MORGAN STANLEY & CO.
Incorporated

MONTGOMERY SECURITIES
SMITH BARNEY INC.
, 1996
<PAGE> 4

PROSPECTUS (Subject to Completion)

Issued May 28, 1996

4,500,000 Shares

LOGO

CLASS A COMMON STOCK

OF THE 4,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 900,000 SHARES
ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 3,600,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 900,000 SHARES OF CLASS A COMMON STOCK BEING
OFFERED BY THE INTERNATIONAL UNDERWRITERS, 600,000 SHARES ARE BEING
SOLD BY THE COMPANY AND 300,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY THE SELLING STOCKHOLDERS. THE CLASS A COMMON STOCK OF
THE COMPANY IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "STMD." ON MAY 24, 1996, THE LAST SALE PRICE OF THE
CLASS A COMMON STOCK, AS REPORTED ON THE NASDAQ NATIONAL
MARKET, WAS $39 3/4 PER SHARE OR $26 1/2 AS ADJUSTED FOR
THE COMPANY'S THREE-FOR-TWO STOCK SPLIT WHICH WILL BE
EFFECTIVE AT THE CLOSE OF BUSINESS ON MAY 28, 1996.
SEE "PRICE RANGE OF COMMON STOCK."

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THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
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PRICE $ A SHARE

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MORGAN STANLEY & CO.
International

MONTGOMERY SECURITIES
SMITH BARNEY INC.
, 1996
<PAGE> 5

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Incorporation of Certain Documents by Reference.......... 2
Prospectus Summary....................................... 3
Risk Factors............................................. 4
The Company.............................................. 12
Recent Developments...................................... 13
Use of Proceeds.......................................... 14
Dividend Policy.......................................... 14
Price Range of Common Stock.............................. 14
Capitalization........................................... 15
Selected Consolidated Financial Data..................... 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 17

<CAPTION>
PAGE
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<S> <C>
Business................................................. 25
Management............................................... 35
Principal and Selling Stockholders....................... 37
Description of Capital Stock............................. 39
Shares Eligible for Future Sale.......................... 42
Underwriters............................................. 43
Legal Matters............................................ 45
Experts.................................................. 46
Available Information.................................... 46
Index to Consolidated Financial Statements............... F-1
</TABLE>

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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Securities and Exchange Commission
(the "Commission") (File No. 0-25796) pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act") are incorporated herein by reference: (1)
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, filed pursuant to Section 13 of the Exchange Act; (2) the Company's
Definitive Proxy Statement dated March 29, 1996 in connection with the Annual
Meeting of Stockholders held April 29, 1996, filed pursuant to Section 14 of the
Exchange Act; (3) the Company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1996 filed pursuant to Section 13 of the Exchange Act; (4) the
description of the Company's Common Stock contained in its Registration
Statement on Form 8-A filed with the Commission on March 30, 1995; and (5) all
reports and other documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering.

Any statement incorporated herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in a Prospectus Supplement or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of the Registration Statement or this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents which are
incorporated herein by reference (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into such documents).
Requests for such documents should be directed to StorMedia Incorporated, 390
Reed Street, Santa Clara, California 95050-3118, or by calling (408) 327-8000.
------------------------

The StorMedia logo is a trademark of the Company. This Prospectus also
contains trade names and trademarks of companies other than the Company.
------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS."

2
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified by the more detailed information and
financial statement and notes thereto appearing elsewhere in this Prospectus.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

StorMedia Incorporated (the "Company") is a leading independent supplier of
thin film disks for hard disk drives used in portable and desktop computers. The
Company designs, develops, manufactures and sells disks in 2 1/2 inch and 3 1/2
inch sizes. Within each size, the Company provides a range of coercivities, fly
heights and disk thicknesses to meet specific customer requirements. The
Company's strategy is to combine leading disk technology with high volume
manufacturing expertise to serve the growing and technologically demanding hard
disk drive market. The Company collaborates with customers during the design
phase of new disk drives, enhancing its ability to bring new products to market
on a timely basis and increasing the likelihood that its disks will be designed
into customers' new disk drive products. The Company currently sells its disks
primarily to Seagate Technology, Inc. ("Seagate") and Maxtor Corporation
("Maxtor"), two of the leading independent hard disk drive manufacturers. The
Company was the first and is the largest independent manufacturer of thin film
disks in Singapore where, according to the Singapore Economic Development Board,
over 45% of hard disks produced worldwide were manufactured in 1995.

RECENT DEVELOPMENTS. In the first quarter of 1996, the Company's net sales
were $61.2 million, gross profit was $17.1 million and earnings per share were
$0.52 as compared to net sales of $27.9 million, gross profit of $6.1 million
and earnings per share of $0.18 in the first quarter of 1995. This represented
an increase of 119% in net sales in the first quarter of 1996 as compared to the
first quarter of 1995. During the first quarter of 1996, the Company began
shipping disks from the first sputter line in its Singapore facility dedicated
to Seagate (the "Dedicated Facility"). On May 16, 1996, the Company announced it
had begun to establish a facility in Singapore (the "Substrate Facility") to
produce substrates for its media operations. The Substrate Facility is scheduled
to begin production in the third quarter of 1996 and to be fully operational by
year end.

THE OFFERING

<TABLE>
<S> <C>
U.S. Offering.......................................... 3,600,000 Shares
International Offering................................. 900,000 Shares
Total.............................................. 4,500,000 Shares (including 3,000,000 Shares by the Company and 1,500,000
Shares by the Selling Stockholders)(1)
Common Stock to be outstanding after the offering...... 20,226,889 Shares(1)
Use of proceeds........................................ Capital expenditures, primarily to establish the Substrate Facility in
Singapore and to further expand manufacturing capacity, working capital
and other general corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol.......................... STMD
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
COMPANY
PREDECESSOR PROFORMA ------------------------------------------
----------------------------------- PREDECESSOR/ THREE MONTHS
COMPANY ENDED
YEAR ENDED DECEMBER 31, COMBINED ---------------------------
----------------------------------- YEAR ENDED YEAR ENDED MARCH 31, MARCH 29,
1991 1992 1993(2) 12/31/94(3) 12/31/95 1995 1996
----------- ------- -------- ----------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.................... $ 22,476 $56,706 $ 77,145 $81,766 $161,455 $ 27,880 $ 61,156
Gross profit (loss).......... (13,460) 1,749 12,793 16,257 43,628 6,062 17,109
Operating earnings (loss).... (22,972) (9,022) (24,657) 7,364 28,924 3,362 11,351
Net earning (loss)........... (22,962) (9,022) (24,657) 3,895 21,158 2,036 9,469
Earnings per share........... $ 0.35 $ 1.38 $ 0.18 $ 0.52
Shares used in per share
computation................ 11,175 15,338 11,175 18,309
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 29, 1996
---------------------------
ACTUAL AS ADJUSTED(4)
--------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................................................... $ 51,795 $127,020
Total assets...................................................................................... 198,679 273,904
Long-term debt, less current portion.............................................................. 32 32
Total equity...................................................................................... 143,778 219,003
</TABLE>

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(1) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriters." Based on shares outstanding as of April 30, 1996. Excludes
2,179,482 shares issuable upon exercise of options outstanding as of that
date. Includes 12,761,265 shares of Class A Common Stock and 4,362,001 shares
of Class B Common Stock. See "Description of Capital Stock -- Class B Common
Stock."

(2) Results include a restructuring charge of $24.9 million principally
reflecting Nashua Corporation's ("Nashua") decision to sell its thin film
disk division. See "The Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 4 of Notes to
Consolidated Financial Statements.

(3) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the period
from May 20, 1994 through December 31, 1994, as if the acquisition of the
thin film disk division (the "Acquisition") of Nashua had been consummated on
January 1, 1994. See "The Company" and Note 12 of Notes to Consolidated
Financial Statements.

(4) Adjusted to give effect to the sale of 3,000,000 shares of Class A Common
Stock offered by the Company hereby at an assumed public offering price of
$26 1/2 per share net of estimated underwriting discounts and commissions and
offering expenses. See "Use of Proceeds."

Unless otherwise indicated, all information contained in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised and gives
effect to the three-for-two split of the Common Stock in the form of a stock
dividend which will be paid on May 28, 1996 to stockholders of record as of May
13, 1996. See Note 14 of Notes to Consolidated Financial Statements. "Common
Stock" as used herein refers collectively and without distinction to the
Company's Class A Common Stock and Class B Common Stock. The Company operates on
a 13 week fiscal quarter basis with a December 31 fiscal year end.

3
<PAGE> 7

RISK FACTORS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors including those set forth in the following risk
factors and elsewhere in this Prospectus and other risks detailed from time to
time in the Company's reports filed with the Commission. In evaluating the
Company and its business, prospective investors should carefully consider the
following factors in addition to the other information presented in this
Prospectus before purchasing shares of Class A Common Stock offered hereby.

Dependence on a Limited Number of Customers; Consolidation Within the Disk
Drive Industry. During 1995 and the three months ended March 29, 1996, the
Company sold its disks primarily to Seagate and Maxtor. Aggregate shipments to
Seagate and Maxtor in 1993, 1994, 1995 and the first three months of 1996
represented 52%, 91%, 99% and 99%, respectively, of net sales. Given the
relatively small number of independent performance disk drive manufacturers,
this dependence on a few customers will continue in the future. The Company's
existing and several of its potential customers are expanding their ability to
produce thin film disks internally and, as a result, could reduce the level of
purchases or cease purchasing from the Company, could sell thin film disks in
competition with the Company or might not increase their level of orders as the
Company increases its capacity. Additionally, the loss of one or more of the
Company's customers or potential customers through consolidations, adverse
financial circumstances or otherwise, could have a material adverse effect on
the Company's business, results of operations and financial condition.

Specifically, Seagate currently produces a portion of its own thin film
disk requirements internally and historically has produced a majority of its
requirements. Seagate's expressed corporate strategy is to significantly
increase its internal capacity to manufacture disks through construction of a
160,000 square foot disk manufacturing facility in Singapore targeted for
completion in mid-1996. In February 1996, Seagate also completed its merger with
Conner Peripherals, Inc. ("Conner") and acquired Conner's internal disk
production capacity, which supplied substantially all of Conner's disk
requirements. In addition, prior to the merger, Conner had stated its intention
to double its internal disk capacity through a newly established facility in
Singapore. This facility has begun producing disks and is expected to be
completed in 1997. Seagate's increased internal disk manufacturing capacity as
described above may reduce Seagate's disk needs from external suppliers. If
Seagate were to reduce the level of orders from the Company as a result of the
expansion of its internal disk production, an acquisition of, or the
establishment of a strategic relationship with, another disk supplier or
otherwise, or if Seagate were to begin selling disks in competition with the
Company, the Company's business, results of operations and financial condition
would be materially adversely affected.

The Company's other principal customer, Maxtor, was recently acquired by
Hyundai Electronics Industries Co. Ltd. ("Hyundai"). While in November 1995 the
Company entered into a multi-year Supply Agreement with Maxtor (the "Maxtor
Supply Agreement") pursuant to which the Company agreed to significantly
increase the number of disks which it supplies to Maxtor beginning in the second
half of 1996. Hyundai has assumed the Maxtor Supply Agreement. Hyundai recently
announced its intention to develop and manufacture disks for use in Maxtor disk
drives, supplementing Maxtor's current suppliers base. There can be no assurance
that Hyundai will order disks in excess of its contractual obligations or that
the Company will continue to qualify new products in sufficient quantity to meet
the unit volumes agreed to in the agreement.

Consolidation within the disk drive industry has reduced the number of
potential customers to whom the Company could market its products. In addition
to the Seagate acquisition of Conner, Quantum Corporation ("Quantum") recently
announced its intention to close all of its manufacturing operations in the
United States and overseas and to transfer all manufacturing production to
Matsushita Kotobuki Electronics of Japan ("MKE"), its long-term contract
manufacturing partner. While Quantum was a customer of the Company in 1994, MKE
has never been a significant customer of the Company. Given the relatively small
number of independent hard disk drive manufacturers who require an independent
source of thin film disks, as well as the consolidations and changes which have
occurred and are continuing to occur in the industry, there can be no

4
<PAGE> 8

assurance that the Company's efforts to diversify its customer base will be
successful. If they are not successful, the Company will continue to be
dependent on a relatively limited number of customers, the loss of, or the
reduction in orders by, any one of which could have a material adverse effect on
the Company's business, results of operations and financial condition.

Uncertainties Associated with Supply Agreement with Seagate. In June 1995,
the Company entered into a Supply Agreement with Seagate (the "Seagate Supply
Agreement") pursuant to which the Company agreed to establish the Dedicated
Facility in Singapore by mid-1996 to manufacture disks for Seagate. The Company
has expended significant financial and management resources to construct and
begin operations at such facility. If the Company does not successfully complete
the facility by mid-1996, Seagate can elect to terminate the Seagate Supply
Agreement without any financial obligation to the Company. While construction of
the Dedicated Facility to date has been on schedule, there can be no assurance
that the Company will be able to complete the Dedicated Facility on a timely
basis.

Even if the Company completes the Dedicated Facility on a timely basis,
while Seagate will be required to purchase the disks manufactured at the
Dedicated Facility through March 31, 1999, each new line in the Dedicated
Facility as well as the products manufactured on that line must be qualified by
Seagate before products can be delivered to Seagate. To date, the Company has
qualified one line in the Dedicated Facility. Additionally, there is no
requirement that Seagate's purchases from the Dedicated Facility must be in
addition to the level of purchases presently being made by Seagate from the
Company's other facilities and the favorable pricing provisions of the Seagate
Supply Agreement would incentivize Seagate to shift its purchases to the
Dedicated Facility. Seagate is presently the Company's largest customer. To the
extent that Seagate shifts the manufacture of its current level of purchase
orders to the Dedicated Facility from the Company's other facilities,
particularly as it increases its own internal disk manufacturing capacity, the
Seagate Supply Agreement and Dedicated Facility may not result in increased
sales to Seagate and could, absent additional orders from other customers,
result in significant excess capacity for the Company with resulting adverse
impacts on the Company's results of operations, particularly net sales and gross
margins. See "-- Variability in Gross Margins and Operating Results."

Variability in Gross Margins and Operating Results. The Company's gross
margins have fluctuated and will continue to fluctuate quarterly and annually
based upon a variety of factors such as the level of utilization of the
Company's production capacity, changes in product mix, average selling prices,
demand or manufacturing yields, increases in production and engineering costs
associated with initial production of new programs, changes in the cost of or
limitations on availability of materials and labor shortages. During 1995 and
the first quarter of 1996, the Company reported a gross margin of 27% and 28%,
respectively. Management does not believe that these gross margins are
sustainable. The purchase price of disks under the Seagate Supply Agreement is
calculated based upon a pricing formula which results in gross margins that are
generally lower than the Company's current gross margins. Accordingly, to the
extent the Dedicated Facility becomes fully operational in the third quarter of
1996, the Company's overall gross margins are likely to decline. This adverse
impact will be exacerbated to the extent that Seagate shifts its purchase orders
to the Dedicated Facility from the Company's other facilities rather than
increase its level of purchases from the Company. Generally, new products have
higher average selling prices than more mature products. Therefore, the
Company's ability to introduce new products in a timely fashion is an important
factor in its ability to maintain gross and operating margins. Moreover,
manufacturing yields and production capacity utilization impact the Company's
gross margins. New products often initially have lower manufacturing yields and
generally are initially produced in lower quantities than more mature products.
Manufacturing yields generally improve as the product matures and production
volumes increase. Manufacturing yields also vary depending on the complexity and
uniqueness of product specifications. Because the thin film disk industry is
capital intensive and requires a high level of fixed costs, gross margins are
also extremely sensitive to changes in volume. Assuming fixed product prices,
small variations in manufacturing yields and productivity generally have a
significant impact on gross margins. Additionally, decreasing demand for the
Company's products generally results in reduced average selling prices and low
capacity utilization which, in turn, adversely affects gross margins and
operating results. The Company's business is also characterized by short term
orders and shipment schedules which typically can be modified or rescheduled
without significant penalty to the

5
<PAGE> 9

customer. Due to the absence of substantial noncancellable backlog, the Company
typically plans its production and inventory based on forecasts of customer
demands, which often fluctuate substantially. These factors have caused and will
continue to cause fluctuations in the Company's gross margins and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Backlog."

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

The effect of these cycles may be magnified by increased disk production
capacity. The Company's principal customers and many of its competitors and
potential customers are currently engaged in substantial efforts to increase
disk manufacturing capacity in light of the apparent imbalance between current
levels of demand for disks and existing industry capacity. These efforts should
result in significant additional capacity in the industry over the next six to
18 months. To the extent these efforts result in industry capacity in excess of
levels of demand, the Company could experience increased levels of competition
which could materially adversely impact the Company's business, results of
operations, and financial condition. In addition, in the event of an oversupply
of disks, customers who have developed an internal supply of disks are likely to
utilize their internal capacity prior to purchasing disks from independent
suppliers such as the Company. See "Business -- Competition."

Dependence on New Manufacturing Facilities for Future Growth. Because the
Company has been operating at close to full capacity, growth in the Company's
net sales in the near term depends on the successful expansion by the Company of
its manufacturing capacity and, in particular, the completion of, and the
successful commencement of volume production at, the Dedicated Facility.
Although the Company has improved its productivity in Santa Clara, California,
there can be no assurance that it will be able to continue to do so. The
Company's primary expansion efforts have been, and in the near-term will
continue to be, focused on expanding its Singapore production facilities,
particularly the Dedicated Facility. While disks produced on the first sputter
line in the Dedicated Facility were shipped to Seagate in the first quarter of
1996, the facility is not yet fully operational and there can be no assurance
that it will become fully operational on a timely basis. See "-- Risks of
International Sales and Manufacturing."

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

Rapid Changes in Customer and Product Mix. Due to the rapid and frequent
development of new disk drive products, it is common in the industry for the
relative mix of customers and products to change rapidly, even from quarter to
quarter. For example, in the first quarter of 1995 sales to Seagate and Maxtor
represented approximately 41% and 55% of net sales, respectively, while in the
second quarter of 1995 sales to Seagate and

6
<PAGE> 10

Maxtor represented approximately 68% and 31% of net sales, respectively. In
addition, in the fourth quarter of 1995, 3% of the Company's unit sales were of
2 1/2 inch disks, whereas in the first quarter of 1996, 15% of the Company's
unit sales were of 2 1/2 inch disks. At any one time the Company typically
supplies disks in volume for only five to ten disk drive products, with the mix
of such products shifting continually. While the Company has entered into supply
agreements with its two largest customers, there can be no assurance that
Seagate and Maxtor will place orders beyond the minimums required in such supply
agreements. In the event the Company cannot fulfill the requirements of the
Seagate Supply Agreement or the Maxtor Supply Agreement, Seagate and Maxtor,
respectively, can elect to terminate such agreements. Termination of either the
Seagate Supply Agreement or the Maxtor Supply Agreement or a significant
reduction in the level of orders by either Seagate or Maxtor, could materially
adversely affect the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations," "Business -- Customers and
Marketing" and "-- Competition."

Disk drive manufacturers demand a variety of thin film disks with differing
design, performance and cost characteristics. Thin film disk suppliers, such as
the Company, are required to work closely with such manufacturers in order to
develop products that will be used in the manufacturers' designs. Thin film disk
suppliers seek to have their products "designed in" to a particular disk drive
and to be qualified as a primary supplier for new programs. The design-in
process is ongoing and frequent and the Company must compete for participation
in each product program including those of existing customers. In the event the
Company's products do not become designed into a particular disk drive program
on a timely basis, the Company could be excluded as a supplier of disks for such
program entirely or could become a secondary source of supply for such program,
which typically results in lower sales and lower gross margins. Consistent
inability to become designed into a disk drive program would have a material
adverse effect on the Company's results of operations. See
"Business -- StorMedia Solution and Strategy."

Intense Competition. The disk drive industry and thin film disk industry
are both characterized by intense competition. The Company's primary competitors
are Komag Incorporated, HMT Technology Corporation, Akashic Memories
Corporation, Showa Denko K.K., Mitsubishi Kasei Corporation and Fuji Electric
Company Ltd. among independent disk manufacturers. With respect to disks based
on glass/ceramic substrates, the Company's principal competitor is Hoya Corp.
Most of these companies have significantly greater financial, technical and
marketing resources than the Company. IBM and several disk drive manufacturers,
including Seagate and Western Digital, currently produce thin film disks
internally for their own use. Seagate's expressed corporate strategy is to be a
vertically integrated disk drive manufacturer and to pursue sales to third
parties of its disk drive components. Hyundai recently announced its intention
to develop and manufacture disks for use in Maxtor disk drives, supplementing
Maxtor's current supplier base. These companies could increase their internal
production to supply their requirements and cease purchasing from independent
disk suppliers. Moreover, these companies could make their products available
for distribution in the market as direct competitors of the Company.
Additionally, other disk drive manufacturers, such as Quantum, may decide to
produce disks for internal use. Any of these changes would reduce the already
small number of current and potential customers and increase competition for the
remaining market. Such competition could materially adversely affect the
Company's business and results of operations. In addition, because of the
limited number of potential customers in the disk drive industry, the loss of
one or more of its customers through consolidations, adverse financial
circumstances or otherwise could have a material adverse effect on the Company's
business, results of operations and financial condition. See "-- Dependence on a
Limited Number of Customers; Consolidation Within the Disk Drive Industry" and
"Business -- Competition."

Dependence on Suppliers. The Company relies on a limited number of
suppliers and, in some cases, a sole supplier, for certain materials used in its
manufacturing processes, including glass/ceramic substrates, texturizers,
plating chemicals, tapes, slurries, certifier heads, sputter targets and certain
other materials. In addition, the Company relies on a single source to build and
supply some portions of its customized sputtering equipment. In the past, the
Company has had to provide financial assistance to this equipment vendor in
order to maintain a source for such equipment. Shortages may occur in the future
or supplies could be available only with lead times of approximately three to
six months. Changing suppliers for certain materials such as the lube

7
<PAGE> 11

or buffing tape used in the Company's products would require that the product be
requalified with each customer. Requalification could prevent early design-in
wins or could prevent or delay continued participation in disk drive programs
into which the Company's products have been qualified. In addition, long lead
times of three to six months are required to obtain many materials. Regardless
of whether these materials are available from established or new sources of
supply, these lead times could impede the Company's ability to respond quickly
to changes in demand. Any limitations on the supply of components, materials or
equipment could disrupt or limit the Company's production volume and could have
a material adverse effect on the Company's business, results of operations and
financial condition. Further, a significant increase in the price of one or more
of these components could adversely affect the Company's results of operations.
See "Business -- Manufacturing."

