<PAGE>
 
              UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549


                                   FORM 10-Q


      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
                             EXCHANGE ACT OF 1934
                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                        COMMISSION FILE NUMBER 0-19674
                           ________________________

                            SYQUEST TECHNOLOGY, INC.
                                  (REGISTRANT)


        DELAWARE                                           (94-2793941
(STATE OR OTHER JURISDICTION OF                        IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

                       47071 BAYSIDE PARKWAY FREMONT, CA
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                     94538
                                  (ZIP CODE)


              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                (510) 226-4000


  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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                            YES   X        NO 
                                -----         -----

     As of July 31, 1998, 128,492,371 shares of the Registrant's common stock,
$0.0001 par value, were issued and outstanding.
<PAGE>
 
                                     INDEX

                            SYQUEST TECHNOLOGY, INC.

<TABLE>
<CAPTION>
                                                                                                        PAGE
                                                                                                       ------
                                                                                                     
<S>                                                                                                     <C> 
PART I   FINANCIAL INFORMATION                                                                       
                                                                                                     
ITEM 1.  Consolidated Condensed Financial Statements                                                 
                                                                                                     
       Consolidated Condensed Statements of Operations -                                             
        Three months and nine months ended June 30, 1998 and June 30, 1997                                 3
                                                                                                     
       Consolidated Condensed Statements of Financial Condition - June 30, 1998                      
        and September 30, 1997                                                                             4
                                                                                                     
       Consolidated Condensed Statements of Cash Flow - Nine months                                  
        ended June 30, 1998 and June 30, 1997                                                              5
                                                                                                     
Notes to Consolidated Condensed Financial Statements - June 30, 1998                                     6-11
                                                                                                     
                                                                                                     
ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results Operations             12-25
                                                                                                     
PART II  OTHER INFORMATION                                                                           
                                                                                                     
ITEM 1.  Legal Proceedings                                                                                 26
                                                                                                     
ITEM 2.  Changes in Securities                                                                             26
                                                                                                     
ITEM 6.  Exhibits and Reports on Form 8-K                                                                  26
                                                                                                     
SIGNATURES                                                                                                 27
</TABLE>

                                       2
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
          CONSOLIDATED CONDENSED STATEMENTS OF RESULTS OF OPERATIONS
                     (IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                 THREE MONTHS ENDED      NINE MONTHS ENDED
                                                                                --------------------  ---------------------
                                                                                      JUNE 30,                JUNE 30,   
                                                                                --------------------  ---------------------
                                                                                  1998       1997        1998       1997
                                                                                ---------  ---------  ----------  ---------
<S>                                                                             <C>        <C>        <C>         <C>
Net revenue                                                                     $ 44,742   $ 31,709   $ 123,831   $ 96,806
Cost of revenue                                                                   51,119     30,829     143,993     98,146
                                                                                --------   --------   ---------   --------
        Gross profit (loss)                                                       (6,377)       880     (20,162)    (1,340)

Operating Expenses:
        Selling, general and administrative                                       22,856      6,941      67,751     30,998
        Research and development                                                   3,378      3,712      10,796     15,430
                                                                                --------   --------   ---------   --------
        Total operating expenses                                                  26,234     10,653      78,547     46,428
                                                                                --------   --------   ---------   --------
        Loss from operations                                                     (32,611)    (9,773)    (98,709)   (47,768)
 
Financing charge on other obligations                                             (8,991)         -      (8,991)         -
Net interest expense                                                                (874)      (899)     (2,173)    (3,437)
                                                                                --------   --------   ---------   --------
Loss before income taxes                                                         (42,476)   (10,672)   (109,873)   (51,205)
Provision for income taxes                                                            15          -         888          -
                                                                                --------   --------   ---------   --------
Net loss                                                                         (42,491)   (10,672)   (110,761)   (51,205)
                                                                                --------   --------   ---------   --------
Value assigned to warrants issued in conjunction with preferred stock
 offerings                                                                             -     (2,550)     (2,100)    (2,550)
 
Preferred stock dividends                                                           (430)      (394)       (761)    (1,658)

Effect of incremental yield embedded in conversions terms                                                           (5,300)
                                                                                --------   -------    ---------   --------

Net loss applicable to commonstock holders                                      $(42,921)  $(13,616)  $(113,622)  $(60,713)
                                                                                ========   ========   =========   ========
Basic and diluted loss per share                                                  $(0.42)    $(0.31)     $(1.40)    $(2.14)
                                                                                ========   ========   =========   ========
Weighted average shares                                                          101,647     44,054      81,204     28,415
                                                                                ========   ========   =========   ========
</TABLE>

See notes to consolidated condensed financial statements

                                       3
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
           CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     JUNE 30,         SEPTEMBER 30,
                         ASSETS                                        1998               1997
-----------------------------------------------------------      ----------------  ---------------------        
<S>                                                              <C>               <C>
Current assets:
     Cash and cash equivalents                                     $  13,432              $   7,083
     Accounts receivable, net                                         20,281                 19,535
     Inventories, net                                                 46,652                 26,737
     Prepaid expenses and deposits                                     7,627                  6,049
                                                                   ---------              ---------
          Total current assets                                        87,992                 59,404
     
     Net property, equipment and leasehold improvements               27,659                 22,999
     Other assets                                                        228                    246
                                                                   ---------              ---------
                                                                   $ 115,879              $  82,649
                                                                   =========              =========
   LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------
Current liabilities:
          Short term borrowings                                    $  16,034              $  23,291
          Accounts payable                                            36,607                 14,800
          Accrued expenses and other liabilities                      15,603                 15,532
          Current portion of long-term debt                            2,172                  4,345
                                                                   ---------              ---------
               Total current liabilities                              70,416                 57,968
                                                                   ---------              ---------
Long-term debt                                                         2,315                  4,024
Other long-term liabilities                                              906                    959
Mandatory redeemable warrants                                          2,672                 14,085
Other obligations                                                     20,710                      -

Stockholders' equity:
 
          Preferred stock                                                  -                      -
          Common stock                                                    13                      6
          Additional paid in capital                                 346,767                222,766
          Treasury stock                                             (12,855)               (12,855)
          Retained deficit                                          (315,065)              (204,304)
                                                                   ---------              ---------
          Total stockholders' equity                                  18,860                  5,613
                                                                   ---------              ---------
                                                                   $ 115,879              $  82,649
                                                                   =========              =========
</TABLE>
See notes to consolidated condensed financial statements

                                       4
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   NINE MONTHS  ENDED JUNE 30,
                                                                               ----------------------------------
                                                                                     1998              1997
                                                                               -----------------  ---------------
Operating Activities:
<S>                                                                            <C>                <C>
     Net loss                                                                         $(110,761)        $(51,205)
     Adjustments to reconcile net loss to cash used in operating
          activities:
          Financing charge on other obligations                                           8,991                -
          Depreciation                                                                    4,279            8,434
          Capital Asset Write-Offs                                                          560            3,287
          Compensation cost in stock option plans                                         1,328               --
          Other                                                                              --               95
   Net changes in current assets and current liabilities:
     Accounts receivable                                                                   (746)           6,499
     Inventories                                                                        (19,915)         (14,393)
     Accounts payable                                                                    21,807             (860)
     Accrued expenses and other liabilities                                                 342             (819)
     Prepaid expenses and other                                                            (652)          (4,414)
                                                                               -----------------  ---------------
     Net cash used in operating activities                                              (94,767)         (53,376)

Investing activities:
     Purchases of equipment and leasehold improvements                                   (9,499)          (3,929)
     Other assets                                                                            --            1,530
                                                                               -----------------  ---------------
     Net cash used in investing activities                                               (9,499)          (2,399)

Financing activities:
     Net proceeds from issuance of common stock                                          83,225            8,916
     Net proceeds from issuance of preferred stock                                       38,931           60,800
     Net (repayment of) proceeds from bank borrowings                                    (7,257)           3,254
     Repayments on long term debt                                                        (4,284)         (13,394)
                                                                               -----------------  ---------------
     Net cash provided by financing activities                                          110,615           59,576

Net increase in cash and cash equivalents                                                 6,349            3,801
Cash and cash equivalents at beginning of the period                                      7,083            3,670
                                                                               -----------------  ---------------
Cash and cash equivalents at end of the period                                        $  13,432         $  7,471
                                                                               =================  ===============
</TABLE>
           See notes to consolidated condensed financial statements

                                       5
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                                 June 30, 1998

NOTE 1 -- BASIS OF PRESENTATION

  The Company's consolidated financial statements have been presented on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.  During the 24 month period 
ended June 30, 1998, the Company incurred aggregated consolidated net losses of
$189.9 million, including a net loss of approximately $68.7 million for the year
ended September 30, 1997 and a net loss of approximately $110.8 million for the
first nine months of fiscal 1998. Working capital was $17,576,000 at June 30,
1998, compared to $1,436,000 at September 30, 1997 and ($37,351,000) at
September 30, 1996.

