<PAGE>
 
                     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 MARCH 31, 1998

                       COMMISSION FILE NUMBER 0-19674

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

                          SYQUEST TECHNOLOGY, INC.
                                (REGISTRANT)


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


                      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 April 30, 1998, 95,295,668 shares of the Registrant's common stock,
$0.0001 par value, were issued and outstanding.
<PAGE>
 
<TABLE> 
<CAPTION> 
                                    INDEX

                          SYQUEST TECHNOLOGY, INC.
                                                                                                        PAGE
                                                                                                        ----
<S>                                                                                                     <C> 
PART I     FINANCIAL INFORMATION

ITEM 1.    Consolidated Condensed Financial Statements

   Consolidated Condensed Statements of Operations--Three months
           and six months ended March 31, 1998 and March 31, 1997.....................................    3

   Consolidated Condensed Statements of Financial Condition--March 31, 1998 and
           September 30, 1997.........................................................................    4

   Consolidated Condensed Statements of Cash Flow--Six months ended March 31,
           1998 and March 31, 1997....................................................................    5

   Notes to Consolidated Condensed Financial Statements--March 31, 1998................................   6-10

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations......    10-18

PART II    OTHER INFORMATION

ITEM 1.    Legal Proceedings..........................................................................    19

ITEM 2.    Changes in Securities......................................................................    19

ITEM 6.    Exhibits and Reports on Form 8-K...........................................................    20

SIGNATURES............................................................................................    21
</TABLE> 

                                       2
<PAGE>
 
<TABLE> 
<CAPTION> 

                           SYQUEST TECHNOLOGY, INC.
          CONSOLIDATED CONDENSED STATEMENTS OF RESULTS OF OPERATIONS
                     (IN THOUSANDS EXCEPT PER SHARE DATA)
                                                                                        THREE MONTHS ENDED      SIX MONTHS ENDED
                                                                                            MARCH 31,               MARCH 31, 
                                                                                       --------------------    --------------------
                                                                                         1998        1997        1998        1997
                                                                                       ---------   --------    --------    --------
<S>                                                                                    <C>        <C>         <C>         <C> 
Net revenue........................................................................   $  47,028   $ 16,786    $ 79,089    $ 65,097
Cost of revenue....................................................................      52,241     30,051      92,874      67,317
                                                                                      ---------   --------    --------    --------
     Gross profit (loss)...........................................................      (5,213)   (13,265)    (13,785)     (2,220)

Operating Expenses:

     Selling, general and administrative...........................................      21,156     12,730      44,896      24,057
     Research and development......................................................       3,540      6,617       7,418      11,718
                                                                                      ---------   --------    --------    --------
     Total operating expenses......................................................      24,696     19,348      52,314      35,775
                                                                                      ---------   --------    --------    --------
     Loss from operations..........................................................     (29,909)   (32,613)    (66,099)    (37,995)
Net interest expense...............................................................        (674)    (1,106)     (1,299)     (2,538)
                                                                                      ---------   --------    --------    --------
Loss before income taxes...........................................................     (30,583)   (33,719)    (67,398)    (40,533)
Provision for income taxes.........................................................         873                    873
                                                                                      ---------   --------    --------    --------
Net loss...........................................................................     (31,456)   (33,719)    (68,271)    (40,533)
                                                                                      ---------   --------    --------    --------
Value assigned to warrants issued in conjunction with preferred stock offerings....                             (2,100)         --
Preferred stock dividend...........................................................        (251)      (691)       (331)     (1,264)
Effect of incremental yield embedded in conversions terms..........................                                         (5,300)
                                                                                      ---------   --------    --------    --------
Net loss applicable to common stock holders........................................   $ (31,707)  $(34,410)   $(70,702)   $(47,097)
                                                                                      =========   ========    ========    ========
Basic and diluted loss per share...................................................   $   (0.43) $   (1.31)  $   (1.00)  $   (2.30)
                                                                                      =========  =========   =========   =========
Weighted average shares............................................................      72,973     26,206      70,982      20,466
                                                                                      =========  =========   =========   =========
</TABLE> 
           See notes to consolidated condensed financial statements

