Form 10-Q
==============================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

         [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                For the Quarterly Period Ended March 26, 1999
                                       OR
         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
              For the transition period from _______ to ________


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

                          Commission File Number 1-7534

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



                         STORAGE TECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)

               Delaware                                        84-0593263
    (State or other jurisdiction of                         (I.R.S. Employer
    incorporation or organization)                       Identification Number)

   One StorageTek Drive, Louisville,                           80028-4309
               Colorado
    (Address of principal executive                            (Zip Code)
               offices)



       Registrant's Telephone Number, including area code: (303) 673-5151




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. /X/ YES / / NO

                      APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock as of the latest practicable date.

Common stock ($.10 Par Value) -  99,975,481  shares  outstanding  at 
  April 30, 1999.

<PAGE>
                                                               Form 10-Q, Page 2



               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                               INDEX TO FORM 10-Q
                                 March 26, 1999

                                                                          PAGE
                                                                         -----
PART I - FINANCIAL INFORMATION

      Item 1 - Financial Statements

              Consolidated Balance Sheet                                    3

              Consolidated Statement of Operations                          4

              Consolidated Statement of Cash Flows                          5

              Notes to Consolidated Financial Statements                    6

      Item 2 - Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                       10

PART II - OTHER INFORMATION

      Item 1 - Legal Proceedings                                           23

      Item 6 - Exhibits and Reports on Form 8-K                            25


<PAGE>
                                                               Form 10-Q, Page 3




                STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                            (In Thousands of Dollars)

                                                          03/26/99
                                                        (Unaudited)   12/25/98
                                                       -----------------------
ASSETS
Current assets:
  Cash and cash equivalents                             $  217,778  $  231,985
  Accounts receivable                                      629,338     755,931
  Inventories (Note 2)                                     336,430     261,808
  Deferred income tax assets                               115,073     114,715
                                                         ---------   ---------
     Total current assets                                1,298,619   1,364,439

Property, plant and equipment, at cost                     335,283     320,946
Spare parts for maintenance, at cost                        29,189      33,395
Deferred income tax assets                                  15,456      15,875
Other assets                                               103,878     108,289
                                                         ---------   ---------
                                                        $1,782,425  $1,842,944
                                                         =========   =========

LIABILITIES
Current liabilities:
  Credit facilities (Note 3)                            $  249,788  $  276,673
  Current portion of long-term debt                          1,312       1,722
  Accounts payable                                         150,503     136,555
  Accrued liabilities                                      275,720     332,758
  Income taxes payable                                      97,937      78,400
                                                         ---------   ---------
     Total current liabilities                             775,260     826,108
Long-term debt                                              15,849      17,260
                                                         ---------   ---------
     Total liabilities                                     791,109     843,368
                                                         ---------   ---------

Commitments and contingencies (Note 4)

STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 150,000,000 shares authorized;
  100,073,913 shares issued at March 26, 1999, and
  100,338,353 shares issued at December 25, 1998            10,007      10,034
Capital in excess of par value                             820,183     834,778
Retained earnings                                          165,067     159,254
Treasury stock of 113,774 shares at March 26, 1999,
  and 117,271 shares at December 25, 1998                   (2,334)     (2,409)
Unearned compensation                                       (1,607)     (2,081)
                                                         ---------   ---------
     Total stockholders' equity                            991,316     999,576
                                                         ---------   ---------
                                                        $1,782,425  $1,842,944
                                                         =========   =========


         The accompanying  notes are an integral part of the
               consolidated financial statements.
<PAGE>
                                                               Form 10-Q, Page 4



               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)
                   (In Thousands, Except Per Share Amounts)



                                                            Quarter Ended     
                                                       ----------------------   
                                                        03/26/99    03/27/98
                                                       ----------------------

Revenue                                                $517,503    $484,891
Cost of revenue                                         294,086     253,389
                                                        -------     -------

    Gross profit                                        223,417     231,502


Research and product development costs                   73,476      55,973
Selling, general, administrative and other income
  and expense, net                                      137,859     114,822
                                                        -------     -------

    Operating profit                                     12,082      60,707


Interest expense                                         (3,899)     (1,129)
Interest income                                             930       5,792
                                                        -------     -------

    Income before income taxes                            9,113      65,370


Provision for income taxes                               (3,300)    (24,800)
                                                        -------     -------

    Net income                                         $  5,813    $ 40,570
                                                        =======     =======




EARNINGS PER COMMON SHARE (Note 6)

Basic earnings per share                               $   0.06    $   0.38
                                                        =======     =======


Weighted-average shares                                  99,804     106,627
                                                        =======     =======


Diluted earnings per share                             $   0.06    $   0.37
                                                        =======     =======


Weighted-average and dilutive potential shares          101,982     109,261
                                                        =======     =======


     The accompanying  notes are an integral part of the
               consolidated financial statements.

<PAGE>
                                                               Form 10-Q, Page 5


              STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
                            (In Thousands of Dollars)

                                                          Quarter Ended       
                                                     ---------------------- 
                                                      03/26/99    03/27/98
                                                     ----------------------
OPERATING ACTIVITIES
Cash received from customers                          $ 628,897   $ 605,266
Cash paid to suppliers and employees                   (573,249)   (459,382)
Interest received                                           930       5,792
Interest paid                                            (3,356)       (845)
Income tax refund (paid), net                            16,144     (16,786)
                                                       --------    --------
   Net cash provided by operating activities             69,366     134,045
                                                       --------    --------

INVESTING ACTIVITIES
Short-term investments, net                                          56,574
Purchase of property, plant and equipment, net          (32,498)    (19,328)
Other assets, net                                        (2,582)       (959)
                                                       --------    --------
Net cash provided by (used in) investing activities     (35,080)     36,287
                                                       --------    --------

FINANCING ACTIVITIES
Repayments of credit facilities, net                    (26,887)
Repayments of other debt                                 (1,527)     (2,064)
Repurchases of common stock                             (17,427)    (13,836)
Proceeds from employee stock plans                        3,820       8,909
                                                       --------    --------
   Net cash used in financing activities                (42,021)     (6,991)
                                                       --------    --------

   Effect of exchange rate changes on cash               (6,472)     (3,061)
                                                       --------    --------

Increase (decrease) in cash and cash equivalents        (14,207)    160,280
   Cash and cash equivalents - beginning of the 
     period                                             231,985     256,319
                                                       --------    --------
Cash and cash equivalents - end of the period         $ 217,778   $ 416,599
                                                       ========    ========


RECONCILIATION OF NET INCOME TO NET CASH
   PROVIDED BY OPERATING ACTIVITIES
Net income                                            $   5,813   $  40,570
Depreciation and amortization expense                    26,901      33,583
Translation loss                                         11,201       4,866
Other non-cash adjustments to income                      1,698      (3,383)
Decrease in accounts receivable                         110,039     119,753
Increase in inventories                                 (71,322)    (29,988)
Increase in spare parts, net                               (997)     (8,572)
(Increase) decrease in deferred income tax assets, net   (3,031)     12,107
Decrease in accounts payable and accrued liabilities    (32,459)    (29,698)
Increase (decrease) in income taxes payable              21,523      (5,193)
                                                       --------    --------
   Net cash provided by operating activities          $  69,366   $ 134,045
                                                       ========    ========



     The accompanying  notes are an integral part of the
               consolidated financial statements.

<PAGE>
                                                               Form 10-Q, Page 6



               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 1 - BASIS OF PREPARATION
-----------------------------
The  accompanying   consolidated  financial  statements  of  Storage  Technology
Corporation and its subsidiaries  (StorageTek or the Company) have been prepared
in accordance with the Securities and Exchange Commission  requirements for Form
10-Q. In the opinion of management,  these  statements  reflect all  adjustments
necessary for the fair  presentation of results for the periods  presented,  and
such adjustments are of a normal,  recurring  nature.  For further  information,
refer to the  consolidated  financial  statements and footnotes  included in the
Company's Annual Report on Form 10-K for the year ended December 25, 1998.

