SECURITIES AND EXCHANGE COMMISSION
                     WASHINGTON, D.C.  20549
                                
                                
                            FORM 10-K
      Annual Report Pursuant to Section 13 or 15(d) of the
                 Securities Exchange Act of 1934
                                
For The Year Ended December 29, 1996         Commission File No. 0-12064
                                
                                
                     STRATUS COMPUTER, INC.
     (Exact name of registrant as specified in its charter)
                                
                                
  MASSACHUSETTS                                     04-2697554
 (State or other jurisdiction of                  (I.R.S. Employer
 incorporation or organization)                   Identification No.)
                                
                                
  55 FAIRBANKS BOULEVARD, MARLBOROUGH, MA                01752
(Address of principal executive offices)                 (Zip Code)
                                
                                
                         (508)  460-2000
      (Registrant's telephone number, including area code)
                                
   Securities Registered Pursuant to Section 12(b) of The Act:
                                
Title of each class             Name of each exchange on which registered
 Common Stock , $.01 par            NYSE, Boston Stock Exchange,
  value per share                     Chicago Stock Exchange, Pacific Stock
                                      Exchange
 Common Stock Purchase Rights       NYSE, Boston Stock Exchange,
                                      Chicago Stock Exchange, Pacific Stock
                                      Exchange
                                
   Securities Registered Pursuant to Section 12(g) of The Act:
                              NONE
                                
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.        YES  x    No

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

The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $691,749,006 based
on the last reported sale price of the Common Stock on the NYSE,
Boston Stock Exchange, Midwest Stock Exchange, and the Pacific Stock 
Exchange on March 25, 1997.

Number of shares outstanding of each class of Common Stock as of
March 25, 1997: 24,060,835 shares of Common Stock (par $.01).
                                
DOCUMENTS INCORPORATED BY REFERENCE
                                             Part of Form 10-K into
     Document                                which incorporated

     Portions of Annual Report to
     Stockholders for the Year Ended
     December 29, 1996.                      Parts I, II and IV

     Portions of Proxy Statement for
     Annual Meeting of Stockholders
     on April 23, 1997.                      Part III


PART I

Item 1.   Business

     Founded in 1980, Stratus Computer, Inc. ("Stratus" or "the Company") 
offers a broad range of continuous availability computer hardware, software 
and service solutions to markets where computer availability is a critical 
need.  Continuous availability, as compared to the term "high availability," 
refers to Stratus (r) systems' ability to substantially reduce the two main 
sources of downtime: 1) downtime due to unexpected system failures, such as 
hardware or operating system crashes, and 2) downtime associated with 
shutting down a system for planned maintenance and upgrade procedures.  
Stratus systems are used primarily in the telecommunications and enterprise 
server marketplaces for online transaction processing (OLTP), communications 
control, distributed computing and other interactive applications in which 
system availability, rapid high-volume processing and data integrity are 
critical.  Examples of such applications include telecommunications network 
management, intelligent network services, electronic commerce via the 
Internet, World Wide Web and other enterprise networks, securities quotation 
and trading, stock exchange control, electronic funds transfer, automated 
teller machine networks, customer relationship management for retail and 
banking, credit authorization, home banking, travel reservation systems, 
managed health care administration, and lottery and gaming systems.  In 
addition, Stratus' intelligent network middleware provides a standards-based 
Signalling System 7 (SS7) communications infrastructure and service creation 
environment capabilities for building and connecting applications to the 
intelligent network.  

During 1996, Stratus fully joined the open systems world with two new 
platforms offering the Hewlett-Packard (tm) HP-UX (tm) and Microsoft (r) 
Windows NT (r) operating systems.  These new products address the market's 
demand for open systems that are smaller and more widely affordable, that 
are easy to use, and that satisfy the ever-increasing need for reliability.

The Company remains focused on computer availability, and intends to 
leverage the technology advances of other companies such as Hewlett-Packard, 
Intel (r), and Microsoft to reduce costs and time to market for new 
generations of products.  The Company plans to increase and improve 
performance, functionality and price/performance across its product lines to 
compete in broader markets.



PRODUCTS

Stratus is organized around three major product areas:  a core 
business of continuously available hardware-based fault-tolerant computer 
systems; hardware and software products and services that deliver continuous 
availability in a distributed computing environment; and application 
software and professional services for targeted markets.

Core Business

     Stratus Continuous Processing (tm) systems are used as highly reliable 
and expandable computer "platforms" on which businesses run critical online 
business operations.  Key Stratus product features which apply to this type 
of computing and provide a high level of application availability include:   
1) a hardware-based fault-tolerant design, which provides uninterrupted 
operations in the event of hardware component failures; 2) online system 
administration; 3) remote online service; 4) modular expansion; 5) customer-
replaceable components; 6) high-volume transaction processing; 7) systems 
compatibility; 8) support of industry standards; and 9) a productive 
development environment.  Stratus systems link with other systems such as 
terminals, workstations, shop floor devices and retail terminals for user 
input and transaction collection, and with large systems such as mainframes 
and other superminicomputers for database, planning and other business 
applications.

     Stratus systems achieve fault tolerance through a proprietary hardware 
architecture, duplication of off-the-shelf microprocessors, and one of three 
operating systems - Stratus FTX (r), the Company's UNIX (r) System V.4-
compliant operating system, the Company's implementation of the HP-UX 
operating system and the proprietary Stratus Virtual Operating System (VOS). 
Stratus' hardware-based fault-tolerant design requires no programming, a 
competitive advantage over most other fault-tolerant implementations.  
Stratus' multiprocessor architecture and operating systems are specifically 
designed to provide the functions and performance required by complex 
telecommunications-based applications and other online transaction 
processing.  For example, the FTX, HP-UX and VOS operating systems 
distribute the processing workload across multiple microprocessors, allowing 
the system to handle heavy transaction loads efficiently, and permitting 
multiple users to access and update data simultaneously.  To increase 
capacity, Stratus users simply add additional processors without rewriting 
software, a feature which permits economical online expansion.


In 1995, the Continuum (r) family of hardware fault-tolerant computer 
systems was announced.  Using Hewlett-Packard PA-RISC microprocessors, 
Continuum systems provide up to four times the price/performance of the 
previous core product line, the XA/R (tm) Series of fault-tolerant systems, 
and represent the largest increase in price/performance in the Company's 
history.  In June 1996, Stratus began shipments of the Continuum Series 400, 
an entry-level extension of the existing Continuum hardware family, and in 
November 1996, made the HP-UX operating system available on this new system.

	The Continuum Series offers three ranges of systems.  Continuum Models 
412, 415, 422, and 425 are entry-level systems.  The Series 400's Peripheral 
Component Interconnect (PCI) I/O subsystem leverage off-the-shelf components 
to provide high-performance, industry-standard bus capabilities.  This means 
the system's I/O options can be expanded as readily as technology allows.  
Continuum Models 610S, 610, 620, and 625 are midrange, high-performance 
systems that provide open, continuously available computing in distributed 
and departmental environments. Continuum Models 1210, 1215, 1220, 1225, and 
1245, the family's high-end systems, offer the expandability and growth path 
customers need for large online transaction processing applications.

	The Continuum family offers high performance, guaranteed availability 
and open systems.  Design innovations include incorporating up to 512MB 
memory on each CPU board, offloading the bus of memory traffic, dedicated 
I/O processors and symmetric multiprocessing.  The Continuum architecture 
allows users to expand system capabilities incrementally as needs increase.  
All Continuum models within each range utilize the same system logic cabinet 
and can be upgraded simply by swapping or adding processor boards.  Designs 
of the memory, disk, and I/O subsystems also simplify incremental growth.  
The Continuum 600 and 1200 Series supports up to three I/O communications 
processors, four logical RISC processors, 2GB of duplex memory, 178GB of 
duplex disk, and 84 I/O adapters which allow up to 1344 direct connect 
communications lines.

 	The Continuum Series' architecture enables the Company to offer one of 
the strongest availability guarantees in the industry.  In the guarantee, 
the Company agrees to refund a month's maintenance fees to a customer if 
that customer experiences even one second of unplanned hardware, Stratus 
value-added software or operating system downtime.  Stratus offers the 
availability guarantee in addition to the standard Stratus Continuum one-
year hardware warranty. 

     Stratus systems can identify and isolate many of their own failures, 
and automatically dial in to a Stratus Customer Assistance Center (CAC) to 
report system interruptions and order replacement parts.  Duplicate hardware 
components keep the system running the same as before the failure.  Users 
can readily replace these components.  CAC personnel can diagnose and fix 
most software problems remotely.

    As with all Stratus systems, the Continuum Series is binary compatible 
among all models that support a chosen operating system and is source code 
compatible with all prior Stratus models, including the previous XA/R Series 
based on i860 microprocessors from Intel and the XA (tm) 2000 Series based 
on the 680X0 microprocessors from Motorola.  Full source code compatibility 
protects existing software investments by allowing earlier applications to 
easily run on Continuum with only a recompile.

     The Continuum 600 and 1200 Series can be ordered with either the FTX or 
VOS operating system.  The Continuum Series 400 can be ordered with either 
FTX or the HP-UX operating system.  The Company offers Continuum systems 
that comply with central office environmental requirements for telephone 
operating companies throughout the world.

	The FTX operating system provides an industry-standard computing 
environment that complies with SVID (System V Interface Definition) Issue 3, 
POSIX 1003.1, and X/Open's XPG3 standard.  FTX facilitates customers' 
implementations of heterogeneous networks based on open systems, and 
provides for the portability of applications from other UNIX systems.  FTX 
is a fault-tolerant and scalable native port of UNIX System V, Release 4 
Multiprocessing, maintaining all of the open features and benefits of 
standard UNIX, with added extensions for reliability, availability, and 
serviceability.  In addition, FTX provides an adaptable UNIX environment 
that allows users to customize their telecommunications services to meet 
local requirements.

	The HP-UX operating system, running on the HP (tm) PA-RISC 
microprocessor, is one of the most open UNIX operating systems available in 
the industry today.  It provides enterprise-level functionality, including 
broad scalability, high performance, a large number of application 
solutions, and integrated system and network management solutions.  The HP-
UX operating system also provides complete Application Binary Interface 
compatibility with other HP systems running HP-UX version 10.10.  This means 
that a broad range middleware and applications currently operating on HP-UX 
version 10.10 can be moved without change to Stratus' implementation of the 
HP-UX operating system.  

	The VOS operating system provides a sophisticated environment tuned to 
meet the needs of OLTP applications in critical online computing 
environments. VOS also supports a large portfolio of industry-specific 
applications that provide solutions to customers with critical computing 
needs.

     The Continuum Series also offers existing Stratus customers a migration 
path forward. This benefits customers in two ways: by preserving their 
investments in application software and ensuring a continued growth path for 
the future. All three operating systems give customers access to a wealth of 
end-user applications and layered software products including database 
solutions, communications, programming languages, development tools, 
interfaces and transaction monitors.


	Stratus' previous XA/R system family, equipped with RISC 
microprocessors, comprises twelve fully software compatible systems from 
entry-level models through powerful mainframe-class platforms.  The entire 
XA/R family combines RISC technology with advanced cache memory design.  In 
addition, the Models 15-S, 45-S, 55-S, 310, 320 and 330 offer symmetric 
multiprocessing for higher performance.  This feature provides for a tightly 
coupled architecture in which multiple processor resources are available to 
any system or application task; system performance is thus improved.  All 
system memory is available to all system processors, providing further 
system overhead savings. 

     The XA/R Models 5-S, 10-S and 15-S are entry-level systems positioned 
as critical servers for small to medium-sized applications and distributed 
computing sites.  The midrange XA/R Models 25-S, 35-S, 45-S and 55-S are 
appropriate as critical servers where more expandability and growth are 
required.  The XA/R Series 300 provides the performance, growth path and 
expandability demanded by large OLTP applications.  CPU, memory, 
communications and disks can be increased online while an application is 
running, providing dynamic application growth.  Specifically, the Models 
305, 310 and 320 are upgraded by swapping or adding additional processor 
boards.  From one to eight I/O subsystems may be configured on the XA/R 
Series 300 to provide a range of communications growth and flexibility.  The 
Series 300 supports a maximum of six RISC processors, 512MB of duplex 
memory, 230GB of duplex disk capacity and 112 I/O adapters that allow up to 
1,744 direct communications lines.

Distributed Computing

     In the fourth quarter of 1996, RADIO (tm) Cluster (tm), the Company's 
Intel-based networked computer became generally available.  RADIO Cluster 
combines Windows NT with software from the Company's Isis Distributed 
Systems (tm) division to provide the highest level of reliability in a PC 
superserver.  Windows NT gives Stratus customers access to one of the 
fastest growing operating environments for PC-based servers.  RADIO Cluster 
is the first PC cluster designed for application availability in the event 
of hardware or software failure.  Redundancy of RADIO Cluster's compute 
processing, storage handling, and high-speed networking eliminates the 
single points of failure in PC servers.  

	RADIO Cluster delivers a packaged, expandable PC server cluster with 
Compute, Storage and high-speed Network Nodes configured with Isis (tm) high 
availability software providing automatic recovery and fail-over for 
uninterrupted performance.  In the event of component failures, application 
requests can be automatically re-routed to available RADIO Cluster Compute 
nodes permitting uninterrupted processing with transparent failover.  
Software from Isis is incorporated in the RADIO Cluster product to provide 
customers with a choice of availability levels:  basic replicated disk 
storage and cluster management or high availability.

     All RADIO Cluster systems provide data protection as a standard 
availability enhancement.  Customers can also select a high availability 
mode of operation, which provides fast restart and recovery in the event of 
failure of a process.  For the most critical applications, customers can 
incorporate Isis technology in the application itself to achieve Active 
Replication (tm), in which the application runs in two or more locations in 
the network simultaneously.  Active Replication guarantees continuous 
availability despite the failure of any one process or component.

     RADIO Cluster provides an integrated hardware and software platform 
that addresses scalability and upgradability.  Its Pentium (r) and Pentium 
Pro (r) -based compute nodes can be upgraded to the latest Pentium Pro 
technology.  This strategy allows Stratus' RADIO Cluster customers to 
immediately take advantage of the increased power and performance found in 
Intel's latest technology.  Adding or upgrading computing performance or 
storage is achieved simply by sliding new nodes into the RADIO Cluster 
cabinet while RADIO Cluster continues to operate.