Shortage of Substrate Plating and Polishing Services. The Company's ability
to increase its volume in the future depends on the availability of plated and
polished substrates. The Company believes a shortage of plated and polished
substrates could occur in 1996. To address the shortage, the Company intends to
use a portion of the proceeds of this offering to complete a manufacturing
facility in Singapore to produce plated and polished substrates. In addition,
the Company has entered into a strategic relationship with one of its suppliers
of plated and polished substrates and is assisting this supplier to increase its
capacity to supply plated and polished substrates to the Company. The Company
has an option to acquire this supplier. If the Company is unable to increase its
supply of plated and polished substrates for any reason or if plated and
polished substrates are not available on favorable terms, the Company may not be
able to produce disks at its manufacturing facilities. In addition, such a
shortage could prevent the Company from accepting new orders or meeting delivery
obligations under existing contracts, including its supply agreements with
Seagate and Maxtor, which could materially and adversely affect the Company's
business, results of operations and financial condition. See
"Business -- Manufacturing."

Risks Associated With New Substrate Facility. The Company has begun
establishing a substrate manufacturing operation in Singapore. This facility
requires the expenditure of significant financial and management resources. In
addition to the usual risks of establishing a new manufacturing facility, such
as the completion of the buildings, installation of equipment, implementation of
systems, procedures and controls and the hiring and training of qualified
personnel, there are unique risks associated with this facility. First, the
Company is vertically expanding its business to include the process of grinding
aluminum blanks which occurs prior to the nickel plating process. While the
Company believes it has the expertise to establish this process, this will be
the Company's first substrate facility and there can be no assurance that it
will be completed in a timely, cost-effective manner or that it will produce
high quality and low cost aluminum substrates. Second, the facility is being
established in Singapore and will be the first facility of this type in
Singapore. Manufacturing and other problems which occur in connection with the
commencement and expansion of operations at this facility could materially
adversely affect the Company's results of operations and financial condition.
See "Business -- Manufacturing."

Future Capital Needs. The Company believes that in order to achieve its
expansion objectives, it will need significant additional financial resources
over the next several years for capital expenditures, working capital and
research and development. The Company expects to spend approximately $100
million on capital expenditures during 1996 for expansion of its facilities
including investments in the Dedicated Facility, the Substrate Facility and
other capital expenditures. The Company believes it will be able to fund these
expenditures from a combination of the proceeds of this offering, existing cash
balances and cash from operations. If the Company decides to expand its
facilities further or sooner than presently contemplated or requires capital for
other purposes, it will require additional debt or equity financing. There can
be no assurance that such additional funds will be available to the Company or,
if available, will be available on favorable terms. If the Company is unable to
obtain sufficient capital, it could be required to curtail its capital
equipment, working capital and research and development expenditures which could
adversely affect the Company's future years' operations and competitive
position. Conversely, overexpansion due to the failure to accurately predict
future demand for its products could have a material adverse effect on the
Company's future operating results and could cause fluctuations in the Company's
results of operations. See "Manage-

8
<PAGE> 12

ment's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Dependence on Personnel. The Company's future operating results depend in
significant part upon the continued contributions of its officers and personnel,
many of whom would be difficult to replace. At present the Company does not have
employment agreements with any employee. The Company maintains a $4.0 million
key person life insurance policy (with $3.0 million of proceeds payable to the
Company) on the life of its Chairman of the Board and Chief Executive Officer,
William J. Almon, but not on the lives of other key persons. The loss of any of
its officers or other key personnel could have a material adverse effect on the
business, financial condition and results of operations of the Company. In
addition, the production of thin film disks requires employees skilled in highly
technical and precise production processes with expertise specific to thin film
disk production. The Company's future operating results depend in part upon its
ability to attract, train, retain and motivate other qualified management,
technical, manufacturing, sales and support personnel for its operations both in
California and in Singapore. Competition for such personnel is intense,
especially since many of the Company's competitors are located near the
Company's facilities in Santa Clara, California. There can be no assurance that
the Company will be successful in attracting or retaining such personnel. Hiring
qualified personnel in Singapore is made more difficult because Singapore has
substantially full employment at the present time and because the Company was
the first manufacturer of thin film disks and will be the first manufacturer of
substrates with operations in Singapore. The loss of the services of existing
personnel as well as the failure to recruit, train and retain additional
personnel in a timely manner could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Employees."

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

9
<PAGE> 13

Hedgcoth Patents are not valid because of prior commercial activities by other
companies utilizing the technology covered. However, should Mr. Hedgcoth prevail
in such litigation and elect to pursue the Company, the Company would be forced
to either litigate any infringement claims, execute a license, if available, or
design around the patents, which the Company believes is possible. The failure
to obtain a key patent license or a license to key proprietary intellectual
property from a third party could cause the Company to incur substantial
liabilities and possibly to suspend the manufacture of the products utilizing
the patented or proprietary invention either of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business -- Intellectual Property and Proprietary Rights."

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

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

Risks of International Sales and Manufacturing. In 1995 and in the first
quarter of 1996, international sales (sales delivered to customers in the Far
East, including foreign subsidiaries of domestic companies) accounted for over
95% of the Company's net sales, and the Company anticipates that international
sales will continue to represent the substantial majority of its net sales.
Accordingly, the Company's operating results are subject to the risks inherent
in international sales, including compliance with or changes in the law and
regulatory requirements of foreign jurisdictions, fluctuations in exchange
rates, tariffs or other barriers, exposure to taxes in multiple jurisdictions
and transportation delays and interruptions. Although presently all of the
Company's sales are made in U.S. dollars, including sales from its Singapore
facility, a portion of the Company's expenses must be paid in Singapore dollars.
Future international sales may be denominated in foreign currencies. Gains and
losses on the conversion to U.S. dollars of accounts receivable and accounts
payable arising from international operations may contribute to fluctuations in
the Company's results of operations. Additionally, the Company's international
business may be materially adversely affected by fluctuations in currency
exchange rates, increases in duty rates, exchange or price controls or other
restrictions on foreign currencies and difficulties in obtaining export
licenses. Moreover, the Company's efforts to expand its manufacturing operations
are concentrated in Singapore. This expansion requires the Company to implement
and monitor new systems, procedures and controls and to attract, train, motivate
and manage qualified employees effectively. These risks are exacerbated by the
distance of the Singapore facilities from the Company's California headquarters,
the fact that the Company was the first thin film disk manufacturer and will be
the first substrate manufacturer with a facility in Singapore and the fact that
Singapore has substantially full employment. These risks will increase as
production increases at the Singapore facilities. Due to the anticipated
expansion of the Company's manufacturing operations in Singapore, the impact of
the foregoing factors on the Company's business, results of operations and
financial condition could be material and adverse. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Manufacturing."

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<PAGE> 14

Control by Existing Stockholders and Anti-takeover Effects. Upon the
closing of the offering and based on shares outstanding at April 30, 1996,
directors, officers and holders of 5% or more of the outstanding shares of
Common Stock of the Company will own 27.8% of the outstanding shares of Common
Stock. Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, Bylaws and Delaware law, including the provisions of Section 203
of the Delaware General Corporation Law, which restrict the ability of a major
stockholder to acquire the Company, may also discourage certain transactions
involving a change in control of the Company. In addition to the foregoing, the
ability of the board of directors to issue "blank check" preferred stock without
further stockholder approval could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Principal and Selling
Stockholders" and "Description of Capital Stock."

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

Benefits of the Offering to Selling Stockholders. Existing stockholders
will be selling 1,500,000 shares of the Common Stock offered hereby. The price
per share paid by the Selling Stockholders for their shares is a fraction of the
proposed public offering price for the Common Stock offered hereby.

Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Class A Common Stock in the public market after this offering could
adversely affect the market price of the Company's Class A Common Stock and the
Company's ability to raise additional capital at a price favorable to the
Company. See "Description of Capital Stock -- Registration Rights," "Shares
Eligible for Future Sale" and "Underwriters."

11
<PAGE> 15

THE COMPANY

StorMedia Incorporated is a leading independent supplier of thin film disks
for hard disk drives used in portable and desktop computers. The Company
designs, develops, manufactures and sells disks in 2 1/2 inch and 3 1/2 inch
sizes. Within each size, the Company provides a range of coercivities, fly
heights and disk thicknesses to meet specific customer requirements. The Company
manufactures disks based on both aluminum and glass/ceramic substrates. The
Company's strategy is to combine leading disk technology with high volume
manufacturing expertise to serve the growing and technologically demanding hard
disk drive market. StorMedia seeks to address the competitive pressures of the
disk drive industry by providing advanced products at competitive prices,
developing new technologies and improving manufacturing efficiency. The Company
collaborates with customers during the design phase of new disk drives,
enhancing its ability to bring new products to market on a timely basis and
increasing the likelihood that its disks will be designed into customers' new
disk drive products. The Company currently sells its disks primarily to Seagate
and Maxtor, two of the leading independent hard disk drive manufacturers.

The Company currently employs a proprietary, multi-chamber sputtering
system to deposit multiple layers of magnetic material on a disk. This process
facilitates the Company's ability to make adjustments to the materials sputtered
on the disk, enhancing its ability to modify the coercivity and other
characteristics of its output in order to meet customer requirements.

The Company has developed a "modular" manufacturing strategy pursuant to
which it builds smaller scale production lines that can be installed, modified
or expanded comparatively quickly and inexpensively. This "modular" strategy
allows the Company to incrementally increase capacity, to rapidly adapt
manufacturing equipment to new product technology and to rapidly achieve high
volume manufacturing capabilities. The ability to implement new technology
processes quickly is critical to achieving the Company's goal of having its
products designed into its customers' products. This ability also allows the
Company to meet its customers' increasingly rapid time-to-market demands. In
addition, drawing upon its past experience as a high volume, low cost producer,
the Company has expended significant efforts on the internal development of
equipment and manufacturing processes which the Company believes provides it
with lower capital costs.

The Company has located its manufacturing facilities in Santa Clara,
California and Singapore, in close proximity to its customers. StorMedia was the
first and is the largest independent manufacturer of thin film disks in
Singapore, where, according to the Singapore Economic Development Board, over
45% of hard disk drives produced worldwide were manufactured in 1995. In
September 1995, the Company began construction of a second Singapore facility
dedicated to the manufacture of disks for Seagate. During the first quarter of
1996, the Company began shipping disks from its first sputter line in the
Dedicated Facility. The Company expects that this facility to be fully
operational by mid-1996.

To address an anticipated shortage of substrates, the Company announced in
May 1996 that it had begun to establish a substrate manufacturing facility in
Singapore. In addition, the Company has entered into a strategic relationship
with one of its substrate suppliers and is assisting this supplier in increasing
its capacity to supply substrates to the Company.

* * *

The Company was formed in May 1994 to acquire the thin film division (the
"Predecessor") of Nashua Corporation ("Nashua"). The Company purchased
substantially all of the assets (excluding certain accounts receivable) and
assumed certain liabilities (the "Acquisition") of the Predecessor. The
Company's principal offices are located at 390 Reed Street, Santa Clara,
California 95050 and its telephone number is (408) 327-8000. As used in this
Prospectus, the terms "Company" and "StorMedia" refer to StorMedia Incorporated,
a Delaware corporation, and, when the context so requires, its wholly-owned
subsidiaries, StorMedia International Ltd., a Cayman Islands corporation, and
StorMedia Foreign Sales Corporation, a U.S. Virgin Islands corporation, as well
as the business and operations of the Predecessor.

12
<PAGE> 16

RECENT DEVELOPMENTS

In the first quarter of 1996, the Company's net sales were $61.2 million,
gross profit was $17.1 million and earnings per share were $0.52 as compared to
net sales of $27.9 million, gross profit of $6.1 million and earnings per share
of $0.18 in the first quarter of 1995. This represented an increase of 119% in
net sales in the first quarter of 1996 as compared to the first quarter of 1995.
The increase in net sales was primarily due to an increase in unit volume and
secondarily due to an increase in average selling price. The principal factors
contributing to the increase in unit volumes were the additional capacity
provided by the initial manufacturing facility in Singapore and improved
utilization of production capacity. The increase in average selling price was
principally attributed to the introduction of new products and continued high
levels of demand for thin film disks.

During the first quarter of 1996, the Company began shipping disks from its
first sputter line in the Dedicated Facility. The Company expects this facility
to be fully operational by mid-1996. On May 16, 1996, the Company announced it
had begun to establish a facility in Singapore to produce substrates for its
media operations. This facility is scheduled to begin production in the third
quarter of 1996 and to be fully operational by year end.

13
<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Class A Common Stock
offered by the Company hereby are estimated to be approximately $75.2 million
(based upon an assumed offering price of $26 1/2 per share and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company). The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. The Company expects to use the net proceeds
received from this offering for capital expenditures primarily to complete the
Substrate Facility in Singapore and to further expand manufacturing capacity. In
addition to completing the Dedicated Facility and further expanding production
capacity at its initial manufacturing facility in Singapore, the Company is
planning for the construction of a third and larger manufacturing facility in
Singapore to secure space for future capacity expansion, as required. A portion
of the net proceeds may also be used for working capital and other general
corporate purposes. In addition, as part of its expansion strategy, the Company
considers acquiring or expanding its operations into complementary businesses,
products, assets or technologies. Although currently there are no material
agreements or understandings with respect to any such activities, the Company
may use a portion of the proceeds to respond to any such opportunities as they
arise. Pending such uses, the Company intends to invest the net proceeds in
interest-bearing deposit accounts, certificates of deposit or similar short-term
investment grade financial instruments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DIVIDEND POLICY

The Company has never paid cash dividends on its Class A Common Stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the payment of cash dividends by the Company to its stockholders is
currently prohibited by the Company's bank revolving line of credit. See Note 5
of Notes to Consolidated Financial Statements. On April 29, 1996, the Company
declared a three-for-two stock split in the form of a stock dividend payable on
May 28, 1996 to stockholders of record on May 13, 1996.

PRICE RANGE OF COMMON STOCK

The Company's Class A Common Stock has been traded on the Nasdaq National
Market under the symbol "STMD" since the Company's initial public offering on
May 4, 1995. The following table sets forth for the periods indicated the high
and low closing sale prices for the Class A Common Stock after giving effect to
the Company's three-for-two stock split effective May 28, 1996.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1995
Second Quarter (from May 4, 1995).................................. $21.00 $10.67
Third Quarter...................................................... 36.00 21.33
Fourth Quarter..................................................... 33.17 22.00
Fiscal Year Ending December 31, 1996
First Quarter...................................................... $24.33 $15.00
Second Quarter (through May 21, 1996).............................. 29.33 15.92
</TABLE>

On May 24, 1996, the closing price on the Nasdaq National Market for the
Company's Class A Common Stock was $39 3/4 per share or $26 1/2 per share after
giving effect to the Company's three-for-two stock split effective May 28, 1996.
As of April 24, 1996, there were approximately 70 holders of record of Common
Stock.

14
<PAGE> 18

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
29, 1996 on (i) an actual basis, and (ii) as adjusted to give effect to the sale
of 3,000,000 shares of Class A Common Stock offered by the Company hereby at an
assumed offering price of $26 1/2 per share and after deducted estimated
underwriting discounts and commissions and offering expenses payable by the
Company and application of the net proceeds therefrom. This table should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 29, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term debt, less current portion(1)............................... $ 32 $ 32
Put options(2)........................................................ 12,363 12,363
Equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized, no
shares issued or outstanding..................................... -- --
Class A Common Stock, $0.013 par value; 50,000,000 shares
authorized; 12,761,265 shares issued and outstanding; 15,761,265
shares issued and outstanding as adjusted(3)..................... 170 210
Class B Common Stock, $0.013 par value; 5,000,000 shares authorized;
4,362,001 shares issued and outstanding and as adjusted(3)....... 58 58
Additional paid-in capital............................................ 109,907 185,092
Deferred compensation................................................. (9) (9)
Retained earnings..................................................... 33,652 33,652
-------- -----------
Total equity................................................... 143,778 219,003
-------- -----------
Total capitalization........................................ $156,173 $ 231,398
======== =========
</TABLE>

- ---------------

(1) For information concerning the Company's indebtedness outstanding at March
29, 1996, see Note 6 of Notes to Consolidated Financial Statements.

(2) As of April 29, 1996 the Company had settled all of its outstanding put
options through cash settlements at a cost of $1.7 million.

(3) Excludes (i) 2,179,482 shares of Class A Common Stock issuable upon exercise
of options outstanding as of March 29, 1996 and (ii) 1,736,413 shares of
Class A Common Stock reserved for future grant under the Company's 1994
Incentive Stock Option Plan, as amended, 1995 Director Option Plan and 1995
Employee Stock Purchase Plan, as amended, as of April 29, 1996. See Note 9
of Notes to Consolidated Financial Statements.

15
<PAGE> 19

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for the years ended December 31,
1992, 1993, 1994 and 1995 have been derived from the audited consolidated
financial statements of the Company and the Predecessor included elsewhere in
this Prospectus. The selected financial data as of and for the year ended
December 31, 1991 have been derived from the Predecessor's unaudited accounting
records. In the opinion of management, all adjustments necessary for a fair
presentation of the information are set forth therein. The pro forma results of
operations for the year ended December 31, 1994 are based upon assumptions
deemed reasonable by management and are not necessarily indicative of results of
operations that would have been attained had the transactions described in
footnote (1) herein actually occurred on the dates indicated. The selected data
presented below for the three months ended March 31, 1995 and March 29, 1996 are
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, all necessary
adjustments (consisting of acquisition related adjustments and normal recurring
adjustments) for a fair presentation of the information are set forth therein.
The results of operations for the three months ended March 29, 1996 are not
necessarily indicative of the results to be expected for the full year. The data
set forth below are qualified in their entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------
COMPANY
--------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED ----------------------
---------------------------------- DECEMBER 31, MARCH 31, MARCH 29,
1992 1993 1995 1995 1996
------- -------- ------------ --------- ---------
PRO FORMA
PREDECESSOR/
COMPANY
COMBINED
YEAR ENDED
1991 DECEMBER 31,
----------- 1994(1)
------------
(UNAUDITED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.......................... $ 22,476 $56,706 $ 77,145 $ 81,766 $161,455 $27,880 $61,156
Costs of sales..................... 35,936 54,957 64,352 65,509 117,827 21,818 44,047
-------- ------- -------- ------- -------- ------- -------
Gross profit (loss).............. (13,460) 1,749 12,793 16,257 43,628 6,062 17,109
Operating Expenses:
Research and development......... 4,010 5,022 5,417 5,010 9,269 1,692 3,708
Selling, general and
administrative................. 5,502 5,749 7,117 3,883 5,435 1,008 2,050
Restructuring charge............. -- -- 24,916 -- -- -- --
-------- ------- -------- ------- -------- ------- -------
Total operating expenses... 9,512 10,771 37,450 8,893 14,704 2,700 5,758
-------- ------- -------- ------- -------- ------- -------
Operating earnings (loss).......... (22,972) (9,022) (24,657) 7,364 28,924 3,362 11,351
Interest income (expense), net..... 10 -- -- (1,083) 76 (567) 485
-------- ------- -------- ------- -------- ------- -------
Earnings (loss) before income tax
expense.......................... (22,962) (9,022) (24,657) 6,281 29,000 2,795 11,836
Income tax expense................. -- -- -- 2,386 7,842 759 2,367
-------- ------- -------- ------- -------- ------- -------
Net earnings (loss)................ $ (22,962) $(9,022) $(24,657) $ 3,895 $ 21,158 $ 2,036 $ 9,469
======== ======= ======== ======= ======== ======= =======
Earnings per share................. $ 0.35 $ 1.38 $ 0.18 $ 0.52
======= ======== ======= =======
Shares used in per share
computation...................... 11,175 15,338 11,175 18,309
======= ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------- COMPANY
--------------------------------------------
AS OF DECEMBER 31, AS OF DECEMBER 31,
----------------------------------- ----------------------------
1992 1993 1994 1995
------- ------- ------------ ------------ AS OF
MARCH 29,
1996
1991 -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................... $ 3,552 $ 8,442 $13,147 $ 1,736 $ 74,052 $ 51,795
Total assets.............................. 34,706 43,027 22,708 46,767 181,597 198,679
Long-term debt, less current portion...... -- -- -- 12,806 111 32
Redeemable preferred stock................ -- -- -- 4,750 -- --
Put options............................... -- -- -- -- 20,605 12,363
Total equity.............................. 31,492 36,011 18,405 3,599 132,614 143,778
</TABLE>

- ---------------

(1) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the
period May 20, 1994 through December 31, 1994, as if the Acquisition had
been consummated on January 1, 1994 and reflects for the period January 1,
1994 through May 19, 1994 an increase in interest expense for debt issued in
connection with the Acquisition and upon the initial capitalization of the
Company, a decrease in depreciation and charges by Nashua, and related pro
forma income tax effects. Net sales and net earnings for the Predecessor for
the period from January 1, 1994 through May 19, 1994 were $26,168 and $384,
respectively. Net sales, net earnings, and earnings per share for the
Company for the period from May 20, 1994 through December 31, 1994 were
$55,598, $3,393, and $0.30, respectively. See Note 12 of Notes to
Consolidated Financial Statements. The pro forma statement of operations may
not be indicative of future operating results.

16
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion contains trend analysis and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those set forth in such
forward-looking statements as a result of various factors including those set
forth under "Risk Factors" and elsewhere in this Prospectus and other risks
detailed from time to time in the Company's reports filed with the Commission.

OVERVIEW

The Company's business is focused on sales of disks to hard disk drive
manufacturers. The disk drive industry is characterized by short product life
cycles, rapid technological change, significant fluctuations in product demand,
periods of oversupply, reductions in customer forecasts, price erosion and
reduced production levels. The disk industry is also capital intensive. The
Company is expending significant capital to expand its operations. Failure to
accurately predict future demand could have a material adverse effect on the
Company's future operating results and could cause fluctuations in the Company's
quarterly and annual operating results. See "Risk Factors -- Dependence on
Intensely Competitive Hard Disk Drive Industry; Risk of Excess Industry
Capacity" and "-- Future Capital Needs."