NOTE 2 - INVENTORIES
--------------------
Inventories consist of the following (in thousands of dollars):

                                              03/26/99          12/25/98
                                             ---------------------------
      Raw materials                           $ 80,632          $ 46,672
      Work-in-process                           84,269            76,839
      Finished goods                           171,529           138,297
                                               -------           -------
                                              $336,430          $261,808
                                               =======           =======

NOTE 3 - DEBT AND FINANCING ARRANGEMENTS
----------------------------------------
The Company has a financing  agreement with a bank that provides for the sale of
promissory  notes in the principal amount of up to $140,000,000 at any one time.
The agreement,  which expires in January 2000,  provides for  commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of March 26, 1999, the Company had outstanding  borrowings of $64,788,000 and
had  committed  to  borrowings  between  April  1999  and  December  1999 in the
cumulative  principal  amount of approximately  $292,687,000.  The notes must be
repaid only to the extent of future revenue. Obligations under the agreement are
not  cancelable  by the Company or the bank.  Gains and losses  associated  with
changes in the underlying  foreign currencies are deferred during the commitment
period and  recognized  as an  adjustment  to the  revenue  supporting  the note
repayment at the time the bank  purchases the promissory  notes.  The promissory
notes,  together with accrued  interest,  are payable in U.S.  dollars within 40
days from the date of issuance and bear interest at rates no less than the LIBOR
plus 0.35%  (approximately  5.29% as of March 26, 1999).  Under the terms of the
agreement,  the Company is required to comply with certain  covenants and, under
certain  circumstances,  may be  required  to  maintain  a  collateral  account,
including  cash and  qualifying  investments,  in an  amount  not less  than the
outstanding promissory notes.

See the Company's 1998 Form 10-K and "Liquidity and Capital Resources  Available
Financing  Lines" of this Form 10-Q,  for additional  information  regarding the
Company's debt and financing arrangements.
<PAGE>
                                                               Form 10-Q, Page 7



NOTE 4 - LITIGATION
-------------------
In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder  County,  Colorado,  District  Court against the
Company and certain  subsidiaries.  The suit alleged that the Company breached a
1990  settlement  agreement  that had resolved  earlier  litigation  between the
parties.  The suit  sought  injunctive  relief  and  damages  in the  amount  of
$2,400,000,000.  On December 28, 1995, the court dismissed the complaint.  Stuff
appealed  the  dismissal to the Colorado  Court of Appeals.  In March 1997,  the
Court of Appeals reversed the District Court's judgment and remanded the case to
the  District  Court for further  proceedings.  In December  1997,  the Colorado
Supreme  Court  rejected  the  Company's  petition  seeking a  reversal  of this
decision. A new trial date has not been set. The case is in the discovery phase.

On June 29, 1995,  Odetics,  Inc. (Odetics) filed a patent  infringement suit in
the U.S. District Court for the Eastern District of Virginia against the Company
alleging that the  "pass-through"  port in certain of the Company's tape library
products  infringed U.S. Patent No. 4,779,151 (the "151 Patent").  The complaint
asked the court to impose  injunctive  relief,  treble damages in an unspecified
amount,  and an award of  attorney's  fees and costs.  In February  1996, a jury
found that the  Company's  products  did not  infringe  the 151 Patent.  Odetics
appealed  and in June 1997,  the U.S.  Court of Appeals for the Federal  Circuit
reversed the District  Court's ruling and remanded the case back to the District
Court for further proceedings.  On March 27, 1998, a second trial was held and a
jury found that a  pass-through  port in certain of the  Company's  tape library
products  willfully  infringed  the 151 Patent  and  awarded  actual  damages to
Odetics of $70,600,000. On July 31, 1998, the Court granted the Company's motion
for judgment as a matter of law,  overturning  the jury's  verdict,  and entered
judgment in favor of the  Company.  On August 10,  1998,  Odetics  appealed  the
judgment to the U.S. Court of Appeals for the Federal Circuit, and on August 26,
1998, the Company filed a cross-appeal.  Oral arguments on the appeals were held
on April 12, 1999. A decision on these appeals is pending  before the U.S. Court
of Appeals.

On December 8, 1995, Odetics filed a second patent infringement suit in the U.S.
District  Court for the Eastern  District of Virginia  against the Company.  The
complaint  alleges that the "cartridge  access port" in certain of the Company's
tape  library  products  also  infringes  the 151 Patent.  The  complaint  seeks
injunctive  relief,  treble  damages in an unspecified  amount,  and an award of
attorney's fees and costs.  This case has been stayed pending the outcome of the
case filed by Odetics on June 29, 1995, which is described above.

On October 3, 1995,  certain  former  employees of the Company filed suit in the
U.S.  District  Court for the  District of Colorado  against  the  Company.  The
amended suit alleges  violations of the Age  Discrimination  in  Employment  Act
(ADEA) and the  Employee  Retirement  Income  Security  Act (ERISA)  between the
period of April 13, 1993, and December 31, 1996. On November 26, 1997, the Court
granted the  plaintiffs'  request to proceed as a collective  action on the ADEA
claims.  On  November 9, 1998,  the Court  granted  the  plaintiffs'  request to
proceed as a class on the ERISA claims.  On March 1, 1999,  the Court denied the
Company's appeal on the  certification of the ERISA class.  Approximately  1,300
persons are eligible  members of the ERISA class,  which includes  approximately
400  members  of the ADEA  class.  The  plaintiffs  seek,  among  other  things,
compensatory  damages in an unspecified amount,  including the value of back pay
and benefits;  reinstatement as employees or  alternatively  the value of future
earnings and  benefits;  and exemplary or  liquidated  damages.  The Company has
filed an  answer  denying  both the ADEA and  ERISA  claims.  The case is in the
discovery phase and a trial date has been set for October 1999.
<PAGE>
                                                               Form 10-Q, Page 8



The Company  believes it has adequate legal defenses with respect to each of the
actions cited above and intends to  vigorously  defend  against  these  actions.
However,  it is reasonably  possible that these actions could result in outcomes
unfavorable  to the Company.  The Company is also involved in various other less
significant legal actions.  While the Company currently believes that the amount
of the ultimate potential loss would not be material to the Company's  financial
position,  the outcome of these actions is inherently  difficult to predict.  In
the event of an  adverse  outcome,  the  ultimate  potential  loss  could have a
material adverse effect on the Company's  financial position or reported results
of operations in a particular quarter. An unfavorable decision,  particularly in
patent  litigation,  could require material changes in production  processes and
products or result in the  Company's  inability to ship  products or  components
found to have violated third-party patent rights.

NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
---------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS
No. 133 is effective for all fiscal periods  beginning after June 15, 1999, with
earlier  adoption  encouraged.  SFAS No.  133  requires  all  derivatives  to be
recognized as either assets or liabilities on the consolidated balance sheet and
be measured at their fair value. The  corresponding  change in fair value of the
derivative  instrument  will be recorded in the earnings of the Company,  net of
any  change in fair value of the  related  hedged  item,  or as a  component  of
comprehensive  income  depending  upon the  intended  use and  designation.  The
Company is  currently  evaluating  the  impact of SFAS No. 133 on its  financial
statements and its plans for adopting the new accounting standard.

NOTE 6 - COMMON STOCK SPLIT
---------------------------
In May 1998, the Company declared a two-for-one stock split effected in the form
of a 100%  stock  dividend  paid at the  close of  business  June 26,  1998,  to
shareholders  of record on June 5, 1998.  All earnings per common share  amounts
have been  restated as if the stock  dividend  had  occurred as of the  earliest
period presented.
<PAGE>
                                                               Form 10-Q, Page 9



NOTE 7 - OPERATIONS OF BUSINESS SEGMENTS
----------------------------------------
The Company is organized into three reportable segments based on the definitions
of segments provided under SFAS No. 131: storage products,  storage services and
storage  management  software.  The storage products  segment sells  information
storage tape, disk and network  products.  The storage services segment provides
support  services  for  the  Company's  and  third-party  products,  integration
services,  storage  consulting  and managed  services.  The  storage  management
software segment sells and licenses software products.