     All RADIO Cluster nodes are self diagnosing, hot pluggable and 
replaceable by the user.  They are monitored by dedicated maintenance 
capabilities that automatically call a Stratus Customer Assistance Center in 
the event of a failure.  Disk partitions can be replicated and automatically 
resynchronized should a failure occur.  The entire system can be uniformly 
managed with powerful administrative and management capabilities that can be 
used locally or remotely.

     To implement high availability solutions, users simply add the Isis 
Availability Manager (IAM).  This layered software product enables users to 
define, monitor and detect failures for recovery action, e.g., existing or 
off-the-shelf applications can be automatically restarted on any node, or 
disk partitions can be reallocated from failed storage units.  IAM itself is 
replicated to remove any possibility of loss of such a key capability.  The 
Company will also develop products from IAM-based scripts for popular 
Windows NT applications (e.g. IIS, SQL and ExChange).

	Products from the Company's Isis division provide the applications 
fault tolerance for distributed computing environments.  This Isis software 
architecture, known as Active Replication, is a key differentiator of the 
RADIO Cluster product.  Isis products operate on both Stratus and non-
Stratus platforms.  Isis products include:  the Isis Reliable Software 
Developer's Kit for Windows (r) and Windows NT; Orbix+Isis (tm), a joint 
development effort between Isis and IONA Technologies Limited of Dublin, 
Ireland; and Isis for database.  Isis has customers worldwide in the 
financial service, telecommunications, manufacturing and scientific 
computing fields.

Application Software

     Application software and professional services that solve business 
problems by fully utilizing Stratus continuous processing and other 
distributed computing capabilities, are provided by the company's wholly-
owned software subsidiaries, S2 Systems, Inc. (S2)(tm) and the TCAM Group of 
companies (TCAM)(tm), as well as select third parties such as software 
houses, systems integrators and value-added resellers.  

     S2 is a leading supplier of business electronic commerce (EC) gateway, 
EC payments, EC healthcare and EC decision support systems software and 
professional services.  S2 specializes in the EC needs of the financial 
services, retail and healthcare/insurance industries as well as other 
evolving markets worldwide.

     S2 supports the needs of the "extended bank" through electronic funds 
transfer and other electronic banking services offered through ATMs, point-
of-sale devices, in-branch terminals, or in a home, office or wherever an 
Internet connection can be found.  In retailing, S2 specializes in 
enterprise retailing including electronic payments, customer-specific 
marketing rewards and data mining, and supply chain management EC software.  
For healthcare and insurance, S2 supplies managed care, health claims 
processing, electronic data interchange and broad EC gateway capabilities 
that drive integrated healthcare networks.  S2's products include the 
Network Express (tm) line of EC gateway and middleware products, ON/2 (r) 
and OpeN/2 for EC banking and electronic payments, HealthLine (tm) for EC 
healthcare systems and Customer Relationship Marketing for retail and 
banking EC decision support.

     TCAM is a leading provider of application software and services to the 
worldwide securities and brokerage industry, and provides solutions to 
several of the largest market makers in the NASDAQ equities market and the 
London Stock Exchange.

     Both S2 and TCAM software is available in client/server, PC, 
distributed and continuous availability computing environments. 

     Stratus, the Stratus logo, Continuum, FTX, StrataLINK, and StrataNET 
are registered trademarks, and RADIO, RADIO Cluster, Selectable 
Availability, Isis, Isis Distributed Systems, Continuous Processing 
HealthLine, Active Replication, Orbix+Isis, XA/R and XA are trademarks of 
Stratus Computer, Inc.  ON/2 is a registrated trademark and S2 and Network 
Express are trademarks of S2 Systems, Inc.  TCAM is a trademark of TCAM 
Systems, Inc.  All other trademarks are the property of their respective 
owners.


MARKETING AND SALES

Markets

     The Company's business objective is to be a leading supplier of 
hardware, software and service solutions to targeted telecommunications and 
enterprise server marketplaces where computer availability is a critical 
need. During 1996, Stratus realigned engineering, sales, and marketing 
efforts to better focus on growth opportunities in the targeted markets.  
Telecommunications service providers use Stratus systems at critical points 
in their networks and operations support systems.  Enterprise server 
applications support enterprise-wide computing in a client/server 
architecture.  Examples of applications in the targeted marketplaces include 
telecommunications network management, intelligent network services, 
electronic commerce via the Internet, World Wide Web and other enterprise 
networks, securities quotation and trading, stock exchange control, 
electronic funds transfer, automated teller machine networks, customer 
relationship management for retail and banking, credit authorization, home 
banking, travel reservation systems, managed health care administration, and 
lottery and gaming systems.  In addition, Stratus' intelligent network 
middleware provides a standards-based Signalling System 7 (SS7) 
communications infrastructure and service creation environment capabilities 
for building and connecting applications to the intelligent network.

	A headquarters staff of marketing professionals is employed with 
responsibility for direction of the field sales force, marketing strategy, 
technical support, advertising and public relations, customer and field 
training, competitive analysis and product planning.


Sales Channels

     Stratus sells its products and services to end users directly through 
its sales organization in the United States, Mexico, Canada, Western Europe, 
the Far East, Japan, Australia and New Zealand, South Africa, and indirectly 
through, or in conjunction with, its system integrators, VARs, application 
software houses and distributors. The Company's distributors are located in 
Central and South America, Central and Eastern Europe, the Middle East, 
Africa and the Far East.  The Company also sells through certain general 
purpose OEMs such as NEC Corporation, Ing. C. Olivetti & C., S.p.A. 
(Olivetti), and L.G. Electronics (LGE).

     NEC Corporation has non-exclusive rights to sell Stratus' UNIX-based, 
fault-tolerant systems worldwide.  Targeting the telecommunications market, 
NEC uses Stratus systems in a variety of applications, including integration 
with various NEC telecommunications solutions.  During 1996, 1995 and 1994, 
product sales and service revenue from NEC accounted for 15%, 7% and 4% of 
total revenues, respectively.  Olivetti has rights to distribute selected 
Stratus products on a non-exclusive basis in Italy and the rest of the 
world. LGE and its sister company, LGIC, a major Call Division Multiple 
Access (CDMA) switch manufacturer, have strong ties to the 
telecommunications marketplace in Korea.  As members of the global giant, LG 
Group, part of their strategy includes marketing Stratus-based solutions 
outside of Korea, in countries such as the United States and China.

For information on sales by geographic region, see Note 13 in Notes to 
Consolidated Financial Statements included as part of the 1996 Annual Report 
to Stockholders, which Note is incorporated herein by reference.

Competition

     The Company faces intense competition from a growing number of 
companies who offer a wide spectrum of business-class servers and employ a 
variety of techniques aimed at maintaining system and data availability.  
Most of these companies offer their solutions to the same markets targeted 
by Stratus.  While the Company's primary competitors are Tandem Computers, 
Inc., Hewlett-Packard Company, IBM Corporation, Sun Microsystems, Inc., and 
Digital Equipment Corporation, the Company expects to encounter additional 
competition in the future from vendors who integrate hardware and software 
products from such providers as Intel Corporation and Microsoft Corporation.  
Companies that fall into this category include Compaq Computer Corp. and 
Sequent Computer Systems, Inc.  While its primary competitors are 
substantially larger and have significantly more resources, the Company 
believes that its singular focus on critical on-line business applications, 
its expertise in continuous availability, transaction processing, 
distributed computing, automated service and specialized application 
solutions provide unique advantages compared with those of its competitors.  
The Company also believes it competes successfully on the basis of product 
capabilities, price and life cycle costs, ease of 
programming and its third party marketing programs.


BACKLOG

     Part of the Company's manufacturing and distribution strategy is to 
minimize the elapsed time between receipt of customer purchase orders and 
delivery of equipment.  The final completion of the Company's manufactured 
products is usually accomplished with standard parts and without the need 
for additional engineering, generally permitting shipment of products within 
30 to 60 days from receipt of order.  Throughout the Company's history a 
very substantial portion of quarterly shipments tend to be made in the last 
month of each quarter, and any backlog is generally filled within weeks of 
the beginning of the next quarter.  For these reasons, the amount of backlog 
is not required in order to understand the Company's business.


RAW MATERIALS, SUBCONTRACT LABOR AND MANUFACTURING

     Essentially all of the Company's product manufacturing is located 
outside the United States at the Company's manufacturing facility in Dublin, 
Ireland.  The Company purchases substantially all of its system component 
parts and peripheral devices from other manufacturers.  The majority of 
printed circuit boards are purchased from board subcontractors in the United 
States who manufacture in accordance with production standards and quality 
controls established by Stratus.  Presently, the Company believes it has 
adequate supplies and commitments from vendors to satisfy 1997 forecasted 
requirements; no delays in product shipments are expected.  Most peripheral 
devices, assemblies and parts are available from a number of different 
suppliers, but certain integrated circuits, printed circuit boards, plastic 
parts, and disk and tape drives are purchased from single sources of supply.

	During the second half of 1996, the disk drive industry experienced a 
lack of capacity related to certain size disks.  This situation is expected 
to continue into 1997; however, the Company believes that adequate supplies 
of current disk products will be available.  In addition, the Company will 
introduce several new disk products during 1997 that are expected to be more 
readily available within the disk drive industry.  The Company has not 
experienced any significant difficulties in obtaining supplies of memory 
devices, integrated circuits, peripherals, assemblies or parts, but 
shortages, if any, could result in production delays that may adversely 
affect its business.


PRODUCT DEVELOPMENT

     Hardware and software development expenditures are expected to remain 
in line with the general trend of product gross margin dollars over the next 
several years.  The Company's total research and development expenditures, 
which include certain capitalized software development costs, were $90.3 
million in 1996, $94.2 million in 1995 and $95.3 million in 1994.  These 
investments reflect the Company's commitment to provide leading edge 
hardware and software products to the telecommunications and enterprise 
server marketplaces. The Company leverages base hardware and software 
technologies supplied by partners, with development activities primarily 
focused on technologies which enhance systems and applications availability.  
In 1996, the major development efforts were directed towards the Company's 
Continuum and RADIO Cluster product families, Isis software products and 
ongoing investments in industry-targeted application software from its S2 
and TCAM subsidiaries.

     The Company owns patents and has patent applications pending in the 
United States and abroad relating to certain of its products.  While the 
Company believes that the pending applications relate to patentable devices 
or concepts, there can be no assurance that any patents will be issued or 
that any patents issued can be successfully defended.  The Company believes 
that patents are less significant in its industry than such factors as 
innovative and creative skills, technical experience and the management 
ability of its personnel.


EMPLOYEES

     As of December 29, 1996, the Company employed 2,293 persons.


Item 2.   Properties

     The Company currently occupies three buildings on a 112 acre site at
its corporate headquarters location in Marlborough, Massachusetts.  Two of
the three buildings and the underlying land (approximately 27 acres) plus a
62 acre adjoining parcel are owned, while the third building is leased
under an operating lease.  In addition, the Company owns its manufacturing and
office facility in Dublin, Ireland.  The aggregate amount of office,
engineering, manufacturing and customer service space that is owned is
approximately 410,749 square feet.

     Information relating to the above facilities is set forth in the
following table.


                                                 Owned/
                                       Floor     Leased
                                       Space   (Expiration
Plant Location        Use            (Sq. Ft.)    Date)     Renewals
--------------  ---------------      --------- ------------ -------

Marlborough,   Office, research and   202,087   Lease-2000  2 successive
MA             development                                  periods of
                                                            10 years each

Marlborough,   Office, engineering    198,341   Own
MA             and customer service

Marlborough,   Office, manufacturing  102,408   Own
MA             and engineering

Dublin,        Office and
Ireland        manufacturing          110,000   Own



     The Company's fiscal year 1996 annual rent for the leased facilities
was approximately $2.2 million plus real estate taxes and other occupancy
expenses.

     The Company also leases additional sales, customer service and
education space at locations throughout the United States, Canada, Europe,
the Far East, Japan, Australia and New Zealand, South Africa and Mexico at
an aggregate annual rent of approximately $12.8 million for fiscal year 1996.



Item 3.   Legal Proceedings

     The Company is subject to legal proceedings and claims, including claims
of patent infringement and other matters, which arose in connection with the
acquisition of businesses.  Management believes that the outcome of those
matters will not have a material adverse effect on the Company's financial
condition or results of operations.


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

     Not applicable.



PART II


Item 5.   Market for Registrant's Common Stock and Related Stockholder
Matters

     The approximate number of holders of record of the Company's common
stock at March 25, 1997 was 1,254. Additional information required by this
item is incorporated herein by reference to the "Common Stock Information"
appearing on page 34 of the 1996 Annual Report to stockholders.


Item 6.   Selected Financial Data

     The information required by this item is incorporated herein by
reference to the "Financial History" appearing on pages 14-15 of the 1996
Annual Report to Stockholders.


Item 7.   Management's Discussion and Analysis of Financial Condition and
Results of Operations

     The information required by this item is incorporated herein by
reference to the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 16-20 of the 1996
Annual Report to Stockholders.


Item 8.   Financial Statements and Supplementary Data

     The financial statements listed in the "Index to Consolidated
Financial Statements" filed as part of the Annual Report, together with the
report of Ernst & Young LLP dated January 21, 1997, are incorporated herein
by reference to the "Financial Statements and Supplementary Data" contained
in pages 21-35 of the 1996 Annual Report to Stockholders.


Item 9.   Disagreements on Accounting and Financial Disclosure

     None.



PART III

Item 10.  Directors and Executive Officers of the Registrant

A.   Directors of the Company:

     The information required by this item is incorporated herein by
reference to the "Election of Directors" appearing on pages 2-4 of the
Proxy Statement for Annual Meeting of Stockholders on April 23, 1997.

B.   The executive officers of the Company are as follows:

          Name             Age                 Position

     William E. Foster     52   Chairman, President and Chief Executive Officer

     Robert E. Donahue     48   Vice President, Finance and
                                Administration, Chief Financial Officer
                                and Treasurer

     Stephen C. Kiely      51   Vice President, Platform Products

     J. Donald Oldham      55   Vice President, Worldwide Sales

     David M. Weishaar     45   Vice President, Worldwide Operations
                                and Chief Quality Officer

     John F. Young         54   Vice President, Human Resources

     Eileen Casal          38   Vice President, General Counsel

     David P. Gamache      39   Vice President, Corporate Controller


     Mr. Foster, a founder of the Company, was, from February 1980, to
January 1996, Chairman and Chief Executive Officer of the Company.  From
1980 until November 1993, Mr. Foster also served as President of the
Company.  From January 1996, he has been Chairman and from August 1996, he has
also been President and Chief Executive Officer of the Company.

