<PAGE>

                                                                    EXHIBIT 10.4

                       SEPARATION AGREEMENT AND RELEASE

     This Separation Agreement and Release ("Agreement") is made by and between
Seagate Technology, Inc. (the "Company") and Al Shugart ("Employee").


                                    RECITALS
                                    --------

     1.   Employee was employed by the Company as its Chief Executive Officer
and Chairman of its Board of Directors, and was a member of the Board of
Directors of the Company and an officer and/or director of certain of the
Company's subsidiaries.

     2.   The Company and Employee (collectively referred to as "the Parties")
wish to document the severance and other benefits the Company has agreed to pay
Employee in connection with (i) Employee's termination as Chief Executive
Officer and Chairman of the Board of Directors of the Company and for his
resignation as a member of the Company's Board of Directors and of each of its
subsidiaries and other related companies upon which he serves as a director
and/or officer and (ii) the consulting arrangement and restrictive covenants
that will be in effect for Employee following such termination.

     NOW THEREFORE, in connection with the promises made herein, the Company and
Employee hereby agree as follows:

     1.   Termination Date.  Employee's termination as Chief Executive Officer
          ----------------
and Chairman of the Board of Directors of the Company, and as an employee of the
Company and of each of its subsidiaries upon which he serves as a director
and/or officer is effective as of July 19, 1998 (the "Termination Date").

     2.   Payment of Salary; Benefits.  Employee will receive his normal salary
          ---------------------------
through the Termination Date and all regular and mandatory payroll deductions
will be taken from Employee's final paycheck.  Employee's participation in the
Company's employee benefit programs shall cease as of the Termination Date,
except to the limited extent provided in Sections 5 and 6 below.

     3.   Severance Payments.  Employee will receive $750,000 per annum over the
          ------------------
three-year period beginning July 20, 1998 and ending July 19, 2001.  These
payments will be made in equal installments at monthly intervals over the three-
year period, with the first payment to be made as of August 31, 1998.  All
payments will be subject to the Company's collection of applicable withholding
taxes.  However, all such payments will immediately terminate in the event of a
material breach of any of Employee's covenants under Section 9 of this
Agreement.

     4.   Restricted Stock.  In November 1995, Employee received a restricted
          ----------------
stock award for a total of 300,000 shares of the Company's common stock.  As of
the Termination Date, 145,000 of those shares were unvested.  All of Employee's
unvested shares shall vest (the Company's repurchase right shall lapse) on the
Effective Date of this Agreement (as defined in Section 28 below).  At the time
of

<PAGE>

such vesting, Employee will recognize immediate taxable income equal to the fair
market value of those previously unvested shares, less the issue price Employee
paid for such shares, and Employee agrees to satisfy the applicable withholding
taxes on that income before the certificates for the shares will be released.
Employee may satisfy the withholding tax obligation by directing the Company to

withhold from the vested shares that number of shares having a fair market value
equal to the amount required to be withheld, subject to such other limitations
and conditions as the Company may impose in connection with applicable legal and
accounting considerations.

     5.   Stock Options.
          -------------

          (a) Employee currently holds outstanding stock options for 1,060,000
shares of the Company's common stock ("Company Options") and for 100,000 shares
of the common stock of Seagate Software ("Seagate Software Options").  As of the
Termination Date, the Company Options were exercisable for a total of 440,000
shares, and the Seagate Software Options were exercisable for a total of 12,000
shares.  The specific breakdown of Employee's vested and unvested stock options
as of the Termination Date is also included in attached Schedule A.  Subject to
Section 5(b) below, Employee's Company Options, to the extent vested and
exercisable as of the Termination Date, shall remain exercisable and may be
exercised at any time during the Consultancy Period (as defined in Section 8
below) and for the ninety (90)-day period thereafter, subject to the original
term of such Company Options.  To the extent Employee's Company Options are
unvested as of the Termination Date, the Company Options shall continue to vest
and may be exercised (to the extent vested) during the Consultancy Period (as
defined in Section 8 below) and for the ninety (90)-day period thereafter,
subject to the original term of such Company Option.  To the extent Employee's
Seagate Software Options were vested immediately prior to the Termination Date,
Employee agrees to exercise such vested Seagate Software Options on or before
August 18, 1998; to the extent such vested Seagate Software Options are not
exercised on or before August 18, 1998, they shall be cancelled without
consideration to Employee. To the extent Employee's Seagate Software Options
were unvested immediately prior to the Termination Date, such unvested Seagate
Software Options shall become fully vested and exercisable as of the Effective
Date and may be exercised at any time during the Consultancy Period and for the
thirty (30)-day period thereafter, subject to the original term of such Seagate
Software Options. Employee's Company Options and Seagate Software Options may be
exercised by Employee consistent with the procedures available to him prior to
the Termination Date.  To the extent Employee's options are non-qualified
options under the federal income tax laws, Employee will recognize compensation
income in connection with his exercise of those options, and agrees to satisfy
all applicable withholding taxes associated with each such exercise.