The  Company  does not have  any  intersegment  revenue  and  evaluates  segment
performance  based  on  gross  profit.  The  segment  gross  profit  equals  the
consolidated gross profit and the Company does not allocate research and product
development  costs;  selling,  general,  administrative  and  other  income  and
expense; interest expense; interest income; or provision for income taxes to the
segments. The revenue and gross profit by segment is as follows (in thousands of
dollars):

                                               Quarter Ended
                                          ------------------------
                                          03/26/99        03/27/98
                                          --------        --------
         Revenue:
           Storage products               $323,194        $328,591
           Storage services                164,522         143,303
           Storage management software      29,787          12,997
                                           -------         -------
               Total revenue              $517,503        $484,891
                                           =======         =======

         Gross profit:
           Storage products               $134,743        $159,878
           Storage services                 67,045          62,585
           Storage management software      21,629           9,039  
                                           -------         -------
              Total gross profit          $223,417        $231,502
                                           =======         =======

<PAGE>
                                                              Form 10-Q, Page 10


                Storage Technology Corporation and Subsidiaries
                     Management's Discussion and Analysis of
                Financial Condition and Results of Operations
                                 March 26, 1999


All  assumptions,  anticipations,  expectations  and forecasts  contained in the
following  discussion regarding the Company's future product and business plans,
financial results,  performance and events are forward-looking  statements.  The
Company's actual results may differ materially  because of a number of risks and
uncertainties.  Some of these risks are detailed below in "Risk Factors That May
Affect Future Results" and elsewhere in this Form 10-Q.

Statements made herein are accurate only as of the date of filing this Form 10-Q
with the  Securities  and Exchange  Commission and may be relied upon only as of
that date.  The  Company  disclaims  any  obligation  to update  information  on
forecasts contained herein, except as may be otherwise required by law.

GENERAL
-------
The Company  reported net income for the first  quarter ended March 26, 1999, of
$5.8 million on revenue of $517.5  million,  compared to net income for the same
period in 1998 of $40.6 million on revenue of $484.9 million.

Revenue  increased  7% during the first  quarter of 1999,  compared  to the same
period in 1998,  primarily due to increases in revenue from storage services and
storage management software. Revenue from storage products decreased slightly in
the first quarter of 1999, as compared to the same period in 1998.  Gross profit
margins  decreased to 43% during the first  quarter of 1999,  as compared to 48%
for the same period in 1998, due to decreased profit margins on storage products
and storage  services.  The decreased margins from storage products and services
were partially  offset by increased sales of  higher-margin  storage  management
software.

The Company's future revenue and operating results are  significantly  dependent
upon  effectively  managing  the  introduction  of new  products  and  services;
successfully   managing  its  direct  and  indirect   sales  channel   activity;
successfully  implementing  the new storage area  network  (SAN)  strategy;  and
managing operating expenses. For the discussion of these and other risk factors,
see "Risk Factors That May Affect Future Results" below.

The Company's cash balance  decreased  $14.2 million during the first quarter of
1999 due primarily to net investments in property,  plant and equipment of $32.5
million, a reduction in total debt of $28.4 million,  and cash payments of $17.4
million  associated with the Company's  on-going common stock repurchase program
to offset  dilution  from  employee  stock  purchase  plans.  Cash  provided  by
operating  activities  decreased to $69.4  million  during the first  quarter of
1999, as compared to $134.0  million for the same period in 1998. See "Liquidity
and Capital Resources - Working Capital" for additional  discussion of operating
cash flows.


<PAGE>
                                                              Form 10-Q, Page 11


The  following  table,  stated  as  a  percentage  of  total  revenue,  presents
Consolidated Statement of Operations information and revenue by segment.

                                                    Quarter Ended              
                                              --------------------------
                                              03/26/99          03/27/98
                                              --------------------------
Storage products:
  Tape products                                 45.6%             44.8%
  Disk products                                 14.8              19.8
  Network products                               2.0               3.2
                                               -----             -----
   Total storage products                       62.4              67.8
Storage services                                31.8              29.5
Storage management software                      5.8               2.7
                                               -----             -----
      Total revenue                            100.0             100.0
Cost of revenue                                 56.8              52.3
                                               -----             -----
      Gross profit                              43.2              47.7
Research and product development costs          14.2              11.5
Selling, general, administrative and other
  income and expense, net                       26.7              23.7
                                               -----             -----
      Operating profit                           2.3              12.5
Interest income (expense), net                  (0.5)              1.0
                                               -----             -----
      Income before income taxes                 1.8              13.5
Provision for income taxes                      (0.7)             (5.1)
                                               -----             -----
      Net income                                 1.1%              8.4%
                                               =====             =====


REVENUE
-------

STORAGE PRODUCTS

The Company's storage products revenue includes sales of tape, disk, and network
products.  Revenue generated from storage products decreased 2% during the first
quarter  of 1999,  as  compared  to the same  period in 1998,  primarily  due to
decreased  revenue from disk products.  The decreased revenue from disk products
was partially offset by increased revenue from tape products.

Tape Products

Tape product revenue  increased 9% during the first quarter of 1999, as compared
to the same period in 1998. Revenue from the 9840  high-performance  tape drive,
and the  TimberWolf(TM)  family of  automated  tape  libraries  designed for the
client-server market, increased during the first quarter of 1999, as compared to
the same period in 1998.  As  anticipated,  revenue from  TimberLine(R)  9490, a
36-track cartridge subsystem;  PowderHorn(R) 9310, an automated cartridge system
library;  and other earlier generation tape products declined during the quarter
reflecting  reduced units sold and lower selling prices.  While revenue from the
9840 product increased during the quarter, the Company experienced manufacturing
constraints,  which adversely affected revenue  contribution.  The Company added
manufacturing capacity for the 9840 during the second quarter.

Disk Products

Disk product revenue decreased 20% during the first quarter of 1999, as compared
to the same  period  in 1998,  primarily  due to  decreased  OEM sales to IBM of
Iceberg(R),  a disk storage
<PAGE>
                                                              Form 10-Q, Page 12


product  designed for the mainframe  market.  While terabyte sales of Iceberg 
increased in the first quarter of 1999, as compared to 1998,  the  increase  
was more than  offset by a decrease in product  prices.  A significant  portion
of the Company's disk product revenue has been derived from OEM sales of disk 
products to IBM. The Company anticipates that OEM sales to IBM will decrease in
the future.  See "Risk Factors That May Affect Future Results - Dependence  on
IBM," for  discussion  of the  risks  associated  with  IBM.  The decrease in 
revenue from sales of Iceberg was partially offset by an increase in revenue 
from  sales of the  OPENstorage(TM)  Disk  products,  a family  of disk
products  designed  for the  client-server  market.  In April 1999,  the Company
announced  the  availability  of a new disk  storage  product,  the 9393  Shared
Virtual  Array  (SVA).  The SVA  supports  the  consolidation  of data  which is
co-located on mainframe and client-server  systems.  The Company expects that it
will sell SVA primarily through the Company's direct sales organization.

Network Products

Network  product  revenue  decreased  32% during the first  quarter of 1999,  as
compared to the same period in 1998,  primarily due to reduced  revenue from the
earlier  generation network products as the Company has de-emphasized the legacy
network business and has  re-prioritized  investments into products  designed to
address the emerging Storage Area Network (SAN) market. Future revenue growth in
network products is dependent upon customer acceptance of the SAN technology.

Future revenue growth in the Company's storage products segment is significantly
dependent  upon  increasing  volumes  for  the  9840  tape  drive,  successfully
replacing  the  anticipated  decline in OEM sales of Iceberg to IBM with  direct
sales of the  recently-introduced  SVA disk product,  and gaining greater market
acceptance  for SAN  applications.  There can be no assurances  that the Company
will be successful in these endeavors.  See "Risk Factors That May Affect Future
Results - New Products,  Markets and  Distribution  Channels," for discussion of
the risks associated with the introduction and manufacture of new products.