  The Company is in the process of executing a turnaround and faces significant 
risks associated with successful execution of its turnaround strategy. These 
risks include, but are not limited to, risks associated with lack of cash flow 
and available funds, technology and product development, introduction and market
acceptance of new products, changes in the marketplace, competition from 
existing and new competitors and retention of key personnel.

  The Company introduced new products in November 1997 and incurred production
start-up costs associated with the launch of those products that contributed to
the losses reported for the fiscal quarters ended December 31, 1997, March 31,
1998 and June 30, 1998. The Company has funded the cumulative losses primarily
through the sale of preferred and common stock and the sale of common stock at
par value as an incentive to exercise outstanding warrants to purchase common
stock. At the November 1997 Special Stockholders' Meeting, the stockholders
approved an increase in the Company's authorized capital stock from 120 million
common shares to 240 million common shares.

  Adverse market conditions in the personal computer and data storage industries
have resulted in lower than anticipated unit shipments and sales prices of the
Company's products.  As a result, the Company has experienced significant
revenue shortfalls, negative cash flow, a lack of liquidity and excess
inventory.  The Company anticipates continuing losses during its fourth quarter
ending September 30, 1998, commensurate with the losses incurred during the
first three quarters of fiscal 1998.

  The Company's existing capital resources are insufficient to fund operations
through the remainder of its fiscal year ending September 30, 1998. The Company
will look to proceeds from the exercise of outstanding warrants issued in
connection with previously completed financings, or from sales of common or
preferred stock, or debt securities to fund operations until market conditions
improve. The Company has no agreements with investors or potential investors
to exercise warrants or sell equity or debt securities, however, and there is
no assurance that the Company will be able to secure such additional
financing. Without such additional funding, there is no assurance that the
Company will be able to continue as a going concern.

  Cash proceeds could be raised upon exercise of outstanding warrants;
however, the outstanding warrants do not include any demand or call
provisions. To induce existing warrant holders to exercise their warrants
management may have to offer discounts to the contractual exercise prices,
issue exchange warrants at market or negotiated discount exercise prices or
provide other incentives. From March through June 1998, the Company sold a
total of 17,475,736 shares of common stock to certain investors at par value
as incentives for the investors to exercise their outstanding warrants.

                                       6
<PAGE>
 
  If management is unable to raise equity capital through the exercise of
outstanding warrants, the Company may have to offer for sale additional
convertible preferred stock or debt instruments such as convertible debentures.
There can be no assurance, however, that such financings would be available when
needed, if at all, or on favorable terms and conditions. The existence of the
Company's outstanding convertible preferred stock, warrants and options is
likely to affect, materially and adversely, the terms on which the Company can
obtain additional financing. Moreover, the holders of such convertible
securities, warrants and options can be expected to exercise them at a time when
the Company would otherwise, in all likelihood, be able to obtain additional
capital by an offering of its unissued capital stock on terms more favorable to
the Company than those provided by such convertible securities, warrants and
options.

  The precise amount and timing of the Company's future funding needs cannot be
determined accurately at this time, and will depend on a number of factors,
including the market conditions in the personal computer and data storage
industries, the demand for the Company's products, the quality of product
development efforts, availability of critical components, management of working
capital, and continuation of normal payment terms and conditions for purchase of
materials and services.

  The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for fair
presentation have been included.

  Operating results for the three and nine-month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K, as amended, for the year ended September 30, 1997.


NOTE 2 -- INVENTORIES

  Inventories are comprised of the following:
<TABLE>
<CAPTION>
                                 JUNE 30,         SEPTEMBER 30,
                                   1998                1997
                            ------------------  ------------------
<S>                         <C>                 <C>
                                        (IN THOUSANDS)
Raw materials                 $14,307               $13,675
Work in process                 6,486                 6,840
Finished goods                 25,859                 6,222
                            ------------------  ------------------
                              $46,652               $26,737
                            ==================  ==================
</TABLE>

                                       7
<PAGE>
 
NOTE 3 -- NET LOSS PER SHARE

  The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share", during fiscal 1998.

  The computation of net loss per share for the quarter ended June 30, 1998
includes an adjustment related to the computation of earnings per share
applicable to common shareholders of $0.4 million, representing preferred stock
dividends. Absent this adjustment, the net loss per share applicable to the
operations of the business would be $(0.42).  The computation of net loss per
share for the nine months ended June 30, 1998 includes adjustments related to
the computation of earnings per share applicable to common stockholders of $2.1
million, representing the value assigned to warrants issued in connection with
Series 5 preferred stock, and $0.8 million, representing preferred stock
dividends. Absent these adjustments, the net loss per share applicable to the
operations of the business would be $(1.36). The net loss per share has
decreased during the periods presented primarily due to the increased number
of common shares outstanding.

  The basic net loss per share amount for the three and nine-month periods ended
June 30, 1998 are based on the weighted average number of shares of common stock
outstanding during the period.

  Options, warrants and common shares issuable on the conversion of preferred
stock have been excluded from the computation of diluted earnings per share, as
they are anti-dilutive.

                       COMPUTATION OF EARNINGS PER SHARE
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                THREE MONTHS    THREE MONTHS   NINE MONTHS   NINE MONTHS
                                                   ENDED            ENDED         ENDED         ENDED
                                                  JUNE 30,        JUNE 30,       JUNE 30,      JUNE 30,
                                                    1998           1997           1998          1997
                                                ------------    ------------   -----------   -----------
<S>                                             <C>             <C>            <C>            <C>
Net Loss                                          $(42,491)      $(10,672)     $(110,761)     $(51,205)

Value assigned to warrants issued in
   conjunction with preferred stock offerings          ---         (2,550)        (2,100)       (2,550)
 
       Cumulative preferred stock dividends           (430)          (394)          (761)       (1,658)

       Effect of incremental yield embedded in                     
          conversions terms                            ---            ---            ---        (5,300)
                                                ------------    ------------   -----------   -----------
       Net loss applicable to common 
          stockholders                            $(42,921)      $(13,616)     $(113,622)     $(60,713)
       Weighted average shares                     101,647         44,054         81,204        28,415
       Basic and diluted loss per share           $  (0.42)      $  (0.31)     $   (1.40)     $  (2.14)
</TABLE>

                                       8
<PAGE>
 
NOTE 4 -- LINES OF CREDIT

    In May 1998, the Company renegotiated its domestic line of credit with a
financial institution, continuing the existing terms and extending the line
through May 31, 1999. The line provides for a limit on borrowings of the lesser
of $30.0 million or 80 percent of eligible accounts receivable. As of June 30,
1998, approximately $13.7 million of borrowings were outstanding under the line.

    Pursuant to the terms of its line of credit, the Company is required to meet
or exceed certain financial performance criteria on a quarterly basis (the 
"Financial Covenants"). The Company's lender has verbally notified the Company 
that a written waiver of the Financial Covenants for the Company's third quarter
ended June 30, 1998, will be provided if the Company does not comply with the 
Financial Covenants. Without such a waiver, the Company would be in default
under its line of credit.

    The Company's manufacturing subsidiary in Penang, Malaysia, SyQuest
Technology Sdn Bhd (M), has a banking facility with a Malaysian financial
institution expiring September 1998 and consisting of a line of credit with an
outstanding balance of (RM) 9.6 million (approximately $2.3 million) and a term
loan with an outstanding balance of (RM) 9.6 million (approximately $2.3
million) at June 30, 1998. The subsidiary's building, equipment, inventory, and
eligible receivables secure the facility. The existing line of credit limit will
be reduced from (RM) 17.5 million (approximately $4.2 million) to (RM) 7.5
million (approximately $1.8 million). No further drawdown on the line of credit
is allowed after June 1, 1998 until the limit reaches (RM) 7.5 million. No
further drawdown is allowed against the term loan.