          (b) The Company previously established a deferred bonus amount with
respect to certain of Employee's Company Options.  Such bonus amounts are
reflected in the attached Schedule A. In consideration of Employee's agreement
to exercise certain vested Company Options as provided herein, deferred bonus
amounts attributable to Employee's Company Options that were unvested
immediately prior to the Termination Date shall be available to reduce the
exercise price of such unvested Company Options to the extent such Options vest
and are exercised in accordance with Section 5(a) above.  In consideration of
Employee's eligibility to receive deferred bonus amounts pursuant to the
preceding sentence, Employee agrees to exercise on or before October 17, 1998,
all of his Company Options that (i) were vested immediately prior to the
Termination Date, and (ii) have a per

                                      -2-


<PAGE>

share exercise price at or below $17.00; to the extent such Options are not
exercised on or before October 17, 1998, they shall be cancelled without
consideration to Employee.

     6.   Benefits.
          --------

          (a) The Company shall continue to provide Employee, for thirty-six
(36) months after the Termination Date, medical and group insurance benefits or
such comparable alternative medical and insurance benefits as the Company may,
in its discretion, determine to be sufficient to satisfy its obligations to
Employee under this Agreement, which are at least as favorable as the most
favorable medical and group insurance benefits available to the Company's senior
executives as of the Termination Date.  Notwithstanding the foregoing, if
Employee is covered under any medical or group insurance plan(s) provided by a
subsequent employer, then the amount of coverage required to be provided by the
Company hereunder shall be reduced by the amount of coverage provided by the
subsequent employer's medical or group insurance plan(s).

          (b) Following Employee's request on or after the Effective Date, the
Company shall furnish Employee during the Consultancy Period (as defined in
Section 8) with an automobile of Employee's choosing, provided that the retail
value of such automobile shall not exceed $50,000.  The Company shall remain the
legal owner of the automobile and will be responsible for license, insurance and
registration thereof.  All other costs and expenses relating to the use and
maintenance of such automobile shall be the sole responsibility of Employee.
Employee agrees to return the automobile to the Company's corporate headquarters
in Scotts Valley, California, or such other place as the Parties may mutually
agree, on or before the end of the Consultancy Period.

     7.   Indemnification.  Employee shall be entitled to indemnification, in
          ---------------
accordance with the applicable provisions of the Company's articles of
incorporation and bylaws, against all expense, liability and loss (including
attorneys' fees and settlement payments) that Employee may incur by reason of
any action, suit or proceeding arising from or relating to the performance of
Employee's duties as an officer or director of the Company or any of its
subsidiaries.  The Company agrees to maintain directors and officers coverage
for Employee's benefit during the Consultancy Period (as defined in Section 8
below).

     8.   Consulting.  As a condition to, and in consideration for, the
          ----------
severance benefits Employee is to receive herein, Employee agrees to make
himself available to perform consulting services reasonably requested of him
during the three (3)-year period beginning July 20, 1998 and ending July 19,
2001 (the "Consultancy Period").  Employee agrees to make himself reasonably
available to render up to 30 hours of consulting services per each of the
Company's fiscal quarters during the Consultancy Period, provided that such
consulting services do not materially conflict with Employee's then-existing
activities or commitments.  All assignments will come from the Chief Executive
Officer of the Company, and Employee will report directly to such person with
respect to each assignment.  Should Employee be requested to render more than
the required 30 hours of consulting services per fiscal quarter, then Employee
will be compensated for those additional hours at an hourly rate to be agreed
upon by Employee and the Chief Executive Officer of the Company at the time such
consulting services are to be rendered.  Employee will be reimbursed for all
reasonable out-of-pocket expenses incurred in rendering such consulting services
upon Employee's submission of appropriate documentation for those expenses.
During the Consultancy Period, Employee will not make any representations to any
third party

                                      -3-



<PAGE>

that he is an officer or employee of the Company and, following his resignation
as a member of the Company's Board of Directors, a director of the Company. Any
proprietary information or other confidential information of the Company to
which he may have access in the performance of his consulting services will be
held in confidence and will not be disclosed to any third party otherwise
directly or indirectly used by Employee, except to the extent necessary to
perform his consulting services.