STORAGE SERVICES

Storage   services   include  support  service  revenue  from  the  Company  and
third-party storage products,  as well as integration service revenue associated
with new applications,  storage consulting and managed services revenue. Storage
services revenue  increased 15% during the first quarter of 1999, as compared to
the same period in 1998,  primarily due to growth in the storage  consulting and
managed  services  area and an  increase  in both the  Company  and  third-party
storage products maintenance contracts.

Future revenue growth from storage  services is  significantly  dependent on the
Company's  ability to provide  consulting and integration  services as part of a
bundled  solution with products and software.  Storage  services revenue is also
dependent on the Company's continued success in maintaining the support services
business for both its own and third-party products as the indirect sales channel
expands and the Company focuses on the client-server market.

STORAGE MANAGEMENT SOFTWARE

Storage  management  software revenue increased 129% during the first quarter of
1999, as compared to the same period in 1998, primarily due to increased revenue
from the Virtual Storage  Manager(TM)  (VSM).  The VSM is a software driven data
storage  management   solution  designed  to  improve   performance,   cartridge
utilization,  and overall storage  management.  Revenue from  SnapShot(TM)  also
contributed to the increased revenue from storage 

<PAGE>
                                                              Form 10-Q, Page 13


management software.  SnapShot is software  which is currently designed for use 
with the  Company's  mainframe disk products.  While revenue from VSM increased 
during the quarter,  sales did not meet the Company's  expectations  due to 
early start-up  issues and extended evaluation periods by customers.  The 
extended  evaluation periods resulted from additional  time  required for  
customers to analyze the benefits  from this new software product.

Future  revenue  growth  from  storage  management   software  is  significantly
dependent upon growing market  acceptance for VSM.  Because VSM is a new complex
application  with  extended  customer  evaluation  periods,  it is  difficult to
predict  the timing and extent in which VSM will gain market  acceptance.  There
can be no  assurances  that the Company  will be  successful  in gaining  market
acceptance  for VSM.  The  Company  anticipates  sales of  SnapShot  to IBM will
decline in 1999 as the sales of Iceberg are also expected to decline.  While the
Company  has  developed   SnapShot   capabilities   for  SVA  in  the  mainframe
marketplace, future revenue growth from Snapshot is significantly dependent upon
the timely introduction and market acceptance of future releases of the SnapShot
software. See "Risk Factors That May Affect Future Results - Dependence on IBM,"
for discussion of the risks associated with IBM.

GROSS PROFIT
------------
Gross  profit  margins  decreased  to 43% during the first  quarter of 1999,  as
compared to 48% for the same period in 1998, due to reduced  margins  associated
with  storage  products  and storage  services.  These  decreased  margins  were
partially offset by increased sales of higher-margin storage management software
products.  The gross profit margins on storage products decreased primarily as a
result of price erosion  associated with the Company's disk products and earlier
generation tape products. The gross profit margins on storage services decreased
primarily due to increased pricing pressures  associated with the maintenance of
StorageTek  manufactured  client-server storage products, and the maintenance of
third-party  equipment,  as well as increased revenue from lower-margin  storage
consulting services.

The markets for the Company's products and services are subject to intense price
competition. The Company anticipates that price competition for its products and
services  will continue to have a  significant  impact on the  Company's  profit
margins.   The  Company's  ability  to  sustain  or  improve  gross  margins  is
significantly  dependent  upon its ability to  continue to reduce  manufacturing
costs and increase sales of higher-margin  storage management software.  Storage
product and storage management  software gross margins may be affected in future
periods by inventory reserves and writedowns  resulting from rapid technological
changes or delays in gaining market  acceptance for products.  Storage  services
margins  may be  adversely  affected  in the  future  as a result  of  increased
competition and lower-margins  associated with the Company's consulting services
and multi-vendor support services.

RESEARCH AND PRODUCT DEVELOPMENT
--------------------------------
Research and product development expenses increased 31% during the first quarter
of 1999, as compared to the same period in 1998. This increase was primarily due
to increased  investment in products and software designed for the client-server
and SAN markets as well as a reduction of approximately  $10 million in research
and development  funding received from  third-parties,  as compared to the first
quarter of 1998.
<PAGE>
                                                              Form 10-Q, Page 14


As further  discussed under  "Restructuring,"  below,  the Company has announced
plans to eliminate lower priority  development  programs.  The  restructuring is
expected to reduce research and  development  expenses during the second half of
1999.

SELLING, GENERAL, ADMINISTRATIVE AND OTHER
------------------------------------------
Selling,  general,  administrative and other income and expense (SG&A) increased
20% during the first  quarter of 1999,  as  compared to the same period in 1998.
The increase was primarily due to increased  expenses  associated with expanding
and  training  the direct  sales  force in order to sell SVA,  the  addition  of
storage  consultants,  and increased  marketing efforts  associated with the SAN
initiative and a corporate branding campaign.

As further  discussed under  "Restructuring,"  below,  the Company has announced
plans that are expected to reduce SG&A expenses during the second half of 1999.

RESTRUCTURING
-------------
On April 15, 1999, the Company announced plans to restructure certain aspects of
its  business.  The  elements of the  restructuring  plan include a reduction in
headcount and the elimination of certain lower priority development projects. At
the time of the  announcement,  the Company  expected that the  combination of a
voluntary  separation  program (VSP) and attrition would result in a decrease of
500 positions,  with approximately 250 of the positions eliminated by the end of
the second quarter.

The deadline for employees to elect to  participate  in the VSP was May 3, 1999.
While the Company has received and accepted in excess of 500 offers to volunteer
under the VSP,  the Company is unable to determine at this time the total number
of employees  that will finally  terminate as the employees  have until June 30,
1999, to make a final decision  regarding  whether they will  participate in the
VSP.

Until the Company  determines the final number of  participants  in the VSP, the
Company can not estimate with certainty the actual pre-tax restructuring charge.
The Company  currently  anticipates it will incur employee  severance charges as
part  of the  restructuring  of  between  $25  million  and $30  million.  Asset
writedowns,  lease  abandonments,  and other exit costs may also be  incurred in
connection with the restructuring.  The majority of the restructuring  charge is
expected  to be  incurred  during  the second and third  quarters  of 1999.  The
Company  is  targeting  annualized  savings  of  approximately  $40  million  in
connection with the restructuring.  As the Company is in the early stages of its
restructuring  program  and  it is  unclear  how  many  employees  will  finally
participate in the VSP, there can be no assurance that the restructuring  charge
will be within the range  described  above or that the targeted  savings will be
achieved.

The Company has  restructured  its business in the past in order to re-align its
business  with its  products  and market  strategies,  or  establish a more cost
efficient business  structure.  There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to generate improved  operating  results in future periods.  It is possible that
additional  changes in the Company's business or in its industry may necessitate
additional  restructuring  charges in the future.  The necessity for  additional
restructuring  activities may result in expenses that adversely  affect reported
results of  operations  in the period the  restructuring  plan is  adopted,  and
require incremental cash payments.
<PAGE>
                                                              Form 10-Q, Page 15



INTEREST EXPENSE AND INCOME
---------------------------
Interest  expense  increased  245% to $3.9 million  during the first  quarter of
1999,  as  compared  to the same  period in 1998,  due to  borrowings  under the
Company's  credit  facilities.  Interest income decreased 84% to $930,000 during
the first quarter of 1999, as compared to the same period in 1998,  primarily as
a result of a decrease in cash  available for  investment.  See  "Liquidity  and
Capital  Resources," for further discussion of the Company's working capital and
credit facilities.