     Mr. Donahue joined the Company in June 1986 as Corporate Controller.
From June 1988 to October 1990, he served as Vice President of Finance and
Corporate Controller.  From October 1990 to April 1995, Mr. Donahue served as
Vice President, Finance and Administration, Chief Financial Officer and
Corporate Controller.  From April 1994, he has served as Vice President,
Finance and Administration, Chief Financial Officer and Chief Accounting
Officer.  From January 1996, he has also served as Treasurer.  From June 1996
to March 1997, Mr. Donahue also served as President of the Company's S2
Systems, Inc. subsidiary (S2) and from December 1995 has served as Chief
Executive Officer of S2.

     Mr. Kiely was, prior to joining the Company in 1994, Vice President
for EON Corporation and prior to that from 1990 through June 1993 Vice
President for Bull HN Information Systems, Inc.  He joined the Company and
was elected Vice President, Engineering in September 1994.  From January 1996
to November 1996, he served as Vice President, Continuum Products Group.  From
November 1996, he has served as Vice President, Platform Products.

     Mr. Oldham joined the Company in March 1984 as Regional Director for
the Company's Eastern Sales Region.  In December 1990 he was appointed Vice
President, Telecommunications Sales.  In May 1994 he was elected Vice
President, Telecommunications Division.  He has served as Vice President
Worldwide Sales since his election in October 1994.

     Mr. Weishaar joined the Company in August 1993 and was elected Vice
President, Worldwide Operations and Chief Quality Officer.  Prior to that
time, he was Vice President of European Operations and prior to that Vice
President, East Coast Operations for Sun Microsystems, Inc.

     Mr. Young joined the Company in 1985 as Director, Human Resources.  He
was elected Vice President, Human Resources in October 1990.

     Ms. Casal joined the Company in September of 1986 as Corporate Staff
Attorney.  From October 1990 to October 1995, she served as Division
Counsel for the Company's International Division.  In October 1995 she
served as Associate General Counsel and in February 1996 she was elected
Vice President, General Counsel.

     Mr. Gamache joined the Company in June of 1983.  Since that time he has
served in several corporate and operational finance positions including
General Accounting Manager, International Sales Controller, Director,
Finance and Administration - International Division and Director, Finance
and Administration - Worldwide Sales.  In October of 1995 he was elected
Vice President, Corporate Controller.

Item 11.  Executive Compensation

     The information required by this item is incorporated herein by
reference to the "Executive Compensation" appearing on pages 6-13 of the
Proxy Statement for Annual Meeting of Stockholders on April 23, 1997.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information required by this item is incorporated herein by
reference to the tables on pages 1 and 5 of the Proxy Statement for Annual
Meeting of Stockholders on April 23, 1997.

Item 13.  Certain Relationships and Related Transactions

     None.



PART IV

Item 14.  Exhibits, Financial Statements, Schedules and Reports on Form 8-K

(a)       1.   Financial Statements:

               The financial statements are listed in the Index to
               Consolidated Financial Statements filed as part of this
               Annual Report.

          2.   Schedule:

               The schedule listed in the accompanying Index to Consolidated
               Financial Statements is filed as part of this Annual Report.

          3.   Exhibits:

               The exhibits listed in the accompanying Index to Exhibits are
               filed as part of this Annual Report.

(b)       Reports on Form 8-K

          None.

<TABLE>


FINANCIAL HISTORY

In thousands except per share and employee amounts, unaudited

                                1996(1)    1995(1)    1994(2)    1993(2)    1992      1991      1990     1989     1988     1987  
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>       <C>       <C>      <C>      <C>      <C>      <C>
Summary of operations
-----------------------------------------------------------------------------------------------------------------------------------
Revenues                        $609,329   $587,922   $576,556   $513,680   $486,266  $448,632  $403,850 $341,327 $265,314 $184,150
-----------------------------------------------------------------------------------------------------------------------------------
Product revenue percent              67%        65%        72%        77%        79%       82%       84%      85%      88%      89%

Service revenue percent              33%        35%        28%        23%        21%       18%       16%      15%      12%      11%

Gross profit margin              269,771    284,732    321,961    292,811    289,070   267,312   237,995  207,613  160,787  117,281

Gross profit margin 
percent to sales                   44.3%      48.4%      55.8%      57.0%      59.4%     59.6%     58.9%    60.8%    60.6%    63.7%

Operating expenses               219,637(1) 272,664(1) 252,283(2) 267,395(2) 220,649   205,241   186,913  153,920  115,671   86,494

Operating expenses 
percent to sales                     36%        46%        44%        52%        45%       46%       46%      45%      44%      47%

Operating income                  50,134     12,068     69,678     25,416     68,421    62,071    51,082   53,693   45,116   30,787

Operating income 
percent to sales                      8%         2%        12%         5%        14%       14%       13%      16%      17%      17%
-----------------------------------------------------------------------------------------------------------------------------------
Net income                       $43,520    $17,338    $60,982    $16,607    $56,945   $49,705   $36,987  $35,393  $29,344  $19,395
-----------------------------------------------------------------------------------------------------------------------------------
Cash flow data

Net cash provided by 
operating activities             $99,118    $48,090   $140,621   $121,919    $97,445   $81,127   $36,102  $21,622  $12,696  $15,197

Acquisition of property, 
plant and equipment               48,165     54,734     53,858     33,668     60,759    31,478    27,395   36,963   17,807    9,801

Depreciation of property, 
plant and equipment               41,790     42,864     40,395     35,111     31,778    28,910    19,893   16,889   10,547    8,056

Share Data

Average shares and equivalents 
outstanding                       23,774     23,757     24,649     23,769     23,457    22,419    20,894   20,712   20,257   19,974

Net income per share               $1.83      $0.73      $2.47      $0.70      $2.43     $2.22     $1.77    $1.71    $1.45    $0.97

Common stock price
 High                             $34.87     $39.62     $38.50     $41.25     $54.25    $50.62    $29.00   $35.25   $31.50   $40.50
 Low                              $17.12     $23.37     $23.25     $20.25     $29.50    $20.75    $14.62   $19.25   $19.50   $15.25

Book value per share              $22.28     $20.49     $20.31     $18.13     $17.03    $14.18    $11.15    $9.12    $7.08    $5.34

Year end position

Total assets                    $638,921   $607,809   $613,410   $558,531   $467,182  $397,081  $327,574 $274,098 $199,787 $145,429

Working capital                  325,724    292,993    324,431    299,293    277,600   237,977   170,306  136,257  101,273   77,389
Long-term debt and obligations 
under capital leases               2,460      5,330      7,849     10,879        523     2,552    14,267   29,402   10,170    6,157

Stockholders' equity             519,484    478,391    490,152    435,960    389,663   314,026   230,281  183,972  138,985  102,360

Return on average 
stockholders' equity                  9%         4%        13%         4%        16%       18%       18%      22%      24%      22%

Employees                          2,293      2,441      2,878      2,610      2,622     2,492     2,381    2,147    1,711    1,224
-----------------------------------------------------------------------------------------------------------------------------------


<FN1> Operating expenses in 1996 and 1995 included charges of $4,623 and $24,500, respectively, to cover the cost of reducing the
Company's cost structure.

<FN2> Operating expenses in 1994 and 1993 included charges of $7,800 and $36,230, respectively, to write off purchased research and
development acquired in connection with the Company's acquisitions.

</TABLE>

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

The following table summarizes the percentage relationships of income and 
expense items included in the Consolidated Statements of Income for the three 
years ended December 29, 1996 and the percentage changes in those items when 
compared to the preceding year.

                            Percentage of       Percentage increase
                            total revenues           (decrease)
                          1996  1995  1994     1996   1995   1994   
-----------------------------------------------------------------
Product sales              67%   65%    72%     6%     (8%)    6%
Service revenue            33%   35%    28%    (1%)    27%    34%
-----------------------------------------------------------------
Total revenues            100%  100%   100%      4%     2%    12%
-----------------------------------------------------------------

Product cost of sales      35%   32%    29%     14%    11%     9%
Service expense            21%   20%    15%      8%    36%    30%
Research & development 
 expense                   13%   14%    15%     (5%)   (1%)    5%
Selling, general
 & administrative expenses 22%   28%    28%    (18%)    3%     6%
Restructuring charge        1%    4%      -    (81%)   N/A    N/A
Charge for purchased 
 research & development      -     -     1%     N/A    N/A   (78%)
Total costs and expenses   92%   98%    88%     (3%)   14%     4%
-----------------------------------------------------------------

Operating income            8%    2%    12%    315%   (83%)  174%
Other income, including
 interest income
 and interest expense       1%    2%     1%    (31%)   29%    42%
-----------------------------------------------------------------

Income before provision
 for income taxes           9%    4%    13%    162%   (72%)  152%
Provision for income taxes  2%    1%     2%    205%   (73%)   15%
-----------------------------------------------------------------

Net income                  7%    3%    11%    151%   (72%)  267%
-----------------------------------------------------------------



OVERVIEW
Stratus' business objective is to be a leading supplier of hardware,
software and service solutions to markets where computer availability is a
critical need. The Company's primary goal in 1997 is to accelerate the rate
of revenue growth and further improve operating margins. New Continuum and
RADIO Cluster products shipped in 1996 reached higher levels of systems and
applications availability for centralized and client-server computing in
the open systems world. These entry-level systems incorporate standard
commodity hardware technologies and standard operating systems at lower
price points. In June 1996, the Continuum Series 400, an entry-level
extension of the Company's existing Continuum family of hardware fault-
tolerant computer systems, began shipping. In November 1996, the Company's
implementation of the HP-UX operating system became available on the Series
400, bringing fault tolerance to a diverse portfolio of applications.
     In the fourth quarter of 1996, RADIO Cluster, the Company's Intel-
based networked computer achieved general customer availability. RADIO
Cluster combines Windows NT with software from the Company's Isis
Distributed Systems division to provide the highest level of reliability in
a PC superserver.
     During 1996, the Company continued to strengthen the application
software product offerings at its S2 and TCAM subsidiaries. As part of the
Company's strategy of providing complete solutions to targeted markets,
leading edge application suites are provided by these subsidiaries and
supported much of the Company's hardware revenues in 1996. Major
application products provided by S2 for electronic commerce and Internet
initiatives include ON/2 and OpeN/2 for banking solutions, the Customer
Relationship Marketing Suite for retail solutions and HealthLine for
medical claims processing. The TCAM subsidiary provides securities trading,
settlement, stock lending and exchange solutions.
     Products from the Company's Isis division provide the applications
fault tolerance for distributed computing environments. This Isis software
architecture, known as Active Replication, is a key differentiator of the
RADIO Cluster product. Isis products operate on both Stratus and non-
Stratus platforms.
     The Company remains focused on computer availability, and intends to
leverage the technology advances of other companies such as Hewlett-
Packard, Intel and Microsoft to reduce costs and time to market for new
generations of products. The Company plans to increase and improve
performance, functionality and price/performance across its product lines
to compete in broader markets.
     
OPERATING RESULTS
The Company's 1996 net income of $43.5 million, or $1.83 per share,
increased $26.2 million, or 151%, from 1995 net income of $17.3 million, or
$0.73 per share. Net income in 1995 had decreased $43.6 million, or 72%,
from 1994 net income of $61.0 million, or $2.47 per share.
     Operating income for 1996 and 1995 included restructuring charges of
$4.6 million, or $0.15 per share, and $24.5 million, or $0.83 per share,
respectively. Included in 1994 results was a charge of $7.8 million to
write off purchased research and development acquired in connection with
the Company's acquisitions. Excluding these charges, 1996 net income would
have been $47.1 million, or $1.98 per share, 1995 net income would have
been $36.9 million, or $1.55 per share and 1994 net income would have been
$68.8 million, or $2.79 per share.
     
REVENUES
Total 1996 revenues increased $21.4 million to $609.3 million, 4% higher
than 1995. This compares with an increase of $11.4 million, or 2%, from
1994 to 1995 and an increase of $62.9 million, or 12%, from 1993 to 1994.
The increase in 1996 was primarily due to increased sales of the Company's
Continuum family of hardware fault-tolerant computer systems.
     The following table details the percentage of product sales for each
of the Company's distribution channels:

                                            PERCENT OF TOTAL
                                     1996        1995        1994
-----------------------------------------------------------------
Domestic direct                        38          44          46
International direct                   28          33          35
NEC                                    22          11           6
Distributors                           11           8           9
Olivetti                                1           4           4
-----------------------------------------------------------------
Total                                 100         100         100
-----------------------------------------------------------------


     The Company's product sales increased 6% in 1996 compared with 1995.
This compares to an 8% decline in 1995 and 6% growth in 1994. The 1996
increase was driven primarily by increased hardware product revenues, up 9%
in 1996, somewhat offset by lower software license revenues. Strong results
in 1996 were realized in the telecommunications market sector, especially
in the United States, Japan and Korea, while sales to the financial
services and gaming industries declined.
     In 1996, international direct product sales declined 8% from 1995,
following a decline of 12% in 1995 and an increase of 12% in 1994.
International direct sales in 1996 were strong in the United Kingdom,
Sweden and Mexico. This growth was more than offset by declines in Holland,
France and Japan. The Company's 1996 direct product sales in the U.S.
declined 9% from 1995 following declines of 12% and 2% in 1995 and 1994,
respectively. The decline in the U.S. in 1996 was due mainly to lower sales
in the financial services industry, mitigated by increased sales in the
telecommunications industry.
     Revenue from the Company's indirect channels grew by 53% in 1996
compared to 1995, due primarily to increased sales to NEC. This followed
increases of 9% in 1995 and 14% in 1994. Distributor sales increased 38% in
1996 compared to a decline of 22% in 1995 and growth of 26% in 1994. The
1996 year-over-year results included stronger sales in the Far East, Latin
America and Africa. Revenues from NEC increased 111% in 1996 following
increases of 70% in 1995 and 62% in 1994.
     The Company's service revenues declined 1% in 1996 compared with 1995.
This compares to growth of 27% in 1995 and 34% in 1994. The decline in 1996
was due mainly to a 24% decrease in hardware professional services revenue
primarily related to the completion of several large system integration
contracts in 1995. This decline was partially offset by a 1% increase in
hardware and software maintenance revenues related to an increase in the
number of installed systems, and a 9% increase in consulting and support
revenues in the Company's software business.
     