                                       3
<PAGE>
 
<TABLE> 
<CAPTION> 

                           SYQUEST TECHNOLOGY, INC.
           CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
                                (IN THOUSANDS)

                                                      MARCH 31,      SEPTEMBER 30,
                                                         1998            1997
                                                       ---------      ----------
                          ASSETS
                          ------
<S>                                                   <C>            <C> 
Current assets:
     Cash and cash equivalents ...................     $  16,559      $   7,083
     Accounts receivable, net ....................        33,072         19,535
     Inventories, net ............................        36,154         26,737
     Prepaid expenses and deposits ...............         8,497          6,049
                                                       ---------      ---------
     Total current assets ........................        94,282         59,404
Net property, equipment and leasehold improvements        25,857         22,999
Other assets .....................................           229            246
                                                       ---------      ---------
                                                       $ 120,368      $  82,649
                                                       =========      =========

           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------
Current liabilities:
     Short term borrowings .......................     $  25,483      $  23,291
     Accounts payable ............................        36,466         14,800
     Accrued expenses and other liabilities ......        16,671         15,532
     Current portion of long-term debt ...........         3,387          4,345
                                                       ---------      ---------
          Total current liabilities ..............        82,007         57,968
                                                       ---------      ---------
Long-term debt ...................................         2,639          4,024
Other long-term liabilities ......................           914            959
Mandatory redeemable warrants ....................         5,145         14,085

Stockholders' equity:
     Preferred stock .............................          --             --
     Common stock ................................             8              6
     Additional paid in capital ..................       315,084        222,766
     Treasury stock ..............................       (12,855)       (12,855)
     Retained deficit ............................      (272,574)      (204,304)
                                                       ---------      ---------
          Total stockholders' equity .............        29,663          5,613
                                                       ---------      ---------
                                                       $ 120,368      $  82,649
                                                       =========      =========
</TABLE> 


           See notes to consolidated condensed financial statements

                                       4
<PAGE>
 
<TABLE> 
<CAPTION> 


                           SYQUEST TECHNOLOGY, INC.
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                                                                     SIX MONTHS
                                                                                        ENDED
                                                                                       MARCH 31,
                                                                                --------------------------
                                                                                  1998             1997
                                                                                ---------       ----------
<S>                                                                             <C>              <C> 
Operating Activities:
   Net loss ..............................................................       $(68,271)      $ (40,533)
   Adjustments to reconcile net loss to cash used in operating activities:
       Depreciation ......................................................          3,305           6,567
       Capital Asset Write-Off ...........................................           --             2,470
       Compensation cost in stock option plans ...........................            857            --
       Other .............................................................           --              (127)

Net changes in current assets and current liabilities:
   Accounts receivable ...................................................        (13,537)          5,683
   Inventories ...........................................................         (9,417)        (12,154)
   Accounts payable ......................................................         22,099           1,507
   Accrued expenses and other liabilities ................................            833           2,456
   Prepaid expenses and other ............................................         (1,945)         (6,481)
                                                                                 --------       ---------
   Net cash used in operating activities .................................        (66,076)        (40,612)

Investing activities:
   Purchase of equipment and leasehold improvements ......................         (6,163)         (2,298)
   Other assets ..........................................................           --               640
                                                                                 --------       ---------
   Net cash used in investing activities .................................         (6,163)         (1,658)

Financing activities:
   Net proceeds from issuance of common stock ............................         43,782           8,728
   Net proceeds from issuance of preferred stock .........................         38,491          28,490
   Net proceeds from bank borrowings .....................................          2,192          11,086
   Repayments on long term debt ..........................................         (2,750)         (6,568)
                                                                                 --------       ---------
   Net cash provided by financing activities .............................         81,715          41,736
Net increase (decrease) in cash and cash equivalents .....................          9,476            (534)
Cash and cash equivalents at beginning of the period .....................          7,083           3,670
                                                                                 --------       ---------
Cash and cash equivalents at end of the period ...........................       $ 16,559       $   3,136
                                                                                 ========       =========
</TABLE> 

           See notes to consolidated condensed financial statements


                                       5
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                MARCH 31, 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 last
24 months, the Company incurred aggregated consolidated net losses of
$188,687,000, including a net loss of approximately $68.7 million for the year
ended September 30, 1997 and a net loss of aprroximately $68.3 million for the
first six months of fiscal 1998. Working capital was $12,275,000 at March 31,
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 and March 31, 1998. The Company has funded the cumulative losses
primarily through the sale of preferred and common stock and the issuance of
additional common stock on the exercise of existing warrants. 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.

