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 September 29, 2000
                                       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) - 102,408,424  shares  outstanding  at November 3,
2000.

<PAGE>
                               Form 10-Q, Page 2



                   STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                               INDEX TO FORM 10-Q
                               September 29, 2000

                                                                          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                       12

      Item 3 - Quantitative and Qualitative Disclosures about Market Risk  27


PART II - OTHER INFORMATION

      Item 1 - Legal Proceedings                                           28

      Item 6 - Exhibits and Reports on Form 8-K                            30

      Signatures                                                           32

      Exhibit Index                                                        33


<PAGE>
                               Form 10-Q, Page 3



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


                                                          09/29/00    12/31/99
                                                      ------------------------
                                                        (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                             $  221,613  $  215,421
  Accounts receivable                                      464,119     627,435
  Inventories (Note 2)                                     229,553     260,642
  Deferred income tax assets                               123,320     124,588
                                                         ---------   ---------
     Total current assets                                1,038,605   1,228,086

Property, plant and equipment, net                         262,297     322,061
Spare parts for maintenance, net                            40,719      41,995
Deferred income tax assets                                  41,106      40,882
Other assets                                               135,534     102,451
                                                         ---------   ---------
     Total assets                                       $1,518,261  $1,735,475
                                                         =========   =========


LIABILITIES
Current liabilities:
  Credit facilities (Note 3)                            $   96,592  $  286,152
  Current portion of long-term debt                          6,098      13,943
  Accounts payable                                          83,695     111,253
  Accrued liabilities                                      304,084     303,110
  Income taxes payable                                     114,364      72,865
                                                         ---------   ---------
     Total current liabilities                             604,833     787,323
Long-term debt                                              11,841      28,953
                                                         ---------   ---------
     Total liabilities                                     616,674     816,276
                                                         ---------   ---------

Commitments and contingencies (Note 4)

STOCKHOLDERS' EQUITY

Common stock, $.10 par value, 300,000,000 shares authorized;
  101,751,436 shares issued at September 29, 2000, and
  100,825,390 shares issued at December 31, 1999            10,175      10,083
Capital in excess of par value                             843,141     830,780
Retained earnings                                           52,087      84,704
Treasury stock                                              (2,334)     (2,334)
Unearned compensation                                       (1,482)     (4,034)
                                                         ---------   ---------
     Total stockholders' equity                            901,587     919,199
                                                         ---------   ---------
                                                        $1,518,261  $1,735,475
                                                         =========   =========

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        Nine Months Ended
                                  -------------------------------------------
                                  09/29/00   09/24/99     09/29/00   09/24/99
                                  -------------------------------------------
Revenue
   Storage products               $325,301   $416,392   $  975,308 $1,258,188
   Storage services                161,316    157,338      483,455    487,447
                                   -------    -------    ---------  ---------
      Total revenue                486,617    573,730    1,458,763  1,745,635
                                   -------    -------    ---------  ---------
Cost of revenue
   Storage products                179,254    233,127      578,502    702,343
   Storage services                 99,941    110,282      308,554    319,112
                                   -------    -------    ---------  ---------
      Total cost of revenue        279,195    343,409      887,056  1,021,455
                                   -------    -------    ---------  ---------
  Gross profit                     207,422    230,321      571,707    724,180

Research and product development
  costs                             63,112     66,225      192,594    212,325
Selling, general, administrative
  and other income and
  expense, net                     129,403    150,732      396,380    440,293
Restructuring expense (Note 5)       3,376     16,082       27,176     36,328
Litigation expense (Note 4)                    16,274                  98,582
                                   -------    -------    ---------  ---------
  Operating profit (loss)           11,531    (18,992)     (44,443)   (63,348)

Interest expense                    (3,353)    (6,765)     (13,617)   (15,397)
Interest income                      1,442        712        7,843      2,733
                                   -------    -------    ---------  ---------
  Income (loss) before
    income taxes                     9,620    (25,045)     (50,217)   (76,012)
Benefit (provision) for
  income taxes                      (3,350)     9,000       17,600     27,300
                                   -------    -------    ---------  ---------
  Net income (loss)               $  6,270   $(16,045)  $  (32,617)$  (48,712)
                                   =======    =======    =========  =========


EARNINGS (LOSS) PER SHARE (Note 8)

Basic earnings (loss) per share   $   0.06   $  (0.16)  $    (0.32)$    (0.49)
                                   =======    =======    =========  =========
Weighted-average shares            101,300     99,743      100,871     99,800
                                   =======    =======    =========  =========

Diluted earnings (loss) per share $   0.06   $  (0.16)  $    (0.32)$    (0.49)
                                   =======    =======    =========  =========
Weighted-average and dilutive
  potential shares                 102,064     99,743      100,871     99,800
                                   =======    =======    =========  =========