INCOME TAXES
------------
The  Company's  effective tax rate  decreased  from 38% for the first quarter of
1998,  to 36% for the first quarter of 1999.  Statement of Financial  Accounting
Standards  (SFAS) No. 109 requires that deferred income tax assets be recognized
to the extent  realization  of such assets is more likely than not. Based on the
currently available information, management has determined that the Company will
more likely than not realize $130.5 million of deferred  income tax assets as of
March 26, 1999. The Company's valuation allowance of approximately $24.5 million
as  of  March  26,  1999,  relates  principally  to  net  deductible   temporary
differences and net operating loss  carryforwards  associated with the Company's
foreign subsidiaries.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Working Capital

The Company's cash balance  decreased  $14.2 million during the first quarter of
1999 due primarily to net investments in property,  plant and equipment of $32.5
million, a reduction of total debt of $28.4 million,  and cash payments of $17.4
million  associated with the Company's  on-going common stock repurchase program
to offset  dilution  from  employee  stock  purchase  plans.  Cash  provided  by
operating  activities  decreased to $69.4  million  during the first  quarter of
1999, as compared to $134.0  million for the same period in 1998.  While revenue
has increased in the first quarter of 1999, as compared to 1998, the Company has
not realized  the benefit of the revenue  increase in terms of cash flows due to
decreased gross margins,  increased  operating  expenses,  slower collections of
accounts  receivable,  and increased  levels of inventory.  Accounts  receivable
collections  have been adversely  impacted by issues  associated with the recent
integration  and  implementation  of  new  internal   information   systems  and
processes.  See "Risks  Factors  That May Affect  Future  Results -  Information
Systems  Transition," for discussion of the risks associated with integration of
new systems.  Inventory levels increased during the first quarter of 1999 due to
inventory ramp-up for new products coupled with longer than anticipated customer
evaluation periods.

Available Financing Lines

The Company has an unsecured  revolving  credit  facility (the  Revolver)  which
expires in October 2001. The credit limit available  under the Revolver,  $337.5
million as of March 26,  1999,  is  reduced by $12.5  million on the last day of
each calendar quarter.  The interest rates under the Revolver depend on the type
of  advance  selected.  The  basic  advance  rate is not less  than  the  London
Interbank Offered Rate (LIBOR) plus .625%  (approximately  5.56% as of March 26,
1999). The interest rate on the outstanding  borrowings under the Revolver as of
March 26, 1999, has varied from  approximately  5.94% to 7.75%.  As of March 26,
1999,  the  Company had  borrowings  of $185  million and had issued  letters of
credit for approximately  $100,000 under 


<PAGE>
                                                              Form 10-Q, Page 16


the Revolver.  The remaining  available credit  under  the  Revolver  as of 
March 26,  1999,  was  approximately  $152.4 million. The Revolver contains 
certain financial and other covenants,  including restrictions on payment of 
cash dividends on the Company's common stock.

In January 1999,  the Company  entered into a $150 million  unsecured  revolving
credit  facility (the $150 million  Revolver) which expires in January 2000. The
interest  rates under the $150  million  Revolver  depend on the type of advance
selected.  The  basic  advance  rate is not  less  than  the  LIBOR  plus  1.00%
(approximately  5.94% as of March 26, 1999).  As of March 26, 1999,  the Company
had no  borrowings  or  outstanding  letters of credit  issued  against the $150
million Revolver. The $150 million Revolver contains certain financial and other
covenants,  including  restrictions  on the payment of the cash dividends on the
Company's common stock.

The Company has a financing  agreement with a bank that provides for the sale of
promissory  notes in the principal amount of up to $140 million at any one time.
The agreement,  which expires in January 2000,  provides for  commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of March 26, 1999,  the Company had  outstanding  borrowings of $64.8 million
and had  committed to  borrowings  between  April 1999 and December  1999 in the
cumulative  principal amount of approximately  $292.7 million. The notes must be
repaid only to the extent of future revenue. Obligations under the agreement are
not  cancelable  by the Company or the bank.  Gains and losses  associated  with
changes in the underlying  foreign currencies are deferred during the commitment
period and  recognized  as an  adjustment  to the  revenue  supporting  the note
repayment at the time the bank  purchases the promissory  notes.  The promissory
notes,  together with accrued  interest,  are payable in U.S.  dollars within 40
days from the date of issuance and bear interest at rates no less than the LIBOR
plus 0.35%  (approximately  5.29% as of March 26, 1999).  Under the terms of the
agreement,  the Company is required to comply with certain  covenants and, under
certain  circumstances,  may be  required  to  maintain  a  collateral  account,
including  cash and  qualifying  investments,  in an  amount  not less  than the
outstanding promissory notes.

The  Company  intends  to  continue  to commit  substantial  working  capital to
research and product development  projects,  and the rollout of new products and
services.  The  Company  may  invest  in or  acquire  complementary  businesses,
products or technologies as market and business conditions warrant.  The Company
believes it has adequate working capital and financing  capabilities to meet its
anticipated  operating and capital requirements for the next 12 months. Over the
longer  term,  the  Company  may choose to fund  these  activities  through  the
issuance  of  additional  equity or debt  financing.  The  issuance of equity or
convertible   debt  securities   could  result  in  dilution  to  the  Company's
stockholders.  There can be no  assurance  that such  additional  financing,  if
required, can be completed on terms acceptable to the Company.

Total Debt-to-Total Capitalization

The  Company's  total  debt-to-capitalization  ratio  decreased  from  23% as of
December 25, 1998,  to 21% as of March 26, 1999,  primarily due to a decrease in
short-term borrowings of $26.9 million under the Company's credit facilities.

INTERNATIONAL OPERATIONS
------------------------
During  the  first  quarter  of  1999  and  1998,  approximately  40%  and  36%,
respectively,  of the  Company's  revenue  was  generated  by its  international
operations.  The Company also sells other products and software through domestic
indirect  distribution channels that have end-user customers located outside the
United  States.  The  Company  expects  that  it will  continue  to  generate  a
significant portion of its revenue from international  operations in the future.
The

<PAGE>
                                                              Form 10-Q, Page 17


majority  of  the  Company's  international  operations  involve  transactions
denominated  in  the  local  currencies  of  countries  within  Western  Europe,
principally Germany, France and the United Kingdom; Japan; Canada and Australia.
An increase in the exchange  value of the United States dollar reduces the value
of revenue and profits generated by the Company's international operations. As a
result, the Company's operating and financial results can be materially affected
by  fluctuations in foreign  currency  exchange rates. In an attempt to mitigate
the impact of  foreign  currency  fluctuations,  the  Company  employs a foreign
currency  hedging  program.  See  "Market  Risk  Management  / Foreign  Currency
Exchange Risk," below.

The  Company's  international  business  may be  affected  by  changes in demand
resulting  from global and  localized  economic  and  business  conditions.  The
Company  is  subject  to the risks of  conducting  business  outside  the United
States,  including  changes in, or  impositions  of,  legislative  or regulatory
requirements,   tariffs,  quotas,   difficulty  in  obtaining  export  licenses,
potentially  adverse  taxes,  the burdens of complying with a variety of foreign
laws,  and  other  factors  outside  the  Company's  control.  There  can  be no
assurances  these  factors  will  not  have a  material  adverse  effect  on the
Company's business or financial results in the future.

MARKET RISK MANAGEMENT / FOREIGN CURRENCY EXCHANGE RISK
-------------------------------------------------------
The  market  risk  inherent  in  the  Company's  financial  instruments  relates
primarily to changes in foreign currency  exchange rates. To mitigate the impact
of foreign  currency  fluctuations,  the Company seeks  opportunities  to reduce
exposures  through  financing  activities.  Foreign currency options and forward
exchange  contracts  are also used to reduce  foreign  currency  exposures.  All
foreign  currency  options and forward  exchange  contracts are  authorized  and
executed  pursuant  to the  Company's  policies.  Foreign  currency  options and
forward  exchange  contracts  that are  designated  as and  qualify  as  hedging
transactions  are subject to hedge  accounting  treatment.  The Company does not
hold or  issue  derivatives  or any  other  financial  instruments  for  trading
purposes.

The Company has a financing agreement with a bank which provides for commitments
by the bank to  purchase  promissory  notes  denominated  in a number of foreign
currencies.  Gains and losses associated with changes in the underlying  foreign
currencies  are  deferred  during the  commitment  period and  recognized  as an
adjustment  to the revenue  supporting  the note  repayment at the time the bank
purchases the promissory notes. See "Liquidity and Capital Resources - Available
Financing Lines," for a description of the financing agreement.