     9.   Employee Covenants.  As a condition to, and a consideration for, the
          ------------------
severance and other benefits Employee is to receive herein, Employee agrees
that:

          (a) he will not, at any time during the three (3)-year period
     beginning July 20, 1998 and ending July 19, 2001, directly or indirectly,
     whether for his own account or as an employee, director, consultant or
     advisor, provide services to any business enterprise that is at the time in
     competition with any of the Company's or any of its subsidiaries' existing
     product lines or business activities as of the Effective Date and that is
     located geographically in an area where the Company or any of its
     subsidiaries maintains substantial business activities, unless Employee
     obtains the prior written consent of the Company's Chief Executive Officer,
     or

          (b) he will not, at any time during the three (3)-year period
     beginning July 20, 1998 and ending July 19, 2001, directly or indirectly
     solicit any individuals to leave the Company's (or any of its
     subsidiaries') employ for any reason or interfere in any other manner with
     the employment relationships at the time existing between the Company (or
     any of its subsidiaries) and its current or prospective employees;
     provided, however, that Employee shall not be considered to have interfered
     with existing employment relationships in the event he responds to good
     faith inquiries initiated other than by Employee, or

          (c) he will not, at any time during the three (3)-year period
     beginning July 20, 1998 and ending July 19, 2001, induce or attempt to
     induce any customer, supplier, distributor, licensor, licensee or other
     business relation of the Company (or any of its subsidiaries) to cease
     doing business with the Company (or any of its subsidiaries) or in any way
     interfere with the existing business relationship between any such
     customer, supplier, distributor, licensor, licensee or other business
     relation and the Company (or any of its subsidiaries), or

          (d) he will not, at any time during the four and one-half (4 1/2)-year
     period beginning July 20, 1998 and ending January 19, 2002, disparage,
     defame or slander the Company (or any of its subsidiaries) or any of their
     (i) officers (within the meaning of Rule 16a-1(f) under the Securities
     Exchange Act of 1934, as amended, hereinafter "Officers") or directors as
     of the Termination Date, (ii) then-existing directors, or (iii) any of its
     products or services, to any one, including but not limited to any past,
     present or prospective customers.  The foregoing sentence is not applicable
     to comments Employee makes to his immediate family.  For such four and one-
     half (4 1/2) year-period the Company's Board of Directors and its current
     Officers shall refrain from disparagement, defamation or slander of
     Employee.

          (e) he will resign as a member of the boards of the Company's
     subsidiaries (as applicable) on or before delivery of a fully executed copy
     of this Agreement and will transfer to

                                      -4-

<PAGE>

     the Company (or its designee) any and all shares he currently owns or holds
     in the Company's foreign subsidiaries (such transfer to occur within
     fifteen (15) days of the Effective Date). Employee shall resign as a member
     of the Company's Board of Directors as of the Effective Date.

     Employee acknowledges that monetary damages may not be sufficient to
compensate the Company for any economic loss that may be incurred by reason of
Employee's breach of the foregoing restrictive covenants.  Accordingly, in the
event of any such breach, the Company will, in addition to the cessation of the
severance benefits provided Employee under this Agreement and any remedies
available to the Company at law, be entitled to obtain equitable relief in the
form of an injunction precluding Employee from continuing to engage in such
breach.

     In the event of any material breach by the Company of  its obligation to
Employee under Section 9(d) above, the Company shall pay Employee liquidated
damages in the amount of $100,000 for each such breach.

     10.  Confidential Information.  Employee shall continue to maintain the
          ------------------------
confidentiality of all confidential and proprietary information of the Company.

     11.  Payment of Salary.  The Company represents and Employee acknowledges
          -----------------
and represents that the Company has paid (or will pay pursuant to the terms of
the applicable plan or program) all salary, wages, bonuses, commissions and any
and all other benefits due to Employee through the Employee's Termination Date.