NOTE 5 -- OTHER OBLIGATIONS 

    During the quarter ended June 30, 1998, upon review of its financing 
transactions completed during the quarter, the Company recorded a financing 
charge in the amount of $9.0 million. Management has determined such amount to 
be the maximum exposure and is currently in active renegotiations with regard to
its ultimate settlement.

NOTE 6 -- CONVERTIBLE PREFERRED STOCK

    At June 30, 1998, the Company had issued and outstanding 46 shares of 5%
cumulative convertible preferred stock, Series 3 (Series 3), 4,867 shares of 5%
convertible preferred stock, Series 4 (Series 4), 7,940 shares of convertible
preferred stock, Series 5 (Series 5), and 30,710 of 5% convertible preferred
stock Series 7 (Series 7).  Each of the holders of Series 3,  Series 4 and
Series 7 preferred stock is entitled to a 5% per share stock dividend.

NOTE 7 -- COMMON STOCK

    During the quarter ended June 30, 1998, the Company received proceeds of
approximately $40.0 million from the exercise of outstanding stock purchase
warrants. These transactions resulted in the issuance of approximately 29.5
million shares of common stock, including approximately 14.4 million shares that
were issued as incentives to exercise the warrants.

    During the quarter ended June 30, 1998, approximately $2.5 million of
mandatory redeemable warrants were exercised.

    During the quarter ended June 30, 1998, certain holders of the Company's
Series 4, Series 5 and Series 7 preferred stock converted their preferred stock
into common stock. The conversions resulted in the issuance of a total of
12,520,230 shares of common stock in exchange for 53,337 shares of the Company's
Series 4 preferred stock, 13,242 shares of the Company's Series 5 preferred
stock and 280 shares of the Company's Series 7 preferred stock.

    During the quarter ended March 31, 1998, the Company incurred a penalty due
to the late registration of the shares of common stock underlying the Series 5
preferred stock.  The penalty was calculated based on the terms of the Series 5
preferred stock agreements and 

                                       9

<PAGE>
 
consisted of cash penalties totaling approximately $0.6 million plus an
additional 2.7 million warrants to be issued. In lieu of cash, the Company
issued, in the quarter ended June 30, 1998, 221,878 shares of common stock to
satisfy the cash penalty. The Company issued the penalty warrants in the quarter
ended June 30, 1998.

NOTE 8 -- LITIGATION

    On March 3, 1998,  Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary,  SyQuest Technology SARL
("SyQuest SARL"), and a distributor of the Company's products in France
alleging, among other things, that the Company's SyJet cartridges infringe
Iomega's cartridge design rights and a recently issued patent.  The complaint
requests money damages and an injunction against the Company from further
infringement.  Iomega subsequently requested summary proceedings in which it
made a motion to enjoin the Company from selling SyJet cartridges in France
based on alleged infringement and to block sales of certain of the Company's
products in France.  A hearing was held in Paris on April 3, 1998, and the
French court issued an order on April 30, 1998, denying Iomega's motion to
enjoin sales of SyJet cartridges.  The Company believes that no valid patent
claims or designs of Iomega are infringed by its SyJet product and will continue
to vigorously defend the action.

    On April 29, 1998, Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary, SyQuest SARL, and a
distributor of the Company's products in France.  The suit alleges that the
Company's SparQ 1.0 gigabyte cartridge infringes Iomega's design for its Jaz
cartridge and Iomega's European patent application  number 956002B.4 relating to
an anti-rattle mechanism.  Iomega subsequently requested summary proceedings in
which it made a motion to enjoin the Company and its French Subsidiary from
selling SparQ cartridges in France, Italy, Germany and the United Kingdom based
on the alleged patent infringement.  A hearing was held in Paris on June 25,
1998, and the French court issued an order on July 3, 1998, granting Iomega's
motion to enjoin sales of SparQ cartridges in France while rejecting Iomega's
motion to enjoin sales of SparQ cartridges in Italy, Germany and the United
Kingdom.  The Company plans to appeal the July 3 order enjoining sales in France
to the French court of appeals.  The Company believes that no valid patent
claims or designs of Iomega are infringed by its SparQ product and intends to
defend the action vigorously.

    Due to the inherent uncertainty of litigation, management is unable to
predict the outcome of the above litigation.  A materially unfavorable outcome
could have an adverse effect on the Company's financial condition, results of
operations and cash flow.  No loss contingency has been provided for any of the
litigation described above, as the amount of losses, if any, is not yet
determinable or reasonably estimable.

                                       10
<PAGE>
 
NOTE 9 -- RECENT ACCOUNT PRONOUNCEMENTS

    In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Segment Reporting."  These
statements are effective for the Company's fiscal year ending September 30,
1999.  SFAS 130 defines the items to be included in the determination of
comprehensive income, and SFAS 131 specifies revised guidelines for determining
an entity's operating segments and the type and level of financial information
to be disclosed.  Management believes the adoption of SFAS 130 and 131 will not
have a material impact on the Company's financial statements and disclosures.

NOTE 10 -- SUBSEQUENT EVENT

    On August 6, 1998, the Company announced a restructuring and streamlining of
its operations in a continuing effort to improve the Company's financial
performance and in response to adverse market conditions in the personal
computer and data storage industries. The restructuring includes the
termination of all manufacturing operations in Fremont, California, a
worldwide workforce reduction of approximately 950 people, a scaling-back of
administrative, sales, marketing and research expenditures, as well as other
cost-cutting moves at its Penang, Malaysia manufacturing facility.

    Effective August 10, 1998, the Company hired its new Chief Financial Officer
and Treasurer, replacing the individual who has served as the acting Chief 
Financial Officer since April 30, 1998.

                                       11
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

    Adverse market conditions in the personal computer and data storage
industries have resulted in lower than anticipated unit shipments and sales
prices of the Company's products.  As a result, the Company has experienced
significant revenue shortfalls, negative cash flow, a lack of liquidity and
excess inventory.  The Company anticipates continuing losses during its fourth
quarter ended September 30, 1998, commensurate with the losses incurred during
the first three quarters of its fiscal year.

    The Company's existing capital resources are insufficient to fund operations
through the remainder of its fiscal year ending September 30, 1998. The Company
will look to proceeds from the exercise of outstanding warrants or the sale of
common or preferred stock or debt securities to fund operations until market
conditions improve. The Company has no agreements with investors or potential
investors to sell equity or debt securities, however, and there is no assurance
that the Company will be able to secure such additional financing. Without such
additional funding, there is no assurance that the Company will be able to
continue as a going concern.

    The following is a discussion and analysis of the consolidated financial
condition and results of operations for the Company for the third fiscal quarter
ended June 30, 1998, and of certain factors that may affect the Company's
prospective financial condition and results of operations.  The following should
be read in conjunction with the Consolidated Financial Statements and related
Notes appearing elsewhere herein, and with the Company's Consolidated Financial
Statements and Notes thereto at September 30, 1997.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

    This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains, in addition to historical information, forward-looking
statements that are based on current expectations and beliefs.  Such forward-
looking statements involve a number of risks and uncertainties that could cause
actual results to differ materially. Some of the factors that could cause actual
results to differ materially include, among other factors, the continuation of
adverse worldwide market conditions that create an imbalance in the supply and
demand for the Company's products and pricing pressures, market acceptance of
the Company's new products; shortages of critical components; shortage of cash
to pay suppliers or other disruptions in the supply of key components;
competitive pricing; excess or shortage of manufacturing capacity; industry
competition; unanticipated manufacturing delays or costs; shortage of cash or
other resources to implement marketing plans or fund other operations or capital
expenditures; and adverse results of litigation. See "Risk Factors," below, as
well as such other risks and uncertainties as are described in the Company's
Securities and Exchange Commission reports and filings for a discussion of the
factors that could cause actual results to differ materially from the forward-
looking statements.

                                       12
<PAGE>
 
RESULTS OF OPERATIONS

    The Company incurred a significant loss in the nine months ended June 30,
1998 primarily as a result of substantial expenses incurred for the advertising
and marketing campaign associated with the launch of SparQ, the impact of price
reductions in response to continued price competition, manufacturing start-up
costs related to SparQ and an inability to ship against customer orders.  The
inability to ship against customer orders resulted primarily from production
start-up inefficiencies related to SparQ, including manufacturing yield problems
related to SyJet cartridges, late delivery of raw materials, and the need for
additional tooling and capital equipment required for production.