In June 1995, the Company entered into the Seagate Supply Agreement under
which the Company agreed to establish the Dedicated Facility for Seagate by
mid-1996. Seagate has committed to purchase all of the disks manufactured at the
new facility at a formula price through March 31, 1999. The Company is bringing
the new Dedicated Facility on line in stages. The first line began producing
disks for Seagate in the first quarter of 1996 and the facility is scheduled to
be completed by mid-1996. Additionally, in November 1995, the Company signed the
multi-year Maxtor Supply Agreement, pursuant to which the Company will
significantly increase the number of disks which it supplies to Maxtor beginning
in the second half of 1996. Because the Company has been operating at close to
full capacity, growth in net sales in the near term as well as fulfillment of
the Company's obligations under these contracts depends on the successful
expansion by the Company of its manufacturing capacity and the completion of,
and the successful commencement of volume production at, the Dedicated Facility.
The Company's ability to increase its volume in the future depends on the
availability of plated and polished substrates. The Company believes a shortage
of plated and polished substrates could occur in 1996. To address the shortage,
the Company intends to use a portion of the proceeds of this offering to
complete a manufacturing facility in Singapore to produce plated and polished
substrates. Commencement of production at a new facility involves numerous risks
and uncertainties, including the possibility of lower product yields, inability
of the Company to implement new systems and controls and difficulties of hiring
a sufficient number of trained employees to operate the facility. Manufacturing
and other problems which occur in connection with the commencement and expansion
of operations at its existing and new facilities could adversely affect the
Company's results of operations. See "Risk Factors -- Dependence on a Limited
Number of Customers; Consolidation Within the Disk Drive Industry,"
"-- Uncertainties Associated with Supply Agreement with Seagate," "-- Dependence
on New Manufacturing Facilities for Future Growth," "-- Dependence on Intensely
Competitive Hard Disk Drive Industry; Risk of Excess Industry Capacity,"
"-- Shortage of Substrate Plating and Polishing Services" and "-- Risks
Associated With New Substrate Facility."

The Company's gross margins have fluctuated and will continue to fluctuate
quarterly and annually based upon a variety of factors such as the level of
utilization of the Company's production capacity, changes in product mix,
average selling prices, demand or manufacturing yields, increases in production
and engineering costs associated with initial production of new programs,
changes in the cost of or limitations on availability of materials and labor
shortages. During 1995 and the first quarter of 1996, the Company reported a
gross margin of 27% and 28%, respectively. Management does not believe that
these gross margins are sustainable. The purchase price of disks under the
Seagate Supply Agreement is calculated based upon a pricing formula which
results in gross margins that are generally lower than the Company's current
gross margins. Accordingly, to the extent the Dedicated Facility becomes fully
operational in the third quarter of 1996, the Company's overall gross margins
are likely to decline. This adverse impact will be exacerbated to the extent
that Seagate shifts its

17
<PAGE> 21

purchase orders to the Dedicated Facility from the Company's other facilities
rather than increase its level of purchase from the Company's other facilities
rather than increase its level of purchase fromthe Company. Generally, new
products have higher average selling prices and, assuming similar yields, higher
gross margins than more mature products. Therefore, the Company's ability to
introduce new products in a timely fashion is an important factor in its ability
to maintain gross and operating margins. Manufacturing yields and production
capacity utilization also impact the Company's gross margins. New products often
initially have lower manufacturing yields and generally are initially produced
in lower quantities than more mature products. Manufacturing yields generally
improve as the product matures and production volumes increase. Manufacturing
yields also vary depending on the complexity and uniqueness of product
specifications. Because the thin film disk industry is capital intensive and
requires a high level of fixed costs, gross margins are also extremely sensitive
to changes in volume. Assuming fixed product prices, small variations in
manufacturing yields and productivity generally have a significant impact on
gross margins. The Company's business is also characterized by short term orders
and shipment schedules which typically can be modified or rescheduled without
significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, the Company typically plans its production and inventory
based on forecasts of customer demands, which often fluctuate substantially. See
"Risk Factors -- Variability in Gross Margins and Operating Margins," "-- Rapid
Technological Change" and "-- Future Capital Needs."

The Company's principal customers and many of its competitors and potential
customers are currently engaged in substantial efforts to increase disk
manufacturing capacity in light of the apparent imbalance between current levels
of demand for disks and existing industry capacity. These efforts should result
in significant additional capacity in the industry over the next six to 18
months. To the extent these efforts result in industry capacity in excess of
levels of demand, the Company could experience increased levels of competition
which could materially adversely impact the Company's business, results of
operations, and financial condition. In addition, in the event of an oversupply
of disks, customers who have developed an internal supply of disks are likely to
utilize their internal capacity prior to purchasing disks from independent
suppliers such as the Company. See "Business -- Competition."

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR/ COMPANY
COMPANY --------------------------------------
PREDECESSOR COMBINED THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ----------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1993 1994 1995 1995 1996
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 83.4 80.1 73.0 78.3 72.0
----- ----- ----- ----- -----
Gross profit..................... 16.6 19.9 27.0 21.7 28.0
Operating expenses:
Research and development......... 7.0 6.1 5.7 6.0 6.1
Selling, general and
administrative................ 9.2 4.8 3.4 3.6 3.3
Restructuring charge............. 32.3 -- -- -- --
----- ----- ----- ----- -----
Total operating
expenses............... 48.5 10.9 9.1 9.6 9.4
----- ----- ----- ----- -----
Operating earnings (loss).......... (31.9) 9.0 17.9 12.1 18.6
Interest, net...................... -- (1.3) 0.1 (2.1) 0.8
----- ----- ----- ----- -----
Earning (loss) before income tax
expense.......................... (31.9) 7.7 18.0 10.0 19.4
Income tax expense................. -- 2.9 4.9 2.7 3.9
----- ----- ----- ----- -----
Net earnings (loss)................ (31.9)% 4.8% 13.1% 7.3% 15.5%
===== ===== ===== ===== =====
</TABLE>

18
<PAGE> 22

THREE MONTHS ENDED MARCH 29, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1995.

Net Sales

Net sales increased 119.4% to $61.2 million for the three months ended
March 29, 1996 from $27.9 million for the three months ended March 31, 1995. The
increase in net sales was primarily due to an increase in unit volume and
secondarily due to an increase in average selling price. The principal factors
contributing to the increase in unit volumes were the additional capacity
provided by the initial manufacturing facility in Singapore and improved
utilization of production capacity. The increase in average selling price was
principally attributed to the introduction of new products and continued high
levels of demand for thin film disks.

Gross Profit

The Company's gross profit increased 182.2% to $17.1 million for the three
months ended March 29, 1996 from $6.1 million for the three months ended March
31, 1995. Gross profit as a percentage of net sales for the three months ended
March 29, 1996 was 28.0% as compared to 21.7% for the three months ended March
31, 1995. The principal factors contributing to the increase in gross profit
were increased unit volumes as a result of the additional capacity of the
Company's operations in Singapore and the improved utilization of production
capacity. The start-up expenses of the initial Singapore manufacturing facility
and of the Dedicated Facility have been expensed as incurred. Management does
not believe that the 1996 gross margin is sustainable. The purchase price of
disks under the Seagate Supply Agreement is calculated based on a pricing
formula which is expected to result in gross margins which are generally lower
than the Company's current gross margins. Accordingly, as the Dedicated Facility
becomes fully operational in the third quarter of 1996, the Company's overall
gross margins are likely to decline.

Research and Development

Research and development expenses increased 119.1% to $3.7 million for the
three months ended March 29, 1996 from $1.7 million for the three months ended
March 31, 1995, increasing as a percentage of net sales to 6.1% for the three
months ended March 29, 1996 from 6.0% for the comparable prior year three month
period. The principal factors contributing to the increase in research and
development expense were increased staffing and spending on development work
related to alternative substrates, new magnetic alloys and sputtering
techniques. The Company expects that research and development expenditures
generally will continue to increase on an absolute dollar basis.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 103.4% to $2.1
million for the three months ended March 29, 1996 from $1.0 million for the
three months ended March 31, 1995, declining as a percentage of net sales to
3.3% for the three months ended March 29, 1996 from 3.6% for the comparable
prior year three month period. The increase in selling, general and
administrative expense, on an absolute dollar basis, was due primarily to
increased staffing associated with expanded operations in Singapore. The
decrease, as a percentage of net sales, was due primarily to the higher net
sales level.

Interest, Net

Interest, net for the three months ended March 29, 1996 was $0.5 million
income as compared to $0.6 million expense for the three months ended March 31,
1995. The change was primarily attributable to decreased borrowing and increased
investments in cash and cash equivalents.

Income Tax Expense

The Company's effective tax rate (which includes federal and state income
tax expense) decreased to 20% for the three months ended March 29, 1996 from 27%
for the three months ended March 31, 1995 primarily due to increased earnings in
Singapore. The Company has been granted a seven year tax holiday in

19
<PAGE> 23

Singapore, which expires in 1999, with the possibility of a three year
extension. The benefit of the Company's income tax holiday in Singapore is the
primary factor contributing to the lower effective tax rate. The Company expects
its effective tax rate to decrease in subsequent quarters as earnings in
Singapore increase as a percentage of consolidated earnings.

1995 COMPARED TO PRO FORMA 1994

The following discussion of 1994 is on a pro forma basis, combining the
operating results of the Predecessor during the period from January 1, 1994
through May 19, 1994 with the operating results of the Company for the period
from May 20, 1994 through December 31, 1994 as if the Acquisition had occurred
on January 1, 1994, and comparing those results with those of the Company for
the year ended December 31, 1995. See Note 12 of Notes to Consolidated Financial
Statements.

Net Sales. Net sales increased 97.5% to $161.5 million in 1995 from $81.8
million in 1994. The increase in net sales was due primarily to a 76.2% increase
in unit volume. The principal factors contributing to the increase in unit
volumes were the additional capacity provided by the initial manufacturing
facility in Singapore and improved utilization of production capacity. Average
selling prices increased slightly in 1995 from 1994. The increase in average
selling prices was principally attributed to the introduction of new products.
As demand for personal computers increased during 1994, demand for hard disk
drives and disks also increased. During the last half of 1994, the Company's
U.S. facility operated at substantially full capacity. In response to this
increased demand, the Company established a manufacturing facility in Singapore
in late 1994, which became fully operational in late 1995.

Gross Profit. The Company's gross profit increased 168.4% to $43.6 million
in 1995 from $16.3 million in 1994, increasing as a percentage of net sales to
27.0% in 1995 from 19.9% in 1994. The principal factors contributing to the
increase in gross profit were increased unit volumes as a result of the
additional capacity of the Company's operations in Singapore and improved
utilization of production capacity.

Research and Development. Research and development expenses increased 85.0%
to $9.3 million in 1995 from $5.0 million in 1994, declining as a percentage of
net sales to 5.7% in 1995 from 6.1% in 1994. The increase in research and
development expense, on an absolute dollar basis, is due primarily to the
increased staffing and spending on development work related to alternative
substrates, new magnetic alloys and sputtering techniques. The decrease, as a
percentage of net sales, was due primarily to the higher net sales level.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 40.0% to $5.4 million in 1995 from $3.9
million in 1994, declining as a percentage of net sales to 3.4% in 1995 from
4.8% in 1994. The increase in selling, general and administrative expense, on an
absolute dollar basis, is due primarily to increased staffing due to the
expanded operations in Singapore and higher professional fees. The decrease, as
a percentage of net sales, was due primarily to the higher net sales level.

Interest, Net. Interest, net for 1995 was $0.1 million income compared to
$1.1 million expense in 1994. The change was primarily attributable to decreased
borrowing and increased investments in cash and cash equivalents and short-term
investments.

Income Tax Expense. The Company's effective tax rate (which includes
federal and state income tax expense) decreased to 27% in 1995 from 38% in 1994
due primarily to increased earnings in Singapore. The benefit of the Company's
income tax holiday in Singapore is the primary factor contributing to the lower
tax rate.

PRO FORMA 1994 COMPARED TO 1993

The following discussion of 1994 is on a pro forma basis, combining the
operating results of the Predecessor during the period from January 1, 1994
through May 19, 1994 with the operating results of the Company for the period
from May 20, 1994 through December 31, 1994, as if the Acquisition had occurred
on January 1, 1994, and comparing those results with the historical results of
the Predecessor for the year ended December 31, 1993. See Note 12 of Notes to
Consolidated Financial Statements.

20
<PAGE> 24

Net Sales. Net sales increased 6.0% to $81.8 million in 1994 from $77.1
million in 1993. The increase in net sales was due primarily to a 9.4% increase
in unit volume. The increased unit volume in 1994 was attributable primarily to
the introduction of new products, favorable market conditions and improved
utilization of manufacturing capacity partially offset by decreased yields.
Average selling prices fluctuated significantly throughout both years, although
on average they decreased slightly in 1994 from 1993. Although net sales
increased from 1993 to 1994, net sales during 1994 were negatively impacted by
the decision of Conner to commence manufacturing disks for its own consumption.
During 1993, sales to Conner represented 44% of net sales while during 1994, the
Company sold no products to Conner.

Gross Profit. The Company's gross profit increased 27.1% to $16.3 million
in 1994 from $12.8 million in 1993, increasing as a percentage of net sales to
19.9% in 1994 from 16.6% in 1993. Both of these increases were primarily the
result of a reduction in depreciation expense due to the lower book value of the
fixed assets of the Company compared to the Predecessor, partially offset by
lower manufacturing yields and, to a lesser extent, the start-up expenses of the
new Singapore facility, which were expensed as incurred. Lower manufacturing
yields were primarily caused by the introduction of 2 1/2 inch products with
more fly height and magnetic specifications. While capacity utilization
fluctuated during both of the years, on an annualized basis, capacity
utilization had a minimal impact on the fluctuations in gross margin.

Research and Development. Research and development expenses decreased 7.5%
to $5.0 million in 1994 from $5.4 million in 1993, declining as a percentage of
net sales to 6.1% in 1994 from 7.0% in 1993. These decreases were primarily the
result of reduced depreciation related to the lower book value of the fixed
assets used in research and development reflected on the books of the Company as
compared to the value reflected on the books of the Predecessor and the
elimination of research charges from Nashua in 1994. This decline was partially
offset by increased staffing and spending on the development of alternative
substrate disks and new magnetic alloys during 1994.

Selling, General and Administrative. Selling, general and administrative
expenses decreased 45.4% to $3.9 million in 1994 from $7.1 million in 1993,
declining as a percentage of net sales to 4.8% in 1994 from 9.2% in 1993. The
decrease was primarily due to the elimination of goodwill amortization charges
and administrative charges by Nashua to the Predecessor and legal expenses in
1993 related to the settlement of a patent claim. In addition, closing the Tokyo
sales office in June 1993 and consolidating the Singapore sales office into the
Singapore manufacturing facility in September 1994 decreased selling expenses.

Restructuring Charge. During 1993, the Predecessor incurred a one-time
restructuring charge of $24.9 million in connection with Nashua's decision to
sell the Predecessor and wrote down fixed assets by $18.7 million and goodwill
by $6.2 million to their net realizable value.

Interest, Net. Pro forma interest, net during 1994 reflected interest paid
to Nashua and its principal investor in connection with the debt incurred in the
Acquisition and the initial capitalization of the Company. Interest expense also
included interest paid to the Company's lender under its senior loan agreement
and, in the fourth quarter of 1994, charges for financing the start up of the
Singapore operation.

Income Tax Expense. Pro forma income tax expense for the results of
operations for the year ended December 31, 1994 is computed as if the
Acquisition had occurred on January 1, 1994. The Company's effective tax rate of
38% includes federal and state income tax expense. The benefit of the Company's
foreign sales corporation was offset by operating losses incurred in Singapore
which are not deductible due to the Company's tax holiday in Singapore. Income
tax expense for 1993 is computed as if the Company were a separate taxpayer
under the provisions of SFAS No. 109. No income tax benefit was recorded in 1993
because a full valuation allowance was necessary for all net deferred tax assets
existing at January 1, 1993 and generated during the year.

21
<PAGE> 25

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly financial
information for the Company's quarters ended March 31, 1995, June 30, 1995,
September 30, 1995, December 31, 1995, and March 29, 1996. The Company believes
that this information includes all necessary adjustments (including those
incurred in connection with the Acquisition and normal recurring adjustments)
necessary for a fair presentation of the quarterly information. This information
should be read in conjunction with the financial statements included elsewhere
herein. The operating results for any quarter are not necessarily indicative of
results for any future period. See Note 13 of Notes to Consolidated Financial
Statements.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 29,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $27,880 $ 34,679 $45,954 $ 52,942 $61,156
Cost of sales.............................. 21,818 25,889 32,579 37,541 44,047
------- ------- ------- ------- -------
Gross profit..................... 6,062 8,790 13,375 15,401 17,109
------- ------- ------- ------- -------
Operating expenses:
Research and development................. 1,692 2,003 2,549 3,025 3,708
Selling, general and administrative...... 1,008 1,273 1,442 1,712 2,050
------- ------- ------- ------- -------
Total operating expenses......... 2,700 3,276 3,991 4,737 5,758
------- ------- ------- ------- -------
Operating earnings......................... 3,362 5,514 9,384 10,664 11,351
Interest income (expense), net............. (567) (594) 400 837 485
------- ------- ------- ------- -------
Earnings before income tax expense......... 2,795 4,920 9,784 11,501 11,836
Income tax expense......................... 759 1,332 2,647 3,104 2,367
------- ------- ------- ------- -------
Net earnings............................... $ 2,036 $ 3,588 $ 7,137 $ 8,397 $ 9,469
======= ======= ======= ======= =======
Earnings per share......................... $ 0.18 $ 0.26 $ 0.40 $ 0.45 $ 0.52
======= ======= ======= ======= =======
Shares used in per share computation....... 11,175 13,877 17,711 18,498 18,309
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 29,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 78.3 74.7 70.9 70.9 72.0
------- ------- ------- ------- -------
Gross profit..................... 21.7 25.3 29.1 29.1 28.0
Operating expenses:
Research and development................. 6.0 5.8 5.5 5.7 6.1
Selling, general and administrative...... 3.6 3.6 3.2 3.3 3.3
------- ------- ------- ------- -------
Total operating expenses......... 9.6 9.4 8.7 9.0 9.4
------- ------- ------- ------- -------
Operating earnings......................... 12.1 15.9 20.4 20.1 18.6
Interest, net.............................. (2.1) (1.7) 0.9 1.6 0.8
------- ------- ------- ------- -------
Earnings before income tax expense......... 10.0 14.2 21.3 21.7 19.4
Income tax expense......................... 2.7 3.9 5.8 5.8 3.9
------- ------- ------- ------- -------
Net earnings............................... 7.3% 10.3% 15.5% 15.9% 15.5%
======= ======= ======= ======= =======
</TABLE>

Net sales have increased each quarter during the last five quarters from
$27.9 million in the first quarter of 1995 to $61.2 million in the first quarter
of 1996. The increase was primarily attributable to increasing demand for new
products, favorable market conditions and increased manufacturing capacity
primarily associated with ramping up of production at the Company's initial
Singapore production facility and secondarily in the first quarter of 1996 to
production from the Seagate Dedicated Facility. Increased unit volume and, to a
lesser extent, higher average selling prices, contributed to improving gross
margins, partially offset by higher manufacturing costs associated with higher
substrate costs, depreciation and start-up expenses on the Seagate Dedicated
Facility during the fourth quarter of 1995 and the first quarter of 1996 which
were

22
<PAGE> 26

expensed as incurred. Operating expenses increased in absolute dollars primarily
as a result of increased staffing and development work on alternative
substrates, new magnetic alloys and new sputtering techniques; and the new
Singapore facilities and professional fees.

Interest declined and interest income increased as debts were paid from the
Company's two stock offerings and the proceeds were invested.

Throughout 1995, income tax expense increased in absolute dollars and as a
percentage of sales as a result of higher earnings before taxes. Income tax
declined in both absolute dollars and as a percent of sales from the fourth
quarter of 1995 to the first quarter of 1996 as the Company's tax rate declined
from 27% to 20% due to the Company's expectations that a higher proportion of
earnings will be earned in Singapore where it has a seven year tax holiday.

LIQUIDITY AND CAPITAL RESOURCES

On May 4, 1995, the Company sold 4,312,500 shares of its Class A Common
Stock in connection with its initial public offering ("IPO"). The net proceeds
of this offering were $41.9 million, after deducting underwriting discounts and
commissions and expenses of the offering. The Company used a portion of the net
proceeds from the IPO to repay $20.9 million of short-term borrowing and
long-term debt. A portion of the net proceeds were also invested in facilities
and capital equipment, primarily in Singapore. See Notes 5 and 6 of Notes to
Consolidated Financial Statements.

On July 26, 1995, the Company sold 2,775,000 of its Class A Common Stock in
a public offering. The net proceeds of this offering were $76.2 million, after
deducting underwriting discounts and commissions and expenses of the offering.
The Company used a portion of the net proceeds received from this offering for
capital expenditures, primarily to establish the Dedicated Facility in
Singapore, including investment in facilities and equipment. A portion of the
net proceeds is being used for working capital, and other general corporate
purposes.

During the year ended December 31, 1995, the Company generated $20.2
million in cash from operating activities. Sources included net earnings of
$21.2 million and a $11.5 million increase in accounts payable and accrued
liabilities, offset by increases of $14.4 million in accounts receivable and
$4.2 million in inventories. The increase in accounts receivable is primarily
due to increased sales levels. The increase in inventories is primarily
attributable to the increased sales level and the establishment of the
operations in Singapore. The increase in accounts payable and accrued
liabilities is primarily attributed to the increased deposits placed for the
continuation and completion of facilities expansion, principally in Singapore
including deposits for equipment for Company's prospective substrate facility.
See Notes 5 and 6 of Notes to Consolidated Financial Statements.

The Company used $78.8 million in investing activities during the year
ended December 31, 1995. Investments consisted primarily of short-term
investments of $18.3 million and capital expenditures for facilities expansion
for its Singapore and Santa Clara, California operations of $60.5 million. In
addition, the Company acquired equipment under capital leases and short-term
borrowing totaling $3.6 million. The Company had $32.2 million of noncancellable
purchase commitments for plant and equipment outstanding at December 31, 1995.

Cash and cash equivalents and short-term investments of $37.3 million as of
March 29, 1996, decreased $18.5 million from December 31, 1995, primarily due to
changes in working capital, acquisition of plant and equipment, repurchase of
Class A Common Stock and settlement of put options.

During the three months ended March 29, 1996, the Company generated $17.0
million from operating activities. Sources included net earnings of $9.5 million
and a $12.8 million increase in accounts payable and accrued liabilities, offset
by an increase of $9.3 million in accounts receivable. The increase in accounts
receivable is primarily due to increased revenue levels. The increase in
accounts payable and accrued liabilities is primarily attributed to the
increased deposits placed on the continuation and completion of facilities
expansion, principally in Singapore, including deposits for equipment for the
Company's prospective substrate facility.

23
<PAGE> 27

The Company used $15.3 million in investing activities during the three
months ended March 29, 1996. Investing activities consisted primarily of
investments of $27.9 million for capital expenditures for facilities expansion
for its Singapore operations, offset by the sale of short-term investments of
$12.6 million. The Company had $30.7 million of noncancellable purchase
commitments for plant and equipment outstanding at March 29, 1996.

In October 1995, the Company's Board of Directors authorized a share
repurchase program. Pursuant to this program, the Company sold put options in
private placements during October 1995. The put options grant the holder the
right to require the Company to repurchase beginning in January 1996 up to
750,000 shares of its Class A Common Stock at an aggregate price of $20.6
million, of which the Company repurchased 262,500 shares at an aggregate cost of
$7.2 million and closed 37,500 put options by cash settlement at an aggregate
cost of $0.3 million during the three months ended March 29, 1996. In April
1996, the Company closed 450,000 put options by cash settlement at an aggregate
cost of $1.7 million. As of April 29, 1996, the Company had no put options
outstanding.