     Management believes, based on the $45.8 million in cash raised in the
quarter ended March 31, 1998 and approximately $20.2 million received in April
1998 from the exercise of common stock purchase warrants, as well as extension
of its bank credit lines and available cash balances, that the Company has
sufficient cash resources to fund operations through the end of fiscal 1998.
There can be no assurance, however, that the Company will be successful in
achieving its internal financial plan. Management's financial plans for fiscal
1998 include raising additional equity capital primarily from the exercise of
currently outstanding warrants. If all of the warrants outstanding at March
31, 1998 were exercised, the Company would receive cash proceeds of
approximately $150 million; 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 price, issue exchange warrants at market or negotiated discount
exercise prices or provide other incentives. Management believes it has
additional sources of equity capital through issuance of additional
convertible preferred stock or through issuance of 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 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 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.

                                       6
<PAGE>
 
     Operating results for the three and six months ended March 31, 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:


                                          MARCH 31,        SEPTEMBER 30,
                                            1998               1997
                                           -------           -------
                                                (IN THOUSANDS)

Raw materials.......................       $21,825           $13,675
Work in process.....................         6,824             6,840
Finished goods......................         7,505             6,222
                                           -------           -------
                                           $36,154           $26,737
                                           =======           =======


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 March 31, 1998
includes an adjustment related to the computation of earnings per share
applicable to common shareholders of $0.3 million, representing preferred stock
dividends. Absent this adjustment, the net loss per share applicable to the
operations of the business would be $0.43. The computation of net loss per share
for the six months ended March 31, 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 $0.3 million, representing preferred stock
dividends. Absent these adjustments, the net loss per share applicable to the
operations of the business would be $0.96. The net loss per share has decreased
during the periods presented primarily due to the increased number of new common
shares outstanding.

     The basic net loss per share amount for the three and six month periods
ended March 31, 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.

                                       7
<PAGE>
 
<TABLE> 
<CAPTION> 

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

                                                                    THREE MONTHS  THREE MONTHS  SIX MONTHS    SIX MONTHS
                                                                       ENDED        ENDED         ENDED         ENDED
                                                                      MARCH 31,     MARCH 31,    MARCH 31,     MARCH 31,
                                                                     -----------  ----------    -----------   -----------
                                                                       1998          1997          1998          1997
                                                                     -----------  ----------    -----------   -----------
<S>                                                                  <C>         <C>            <C>          <C> 
      Net Loss.....................................................  $   (31,456) $   (33,719)  $   (68,271)  $   (40,533)
      Value assigned to warrants issued in conjunction with
         preferred stock offerings.................................           --           --        (2,100)           --
      Cumulative preferred stock dividends.........................         (251)        (691)         (331)       (1,264)
      Effect of incremental yield embedded in conversions terms....           --           --            --        (5,300)
                                                                     -----------  ----------    ----------    -----------
      Net loss applicable to common stockholders...................  $   (31,707) $   (34,410)  $   (70,702)  $   (47,097)
      Weighted average shares......................................       72,973       26,206        70,982        20,466
      Basic and diluted loss per share.............................  $     (0.43) $     (1.31)  $     (1.00)  $     (2.30)
</TABLE> 

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 a combination of 80 percent of eligible accounts receivable
and 40 percent of eligible finished goods inventory. As of March 31, 1998,
approximately $20.7 million of borrowings were outstanding under the line.