     12.  Release of Claims.  Employee agrees that the foregoing consideration
          -----------------
represents settlement in full of all outstanding obligations owed to Employee by
the Company or any subsidiary of the Company.  Employee and the Company, on
behalf of themselves and their respective heirs, agents, representatives,
immediate family members, executors, successors, and assigns, hereby fully and
forever release each other and their respective heirs, agents, directors,
employees, attorneys, investors, shareholders, administrators, affiliates,
divisions, subsidiaries, parents, predecessor and successor corporations, and
assigns, and agree not to sue or otherwise institute or cause to be instituted
any legal or administrative proceedings concerning, any claim, duty, obligation
or cause of action relating to any matters of any kind, whether presently known
or unknown, suspected or unsuspected, that either of them may possess against
the other arising from any omissions, acts or facts that have occurred up until
and including the Effective Date of this Agreement including, without
limitation,

          (a)  any and all claims relating to or arising from Employee's
relationship with the Company or any subsidiary of the Company and the
termination of that relationship;

          (b)  any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company or any
subsidiary of the Company, including, without limitation, any claims for fraud,
misrepresentation, breach of fiduciary duty, breach of duty under applicable
state corporate law, and securities fraud under any state or federal law;

                                      -5-

<PAGE>

          (c)  any and all claims for wrongful discharge of employment;
termination in violation of public policy; discrimination; breach of contract,
both express and implied; breach of a covenant of good faith and fair dealing,
both express and implied; promissory estoppel; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; unfair business practices; defamation; libel; slander; negligence;
personal injury; invasion of privacy; false imprisonment; and conversion;

          (d)  any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, the Employee Retirement Income Security Act of 1974, The Worker
Adjustment and Retraining Notification Act, Older Workers Benefit Protection
Act; the California Fair Employment and Housing Act, and the California Labor
Code;

          (e)  any and all claims for violation of the federal, or any state,
constitution;

          (f)  any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination;  and

          (g)  any and all claims for attorneys' fees and costs.

Each of the Parties agrees that the release set forth in this Section shall be
and remain in effect in all respects as a complete general release as to the
matters released.  This release does not extend to any obligations incurred
under this Agreement.  Each of the Parties acknowledges and agrees that any
breach of this Section shall construe a material breach of the Agreement and in
the case of a breach by Employee, shall entitle the Company immediately to
recover the monetary consideration discussed in Section 3 above.  If any legal
action or other legal proceeding relating to the enforcement of any provision of
this Agreement is brought by either Party hereto, the prevailing Party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing Party may be entitled).

     13.  Acknowledgment of Waiver of Claims under ADEA.  Employee acknowledges
          ---------------------------------------------
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary.  Employee and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
the ADEA after the Effective Date of this Agreement.  Employee acknowledges that
the consideration given for this waiver and release Agreement is in addition to
anything of value to which Employee was already entitled.  Employee further
acknowledges that he has been advised by this writing that (a) he should consult
with an attorney prior to executing this Agreement; (b) he has at least twenty-
                 -----
one (21) days within which to consider this Agreement; (c) he has seven (7) days
following the execution of this Agreement by the Parties to revoke the
Agreement; and (d) this Agreement shall not be effective until the revocation
period has expired.  Any revocation should be in writing and delivered to Tom
Mulvaney, Senior Vice President and General Counsel, Seagate Technology, Inc.,
920 Disc Drive, Scotts Valley, CA  95066, by close of business on the seventh
day from the date that Employee signs this Agreement.

                                      -6-

<PAGE>

     14.  Civil Code Section 1542.  Employee and the Company each represent that
          -----------------------
neither is aware of any claim other than the claims that are released by this
Agreement.  Employee and the Company each acknowledge that they have been
advised by legal counsel and are familiar with the provisions of California
Civil Code Section 1542, which provides as follows:

          A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
          THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
          HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
          WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
          AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

     Employee and the Company, being aware of said code section, agree to
expressly waive any rights they may have thereunder, as well as under any other
federal or state statute or common law principles of similar effect.

     15.  No Pending or Future Lawsuits.  Each Party represents to the other
          -----------------------------
that he or it has no lawsuits, claims, or actions pending in his or its name, or
on behalf of any other person or entity, against the other or any other person
or entity referred to herein.  Each Party also represents to the other that as
of the Effective Date, he or it does not have any basis for, and does not intend
to bring any claims on his or its own behalf or on behalf of any other person or
entity against the other or any other person or entity referred to herein.

     16.  Application for Employment.  Employee understands and agrees that, as
          --------------------------
a condition of this Agreement, he shall not be entitled to any employment with
the Company, its parents, its subsidiaries, or any successor, and he hereby
waives any right, or alleged right, of employment or re-employment with the
Company, its parents, its subsidiaries and any successor.  Subject to the terms
of this Agreement, Employee also waives any right to work as an independent
contractor for the Company, its subsidiaries, its parents and any successor.
Employee further agrees that he will not apply for employment with the Company,
its subsidiaries, its parents, or related companies, or any successor and will
not apply to work as an independent contractor for the Company, its parents, its
subsidiaries or any successor.