COST OF GOODS SOLD
Product sales generated a gross margin of 47% in 1996 compared with 51% in
1995 and 59% in 1994. The four point decline in product gross margin in
1996 was primarily the result of increased competitive pressure, an
aggressively priced Continuum product line that delivers substantial
price/performance improvement over previous lines, the unfavorable impact
of foreign exchange rate movement and a decrease in software license
revenues which carry higher margins than traditional hardware product
sales.
     Service gross margins were 38%, 44% and 47% in 1996, 1995 and 1994,
respectively. The decrease from 1995 to 1996 was due primarily to the
decline in professional services revenues in the hardware business. In
addition, the extended service warranties provided with the Continuum
product offerings, combined with an increase in Continuum sales into the
existing installed base, slowed service revenue growth and added pressure
on the service gross margin.

RESEARCH AND DEVELOPMENT
The Company's investment in research and development of $79.8 million in
1996 decreased 5% from 1995, compared with a decrease of 1% in 1995 and an
increase of 5% in 1994. Although spending has declined, R&D expense as a
percent of revenue is significant and was 13% in 1996, 14% in 1995 and 15%
in 1994. These investments reflect the Company's long-standing commitment
to provide leading edge hardware and software products to the
telecommunications and enterprise server marketplaces, particularly in
support of mission critical applications. The Company leverages base
hardware and software technologies supplied by partners, with development
activities primarily focused on technologies which enhance systems and
applications availability.
     In 1996, the Company's research and development efforts were directed
towards its Continuum and RADIO Cluster product families, Isis software
products and its ongoing investments in industry-targeted application
software from its S2 subsidiary. Continuum is the latest generation of
Stratus' traditional hardware-based fault-tolerant architecture, leveraged
by the successful incorporation of Hewlett-Packard's industry-leading PA-
RISC microprocessor technology and Stratus' implementation of the HP-UX
operating system. The first models of the Continuum family were announced
in 1995, and in 1996 accounted for more than half the revenues from new
system shipments. Ongoing development investments will further leverage the
PA-RISC strategy by producing Continuum models that offer increased
performance and functionality and improved price/performance across the
line.
     The Company announced the first models of its RADIO Cluster family
late in 1995. Like Continuum, RADIO Cluster combines the Company's
expertise in highly available computing with base technologies provided by
best-of-breed partners - in this case Intel for microprocessors, and
Microsoft for operating systems. RADIO Cluster uses distributed computing
software technology developed by the Company's Isis division to achieve
applications availability, with multiple processing, storage handling and
high-speed networking nodes to eliminate single points of failure. The two
product lines broaden the market reach of the Company's product offerings
significantly.
     Management believes that ongoing expenditures in R&D, focusing on core
competencies further leveraged by effective partnerships, are vital to
future growth. The Company expects to continue to invest in these
technologies in the normal course of its business cycle, to bring
competitive products to market, and to realize the benefits of purchased
research and development.
     
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $29.1 million, or
18%, in 1996 to $135.2 million, compared with increases of $4.1 million, or
3%, and $9.5 million, or 6%, in 1995 and 1994, respectively. As a
percentage of total revenues, SG&A expenses were 22% in 1996, down from 28%
in both 1995 and 1994. The 1996 decrease was primarily a result of the 1996
and 1995 restructuring actions combined with a shift towards more of an
indirect distribution model. The Company's strategy is to continue to focus
the sales organization on the telecommunications and enterprise server
marketplaces, expand indirect sales channels and improve overall selling
efficiencies. In addition, the Company will continue to focus on effective
cost management.

RESTRUCTURING
During the second quarter of 1996, the Company restructured its software
business to improve operating results by aligning expenses with revenues,
and to focus on new strategic product offerings. As a result, a $4.6
million restructuring charge was recorded for workforce reductions and
asset write-downs related to the discontinuation of certain product
programs. This restructuring was substantially completed in 1996.
     During the third quarter of 1995, after completing an evaluation of
the Company's economic model and cost structure, management approved a plan
to restructure its operations. As a result, a $24.5 million restructuring
charge was recorded for the reduction of the worldwide workforce by
approximately 575 employees, as well as the consolidation of certain
manufacturing and sales operations. The action was taken to re-size the
expense structure of the Company as a result of a significant decline in
gross margins, bringing expense levels in line with the new economic model.
Of the total charge, $13.0 million was related to the workforce reduction
and $11.5 million was related to the consolidation of facilities and
operations. Approximately $9.5 million was paid and charged against the
reserve in 1996, completing this restructuring action.

OTHER INCOME
Interest income decreased in 1996 primarily due to a lower average balance
of cash and marketable securities during 1996 as compared to 1995. Interest
expense was virtually unchanged from 1995 and relates primarily to interest
on short-term borrowings and payment terms of the 1993 acquisition of Isis
Distributed Systems, Inc. Through the use of forward foreign exchange
contracts, the Company substantially negates the effects of foreign
currency fluctuations on foreign currency denominated intercompany
receivables and payables. The cost of hedging the Company's currency
exposures is included in other income.

INCOME TAXES
The Company's effective tax rate was 23.3% in 1996, 20.0% in 1995 and 20.9%
in 1994. The 1996 tax rate was higher than the previous two years due to a
change in the mix of taxable income among the Company's subsidiaries.
     The Company has recorded a net deferred tax asset at December 29,
1996. Although realization is not assured, based on the Company's history
of profitability and expectation of future taxable income, management
believes it is likely that the deferred tax asset will be realized.
     
FINANCIAL CONDITION AND LIQUIDITY
The Company had cash and marketable securities of $174.9 million at the end
of 1996. Corresponding balances were $155.1 million and $230.0 million at
the end of 1995 and 1994, respectively. Total assets at year end increased
to $638.9 million, compared with $607.8 million in 1995. Stockholders'
equity increased to $519.5 million in 1996 from $478.4 million in 1995.
     Cash generated from operating activities was $99.1 million in 1996
compared to $48.1 million in 1995 and $140.6 million in 1994. The increase
in cash generated from operating activities in 1996 compared to 1995 is
attributable to higher profits in 1996, coupled with a decrease in other
current assets and an increase in taxes payable.
     The Company used net cash of $13.7 million and $20.7 million for the
acquisition of businesses in 1995 and 1994, respectively. There were no
such expenditures during 1996.
     Capital expenditures were $73.3 million in 1996 compared to $77.9
million in 1995 and $67.0 million in 1994. The Company continues to invest
in capital improvements and other long-term assets, principally software
technologies used to broaden the functionality of product offerings and
aimed at targeted markets. Investments will be made in amounts sufficient
to support future growth and enhance operations in order to maintain the
highest standards of overall quality. In 1997, the Company plans to spend
approximately $70 million in capital improvements and software
technologies.
     Net proceeds from the Employee Stock Purchase Plan and the Company's
stock option plans were $10.5 million in 1996, $16.3 million in 1995 and
$19.9 million in 1994. In April 1994, the Board of Directors authorized the
purchase of up to 1.2 million shares of the Company's common stock on the
open market. Approximately 0.9 million shares were repurchased under this
authorization in 1994 for $31.4 million. In January 1995, the Board of
Directors authorized the purchase of an additional 1.2 million shares of
the Company's common stock on the open market. Repurchases under both
authorizations in 1995 totaled 1.5 million shares at a total cost of $44.6
million. In October 1996, the Board of Directors authorized the additional
purchase of up to 1.2 million shares of the Company's common stock on the
open market. Approximately 0.5 million shares were repurchased under the
authorization in 1996 for $12.6 million.
     The Company believes that funds necessary to support its operations in
the foreseeable future will be generated by cash flow from operations,
supplemented by continued stock issuance from the Employee Stock Purchase
Plan and stock option plans.
     
OUTLOOK
Future operating results of the Company will be dependent, in part, upon
its ability to continue to execute its strategy for growth in its three
principal business areas: the core product line of Continuum fault-tolerant
computer systems, the new RADIO Cluster products for distributed computing
and application software products provided by the Company's S2 and TCAM
subsidiaries. The Company will align its product strategies to meet the
industry-specific requirements of targeted growth markets, specifically the
telecommunications and enterprise server markets.
     The Company will continue to invest in its core business by developing
and introducing products which will expand the breadth of the Continuum
product family. In addition, the Company plans to continue to invest in
improvements in the functionality, serviceability and ease-of-use of its
distributed computing products. The development and delivery of
telecommunications middleware, application software and professional
services will be targeted towards those market segments where computer
availability is a critical need.
     
FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward looking statements made within this Report speak only as of the
date made. The Company cautions readers to recognize that actual results
could differ materially from those suggested, as a result of the following
factors:
     The Company's future operating results are dependent upon the timing
and market acceptance of new and enhanced product introductions, including
but not limited to the Continuum family of computers and the RADIO Cluster
products which began shipping in 1996. The transition of customers from
existing to new products in a rapidly changing technological environment,
as well as unexpected delays and/or cancellations in customer purchases of
existing products in anticipation of new products, are inherent risks in
this process.
     The Company historically ships a large percentage of its revenues
towards the end of each quarter, making revenue forecasting unpredictable.
In addition, product volumes and product and service mixes comprising the
forecast are dependent upon customers' changing demands and needs.
As the Company increases its product and service offerings, the process of
planning and forecasting revenue becomes increasingly difficult. Each of
these factors may subject the Company to fluctuations in revenues and
earnings.
     Essentially all of the Company's product manufacturing and many
suppliers are located outside the United States. In conjunction with the
forecast process discussed above, the Company must adjust operations to
satisfy production requirements as the need for demand changes. Production
capacity is dependent upon the ability of the Company's suppliers to
provide components on time and at reasonable prices. Supply constraints,
foreign currency exchange rate fluctuations, foreign country political and
economic changes, as well as changes in export and trade regulations could
adversely impact the Company's operations.
     In addition to its direct channels, the Company continues to expand
its indirect distribution channels through resellers and distributors. The
financial condition of, and ongoing business relationship with, such
resellers and distributors is important to the Company's financial success.
Fluctuations in channel mix may be significant and can have a significant
impact on gross margins as a percentage of revenue and therefore on
earnings per share.
     As the technology marketplace continues to emerge in anticipation of
meeting customers' changing needs, the industry continues to experience
competitive pressures on price and gross margins. Downward pressures on
price and gross margins and unexpected revenue and margin trends may cause
the Company to change its operations and as such, may adversely impact the
Company's financial results.


CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 29, 1996, December 31, 1995 and January 1, 1995


In thousands, except per share amounts

                                    1996       1995        1994
-----------------------------------------------------------------
Revenues
Product sales                    $406,956    $383,850   $ 416,112
Service                           202,373     204,072     160,444
-----------------------------------------------------------------
Total revenues                    609,329     587,922     576,556
-----------------------------------------------------------------
Costs and expenses
Product cost of sales             214,580     187,935     170,044 
Service expense                   124,978     115,255      84,551
Research and development expense   79,818      83,824      84,263
Selling, general and
 administrative expenses          135,196     164,340     160,220
Restructuring charge                4,623      24,500           -
Charge for purchased research
 and development                        -           -       7,800
-----------------------------------------------------------------
Total costs and expenses          559,195     575,854     506,878
-----------------------------------------------------------------
Operating income                   50,134      12,068      69,678
Interest income                     6,545       8,715       7,408
Interest expense                     (760)     (1,077)     (1,057) 
Other income                          836       1,966       1,087
-----------------------------------------------------------------
Income before provision for
 income taxes                      56,755      21,672      77,116
Provision for income taxes         13,235       4,334      16,134 
-----------------------------------------------------------------
Net income                        $43,520     $17,338     $60,982
-----------------------------------------------------------------
Earnings per share                  $1.83       $0.73       $2.47
Shares used to compute
 earnings per share                23,774      23,757      24,649
-----------------------------------------------------------------

See accompanying notes


CONSOLIDATED BALANCE SHEETS

At December 29, 1996 and December 31, 1995

In thousands, except share and per share amounts

                                     1996        1995
-----------------------------------------------------


Assets
Current assets
 Cash and cash equivalents       $131,683    $ 91,592
 Marketable securities             43,187      63,505 
 Accounts receivable, net         175,061     165,643 
 Inventories                       63,283      61,271
 Prepaid expenses                  14,540      10,901
 Other current assets              13,773      22,331
-----------------------------------------------------
Total current assets              441,527     415,243 
-----------------------------------------------------

Property, plant and equipment,
 less accumulated depreciation    122,756     116,381
Other assets, net                  74,638      76,185
-----------------------------------------------------
Total assets                     $638,921    $607,809 
-----------------------------------------------------

Liabilities and stockholders' equity
Current liabilities
 Accounts payable                $ 30,357    $ 31,842
 Accrued expenses:

   Payroll                         17,422      20,235 
   Other                           34,204      38,129 
-----------------------------------------------------
 Total accrued expenses            51,626      58,364
 Income taxes payable              13,564       8,617
 Short-term borrowings
 and obligations                    2,667       5,050 
 Deferred revenue                  17,589      18,377
Total current liabilities         115,803     122,250
-----------------------------------------------------

Long-term obligations and 
 deferrals                          3,634       7,168
Stockholders' equity
 Common stock, $.01 par value, 
  150,000,000 shares authorized, 
  26,252,242 and 25,743,776 shares 
  issued and outstanding in 1996 and
  1995, respectively                  263         257 
 Junior common stock, $.01 par value,
 500,000 shares authorized              -           -
 Additional paid-in capital       219,237     208,308 
 Retained earnings                391,424     347,904 
 Cumulative translation 
  adjustment                       (2,826)     (2,060)
------------------------------------------------------
 Subtotal                         608,098     554,409 
 Less: shares in treasury, at 
  cost, 2,934,300 and 2.400,000 
  shares in 1996 and 1995, 
  respectively                    (88,614)    (76,018)
------------------------------------------------------
Total stockholders' equity        519,484     478,391
Total liabilities and
 stockholders' equity            $638,921    $607,809
-----------------------------------------------------

See accompanying notes

<TABLE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the period January 2, 1994 to December 29, 1996

In thousands, except share amounts

<CAPTION>

                                              Additional                       Cumulative         Total
                                     Common     Paid-in   Retained  Treasury  Translation  Stockholders'
                                      Stock     Capital   Earnings    Stock   Adjustment         Equity
--------------------------------------------------------------------------------------------------------
<S>                                    <C>    <C>         <C>         <C>        <C>           <C>


Balance at January 2, 1994             $240   $168,095    $269,584  $      -       $(1,959)     $435,960

Repurchase of 888,523 shares of
 common stock                             -          -           -   (31,408)            -       (31,408)

Exercise of 641,881 options issued
 under employee stock option plans        7     12,291           -         6             -        12,304

Issuance of 329,272 shares of common
 stock under employee stock purchase
 plan                                     3      7,481           -         -             -         7,484