     On March 31, 1998, the Company's manufacturing subsidiary in Penang,
Malaysia, SyQuest Technology Sdn Bhd (M), had a banking facility with a
Malaysian financial institution expiring September 1998 and consisting of a line
of credit for (RM) 17.5 million (approximately $4.8 million) and a term loan for
(RM) 9.6 million (approximately $2.6 million). The subsidiary's building,
equipment, inventory, and eligible receivables secure the facility. As of March
31, 1998, approximately $7.4 million of borrowings were outstanding against this
facility.

NOTE 5 -- CONVERTIBLE PREFERRED STOCK

     At March 31, 1998, the Company had issued and outstanding 46 shares of 5%
cumulative convertible preferred stock, Series 3 (Series 3), 57,657 shares of 5%
convertible preferred stock, Series 4 (Series 4), 21,182 shares of convertible
preferred stock, Series 5 (Series 5), and 30,177 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 dividend.

     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 consists of cash penalties totaling
approximately $0.6 million plus an additional 2.7 million warrants to be
issued. The Company is currently negotiating to satisfy the cash penalties
with shares of common stock.

     During the quarter ended March 31, 1998, the Company issued 30,000 shares
of convertible preferred stock

                                       8
<PAGE>
 
(Series 7) for net proceeds of approximately $28.8 million.

NOTE 6 -- COMMON STOCK

     During the quarter ended March 31, 1998, the Company received proceeds of
approximately $17.1 million from the exercise of outstanding stock purchase
warrants and the purchase of shares under the Company's Employee Stock Purchase
Plan. These transactions resulted in the issuance of approximately 6.3 million
shares of common stock. The Company also issued new warrants to purchase
approximately 5.1 million shares of common stock in conjunction with the
issuance of Series 7 preferred stock.

     During the quarter ended March 31, 1998, the Company reclassified
approximately $0.5 million which had been previously classified as mandatory
redeemable warrants into additional paid-in capital as a result of warrants
exercised from Series 4 preferred shares. Additionally, the Company reclassified
approximately $1.0 million from mandatory redeemable warrants into additional
paid-in capital on termination of the redeemable feature in the related
warrants.

     During the quarter ended March 31, 1998, certain holders of the Company's
Series 4 and Series 5 preferred stock converted their preferred stock into
common stock. The conversions resulted in the issuance of a total of 3,541,571
shares of common stock in exchange for 197 shares of the Company's Series 4
preferred stock and 8,818 shares of the Company's Series 5 preferred stock.

     Subsequent to March 31, 1998, the Company issued approximately 8.0 million
shares of common stock for proceeds of approximately $20.2 million pursuant to
warrant exercises by holders of Series 3 and Series 5 preferred stock. As an
incentive for warrant holders to exercise these warrants, the Company issued an
additional 3.2 million common shares.


NOTE 7 -- 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. The Company believes that no valid patent claims or
designs of Iomega are infringed by its SparQ product and intends to vigorously
defend the action.

     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.


                                       9
<PAGE>
 
NOTE 8 - RECENT ACCOUNTING 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.


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

     The following is a discussion and analysis of the consolidated financial
condition and results of operations for the Company for the second fiscal
quarter ended March 31, 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 Condensed Consolidated
Financial Statements and related Notes appearing elsewhere herein, and with
the Company's 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,
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.

RESULTS OF OPERATIONS

     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 flow
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.

     The Company began shipments of its newest product, SparQ, during the
quarter ended December 31, 1997. SparQ is a 1.0 gigabyte removable cartridge
storage solution consisting of a hard disk drive and removable cartridge which
is competitively priced at $199 with an additional 3 cartridges priced at $99.
The initial demand for the product has been favorable, and SparQ was a major
contributor to net revenue during the six months ended March 31, 1998;
however, there can be no assurance of continued acceptance by the marketplace.
The Company incurred a significant loss in the six months ended March 31, 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 during the December quarter 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.