The Company  periodically  utilizes  foreign  currency  options,  generally with
maturities  of less  than  one  year,  to hedge a  portion  of its  exposure  to
exchange-rate  fluctuations  in  connection  with  anticipated  revenue from its
international  operations.  Gains and losses  associated  with the  options  are
deferred and recognized as an adjustment to the underlying revenue transactions.
To the extent an option is terminated or ceases to be effective as a hedge,  any
gains and losses as of that date are deferred and recognized as an adjustment to
the underlying revenue transaction.

The Company also utilizes forward exchange contracts,  generally with maturities
of less than two months,  to hedge its  exposure to  exchange-rate  fluctuations
associated with monetary assets and liabilities  held in foreign  currencies and
anticipated revenue from its international  operations.  The carrying amounts of
these  forward  exchange  contracts  equal their fair value as the contracts are
adjusted at each  balance  sheet date for changes in exchange  rates.  Gains and
losses on the  forward  exchange  contracts  used to hedge  monetary  assets and
liabilities are recognized as incurred within SG&A on the Consolidated Statement
of Operations as  adjustments  to the foreign  exchange  gains and losses on the
translation of net monetary 
<PAGE>
                                                              Form 10-Q, Page 18


assets.  Gains and losses on the forward  contracts used to hedge  anticipated  
revenue is recognized as incurred as  adjustments to revenue.

A  hypothetical  10% adverse  movement in foreign  exchange rates applied to the
Company's foreign currency exchange rate sensitive  instruments held as of March
26, 1999, and as of December 25, 1998,  would result in a  hypothetical  loss of
approximately $54.0 million and $59.2 million, respectively. The decrease in the
hypothetical  loss for the  first  three  months of 1999 is  primarily  due to a
decrease  in  committed   borrowings  under  the  financing   agreement.   These
hypothetical  losses do not take into  consideration  the  Company's  underlying
international  operations.  The Company  anticipates that any hypothetical  loss
associated  with  the  Company's   foreign  currency   exchange  rate  sensitive
instruments   would  be  offset  by  gains   associated   with  its   underlying
international operations.

Risk Factors That May Affect Future Results
-------------------------------------------

New Products, Markets and Distribution Channels

The Company's  results of operations and  competitive  strength  depend upon its
ability to successfully develop,  manufacture and market innovative new products
and  software.  Short  product life cycles are  inherent to the  high-technology
market.  The Company must devote  significant  resources to research and product
development  projects and  effectively  manage the risks inherent in new product
transitions.  Developing  new  technology  and  products is complex and involves
uncertainties.  Delays in product  development,  manufacturing,  or in  customer
evaluation and purchasing decisions can make product transitions  difficult.  In
addition,  product  transitions  make the process of  production  and  inventory
planning more difficult as the Company must  accurately  anticipate  product mix
and configuration demands, and accurately forecast inventory levels. The Company
has experienced  product  development delays in the past that adversely affected
the  Company's  financial  results  and  competitive  position.  There can be no
assurances that the Company will be able to successfully  manage the development
and introduction of new products and software in the future.

In December  1998,  the  Company's  new 9840 tape drive and VSM software  became
generally  available.  The Company's financial results in 1999 are significantly
dependent  on  increased  manufacturing  capacity  and volumes for the 9840 tape
drive and gaining  market  acceptance  for VSM. The  manufacture of new products
involves  integrating  complex  designs and processes,  collaborating  with sole
source suppliers for key components,  and increasing manufacturing capacities to
accommodate demand. A design flaw or the failure to obtain sufficient quantities
of key components could adversely  affect the Company's  operating and financial
results.  In the first quarter of 1999,  manufacturing  constraints  on the 9840
product  adversely  effected the Company's  financial  results.  Also,  start-up
issues and extended  evaluation  periods by customers for VSM adversely effected
the Company's financial results in the first quarter.

The Company  historically has generated a significant portion of its revenue and
operating  profits from the  mainframe  market.  The rate of revenue  growth has
declined in the mainframe  market as a result of significant  price  competition
and as  some  customers'  purchase  patterns  transition  to  the  client-server
environment.  The Company's future financial results are significantly dependent
upon  successfully  competing  in the  rapidly  growing  client-server  and  SAN
markets.  The Company currently is making significant  investments in developing
new  products,  services  and  software  for  these  markets.  There  can  be no
assurances that the Company will be successful in these activities.
<PAGE>
                                                              Form 10-Q, Page 19


The Company's business model involves the use of both its direct sales force, as
well as indirect distribution channels,  such as OEMs, value-added resellers and
value-added distributors. In order to be successful with this model, the Company
must successfully manage the mix of these different sales channels. For example,
the Company is  currently  ramping up its direct sales force to sell SVA, as OEM
sales of its mainframe Iceberg product to IBM decline. There can be no assurance
that  the  Company  will not  experience  disruptions  in  sales  or  experience
increased  sales  costs  due to  its  multiple  sales  channels.  The  Company's
operating  and  financial  results  may be  adversely  affected  in the event an
indirect  partner  establishes a new relationship  with a competitor,  delays or
changes its purchasing  patterns,  or experiences  financial  difficulties.  See
"Dependence  on IBM," below,  for a  discussion  of issues  associated  with the
Company's distribution channels for its disk products.

Dependence on IBM

During the first  quarter of 1999,  OEM sales of  products  and  software to IBM
declined  to  less  than  15%  of  the  Company's  total  revenue.  The  Company
anticipates  that IBM will  continue  to reduce its  purchases  from the Company
during 1999 and will not extend the relationship with respect to future products
and  software as IBM has  announced  that it is  developing a  competitive  disk
product. The Company is currently expanding its direct sales channel to sell its
SVA  and  SnapShot   products.   The  Company   anticipates   increased  revenue
contribution from SVA and Snapshot in the second half of 1999 through its direct
sales channel.  Failure to  successfully  develop new  high-volume  distribution
channels for the Company's disk products and software could adversely affect the
Company's financial results.

Competition

The markets for the  Company's  products,  software and  services are  intensely
competitive and are subject to continuous,  rapid technological change, frequent
product  performance  improvements,  short product life cycles,  and  aggressive
pricing.  The Company believes that its ability to remain  competitive  includes
factors such as price and cost of the  Company's  and its  competitors'  product
offerings,  the timing and success of the Company's new products and  offerings,
and new product  introductions  by the Company's  competitors.  This competitive
environment gives rise to aggressive pricing strategies and puts pressure on the
Company's gross margins. The Company's competitors include, among others, Compaq
Computer Corporation,  EMC Corporation,  Hewlett-Packard  Company, Hitachi Ltd.,
IBM,  and Sun  Microsystems,  Inc. A number of the  Company's  competitors  have
significantly  greater market presence and financial resources than the Company.
In the  highly  competitive  client-server  market,  a number  of the  Company's
competitors  are able to offer  customers a bundled server and storage  product,
which may provide  them with a  competitive  advantage.  The Company  expects to
address  some of  these  competitive  issues  through  its  software,  SAN,  and
solutions strategies.

From  time-to-time,  two or more of the Company's  competitors may form business
alliances that compete with the Company.  For example, in the first quarter of 
1999, IBM and EMC announced that they have entered into a strategic business and
technology  alliance.  Although  the impact of this  alliance  on the  Company's
business is unclear at this time,  the  alliance of two of the  Company's  major
competitors  could adversely effect the Company's ability to compete in a number
of its existing market  segments.  A number of the Company's  competitors in the
product,  services and software  markets have formed  alliances  with the stated
objective of developing  interoperable SAN solutions.  In the storage management
software market, the Company competes with vendors with which it has established
partnerships,  including Legato Systems,  Inc. and VERITAS Software Corporation.
The Company also  anticipates  that it will  

<PAGE>
                                                              Form 10-Q, Page 20


continue to establish  distribution partnerships  with other equipment  
manufacturers,  software vendors and service providers to address  competitive  
factors.  There can be no assurances that the Company will be able to  
successfully  compete  against other companies in these markets.