Foreign currency translation
 adjustment                               -          -           -         -           726           726

Tax benefit from non-qualified stock
 options                                  -      4,029           -         -             -         4,029

Compensation expense associated with
 grant of stock options                   -         75           -         -             -            75

Net income for the year ended
 January 1, 1995                          -          -      60,982         -             -        60,982
--------------------------------------------------------------------------------------------------------

Balance at January 1, 1995              250    191,971     330,566   (31,402)       (1,233)      490,152

Repurchase of 1,511,800 shares of
 common stock                             -          -           -   (44,616)            -       (44,616)

Exercise of 472,124 options issued
 under employee stock option plans        5      9,688           -         -             -         9,693

Issuance of 248,332 shares of common
 stock under employee stock purchase
 plan                                     2      6,588           -         -             -         6,590

Foreign currency translation
 adjustment                               -          -           -         -          (827)         (827)

Compensation expense associated with
 grant of stock options                   -         61           -         -             -            61

Net income for the year ended
 December 31, 1995                        -          -      17,338         -             -        17,338
--------------------------------------------------------------------------------------------------------
Balance at December 31, 1995            257    208,308     347,904   (76,018)       (2,060)      478,391

Repurchase of 534,300 shares of
 common stock                             -          -           -   (12,596)            -       (12,596)

Exercise of 242,091 options issued
 under employee stock option plans        3      4,480           -         -             -         4,483

Issuance of 264,028 shares of common
 stock under employee stock
 purchase plan                            3      5,963           -         -             -         5,966

Foreign currency translation
 adjustment                               -          -           -         -          (766)         (766)

Tax benefit from non-qualified stock
 options                                  -        424           -         -             -           424

Compensation expense associated with
 grant of stock options                   -         62           -         -             -            62

Net income for the year ended
 December 29, 1996                        -          -      43,520         -             -        43,520
--------------------------------------------------------------------------------------------------------
Balance at December 29, 1996           $263   $219,237    $391,424  $(88,614)      $(2,826)     $519,484


See accompanying notes

</TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 29,1996, December 31, 1995 and January 1, 1995

In thousands                               1996        1995        1994
-------------------------------------------------------------------------


Operating activities
Cash flows from operating activities:
 Net income                             $ 43,520    $ 17,338    $ 60,982
Adjustments to reconcile net income
to net cash provided by operating
activities:
 Depreciation and amortization            67,345      66,040      58,233 
 Restructuring charge                      4,623      24,500           -
 Charge for purchased research
  and development                              -           -       7,800
 Add (deduct) changes in working capital:
   (Increase) decrease in accounts
     receivable                           (9,485)    (22,596)     20,756 
   Increase in inventory                  (2,013)    (15,725)     (2,439) 
   Increase (decrease) in accounts
    payable and accrued liabilities      (12,301)      7,233       2,751 
   Increase (decrease) in income
    taxes payable                          4,947     (24,710)        (48)
   Net increase (decrease) in other
    working capital items                  2,482      (3,990)     (7,414) 
-------------------------------------------------------------------------
Net cash provided by operating activities 99,118      48,090     140,621  
-------------------------------------------------------------------------

Investing activities
Cash flows from investing activities:
 Acquisition of property, plant
  and equipment                          (48,165)    (54,734)    (53,858) 
 Acquisition of businesses, net of
  cash acquired                                -     (13,711)    (20,659) 
 Purchase of marketable securities       (31,557)   (119,945)    (87,276)
 Proceeds from sale and maturity
  of marketable securities                51,875      94,516      94,100 
 Acquisition of other assets             (25,092)    (23,172)    (13,106) 
-------------------------------------------------------------------------
Net cash used in investing activities    (52,939)   (117,046)    (80,799)
-------------------------------------------------------------------------

Financing activities
Cash flows from financing activities:
 Net proceeds from employee stock plans   10,511      16,344      19,863 
 Acquisition of treasury stock           (12,596)    (44,616)    (31,408) 
 Reduction of long-term debt              (3,531)     (3,187)     (2,684)
 Reduction of obligations under
  capital lease                                -           -        (514)
-------------------------------------------------------------------------

Net cash used in financing activities     (5,616)    (31,459)    (14,743)
-------------------------------------------------------------------------

Effect of exchange rate changes on cash     (472)         73         750 
Net increase (decrease) in cash
 and cash equivalents                     40,091    (100,342)     45,829 
-------------------------------------------------------------------------

Cash and cash equivalents at
 beginning of year                        91,592     191,934     146,105 
Cash and cash equivalents at 
 end of year                            $131,683    $ 91,592    $191,934
-------------------------------------------------------------------------


See accompanying notes


1.   SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. The investment in the
Company's joint venture with Axime S.A. of France (see Note 3) is accounted
for using the equity method. All intercompany transactions and balances
have been eliminated in consolidation. Certain amounts in the consolidated
financial statements of the prior years have been reclassified to conform
to the current year presentation. Such reclassifications had no effect on
previously reported results of operations.

Cash equivalents and marketable securities
Cash equivalents include highly liquid investments with maturities
generally of three months or less at time of acquisition and are comprised
primarily of government securities, commercial paper and bank notes carried
at cost, which approximates fair value. Marketable securities consist of
securities with maturities greater than ninety-one days. Fair values are
based on quoted market prices.

Translation of foreign currencies
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at the balance sheet date.
Revenues and expenses are translated at average exchange rates for the
period.
     Gains and losses from foreign currency translation are recorded in
"cumulative translation adjustment", a separate component of stockholders'
equity.
     
Accounts receivable
The Company states its accounts receivable at their estimated net
realizable value. The allowance for doubtful accounts was $8.3 million at
December 29, 1996 and $8.6 million at December 31, 1995.

Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.

Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation expense of
$41.8 million in 1996 and $42.9 million in 1995 was calculated using the
straight-line method based upon the following estimated useful lives:

Land improvements                  15 years
Buildings and improvements         15-31 1/2 years
Machinery and equipment            2-5 years
Leasehold improvements             terms of leases
Service and spare parts            3-5 years

Software
Costs related to the conceptual formulation and design of software are
expensed as research and development. Costs incurred subsequent to
attaining technological feasibility to produce the finished product are
generally capitalized. These costs are amortized over the lesser of three
years or the estimated product life cycle.

Intangible assets
The Company has classified as goodwill the cost in excess of fair value of
net assets acquired in purchase transactions. Unamortized goodwill costs,
included in other assets on the consolidated balance sheets, were $18.5
million at December 29, 1996 and $21.0 million at December 31, 1995.
Goodwill is being amortized using the straight-line method over a period of
seven years. The Company periodically evaluates the carrying value of
intangible assets for impairment. Any impairment is charged to expense in
the period identified.

Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include collectibility
of accounts receivable, carrying value of inventory and recoverability of
intangible assets, capitalized software and deferred tax assets. Actual
results could differ from those estimates.

Revenue recognition
Revenue from product sales is generally recognized at the time of shipment.
Software revenue is recognized at the time of delivery. Service, product
support and professional services revenues are recognized over the
contractual period or as the services are provided.

Income taxes
The Company provides deferred taxes to recognize temporary differences
between financial reporting and tax accounting.
The Company's practice is to reinvest the earnings of its foreign
subsidiaries in those operations and to repatriate retained earnings only
when it is advantageous to do so. Through the end of 1996, there was
approximately $239.4 million of unremitted earnings from the Company's
Irish manufacturing subsidiary. Additional U.S. taxes resulting from the
incremental U.S. tax rate over the Irish tax rate will be provided if these
earnings are remitted.

Foreign exchange contracts
The Company enters into forward foreign exchange contracts to hedge foreign
currency transactions on a continuing basis
for periods consistent with its committed exposures. These contracts
protect the Company from risk due to exchange rate movements, because gains
and losses on the contracts offset losses and gains on the assets,
liabilities and transactions being hedged. As of December 29, 1996 and
December 31, 1995, the Company had $71.9 million and $87.2 million,
respectively, of net foreign exchange contracts outstanding, predominantly
in European currencies and Japanese yen. The maturities of foreign exchange
contracts generally do not exceed six months. Foreign currency transaction
gains and losses, which are included in other income, as well as unrealized
gains and losses on forward foreign exchange contracts, are not material to
the Company's consolidated financial statements.

Concentration of credit risk
The Company sells its products to customers in diversified industries,
primarily in the United States, the Americas, Europe and the Asia Pacific
Rim. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
     The Company invests its excess cash principally in deposits with major
banks and in money market securities of companies and municipal government
entities with strong credit ratings. These securities typically mature
within three months of their purchase date and, therefore, are subject to
minimal risk. The Company's investments in marketable securities consist
primarily of time deposits, obligations of states and political
subdivisions, U.S. and foreign government issues, commercial paper and
corporate bonds. The weighted average maturity of these investments does
not exceed eighteen months.

Employee stock plans
Proceeds from the sale of common stock issued under the employee stock
option and purchase plans are credited to common stock at the par value.
The excess of the share price over par value is credited to additional paid-
in capital. The Company's stock plans are accounted for under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25), and related interpretations (see Note 10).

Earnings per share
Primary earnings per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding. Fully
diluted earnings per share has not been presented as the amount does not
differ significantly from primary earnings per share.

Effect of recent accounting pronouncements
In the first quarter of 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. SFAS 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The effect of adoption
did not have a material impact on the Company's financial position or
results of operations.
     In 1996, the Company also adopted Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In
accordance with the provisions of SFAS 123, the Company applies APB 25 and
related interpretations in accounting for its stock-based compensation
plans. Accordingly, compensation expense was immaterial in 1996 and 1995.
Note 10 to the Consolidated Financial Statements contains a summary of the
pro forma effects on reported net income and earnings per share in 1996 and
1995 as if the Company had elected to recognize compensation expense based
on the fair value at grant date of the stock options granted and the fair
value at the end of the plan period for stock purchase shares issued, as
prescribed by SFAS 123.
     
2. RESTRUCTURING

During the second quarter of 1996, the Company restructured its software
business to improve operating results by aligning expenses with revenues,
and to focus on new strategic product offerings. The restructuring action
resulted in a charge of $4.6 million and included charges for workforce
reductions and asset write-downs related to the discontinuation of certain
product programs. This restructuring was substantially completed in 1996.
     During the third quarter of 1995, after completing an evaluation of
the Company's economic model and cost structure, management approved a plan
to restructure its operations. As a result, a $24.5 million restructuring
charge was recorded for the reduction of its worldwide workforce by
approximately 575 employees, as well as the consolidation of certain
manufacturing and sales operations. The action was taken to re-size the
expense structure of the Company as a result of a significant decline in
gross margins and to place expense levels in line with the new economic
model. Of the total charges, $13.0 million was related to the workforce
reduction and $11.5 million was related to the consolidation of facilities
and operations.
     In 1995, the Company released approximately 450 employees. Also in
1995, approximately $15.0 million related to the restructuring was incurred
and charged against the reserve. In the first six months of 1996, the
remaining employees were released and approximately $9.5 million related to
the restructuring was incurred and charged against the reserve, completing
this restructuring action.
The restructuring charges and related reserves were recorded based on the
best information available at the time. The facilities related reserves
were established to recognize the lower of the amount of remaining lease
obligations, net of any sublease rentals, or the expected lease settlement
costs. Workforce-related charges, consisting principally of severance
costs, were established based on specific identification of the number of
employees to be terminated, their job classifications or functions and
their location.

3. ACQUISITIONS AND STRATEGIC INVESTMENTS

In December 1995, the Company entered into a joint venture relationship
with Axime, S.A. of Paris, France. The Company invested approximately $6.0
million in cash for 50% ownership of Axime's banking and retail application
software and professional services business. This investment is accounted
for using the equity method. The difference between the carrying amount of
the investment and the underlying equity in net assets of the joint venture
entity is being amoritized over seven years. The companies have combined
their resources to develop, support and market certain integrated solutions
for the Automated Teller Machines/Point of Sale (ATM/POS) market in France
and other authorized countries. Axime has been an exclusive distributor of
S2 products in France since 1988 and controls approximately 50% of that
country's ATM/POS market.
     In July 1995, the Company acquired all the outstanding stock of
Comercializacion TEA, S.A. DE C.V. (COMTEA), for approximately $4.1 million
in cash plus additional consideration of up to $13.6 million based upon
COMTEA's attainment, if achieved, of certain objectives over a three year
period commencing at acquisition. COMTEA is a major distributor of Stratus
hardware and software in Mexico. In addition to distributing Stratus
continuously available hardware systems over the past three years, COMTEA
also has distributed application software solutions from the Company's S2
Systems, Inc. subsidiary for banking, retail, credit authorization and
inter-networking applications.
     In January 1995, the Company, through its TCAM Systems, Inc.
subsidiary, acquired all the outstanding stock of Femcon Associates, Inc.
for approximately $3.0 million in cash. Femcon Associates, Inc. provides
system integration and customized software solutions to the worldwide
securities industry, and offers a broad range of application solutions on
PC, client/server, distributed and continuously available computing
environments.
     In December 1994, the Company acquired certain assets of AST/Transact
Ltd. of London (AST) for $2.9 million in cash. AST's primary product
acquired by the Company is its UM-20 electronic funds transfer (EFT) and
credit card processing software for retail banking. AST develops and
markets retail banking application software and professional services to
customers in the United Kingdom and continental Europe.
     In November 1994, the Company acquired all of the outstanding stock of
the TCAM Group of companies (TCAM) for approximately $16.0 million in cash
plus additional consideration of up to $33.0 million based upon TCAM's
attainment, if achieved, of certain objectives over a three year period
commencing at acquisition. The TCAM Systems Group includes TCAM Systems,
Inc. in New York and TCAM Systems (U.K.) Ltd. in London and Edinburgh,
Scotland. TCAM provides system integration and customized software
solutions to the worldwide securities industry, and offers a broad range of
application solutions on PC, client/server, distributed and continuously
available computing environments.
     Each of the Company's acquisitions, with the exception of the Axime
joint venture, has been accounted for using the purchase method of
accounting. The excess cost over the fair value of the net assets is $26.2
million, which is being amortized on a straight-line basis over seven
years. In connection with its acquisitions, the Company incurred a charge
of $7.8 million in 1994 for purchased research and development. This amount
was charged to operations because, in management's opinion, technological
feasibility for this purchased research and development had not been
established.
     The Company is subject to legal proceedings and claims, including
claims of patent infringement and other matters, which arose in connection
with the acquisition of these businesses. Management believes that the
outcome of those matters will not have a material adverse effect on the
Company's financial condition or results of operations.