     In an effort to increase shipments of SparQ to meet anticipated customer
demand, the Company increased the deployment of available resources to SparQ
during the six months ended March 31, 1998. SparQ was designed and released as a
low cost mass market removable cartridge storage solution and, consequently, the
Company must achieve a significant ramp in units of production. Increasing SparQ
shipments over the next several quarters beyond fiscal 1998 will require
additional manufacturing equipment at an estimated cost of up to $20 to $30
million. The Company plans to finance the capital expenditures and related
working capital required by issuing additional capital stock either through the
exercise of outstanding stock warrants or issuance of new securities. There is
no assurance that the Company will be able to secure additional cash resources
when needed, if at all, or on favorable terms. The inability to do so could have
a materially adverse

                                      10
<PAGE>
 
effect on the Company's financial condition and performance and liquidity.

     Management has decided to focus its other new product, Quest, exclusively
on Original Equipment Manufacturer (OEM) opportunities. The cost of distribution
into the OEM channel is less than the cost of distribution into the retail
marketplace. The production ramp-up for Quest will only occur if management
determines that there is sufficient OEM demand for this product.

NET REVENUE

     Net revenue for the quarter ended March 31, 1998 was $47.0 million,
compared to $16.8 million reported for the comparable prior year's quarter. The
increase in net revenue for the current quarter resulted primarily from an
approximately 300% increase in the number of systems sold and an approximately
50% increase in the number of cartridges sold from the quarter ended March 31,
1997. Net revenue for the six months ended March 31, 1998 was $79.1 million,
compared to $65.1 million for the comparable period in the prior year. The
increase in net revenue, primarily from sales of SparQ systems and cartridges,
was partially 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 primarily resulted from price reductions effected since the
comparable prior year's period. The percentage mix of net revenue by product
family compared to the comparable prior year's quarter was:

<TABLE> 
<CAPTION> 
                                                 CURRENT YEAR  PRIOR YEAR
                                                 ------------  ----------
                                                      Q2          Q2
                                                    ------      ------
<S>                                             <C>             <C> 
      Legacy products.................                5%           45%
                                                            
      EZ Flyer and SyJet products.....               36%           55%
                                                            
      SparQ products..................               59%            0%
                                                            
                Total.................              100%          100%

</TABLE> 

     The Company began shipments of its newest product, SparQ, during the first
fiscal quarter ended December 31, 1997.

     Factors such as slow sell through rates in the sales channels, price
pressures on the Company's products, competitive product introductions 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 March 31, 1998 of
$5.2 million, compared to a gross loss of $13.3 million in the same prior year's
quarter, and reported a gross loss of $13.8 million for the six months ended
March 31, 1998, compared to a gross loss of $2.2 million in the same prior
year's period. The improvement in the gross loss in the current quarter was
driven by the increase in revenue derived primarily from SparQ systems and
cartridges. The increase in the gross loss for the six months ended March 31,
1998, compared to the same period 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 the mix of revenue from the "Legacy"
products which were comprised predominantly of cartridges that realize a higher
gross profit than a drive, 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.

                                      11
<PAGE>
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     For the quarter ended March 31, 1998, selling, general and administrative
expenses totaled $21.2 million, or 45 percent of net revenue, compared to $12.7
million, or 76 percent of net revenue, for the same prior year's quarter.
Selling, general and administrative expenses totaled $44.9 million for the six
months ended March 31, 1998, or 57 percent of net revenue, compared to $24.1
million, or 37 percent of net revenue, for the same period in the prior year.
The significant increase in expenses during the three- and six-month periods
ended March 31, 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 six-month period ended March 31, 1998.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses for the quarter ended March 31, 1998 were
$3.5 million, or 8 percent of net revenue, compared to $6.6 million, or 39
percent of net revenue, for the same prior year's quarter. For the six months
ended March 31, 1998 research and development expenses were $7.4 million, or 9
percent of net revenue, compared to $11.7 million, or 18 percent, 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 that it must continue to make significant investments in
research and development to effectively compete in its markets.

INTEREST EXPENSE

     Net interest expense was $0.7 million for the quarter ended March 31, 1998,
compared to $1.1 million for the same quarter of the prior year. For the six
months ended March 31, 1998 net interest expense was $1.3 million, compared to
$2.5 million for the same period in the prior year. The decreases resulted
primarily from a decrease in the average outstanding borrowings during the
current fiscal year.