The Company's principal sources of liquidity at March 29, 1996 consisted of
$31.6 million in cash and cash equivalents, $5.7 million in short-term
investments, and $20.0 million of funds available under its Company's credit
facility. Capital expenditures are expected to approximate $100 million during
1996 for expansion of its facilities including investments in the Dedicated
Facility, the Substrate Facility and other capital expenditures. The Company
believes it will be able to fund these expenditures from a combination of the
proceeds of this offering, existing cash balances and cash from operations. If
the Company decides to expand its facilities further or sooner than presently
contemplated or requires capital for other purposes, it would require additional
debt or equity financing. There can be no assurance that such additional funds
will be available to the Company or, if available, will be available on
favorable terms. If the Company is unable to obtain sufficient capital, it could
be required to curtail its capital equipment, working capital and research and
development expenditures which could adversely affect the Company's future
years' operations and competitive position.

24
<PAGE> 28

BUSINESS

INDUSTRY BACKGROUND

The Disk Drive Market

Market demand for disks and disk drives is growing rapidly, generated
primarily by demand for new personal computers and, to a lesser extent,
replacement disk drives. The introduction of more powerful microprocessors and
software, combined with the development and growth of multimedia computing
applications, has stimulated demand for personal computers ("PCs") in both the
home and business markets. According to International Data Corporation ("IDC"),
worldwide shipments of PCs reached 58.2 million in 1995, up from 38.2 million in
1993, and are expected to reach 80.9 million in 1997.

Growth in PC shipments has contributed to strong growth in unit shipments
of disk drives. Additionally, the trend in the PC industry toward greater
processing power, larger databases and more sophisticated operating systems and
applications requires greater storage capacity and performance in hard disk
drives. According to IDC, worldwide shipments of hard disk drives were 50
million units in 1993 and 89 million units in 1995 and are projected to reach
135 million units in 1997. IDC estimates that the worldwide market for hard disk
drives was $21 billion in 1995. As a result, the demand for thin film disks has
increased as well, with additional growth coming from an increase in both the
number of drives per PC and the number of disks per drive. According to Trend
Focus, the number of thin film disks produced in 1993 was 134 million and 256
million in 1995 and is projected to reach 416 million in 1997. The worldwide
market for thin film disks is estimated by Trend Focus to have been $3.2 billion
in 1995.

The disk drive industry is also characterized by short product life cycles
and rapid technological change. The Company believes that at the present time
disk drive manufacturers typically market a hard disk drive product for an
average of nine to twelve months. Due to shortening product life cycles and
steepening production ramps, the Company believes leading disk drive
manufacturers, which in the past have typically used multiple suppliers, are
increasingly relying on one primary supplier for a particular disk drive
product. Storage capacity has increased from a median range of 30 to 59
megabytes in 1989 to a median range of 500 to 999 megabytes in 1995. According
to industry sources, storage capacity has been increasing at a rate of 60%
annually since 1992. While the disk drive industry's growth historically has
been very strong, the growth has also been cyclical, with periods of strong
growth followed by downturns or no growth periods.

25
<PAGE> 29

Thin Film Disk Technology

LOGO

The principal components of computer hard disk drives are disks, heads,
mechanics and electronics. Each disk drive contains from one to ten disks which
are attached to a spindle/motor assembly. This assembly rotates the disk at high
speed within a sealed enclosure. The electronics control the spinning of the
disk, the positioning of the head and the writing and reading of stored data.
The head is a small magnetic transducer which, when the disk is spinning,
"flies" just above the disk surface. Data is written when the electronic channel
sends current pulses to the head. The head converts these pulses to magnetic
fields which cause the magnetic layer within the disk and under the recording
head to become magnetized, oriented in the direction of the head's magnetic
field. Reversing the current in the head reverses the magnetized orientation in
the media. During the read-back process, as the head scans over the disk,
magnetic flux from the disk's magnetic layer is picked up by the head and
converted into voltage, which is then converted into digital data by the read
channel electronics.

The most significant challenges influencing disk technology today are the
demand for increasing storage capacity and durability requirements. The
effective implementation of thin film technology requires solutions to several
factors, including magnetics, fly height, durability and static friction.

- Magnetics. Coercivity is the fundamental measure of the magnetic strength
of the disk, as measured by oersted ("oe"). Advanced drive designs
require increasingly higher coercivities without loss of signal strength.
Currently, advanced disk drive designs require coercivities ranging from
1800 to 2200 oe.

- Fly Height. The smaller magnetic regions used when recording at higher
density result in weaker magnetic fields which can be read only if the
head flies lower over the surface of the disk. Effective fly height
depends on the smoothness and flatness of the disk surface as well as the
thickness of the protective overcoat deposited above the magnetic layer
on the disk. The Company expects that fly heights will decrease from the
current level of 1.3 microinches.

- Durability. In most hard disk drives, the head and disk come into contact
when the disk drive is turned on or off. To prevent wear on the disk, a
protective overcoat is deposited over the magnetic layer of the disk.
However, the thickness of this overcoat must be minimized because this
layer uses up a portion of the available fly height. Customer
specifications typically require 50,000 start/stop

26
<PAGE> 30

cycles for desktop PCs and a larger number in portable PCs where power saving
mechanisms automatically turn off the disk drive if the computer is not used for
a certain period of time.

- Static Friction ("Stiction"). An extremely smooth disk surface enables
lower fly heights and can enhance a disk's durability by reducing the
friction which occurs when the head contacts the disk. However, if a disk
is too smooth, stiction will cause the head to adhere to the disk surface
when the drive is turned on and off. This problem is primarily addressed
through texturizing the surface of the disk.

STORMEDIA SOLUTION AND STRATEGY

The Company's strategy is to combine leading disk technology with high
volume manufacturing expertise to serve the growing and technologically
demanding hard disk drive market. The Company seeks to address the competitive
pressures of the disk drive industry by providing advanced products at
competitive prices, developing new technologies and improving manufacturing
efficiency.

Advanced Product Technology

The Company continues to focus its development efforts on increasing
storage capacity and disk durability to meet the requirements of advanced disk
drives. Efforts to increase storage capacity include enhancing magnetics and
reducing fly heights. The manufacturing of thin film disks involves the
deposition of extremely thin, uniform layers of magnetic film onto a disk
substrate using a vacuum sputtering process. The Company's multi-chamber
sputtering system permits the deposition on disks of multiple layers of magnetic
material. This multi-layer technology reduces magnetic noise, thereby improving
signal to noise ratios. In addition, the Company has developed various magnetic
alloys of cobalt, chromium, platinum and tantalum designed to optimize the
particular magnetic recording parameters required by the Company's customers.
Over the past few years the market for 2 1/2 inch disks, the predominant disk
used in portable and notebook computers, has transitioned to glass/ceramic
substrates, which have durability characteristics superior to nickel plated
aluminum substrates. The Company has developed disks based on glass/ceramic
substrates and, in the first quarter of 1996, began shipping glass/ceramic disks
in volume.

Design-In Focus

An important component of the Company's strategy is to develop close
relationships with the major hard disk drive manufacturers and to collaborate
with them during the design phase of new disk drives. By forming close
relationships with its customers, understanding customers' product requirements
and rapidly developing the technology capable of meeting these requirements, the
Company believes it can effectively respond to customer needs and bring advanced
new products to market on a timely basis and increase the likelihood that its
disks will be designed into customers' new disk drive products.

Manufacturing Processes and Equipment

In contrast to many of its competitors, the Company has developed a
"modular" manufacturing strategy pursuant to which it builds smaller scale
production lines that can be installed, modified or expanded comparatively
quickly and inexpensively. This "modular" strategy allows the Company to
incrementally increase capacity, to rapidly adapt manufacturing equipment to new
product technology and to rapidly achieve high volume manufacturing
capabilities. The ability to implement new technology processes quickly is
critical to achieving the Company's goal of having its products designed into
its customers' products. This ability also allows the Company to meet its
customers' increasingly rapid time-to-market demands. In addition, drawing upon
its past experience as a high volume, low cost producer, the Company has
expended significant efforts on the internal development of equipment and
manufacturing processes which the Company believes provides it with lower
capital costs.

27
<PAGE> 31

Strategic Manufacturing Expansion

The Company's strategy is to locate its manufacturing and marketing
resources in close proximity to its customers and sources of supplies in
Singapore. While other manufacturers, including Seagate, have announced their
intention to establish disk manufacturing facilities in Singapore, the Company
was the first and is the largest independent manufacturer of thin film disk in
Singapore, where, according to the Singapore Economic Development Board, in
1995, over 45% of hard disk drives produced worldwide were manufactured.

PRODUCTS

The Company supplies thin film disks in 2 1/2 and 3 1/2 inch sizes which
are used in different disk drive products contained in mobile computers such as
notebooks and laptops as well as stationary computers such as desktop computers,
servers and workstations. Within each disk size, the Company offers disks with a
range of coercivities, fly heights and disk thickness to meet specified customer
requirements. During 1996, the Company launched its first laser-textured
product, which provides more controlled and consistent surface finish than
mechanical textured disks hence enabling lower fly heights. Such capabilities
are particularly useful with magnetoresistive heads. In addition, it began
volume shipment of disks based on glass/ceramic substrates. Substantially all of
the disks shipped by the Company during 1996 had coercivity of 1800 oe or above.

Today's computer applications require large amounts of data storage and the
demand for greater data storage is increasing as new applications arise. This
dynamic requires the continuous introduction of new products which address these
increasing storage requirements. The Company has structured its sales and
marketing and research and development activities to respond to these rapid
product transitions.

As part of its expansion strategy the Company also considers acquiring or
expanding its operations into complementary businesses, products, assets or
technologies, and although currently there are no material agreements or
understandings with respect to any such activities, the Company intends to
respond to any such opportunities as they arise.

CUSTOMERS AND MARKETING

The Company sells its products to independent OEM disk drive manufacturers
for incorporation into hard disk drives which are marketed under the
manufacturers' own labels. During 1994 and 1995, and the three months ended
March 29, 1996, the Company shipped thin film disks to four customers, Seagate,
Maxtor, Western Digital and Quantum. During 1995, sales to Seagate and Maxtor
represented 54% and 45% of net sales, respectively. During 1994, sales to
Seagate and Maxtor represented 66% and 25% of net sales, respectively. Given the
rapid development of new disk drive products, it is common in the industry for
the relative mix of customers to change rapidly, even from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The Company believes that close technical collaboration with its customers
during the design phase of new disk drives facilitates integration of the
Company's products into new disk drives, enhances the likelihood that the
Company will become a primary supplier of thin film disks for new disk drive
programs and improves the Company's ability to rapidly reach high volume
manufacturing. However, the design-in process is ongoing and frequent and the
Company must compete for participation in each product program, even those of
existing customers.

In June 1995, the Company entered into the Seagate Supply Agreement
pursuant to which the Company agreed to establish the Dedicated Facility in
Singapore by mid-1996. Seagate has committed to purchase all the disks
manufactured at the new facility at a formula price through March 31, 1999.
While disks from the first sputter line in the Dedicated Facility were shipped
to Seagate in the first quarter of 1996, the facility is not yet fully
operational. See "Risk Factors -- Dependence on a Limited Number of Customers;
Consolidation Within the Disk Drive Industry" and "-- Uncertainties Associated
with Supply Agreement with Seagate."

In November 1995, the Company entered into a multi-year Supply Agreement
with Maxtor pursuant to which the Company agreed to significantly increase the
number of disks which it supplies to Maxtor beginning

28
<PAGE> 32

in the second half of 1996. Maxtor was recently acquired by Hyundai and Hyundai
assumed the Maxtor Supply Agreement. See "Risk Factors -- Dependence on a
Limited Number of Customers; Consolidation Within the Disk Drive Industry."

While the Company has strengthened its relationship with Seagate and Maxtor
by entering into such supply agreements in 1995, it has also obligated
substantially all of the Company's manufacturing output to these two customers.
Nevertheless, the Company is continuing its efforts to broaden its customer
base. However, given the relatively small number of independent disk drive
manufacturers who require an independent source of thin film disks, as well as
the consolidations and changes which have occurred and are continuing to occur
in the industry, there can be no assurance that the Company's efforts to
diversify its customer base will be successful. If the Company's efforts are not
successful, it will continue to be dependent on a relatively limited number of
customers, the loss of, or the reduction in orders by, any one of which could
have a material adverse effect on the Company's business, results of operations,
particularly with respect to net sales and gross margins, and financial
condition.

In each of 1995 and the three months ended March 29, 1996, over 95% of the
Company's net sales were derived from sales to the Far East operations of its
U.S. customers. Foreign sales are subject to certain risks common to all export
activities, such as government regulation and the imposition of tariffs,
licensing or requirements or other trade barriers. See "Risk Factors -- Risks of
International Sales and Manufacturing" and Note 11 of Notes to Consolidated
Financial Statements.

RESEARCH AND DEVELOPMENT

The Company believes that its continued commitment to develop new
technologies is critical to remain competitive in the industry. The Company has
focused its research and development efforts on enhancing existing product
designs and developing next-generation products and the materials and process
technologies necessary to produce them. The Company's development group
continues to investigate improvements in the composition of the magnetic layer,
the use of new protective overcoat materials and disks based on glass/ceramic
substrates which it began shipping in volume in the first quarter of 1996. The
Company's development programs are targeted at increasing storage capacity
through lower fly heights and improved magnetics, and satisfying increased
durability and friction requirements. There can be no assurance that the Company
will be able to anticipate new technological developments, to develop products
incorporating such advances in a timely manner, or to compete effectively
against competitors' new products. The Company's operating results and financial
condition could be materially adversely affected if these efforts are not
successful or if the technologies that the Company has chosen not to develop
prove to be competitive alternatives.

During 1994, 1995 and the three months ended March 29, 1996, the Company
incurred $5.0 million, $9.3 million and $3.7 million, respectively, of research
and development expenses. The Company believes that its future success depends
on its ability to continue to enhance its existing products and to develop new
products. Accordingly, the Company intends to continue to increase its
expenditures for research and development.

MANUFACTURING

The Company's operating results are highly dependent on its ability to
produce large volumes of thin film disks at acceptable yields. The manufacturing
of thin film disks is a multistep process using processes similar to the
production of silicon wafers. The process involves the deposition of extremely
thin, uniform layers of magnetic film onto a disk substrate using a vacuum
sputtering process, similar to that used to coat semiconductor wafers. The basic
process consists of many interrelated steps, and requires an extremely clean
environment with certain steps being performed in class 10 and class 100
cleanrooms and tolerances of material structures at atomic levels. Minor
deviations in the manufacturing process, minute impurities in materials used,
particulate contamination or other problems can cause significant numbers of
disks to be rejected, thereby causing significant yield loss. Impurities in the
water supply, such as organic build-up, can cause a reduction in production
yields and, in extreme cases, result in suspension of production.

29
<PAGE> 33

The Company believes that its internally developed manufacturing processes
and equipment allow it to both develop new proprietary processes in response to
customers' increasing product requirements and to quickly implement such new
technologies into the manufacturing process. Developing the ability to design
and modify manufacturing equipment has enabled the Company to build smaller
scale production lines that can be installed, modified or expanded relatively
quickly and comparatively inexpensively. This modular strategy allows the
Company to incrementally increase capacity, to rapidly adapt manufacturing
equipment to utilize new proprietary processes and to rapidly achieve high
volume manufacturing capabilities.

The Company has also designed its own in-house data collection process
control device to rapidly provide production information on each machine and
monitor yields and the certification processes. The Company's ability to measure
quality at each phase of the manufacturing process is critical to correcting any
changes in yield or product quality.

The Manufacturing Process

The Company's manufacturing process is briefly summarized as follows:

Plating, Polishing and Texturizing Substrate. The initial input to the
production of a thin film disk is a substrate. Aluminum substrates are plated
with electro-less nickel. This coating is a non-magnetic layer critical to
corrosion resistance and serves to strengthen the disk and improve durability.
Disks are then polished to produce a mirror smooth surface. Polishing enhances
the nickel surface reducing its roughness and minimizing edge rolloff, while
maintaining the overall flatness of the disk. The texturizing process is a
method of producing a controlled roughness on the disk's surface to improve its
friction characteristics. Glass/ceramic substrates do not presently require
plating, polishing or mechanical texturizing.

Sputtering and Lube. The sputter process uses equipment and a process
similar to that used in silicon wafer fabrication, in which layers of materials
are deposited on the disk through a vacuum sputtering process. The initial
layers are various alloys including cobalt, chrome, platinum and tantalum, which
produce the magnetic qualities of the disk. The final layer is a protective
overcoat. The layers are of various thicknesses but are all very thin, and are
controlled to a molecular level. After sputtering, a microscopic layer of
lubrication is applied to the disk's surface to improve durability and reduce
surface friction.

Test and Certification. In the test and certification process each disk is
electronically screened and certified as acceptable based on the customer's
specification. A robotically controlled tester electronically writes information
onto the disk, reads it back and erases it, simulating performance in the
customer's disk drive. The disk is tested for parametrics, errors in the
read/erase process, surface defects and glide performance.

Over the past few years the market for 2 1/2 inch disks, the predominant
disk used in portable and notebook computers, has transitioned to glass/ceramic
substrates, which have durability characteristics superior to nickel plated
aluminum substrates. The Company has developed disks based on glass/ceramic
substrates and, in the first quarter of 1996, began shipping glass/ceramic disks
in volume.

Facilities

The Company currently has three manufacturing facilities and anticipates
that its third manufacturing facility will become fully operational in mid-1996.
The original production site is located in Santa Clara, California on the same
site as its research, development, marketing and administrative functions. This
facility became ISO 9001 registered for the design and manufacture of thin film
disks in February 1995. The Company's second manufacturing site is located in
Singapore and became fully operational in November 1995. This facility was ISO
9002 registered in February 1996. The third manufacturing site, the Dedicated
Facility, is also located in Singapore and is being brought on line in stages
through mid-1996. During the first quarter of 1996, the Dedicated Facility began
shipping disks to Seagate. In addition to completing the Dedicated Facility and
further expanding production capacity at its first Singapore facility, the
Company is planning the construction of a third and larger manufacturing
facility in Singapore to secure space for future capacity expansion, as
required. Singapore was selected for its proximity to customers, its highly
skilled and motivated work force and incentives provided by the Singapore
government. The Singapore government has

30
<PAGE> 34

granted the Company a seven year tax holiday, with the possibility of a three
year extension. The production of thin film disks requires workers who are
highly skilled in technical, precise production processes. However, the existing
Singapore facility has been staffed and the Dedicated Facility is being staffed
with personnel inexperienced in manufacturing thin film disks. The Company has
attempted to minimize this risk by training its new personnel both in its United
States facility and, in the case of its Dedicated Facility, hiring personnel
with related technical experience and assigning U.S. engineering personnel to
assist in the start-up of these facilities. Continued rapid expansion of the
Company's operations, especially overseas, has and will continue to strain the
capacity of current management and require continued implementation of new
financial and management systems and controls.

Sources of Supply

The Company relies on a limited number of suppliers, and in some cases a
sole supplier, for certain materials used in its manufacturing processes,
including glass/ceramic substrates, texturizers, plating chemicals, tapes,
slurries, certifier heads, certifiers, sputter targets and certain other
materials. In addition, the Company relies on a single source to build and
supply some portions of its customized sputtering equipment. These suppliers
work closely with the Company to optimize the Company's production processes.
The Company's reliance on a limited number of suppliers, or sole suppliers,
entails some risk. If such materials were to become unavailable or available in
reduced quantities, it could significantly impact the Company's production
capacity. However, the Company believes that the advantages of working closely
with these suppliers is necessary to ensure a reliable source of supply.
Changing suppliers for certain materials such as the lube or buffing tape used
in the Company's products would require that the products be requalified with
each customer. Requalification could prevent early design-in wins or could
prevent or delay continued participation in disk drive programs into which the
Company's products has been qualified. Long lead times of three to six months
are required to obtain many materials. Regardless of whether these materials are
available from established or new sources of supply, these lead times could
impede the Company's ability to respond quickly to changes in demand. Although
the Company has not experienced significant limitations on the availability of
these materials, shortages could occur in the future. Any limitations on supply
of components, materials or equipment could disrupt or limit the Company's
production volume and could have a material adverse effect on the Company's
business, operating results and financial condition. Further, a significant
increase in the price of one or more of these components could adversely affect
the Company's results of operations.

Substrates. The Company's ability to increase its volume in the future
depends on the availability of plated and polished substrates. The Company
believes a shortage of plated and polished substrates could occur in 1996. To
address the shortage, the Company intends to use a portion of the proceeds of
this offering to complete a manufacturing facility in Singapore to produce
plated and polished substrates. In addition, the Company has entered into a
strategic relationship with one of its suppliers of plated and polished
substrates and is assisting this supplier to increase its capacity to supply
plated and polished substrates to the Company. The Company has an option to
acquire this supplier. The process of manufacturing substrates entails taking a
raw aluminum blank, resurfacing and sizing it through grinding, chemical
etching, computerized lathing, and heat treatment processes to meet precise
size, flatness and strength requirements. The substrate is then plated and
polished. If the Company is unable to increase its supply of plated and polished
substrates for any reason or if plated and polished substrates are not available
on favorable terms, the Company may not be able to produce disks at its
manufacturing facilities. In addition, such a shortage could prevent the Company
from accepting new orders or meeting delivery obligations under existing
contracts, including its supply agreements with Seagate and Maxtor, which could
materially and adversely affect the Company's business, results of operations
and financial condition. See "Risk Factors -- Shortage of Substrate Plating and
Polishing Services."

COMPETITION

The disk drive industry and thin film disk industry are both characterized
by intense competition. The Company's primary competitors are Komag
Incorporated, HMT Technology Corporation, Akashic Memories

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<PAGE> 35

Corporation, Showa Denko K.K., Mitsubishi Kasei Corporation and Fuji Electric
Company Ltd. among independent disk manufacturers. With respect to disks based
on glass/ceramic substrates, the Company's principal competitor is Hoya Corp.
Most of these companies have significantly greater financial, technical and
marketing resources than the Company. IBM and several disk drive manufacturers,
including Seagate and Western Digital, currently produce thin film disks
internally for their own use. Seagate's expressed corporate strategy is to be a
vertically integrated disk drive manufacturer and to pursue sales to third
parties of its disk drive components. In July 1995, Seagate announced its
intention to double its internal capacity by the end of 1997 and that it was
building a 160,000 square foot disk manufacturing plant in Singapore.
Additionally, in February 1996, Seagate completed its merger with Conner and
acquired Conner's internal capacity to produce disks in Santa Clara, California
and its factory expansion in Singapore, currently scheduled to begin volume
production in the second half of 1996. Hyundai recently announced is intention
to develop and manufacturer disks for use in Maxtor disk drives, supplementing
Maxtor's current supplier base. These companies could increase their internal
production to supply their requirements and cease purchasing from independent
disk suppliers. Moreover, these companies could make their products available
for distribution in the market as direct competitors of the Company.
Additionally, other disk drive manufacturers, such as Quantum, may decide to
produce disks for internal use. Any of these changes would reduce the already
small number of current and potential customers and increase competition for the
remaining market. Such competition could materially adversely affect the
Company's business and results of operations. In addition, because of the
limited number of potential customers in the disk drive industry, the loss of
one or more of its customers through consolidations, adverse financial
circumstances or otherwise could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk
Factors -- Dependence on a Limited Number of Customers; Consolidation Within the
Disk Drive Industry" and "-- Intense Competition."