    The Company continues to face significant risks associated with strong
competition in the marketplace and acceptance of new products. The Company faces
additional risks associated with technology and product development, shortages
of components, changes in the Company's marketplace, and liquidity and cash 
availability issues. The Company historically has not carried a significant
backlog of customer orders. Its customers tend to order product for immediate
shipment and, as such, the Company does not have visibility on order rates and
demand for its products generally beyond thirty days.

NET REVENUE

    Net revenue for the quarter ended June 30, 1998 was $44.7 million, compared
to $31.7 million reported for the comparable prior year's quarter. The increase
in net revenue for the current quarter resulted primarily from an approximately
161% increase in the number of systems sold and an approximately 53% increase in
the number of cartridges sold from the quarter ended June 30, 1997.  Net revenue
for the nine months ended June 30, 1998 was $123.8 million, compared to $96.8
million for the comparable period in the prior year.  The increase in net
revenue resulted primarily from sales of SparQ systems and cartridges, offset by
a decrease in net revenue from the Company's older "Legacy" products and the EZ
Flyer 230 product. The decrease in net revenue from the EZ Flyer product
resulted from price reductions and volume decreases effected since the
comparable prior year's period.  The percentage mix of total revenue by product
family compared to the comparable prior year's quarter was:

<TABLE>
<CAPTION>
                                         CURRENT YEAR       PRIOR YEAR
                                        -------------     -------------
                                              Q3                Q3
                                        -------------     -------------
<S>                                      <C>               <C>
Legacy products                                  3.5%             26.5%
EZ Flyer and SyJet products                       25%             73.5%
SparQ products                                  71.5%                0%
Total                                            100%              100%
</TABLE>

    Factors such as slow sell through rates in the sales channels, price
pressures on the Company's products, competitive product introductions 

                                       13
<PAGE>
 
and component shortages may continue to have an adverse impact on net revenue.

GROSS PROFIT (LOSS)

    The Company reported a gross loss for the quarter ended June 30, 1998 of
$(6.4) million, compared to a gross profit of $0.9 million in the same prior
year's quarter, and reported a gross loss of $(20.2) million for the nine months
ended June 30, 1998, compared to a gross loss of $(1.3) million in the same
prior year's period. The increase in the gross loss for the three and nine month
periods ended June 30, 1998, compared to the same periods in the prior year,
resulted primarily from a reduction in product prices effected in November 1997
on SyJet drives and SyJet and EZ Flyer 230 cartridges, a reduction in product
prices effected in June 1998 on EZ Flyer 230 Drives, a reduction in the mix of
revenue from the "Legacy" products which were comprised predominantly of
cartridges that realize a higher gross profit than drives, scrap and rework
costs related to a reduction in cartridge yields in manufacturing, and new
product production start-up costs related to the SparQ product line.

    Factors such as volatility in the drive and cartridge markets, unexpected
production delays and costs, and an inability to meet production schedules and
sales demand may continue to have an adverse effect on gross profits.
Consequently, there can be no assurances that the Company will achieve
profitability in the future.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    For the quarter ended June 30, 1998, selling, general and administrative
expenses totaled $22.9 million, or 51 percent of net revenue, compared to $6.9
million, or 22 percent of net revenue, for the same prior year's quarter.
Selling, general and administrative expenses totaled $67.8 million for the nine
months ended June 30, 1998, or 55 percent of net revenue, compared to $31.0
million, or 32 percent of net revenue, for the same period in the prior year.
The significant increase in expenses during the three and nine month periods
ended June 30, 1998, compared to the same periods in the prior year, resulted
primarily from increased expenses associated with the Company's new sales and
marketing campaign which included programs aimed at stimulating sales demand on
newer products, and increased legal fees incurred during the period.  The
Company plans to continue to incur significant advertising and promotional
expenses related to programs aimed at stimulating sales demand, but not to the
extent incurred during the nine months ended June 30, 1998.

RESEARCH AND DEVELOPMENT EXPENSES

    Research and development expenses for the quarter ended June 30, 1998 were
$3.4 million, or 8 percent of net revenue, compared to $3.7 million, or 12
percent of net revenue, for the same prior year's quarter. For the nine months
ended June 30, 1998 research and development expenses were $10.8 million, or 9
percent of net revenue, compared to $15.4 million, or 16 percent of net revenue,
in the same period in the prior year. The decrease in expense was principally
the result of the Company's ongoing efforts to focus engineering on its primary
core products. The Company believes
                                       14
<PAGE>
 
that it must continue to make significant investments in research and
development to effectively compete in its markets.

FINANCING CHARGE ON OTHER OBLIGATIONS

    During the quarter ended June 30, 1998, upon review of its financing 
transactions completed during the quarter, the Company recorded a financing 
charge in the amount of $9.0 million. Management has determined such amount to 
be the maximum exposure and is currently in active renegotiations with regard to
its ultimate settlement.

INTEREST EXPENSE

    Net interest expense was $0.9 million for the quarter ended June 30, 1998,
compared to $0.9 million for the same quarter of the prior year.  For the nine
months ended June 30, 1998 net interest expense was $2.2 million, compared to
$3.4 million for the same period in the prior year.  The decrease for the nine
month period resulted primarily from a decrease in the average outstanding
borrowings during the current fiscal year.

INCOME TAX EXPENSE

    The tax provision reported for the nine months ended June 30, 1998 relates
to foreign taxes.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's existing capital resources are insufficient to fund operations
through the remainder of its fiscal year ending September 30, 1998. The Company
will look to proceeds from the exercise of outstanding warrants or sale of 
common or preferred stock or debt securities to fund operations until market
conditions improve. The Company has no agreements with investors or potential
investors to sell equity or debt securities, however, and there is no
assurance that the Company will be able to secure such additional financing.
Without such additional funding, there is no assurance that the Company will
be able to continue as a going concern.

    Adverse market conditions in the personal computer and data storage
industries have resulted in lower than anticipated unit shipments and sales
prices of the Company's products.  As a result, the Company has experienced
significant revenue shortfalls, negative cash flow, a lack of liquidity and
excess inventory.  The Company anticipates continuing losses during its fourth
quarter ended September 30, 1998, commensurate with the losses incurred during
the first three quarters of its fiscal year.

    The Company incurred net losses during the 24 month period ended June 30,
1998, totaling approximately $189.9 million, including a net loss of
approximately $110.8 million during the nine months ended June 30, 1998. The
lack of cash flow and available funds caused by the accumulated losses have
adversely affected the Company's product delivery and marketing efforts,
restricted flexibility in payment terms required by suppliers and
manufacturers, limited access to credit, affected employee recruitment and
retention, and diverted management time and attention.

    The Company funded its working capital requirements and capital expenditures
during the period October 1996 through June 1998 through a combination of
existing cash resources, asset-based borrowings and a series of capital
financing transactions.  During this period, the Company raised gross proceeds
of approximately $220 million from sales to private investors of convertible
preferred stock, common stock and warrants.  During the nine months ended June
30, 1998, the Company raised approximately $122.3 million of additional capital
primarily to fund the loss from operations and its sales and marketing programs
aimed at stimulating demand for new products. During the quarter ended June 30,
1998, the Company raised approximately $40.0 million of additional capital from
the exercise of outstanding warrants to purchase common stock.

    There can be no assurance that operating losses will not continue despite
new product introductions due primarily to product start-up costs, competitive
price reductions, the risk that the Company's new products may not be
accepted in the marketplace and adverse market conditions in the personal 
computer market and data storage industries. Continuing operating losses will
necessitate additional financings in the future. Factors such as higher interest
rates, the inability to borrow without collateral, higher capital financing
costs and limitations on further equity funding without stockholder approval or
the unavailability of such funding will materially and adversely affect the
Company's cash resources, cash flow and financial condition.

                                       15
<PAGE>
 
    At June 30, 1998, the Company had cash and short-term investments of $13.4
million, compared to $7.1 million at September 30, 1997. The increase in cash
resulted from the exercise of outstanding stock purchase warrants, the issuance
of convertible preferred stock and an increase in accounts payable. These
increases were partially offset by the net loss recorded for the nine months
ended June 30, 1998 and by increases in inventories, as well purchases of
property and equipment and the payments made against debt balances during the
period.  The Company improved its net worth to $18.9 million at June 30, 1998,
compared to $5.6 million at September 30, 1997. The improvement resulted
primarily from proceeds related to the exercise of outstanding stock purchase
warrants, the issuance of convertible preferred stock and the reclassification
of mandatory redeemable warrants to equity, partially off-set by the net loss
for the nine months ended June 30, 1998.