Volatility of Stock Price / Earnings Fluctuations

The Company's  common stock is subject to  significant  fluctuations  in trading
price.  The Company's  stock price may be impacted if the  Company's  revenue or
earnings  fail  to  meet  the  expectations  of the  investment  community.  The
Company's  stock price may also be affected by broad economic and market trends,
which are unrelated to the Company's performance.

The  Company's  financial and  operating  results may fluctuate  from quarter to
quarter due to a number of reasons.  In the past,  the  Company's  results  have
followed a seasonal  pattern,  which  reflects the tendency of customers to make
their  purchase  decisions  at the end of a  calendar  year.  During  any fiscal
quarter,  a  disproportionately   large  portion  of  total  product  sales  are
recognized  in the last weeks and days of the  quarter.  These  factors make the
forecasting  of revenue  inherently  difficult.  The Company plans its operating
expenses on expected  revenue and a revenue  shortfall may cause  earnings to be
below  expectation  in that period.  A shortfall in revenue could be caused by a
number of factors,  such as product and technology  transitions announced by the
Company or its competitors,  delays in the availability of new products, changes
in the purchasing patterns of the Company's customers and distribution partners,
the timing of customers' acceptance of solutions, rapid price erosion, or global
economic conditions.

Sole Source Suppliers

The Company  generally  uses standard  parts and components for its products and
believes  that,  in most  cases,  there are a number of  alternative,  competent
vendors  for most of those parts and  components.  Many  non-standard  parts are
obtained from a single source or a limited  group of suppliers;  however,  there
are other  vendors who could produce these in  satisfactory  quantities  after a
period of  pre-qualification  and product ramping.  Certain of the Company's key
components  and products are  purchased  from single source  suppliers  that the
Company  believes  are  currently  the  only  manufacturers  of  the  particular
components  that  meet  the  Company's  qualification   requirements  and  other
specifications  or for  which  alternative  sources  of supply  are not  readily
available.  In particular,  Imation  Corporation is a single source supplier for
the 9840 tape cartridges and the Company is dependent on Imation to economically
produce  large volumes of  high-quality  tape  cartridges  for the 9840 product.
Imation is expanding its manufacturing  capability to produce tape cartridges in
sufficient quantity to achieve the Company's demands.  There can be no assurance
that Imation will be able to meet the anticipated  demands.  The Company is also
dependent on IBM for disk drives used in the Company's Iceberg product which are
sold to IBM under an OEM  agreement  and which the Company sells through its own
direct sales channel.

Certain  of the  Company's  suppliers  have  experienced  occasional  technical,
financial  or other  problems  in the past that  have  delayed  deliveries,  but
without significant effect on the Company. An unanticipated  failure of any sole
source supplier to meet the Company's  requirements for an extended  period,  or
the inability to secure comparable  components in a timely manner,  could result
in a shortage of key  components,  longer lead times,  and reduced  control over
production and delivery  schedules.  These factors could have a material adverse
effect on the  Company's  revenue  and  operating  results.  In the event a sole
source  supplier was unable or unwilling to continue to supply  components,  the
Company  would have to identify and qualify  other  acceptable  suppliers.  This
process  could take an extended  period,  and no 

<PAGE>
                                                              Form 10-Q, Page 21


assurance can be given that any additional  source  would  become  available  or
would be able to  satisfy  the Company's production requirements on a timely 
basis.

Information Systems Transition

The  Company is in the process of  replacing  many of its  internal  information
systems with new, integrated  information systems that are complex and that will
affect numerous operational,  transactional, financial, and reporting processes.
The  transition to these new systems and  processes is currently  expected to be
completed  during the third quarter of 1999,  and involves a number of risks and
uncertainties.  The Company  must  successfully  manage the transfer of critical
information  to the new  systems,  the  integration  of these  systems,  and the
implementation of associated process changes and employee training programs. The
Company  intends to conduct  extensive  tests on these new systems and processes
prior to implementation;  however, these tests may not be able to fully simulate
the  transition  phase and  day-to-day  operating  environment.  There can be no
assurance  that the  transition  to the new  information  systems will not cause
delays or interruptions in the Company's critical business processes. Failure to
successfully   manage  the  transition  could  adversely  affect  the  Company's
operating and financial results.

Risks Associated with the Year 2000

The Company's  product lines include  information  storage products and software
which  collect,  move,  store,  share,  and protect  data.  In order to properly
process data,  the Company's  products must  successfully  manage and manipulate
data that  includes  both 20th and 21st  century  dates (Year 2000  Ready).  The
Company has  evaluated all of its  currently  offered  products and software and
believes  that they are Year 2000  Ready,  provided  they have been  upgraded to
include all recommended engineering changes.  However, there can be no assurance
that the Company's  current products and software will be Year 2000 Ready in all
environments.  In  addition,  the Company does not  currently  intend to develop
modifications  to certain of its older  products  and software to make them Year
2000  Ready  and is in the  process  of  notifying  the  affected  customers  of
potential  year 2000 problems with older products and software in order to raise
their awareness.

The Company  generally  believes  that it is not legally  responsible  for costs
incurred  by its  customers  to achieve  their year 2000  readiness.  Should the
Company's products and software fail to be Year 2000 Ready, however, the Company
may experience  increased warranty and other customer  satisfaction costs. Since
the year 2000  complications are not fully known and potential  liability issues
are  uncertain,  the effect of the year 2000 on the  Company's  warranty  costs,
product  liability costs, and financial  results are not known at this time, but
could be material in any given quarter.

The  Company is  currently  in the  process of  replacing  many of its  internal
information systems with new integrated  information  systems.  See "Information
Systems Transition" above. These new systems are believed to be Year 2000 Ready.
The Company has also  completed its  assessment on its other  critical  internal
information systems which are not being replaced and has implemented remediation
programs on non-Year 2000 Ready systems. The Company has substantially completed
assessing  critical  non-information  systems to determine if they are Year 2000
Ready. The remediation programs for its information and non-information  systems
that are not Year 2000 Ready are  expected  to be  substantially  completed  and
tested by August 1999. The Company is currently formulating contingency plans in
the event of a system failure or delay.
<PAGE>
                                                              Form 10-Q, Page 22


The  costs  incurred  to date  directly  related  to the  Company's  remediation
activities  total  approximately  $2  million.   Future  costs  related  to  the
remediation  activities  are not  expected to exceed  approximately  $2 million;
however,  the amount may change as the year 2000 readiness  activities  progress
during 1999.  These  remediation  costs do not include the costs associated with
the Company's new information systems, which are expected to be Year 2000 Ready.
The  Company has  invested  approximately  $39 million in these new  information
systems as of March 26, 1999,  and the  investment in these  systems  during the
remainder of 1999 is estimated to be approximately $4 million. While the Company
has not yet completed its year 2000 remediation and testing activities on all of
its  information  and  non-information  systems,  the Company does not currently
believe  that  these  activities  will  have a  material  adverse  effect on the
Company's operations and financial results.  Delays in implementing new internal
information systems or a failure to fully identify all year 2000 dependencies in
the Company's systems could have material adverse consequences, including delays
in the delivery or sale of the Company's products, or cause the Company to incur
unexpected additional costs.

The  Company  has  completed  a program  to assess the  possible  effects on its
operations of the year 2000 readiness of key suppliers and vendors.  The Company
identified  all vendors and suppliers who are not currently  Year 2000 Ready and
has  formulated  a plan to ensure they are Year 2000 Ready by the third  quarter
1999. The Company has also identified  alternative  suppliers and vendors in the
event the  suppliers  and vendors  are not Year 2000 Ready in the third  quarter
1999. The Company's  dependence on suppliers and vendors and, therefore,  on the
proper functioning of their information  systems and software,  means that their
failure  to  address  year  2000  issues  could  have a  material  effect on the
Company's operations and financial results.