The Company's existing and several of its potential customers are expanding
their ability to produce thin film disks internally and, as a result, could
reduce the level of purchases or cease purchasing from the Company, could sell
thin film disks in competition with the Company or might not increase their
level of orders as the Company increases its capacity. These efforts should
result in significant additional capacity in the industry within the next one to
two years. To the extent these efforts result in industry capacity in excess of
levels of demand, the Company could experience increased levels of competition
which could materially adversely impact the Company's business, results of
operations and financial condition.

The principal competitive factors in the film disk market which the Company
addresses are rapidly advancing technology, product performance and quality,
volume manufacturing, responsiveness to customers and price. The Company
believes that it competes favorably with respect to these factors, but there can
be no assurance that it will continue to be able to do so.

BACKLOG

The Company's sales are generally made pursuant to purchase orders which
are subject to modification or rescheduling without significant penalty. The
Company's backlog of purchase orders requesting delivery in the following
quarter was approximately $38 million as of March 29, 1996. The Company
believes, however, that it is common practice for disk drive manufacturers to
place orders in excess of actual requirements when there is a shortage of supply
capacity. Because these purchase orders may be modified or rescheduled by
customers on short notice and without penalty, the Company does not believe that
its backlog as of any particular date should be considered indicative of sales
for any future period.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company regards elements of its manufacturing process, product design
and equipment as proprietary and seeks to protect its proprietary rights through
a combination of employee and third party non-disclosure agreements, internal
procedures and, increasingly, patent protection. The Company has had four U.S.
patents issued to it, has an additional application allowed and has twelve
additional patent applications (five of which are provisional applications)
pending in the United States. The Company intends to file additional U.S.
applications as appropriate for patents covering its products and manufacturing
processes.

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<PAGE> 36

There can be no assurance that patents will be issued or be allowed with respect
to any of the Company's allowed patent applications, that patents will be issued
or be allowed with respect to any of the Company's other pending applications or
that claims allowed on any existing or future patents will be sufficiently broad
to protect the Company's technology. There can also be no assurance that any
patents now or hereafter held by the Company will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company. In addition, the laws of certain foreign countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States. Although the Company continues to implement
protective measures and intends to defend its proprietary rights, there can be
no assurance that these measures will be successful. The Company believes,
however, that, because of the rapid pace of technological change in the disk and
disk drive industries, the legal protections for its products are less
significant factors in the Company's success than the innovative skills,
experience and technical competence of its employees.

The Company has from time to time been notified of, or has otherwise been
made aware of, claims that it may be infringing upon patents or other
proprietary intellectual property owned by others. If it appears necessary or
desirable, the Company may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses, no
assurance can be given that licenses under such patents or proprietary
intellectual property will be offered or that the terms of any offered licenses
will be acceptable to the Company. The Company has been contacted by IBM
concerning the Company's interest in licensing a patent. Based upon an opinion
of its patent counsel, Lahive & Cockfield, the Company believes that no license
is required because the Company does not believe that it is practicing any
invention covered by the IBM patent. There can be no assurance, however, that
IBM will not pursue its claim. The Company is also aware of pending litigation
between Virgle L. Hedgcoth and Mitsubishi Kasei Corporation regarding certain
disk preparation techniques allegedly patented by Mr. Hedgcoth (the "Hedgcoth
Patents"). These disk preparation techniques are used by most disk
manufacturers, including the Company. The Company believes that the Hedgcoth
Patents are not valid because of prior commercial activities by other companies
utilizing the technology covered. However, should Mr. Hedgcoth prevail in such
litigation and elect to pursue the Company, the Company would be forced to
either litigate any infringement claims, execute a license, if available, or
design around the patents, which the Company believes is possible. The failure
to obtain a key patent license or a license to key proprietary intellectual
property from a third party could cause the Company to incur substantial
liabilities and possibly to suspend the manufacture of the products utilizing
the patented or proprietary invention, either of which would have a material
adverse effect on the Company's business, results of operation and financial
condition. See "Risk Factors -- Intellectual Property and Proprietary Rights"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

EMPLOYEES

As of March 29, 1996, the Company had approximately 735 employees located
in California, with approximately 610 in manufacturing, 100 in research and
development and approximately 25 in administration and marketing, and
approximately 400 employees located in Singapore. The Company believes it has
good relations with its employees. None of the Company's employees is
represented by a labor union and the Company has never experienced a work
stoppage. The Company believes that attracting and motivating skilled technical
talent is vital to its success. See "Risk Factors -- Dependence on Personnel"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ENVIRONMENTAL MATTERS

The Company's operations and manufacturing processes are subject to certain
federal, state, local and foreign environmental protection laws and regulations.
These laws and regulations relate to the Company's use, handling, storage,
discharge and disposal of certain hazardous materials and wastes, the
pre-treatment and discharge of process waste waters, and the control of process
air pollutants. The Company has from time to time been notified of minor
violations concerning its waste water discharge permits, air quality regulations
and hazardous material regulations. The Company has implemented corrective
action plans to remedy these violations and has put in place procedures to
effectuate continued compliance with these laws and regulations.

33
<PAGE> 37

The Company has also initiated safety programs and training of personnel on safe
storage and handling of hazardous materials and wastes. The Company believes
that it is in compliance in all material respects with applicable environmental
regulations and does not anticipate any material capital expenditures for
environmental related matters. Environmental laws and regulations, however, may
become more stringent over time and there can be no assurances that the
Company's failure to comply with either present or future regulations would not
subject the Company to significant compliance expenses, production suspensions
or delay, restrictions on expansion at its present locations or the acquisition
of costly equipment. See "-- Legal Proceedings."

The Company uses a significant amount of water in its manufacturing
process. During periods of drought in California, water use restrictions have
been imposed on many manufacturers in the state. During past droughts, the
Company was able to obtain sufficient water supplies without significant
increasing costs. The Company is currently considering the implementation of a
recycling program which would reduce the Company's water intake from external
sources. However, if a drought reoccurs and reductions in the Company's water
usage allocation are mandated by the government, there can be no assurances that
such water use restrictions would not subject the Company to significant
expenses or a reduction in its level of production in California which could
cause a material adverse affect on the Company's business, operating results and
financial condition. See "Risk Factors -- Environmental Issues" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PROPERTIES

The Company currently leases all of its facilities, including 116,100
square feet in Santa Clara, California. These buildings house manufacturing,
research and development and the Company's headquarter offices. The primary
leases for these properties have various expiration dates from April 1996
through June 1997. Each lease has a renewal option with durations of two through
six years.

The Company leases a 52,000 square foot manufacturing facility in
Singapore, the lease for which expires in June 1997 (subject to renewal options
through June 2000). In addition the Company is currently negotiating leases on
land and buildings in Singapore for the Dedicated Facility, its new substrate
facility and the proposed 180,000 square foot disk manufacturing facility.

LEGAL PROCEEDINGS

On December 4, 1995, the Company and the Bay Area Air Quality Management
District (the "District") agreed in principle upon the terms of a stipulated
conditional abatement order to be issued by the District with respect to the
Company's luber equipment. The stipulation requires the Company to conduct a
thorough evaluation of the optimum operating parameters for the luber to assist
the District in determining the best available control technology to be applied
to reduce volatile organic emissions from such equipment. The Company believes
that neither the evaluation nor its results will materially adversely affect its
results of operations or financial condition.

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<PAGE> 38

MANAGEMENT

OFFICERS AND DIRECTORS

Officers and directors of the Company and their ages as of April 30, 1996
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------- --- -------------------------------------
<S> <C> <C>
William J. Almon..................... 63 Chairman of the Board of Directors
and Chief Executive Officer
Michael E. Oxsen..................... 45 President and Chief Operating Officer
Atef Eltoukhy........................ 45 Senior Vice President and Chief
Technical Officer
Stephen M. Abely..................... 39 Vice President, Chief Financial
Officer and Assistant Secretary
Sherman Silverman.................... 55 Vice President, Sales and Marketing
John A. Downer(1)(2)................. 38 Director
Francis J. Lunger(1)................. 50 Director
Mark S. Rossi(2)..................... 39 Director
</TABLE>

- ---------------

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

William J. Almon has served as Chairman of the Board of Directors and Chief
Executive Officer since the Company's organization in May 1994. Mr. Almon served
as the Company's President from the Company's organization in May 1994 until May
1995 when Michael E. Oxsen was appointed to succeed Mr. Almon as President of
the Company. Prior to joining the Company, Mr. Almon served as an independent
consultant from February 1993 until May 1994 and as President, Chief Operating
Officer and a director of Conner Peripherals, Inc., an independent disk drive
manufacturer, from December 1988 to February 1993. From 1958 to 1987, Mr. Almon
served in various management positions with IBM Corporation, most recently as
Vice President, Low End Storage Products. Mr. Almon holds a B.S. in Engineering
from the U.S. Military Academy, West Point. Mr. Almon also serves as a director
of Read-Rite Corporation and Sigma Designs Corporation.

Michael E. Oxsen has served as President of the Company since May 1995 and
Chief Operating Officer since May 1994, prior thereto having served as Vice
President and Chief Operating Officer since May 1994. From October 1991 to May
1994, Mr. Oxsen served in various capacities at the Predecessor, most recently
as Vice President of Manufacturing Operations and Director of Manufacturing
Engineering. From December 1977 to October 1991, Mr. Oxsen served in various
engineering and management positions with IBM Corporation, most recently as a
manager in the thin film disk operations unit. Mr. Oxsen holds a B.S. in
Chemistry from San Jose State University.

Atef Eltoukhy has served as Senior Vice President and Chief Technical
Officer since May 1995, acting as an independent consultant to the Company from
May 1994 until September 1994. In September 1994, the Board of Directors
appointed Dr. Eltoukhy Vice President of Research and Development and Chief
Technical Officer. From September 1991 until May 1994, Dr. Eltoukhy served as
Vice President and Chief Technical Officer of the Predecessor. From June 1983 to
September 1991, Dr. Eltoukhy served as Senior Vice President of Research and
Development for HMT Technology Corporation and its predecessor, Xidex
Corporation. Xidex Corporation acquired Trimedia, a company of which Dr.
Eltoukhy was a founder and chairman of the board of directors. Dr. Eltoukhy
holds a Ph.D. in Material Science from the University of Illinois, an M.S. in
Material Science from the American University in Cairo, and an M.S. in
Metallurgical Engineering from Cairo University.

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<PAGE> 39

Stephen M. Abely has served as Vice President, Chief Financial Officer and
Assistant Secretary since May 1994. From August 1983 until May 1994, Mr. Abely
served in various capacities at Nashua Corporation, an office supply and paper
company, most recently as Controller of the Predecessor. Mr. Abely holds a B.S.
in Business Administration from Northeastern University.

Sherman Silverman has served as Vice President, Sales and Marketing since
May 1994. From September 1969 until May 1994, Mr. Silverman served in various
capacities at the Predecessor, most recently as Vice President, Marketing and
Sales. Mr. Silverman holds a B.A. in Economics from Tulane University.

John A. Downer has served as a director of the Company since May 1994.
Since July 1989, Mr. Downer has served as a Vice President of Prudential Equity
Investors, Inc., the general partner of Prudential Private Equity Investors III,
L.P., a private equity fund. Mr. Downer also serves as a director of several
private companies. Mr. Downer served as a director of Auspex Systems, Inc. from
January 1992 to December 1995 and Medaphis Corporation from November 1989 to May
1996.

Francis J. Lunger has served as a director of the Company since May 1994.
Since November 1995 Mr. Lunger has served as Senior Vice President and Chief
Financial Officer of Oak Industries Inc., a component supplier to the
telecommunications industry. From March 1994 until August 1995 Mr. Lunger served
as Chief Administrative Officer, and from August 1995 until November 1995,
Acting Chief Executive Officer of Nashua Corporation. From January 1983 until
March 1994, Mr. Lunger served as a Vice President of Raychem Corporation, a
diversified materials science company, most recently serving as Vice President
and General Manager of the Interconnect Components and Medical Division.

Mark S. Rossi has served as a director of the Company since May 1994. Since
March 1984, Mr. Rossi has served as President or Vice President of Prudential
Equity Investors, Inc., the general partner of Prudential Private Equity
Investors III, L.P., a private equity fund. Mr. Rossi also serves as a director
of several private companies and until February 1996, served as a director of
Conner Peripherals, Inc.

36
<PAGE> 40

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1996 and as adjusted to
give effect to the sale of the 4,500,000 shares of Class A Common Stock offered
hereby, by (i) each person (or group of affiliated persons) known to the Company
to be the beneficial owner of more than 5% of the Company's Common Stock, (ii)
each director, (iii) each of the Company's executive officers, (iv) each Selling
Stockholder, and, (v) all of the Company's directors and officers as a group.
See "Risk Factors -- Control By Existing Stockholders and Anti-takeover Effects"
and "-- Benefits of the Offering to Selling Stockholders."

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1)
-------------------- SHARES --------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Prudential Private Equity Investors III,
L.P. ("PPEI")(2).......................... 5,737,499 33.3% 1,180,000 4,557,499 22.5%
717 Fifth Avenue
New York, NY 10022
William J. Almon(3)......................... 1,295,122 7.3 295,000 1,000,122 4.8%
c/o StorMedia Incorporated
390 Reed Street
Santa Clara, California 95050
John A. Downer (4).......................... 5,737,499 33.3 1,180,000 4,557,499 22.5
Francis J. Lunger (5)....................... 4,000 * -- 4,000 *
Mark S. Rossi (4)........................... 5,737,499 33.3 1,180,000 4,557,499 22.5
Michael E. Oxsen (6)........................ 38,331 * 12,500 25,831 *
Atef Eltoukhy (7)........................... 3,285 * -- 3,285 *
Stephen M. Abely (8)........................ 30,692 * -- 30,692 *
Sherman Silverman (9)....................... 41,391 * 12,500 28,891 *
All directors and executive officers as a
group (8 persons)(2)(4)(10)............... 7,150,320 40.4 1,500,000 5,650,320 27.3
</TABLE>

- ---------------
* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission and generally includes voting or investment
power with respect to securities. Options to purchase shares of Common
Stock which are currently exercisable or will become exercisable within 60
days of April 30, 1996, are deemed to be outstanding for purposes of
computing the percentage of the shares held by an individual but are not
outstanding for purposes of computing the percentage of any other person.
Except as indicated otherwise in the footnotes below, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.

(2) At April 30, 1996, PPEI owned 1,375,498 shares of Class A Common Stock and
4,362,001 shares of non-voting Class B Common Stock. Following this
offering PPEI will own 195,498 shares of Class A Common Stock and 4,362,001
shares of Class B Common Stock. PPEI may convert shares of Class B Common
Stock into Class A Common Stock at any time subject to certain limitations.
See "Description of Capital Stock -- Class B Common Stock."

(3) Includes 431,250 shares subject to stock options which are exercisable
within 60 days of April 3 0, 1996.

(4) Messrs. Rossi and Downer are the President and Vice President,
respectively, of the general partner of PPEI and, as such, may be deemed to
beneficially own the 5,737,499 shares owned by such partnership. Mr. Rossi
and Mr. Downer each disclaim personal beneficial ownership of any or all of
these shares except to the extent of their respective individual
proportionate ownership interests therein.

37
<PAGE> 41

(5) Includes 4,000 shares subject to stock options which are exercisable within
60 days of April 30, 1996.

(6) Includes 11,531 shares subject to stock options which are exercisable
within 60 days of April 30, 1996.

(7) Includes 3,285 shares subject to stock options which are exercisable within
60 days of April 30, 1996.

(8) Includes 18,891 shares subject to stock options which are exercisable
within 60 days of April 30, 1996.

(9) Includes 7,641 shares subject to stock options which are exercisable within
60 days of April 30, 1996.

(10) Includes an aggregate of 476,598 shares subject to stock options which are
exercisable within 60 days of April 30, 1996. See footnotes 3, 5, 6, 7, 8
and 9.

38
<PAGE> 42

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares
of Class A Common Stock, $0.013 par value, 5,000,000 shares of Class B Common
Stock, $0.013 par value and 1,000,000 shares of Preferred Stock, $0.01 par
value. On April 30, 1996, there were outstanding 12,864,888 shares of Class A
Common Stock, 4,362,001 shares of Class B Common Stock, and no shares of
Preferred Stock.

Class A Common Stock

The holders of Class A Common Stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors and paid out of funds
legally available therefor, subject to the simultaneous payment of dividends to
the holders of Class B Common Stock. See "Class B Common Stock" below. Holders
of shares of Class A Common Stock are entitled to one vote per share. Cumulative
voting of shares is not permitted. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Class A
Common Stock are entitled to receive and share ratably, along with the holders
of Class B Common Stock, in all assets remaining available for distribution to
stockholders, after payment of any preferential amounts, if any, to which the
holders of Preferred Stock may be entitled. The Class A Common Stock has no
preemptive rights and is not redeemable, assessable or entitled to the benefits
of any sinking fund. Shares of Class A Common Stock held by PPEI, Prudential
Insurance Company of America or any of their affiliates may be converted at the
option of the holder thereof, into an equal number of fully paid and
nonassessable shares of Class B Common Stock. All outstanding shares of Class A
Common Stock are, and the Class A Common Stock to be issued in this offering
will be, validly issued, fully paid and nonassessable.

Class B Common Stock

The holders of Class B Common Stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors and paid out of funds
legally available therefor. In the event that the holders of Class A Common
Stock receive a dividend payable in shares of Class A Common Stock, the holders
of Class B Common Stock are entitled to receive a proportionate number of shares
of Class B Common Stock. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Class B
Common Stock are entitled to receive and share ratably, along with the holders
of Class A Common Stock, in all assets remaining available for distribution to
stockholders, after payment of any preferential amounts to which the holders of
Preferred Stock may be entitled. The Class B Common Stock has no preemptive
rights and is not redeemable or assessable, or entitled to the benefits of any
sinking fund. All outstanding shares of Class B Common Stock are validly issued,
fully paid and nonassessable.

Holders of Class B Common Stock have no rights to vote except upon the
occurrence of a Voting Event (as defined by the Company's Amended and Restated
Certificate of Incorporation) and then vote as a single class with the Class A
Common Stock, or as expressly provided by law. Each share of Class B Common
Stock shall have a number of votes equal to the number of shares of Class A
Common Stock into which it is then convertible, which, as of the date of this
Prospectus, was one for one. The Voting Events include (i) amendments to the
Company's Amended and Restated Certificate of Incorporation; (ii) the
liquidation, dissolution, winding-up or bankruptcy of the Company or
reclassification of its capital stock; and (iii) the consolidation, merger or
other business combination of the Company or its subsidiaries, requiring
submission for approval to the stockholders of the Company or the sale of all or
substantially all of its assets. Holders of Class B Common Stock have the right
to convert any such shares to Class A Common Stock following notice of a
conversion event. PPEI and its affiliates also have the right to convert any
such shares to the extent they own less than 19.9% of the Class A Common Stock,
provided that at the time of such conversion either (i) William J. Almon, his
spouse and lineal descendants, or any trust or partnership controlled by such
persons, taken together, or (ii) at least one stockholder not affiliated with
Prudential or PPEI owns a larger percentage of Class A Common Stock than PPEI,
Prudential and its affiliates taken together. Conversion events include (i) sale
of substantially all of the Company's assets, or any acquisition of the Company
by merger or stock acquisition; (ii) the Company's suffering of two consecutive
quarterly net losses from

39
<PAGE> 43

operations; (iii) transfer of shares of Class B Common Stock to an unaffiliated
party by the holder; (iv) the resignation or replacement during any twelve-month
period of more than 30% of the Company's directors; (v) default by the Company
on any indebtedness for borrowed money as to which the Class B Common
stockholder is not a holder; (vi) if PPEI believes conversion is necessary as a
result of any tax, accounting or legal consideration; and (vii) at such time
William J. Almon, his spouse and lineal descendants, or any trust or partnership
controlled by any one of them, taken together, own less than 282,000 shares of
Class A Common Stock. PPEI intends to periodically convert a number of shares of
Class B Common Stock into Class A Common Stock such that it owns the maximum
number of shares of Class A Common Stock permissible under the Company's Amended
and Restated Certificate of Incorporation which maximum number of shares is
currently one share less than the number of shares owned by William J. Almon,
his spouse and lineal descendants or any trust or partnership controlled by such
persons, taken together.

Preferred Stock

The Board of Directors of the Company is authorized, without further
stockholder action, to authorize and issue any of the 1,000,000 undesignated
shares of Preferred Stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions and certain other
rights and preferences of such shares of the Preferred Stock. The voting and
conversion rights of any class or series of Preferred Stock issued by the
Company could adversely affect the voting power of the holders of Common Stock
and may have the effect of delaying, deferring or preventing a change in control
of the Company. The Company has no present plans to issue any of the Preferred
Stock.

REGISTRATION RIGHTS

PPEI and William J. Almon are entitled to certain rights with respect to
the registration under the Securities Act of 1933, as amended (the "Securities
Act") of their shares of Class A Common Stock held by them or issuable upon
conversion of Class B Common Stock pursuant to an agreement among the Company
and such holders. Under the terms of such agreement, if the Company proposes to
register any of its securities under the Securities Act, PPEI and Mr. Almon are
entitled to notice of such registration and are entitled to include their shares
of Class A Common Stock therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of such
shares included in such registration. In addition, PPEI may require the Company,
beginning 180 days after the date of this Prospectus to file a registration
statement under the Securities Act with respect to such shares, and the Company
is required to use its best efforts to effect such registration, subject to
certain conditions and limitations. PPEI, however, has signed a Lock-Up
Agreement with the Underwriters for this Offering pursuant to which it has
agreed not to sell any shares of Common Stock prior to 90 days after the
effective date of the offering being made pursuant to this Prospectus. Further,
the holders may require the Company to register, subject to certain conditions
and limitations, all or a portion of their shares on a Registration Statement on
Form S-3. The holders may request up to three demand registrations.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Class A Common Stock is
First Interstate Bank of California, San Francisco, California. Its telephone
number is (800) 522-6645. Effective June 3, 1996, the transfer agent and
registrar for the Company's Class A Common Stock will be the First National Bank
of Boston, Canton, Massachussetts. Its telephone number is (800) 730-6001.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is governed by the provisions of Section 203 of the DCL. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested

40
<PAGE> 44

stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of a corporation's voting stock. The
statute could have the effect of delaying, deferring or preventing a change in
control of the Company.