4. AVAILABLE-FOR-SALE INVESTMENTS

Management determines the appropriate classification of investments at the
time of purchase and reevaluates such designation as of each balance sheet
date. All of the Company's investments at December 29, 1996 and December
31, 1995 have been classified as being "available-for-sale", and are
included in cash equivalents and marketable securities on the balance
sheet.
     Available-for-sale investments are carried at fair value with the
unrealized gains and losses reported in stockholders' equity. Unrealized
gains and losses were not material in 1996 and 1995. The amortized cost of
investments is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion is included in other
income. Realized gains and losses and declines in value judged to be other
than temporary on investments are included in other income. Interest and
dividends on investments are included in other income. The cost of
investments sold is based on the specific identification method.
     
The following is a summary of available-for-sale investments at 
December 29, 1996 and December 31, 1995:

                                            Estimated   Estimated
                                           Fair Value  Fair Value
In thousands                                     1996        1995
-----------------------------------------------------------------

Time deposits at banks                      $ 74,155     $ 57,140
Obligations of states and political 
 subdivisions                                 30,242       29,857 
Government issues - U.S. and foreign           4,900       19,883 
Commercial paper                                   -        1,853
Corporate bonds                                4,000        8,706
-----------------------------------------------------------------
Total available-for-sale investments        $113,297     $117,439 
-----------------------------------------------------------------


5. INVENTORIES

Inventories consisted of the following:

In thousands                                     1996        1995
-----------------------------------------------------------------

Finished products                             $35,921     $35,640
Work in process                                 1,542       1,174
Parts and assemblies                           25,820      24,457
-----------------------------------------------------------------
Total inventories                             $63,283     $61,271
-----------------------------------------------------------------


6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

In thousands                                     1996        1995
-----------------------------------------------------------------

Land and improvements                        $  3,241    $  3,241
Buildings                                      33,620      31,714
Machinery and equipment                       267,083     234,419 
Leasehold improvements                         24,282      26,128 
Service and spare parts                        19,829      21,455 
Construction in progress                        7,042       6,572  
-----------------------------------------------------------------
Total property, plant and equipment           355,097     323,529 
-----------------------------------------------------------------
Less accumulated depreciation                 232,341     207,148
Net property, plant and equipment            $122,756    $116,381
-----------------------------------------------------------------


7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS 

Unamortized software development costs, included in other assets on the
consolidated balance sheets, were $34.0 million and $34.3 million at
December 29, 1996 and December 31, 1995, respectively. Amortization
expense, along with adjustments to net realizable value, is included in
product cost of sales, and amounted to $23.1 million in 1996, $20.6 million
in 1995 and $16.7 million in 1994.


8. INCOME TAXES

The components of income (loss) before provisions for income taxes consisted 
of the following:

In thousands                         1996        1995        1994
-----------------------------------------------------------------
Domestic                        $(3,087)    $(27,157)     $13,010 
Foreign                          59,842       48,829       64,106
-----------------------------------------------------------------
Income before provision for 
 income taxes                   $56,755     $ 21,672      $77,116
-----------------------------------------------------------------


The provisions (benefits) for income taxes consisted of the
following:

In thousands                         1996        1995        1994
-----------------------------------------------------------------
Current
Federal                           $   452    $ (3,312)    $ 6,612 
State                                 295         250       1,216  
Foreign                            11,518      14,465       9,666 
-----------------------------------------------------------------
Total current                      12,265      11,403      17,494
-----------------------------------------------------------------
Deferred
Federal                               419      (4,612)       (759) 
State                                 105        (382)       (192)
Foreign                               446      (2,075)       (409) 
-----------------------------------------------------------------
Total deferred                        970      (7,069)     (1,360) 
-----------------------------------------------------------------
Provision for income taxes        $13,235    $  4,334     $16,134 
-----------------------------------------------------------------


The following table reconciles the Federal income tax rate to the tax rate 
used in the calculation of the provisions for income taxes as reported in the 
financial statements:

                                                1996        1995        1994
-----------------------------------------------------------------------------

Income tax at U.S. Federal statutory rate       35.0%       35.0%       35.0%
State income taxes, net of Federal benefit       0.5%       (0.4%)       0.9% 
Foreign sales corporation exempt income             -       (0.6%)      (0.3%)
Tax effect of foreign operations               (13.8%)     (15.5%)     (17.3%) 
Research and development credits                (1.3%)          -       (1.0%)
Tax exempt interest income                      (0.9%)      (3.4%)      (1.3%)
Goodwill                                         1.1%        1.6%        0.1%
Non-deductible charge in connection
 with acquisitions                                  -           -        3.5%
Other, net                                       2.7%        3.3%        1.3%
-----------------------------------------------------------------------------
Effective tax rate                              23.3%       20.0%       20.9% 
-----------------------------------------------------------------------------

     The Company paid income taxes of $5.7 million in 1996, $26.3 million in
1995 and $18.4 million in 1994.
     The earnings from products manufactured and sold by the Company's
Ireland manufacturing subsidiary are subject to a 10% tax rate through
December 2010.
     The Company has research and development credit carryforwards of $3.8
million that begin to expire in the year 2005 and alternative minimum tax
credit carry-forwards of $1.1 million which carry forward indefinitely.
Deferred tax assets and (liabilities) as of December 29, 1996 and December
31, 1995 were comprised of the following:


In thousands                                     1996        1995
----------------------------------------------------------------- 
Deferred tax assets
Depreciation/amortization                     $10,862     $ 9,773
Inventory/other reserves                       14,052      15,087
Carryforward losses, federal and
 state tax credits                              7,169       9,164 
Deferred gain on sale of building                 698         925
Intercompany profit elimination                   741         856 
Deferred compensation                             706       1,112
Other                                           3,128       3,070 
-----------------------------------------------------------------

Total deferred tax assets                      37,356      39,987 
Valuation allowance                            (3,947)     (3,947)
-----------------------------------------------------------------
Net deferred tax assets                       $33,409     $36,040
-----------------------------------------------------------------


9. DEBT

On January 3, 1997, the Company canceled its $50 million Multicurrency
Revolving Credit Agreement because management believes that it is no longer
needed. There were never any borrowings against this Agreement.
     In 1993, the Company issued $7.5 million of promissory notes and $4.1
million of deferred compensation obligations in connection with the Isis
acquisition. The remaining balances of the promissory notes are payable in
two annual installments of $1.5 million in each January of 1997 and 1998.
These notes accrue interest at a floating rate equal to the sum of .00465
plus the applicable federal rate for mid-term obligations. The remaining
deferred compensation of $0.2 million is payable in January 1997. These
payments are non-interest bearing and thus were recorded at their net
present value using a 6.5% discount rate. The fair values of these
instruments are not significantly different from their carrying values at
December 29, 1996.
     Certain subsidiaries have entered into credit arrangements with local
banks, principally in the form of overdraft borrowings, for the purpose of
short-term liquidity management. Borrowings under these agreements, whose
carrying amounts approximated fair value, were $0.9 million and $1.9
million at December 29, 1996 and December 31, 1995, respectively, with
weighted average interest rates of 4.8% in 1996 and 4.7% in 1995.
     The Company paid interest of approximately $0.6 million in 1996, $0.4
million in 1995 and $0.3 million in 1994.


10. STOCK PLANS

Employee option plans
The Company maintains three active stock option plans: the 1983 Stock
Option Plan, the Non-Qualified Stock Option Plan and the 1997 Non-Qualified
Stock Option Plan. The 1983 Stock Option Plan provides for the granting of
both incentive stock options and non-statutory (non-qualified) stock
options. The 1983 Stock Option Plan and the Non-Qualified Stock Option Plan
have a maximum authorized number of shares available for grant of 9,380,200
and limit the number of shares for which options may be granted to any
person in any fiscal year to a maximum of 100,000 shares. The 1997 Non-
Qualified Stock Option Plan has a maximum authorized number of shares
available for grant of 3,000,000. The option prices for non-qualified
grants under all plans are determined by the Compensation and Stock Option
Committee (the Committee) of the Board of Directors, subject to a minimum
option price of not less than 50% of the fair market value of the stock at
the time of grant for options issued under the 1983 Stock Option Plan. The
option price for grants intended to qualify as incentive stock options
under Section 422A of the Internal Revenue Code, as amended, shall not be
less than 100% of the fair market value of the stock on the date of grant.
The terms of exercise of the options are also determined by the Committee.
All options granted to date become exercisable in full not later than one
year from the date of grant and vest over periods ranging from two to five
years from the date of grant.
     At December 29, 1996 and December 31, 1995, a combined total of
930,927 and 1,638,344 shares, respectively, were available for future
grants under the 1983 Stock Option Plan and the Non-Qualified Stock Option
Plan. Substantially all options have been issued at the fair market value
of the stock on the date of grant.
     The Company applies APB 25 and related interpretations in accounting
for its stock-based compensation plans, including its Employee Stock
Purchase Plan. Accordingly, compensation expense was immaterial in 1996 and
1995. Had compensation expense for the Company's stock-based compensation
plans been determined based upon the fair market value at the grant date
for stock option awards (stock options) and at the end of the plan period
for stock purchased under its Employee Stock Purchase Plan (stock purchase
shares), consistent with the methodology prescribed under SFAS 123, the
Company's net income and earnings per share would have been $37.8 million,
or $1.59 per share, and $14.1 million, or $0.59 per share, in 1996 and
1995, respectively.
     The fair value of stock options granted and stock purchase shares
issued during 1996 and 1995 was estimated at the date of the grant and the
end of the plan period, respectively, using the Black-Scholes option-
pricing model with the following weighted-average assumptions: volatility
of 36.3% and 27.5%, respectively, risk-free interest rate of 6.13% and
5.99%, respectively, and no dividends. The weighted-average expected life
was 4 years for stock options granted during 1996 and 1995. The effects on
fiscal 1996 and 1995 pro forma net income and earnings per share of
expensing the estimated fair value of stock options and stock purchase
shares are not necessarily representative of the effects on reported net
income for future years due to such factors as the vesting period of the
stock options and the potential for issuance of additional stock options
and stock purchase shares in future years.

Stock option activity was as follows:

                                 Shares under  Weighted average
                                   options      exercise price
--------------------------------------------------------------
Outstanding, January 2, 1994      2,825,874          $22.25
--------------------------------------------------------------

Granted                           1,236,475           28.35
Exercised                          (641,881)          19.18
Canceled                           (274,953)          26.03
--------------------------------------------------------------
Outstanding, January 1, 1995      3,145,515          $24.74
--------------------------------------------------------------
Exercisable, January 1, 1995      3,145,515          $24.74
--------------------------------------------------------------

Granted                           1,226,168           26.79
Exercised                          (472,124)          20.11
Canceled                           (708,487)          27.61
--------------------------------------------------------------
Outstanding, December 31, 1995    3,191,072          $25.58
--------------------------------------------------------------
Exercisable, December 31, 1995    3,191,072          $25.58
--------------------------------------------------------------

Granted                           3,779,521           20.08
Exercised                          (242,091)          20.14
Canceled                         (3,072,104)          26.53
--------------------------------------------------------------
Outstanding, December 29, 1996    3,656,398          $19.57
--------------------------------------------------------------
Exercisable, December 29, 1996    3,656,398          $19.57
--------------------------------------------------------------

     The weighted average fair value of stock options granted during 1996
and 1995 was $7.78 and $9.77, respectively. The weighted-average fair value
of stock purchase shares issued during 1996 and 1995 was $7.61 and $9.95,
respectively.
     Exercise prices for options outstanding under the Plans as of December
29, 1996 ranged from $11.87 to $40.00. The weighted-average remaining
contractual life of those options is 8.14 years.
     During 1996, the Board of Directors authorized the Company to offer
holders of all outstanding, unexercised stock options granted between
January 1, 1994 and July 25, 1996 under the Company's stock option plans
(old options) the opportunity to exchange such options for an equal number
of options (new options) under the 1983 Stock Option Plan and the Non-
Qualified Stock Option Plan. Approximately 2,467,000 shares were exchanged,
with all new options issued at the fair market value ($17.125) of the
Company's common stock on the date of the exchange (July 25, 1996). These
new options were non-qualified and began a new four year vesting schedule.
     
Employee purchase plan
Under the Company's Employee Stock Purchase Plan, employees may purchase
the Company's common stock, at a price equal to 85% of the fair market
value of the stock, as defined. In April 1995, the shareholders approved an
increase in the number of shares which may be issued under the Plan from
2,700,000 to 3,100,000. An amendment to the Purchase Plan was adopted by
the Board of Directors on August 1, 1995, to ensure that the plan
administrators were "disinterested persons" for purposes of Section
16(b)(3) of the Securities and Exchange Act of 1934. On April 19, 1994, the
shareholders approved the amendment adopted by the Board of Directors to
extend the Plan to December 31, 2004. Common stock reserved for future
grants aggregated 172,938 and 437,015 shares at December 29, 1996 and
December 31, 1995, respectively. There were 264,028 shares issued at an
average price of $21.36 in 1996, 248,332 shares issued at an average price
of $26.56 in 1995 and 329,272 shares issued at an average price of $22.76
in 1994.

Stockholder rights plan
In December 1990, the Company adopted a Stockholder Rights Plan and
declared a distribution of Rights under the Plan to holders of record of
common stock on December 20, 1990. The Plan is designed to assure that all
Stratus Computer, Inc. stockholders receive fair and equal treatment in the
event of any unsolicited attempt to acquire control of the Company. Under
the Plan, each share of common stock carries one Right to purchase
additional stock at a purchase price of $110.00 subject to adjustment in
certain circumstances. The Rights are not exercisable or transferable apart
from the common stock until ten days after, (i) another person or group of
persons has acquired, or obtained the right to acquire, at least 20% of the
common stock, (ii) notice of a tender or exchange offer that would result
in another person or group of persons beneficially owning at least 20% of
the outstanding shares of common stock or (iii) determination by the Board
of Directors of the Company that a 15% stockholder is an "Adverse Person."
     On the occurrence of certain Triggering Events, as described in the
Plan, holders of Rights become entitled, upon exercise, to purchase shares
of the Company's common stock at a substantial discount. The Rights are
redeemable by the Company for $0.01 per Right and expire on December 4,
2000.