    Working capital improved from $1.4 million at September 30, 1997 to $17.6
million at June 30, 1998.  This increase was primarily the result of an increase
in cash and short-term investments of $6.3 million, an increase in inventories
of $19.9 million, an increase in prepaid expenses of $1.6 million and a decrease
in short term borrowings and debt totaling $9.4 million. The increases in
working capital were partially offset by the increase in accounts payable of
$21.8 million.  The increase in inventories and accounts payable was primarily
attributable to an increase in raw materials related to the new SparQ product
and a ramp up of SparQ finished goods in order to promptly meet estimated future
customer demand.  Inventory turnover at June 30, 1998 was 4.1 times.

    In May 1998, the Company renegotiated its domestic line of credit with a
financial institution, continuing the existing terms and extending the line
through May 31, 1999. The line provides for a limit on borrowings of the lesser
of $30.0 million or 80 percent of eligible accounts receivable. As of June 30,
1998, approximately $13.7 million of borrowings were outstanding under the line.

    Pursuant to the terms of its line of credit, the Company is required to meet
or exceed certain financial performance criteria on a quarterly basis (the 
"Financial Covenants"). The Company's lender has verbally notified the Company 
that a written waiver of the Financial Covenants for the Company's third quarter
ended June 30, 1998, will be provided if the Company does not comply with the 
Financial Covenants. Without such a waiver, the Company would be in default
under its line of credit.

    The Company's manufacturing subsidiary in Penang, Malaysia, SyQuest
Technology Sdn Bhd (M), has a banking facility with a Malaysian financial
institution expiring September 1998 and consisting of a line of credit with an
outstanding balance of (RM) 9.6 million (approximately $2.3 million) and a term
loan with an outstanding balance of (RM) 9.6 million (approximately $2.3
million) at June 30, 1998. The subsidiary's building, equipment, inventory, and
eligible receivables secure the facility.  The existing line of credit limit
will be reduced from (RM) 17.5 million (approximately $4.2 milllion)  to (RM) 
7.5 million (approximately $1.8 milllion).  No further drawdown
on the line of credit is allowed after June 1, 1998 until the limit reaches (RM)
7.5 million.  No further drawdown is allowed against the term loan.

    The Company raised significant funds during the nine months ended June 30,
1998. See Part II, Item 2 of this Form 10-Q. The Company will require additional
equity funding to fund operations through the remainder of its fiscal year
ending September 30, 1998, which, if available, will cause further dilution of
the outstanding common stock. Further equity funding may require stockholder
approval of each transaction and stockholder approval of an increase in the
Company's authorized common stock.

                                       16
<PAGE>
 
    For the nine months ended June 30, 1998, the Company used $94.8 million in
cash for operating activities and $9.5 million for capital expenditures.

    Management will seek additional equity capital primarily through the sale of
common stock covered by currently outstanding warrants issued in conjunction
with previously completed financings. However, the outstanding warrants do not
include any demand or call provisions. To induce existing warrant holders to
exercise their warrants management may have to offer discounts to the
contractual exercise prices, issue exchange warrants at market or negotiated
discount exercise prices or provide other incentives. From March through June
1998, the Company sold a total of 17,475,736 shares of common stock to certain
investors at par value as incentives for the investors to exercise their
outstanding warrants.

    If management is unable to raise equity capital through the exercise of
outstanding warrants, the Company may have to offer for sale additional
convertible preferred stock or debt instruments such as convertible debentures.
There can be no assurance, however, that such financings would be available when
needed, if at all, or on favorable terms and conditions. The existence of the
outstanding convertible preferred stock, warrants and options is likely to
affect, materially and adversely, the terms on which the Company can obtain
additional financing. Moreover, the holders of such convertible securities,
warrants and options can be expected to exercise them at a time when the Company
would otherwise, in all likelihood, be able to obtain additional capital by an
offering of its unissued capital stock on terms more favorable to the Company
than those provided by such convertible securities, warrants and options.

    The Company's current negative cash flow position and liquidity problems
could jeopardize existing terms under which SyQuest purchases key components
from suppliers.  The Company has exceeded 60 days in its 

                                       17
<PAGE>
 
payables to several suppliers, and consequently faces the risk that such
suppliers could again require cash on delivery payments.

RISK FACTORS

    CHANGING ASSUMPTIONS ABOUT THE SIZE AND STRENGTH OF THE MARKET FOR THE
COMPANY'S PRODUCTS

    The personal computer and data storage industries are currently experiencing
significant oversupply and severe pricing pressures.  The SparQ and SyJet
products continued to be favorably received during the fiscal third quarter
ended June 30, 1998, and into the fiscal fourth quarter, but the Company has
been shipping into a significantly smaller and more price competitive market
than anticipated.  Management of the Company has revised sharply downward its
assumptions about the size of the market, growth rates and competitive pricing
for the SparQ and SyJet product lines to reflect prevailing conditions.
Management has also taken steps to bring costs into alignment with demand by
effecting a workforce reduction and closing a Fremont, California manufacturing
facility, among other things.

    The reductions in revenues and margins, and increases in excess inventory
caused by the prevailing market conditions have materially adversely affected
the Company's current and anticipated operating results and liquidity.  Even
with the cost-cutting measures recently implemented by the Company, the Company
will require additional cash from outside sources to fund operations for the
remainder of its 1998 fiscal year and until market conditions improve. The 
inability to secure such financing will jeopardize the Company's continuing 
operations as a going concern.

    DILUTION OF COMMON STOCK

    To the extent that the Company's outstanding options and warrants are
exercised or such convertible securities are converted, substantial dilution of
the interests of the Company's stockholders is likely to result and the market
price of the common stock could be materially adversely affected. Such dilution
will be greater if the future market price of the common stock decreases, as the
number of conversion shares to be issued will increase. For the life of such
warrants, options and convertible securities, the holders will have the
opportunity to profit from a rise in the price of the underlying securities. The
existence of such warrants, options and convertible securities is likely to
affect, materially and adversely, the terms on which the Company can obtain
additional financing, and the holders of such warrants, options and convertible
securities can be expected to exercise them at a time when the Company would
otherwise, in all likelihood, be able to obtain additional capital by an
offering of its unissued capital stock on terms more favorable to the Company
than those provided by such warrants, options and convertible securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

    At June 30, 1998, the Company had issued and outstanding 46 shares of Series
3 preferred stock, 4,867 shares of Series 4 preferred stock, 7,940 shares of
Series 5 preferred stock and 30,710 shares of Series 7 preferred stock.  Several
of the Company's financings have included 

                                       18
<PAGE>
 
significant warrant coverage which, when exercised, will result in the issuance
of additional shares of common stock. Assuming the conversion of all outstanding
preferred stock, the exercise of outstanding warrants and the fulfillment of
other existing commitments to issue common stock, approximately 89.5 million
additional shares of common stock would be issued based on existing preferred
stock and warrant balances outstanding as of July 31, 1998. Total shares
outstanding at that date were approximately 128 million, providing a total of
217.5 million common shares outstanding if all convertible preferred stock is
converted and warrants and options are exercised.

    As of June 30, 1998, the Company had outstanding options and warrants to
purchase approximately 57.5 million shares of common stock.  The exact number of
shares of common stock issuable on conversion of the Series 4, Series 5 and
Series 7 preferred stock (collectively, the "Preferred Stock") cannot be
estimated with certainty because, generally, such issuances of common stock will
vary inversely with the market price of the common stock at the time of such
conversion, and there is no maximum limit on the number of shares of common
stock that may be issuable. The number of shares of common stock issuable on
conversion of the Preferred Stock is also subject to various adjustments to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. Further, the Company may issue additional shares of Series 3,
Series 4 and Series 7 preferred stock in lieu of cash dividends due the holders
of such preferred stock.

    The Company has filed Registration Statements on Form S-8 under the
Securities Act to register shares of Common Stock subject to stock options and
to the Company's employee stock purchase plan that will permit the resale of
such shares, subject to Rule 144 volume limitations applicable to affiliates of
the Company and vesting restrictions.  The Company has also registered the
common stock issuable on exercise of the warrants and conversion of the
convertible securities pursuant to prospectuses included in Registration
Statement Nos. 333-7369, 333-17119, 333-28225 and 333-40329.  Such registered
shares can be sold without any 

                                       19
<PAGE>
 
holding period or sales volume limitations. Registration No. 333-56597 is
currently pending.