The effect  that the year 2000 will have on  customers'  information  technology
spending patterns is uncertain at this time. The potential adverse  consequences
resulting  from  customers'  year 2000  concerns  could  include,  among others,
decreased spending on new information  storage systems during the second half of
1999 as  customers  complete  their year 2000 testing  activities  and delays in
customer purchase decisions once customers have verified the year 2000 readiness
of their information  systems.  The demand for the Company's  products worldwide
could be adversely  affected in the event these  patterns  were to  materialize,
which could have an adverse  effect on the  Company's  operating  and  financial
results.

Euro Conversion

Effective  January 1, 1999, 11 of the 15 member  countries of the European Union
adopted a single  European  currency,  the euro, as their common legal currency.
The Company generates a significant  portion of its revenue from sales in member
countries of the European  Union.  Like many  companies  that operate in Europe,
various  aspects of the  Company's  business and  financial  accounting  will be
affected by the euro conversion and the transitions in the business  environment
resulting from the convergence of currencies.  The Company continues to evaluate
the  European  pricing   strategies  for  its  products  and  services  and  the
implications of the euro conversion on its contractual agreements,  tax strategy
and foreign currency risk management strategy. The Company does not believe that
the transition in the European  market  resulting from the euro  conversion will
impact  the  competitiveness  of its  products  and  services  in  Europe in the
short-term,  as significant price transparency  already exists.  There can be no
assurances, however, that the conversion will not adversely affect the Company's
pricing, tax, and currency hedging strategies, or business systems and processes
in the future.


<PAGE>
                                                              Form 10-Q, Page 23



               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                           PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS
--------------------------
See Part I,  Item 3 - Legal  Proceedings,  of the  Company's  Form  10-K for the
fiscal year ended December 25, 1998, filed with the Commission on March 5, 1999.

In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder  County,  Colorado,  District  Court against the
Company and certain  subsidiaries.  The suit alleged that the Company breached a
1990  settlement  agreement  that had resolved  earlier  litigation  between the
parties.  The suit  sought  injunctive  relief and damages in the amount of $2.4
billion. On December 28, 1995, the court dismissed the complaint. Stuff appealed
the  dismissal to the  Colorado  Court of Appeals.  In March 1997,  the Court of
Appeals  reversed  the  District  Court's  judgment and remanded the case to the
District Court for further  proceedings.  In December 1997, the Colorado Supreme
Court rejected the Company's petition seeking a reversal of this decision. A new
trial date has not been set. The case is in the discovery phase.

On June 29, 1995,  Odetics,  Inc. (Odetics) filed a patent  infringement suit in
the U.S. District Court for the Eastern District of Virginia against the Company
alleging that the  "pass-through"  port in certain of the Company's tape library
products  infringed U.S. Patent No. 4,779,151 (the "151 Patent").  The complaint
asked the court to impose  injunctive  relief,  treble damages in an unspecified
amount,  and an award of  attorney's  fees and costs.  In February  1996, a jury
found that the  Company's  products  did not  infringe  the 151 Patent.  Odetics
appealed  and in June 1997,  the U.S.  Court of Appeals for the Federal  Circuit
reversed the District  Court's ruling and remanded the case back to the District
Court for further proceedings.  On March 27, 1998, a second trial was held and a
jury found that a  pass-through  port in certain of the  Company's  tape library
products  willfully  infringed  the 151 Patent  and  awarded  actual  damages to
Odetics of $70.6  million.  On July 31, 1998,  the Court  granted the  Company's
motion for  judgment as a matter of law,  overturning  the jury's  verdict,  and
entered judgment in favor of the Company.  On August 10, 1998,  Odetics appealed
the judgment to the U.S. Court of Appeals for the Federal Circuit, and on August
26, 1998, the Company filed a  cross-appeal.  Oral arguments on the appeals were
held on April 12, 1999. A decision on these  appeals is pending  before the U.S.
Court of Appeals.

On December 8, 1995, Odetics filed a second patent infringement suit in the U.S.
District  Court for the Eastern  District of Virginia  against the Company.  The
complaint  alleges that the "cartridge  access port" in certain of the Company's
tape  library  products  also  infringes  the 151 Patent.  The  complaint  seeks
injunctive  relief,  treble  damages in an unspecified  amount,  and an award of
attorney's fees and costs.  This case has been stayed pending the outcome of the
case filed by Odetics on June 29, 1995, which is described above.

On October 3, 1995,  certain  former  employees of the Company filed suit in the
U.S.  District  Court for the  District of Colorado  against  the  Company.  The
amended suit alleges  violations of the Age  Discrimination  in  Employment  Act
(ADEA) and the  Employee  Retirement  Income  Security  Act (ERISA)  between the
period of April 13, 1993, and December 31, 1996. On November 26, 1997, the Court
granted the  plaintiffs'  request to proceed as a collective  action on the ADEA
claims.  On  November 9, 1998,  the Court  granted  the  plaintiffs'  request to
proceed as a class on the ERISA claims.  On March 1, 1999,  the Court denied the
Company's appeal on the  certification of the ERISA class.  Approximately  1,300
persons are eligible  members of the ERISA class,  which includes  approximately
400  members  of the ADEA  class.  
<PAGE>
                                                              Form 10-Q, Page 24


The  plaintiffs  seek,  among  other  things, compensatory  damages in an 
unspecified amount,  including the value of back pay and benefits;  
reinstatement as employees or  alternatively  the value of future earnings and 
benefits;  and exemplary or  liquidated  damages.  The Company has filed an  
answer  denying  both the ADEA and  ERISA  claims.  The case is in the discovery
phase and a trial date has been set for October 1999.

The Company  believes it has adequate legal defenses with respect to each of the
actions cited above and intends to  vigorously  defend  against  these  actions.
However,  it is reasonably  possible that these actions could result in outcomes
unfavorable  to the Company.  The Company is also involved in various other less
significant legal actions.  While the Company currently believes that the amount
of the ultimate potential loss would not be material to the Company's  financial
position,  the outcome of these actions is inherently  difficult to predict.  In
the event of an  adverse  outcome,  the  ultimate  potential  loss  could have a
material adverse effect on the Company's  financial position or reported results
of operations in a particular quarter. An unfavorable decision,  particularly in
patent  litigation,  could require material changes in production  processes and
products or result in the  Company's  inability to ship  products or  components
found to have violated third-party patent rights.

Information  concerning  these legal  proceedings is also contained in Note 4 of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included in Part I of this Form 10-Q.

<PAGE>
                                                              Form 10-Q, Page 25


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

      (a)   Exhibits

      10.1        Credit  Agreement  dated as of January 14,  1999,  between the
                  Company and Bank of America National Trust and Savings
                  Association.

      10.2*       Storage  Technology  Corporation  Amended and Restated Stock
                  Option Plan for Non-Employee Directors

      11.0        Computation of Earnings Per Share

      27.0        Financial Data Schedule.


(b)   Reports on Form 8-K

            On February 1, 1999, the Company filed a Current Report on Form 8-K,
            under Item 5, regarding the Company's  announcement  that on January
            25,  1999,  it had  appointed  Victor M. Perez to serve as Executive
            Vice  President  and  Chief  Operating   Officer,  a  newly  created
            position, reporting directly to David Weiss, Chairman,
            President and Chief Executive Officer.







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

*     Contract or compensation plan or arrangement in which directors and/or
      officers participate.


<PAGE>
                                                              Form 10-Q, Page 26




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.


                                           STORAGE TECHNOLOGY CORPORATION
                                                    (Registrant)




         May 10, 1999                           /s/ ROBERT S. KOCOL
-------------------------------      ------------------------------------------
            (Date)                                   Robert S. Kocol
                                                 Corporate Vice President
                                               and Chief Financial Officer
                                              (Principal Financial Officer)






         May 10, 1999                          /s/ THOMAS G. ARNOLD 
-------------------------------      ------------------------------------------
            (Date)                                   Thomas G. Arnold
                                        Vice President and Corporate Controller
                                              (Principal Accounting Officer)