INCOME TAX EXPENSE

     The tax provision reported for the quarter ended March 31, 1998 relates to
income generated at the Company's manufacturing facility in Penang, Malaysia.

LIQUIDITY AND CAPITAL RESOURCES

     The Company incurred operating losses during the last 24 months totaling
approximately $188.7 million, including a net loss of approximately $68.3
million during the six-month period ended March 31, 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. During the second half of fiscal 1996, the Company began assembling a
turnaround management team in an attempt to address these difficulties and
restore viability.

     The Company funded its working capital requirements and capital
expenditures during the period October 1996 through April 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 $200 million from sales to private investors of
convertible preferred stock, common stock and warrants. During the six months
ended March 31, 1998, the Company raised approximately $82.3 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 April
1998, the Company raised approximately $20.2 million of additional capital from
the exercise of outstanding warrants to purchase common stock.

                                      12
<PAGE>
 
     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 and the risk that the Company's new products may not be
accepted in the marketplace. 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.

     At March 31, 1998, the Company had cash and short-term investments of $16.6
million, compared to $7.1 million at September 30, 1997. The increase in cash
resulted from the issuance of convertible preferred stock, the exercise of
outstanding stock purchase warrants, and an increase in accounts payable. These
increases were partially offset by the net loss recorded for the six months
ended March 31, 1998 and by increases in accounts receivables and inventories,
as well purchases of property and equipment during the period. The Company
improved its net worth to $29.7 million at March 31, 1998, compared to $5.6
million at September 30, 1997. The improvement resulted primarily from proceeds
related to the issuance of convertible preferred stock, the exercise of
outstanding stock purchase warrants and the reclassification of mandatory
redeemable warrants to equity, partially off-set by the net loss for the six
months ended March 31, 1998.

     Working capital improved from $1.4 million at September 30, 1997 to $12.3
million at March 31, 1998. This increase was primarily the result of an increase
in cash and short-term investments of $9.5 million, an increase in accounts
receivable of $13.5 million and an increase in inventories of $9.4 million. The
increases in working capital were partially offset by the increase in accounts
payable of $21.7 million. The increase in accounts receivable was primarily
attributable to increased net revenue during the quarter ended March 31, 1998,
compared to the fourth fiscal quarter of 1997. Days sales outstanding in
accounts receivable at March 31, 1998 was 63 days compared to 68 days at
September 30, 1997. The increase in inventories was primarily attributable to an
increase in raw materials related to the new SparQ product. Inventory turnover
at March 31, 1998 was 5.1 times. The increase in accounts payable was also
consistent with the build up of raw materials required for the manufacture of
the SparQ product.

     During fiscal 1998, the Company experienced a return to regular business
terms with key suppliers.

     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 a combination of 80 percent of eligible accounts receivable
and 40 percent of eligible finished goods inventory. As of March 31, 1998,
approximately $20.7 million of borrowings were outstanding under the line.

     On March 31, 1998, the Company's manufacturing subsidiary in Penang,
Malaysia, SyQuest Technology Sdn Bhd (M), had a banking facility 
with a Malaysian financial institution expiring September 1998 and
consisting of a line of credit for (RM) 17.5 million (approximately $4.8
million) and a term loan for (RM) 9.6 million (approximately $2.6 million). The
subsidiary's building, equipment, inventory and eligible receivables secure the
facility. As of March 31, 1998, approximately $7.4 million of borrowings were
outstanding against this facility.

     The Company raised significant funds during the six months ended March 31,
1998. See Part II, Item 2 of this Form 10-Q. The Company will require additional
equity funding which, if successful, will cause further dilution of the
outstanding common stock. Further equity funding may require stockholder
approval of each transaction or stockholder approval of an increase in the
Company's authorized common stock.

     For the six months ended March 31, 1998, the Company used $66.1 million in
cash for operating activities and $6.2 million for capital expenditures.