     17.  Confidentiality.  The Parties agree to maintain in complete confidence
          ---------------
the contents and terms of this Agreement, and the consideration for this
Agreement.  The Parties may disclose Employee's status as a consultant to the
Company and  agree to disclose the contents and terms of this Agreement only to
Employee's immediate family and to those attorneys, accountants, tribunals and
governmental entities who have a reasonable need to know (or as required by
applicable law or governmental agency or tribunal) the contents and terms of
this Agreement to prevent disclosure of the contents and terms of this Agreement
to other third parties.

     18.  No Cooperation.  Employee and the Company agree that he or it will not
          --------------
counsel or assist any attorneys or their clients in the presentation or
prosecution of any lawsuits, disputes, claims, charges, or complaints by any
third party against the other (including in the case of the Company any
subsidiary of the Company, and/or any officer, director, employee, agent,
representative, shareholder or attorney of the Company or any subsidiary in his,
her or its capacity as such on behalf of the Company or any

                                      -7-

<PAGE>

subsidiary) unless under a subpoena, court order or otherwise required by law to
do so. Nothing in this Section 18 shall preclude Employee from exercising his
rights as a stockholder of the Company.

     19.  Tax Consequences.  The Company makes no representations or warranties
          ----------------
with respect to the tax consequences of the payment of any sums to Employee
under the terms of this Agreement. Employee agrees and understands that he is
responsible for payment, if any, of local, state and/or federal taxes on the
sums paid hereunder by the Company and any penalties or assessments thereon.

     20.  Costs.  The Parties shall each bear their own costs, expert fees,
          -----
attorneys' fees and other fees incurred in connection with this Agreement.

     21.  Non-Binding Mediation.  The Parties shall make a good faith attempt to
          ---------------------
resolve any dispute or claim arising out of or related to this Agreement through
negotiation.  In the event that any dispute or claim arising out of or related
to this Agreement is not settled by the Parties, the Parties will attempt in
good faith to resolve such dispute or claim by non-binding mediation in Santa
Cruz, California to be conducted by JAMS-Endispute or such other mediator as the
parties shall mutually agree.  The mediation shall be held within thirty (30)
days of the request therefor.  The costs of mediation shall be shared equally by
the Parties to the mediation.

     22.  Authority.  The Company represents and warrants that the undersigned
          ---------
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Employee represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement.  Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.

     23.  No Representations.  Each Party represents that it has had the
          ------------------
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement.  Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.

     24.  Severability.  In the event that any provision hereof becomes or is
          ------------
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.

     25.  Entire Agreement.  This Agreement represent the entire agreement and
          ----------------
understanding between the Company and Employee concerning the subject matter
herein, and supersede and replace any and all prior agreements and
understandings.

     26.  No Oral Modification.  This Agreement may only be amended in writing
          --------------------
signed by Employee and the Chief Executive Officer of the Company.

     27.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of the State of California.

                                      -8-

<PAGE>

     28.  Effective Date.  This Agreement is effective eight days after it has
          --------------
been signed by both Parties (the "Effective Date").

     29.  Office Space.  Employee agrees that he will vacate his current office
          ------------
at the Company's corporate headquarters in Scotts Valley, California by August
15, 1998.

     30.  Paintings.  Employee hereby conveys, without consideration to
          ---------
Employee, all right, title and interest in all paintings previously provided to
the Company and its subsidiaries by Rita Shugart.

     31.  Counterparts.  This Agreement may be executed in counterparts, and
          ------------
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.

     32.  Voluntary Execution of Agreement.  This Agreement is executed
          --------------------------------
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims.  The Parties
acknowledge that:

          (a)  They have read this Agreement;

          (b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;

          (c) They understand the terms and consequences of this Agreement and
of the releases it contains;

          (d) They are fully aware of the legal and binding effect of this
Agreement.

     IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.

                                       SEAGATE TECHNOLOGY, INC.



Dated: 7/29/98                         By  /s/ Stephen J. Luezo
      ________________                    __________________________________


                                       AL SHUGART, an individual



Dated: 7/29/98                          /s/ Al Shugart
      ________________                 _____________________________________
                                       Al Shugart

                                      -9-

<PAGE>
                                                                              34


Accepted:

CHASE SECURITIES INC.,


by /s/ Sean Holland
   ---------------------------------------------------
   Authorized Signatory



GOLDMAN, SACHS & CO.,


by /s/ Goldman, Sachs & Co.
   ---------------------------------------------------
   Authorized Signatory


MERRILL LYNCH, PIERCE,
  FENNER & SMITH
  INCORPORATED,


by /s/ Michael Senft
   ----------------------------------------------------
    Authorized Signatory