Common stock repurchase programs
In April 1994, the Board of Directors approved a plan to repurchase up to
1.2 million shares of common stock on the open market. In fiscal 1994, the
Company repurchased 888,200 shares at a cost of approximately $31.4 million
under the program. On January 31, 1995, the Board of Directors approved a
second open market share repurchase program to extend the total amount of
shares to be repurchased by another 1.2 million shares for a total of 2.4
million shares. In fiscal 1995, the Company completed this program when it
repurchased an additional 1,511,800 shares at a cost of approximately $44.6
million.
     In October 1996, the Board of Directors approved a plan to repurchase
up to 1.2 million additional shares of common stock on the open market. In
fiscal 1996, the Company repurchased 534,300 shares at a cost of
approximately $12.6 million under the program.

     
11. EMPLOYEE BENEFIT PLAN

Stratus employee capital accumulation plan (SECAP)
The Company has a benefit plan available to all domestic employees which
qualifies as a deferred compensation plan under Section 401(k) of the
Internal Revenue Code. Employees may contribute to the plan from 2% to 15%
of their salary, on a pre-tax basis, subject to certain statutory
limitations ($9,500 in 1996). The Company matches 100% of the first     1
1/2% automatically and an additional 1 1/2% of pre-tax contributions, up to
a maximum of $4,500 per participant, based on performance criteria
established by the Board of Directors. Contributions are invested at the
direction of the employee in one or more investment funds. Company
contributions accrued to the plan were $2.6 million in 1996 and $3.3
million in 1994. There were no Company contributions accrued to the plan in
1995.


12. COMMITMENTS

Lease obligations
The Company leases certain corporate and branch sales offices. The leases
range from one to seven years and generally contain renewal options for
periods ranging from one to twenty years and require the Company to pay all
executory costs. The following is a schedule of required future minimum
lease payments under operating leases at December 29, 1996:

                                                        Operating
In thousands                                               leases
-----------------------------------------------------------------
1997                                                       14,847
1998                                                       11,752
1999                                                        8,471
2000                                                        4,204
2001                                                        2,158
Subsequent years                                            3,147
-----------------------------------------------------------------
Total minimum lease payments                              $44,579
-----------------------------------------------------------------

     Total rental expense was $18.1 million in 1996, $18.7 million in 1995
and $16.3 million in 1994.


13. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

The Company operates in one industry segment, the design, manufacture,
marketing and service of hardware and software solutions to markets where
computer availability is a critical need.

Geographic information for 1996, 1995 and 1994 was as follows:


in thousands                         1996        1995        1994
-----------------------------------------------------------------
Revenues
United States                    $274,892    $289,500   $ 310,864
Intercompany                       41,296      46,165      27,377
-----------------------------------------------------------------
Total United States               316,188     335,665     338,241 
Ireland                           129,145      66,760      55,857 
Intercompany                      155,342     110,003      89,909 
-----------------------------------------------------------------
Total Ireland                     284,487     176,763     145,766 
Europe                            107,136     124,956     122,812
Other international                98,156     106,706      87,023 
Eliminations                     (196,638)   (156,168)   (117,286)
-----------------------------------------------------------------
Total revenues                   $609,329    $587,922    $576,556 
-----------------------------------------------------------------

Operating income (loss)
United States                    $ (8,734)   $ (3,260)   $  9,010 
Ireland                            42,642      29,741      47,158 
Europe                              9,181     (16,918)      2,602 
Other international                 6,588       3,960       9,302 
Eliminations                          457      (1,455)      1,606 
-----------------------------------------------------------------
Total operating income           $ 50,134    $ 12,068    $ 69,678 
-----------------------------------------------------------------

Assets
United States                    $526,333    $507,638    $458,551 
Ireland                           122,234      67,926      61,946 
Europe                             62,585      72,335      47,121 
Other international                48,893      51,180      38,155
Corporate assets (cash, cash 
 equivalents and marketable 
 securities)                      174,870     155,097     230,010 
Eliminations                     (295,994)   (246,367)   (222,373)
-----------------------------------------------------------------
Total assets                     $638,921    $607,809    $613,410 
-----------------------------------------------------------------


Intercompany transactions are accounted for at prices which approximate
arm's length transactions.

The Company has distribution agreements with various companies including
NEC. During 1996, 1995 and 1994, product sales and service revenue from NEC
accounted for 15%, 7% and 4% of total revenues, respectively.

The 1994 operating results for the United States include a charge of $7.8
million to write off purchased research and development acquired in
connection with the Company's acquisitions.



Unaudited Quarterly Financial Data

In thousands, except per share amounts and stock prices

                                                      Net Income
                    Total    Gross     Net Income        (loss)   Stock Prices
                    Revenues Profit     (loss)         Per Share  High     Low
-------------------------------------------------------------------------------
Fiscal 1996
First quarter      $142,925  $ 64,119    $10,583     $ 0.45      $34.87  $25.50
Second quarter      140,301    60,735      4,455       0.19       31.75   26.50
Third quarter       150,010    65,799     10,757       0.45       29.00   17.12
Fourth quarter      176,093    79,118     17,725       0.74       27.75   19.12
Total              $609,329  $269,771    $43,520     $ 1.83
-------------------------------------------------------------------------------
Fiscal 1995
First quarter      $128,502  $ 64,523    $ 6,414     $ 0.26      $39.62  $26.37
Second quarter      140,317    67,763      6,089       0.26       31.75   26.37
Third quarter       150,743    71,957     (9,268)     (0.40)      32.75   23.37
Fourth quarter      168,360    80,489     14,103       0.60       35.50   24.25
Total              $587,922  $284,732    $17,338     $ 0.73
-------------------------------------------------------------------------------
Fiscal 1994
First quarter      $135,407  $ 71,806    $11,389     $ 0.46      $31.75  $25.00
Second quarter      144,379    79,946     17,367       0.71       30.37   23.25
Third quarter       145,746    81,782     18,807       0.76       38.50   27.75
Fourth quarter      151,024    88,427     13,419       0.54       38.50   33.75
Total              $576,556  $321,961    $60,982     $ 2.47
-------------------------------------------------------------------------------


Second quarter 1996 results include a pre-tax charge of $4.6 million to
cover the cost of workforce reductions and asset write-downs relating to
the Company's software business.

Third quarter 1995 results include a pre-tax charge of $24.5 million to
cover the cost of a 21% workforce reduction and the consolidation of
certain manufacturing and sales facilities.

Fourth quarter 1994 results include a charge of $7.8 million to write off
purchased research and development acquired in connection with the
Company's 1994 acquisitions.

Stratus Computer, Inc. Common Stock is traded via the New York Stock
Exchange, the Boston Stock Exchange, the Chicago Stock Exchange and the
Pacific Stock Exchange under the trading symbol SRA. No dividends have been
declared on the Common Stock.


REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Stratus Computer, Inc.

We have audited the accompanying consolidated balance sheets of Stratus
Computer, Inc. as of December 29, 1996 and December 31, 1995, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 29, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on 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 that our audits
provide a reasonable basis for our opinion.
     In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Stratus Computer, Inc. at December 29, 1996 and December 31,
1995 and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 29, 1996 in conformity
with generally accepted accounting principles.
     
                                                  ERNST & YOUNG LLP
     
Boston, Massachusetts
January 21, 1997


DIRECTORS

Arthur Carr
Private Investor

Alexander V. d'Arbeloff
President and Chief Executive Officer, Teradyne, Inc.

Paul J. Ferri
General Partner, Matrix Partners

William E. Foster
Chairman and Chief Executive Officer, Stratus Computer, Inc.

Gardner C. Hendrie
Sigma Partners

Robert M. Morrill
Private Investor

Candy M. Obourn
Vice President, Eastman Kodak Company
President, Business Imaging Systems

Paul J. Severino
Founder and Former Chief Executive Officer, Bay Networks, Inc.

OFFICERS

William E. Foster
Chairman and Chief Executive Officer

Eileen Casal
Vice President, General Counsel

Robert E. Donahue
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer

David P. Gamache
Vice President, Corporate Controller

Stephen C. Kiely
Vice President, Platform Products

J. Donald Oldham
Vice President, Worldwide Sales

David M. Weishaar
Vice President, Worldwide Operations
and Chief Quality Officer

John F. Young
Vice President, Human Resources

CLERK

Richard N. Hoehn, Esq.
Partner, Choate, Hall & Stewart

VICE PRESIDENTS

Francois Barrault
Vice President, Sales, WESEMEA

Robert C. B. Cooper
Vice President, Distributed Computing Technology

Frank M. Coyle
Vice President, Information Services

Joe D. Croman
Vice President, Software Engineering

Joseph A. D'Angelo
Vice President, Business Development

Alain Daste
Vice President, International Sales

Winston Hui
Vice President, Asia Pacific Customer Service

Haruyoshi Iida
Vice President, Stratus Japan

Raefail K. Irvine
Vice President, Open Systems Engineering

Ivan M. Koon
President, S2 Systems

Karyn Lainis-Lantier
Vice President, Reliable Enterprise Systems

David J. Laurello
Vice President, Hardware Engineering

Marjorie Martin
Vice President, Continuum Products Engineering

Edward J. Mezzanotte
Vice President, Isis Distributed Systems

Eoin O'Driscoll
Vice President, Worldwide Manufacturing

Gary H. Okimoto
Vice President, Sales, Far East

Mark S. Quinlivan
Vice President, Professional and Technical Services

Geoffrey Sambells
Vice President, EMEA Customer Service

John H. Scanlon
Vice President, Telecommunications Systems

Ronald E. Staub
Vice President, Telecommunications Products

Richard M. Suech
Vice President, Americas Customer Service

Michael R. Thompson
Vice President, Americas Sales

Edward W. Turcotte
Vice President, Sales, U.S. Telecommunications

James S. Williams
Vice President, Channels




STRATUS COMPUTER, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

COVERED BY REPORT OF INDEPENDENT AUDITORS


Item 14(a)                                             Reference
                                                         (page)
                                              ------         -------------
                                               Form           Annual Report
                                               10-K                to
                                                              Stockholder
                                              ------         -------------

Data incorporated by reference to the
attached 1996 Annual Report to
Stockholders:

  Consolidated Balance Sheets at
     December 31, 1995 and
     December 29, 1996                                              22

  For the years ended January 1, 1995,
     December 31, 1995 and
     December 29, 1996:

          Consolidated Statements of
          Income                                                    21

          Consolidated Statements of
          Stockholders' Equity                                      23

          Consolidated Statements of
          Cash Flows                                                24

          Notes to Consolidated Financial
          Statements                                                25-33

          Supplementary information:
          Quarterly Financial Data (unaudited)                      34




Consolidated schedule for the year ended 
 December 29, 1996:

  II  -   Valuation and qualifying accounts     F-1

     All other schedules have been omitted since the required information
is not applicable or not present in amounts sufficient to require
submission of the schedule, or because the information required is included
in the Consolidated Financial Statements or the Notes thereto.

     The financial statements listed in the preceding index which are
included in the 1996 Annual Report to Stockholders are hereby incorporated
by reference.  With the exception of the pages listed in the preceding
index, and pages 14-20 and 34 noted in items 5 through 7, the 1996 Annual
Report to Stockholders is not to be deemed filed as part of this report.




                     STRATUS COMPUTER, INC.


                          SCHEDULE II.
                VALUATION AND QUALIFYING ACCOUNTS
           FOR THE THREE YEARS ENDED DECEMBER 29, 1996




ACCOUNTS        BALANCE AT                             BALANCE AT
RECEIVABLE     BEGINNING OF                             END OF
ALLOWANCE         PERIOD     ADDITIONS  DEDUCTIONS(1)    PERIOD



FISCAL
YEAR 1994      $6,132,839     4,547,856    (2,087,061)  $8,593,634

FISCAL
YEAR 1995      $8,593,634     7,520,111    (7,478,021)  $8,635,724

FISCAL
YEAR 1996      $8,635,724     5,852,630    (6,168,457)  $8,319,897

(1) Write-offs of uncollectible accounts receivable net of recoveries.




                              F-1



INDEX TO EXHIBITS

3.1       - Articles of Organization of Registrant. (1)
3.1 (a)   - Amendments to Articles of Organization. (2) (4)
3.2 (b)   - By-Laws of Registrant, as amended through January 31, 1995, (1)
4.11      - Stock Option Plan (January 1983). (3)
4.11(a)   - Restatement of Employee Stock Option Plan dated
             January 28, 1992.(9)
4.11(b)   - Amendment to Option Plans dated January 25, 1994. (7).
4.11(c)   - Amendment to Option Plans dated January 31, 1995.
4.11(d)   - Amendment to Option Plans dated August 1, 1995, (10)
4.13      - Employee Stock Purchase Plan. (3)
4.13(a)   - Amended and Restated Employee Stock Purchase Plan dated
             April 21, 1992. (9)
4.13(b)   - Amendment to Employee Stock Purchase Plan dated January 25,
             1994.
4.13(c)   - Amendment to Employee Stock Purchase Plan dated January 31,
             1995.
4.13(d)   - Employee Stock Purchase Plan amended and restated as of
             August 1, 1995. (10)
4.15      - Non-Qualified Stock Option Plan (November 1984). (3)
4.15(a)   - Restatement of Non-Qualified Common Stock Option Plan dated
             January 28, 1992. (9)
4.15(b)   - Non-Qualified Common Stock Option Plan Restatement Number 4
             effective August 1, 1995. (10)
4.18      - Rights Agreement dated December 4, 1990. (5)
4.20      - 1997 Non-Qualified Common Stock Option Plan (January 1997).
10.18     - Lease dated January 30, 1990 between Registrant and LePercq
             Corporate Income Fund, L.P. (2)
13.0      - 1995 Annual Report to Stockholders (which is not deemed to be
             "filed" except to the extent that portions thereof are expressly
             incorporated by reference in this Annual Report on Form 10-K).
21.1      - Subsidiaries and Joint Ventures of the Registrant, filed herewith.
23.1      - Consent of Ernst & Young LLP, filed herewith.

(1)  Incorporated herein by reference to same exhibit number of
     Item 16 to Registration Statement on Form S-1 (No. 2-85169)
     filed with the Securities and Exchange Commission on July 15,
     1983 as amended on August 25, 1983 and August 26, 1983.

(2)  Incorporated herein by reference to same exhibit number of
     Item 14 to Annual Report on Form 10-K filed with the
     Securities and Exchange Commission on March 28, 1990.

(3)  Incorporated herein by reference to Items 4 through 13 of
     Registration Statements on Form S-8 (No. 33-2174, No. 33-11864
     and No. 33-28742) filed with the Securities and Exchange
     Commission on December, 16, 1985, February 17, 1987 and May
     15, 1989, respectively.

(4)  Incorporated herein by reference to same exhibit number of
     Item 14 to Annual Report on Form 10-K filed with the
     Securities and Exchange Commission on March 31, 1988.