Additionally, the Bylaws of the Company provide that special meetings of
stockholders may only be called by two or more board members or the holders of
at least 50% of any class or series of the Company's outstanding capital stock.

In addition to the foregoing, the ability of the Board of Directors to
issue "blank check" preferred stock without further stockholder approval could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue Preferred Stock.

LISTING

The Company's Class A Common Stock is listed on the Nasdaq National Market
under the trading symbol "STMD." The Company has not applied to list its Common
Stock on any other exchange or quotation system.

41
<PAGE> 45

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Class A Common Stock of the Company in the
public market could adversely affect the prevailing market price of the Common
Stock. Upon completion of the offering, the Company will have 15,864,888 shares
of Class A Common Stock and 4,362,001 shares of Class B Common Stock
outstanding. All of the 4,500,000 shares of Class A Common Stock sold in this
offering (assuming no exercise of the Underwriters' over-allotment option) will
be freely tradeable without restriction or registration under the Securities
Act, except for any shares purchased by affiliates of the Company. All of the
Company's officers and directors as well as PPEI (who will own after the
offering 1,288,319 shares of Class A Common Stock, including options exercisable
within 60 days of April 30, 1996, and 4,362,001 shares of Class B Common Stock)
have signed lock-up agreements with the Underwriters agreeing not to sell any
shares of Common Stock owned by them or acquired on exercise of options for 90
days after the effective date of this offering (the "Effective Date") without
the prior approval of Morgan Stanley & Co. Incorporated. All of these shares of
Common Stock are restricted shares and will be eligible for immediate sale in
the public market upon expiration of such lock-up agreements, subject to volume
and certain other restrictions under Rule 144.

As of April 30, 1996, there were a total of 2,223,887 shares of Common
Stock subject to outstanding options under the 1994 Incentive Stock Option Plan
and 1995 Director Option Plan (the "Option Plans"), of which 572,887 were
exercisable. All options held by officers and directors of the Company are
subject to the 90-day lock-up agreement with the Underwriters. Shares issuable
upon exercise of all other options will, upon exercise, be eligible for
immediate sale pursuant to the Company's Registration Statement on Form S-8. The
Company has filed a Registration Statement on Form S-8 under the Securities Act
to register all of the shares of Common Stock reserved for issuance under the
1995 Employee Stock Purchase Plan and the Option Plans. Shares purchased upon
exercise of options granted pursuant to the Option Plans or purchased pursuant
to the 1995 Employee Stock Purchase Plan generally will be immediately available
for resale in the public market.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed "affiliates",
who has beneficially owned restricted shares for at least two years (as computed
under Rule 144) is entitled to sell in "broker's transactions" or to market
makers, within any three-month period, a number shares that does not exceed
greater of (i) one percent of the then outstanding shares of the Company's
Common Stock (approximately 202,300 shares immediately after this offering) or
(ii) the average weekly trading volume in the Class A Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain requirements as to manner
of sale, the filing of a notice, and the availability of public information
concerning the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the three-month period preceding a
sale and who has beneficially owned the restricted shares proposed to be sold
for at least three years (including the contiguous holding period of any prior
owner except an affiliate), would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations and certain other requirements
described above. Restricted shares and options to purchase Common Stock sold by
the Company to, among others, its employees, officers and directors pursuant to
written compensation plans or contracts and in reliance on Rule 701 under the
Securities Act, may be resold in reliance on Rule 144 by such persons who are
not affiliates subject only to the provisions of Rule 144 regarding manner of
sale, and by such persons who are affiliates without complying with the Rule's
holding period requirements.

The Company has granted to PPEI and William J. Almon registration rights
with respect to shares of Class A Common Stock owned by them, including shares
of Class A Common Stock issuable upon conversion of Class B Common Stock. Under
the terms of the registration rights agreement, if the Company proposes to
register any of its securities under the Securities Act, whether for its own
account or otherwise, such persons are entitled to notice of such registration
and are entitled to include their shares therein, subject to certain conditions
and limitations. In addition, such persons may require the Company to effect the
registration of their registrable shares for sale to the public, subject to
certain conditions and limitations. See "Description of Capital
Stock -- Registration Rights."

The Company has also agreed not sell or otherwise dispose of any shares of
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock, or enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of ownership of
the Class A Common Stock, for a period of 90 days after the Effective Date,
without the prior written consent of Morgan Stanley & Co. Incorporated, subject
to certain limited exceptions.

42
<PAGE> 46

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the U.S. Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Montgomery Securities and Smith Barney Inc.
are acting as U.S. Representatives, have severally agreed to purchase, and the
Company and Selling Stockholders have agreed to sell to them, and the
International Underwriters named below, for whom Morgan Stanley & Co.
International Limited, Montgomery Securities and Smith Barney Inc. are acting as
International Representatives (collectively with the U.S. Representatives, the
"Representatives"), have severally agreed to purchase, and the Company and the
Selling Stockholders agreed to sell to them, the respective number of shares of
the Company's Class A Common Stock set forth opposite their respective names
below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.......................................
Montgomery Securities...................................................
Smith Barney Inc........................................................

---------
Subtotal........................................................ 3,600,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited..............................
Montgomery Securities...................................................
Smith Barney Inc. ......................................................

---------
Subtotal........................................................ 900,000
---------
Total......................................................... 4,500,000
=========
</TABLE>

The U.S. Underwriters and International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Class A Common Stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the shares of Class A
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.

Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (a) it is not purchasing any shares of Class A Common Stock being
sold by it (the "U.S. Shares") for the account of anyone other than a United
States or Canadian Person (as defined below) and (b) it has not offered or sold,
and will not offer or sell, directly or indirectly, any U.S. Shares or
distribute this Prospectus outside the United States or Canada or to anyone
other than a United States or Canadian Person. Pursuant to the Agreement Between
U.S. and International Underwriters, each International Underwriter has
represented and agreed that, with certain

43
<PAGE> 47

exceptions set forth below, (a) it is not purchasing any shares of Class A
Common Stock being sold by it (the "International Shares") for the account of
any United States or Canadian Person and (b) it has not offered or sold, and
will not offer or sell, directly or indirectly, any International Shares or
distribute this Prospectus within the United States or Canada or to any United
States or Canadian Person. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in the
Agreement Between U.S. and International Underwriters. With respect to
Montgomery Securities and Smith Barney Inc., the foregoing representations or
agreements (i) made by each of them in their capacity as a U.S. Underwriter
shall apply only to shares of Class A Common Stock purchased by each of them in
their capacity as a U.S. Underwriter, (ii) made by each of them in their
capacity as an International Underwriter shall apply only to shares of Class A
Common Stock purchased by each of them in their capacity as an International
Underwriter and (iii) shall not restrict either of their abilities to distribute
the Prospectus to any person. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside of the United States and Canada of
any United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person and
"United States" means the United States of America, its territories, its
possessions and all areas subject to its jurisdiction.

Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Class A Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.

Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Class A Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of shares of
Class A Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. Underwriter has further agreed to send to
any dealer who purchases from it any shares of Class A Common Stock a notice
stating in substance that, by purchasing such shares such dealer represents and
agrees that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares in Canada or to, or for the benefit of, any
resident of Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of shares of Class A Common
Stock in Canada will be made only pursuant to an exemption from the requirement
to file a prospectus in the province or territory of Canada in which such offer
is made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Class A Common Stock a notice to the foregoing effect.

Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and will not offer or sell any shares of Class A Common Stock to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995
(the "Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares of Class A Common Stock in,
from or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the shares of Class A
Common Stock if that person is of a kind described in Article II(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on.

The Underwriters initially propose to offer part of the shares of Class A
Common Stock offered hereby directly to the public at the public offering price
set forth on the cover page hereof and part to certain dealers

44
<PAGE> 48

at a price that represents a concession not in excess of $ per share
under the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other
Underwriters or to certain other dealers.

Pursuant to the Underwriting Agreement, certain of the Selling Stockholders
have granted to the U.S. Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 675,000 additional shares of
Class A Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in the sale of the shares of Class A Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such U.S. Underwriter's
name in the preceding table bears to the total number of shares of Class A
Common Stock offered hereby to the U.S. Underwriters.

Pursuant to regulations promulgated by the Securities and Exchange
Commission, market makers in the Common Stock who are Underwriters or
prospective underwriters ("passive market makers") may, subject to certain
limitations, make bids for or purchases of shares of Class A Common Stock until
the earlier of the time of commencement (the "Commencement Date") of offers or
sales of the Class A Common Stock contemplated by this Prospectus or the time at
which a stabilizing bid for such shares is made. In general, on and after the
date two business days prior to the Commencement Date (1) such market maker's
net daily purchases of the Class A Common Stock may not exceed 30% of its
average daily trading volume in such stock for the two full consecutive calendar
months immediately preceding the filing date of the registration statement of
which this Prospectus forms a part, (2) such market maker may not effect
transactions in, or display bids for, the Class A Common Stock at a price that
exceeds the highest bid for the Class A Common Stock by persons who are not
passive market makers and (3) bids made by passive market makers must be
identified as such.

See "Shares Eligible for Future Sale" for a description of certain
arrangements pursuant to which certain stockholders and all officers and
directors have agreed that they will not, without the prior written consent of
Morgan Stanley & Co. Incorporated, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of any Common Stock of the Company, or enter into any swap or similar agreement
that transfers, in whole or in part, the economic risk of ownership of the
Common Stock for a period of 90 days after the Effective Date. The Company has
agreed in the Underwriting Agreement that it will not, without the prior written
consent of Morgan Stanley & Co. Incorporated, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of any shares of Class A Common Stock or any securities convertible
into or exercisable or exchangeable for Class A Common Stock, or enter into any
swap or similar agreement that transfers, in whole or in part, the economic risk
of ownership of the Class A Common Stock for a period of 90 days after the
Effective Date, provided that the Company may grant options or issue shares
under its stock option plans during such 90 day period.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

Prior to the offering, PPEI owned 1,375,498 shares of Class A Common Stock
and 4,362,001 shares of Class B Common Stock. PPEI has certain rights to convert
Class B Common Stock into Class A Common Stock. See "Description of Capital
Stock." Prudential Equity Investors, Inc. ("PEI"), the general partner of PPEI,
is a wholly-owned subsidiary of Prudential Insurance Company of America, which
is the controlling shareholder of Prudential Securities Incorporated, a member
of the National Association of Securities Dealers, Inc.

45
<PAGE> 49

LEGAL MATTERS

The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company by Wilson, Sonsini, Goodrich &
Rosati, P.C., Palo Alto, California. Judith M. O'Brien, a member of Wilson,
Sonsini, Goodrich & Rosati, is Secretary of the Company. As of the date of this
Prospectus, Mrs. O'Brien and certain attorneys employed by Wilson, Sonsini,
Goodrich & Rosati, P.C., own 3,750 shares of the Company's Class A Common Stock.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP San Francisco, California.

EXPERTS

The consolidated financial statements and related schedule of the Company
and its subsidiaries as of December 31, 1994 and 1995 and for the period from
May 20, 1994 through December 31, 1994 and the year ended December 31, 1995 and
the financial statements and related schedule of the Predecessor as of December
31, 1993 and for the year ended December 31, 1993 and for the period from
January 1, 1994 through May 19, 1994 have been included herein or incorporated
herein by reference and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

The statements in this Prospectus under the captions "Risk
Factors -- Intellectual Property and Proprietary Rights" and
"Business -- Intellectual Property and Proprietary Rights" have been reviewed
and approved by Lahive & Cockfield, special intellectual property counsel to the
Company, as experts in such matters, and are included herein in reliance upon
such review and approval.

AVAILABLE INFORMATION

StorMedia Incorporated (the "Company") is subject to the informational
requirements of the Exchange Act, and in accordance therewith files reports,
proxy and information statements and other information with the Commission.
Reports, proxy and information statements and other information filed by the
Company with the Commission pursuant to the Exchange Act may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material also can be obtained from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy and information statements and
other information can also be inspected at the offices of the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.

46
<PAGE> 50

STORMEDIA INCORPORATED AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Equity..................................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 51

INDEPENDENT AUDITORS' REPORT

The Board of Directors
StorMedia Incorporated:

We have audited the accompanying consolidated balance sheets of StorMedia
Incorporated (the Company) and its subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations, equity and cash
flows for the year ended December 31, 1995 and for the period from May 20, 1994
through December 31, 1994, and the accompanying statements of operations, equity
and cash flows for the period from January 1, 1994 through May 19, 1994 and for
the year ended December 31, 1993 of the thin film division (the Predecessor) of
Nashua Corporation. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

As described in Note 1 of the notes to consolidated financial statements,
the Company acquired certain assets of the Predecessor in return for notes
payable and assumption of certain liabilities on May 20, 1994 in a transaction
which was accounted for as a purchase. Accordingly, the consolidated financial
statements of the Company and its subsidiaries are presented on a different cost
basis than the financial statements of the Predecessor and therefore, are not
comparable.

In our opinion, the consolidated financial statements of the Company and
its subsidiaries referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 1995 and 1994, and the results of their operations and their cash
flows for the year ended December 31, 1995 and for the period from May 20, 1994
through December 31, 1994, in conformity with generally accepted accounting
principles.

In our opinion, the financial statements of the Predecessor referred to
above present fairly, in all material respects, the results of operations and
cash flows of the Predecessor for the period from January 1, 1994 through May
19, 1994 and for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP

Palo Alto, California
January 17, 1996

F-2
<PAGE> 52

STORMEDIA INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(INFORMATION AS OF MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
MARCH 29,
1996
DECEMBER 31, DECEMBER 31, ------------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2,355 $ 37,407 $ 31,624
Short-term investments........................................... -- 18,421 5,700
Accounts receivable, less allowances of $253, $1,555, and $1,084,
at December 31, 1994 and 1995 and March 29, 1996,
respectively.................................................. 15,709 30,114 39,365
Inventories...................................................... 5,616 9,811 10,357
Prepaid expenses................................................. 2,861 4,551 5,240
Deferred income taxes............................................ 807 2,015 2,015
-------- ------- --------
Total current assets..................................... 27,348 102,319 94,301
Plant and equipment, net........................................... 17,976 77,856 102,737
Deferred income taxes.............................................. 1,172 576 576
Deposits and other assets.......................................... 271 846 1,065
-------- ------- --------
$ 46,767 $181,597 $198,679
======== ======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK, PUT OPTIONS AND EQUITY
Current liabilities:
Trade accounts payable........................................... $ 10,584 $ 18,997 $ 32,402
Short-term borrowings............................................ 7,283 -- --
Current portion of long-term debt................................ 2,944 47 20
Accrued salaries and benefits.................................... 2,010 4,607 4,139
Income taxes payable............................................. 2,069 3,407 4,845
Other accrued expenses........................................... 722 1,209 1,100
-------- ------- --------
Total current liabilities................................ 25,612 28,267 42,506
Long-term debt, less current portion............................... 12,806 111 32
Redeemable Preferred Stock, par value $.01 per share 6,300 Series A
shares authorized, 1,890 shares issued and outstanding at
December 31, 1994, and no shares issued and outstanding at
December 31, 1995 and March 29, 1996; and 5,040 Series B shares
authorized, no shares issued and outstanding at December 31,
1994, 1995 and March 29, 1996; aggregate liquidation preference
$4,793 at December 31, 1994 and $0 at December 31, 1995 and March
29, 1996......................................................... 4,750 -- --
Put options........................................................ -- 20,605 12,363
Commitments and contingencies
Equity:
Preferred Stock, $.01 par value; 1,000 shares authorized; none
issued or outstanding......................................... -- -- --
Class A Common Stock, $.013 par value; 50,000 shares authorized;
618, 11,482, and 12,761 shares issued and outstanding at
December 31, 1994 and 1995, and March 29, 1996,
respectively.................................................. 8 153 170
Convertible Class B Common Stock; $.013 par value; 5,000 shares
authorized; 1,520, 5,738, and 4,362 shares issued and
outstanding at December 31, 1994 and 1995 and March 29, 1996,
respectively.................................................. 20 77 58
Additional paid-in capital....................................... 368 108,116 109,907
Deferred compensation............................................ -- (10) (9)
Net unrealized gain.............................................. -- 95 --
Retained earnings................................................ 3,203 24,183 33,652
-------- ------- --------
Total equity............................................. 3,599 132,614 143,778
-------- ------- --------
$ 46,767 $181,597 $198,679
======== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 53

STORMEDIA INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND
MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR COMPANY PREDECESSOR/ COMPANY
---------------------------- ------------ COMPANY ------------------------------------
PERIOD FROM PERIOD FROM COMBINED THREE MONTHS ENDED
YEAR ENDED JANUARY 1 TO MAY 20 TO YEAR ENDED YEAR ENDED ---------------------
DECEMBER 31, MAY 19, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1993 1994 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 77,145 $26,168 $ 55,598 $ 81,766 $161,455 $27,880 $61,156
Cost of sales................. 64,352 22,077 43,795 65,509 117,827 21,818 44,047
-------- ------- ------- ------- --------
Gross profit................ 12,793 4,091 11,803 16,257 43,628 6,062 17,109
Operating expenses:
Research and development.... 5,417 2,124 3,116 5,010 9,269 1,692 3,708
Selling, general and
administrative............ 7,117 1,583 2,552 3,883 5,435 1,008 2,050
Restructuring charge........ 24,916 -- -- -- --
-------- ------- ------- ------- --------
Total operating
expenses............ 37,450 3,707 5,668 8,893 14,704 2,700 5,758
-------- ------- ------- ------- --------
Operating earnings
(loss).............. (24,657) 384 6,135 7,364 28,924 3,362 11,351
Interest income (expense)
net....................... -- -- (663) (1,083) 76 (567) 485
-------- ------- ------- ------- --------
Earnings (loss) before
income tax expense........ (24,657) 384 5,472 6,281 29,000 2,795 11,836
Income tax expense............ -- -- 2,079 2,386 7,842 759 2,367
-------- ------- ------- ------- --------
Net earnings (loss)......... $(24,657) $ 384 $ 3,393 $ 3,895 $ 21,158 $ 2,036 $ 9,469
======== ======= ======= ======= ========
Earnings per share:
Primary..................... $ 0.30 $ 0.35 $ 1.38 $ 0.18 $ 0.52
======= ======= ========
Fully diluted............... $ 0.30 $ 0.35 $ 1.38 $ 0.18 $ 0.52
======= ======= ========
Number of shares used in per
share computation:
Primary..................... 11,175 11,175 15,314 11,175 18,305
======= ======= ========
Fully diluted............... 11,175 11,175 15,338 11,175 18,309
======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 54

STORMEDIA INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY
(INFORMATION FOR MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NET
--------------- PAID-IN DEFERRED DIVISIONAL UNREALIZED RETAINED TOTAL
SHARES AMOUNT CAPITAL COMPENSATION EQUITY GAIN EARNINGS EQUITY
------ ------ ---------- ------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR PERIOD
Balances at December 31, 1992..... -- $ -- $ -- $ -- $ 36,011 $ -- $ -- $ 36,011
Net advances from Nashua.......... -- -- -- -- 7,051 -- -- 7,051
Net loss.......................... -- -- -- -- (24,657) -- -- (24,657)
------ ---- -------- ---- -------- --- ------- --------
Balances at December 31, 1993..... -- -- -- -- 18,405 -- -- 18,405
Net advances from Nashua.......... -- -- -- -- 3,280 -- -- 3,280
Net earnings...................... -- -- -- -- 384 -- -- 384
------ ---- -------- ---- -------- --- ------- --------
Balances at May 19, 1994.......... -- $ -- $ -- $ -- $ 22,069 $ -- $ -- $ 22,069
====== ==== ======== ==== ======== === ======= ========
SUCCESSOR PERIOD
Net proceeds from sale of Class A
Common Stock for $115 and $281,
respectively.................... 2,138 $ 28 $ 368 $ -- $ -- $ -- $ -- $ 396
Preferred Stock dividends
(.03 per share)................. -- -- -- -- -- -- (190 ) (190)
Net earnings...................... -- -- -- -- -- -- 3,393 3,393
------ ---- -------- ---- -------- --- ------- --------
Balances at December 31, 1994..... 2,138 28 368 -- -- -- 3,203 3,599
Proceeds from exercise of
common stock options............ 908 12 275 -- -- -- -- 287
Proceeds from sale of Common
Stock........................... 7,087 95 118,051 -- -- -- -- 118,146
Conversion of Redeemable Preferred
Stock to Common Stock........... 7,087 95 4,655 -- -- -- -- 4,750
Proceeds from sale of put
options......................... -- -- 1,918 -- -- -- -- 1,918
Reclassification of put option
obligation...................... -- -- (20,605) -- -- -- -- (20,605)
Deferred compensation............. -- -- 86 (10) -- -- -- 76
Tax benefit arising from early
dispositions of stock issued
upon exercise of stock
options......................... -- -- 3,368 -- -- -- -- 3,368
Preferred Stock dividends
(.01 per share)................. -- -- -- -- -- -- (178 ) (178)
Net unrealized gain............... -- -- -- -- -- 95 -- 95
Net earnings...................... -- -- -- -- -- -- 21,158 21,158
------ ---- -------- ---- -------- --- ------- --------
Balances at December 31, 1995..... 17,220 $230 $108,116 $(10) $ -- $ 95 $24,183 $132,614
Proceeds from exercise of common
stock options (unaudited)....... 166 2 167 -- -- -- -- 169
Settlement of put options
(unaudited)..................... -- -- (311) -- -- -- -- (311)
Reclassification of put option
obligation (unaudited).......... -- -- 8,242 -- -- -- -- 8,242
Repurchase of Class A Common stock
(unaudited)..................... (263 ) (4) (7,208) -- -- -- -- (7,212)
Deferred compensation
(unaudited)..................... -- -- -- 1 -- -- -- 1
Net unrealized gain (loss)
(unaudited)..................... -- -- -- -- -- (95) -- (95)
Tax benefit arising from early
dispositions of stock issued
upon exercise of stock options
(unaudited)..................... -- -- 901 -- -- -- -- 901
Net earnings (unaudited).......... -- -- -- -- -- -- 9,469 9,469
------ ---- -------- ---- -------- --- ------- --------
Balances at March 29, 1996
(unaudited)..................... 17,123 $228 $109,907 $ (9) $ -- $ -- $33,652 $143,778
====== ==== ======== ==== ======== === ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 55