    SHORT SALES OF COMMON STOCK

    Because the number of shares of common stock issuable on conversion of the 
Preferred Stock increases as the price of the common stock decreases, the 
holders of the Preferred Stock benefit from a decrease in the market price of 
the common stock as it increases the number of shares of common stock issuable 
on the conversion of the Preferred Stock. Short sales of the Company's common 
stock have depressed its market price and increased its market volatility. 
Holders of the outstanding Preferred Stock are not prohibited from engaging in 
short sales of the Company's common stock, although they are subject to 
limitations of their ability to use shares of common stock received on 
conversion to cover short sales. Specifically, holders of Series 4 and Series 5 
Preferred Stock are prohibited from using the common stock issuable on the 
conversion of the preferred stock or exercise of related warrants to cover any 
short sale position in the common stock. Holders of the Series 7 Preferred Stock
are prohibited from using the common stock issuable on the conversion of the 
preferred stock or exercise of related warrants to cover any short sale position
in the common stock existing prior to the issuance of the Series 7 Preferred 
Stock, but are not prohibited from using such shares to cover short sale 
positions established after the issuance of the Series 7 Preferred Stock.

    POTENTIAL LOSS OF NASDAQ LISTING

    The continuing listing requirements for inclusion on the Nasdaq National 
Market require that the Company's securities trade at over $1.00 per share. If 
the Company's common stock closes below $1.00 for 30 consecutive trading days, 
the Company will likely receive notification from Nasdaq that its common stock 
will be delisted from the Nasdaq National Market unless the stock closes at or 
above $1.00 for at least 10 consecutive trading days during the 90 day period 
following such notification. In addition, there are other minimum listing 
requirements that the Company must continually satisfy.

    Delisting from the Nasdaq National Market could adversely affect the 
liquidity and price of the Company's common stock. Moreover, investors may find 
it more difficult to dispose of or to obtain accurate quotations for the 
Company's common stock because the bid and asked quotations would be reported on
an electronic bulletin board such as the OTC Bulletin Board or similar 
quotations medium.

    UNCERTAIN PROFITABILITY OR SUCCESSFUL TURNAROUND

    Market acceptance of the Company's products and access to capital
continue to be paramount in ensuring a successful turnaround strategy.  The
Company's products are subject to increasing competition from several other
removable-media data storage devices.  To secure adequate market share,
the Company must ensure that the functionality and quality of its products are
effectively communicated to the marketplace.  As a result, the Company needs
sufficient capital to implement a marketing strategy that will adequately
address the appropriate markets.  The Company is also dependent on the
successful production and sale of the SyJet and SparQ product lines.
Additionally, the decline in volumes and pricing on mature products will
continue to have a negative impact on the Company's revenue. The Company
historically has not carried a significant backlog of customer orders.  Its
customers tend to order product for immediate shipment and, consequently, the
Company does not have visibility on order rates or demand for its products
generally beyond thirty days.  Critical to each of these factors is the
Company's ability to attract additional investment capital. There can be no
assurances that the Company will achieve these objectives.

    SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF SUPPLY CONTRACTS

    Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers. The
Company purchases all of its sole and limited source components and equipment
pursuant to purchase orders placed from time-to-time, and has no guaranteed
supply arrangements. The inability to obtain sufficient components and
equipment, obtain or develop alternative sources of supply at competitive prices
and quality, or avoid manufacturing delays could prevent the Company from
producing sufficient quantities of its products to satisfy market demand, result
in delays in product shipments, increase the Company's material or manufacturing
costs, or cause an imbalance in the inventory level of certain components.
Moreover, difficulties in obtaining sufficient components may cause the Company
to modify the design of its products to use more readily available components,
and such design modifications could result in increased costs and product
performance problems. The Company's current negative cash flow position and 
liquidity problems could jeopardize existing terms under which SyQuest purchases
key components from suppliers. The Company has exceeded 60 days in its payables
to several suppliers, and consequently faces the risk that such suppliers could
again require C.O.D. payments. Any or all of these problems could, in turn,
result in the loss of customers, provide an opportunity for competing products
to achieve market acceptance or increase market share and otherwise adversely
affect the Company's business and financial results.

    QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

    The Company has experienced and may continue to experience significant
fluctuations in its quarterly operating results. Factors such as price
reductions, the introduction and market acceptance of new products, product
returns, availability of critical components, lower gross profits associated
with the Company's newer products and decreasing demand for the Company's older
products could contribute to this quarterly fluctuation.  Moreover, the
Company's expense levels are based, in part, on expectations of future sales
levels, and a shortfall in expected sales could therefore result in a
disproportionate decrease in the Company's financial performance.  As a result
of these and other factors, including possible further dilution, it is likely
that the Company will continue to experience significant fluctuations in
quarterly operating profits.


    DEPENDENCE ON PROPRIETARY TECHNOLOGY

    The Company's ability to compete effectively in its markets depends heavily
on the establishment and maintenance of proprietary technologies.  The Company
relies on a combination of patent, copyright and trade secret law to protect the
technology in its drives and cartridges.  The Company holds numerous U.S. and
foreign patent applications and patents relating to its drives and hard disk
cartridges.  Many of these patents and applications, however, do not pertain to
the Company's recent product generations, and there can be no assurance as to
the degree of protection afforded by these patents or the likelihood that
additional patents will be issued pursuant to pending patent applications.
Furthermore, there can be no assurance that third parties will not independently
develop the same or similar technology, develop around the patented aspects of
any of the Company's products or proposed products, or otherwise obtain access

                                       20
<PAGE>
 
to the Company's proprietary technology.  In particular, the Company's sales
would be materially adversely affected if any unlicensed parties develop
removable cartridges compatible with the Company's disk drives.

    Certain technology used in the Company's products is licensed from third
parties.  The termination of any such license arrangements could have a material
adverse effect on the Company's business and financial results.

    INTELLECTUAL PROPERTY LITIGATION

    Patent and similar litigation frequently is complex and expensive and its
outcome can be difficult to predict.  There can be no assurance that the Company
will prevail in any proceedings that have been or may be commenced by or against
the Company.  The Company is currently involved in the intellectual property
lawsuits summarized below.

    On December 3, 1997, SPARC International, Inc. filed a lawsuit against the
Company in the United States District Court in and for the Northern District of
California.  The lawsuit alleges that the Company's use of the trademark SparQ
in connection with its recently introduced SparQ removable cartridge hard drive
product constitutes an infringement of the SPARC trademark owned by SPARC
International, Inc.  The complaint requests money damages and preliminary and
permanent injunctions enjoining the Company from further infringement.  On
December 19, 1997, SPARC International, Inc. filed a motion seeking a
preliminary injunction enjoining the Company from using the SparQ trademark on
its removable cartridge hard drive products and requesting a hearing which was
held on March 23, 1998.  Subsequently, the court denied Sparc International's
motion for a preliminary injunction.  The Company believes that it does not
infringe any valid trademarks of SPARC International, Inc., and intends to
defend the case vigorously.

    On July 29, 1997, Iomega Corporation ("Iomega") initiated an action for
patent and trademark infringement against SyQuest in the United States District
Court for the District of Delaware.  The suit alleges that SyQuest's SyJet and
EZFlyer 230 products infringe United States Utility Patent No. 5,644,444,
entitled "Read/Write Protect Scheme for a Disk Cartridge and Drive," and that
the cartridges sold by SyQuest for use with its SyJet and EZFlyer 230 products
infringe United States Design Patent No. Des. 378,518, entitled "Computer
Storage Disk Cartridge."  The suit further alleges that SyQuest has infringed
Iomega's claimed "Jet" trademark and engaged in unfair competition through the
use of the "SyJet" name for one of its products.  Iomega seeks a judgment of
infringement, monetary damages, injunctive relief, disgorgement of profits, and
trebled actual damages on the disputed products.  Iomega also seeks exemplary
damages and attorney's fees based on SyQuest's alleged willful infringement of
Iomega's patents and claimed trademark.  SyQuest has filed an answer and
counterclaim denying infringement and requesting a declaratory judgment that the
patents-in-suit are invalid and not infringed.  The case is in the discovery
stage.  In interrogatory responses served December 3, 1997, Iomega asserted that
SyQuest's recently introduced SparQ and Quest products infringe Iomega's design
patent and that it is investigating whether it believes that the SparQ or Quest
products infringe Iomega's utility patent.  The Court has set a trial date of
January 11, 1999.  SyQuest believes it has meritorious 

                                       21
<PAGE>
 
defenses to Iomega's allegations and intends to defend the case vigorously.