(5)  Incorporated herein by reference to Exhibit 1 to Registration
     Statement on Form 8-A filed with the Securities and Exchange
     Commission on December 6, 1990.

(6)  Incorporated herein by reference to same exhibit number of
     Item 14 to Annual Report on Form 10-K filed with the
     Securities and Exchange Commission on March 31, 1989.

(7)  Incorporated herein by reference to same exhibit number of
     Item 14 to Annual Report on Form 10-K  filed with the
     Securities and Exchange Commission on March 30, 1994.

(8)  Incorporated herein by reference to same exhibit number of
     Item 14 to Annual Report on Form 10-K  filed with the
     Securities and Exchange Commission on March 28, 1991.

(9)  Incorporated herein by reference to Exhibit 28 of Registration
     Statement on form S-8 (33-67758) filed with the Securities and
     Exchange Commission on August 23, 1993.

(10) Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3
     of Registration Statement on form S-8 (33-64709) filed with
     the Securities and Exchange Commission on December 4, 1995.



SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
28 th day of March 1997.

                        Stratus Computer, Inc.


                         BY:  ROBERT E. DONAHUE
                              ---------------------
                              Robert E. Donahue, Vice President, Finance
                              and Administration, Chief Financial Officer
                              and Treasurer

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


            Name                        Title                      Date


WILLIAM E. FOSTER         Chairman, President, Chief       March 28, 1997
-----------------          Executive Officer and Director
(William E. Foster)      (Principal Executive Officer)




ROBERT E. DONAHUE         Vice President, Finance and      March 28, 1997
-----------------         Administration, Chief
(Robert E. Donahue)       Financial Officer and Treasurer
                         (Principal Financial Officer and
                          Principal Accounting Officer)


ARTHUR CARR               Director                         March 28, 1997
-----------
(Arthur Carr)


ALEXANDER V. D'ARBELOFF   Director                         March 28, 1997
-----------------------
(Alexander V. d'Arbeloff)


PAUL J. FERRI             Director                         March 28, 1997
-------------
(Paul J. Ferri)


GARDNER C. HENDRIE        Director                         March 28, 1997
------------------
(Gardner C. Hendrie)


ROBERT M. MORRILL         Director                         March 28, 1997
-----------------
(Robert M. Morrill)


CANDY M. OBOURN           Director                         March 28, 1997
---------------
(Candy M. Obourn)


PAUL J SEVERINO           Director                         March 28, 1997
---------------
(Paul J.Severino)



                          EXHIBIT 4.20


STRATUS  COMPUTER, INC.

1997 NON-QUALIFIED COMMON STOCK OPTION PLAN


1.	Purpose.  The purpose of this Plan is to advance the interests of
Stratus Computer, Inc. (the "Company") by providing an opportunity to selected 
employees and consultants of the Company and its subsidiaries (including 
foreign subsidiaries) to purchase common stock of the Company through the 
exercise of options granted under this Plan.  By encouraging such stock 
ownership, the Company seeks to attract, retain and motivate employees of 
experience and ability.  It is intended that this purpose will be effected by 
the granting of non-qualified stock options as provided herein.

2.	Effective Date.  The Plan became effective as of January 13, 1997.

3.	Stock Subject to the Plan.  The number of shares that may be granted
under this Plan shall not exceed in the aggregate 3,000,000 shares of the
Common Stock, $.01 par value, of the Company ("the "Shares").Any Shares subject
to an option which for any reason expires or is terminated unexercised as to
such Shares may again be the subject of an option under the Plan.  In addition
any Shares purchased by an optionee upon exercise of an option under this Plan 
that are subsequently repurchased by the Company pursuant to the terms of such 
option may again be the subject of an option under the Plan.  The Shares 
delivered upon exercise of options under this Plan may, in whole or in part, 
be either authorized but unissued Shares or issued Shares reacquired by the 
Company.

4.	Administration.  This Plan shall be administered by a committee
consisting of two (2) or more members of the Board of Directors of the Company
(the "Board"), all of whom are "non-employee directors" as defined under
Section 16 of the Securities Exchange Act of 1934  (the "Committee").  Subject
to the provisions of this Plan, the Committee shall have full power to construe
and interpret the Plan and to establish, amend and rescind rules and
regulations for its administration.  Any decisions made with respect thereto
shall be final and binding on the Company, the optionee and all other persons.

5.      Eligible Participants.    Options may be granted to such employees of
or consultants to the Company or any of its subsidiaries as are selected by the
Committee.

6.      Duration of the Plan.  This Plan shall terminate on December 31, 2006, 
unless terminated earlier pursuant to Paragraph 10 hereof, and no options may 
be granted thereafter.

7.	Terms and Conditions of Options.  Options granted under this Plan shall
be evidenced by stock option agreements in such form and not inconsistent with 
the Plan as the Committee shall approve from time to time, which agreements 
shall evidence the following terms and conditions:

(a)     Price.  Each option agreement shall specify the purchase price per
share of stock payable upon the exercise of the option granted thereunder.

(b)     Number of Shares.  Each option agreement shall specify the number of
Shares to which it pertains.

(c)     Exercise of Options.  Each option shall be exercisable for the full 
amount or for any part thereof and at such intervals or in such 
installments as is specified in the option agreement pertaining thereto; 
provided, however, that no option shall be exercisable with respect to 
any shares later than ten (10) years after the date of grant of such 
option.

(d)     Notice of Exercise and Payment.  Each option hereunder shall be 
exercisable only by delivery of a written notice to the Company's 
Treasurer or any other officer of the Company designated by the 
Committee to accept such notices on its behalf, specifying the number of 
Shares for which it is exercised.  If said Shares are not at that time 
effectively registered under the Securities Act of 1933, as amended, the 
optionee shall include with such notice a letter, in form and substance 
satisfactory to the Company, confirming that the Shares are being 
purchased for the optionee's own account for investment and not with a 
view to distribution.  Payment shall be made in full at the time the 
option is exercised.  Payment shall be made (i) by cash or check, (ii) 
if permitted by the Committee, by delivery and assignment to the Company 
of Shares of Company stock having a fair market value (as determined by 
the Committee) equal to the option price, (iii) if permitted by the 
Committee, by promissory note, or (iv) by a combination of (i), (ii) and 
(iii) (if applicable).

(e)     Withholding Taxes; Delivery of Shares.  The Company's obligation to 
deliver Shares of Common Stock upon exercise of the option, in whole or 
in part, shall be subject to the optionee's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations.
The optionee may satisfy the obligation, in whole or in part, by electing to
have the Company withhold Shares of Common Stock having a value equal to the
amount required to be withheld.  The value of Shares to be withheld shall be
based on the fair market value of the Shares on the date the amount of tax to
be withheld is to be determined (the "Tax Date").  The optionee's election to
have Shares withheld for this purpose will be subject to the following
restrictions:  (1) the election must be made prior to the Tax Date, (2) the
election must be irrevocable,  and (3) the election will be subject to the
right of the Committee to disapprove the election.

(f)     Termination of Options.  Each option shall terminate and may no longer
be exercised if the optionee ceases for any reason to be an employee of or 
consultant to the Company or any of its subsidiaries, subject to the 
following provisions:

        (i)     if the optionee's employment shall have been terminated for any
                reason other than cause, death or disability, the optionee may
                at any time within a period of thirty (30) days after such 
                termination of employment, if and to the extent permitted by
                the option agreement, exercise the option to the extent it was 
                exercisable on the date of termination of the optionee's 
                employment;

        (ii)    if the optionee's employment shall have been terminated
                because of disability within the meaning of Section 22(e) (3)
                of the Internal Revenue Code of 1986, as amended (the "Code"),
                the optionee may at any time within a period not longer than
                one (1) year and one day after such termination of employment,
                if and to the extent permitted by the option agreement,
                exercise the option to the extent that the option was
                exercisable on the date of termination of the optionee's
                employment;

        (iii)   if the optionee dies at a time when he might have exercised the
                option, then his estate, personal representative or beneficiary
                to whom it has been transferred pursuant to Paragraph 7(h)
                hereof may at any time within a period not longer than one (1)
                year after the optionee's death, if and to the extent permitted
                by the option agreement, exercise the option to the extent the
                optionee might have exercised it at the time of this death; and

        (iv)    if the optionee's consulting engagement shall have been
                terminated, the optionee may thereafter exercise the option to
                the extent permitted by the option agreement; provided,
                however, that no option may be exercised to any extent by
                anyone after the date of expiration of the option.

(g)	Rights as Shareholder.  The optionee shall have no rights as a 
shareholder with respect to any Shares covered by his option until the 
purchase thereof.

(h)     Non-Transferability.    No option shall be transferable by the optionee
otherwise than by will or the laws of descent or distribution, and each 
option shall be exercisable during his lifetime only by him.

(i)     Repurchase of Shares by the Company. Any Shares purchased by an
optionee upon exercise of an option may in the discretion of the Committee be 
subject to repurchase by the Company if and to the extent specifically 
set forth in the option agreement pursuant to which the Shares were 
purchased.

8.	Stock Dividends; Stock Splits; Stock Combinations; Recapitalizations.  
Appropriate adjustment shall be made in the maximum number of Shares of Common 
Stock subject to the Plan, to give effect to any stock dividends, stock 
splits, stock combinations, recapitalizations and other similar changes in the 
capital structure of the Company.  Appropriate adjustment shall be made in the 
number, kind, and option price of Shares covered by any outstanding option 
hereunder to give effect to any stock dividends, stock splits, stock 
combinations, recapitalizations and other similar changes in the capital 
structure of the Company after the date such option is granted.

9.	Merger; Sales of Assets; Dissolution.  In the event of a change of the
Common Stock resulting from a merger or similar reorganization as to which the 
Company is the surviving corporation, the number and kind of Shares which 
thereafter may be optioned and sold under the Plan and the number and kind of 
Shares then subject to options granted hereunder and the price per share 
thereof shall be appropriately adjusted in such manner as the Board may deem 
equitable to prevent substantial dilution or enlargement of the rights 
available or granted hereunder.  Except as otherwise determined by the Board 
of Directors, a merger or a similar reorganization which the company does not 
survive, or a sale of all or substantially all of the assets of the Company, 
shall cause every option outstanding hereunder to terminate, to the extent not 
then exercised, unless any surviving entity agrees to assume the obligations 
hereunder.

10.	Termination or Amendment of Plan.  The Board may at any time terminate
the Plan or make such changes in or additions to the Plan as it deems
advisable, provided that no such termination or amendment shall adversely
affect or impair any then outstanding option without the consent of the
optionee holding such option.




                          EXHIBIT 21.1



                  SUBSIDIARIES AND JOINT VENTURES:


     The following is a list of the Company's current subsidiaries,
all of which are wholly-owned:

                                                  ORGANIZED
                                                UNDER LAWS OF
                                                -------------
Stratus Securities Corp.                        Massachusetts
Stratus World Trade Corp.                       Delaware
Stratus International, Inc.                     Massachusetts
Stratus F.S.C., Inc.                            U.S. Virgin Islands
S2 Systems, Inc.                                Delaware
TCAM Systems, Inc.                              New York


     The following is a list of subsidiaries of Stratus World Trade
Corp., all of which are wholly-owned:


                                                    ORGANIZED
                                                UNDER LAWS OF
                                                -------------
Stratus Computer Belgium S.A.                   Belgium
Stratus Computer GmbH                           Germany
Stratus Computer B.V.                           Netherlands
Stratus Holding & Finance, B.V.                 Netherlands
Stratus Computer (H.K.) Ltd.                    Hong Kong
Stratus Computer Corporation                    Canada
Stratus Computer Japan Co., Ltd.                Japan
Stratus Computer S.A.                           France
Stratus Computer PTY, Ltd.                      Australia
Stratus Holding & Finance Company, Ltd.         Ireland
Stratus Computer AB                             Sweden
Stratus Computer AG                             Switzerland
Stratus Computer (Singapore) Pte. Ltd.          Singapore
Stratus Computer (NZ) Limited                   New Zealand
Stratus Computer Luxembourg S.A.                Luxembourg
Stratus Computer (Korea) Ltd.                   Korea
Stratus Computer Philippines, Inc.              Philippines
Stratus Computer (Pte) Ltd.                     South Africa

     The following are wholly-owned subsidiary companies of Stratus
Holding & Finance Company Ltd:

Stratus Computer Limited                        Ireland
Stratus Investments Limited                     Bermuda
Stratus UK Holding and Finance Limited          United Kingdom


     The following is wholly-owned subsidiary companies of Stratus
Computer Limited:

Stratus Computer Ireland                        Ireland

     The following is a wholly-owned subsidiary company of Stratus
Holding & Finance B.V.:

Stratus Computer S.A.                           Spain

     The following is an 80% owned subsidiary company of Stratus
Holding & Finance B.V. and a 20% owned subsidiary of Stratus World
Trade Corp.:

Stratus Italia S.R.L.                           Italy


     The following are wholly-owned subsidiary companies of Stratus
UK Holding & Finance Company Limited:

Stratus Computer Ltd.                           United Kingdom
S2 Systems International Limited                United Kingdom
Stratus de Mexico S.A de C.V                    Mexico

     The following is an 90% owned subsidiary company of Stratus UK
Holding & Finance Company Limited and a 10% owned subsidiary of
Stratus World Trade Corp.:

TCAM Systems UK Ltd.                            United Kingdom

     The following is a list of the Company's current joint ventures, all of
which are 50% owned:

Astria S.A.                                     France



                                
                          EXHIBIT 23.1
                                
                                
                Consent of Independent Auditors


We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Stratus Computer, Inc. of our report dated January 21, 1997, included in 
the 1996 Annual Report to Stockholders of Stratus Computer, Inc.

Our audits also included the financial statement schedule of Stratus Computer,
Inc. listed in Item 14(a).  This schedule is the responsibility of the 
Company's management.  Our responsibility is to express an opinion based on
our audits.  In our opinion, the financial statement schedule referred to 
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

We also consent to the incorporation by reference in the Registration 
Statements (Forms S-8 Nos. 2-88104, 2-89901, 33-2174, 33-11864, 33-28742, 
33-67758 and 33-64709 and Form S-3 No. 33-77764 and in the related 
prospectus) of our report dated January 21, 1997, with respect to the 
consolidated financial statements and schedule of Stratus Computer, Inc.
included or incorporated by reference in this Annual Report (Form 10-K) for
the year ended December 29, 1996.


                                                ERNST & YOUNG LLP


Boston, Massachusetts
March 28, 1997