STORMEDIA INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(INFORMATION FOR MARCH 31, 1995 AND MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------- -------------------------------------------------------
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
YEAR ENDED JANUARY 1 MAY 20 TO YEAR ENDED -------------------------
DECEMBER 31, TO MAY 19, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1993 1994 1994 1995 1995 1996
------------ ----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss)........................ $(24,657) $ 384 $ 3,393 $ 21,158 $ 2,036 $ 9,469
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.............. 7,973 467 357 4,355 584 3,029
Restructuring charge....................... 24,916 -- -- -- -- --
Deferred income taxes...................... -- -- (1,979) (612) -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... (2,202) (3,650) (10,352) (14,405) (3,385) (9,251)
Inventories.............................. (446) (766) (979) (4,195) (2,016) (546)
Prepaid expenses......................... 315 481 (1,387) (1,690) (402) (689)
Other assets............................. (16) (9) (213) (575) (78) (219)
Trade accounts payable................... (2,517) 575 7,053 8,413 1,926 13,405
Accrued liabilities...................... (197) 1,210 1,224 3,084 (240) (577)
Income taxes payable..................... -- -- 2,069 4,706 (1,010) 2,339
-------- -------- ------- -------- ------- -------
Net cash provided by (used in)
operating activities................ 3,169 (1,308) (814) 20,239 (2,585) 16,960
-------- -------- ------- -------- ------- -------
INVESTING ACTIVITIES
Acquisition of plant and equipment......... (10,563) (1,972) (14,113) (60,321) (3,510) (27,909)
Interest capitalized on plant and
equipment................................ -- -- (364) (197) (197) --
Sale of short-term investments............. -- -- -- -- -- 12,626
Purchase of short-term investments......... -- -- -- (18,326) -- --
Other...................................... -- -- (447) -- -- --
-------- -------- ------- -------- ------- -------
Net cash used in investing
activities.......................... (10,563) (1,972) (14,924) (78,844) (3,707) (15,283)
-------- -------- ------- -------- ------- -------
FINANCING ACTIVITIES
Short-term borrowings (repayments)......... -- -- 7,283 (8,783) 6,654 --
Issuance of long-term obligations.......... -- -- 11,708 79 -- --
Payment of debt obligations................ -- -- (5,854) (17,812) (100) (106)
Proceeds from sale of Common Stock, net of
issuance costs........................... -- -- 396 118,433 85 169
Proceeds from sale of Preferred Stock, net
of issuance costs........................ -- -- 4,750 -- -- --
Proceeds from sale of put options.......... -- -- -- 1,918 -- (311)
Repurchase of Class A Common Stock......... -- -- -- -- -- (7,212)
Preferred Stock dividends paid............. -- -- (190) (178) (76) --
Net advances from Nashua................... 7,051 3,280 -- -- -- --
-------- -------- ------- -------- ------- -------
Net cash provided by financing
activities.......................... 7,051 3,280 18,093 93,657 6,563 (7,460)
-------- -------- ------- -------- ------- -------
Increase (decrease) in cash and cash
equivalents.............................. (343) -- 2,355 35,052 271 (5,783)
Cash and cash equivalents at beginning of
period................................... 343 -- -- 2,355 2,355 37,407
-------- -------- ------- -------- ------- -------
Cash and cash equivalents at end of
period................................... $ -- $ -- $ 2,355 $ 37,407 $ 2,626 $ 31,624
======== ======== ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest..................... -- -- $ 727 $ 1,827 $ 734 --
======= ======== =======
Cash paid for income taxes................. -- -- $ 1,988 $ 3,748 $ 1,770 $ --
======= ======== =======
Non-cash financing and investing
activities:
Obligations to Nashua incurred for purchase
of thin film
division................................. -- -- $ 6,950 -- -- --
=======
Equipment acquired under capital lease
obligations.............................. -- -- $ 2,946 $ 2,141 $ 1,592 --
======= ======== =======
Equipment acquired under short-term
borrowings............................... -- -- -- $ 1,500 $ 1,500 --
======== =======
Conversion of Preferred Stock to Common
Stock.................................... -- -- -- $ 4,750 -- --
========
Tax benefit arising from early dispositions
of stock issued upon exercise of stock
options.................................. -- -- -- $ 3,368 -- $ 901
======== =======
Net unrealized gain on investments......... -- -- -- $ 95 -- --
========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 56

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 -- BASIS OF PRESENTATION

On May 4, 1994, StorMedia Incorporated (the "Company") was incorporated to
acquire the thin film division (the "Predecessor") of Nashua Corporation
("Nashua"). The Company develops, manufactures and sells sputtered thin film
disks to independent hard disk drive manufacturers. On May 20, 1994, the Company
purchased substantially all of the assets (excluding certain accounts
receivable) and assumed certain liabilities (the "Acquisition") of the
Predecessor. The Company's operations prior to May 20, 1994 were immaterial.

At the time of the Acquisition, the Company delivered Subordinated
Promissory Notes for $4,950 (See Note 6) to Nashua, assumed $5,486 of current
liabilities, and agreed to pay Nashua a contingent amount ("Earn Out Payment")
based upon the 1994 combined operating profits of the Predecessor and Company.
In addition, Nashua retained $10,000 of selected accounts receivable which were
guaranteed by the Company and which receivables have since been fully paid by
the obligors. The Earn Out Payment of $2,000 plus accrued interest was paid to
Nashua in 1995.

The Acquisition was accounted for as a purchase, and, accordingly, the
purchase price was allocated based upon fair values of assets acquired and
liabilities assumed as of May 20, 1994. The replacement cost of the acquired
plant and equipment was reduced by the excess of the fair value of the net
assets acquired over the purchase price.

A summary of the assets acquired and liabilities incurred by the Company is
as follows:

<TABLE>
<S> <C>
Assets acquired:
Accounts receivable...................................................... $15,357
Inventories.............................................................. 4,637
Prepaid expenses and other current assets................................ 1,532
Plant and equipment...................................................... 910
-------
22,436
Less receivables retained by Nashua...................................... 10,000
-------
$12,436
=======
Liabilities incurred:
Notes payable to Nashua at acquisition................................... $ 4,950
Earn out payment......................................................... 2,000
-------
6,950
Accounts payable......................................................... 3,531
Accrued liabilities...................................................... 1,955
-------
$12,436
=======
</TABLE>

The accompanying financial statements include the accounts of the
Predecessor for the period from January 1, 1994 through May 19, 1994 and for the
year ended December 31, 1993. The accompanying consolidated financial statements
for the year ended December 31, 1995 and for the period from May 20, 1994
through December 31, 1994 include the accounts of the Company and its wholly
owned subsidiaries, StorMedia International Ltd. and StorMedia Foreign Sales
Corporation. All significant intercompany balances and transactions have been
eliminated in consolidation.

The 1994 pro forma combined results of operations include the operations of
the Predecessor from the beginning of the period through May 19, 1994 and the
results of the Company for the remainder of the period,

F-7
<PAGE> 57

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

adjusted on a pro forma basis for changes in interest expense, depreciation and
corporate charges. See Note 12.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Cash and cash equivalents: The Company considers all highly liquid debt
instruments with maturities of less than three months at date of purchase to be
cash equivalents for purposes of the statements of cash flows. Cash equivalents
are stated at cost which approximates market.

Short-term investments: As of January 1, 1995, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, the
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date. At
March 29, 1996, all short-term investments are designated as
"available-for-sale." Interest on the investments are included in interest
income. The adoption of SFAS No. 115 did not have a material impact on the
Company's consolidated financial statements.

Concentration of credit risk: A majority of the Company's trade receivables
are derived principally from export sales to the Far East operations of large
U.S. companies within the disk drive industry. The Company performs ongoing
credit evaluations of its customers' financial condition. See Note 11.

Inventories: Inventories are stated at the lower of cost or market (net
realizable value). Cost is determined using the first-in, first-out method.
Provisions to reduce the cost of obsolete, slow moving and non-usable inventory
to net realizable value are charged to operations.

Prepaid expenses: The Company includes in prepaid expenses the cost of
consumable spare parts and the recoverable amount of sputtering materials which
are used in production. Spare parts and sputtering materials are charged to
manufacturing costs when used over the Company's normal operating cycle, which
is less than twelve months.

Plant and equipment: Plant and equipment is carried at cost of acquisition
which includes capitalized interest on construction in progress. Depreciation is
computed on a straight-line basis generally over five years, representing the
shorter of the estimated useful lives of the equipment or the lease term in the
case of assets under capital leases. Leasehold improvements are depreciated over
the shorter of the estimated useful lives of the assets, or the term of the
leased property, computed on a straight-line basis.

Revenue recognition: The Company records sales when shipped and provides an
allowance for estimated costs associated with returns of nonconforming product.

Foreign currency accounting: The functional currency of the Singapore
branch of StorMedia International Ltd. is the U.S. dollar. Exchange gains and
losses which result from the remeasurement of foreign currency financial
statements into U.S. dollars are included in results of operations. Net
translation gains/losses were immaterial through March 29, 1996.

Foreign exchange gains and losses: The Company enters into foreign forward
exchange contracts for firm commitments on equipment and
construction-in-progress to hedge foreign exchange risk. Any gains or losses on
these instruments are recognized in accordance with SFAS No. 52, "Foreign
Currency Translations" and SFAS No. 80, "Accounting for Futures Contracts." The
Company does not enter into derivative financial

F-8
<PAGE> 58

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

instruments for trading purposes. As of March 29, 1996, there were no foreign
forward exchange contracts outstanding.

Income taxes: Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax basis and the
financial reporting basis of assets and liabilities.

The Predecessor was a division of Nashua, and its taxable income or loss
was included in the tax return of Nashua. SFAS No. 109 was applied to determine
the income tax expense or benefit to be recorded in the accompanying financial
statements by the Predecessor as though it were a separate taxpayer.

Earnings per share: Earnings per share is calculated by dividing net
earnings by the weighted average number of shares of Common Stock and Common
Stock Equivalents outstanding including, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, dilutive common equivalent shares
from stock options granted at an exercise price less than the IPO price (using
the treasury stock method) and common shares from the conversion of the Series A
Preferred Stock and Series B Preferred Stock as if they were outstanding
throughout the periods presented prior to the IPO (using the if-converted
method).

Use of estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

NOTE 3 -- BALANCE SHEET COMPONENTS

Short-term investments: The amortized cost and amortized fair value of
securities available-for-sale as of December 31, 1995, are as follows:

<TABLE>
<CAPTION>
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds.......................... $ 5,113 $ -- $ 17 $ 5,096
U.S. government obligations.............. 4,964 -- -- 4,964
Commercial paper......................... 21,643 96 -- 21,739
Money market instruments................. 341 -- -- 341
Municipal bonds.......................... 7,232 -- -- 7,232
Auction rate preferred................... 16,440 16 -- 16,456
--------- ---------- --- ---------
Total.......................... $55,733 $112 $ 17 $55,828
======= ======== ======== =======
Included in cash and cash equivalents.... $37,407
Included in short-term investments....... 18,421
---------
Total.................................... $55,828
=======
</TABLE>

F-9
<PAGE> 59

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The amortized cost and amortized fair value of securities
available-for-sale as of March 29, 1996, are as follows:

<TABLE>
<CAPTION>
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds.......................... $ 6,091 $ -- $ -- $ 6,091
U.S. government obligations.............. 4,968 -- -- 4,968
Commercial paper......................... 1,385 -- 95 1,290
Money market instruments................. 13,170 -- -- 13,170
Municipal bonds.......................... 6,105 -- -- 6,105
Auction rate preferred................... 5,700 -- -- 5,700
--------- ---------- ---------- ---------
Total.......................... $37,419 $ -- $ 95 $37,324
======= ======== ======== =======
Included in cash and cash equivalents.... $31,624
Included in short-term investments....... 5,700
---------
Total.................................... $37,324
=======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 29,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Inventories:
Raw materials................................. $ 2,741 $ 4,167 $ 5,155
Work-in-process............................... 1,808 4,368 4,869
Finished goods................................ 1,067 1,276 333
------- ------- --------
Total inventories..................... $ 5,616 $ 9,811 $ 10,357
======= ======= ========
Plant and equipment:
Leasehold improvements........................ $ 2,282 $ 8,379 $ 12,050
Machinery and equipment....................... 7,202 37,381 61,229
Construction-in-progress...................... 8,849 36,695 37,020
------- ------- --------
$ 18,333 $ 82,455 $ 110,299
Less allowance for depreciation and
amortization............................... (357) (4,599) (7,562)
------- ------- --------
Plant and equipment, net................... $ 17,976 $ 77,856 $ 102,737
======= ======= ========
</TABLE>

NOTE 4 -- RELATED PARTY TRANSACTIONS

Nashua provided certain services to the Predecessor up through May 19,
1994, including executive management, treasury, tax, financial audit, insurance
administration, legal, 401(k) plan administration and general research services.
Nashua generally charged the Predecessor for these services based upon the
relationship of its sales to total Nashua sales. There were also direct charges
for specific expenses paid by Nashua for the Predecessor including insurance
coverage and specific research and engineering projects. Management believes the
allocation method of the service charges to be reasonable. Management believes
the charges incurred for selling, general and administrative expenses and
research and development expenses would not have been incurred by the Company on
a stand-alone basis, and would have decreased the net loss of the Predecessor by
$482 and $894 for the period from January 1 to May 19, 1994, and for the year
ended December 31, 1993, respectively.

The Predecessor's financial statements also included amortization of
goodwill relating to the acquisition of Lin Data Corporation in May 1987 which
became Nashua's thin film disk division. In the fourth quarter of

F-10
<PAGE> 60

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1993, Nashua decided to sell its thin film disk division and recorded a
restructuring charge of $24,916. The charge reflected Nashua's estimated net
realizable value of the business and comprised write-downs of plant and
equipment (approximately $18,700) and goodwill (approximately $6,216).

The following charges by Nashua were included in the accompanying
statements of operations of the Predecessor:

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1, 1994
TO DECEMBER 31,
MAY 19, 1994 1993
--------------------------- ------------
<S> <C> <C>
Selling, general and administrative.............. $ 252 $ 685
Research and development......................... 230 209
Restructuring charge............................. -- 24,916
</TABLE>

The Predecessor purchased substantially all of its substrate requirements
from Nashua Precision Technologies (NPT), a division of Nashua. In addition, in
connection with the acquisition, the Company entered into a supply agreement
with Nashua for the purchase of 75% of the Company's substrate requirements for
a period of two years beginning May 20, 1994. The supply agreement is
conditioned upon Nashua meeting competitive quality and price criteria.
Purchases from NPT were:

<TABLE>
<S> <C>
Year ended December 31, 1995............................................... $12,634
Period from May 20 to December 31, 1994.................................... 6,089
Period from January 1 to May 19, 1994...................................... 4,769
Year ended December 31, 1993............................................... 12,447
</TABLE>

The Company purchased equipment from a company controlled by the
brother-in-law of the President and Chief Operating Officer. Such purchases
amounted to approximately $1.8 million and approximately $0.1 million during
1995 and 1994, respectively. All transactions were conducted on an arms-length
basis.

NOTE 5 -- SHORT-TERM BORROWINGS

Line of Credit

On December 1, 1995, the Company entered into an unsecured revolving credit
facility agreement (the "Agreement") with Bank of America National Trust and
Savings Association ("Bank of America"). Under the Agreement, the Company may
borrow up to $20,000 (the "Credit Facility") on a revolving basis through
October 31, 1997. Borrowings under the Agreement carry interest at LIBOR plus
.75% or, at the option of the Company, at a reference rate (as defined in the
Agreement) if 50% or less of the Credit Facility is utilized; or at LIBOR plus
1.25% or, at the option of the Company, at a reference rate (as defined in the
Agreement) if more than 50% of the Credit Facility is utilized. The Credit
Facility provides for a commitment fee of $50 per annum. As of December 31,
1995, the Company had no borrowings under the Credit Facility.

The Agreement prohibits the payment of cash dividends and requires the
continued compliance with various financial covenants. At December 31, 1995, the
Company was in full compliance with all covenants and conditions.

Under the Company's Loan and Security Agreement dated May 20, 1994, as
amended (the "Senior Loan Agreement") with Coastfed Business Credit Corporation
("Coast"), which the Company terminated and repaid in August 1995, the Company
was permitted to borrow up to $15,000 on a revolving basis secured by
substantially all of the assets of StorMedia Incorporated. The Senior Loan
Agreement provided the Company with a trade receivables credit line pursuant to
which the Company could borrow funds equal to 80% of the eligible trade
receivables of the U.S. operation at an interest rate equal to the bank's prime
rate plus 2%.

F-11
<PAGE> 61

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Interest charges were computed on the effect of cash in-transit and clearing
periods specified in the Senior Loan Agreement as well as outstanding balances.
The weighted average effective interest rate for the year ended December 31,
1995 and for the period from May 20, 1994 to December 31, 1994 was 14.7% and
13.7%, respectively. Notwithstanding the amount outstanding under the Senior
Loan Agreement, the Company was obligated to make monthly minimum interest
payments of $13 to Coast. At December 31, 1994 the aggregate amount of the
Company's indebtedness to Coast under the trade receivables credit line was
$4,300 and there was $4,678 available for future borrowings. Under the terms of
the trade receivables credit line, all collections of trade receivables were
remitted to Coast, with loan availability adjusted accordingly. The Senior Loan
Agreement contained certain requirements including restrictions on payment of
any common stock dividends, approval of asset sales, mergers and additional
borrowings, and maintenance of a minimum level of tangible net worth.

On January 27, 1995, the Company amended its Senior Loan Agreement with
Coast extending the expiration date to August 31, 1995 and entered into a $4,000
term loan agreement within the total $15,000 commitment. The term loan accrued
interest at a rate of prime plus 2% and was payable monthly in arrears.

Singapore Financing Agreement

On November 4, 1994, StorMedia International Ltd. ("Subsidiary"), one of
the Company's wholly owned subsidiaries, entered into three financing agreements
with Sembawang Leasing Pte Ltd. ("Sembawang"): an accounts receivable factoring
agreement, a short term loan and a capital lease (See Note 6). In August 1995,
the Subsidiary repaid Sembawang the entire principal amounts owing under the
three financing agreements, plus accrued interest.

The accounts receivable factoring agreement permitted the Subsidiary to
borrow funds in U.S. dollars on a full recourse basis equal to 90% of the
Subsidiary's eligible trade receivables, at a discount rate equal to a United
States bank's prime rate plus 1.75% and less a service charge of .125% of each
amount factored. During the initial year of the agreement Sembawang retained an
additional 5% of the amount factored as a security deposit applied to all three
financing agreements up to a maximum of $150 for any one month and $2,000 for
the year. At December 31, 1994, the aggregate amount of the Subsidiary's
indebtedness to Sembawang under the accounts receivable financing factoring
agreement was $2,983. The weighted average interest rate during the period from
November 4, 1994 to December 31, 1994 was 10.25%.

The short term loan facility permitted borrowings of up to $1,500 in U.S.
dollars at an interest rate of SIBOR plus 2.625%. The borrowings were repayable
in quarterly installments over the year following the date of the initial
borrowing.

In connection with the borrowing agreements between Sembawang and the
Subsidiary, the Company, the Company's subordinated debt holders and the
Company's Chairman entered into agreements with Sembawang. The Company and its
Chairman entered into guarantee agreements with Sembawang under which each would
guarantee payment of borrowings under the capital lease line and the facility
agreement. The Company's Chairman received a $50 fee in consideration of his
guarantee. In addition, Sembawang had a security interest in all of the assets
of the Subsidiary, and the capital lease line and the facility agreement
contained various covenants, including maintenance of minimum levels of tangible
net worth and ratios of debt to equity.

F-12
<PAGE> 62

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6 -- LONG-TERM DEBT

Long-term debt at December 31, 1995 and December 31, 1994 consisted of the
following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 29,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
12 3/8% Subordinated note due May 20, 1999..... $ 5,854 $ -- $--
Subordinated promissory notes due May 20,
1997......................................... 4,950 -- --
Capital lease obligations...................... 2,946 158 52
Earn out payment............................... 2,000 -- --
------------ ------ ---
Total long-term borrowings................... 15,750 158 52
Less current portion......................... 2,944 47 20
------------ ------ ---
Total long-term portion.............. $ 12,806 $111 $32
========== ========== =========
</TABLE>

In July 1994 the Company sold a $5,854, 12 3/8% Subordinated Note to its
majority stockholder. This note accrued interest at 12 3/8% per annum, payable
quarterly, with the principal payable in two equal installments on May 20, 1998
and 1999. Payment of principal and accrued interest on this note accelerated and
became payable upon the occurrence of the IPO. This 12 3/8% Subordinated Note,
plus accrued interest, was repaid in full on the closing of the Company's IPO.

On May 20, 1994, in connection with the acquisition of the Predecessor, the
Company delivered two Subordinated Promissory Notes totaling $4,950 to Nashua.
The notes accrue interest at an annual rate of prime plus 2% which was payable
quarterly. Principal was payable quarterly on the occurrence of certain events.
These Subordinated Promissory Notes, plus accrued interest, were repaid in full
on the closing of the Company's IPO.

On November 4, 1994, the Subsidiary entered into three financing agreements
with Sembawang, all of which were fully repaid in 1995. Under the capital lease
the Company had available up to $5,000 in financing representing 67% of the cost
of the equipment being leased. Fixed lease payments were to be made quarterly
over a five year period beginning at the end of the calendar quarter following
equipment installation and acceptance by the Company. In addition, variable
interest payments were to be made quarterly over the same five year period
computed at the rate of SIBOR plus 2.625% based on the amount outstanding.

As part of the purchase of the Predecessor, the Company agreed to pay an
Earn Out Payment (See Note 1), to Nashua which had been determined to be $2,000.
The Earn Out Payment accrued interest annually beginning on March 15, 1995 at a
rate of prime plus 2%. Principal payments were scheduled to be made in two equal
installments on June 30, 1995 and 1996 plus accrued interest. The Earn Out
Payment was paid in two installments of principal plus accrued interest on June
30, 1995 and August 1, 1995.

Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
1996.................................................................... $ 47
1997.................................................................... 45
1998.................................................................... 47
1999.................................................................... 18
2000.................................................................... 1
thereafter.............................................................. --
</TABLE>

F-13
<PAGE> 63

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 7 -- COMMITMENTS

Operating Leases

The Company leases all its facilities under noncancelable operating leases
which expire at various dates during the next six years. Rental expense for the
year ended December 31, 1995, the period from May 20, 1994 through December 31,
1994, the period from January 1, 1994 through May 19, 1994 and the year ended
December 31, 1993 were $1,286, $544, $227 and $588, respectively. Future minimum
payments under noncancelable operating leases as of December 31, 1995 are:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C> <C>
1996......................................................................... $1,312
1997......................................................................... 960
1998......................................................................... 664
1999......................................................................... 636
2000......................................................................... 514
thereafter................................................................... --
</TABLE>

Capital Expenditures

At December 31, 1995, the Company had noncancelable purchase commitments
for manufacturing equipment totaling $32,224.