    On March 3, 1998, Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary, SyQuest Technology SARL
("SyQuest SARL"), and a distributor of the Company's products in France
alleging, among other things, that the Company's SyJet cartridges infringe
Iomega's cartridge design rights and a recently issued patent.  The complaint
requests money damages and an injunction against the Company from further
infringement.  Iomega subsequently requested summary proceedings in which it
made a motion to enjoin the Company from selling SyJet cartridges in France
based on the alleged infringement and to block sales of certain of the Company's
products in France.  A hearing was held in Paris on April 3, 1998, and the
French court issued an order on April 30, 1998 denying Iomega's motion to enjoin
sales of SyJet cartridges.  The Company believes that no valid patent claims or
designs of Iomega are infringed by its SyJet product and will continue to defend
the action vigorously.

    On April 29, 1998, Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary, SyQuest SARL, and a
distributor of the Company's products in France.  The suit alleges that the
Company's SparQ 1.0 gigabyte cartridge infringes Iomega's design for its Jaz
cartridge and Iomega's European patent application number 956002B.4 relating to
an anti-rattle mechanism. Iomega subsequently requested summary proceedings in
which it made a motion to enjoin the Company and its French Subsidiary from
selling SparQ cartridges in France, Italy, Germany and the United Kingdom based
on the alleged patent infringement.  A hearing was held in Paris on June 25,
1998, and the French court issued an order on July 3, 1998, granting Iomega's
motion to enjoin sales of SparQ cartridges in France while rejecting Iomega's
motion to enjoin sales of SparQ cartridges in Italy, Germany and the United
Kingdom.  The Company plans to appeal the July 3 order enjoining sales in France
to the French court of appeals.  The Company believes that no valid patent
claims or designs of Iomega are infringed by its SparQ product and intends to
defend the action vigorously.

    On or about June 10, 1997, the Company initiated litigation against
Castlewood Systems, Inc. and eleven former Company employees in the Superior
Court of the State of California for the County of Santa Clara, entitled SyQuest
                                                                         -------
Technology, Inc. v. Castlewood Systems, Inc., et al. (Case No. 766757),
----------------------------------------------------                   
asserting ten (10) causes of action, including claims for misappropriation of
trade secrets, unfair competition, and breach of fiduciary duty.  The complaint
seeks money damages and an injunction from engaging in such conduct.  On or
about July 16, 1997, Castlewood filed a cross-complaint against the Company,
alleging three causes of action (interference with prospective economic
advantage, unfair competition and trade libel) and seeking damages and
injunctive relief.  Since that time, the parties have engaged primarily in
hearings before Thomas E. Schatzel, Esq., the Court-appointed Discovery Referee,
to finalize the Company's identification of trade secrets in accordance with the
requirements of the California Code of Civil Procedure section 2019 (d), which
was deemed acceptable by such Referee on October 20, 1997, and to adjudicate the
discovery matters between the parties.  Discovery is under way, and there can be
no assurance as to what financial effect this litigation may have on the
Company.

                                       22
<PAGE>
 
    On January 27, 1997, the Company filed a lawsuit in the United States
District Court for the Northern District of California, entitled SyQuest
                                                                 -------
Technology, Inc. v. Nomai. S.A. et al. (Case No. C97-0271 FMS) (the "Nomai
--------------------------------------                                    
Action"). The lawsuit named as defendants Nomai, S.A., Nomus, Inc. (Nomai, S.A.
and Nomus, Inc. sometimes hereinafter referred to as "Nomai") Marc Frouin, Herve
Frouin, Electronique d2 and La Cie Ltd., certain competitors and/or
manufacturers and their shareholders.  The Nomai Action alleged patent,
trademark and copyright infringement, unfair competition, breach of contract and
other claims arising out of the use by Nomai and others of the Company's
proprietary technology in certain of Nomai's competing products.  The suit seeks
to block further sales of such products and damages deriving from harm done to
the Company by this conduct.  During April through June 1997, Nomai, S.A., Marc
Frouin and Herve Frouin (collectively the "Nomai Parties") filed certain cross-
complaints against the Company.  The Company, Nomai, S.A. and the Nomai Parties
have resolved their respective claims in the Nomai Action, pursuant to a
settlement agreement.  In accordance with that settlement agreement, the parties
filed a Stipulation to Dismiss with prejudice the Company's complaint and the
Nomai Parties' cross-complaints on December 16, 1997.  The Nomai Action remains
pending against defendants Electronique d2 and La Cie Ltd.

    On March 7, 1997, RKS Design, Inc. ("RKS") filed suit against the Company in
the Superior Court of the State of California for the County of Los Angeles,
entitled RKS Design, Inc. v. SyQuest Technology, Inc., et al., alleging that the
         -----------------------------------------------------                  
Company failed to pay $48,394.21 of interest charges on fees charged for design
services rendered to its EZ Flyer and SyJet products.  The suit requests damages
including profits associated with these products, interest and attorneys' fees.
The Company has filed a counterclaim asserting, among other things, that no
amount is owing to RKS, and that the Company is entitled to a refund of certain
overpayments made to RKS.  The Company does not believe that this claim will
have a material adverse effect on the Company's financial position or results of
operations.

    Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product or
process technology rights held by others.  Companies that have contacted the
Company include one company that has recently alleged that the Company's
products infringe three U.S. patents.  The Company is in the process of
reviewing and analyzing the infringement allegations.  Another Company has
notified the Company that it believes a number of the Company's removable
cartridge hard drive products infringe several of that company's patents
relating to the use of spin motors in disc drives.  The Company believes that
its removable cartridge hard drive products do not infringe the claims of these
patents and that some or all of the asserted patents are invalid. Resolution of
whether the Company's manufacture of products has infringed on valid rights held
by others could have a material adverse effect on the Company's financial
position and results of operations, and may require material changes in
production processes and products.  It may be necessary for the Company to enter
into license agreements to avoid protracted disputes over patent infringement.
The Company is unable to predict whether license agreements can be obtained on
terms acceptable to the Company or the magnitude of the costs associated with
such terms.  Failure to obtain 

                                       23
<PAGE>
 
such license could have a material effect on the Company's financial position or
results of operations.

    SECURITIES CLASS ACTION AND DERIVATIVE LITIGATION

    The Company has been named as a defendant in four putative class action
lawsuits.  Two of the actions, Ravens, et al. v. Iftikar, et al. (filed April 2,
                               ---------------------------------                
1996) and Belleza, et al. v. Iftikar, et al. (filed May 24, 1996) were brought
          ----------------------------------                                  
in the United States District Court for the Northern District of California
(collectively, the "Federal Lawsuits").  The other two purported class actions,
                                                                               
Gary S. Kaufman v. SyQuest Technology Inc., et al. (filed March 25, 1996) and
--------------------------------------------------                           
Ravens, et al. v. Iftakar, et al. (filed on October 11, 1996) were filed in the
---------------------------------                                              
Superior Court of the State of California for the County of Alameda (the "State
Court Lawsuits").

    Plaintiffs in all the aforementioned class actions purport to represent a
class of all persons who purchased the Company's common stock between October
21,  1994, and February 1, 1996, and allege that certain current and former
officers and directors of the Company engaged in illegal insider trading of the
Company's common stock and made certain material misrepresentations and
omissions regarding, among other things, the Company's SQ3270 drive and EZ135
drive.  The Federal Lawsuits assert that the alleged wrongdoing violated the
federal securities laws, and the State Court Lawsuits assert claims for damages
under the California securities statutes and common law.

    The Federal Lawsuits have been assigned to the Honorable Vaughan Walker.  In
January 1997, the court denied the motion of certain plaintiffs to be appointed
lead plaintiffs under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") on the ground, inter alia, that the plaintiffs' published notice
                             ----------                                       
to the class did not constitute adequate notice of the litigation under the
Reform Act.  In July 1997, the Court denied a motion for reconsideration of its
prior order and directed the plaintiffs to issue a revised notice and/or amend
their complaint by August 22, 1997, or be subject to a motion to dismiss or for
summary judgement.  Plaintiffs have informed the court that they elect to stand
on the existing notice and complaint.