     Management believes, based on the additional $20.2 million in cash raised
in April 1998, extension of its bank credit lines and available cash balances,
that the Company has sufficient cash resources to fund operations through the
end of fiscal 1998. There can be no assurance, however, that the Company will be
successful in achieving its internal financial plan.

                                      13
<PAGE>
 
Additional financing may not be available when needed, if at all, or on
favorable terms. Failure to raise additional capital when needed or failing to
renew the existing bank lines of credit will have a material adverse effect on
the Company's liquidity, financial condition and operations.

RISKS FACTORS

     Uncertain Profitability or Successful Turnaround

     The Company continues to execute its turnaround plan, which includes
focusing on its core products and production efficiencies. A successful
turnaround and return to profitability are subject to the risks described
herein and in the Company's Annual Report on Form 10-K, as amended, for its
fiscal year ended September 30, 1997. Many of the risks are beyond the
Company's control. There can be no assurance that the Company will execute its
turnaround plan or that it will secure sufficient capital to withstand
prolonged operating losses.

     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. In order 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.

     Dilution of Common Stock

     At March 31, 1998, the Company had issued and outstanding 46 shares of
Series 3 preferred stock, 57,657 shares of Series 4 preferred stock, 21,182
shares of Series 5 preferred stock and 30,177 shares of Series 7 preferred
stock. Several of the Company's financings have included 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 80 million additional shares of
common stock would be issued based on existing preferred stock and warrant
balances outstanding as of April 30, 1998. Total shares outstanding at that date
were approximately 95 million, providing a total of 175 million common shares
outstanding if all convertible preferred stock is converted and warrants and
options are exercised.

     As of March 31, 1998, the Company had outstanding options and warrants to
purchase approximately 60 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 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.

     To the extent that such 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."

     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 holding period or sales volume limitations.

     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. 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.


                                      14
<PAGE>
 
     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 issue 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
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, disgourgement 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

                                      15
<PAGE>
 
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 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. 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 Santa Clara
Superior Court, 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.

     On January 27, 1997, the Company filed a lawsuit in Federal District Court
in 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

                                      16
<PAGE>

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. filed suit against the Company 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. 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. Several companies have individually contacted the Company concerning
its alleged use of intellectual property belonging to them. Companies that have
contacted the Company include one company that has alleged that the Company's
products infringe six U.S. patents. It is the Company's belief that the claims
are without merit or that the infringement claims relate to component parts
purchased from vendors. The Company also believes that in the event this company
prevailed on its claims, the Company would be indemnified by its vendors for any
liability arising from the alleged infringements and that this matter would not
have a material adverse effect on its financial condition or results of
operations. 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.

     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) have been
          __________________________________
brought in the United States District Court for the Northern District of
California and have been assigned to the Honorable Vaughn Walker (collectively,
the "Federal Lawsuits"). Certain current and former officers and directors also
have been named as defendants in the Federal Lawsuits. The plaintiffs in the
Federal Lawsuits purport to represent a class of all persons who purchased the
Company's common stock between October 21, 1994 and February 1, 1996. The
Federal Lawsuits allege that the defendants violated the federal securities laws
through certain alleged material misrepresentations and omissions and seek
unspecified damages. In general, the litigation alleges insider trading by
certain officers and directors of the Company, failures to disclose on a timely
basis contamination problems in the SQ3270 drive, failure to disclose on a
timely basis that the EZ135 drive could not be sold profitably given the cost of
production, and the failure of certain of the Company's financial statements to
reflect properly the value of inventory relating to those two drives. In January
1997, the federal 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 judgment. Plaintiffs have informed the Court that they elect to stand on
the existing notice and complaint.