NOTE 8 -- 401(K) PLAN

During 1994, the Company established a 401(k) employee salary deferral plan
(the "Plan") that allows voluntary contributions by all full-time U.S. employees
upon employment. Under the Plan, eligible employees may contribute from 1% to
15% of their pretax earnings, up to the Internal Revenue Service's annual
contribution limit. The Company matches employee contributions at 50% of the
first 6% contributed with an annual maximum employer match of $2,500. The
Company's contributions to the Plan for the year ended December 31, 1995 and for
the period from May 20 to December 31, 1994 were $442 and $199, respectively.

NOTE 9 -- EQUITY

Common Stock

The Class B Common Stock is convertible into shares of Class A Common Stock
on a one for one basis at the discretion of the holder based upon the occurrence
of certain conversion events.

On May 4, 1995, the Company sold 4,313 shares of its Class A Common Stock
in connection with its IPO. The net proceeds of this offering were $41.9 million
after deducting underwriting discounts and commissions and expenses of the
offering.

On July 26, 1995, the Company sold 2,775 shares of its Class A Common Stock
in connection with its secondary offering. The net proceeds of this offering
were $76.2 million after deducting underwriting discounts and commissions and
expenses of the offering.

As part of the initial funding of the Company in May 1994, the Company sold
1,890 shares of Series A Preferred Stock and 7,560 shares of Series B Preferred
Stock concurrent with the sale of 618 shares of Class A Common Stock and 1,520
shares of Class B Common Stock in addition to $5,854 of subordinated debt. Upon
the closing of the Company's IPO, the Company's Series A and Series B Preferred
Stock was converted into shares of Class A and Class B Common Stock.

F-14
<PAGE> 64

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Redeemable Preferred Stock

Both Series A Preferred Stock and Series B Preferred Stock had a
liquidation preference of approximately $.75 per share plus accumulated and
unpaid dividends and redeemable at the option of the holders at the liquidation
preference amount upon a change in ownership or upon an affirmative vote of the
preferred stockholders after May 20, 1999. Both Series A Preferred Stock and
Series B Preferred Stock accumulated dividends daily at an annual rate of 8% of
the liquidation preference amount payable quarterly in August, November,
February and May.

The Series A Preferred Stock was convertible into shares of Class A Common
Stock at the discretion of the holder any time after the date of issuance at a
conversion ratio of 1.0 to 0.75, subject to adjustments for certain dilutive
transactions. The Series B Preferred Stock was convertible into shares of Class
B Common Stock at the discretion of the holder any time after the date of
issuance at a conversion ratio of 1.0 to 0.75, subject to adjustments for
certain dilutive transactions. Series B Preferred Stock was also convertible
into Series A Preferred Stock at the option of the holder in the event of the
acquisition of the Company by another entity, the sale of all or substantially
all of the Company's assets or by the written consent or agreement of the
holders of two-thirds of the then outstanding shares of Series B Preferred
Stock. Shares of Series A Preferred Stock and Series B Preferred Stock
automatically converted into shares of Class A Common Stock and Class B Common
Stock, respectively, at the then effective conversion ratios upon the closing of
the IPO.

1994 Stock Option Plans

The Company has adopted two stock option plans: the 1994 Incentive Stock
Option Plan ("ISO Plan") and the 1994 Non-Qualified Stock Option Plan ("NSO
Plan"). A total of 3,150 shares of Class A Common Stock have been reserved for
issuance under the Plans as of December 31, 1995. Eligible individuals under the
Plans may be granted options to purchase the Company's Class A Common Stock at
an exercise price per share of at least 100% of fair market value at date of
grant for an incentive stock option and at least 85% of fair market value for a
non-qualified stock option. Options under the ISO Plan may be granted to
employees and consultants of the Company and generally vest monthly over a four
year period from the date of grant. Options under the NSO Plan may be granted to
employees, directors, contractors or other individuals affiliated with the
Company and generally vest seven years from the date of grant with vesting
accelerated upon the achievement of certain financial objectives. Options under
both plans have a maximum term of ten years.

1995 Director Option Plan

The Company's 1995 Director Option Plan (the "Director Plan") was adopted
by the Company's Board of Directors in February 1995 and was approved by the
stockholders in March 1995. The Director Plan provides for the granting of
nonqualified stock options to nonemployee directors of the Company who are not
employed directly or indirectly by the Company or by a stockholder of the
Company ("Outside Director"). A total of 75 shares of Class A Common Stock has
been reserved for issuance under the Director Plan. Under the Director Plan,
each Outside Director is automatically granted a non-qualified option to
purchase 12 shares of Class A Common Stock on the last to occur of the date of
adoption of the plan or the date upon which such person first becomes a director
("Initial Option") with an exercise price equal to the fair market value of the
Company's Class A Common Stock as of the date of grant. Thereafter, each Outside
Director is automatically granted an option to purchase 3 shares of Class A
Common Stock on April 1 of each year, except in the year the Director Plan was
adopted ("Subsequent Option"), provided he or she has served as a director for
at least six months as of such date.

Options granted under the Director Plan generally have a term of ten years
and are evidenced by an option agreement between the Company and the director to
whom the option is granted. The exercise price of

F-15
<PAGE> 65

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

each option granted under the Director Plan is equal to the fair market value of
the Class A Common Stock on the date of grant. Initial Options granted under the
Director Plan generally vest cumulatively as to 12/48ths of the shares on the
first anniversary date of the date of grant and as to 1/48th of the shares
subject to the option each month thereafter. Subsequent Options generally vest
entirely on the fourth anniversary of the date of grant. In the event of a
merger of the Company with or into another corporation or an acquisition of
assets involving the Company, or a change of control, each option shall become
fully vested and exercisable, including shares which would not otherwise be
exercisable, immediately prior to the closing. Unless terminated sooner, the
Director Plan will terminate in 2005. The Board has certain authority to amend
or terminate the Director Plan.

The following summarizes the transactions under the 1994 and 1995 Plans:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------------------
AVAILABLE NUMBER OF AGGREGATE
FOR GRANT SHARES PRICE PER SHARE PRICE
--------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Balances December 31, 1994............ 60 1,965 $ 0.19 $ 367
Options authorized.................. 1,200 -- -- --
Options granted..................... (1,169) 1,169 $ 0.89-$31.83 $11,086
Options terminated.................. 59 (59) $ 0.19-$18.00 $ (197)
Options exercised................... -- (908) $ 0.19-$ 8.00 $ (287)
------ ----- ------------- -------
Balances December 31, 1995............ 150 2,167 $ 0.19-$31.83 $10,969
Options granted (unaudited)......... (215) 215 $ 16.67-$19.00 $ 3,645
Options terminated (unaudited)...... 37 (37) $ 0.19-$31.83 (382)
Options exercised (unaudited)....... -- (166) $ 0.19-$18.00 (171)
------ ----- ------------- -------
Balances March 29, 1996 (unaudited)... (28) 2,179 $ 0.19-$31.83 $14,061
====== ===== ============= =======
</TABLE>

At December 31, 1995 and March 29, 1996, 653 and 607 options were
exercisable at a weighted average exercise price of $0.91 and $1.96,
respectively.

During the first quarter of 1996 the Company granted options subject to
stockholder approval. On April 29, 1996, the stockholders of the Company
approved the additional options grant.

Put Options

The Company sold 750 put options in private placements during the fourth
quarter of 1995. Each option obligates the Company to purchase one share of
Common Stock at $27.47 per share if the purchaser exercises the option. The
warrants expire in April 1996. The proceeds of the put option offerings of $1.9
million have been recorded in additional paid-in-capital. The amount related to
the Company's potential $20.6 million obligation to buyback 750 shares of Common
Stock has been removed from Stockholders' Equity and recorded as Put options.
(See Note 14)

F-16
<PAGE> 66

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 10 -- INCOME TAXES

Income tax expense (benefit) for the year ended December 31, 1995 includes
the following:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal.................................................. $ 3,077 $ (475) $2,602
State.................................................... 1,773 (137) 1,636
Foreign.................................................. 236 -- 236
Charge in lieu of taxes early dispositions of stock
issued upon exercise of stock options.................. 3,368 -- 3,368
------ ----- ------
Total.......................................... $ 8,454 $ (612) $7,842
====== ===== ======
</TABLE>

Income taxes reconcile to the amount computed by applying the federal
statutory rate to income before income taxes as follows:

<TABLE>
<CAPTION>
PERIOD FROM MAY 20,
1994 THROUGH
1995 DECEMBER 31, 1994
---- -------------------
<S> <C> <C>
Tax computed at federal statutory rate...................... 35 % 34%
State income taxes (net of federal benefit)................. 4 6
Foreign sales corporation................................... (2 ) (7)
Foreign subsidiary income................................... (10 ) 6
Other, net.................................................. -- (1)
--
---
Income tax provision........................................ 27 % 38%
=== ==
</TABLE>

Significant components of deferred tax assets and liabilities as of
December 31, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax asset:
Property and equipment basis differences................. $ 551 $1,009
Accrual and reserve accounts............................. 1,689 612
State taxes.............................................. 321 229
Inventory costs.......................................... 5 129
Other.................................................... 25 --
------ ------
Total gross deferred tax assets............................ 2,591 1,979
Less valuation allowance................................... -- --
------ ------
Net tax assets and liabilities............................. $2,591 $1,979
====== ======
</TABLE>

Management believes it is more likely than not that a full benefit will be
obtained for the deferred tax assets.

The Company has been granted a seven year tax holiday in Singapore with the
possibility of a three year extension. Consolidated earnings before income taxes
includes $20,927 of income from foreign operations for the year ended December
31, 1995. These earnings are considered to be permanently invested in non-U.S.
operations. Additional taxes of approximately $8,580 would have to be provided
if these earnings were repatriated to the U.S.

F-17
<PAGE> 67

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Income Tax Benefit

The Company recognized an income tax benefit from the exercise or early
disposition of certain stock options. This benefit resulted in a decrease in
current income taxes payable and an increase in additional paid-in capital.

Income tax expense (benefit) for all Predecessor periods has been computed
as if the Predecessor was a separate taxpayer. Because the Predecessor generated
significant operating losses in 1992 and 1993 which were not realizable on a
stand alone basis under SFAS No. 109, no income tax benefit was provided in the
Predecessor's financial statements for these years. No income tax expense was
provided in the financial statements of the Predecessor for the period from
January 1, 1994 through May 19, 1994 because deferred tax assets relating to net
operating loss carryovers and other tax benefits which had previously been
reserved by valuation allowances were available to offset any otherwise payable
current income taxes or deferred income tax liabilities.

NOTE 11 -- SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION

The Company operates in one industry segment and is engaged in the
development, manufacture and sale of thin film disks to the disk drive industry.
The Company began manufacturing and selling product from its initial
manufacturing site in Singapore in the fourth quarter of 1994. The following
table summarizes geographic information on the Company's operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 U.S. ASIA ELIMINATIONS CONSOLIDATED
----------------------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total net sales.......................... $121,384 $76,024 $(35,953) $161,455
======== ======= ======== ========
Operating earnings....................... $ 7,048 $21,876 $ -- $ 28,924
======== ======= ======== ========
Identifiable assets...................... $119,680 $66,417 $ (4,500) $181,597
======== ======= ======== ========

<CAPTION>
PERIOD FROM MAY 20, 1994
THROUGH DECEMBER 31, 1994 U.S. ASIA ELIMINATIONS CONSOLIDATED
----------------------------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Total net sales.......................... $ 55,141 $ 4,267 $ (3,810) $ 55,598
======== ======= ======== ========
Operating earnings (loss)................ $ 6,836 $ (701) $ -- $ 6,135
======== ======= ======== ========
Identifiable assets...................... $ 31,715 $18,862 $ (3,810) $ 46,767
======== ======= ======== ========
</TABLE>

Sales from domestic operations were as follows:

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------ ----------------------------------------------------------------
YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, JANUARY 1, 1994 MAY 20, 1994 TO DECEMBER 31, MARCH 31, MARCH 29,
1993 TO MAY 19, 1994 DECEMBER 31, 1994 1995 1995 1996
------------ --------------- ----------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Far East........ $ 68,402 $24,680 $49,420 $ 82,879 $13,973 $22,712
United States... 4,979 1,488 1,911 5,122 1,322 1,884
Europe.......... 3,764 -- -- -- -- --
------- ------- ------- -------
Total... $ 77,145 $26,168 $51,331 $ 88,001 $15,295 $24,596
======= ======= ======= =======
</TABLE>

F-18
<PAGE> 68

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, are summarized as follows:

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------- -------------------------------------------------------------------
PERIOD FROM PERIOD FROM QUARTER QUARTER
FISCAL YEAR JANUARY 1, 1994 MAY 20, 1994 TO FISCAL YEAR ENDED ENDED
1993 TO MAY 19, 1994 DECEMBER 31, 1994 1995 MARCH 31, 1995 MARCH 29, 1996
----------- --------------- ----------------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Customer A... 36% 65% 66% 54% 41% 60%
Customer B... 16 20 27 45 55 39
Customer C... 44 -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------- -----------------------------
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, AS OF
1993 1994 1995 MARCH 29, 1996
------------ ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Accounts receivable balances:
Customer A........................... 35% 42% 45% 54%
Customer B........................... 23 55 50 37%
Customer C........................... 42 -- -- --
</TABLE>

NOTE 12 -- PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)

Pro forma combined operating results assume that the Predecessor had been
acquired and the Company's initial capitalization had occurred on January 1,
1994, and reflect for the periods prior to May 20, 1994 an increase in interest
expense on debt issued in conjunction with the acquisition and upon the initial
capitalization of the Company, a decrease in depreciation and charges to the
Predecessor by Nashua and related pro forma income tax effects as shown in the
following table.

F-19
<PAGE> 69

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The objective of this pro forma statement of operations information is to
show the significant effects on historical financial information as if the
transactions described in Note 1 had occurred at January 1, 1994. However, the
Pro Forma Combined Statement of Operations is not necessarily indicative of the
results of operations that would have been attained had the transactions
mentioned above actually occurred on January 1, 1994 and may not be indicative
of future operating results.

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ----------------- PRO FORMA
PERIOD FROM PERIOD FROM PREDECESSOR/COMPANY
JANUARY 1 TO MAY 20 TO PRO FORMA COMBINED
MAY 19, 1994 DECEMBER 31, 1994 ADJUSTMENTS YEAR ENDED
------------ ----------------- -------------- DECEMBER 31, 1994
(IN THOUSANDS) --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................... $ 26,168 $55,598 $ -- $ 81,766
Cost of sales................. 22,077 43,795 (363)(1) 65,509
------- ------- ----- -------
Gross profit........ 4,091 11,803 363 16,257
Operating expenses:
Research and development.... 2,124 3,116 (230)(2) 5,010
Selling, general and
administrative........... 1,583 2,552 (252)(2) 3,883
------- ------- ----- -------
3,707 5,668 (482) 8,893
------- ------- ----- -------
Operating
earnings.......... 384 6,135 845 7,364
Interest, net................. -- (663) (420)(3) (1,083)
------- ------- ----- -------
Earnings before
income taxes...... 384 5,472 425 6,281
Income tax expense............ -- 2,079 307(4) 2,386
------- ------- ----- -------
Net earnings................ $ 384 $ 3,393 $ 118 $ 3,895
======= ======= ===== =======
</TABLE>

- ---------------

Pro forma adjustments:

(1) Decrease in depreciation

(2) Decrease in charges by Nashua

(3) Additional interest expense

(4) Increase in income tax expense

F-20
<PAGE> 70

STORMEDIA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 13 -- QUARTERLY SUMMARIES (UNAUDITED)

<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Quarterly Financial Data:
1995
Net sales....................................... $27,880 $34,679 $45,954 $52,942
Gross profit.................................... 6,062 8,790 13,375 15,401
Net earnings.................................... 2,036 3,588 7,137 8,397
Earnings per share.............................. $ 0.18 $ 0.26 $ 0.40 $ 0.45
1994(1)
Net sales....................................... $16,523 $19,600 $21,620 $24,023
Gross profit.................................... 2,707 3,958 4,539 5,053
Net earnings.................................... 242 831 1,298 1,524
Earnings per share.............................. $ 0.02 $ 0.07 $ 0.11 $ 0.13
</TABLE>

- ---------------
(1) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the
period May 20, 1994 through December 31, 1994, as if the Acquisition had
been consummated on January 1, 1994 and reflects for the period from January
1, 1994 through May 19, 1994 an increase in interest expense for debt issued
in connection with the Acquisition and upon the initial capitalization of
the Company, a decrease in depreciation and charges by Nashua, and related
pro forma income tax effect. See Note 12 of Notes to Consolidated Financial
Statements. The pro forma statement of operations may not be indicative of
future operating results.

NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED)

During the first quarter of 1996, pursuant to the terms of the put option,
the Company repurchased and retired 263 shares of Class A Common Stock at an
aggregate cost of $7.2 million and closed 38 put options by cash settlement at
an aggregate cost of $0.3 million. In April, the Company closed 450 put options
by cash settlement of $1.7 million. As of April 29, 1996, the Company had no put
options outstanding.

In February 1996, Prudential Equity Investors III, L.P. converted 1,376
shares of Class B Common Stock to Class A Common Stock.

In February 1996, the Company entered into an agreement to sell certain
equipment to Surface Technology Incorporated ("STI"), and to purchase certain
quantities of plated and polished substrates from STI. The Company has an option
to acquire STI. As of December 31, 1995, the Company had accounts receivable
from STI of approximately $1.0 million.

In April 1996, the Board of Directors approved a three-for-two split of its
Class A and Class B Common Stock. The stock split was effected as a stock
dividend. This effect has been shown retroactively throughout the Company's
financial statements.

On April 29, 1996, the Board of Directors approved a proposed filing of a
registration statement with the Securities and Exchange Commission to sell 3,000
shares of the Company's Class A Common Stock to the public.

F-21
<PAGE> 71

LOGO
<PAGE> 72

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various costs and expenses payable by
the Company, other than underwriting discounts and commissions, of the sale and
distribution of the securities being registered. All of the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
Nasdaq National Market listing fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 50,555
NASD Filing Fee........................................................... 14,661
Nasdaq National Market.................................................... 17,500
Blue Sky Fees and Expenses................................................ 10,000
Legal Fees and Expenses................................................... 75,000
Accounting Fees and Expenses.............................................. 75,000
Printing.................................................................. 50,000
Transfer Agent and Registrar Fees......................................... 5,000
Miscellaneous............................................................. 2,284
--------
Total........................................................... $300,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the Delaware General Corporation Law ("DCL"), the Company's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
directors' duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the DCL; or (iv) for any
transaction from which the director derived any personal benefit. This provision
does not affect the availability of equitable remedies such as injunctive relief
or rescission. Further, the provision does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its stockholders. However, the
inclusion of this provision together with a provision which requires the Company
to indemnify its officers and directors against certain liabilities, is intended
to enable the Company to attract qualified persons to serve as directors who
might otherwise be reluctant to do so.

In addition, the Company's Amended and Restated Certificate of
Incorporation and Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by the DCL. The Company believes that indemnification under its
Bylaws and Amended and Restated Certificate of Incorporation covers at least
negligence and gross negligence by indemnified parties and permits the Company
to advance litigation expenses in the case of stockholder derivative actions or
other actions against an undertaking by the indemnified party to repay such
advances even if it is ultimately determined that the indemnified party is not
entitled to indemnification.

The Company has entered into separate indemnification agreements with its
directors and officers. These agreements will require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers to the fullest extent
permitted by law (other than liabilities arising from actions not taken in good
faith or in a manner the indemnitee believed to be opposed to the best interests
of the Company) and to advance their expenses, including attorneys fees,
incurred as a result of any proceeding against them as to which they could be
indemnified. Insofar as

II-1
<PAGE> 73

indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefor unenforceable. The
Company believes that the provisions in its Amended and Restated Certificate of
Incorporation Bylaws and indemnification agreements are necessary to attract and
retain qualified persons as directors and executive officers.

The Company has obtained an insurance policy providing directors' and
officers' liability coverage. At present there is no pending litigation or
proceeding involving a director, officer or employee of the Company where
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.

Reference is also made to Article IX of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.

II-2
<PAGE> 74

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
1.1* -- Form of Underwriting Agreement between Registrant and the
Underwriters.
5.1* -- Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, regarding legality of securities being registered.
11.1* -- Statement of Computation of Earnings Per Share.
23.1 -- Consent of KPMG Peat Marwick LLP (see page II-5).
23.2* -- Consent of Counsel (included in Exhibit 5.1).
23.3* -- Consent of Lahive & Cockfield.
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------

* Previously filed.

(b) Financial Statement Schedules.

None

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions of the Company's Amended and Restated
Certificate of Incorporation and Bylaws, Delaware Corporation Law, the
Underwriting Agreement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will unless in the opinion of its counsel
the question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, StorMedia Incorporated, a corporation organized and existing under
the law of the State of Delaware, certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 28th day of May, 1996.

StorMedia Incorporated

By: /s/ WILLIAM J.
ALMON
William J. Almon,
Chairman of the Board and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
/s/ WILLIAM J. ALMON Chairman of the Board and May 28, 1996
(William J. Almon) Chief Executive Officer
(Principal Executive
Officer)
/s/ STEPHEN M. ABELY Chief Financial Officer, Vice May 28, 1996
(Stephen M. Abely) President, Finance and
Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ JOHN A. DOWNER Director May 28, 1996
(John A. Downer)
/s/ FRANCIS J. LUNGER Director May 28, 1996
(Francis J. Lunger)
/s/ MARK S. ROSSI Director May 28, 1996
(Mark S. Rossi)
</TABLE>

II-4
<PAGE> 76

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use of our report included herein and to the
incorporation by reference in the Prospectuses on Form S-3 of our report dated
January 17, 1996 appearing on page 42 of the StorMedia Incorporated Annual
Report on Form 10-K for the year ended December 31, 1995. We also consent to the
references to our firm under the heading "Experts" in the Prospectuses.

KPMG Peat Marwick LLP

Palo Alto, California
May 21, 1996

II-5
<PAGE> 77

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ---------- ------------------------------------------------------------------------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement between Registrant and the
Underwriters.
5.1* -- Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, regarding legality of securities being registered.
23.1 -- Consent of KPMG Peat Marwick LLP (see page II-5).
23.2* -- Consent of Counsel (included in Exhibit 5.1).
23.3* -- Consent of Lahive & Cockfield.
24.1* -- Power of Attorney (see page II-4).
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------

* Previously filed.

<PAGE> 78
[Appendix -- Graphic Image Page 25]

BUSINESS SECTION

THIN FILM DISK TECHNOLOGY

This is a graphical illustration of a hard disk drive of which the Company's
thin film disk products are a component. The illustration displays the major
components including the Disk, Recording Head, Spindle Actuator and the
Electronics assembled into a hard disk drive. It is a computer generated
sketch rather than a realistic picture and has all the major components
labeled.