    On May 14, 1996, the Company was served with a shareholder derivative action
filed in the Superior Court of the State of California for the County of Alameda
entitled John Nitti, et al. v. Syed Iftikar, et al. (the "Derivative Lawsuit").
         ------------------------------------------                             
The Derivative Lawsuit contains allegations of wrongdoing that are essentially
the same as those in the putative class actions and seeks to recover unspecified
damages and punitive damages on behalf of the Company from current and former
officers and directors of the Company for alleged breaches of fiduciary duty,
unjust enrichment and waste of corporate assets.

    The Company has entered a Stipulation of Settlement with the parties to the
State Court Lawsuits and a separate Stipulation of Settlement with the parties
to the Derivative Lawsuit. The State Court has preliminarily approved the
settlement of the State Court Lawsuits. A hearing for final approval of both
Stipulations of settlement has been scheduled for October 14, 1998, before the
Alameda Superior Court. Each Stipulation of Settlement (which can be obtained
from the Company on request) contains a number of conditions including, but not
limited to, the dismissal with prejudice of

                                       24
<PAGE>
 
the Federal Lawsuits, and will not be fully effective until all such conditions
have been met.

    Given the possibility that all of the conditions may not be satisfied, the
Federal Lawsuits, the State Court Lawsuits and the Derivative Lawsuit may
continue and there can be no assurance as to the outcome or the financial
effect, if any, the litigation may have on the Company. If there is an adverse
result, the Company does not expect any particular product line to be affected
as the plaintiffs seek monetary damages rather than injunctive relief.
Nevertheless, a materially unfavorable outcome could have an adverse effect on
the Company's financial condition, results of operations and cash flow. No loss
contingency has been established for these lawsuits as the amount of losses, if
any, are not yet determinable or reasonably estimable.

    From time to time, the Company is involved in litigation that it considers
to be in the normal course of business. Other than as set forth above, the
Company was not engaged in any legal proceedings as of June 30, 1998, which the
Company expects individually or in the aggregate to have a material adverse
effect on the Company's financial condition or results of operation.

                                       25
<PAGE>
 
                                    PART II

                               OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

    See "Risk Factors-Intellectual Property Litigation," for a description of
certain lawsuits filed against the Company by Iomega Corporation in France
during the quarter ended June 30, 1998.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

    During the quarter ended June 30, 1998, the Company received net proceeds of
approximately $40.0 million from the exercise of outstanding stock purchase
warrants. These transactions resulted in the issuance of approximately 29.5
million shares of common stock, which includes approximately 14.4 million shares
that were issued as an incentive to exercise the warrants.

    During the quarter ended June 30, 1998, certain holders of the Company's
Series 4, Series 5 and Series 7 preferred stock converted their preferred stock
into common stock. The conversions resulted in the issuance of a total of
12,520,230 shares of common stock in exchange for 53,337 shares of the Company's
Series 4 preferred stock, 13,242 shares of the Company's Series 5 preferred
stock and 280 shares of the Company's Series 7 preferred stock.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a.   Exhibits

             4.1       Letter Agreements with CC Investments, LDC dated April
                       22, 1998, incorporated by reference to Exhibit 10.1 and
                       10.2 to the Company's current report on Form 8-K dated
                       April 22, 1998.

             4.2       Letter Agreement with RGC International Investors, LDC
                       dated March 25, 1998, incorporated by reference to
                       Exhibit 10.1 to the Company's current report on Form 8-K
                       dated March 25, 1998.

             4.3       Letter Agreement with Combination, Inc. dated March 31,
                       1998, incorporated by reference to Exhibit 10.2 to the
                       Company's current report on Form 8-K dated March 25,
                       1998.

             4.4       Warrant Exercise Agreement with Fletcher International
                       Limited dated April 1, 1998, incorporated by reference to
                       Exhibit 10.3 to the Company's current report on Form 8-K
                       dated March 25, 1998.

             4.5       Letter Agreement with CC Investments dated June 3, 1998, 
                       filed herewith.

             4.6       Letter Agreement with Nelson Partners dated June 3, 1998,
                       filed herewith.

             4.7       Letter Agreement with Olympus Securities dated June 3, 
                       1998, filed herewith.

             4.8       Letter Agreement with New Enterprises Associates VII 
                       L.P., dated June 3, 1998, filed herewith.

             4.9       Letter Agreement with Jayhawk Institutional Partners,
                       L.P. and Jayhawk Investments, L.P. dated June 3, 1998,
                       filed herewith.

             4.10      Letter Agreement with Combination, Inc. dated June 24, 
                       1998, filed herewith.

             4.11      Letter Agreement with CC Investments, LDC dated June 30, 
                       1998, filed herewith.

            27.1       Financial Data Schedule

            99.1       Registrant's Registration Statement on Form S-3, as filed
                       with the Securities and Exchange Commission on June 11,
                       1998, incorporated by reference to Exhibit 99.1 to the
                       Company's current report on Form 8-K dated June 11, 1998.

     b.   Reports on Form 8-K. The Company filed three reports on Form 8-K
          during the quarter ended June 30, 1998. These reports are summarized
          below.

            A current report on Form 8-K, dated April 22, 1998, was filed by the
            Company reporting under item 5 the issuance of certain equity
            securities pursuant to Regulation D and another event, and under
            item 7 related press releases.

            A current report on Form 8-K, dated June 3, 1998, was filed by the
            Company reporting under item 5 the issuance of certain equity
            securities pursuant to Regulation D.

            A current report on Form 8-K, dated June 11, 1998, was filed by the
            Company reporting under item 5 and item 7 the registration of
            Registrant's Common Stock on Form S-3 and related documents.

                                       26
<PAGE>
 
                                   SIGNATURES

         Pursuant to the requirements 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.

    Dated: 08/14/98               SyQuest Technology, Inc. (Registrant)



                                        By:  /s/ EDWARD L. MARINARO
                                             -------------------------
                                             Edward L. Marinaro
                                             Chairman of the Board
                                             and Director


    Dated: 08/14/98                     By:  /s/ EDWIN L. HARPER
                                             ---------------------
                                             Edwin L. Harper
                                             President and
                                             Chief Executive Officer

                                       27
<PAGE>
 
                                 EXHIBIT INDEX


            Exhibit 
             Index     Description of Document
            -------    -----------------------

             4.1       Letter Agreements with CC Investments, LDC dated April
                       22, 1998, incorporated by reference to Exhibit 10.1 and
                       10.2 to the Company's current report on Form 8-K dated
                       April 22, 1998.

             4.2       Letter Agreement with RGC International Investors, LDC
                       dated March 25, 1998, incorporated by reference to
                       Exhibit 10.1 to the Company's current report on Form 8-K
                       dated March 25, 1998.

             4.3       Letter Agreement with Combination, Inc. dated March 31,
                       1998, incorporated by reference to Exhibit 10.2 to the
                       Company's current report on Form 8-K dated March 25,
                       1998.

             4.4       Warrant Exercise Agreement with Fletcher International
                       Limited dated April 1, 1998, incorporated by reference to
                       Exhibit 10.3 to the Company's current report on Form 8-K
                       dated March 25, 1998.

             4.5       Letter Agreement with CC Investments dated June 3, 1998, 
                       filed herewith.

             4.6       Letter Agreement with Nelson Partners dated June 3, 1998,
                       filed herewith.

             4.7       Letter Agreement with Olympus Securities dated June 3, 
                       1998, filed herewith.

             4.8       Letter Agreement with New Enterprises Associates VII 
                       L.P., dated June 3, 1998, filed herewith.

             4.9       Letter Agreement with Jayhawk Institutional Partners,
                       L.P. and Jayhawk Investments, L.P. dated June 3, 1998,
                       filed herewith.

             4.10      Letter Agreement with Combination, Inc. dated June 24, 
                       1998, filed herewith.

             4.11      Letter Agreement with CC Investments, LDC dated June 30, 
                       1998, filed herewith.

            27.1       Financial Data Schedule.

            99.1       Registrant's Registration Statement on Form S-3, as filed
                       with the Securities and Exchange Commission on June 11,
                       1998, incorporated by reference to Exhibit 99.1 to the
                       Company's current report on Form 8-K dated June 11, 1998.