                                      17
<PAGE>

     The third suit, a purported class action entitled Gary S. Kaufman v.
                                                       __________________
SyQuest Technology Inc., et al., was filed on March 25, 1996, in the Superior
_______________________________
Court of the State of California for the County of Alameda (the "Kaufman
Lawsuit"). The fourth purported class action, entitled Ravens, et al. v.
                                                       _________________
Iftikar, et al., was filed on October 11, 1996, in the Superior Court of the
_______________
State of California for the County of Alameda (the "Ravens Lawsuit"). The
Kaufman Lawsuit and the Ravens Lawsuit (collectively the "State Court Lawsuits")
have been consolidated and a Consolidated Amended Complaint was filed on
December 6, 1996. The allegations are essentially the same as in the Federal
Lawsuits and seek unspecified damages and punitive damages on behalf of all
persons who purchased the Company's common stock from October 21, 1994 through
February 1, 1996. Pursuant to a Stipulation and Order entered on August 6, 1997,
the State Court Lawsuits have been referred to mediation before a retired
federal judge.

     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"). On July 22, 1996, plaintiffs filed an amended complaint. The action
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 breach of fiduciary duty, unjust enrichment and waste of corporate
assets. The Company is a nominal defendant in the action. The complaint alleges
that the officers and directors issued false and misleading information and sold
shares of the Company's stock at artificially inflated prices. The allegations
are essentially the same as those in the putative class actions. Counsel for
plaintiffs in the Derivative Lawsuit are participating in the mediation ordered
for the State Court Lawsuits described above.

     The Company intends to defend the Federal Lawsuits, the State Court
Lawsuits and the Derivative Lawsuit vigorously, but 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 March 31, 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.

                                      18
<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 March 31, 1998.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     During the quarter ended March 31, 1998, the Company issued Series 7
convertible preferred stock for $28.8 million in net proceeds and also received
net proceeds of approximately $17.1 million from the exercise of outstanding
warrants. Further, an additional 5.1 million warrants were issued in conjunction
with the issuance of Series 7 preferred stock.

     During the quarter ended March 31, 1998, certain holders of the Company's
Series 4 and Series 5 preferred stock converted their preferred stock into
common stock. The conversions resulted in the issuance of a total of 3,541,571
shares of common stock in exchange for 197 shares of the Company's Series 4
preferred stock and 8,818 shares of the Company's Series 5 preferred stock.


                                      19
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.   Exhibits

EXHIBIT
NUMBER                  DESCRIPTION OF DOCUMENT
------------            -----------------------
4.1                     Certificate of Designations, Preferences and Rights of
                        5% Cumulative Convertible Preferred Stock, Series 6,
                        filed herewith.

4.2                     Certificate of Designations, Performances and Rights of
                        5% Cumulative Convertible Preferred Stock, Series 7.
                        Incorporated by Reference to Exhibit 10.1 to the
                        Company's Report on Form 8-K dated February 13, 1998.

27.1                    Financial Data Schedule


b.   Reports on Form 8-K. The Company filed three reports on Form 8-K during 
     the quarter ended March 31, 1998. These reports are summarized below.

                 A current report on Form 8-K, dated February 13, 1998, was
                 filed by the Company reporting under item 5 the sale of its
                 Series 7 preferred stock and under item 7 a related press
                 release.

                 A current report on Form 8-K, dated February 17, 1998, was
                 filed by the Company reporting under item 5 the sale of
                 additional Series 7 preferred stock.

                 A current report on Form 8-K, dated March 25, 1998, was filed
                 by the Company reporting under item 5 the issuance of certain
                 equity securities, and under item 7 a related press release.

                                      20
<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: 05/15/98                        SyQuest Technology, Inc. (Registrant)



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



Dated: 05/15/98                        By:  /s/ MICHAEL K. CLEMENS
                                            ----------------------------
                                            Michael K. Clemens
                                            Acting Chief Financial Officer


                                      21
<PAGE>
 
EXHIBIT INDEX

Exhibit 
Index                       Description of Document
-------                     -----------------------
4.1                         Certificate of Designations, Preferences and Rights
                            of 5% Cumulative Convertible Preferred Stock, Series
                            6, filed herewith.

4.2                         Certificate of Designations, Preferences and Rights
                            of 5% Cumulative Convertible Preferred Stock, Series
                            7. Incorporated by reference to Exhibit 10.1 to the
                            Company's Report on Form 8-K dated February 13,
                            1998.

27.1                        Financial Data Schedule

                                              22