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)


                                                       Nine Months Ended
                                                     ----------------------
                                                     09/29/00      09/24/99
                                                     ----------------------
OPERATING ACTIVITIES
Cash received from customers                        $ 1,582,149 $ 1,758,507
Cash paid to suppliers and employees                 (1,336,949) (1,667,577)
Cash paid for restructuring activities (Note 5)         (25,373)    (21,671)
Interest received                                         7,843       2,733
Interest paid                                           (12,287)    (13,738)
Income tax refunded, net                                 61,293       6,240
                                                     ----------  ----------
   Net cash provided by operating activities            276,676      64,494
                                                     ----------  ----------

INVESTING ACTIVITIES
Purchases of property, plant and equipment, net         (48,314)    (90,734)
Business acquisitions, net                                           (6,400)
Other assets, net                                       (18,984)     (4,782)
                                                     ----------  ----------
   Net cash used in investing activities                (67,298)   (101,916)
                                                     ----------  ----------

FINANCING ACTIVITIES
Proceeds from (repayments of) credit facilities, net   (189,559)     86,241
Repayments of other debt, net                            (6,896)     (1,239)
Repurchases of common stock                                         (35,226)
Proceeds from employee stock plans                        9,174      14,843
                                                     ----------  ----------
   Net cash provided by (used in)
     financing activities                              (187,281)     64,619
                                                     ----------  ----------
   Effect of exchange rate changes on cash              (15,905)    (22,868)
                                                     ----------  -----------
Increase in cash and cash equivalents                     6,192       4,329
   Cash and cash equivalents - beginning of
     the period                                         215,421     231,985
                                                     ----------  ----------
Cash and cash equivalents - end of the period       $   221,613 $   236,314
                                                     ==========  ==========


RECONCILIATION OF NET LOSS TO NET CASH
   PROVIDED BY OPERATING ACTIVITIES
Net loss                                            $   (32,617)$   (48,712)
Depreciation and amortization expense                   106,848      98,603
Inventory write downs                                    62,495      36,156
Non-cash litigation expense (Note 4)                                 98,582
Non-cash restructuring expense (Note 5)                   5,720       6,680
Translation loss                                         18,393      18,418
Other non-cash adjustments to income                         (4)      8,434
Decrease in accounts receivable                         139,714      18,224
Increase in inventories, net                            (26,325)   (101,712)
Increase in spare parts                                 (18,413)    (25,502)
(Increase) decrease in deferred income tax
   assets, net                                              452      (6,031)
Decrease in accounts payable and accrued
  liabilities                                           (21,292)    (21,455)
Increase (decrease) in income taxes payable              41,705     (17,191)
                                                     ----------  ----------
   Net cash provided by operating activities        $   276,676 $    64,494
                                                     ==========  ==========

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 (SEC) 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
31, 1999.

NOTE 2 - INVENTORIES
--------------------

Inventories,  net of the  associated  reserves,  consist  of the  following  (in
thousands of dollars):

                                              09/29/00          12/31/99
                                             ---------------------------
      Raw materials                           $ 68,919          $ 59,141
      Work-in-process                           36,784            45,717
      Finished goods                           123,850           155,784
                                               -------           -------
                                              $229,553          $260,642
                                               =======           =======

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 $120,000,000 at any one time.
The agreement,  which expires in January 2002,  provides for  commitments by the
bank to purchase  the  Company's  promissory  notes  denominated  in a number of
foreign  currencies.  As of September 29, 2000, the Company had promissory notes
of $61,592,000  outstanding under this financing  agreement and had committed to
borrowings  between  October 2000 and January 2002 in the  cumulative  principal
amount  of  approximately  $252,851,000.  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.  The weighted  average interest rate associated with the promissory
notes  outstanding as of September 29, 2000,  was 8.62%.  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 up to the  outstanding
balance of the promissory notes.

See the  Company's  1999  Form 10-K for  additional  information  regarding  the
Company's debt and financing arrangements.


NOTE 4 - LITIGATION
-------------------

In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder County,  Colorado,  District Court (the District
Court) against the Company and certain  subsidiaries.  The suit alleged that the
Company breached a 1990 settlement agreement that had resolved



<PAGE>
                               Form 10-Q, Page 7


earlier  litigation between the parties concerning an optical disk drive storage
development  project entered into in 1981 which was  unsuccessful and terminated
in 1985.  The suit  sought  injunctive  relief and damages in the amount of $2.4
billion.  On December 28, 1995, the District Court granted the Company's  motion
for summary  judgment and dismissed the complaint.  Stuff appealed the dismissal
to the  Colorado  Court of Appeals (the 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. On July 15, 1999, the District Court
again  dismissed,  with  prejudice,  all of Stuff's  material claims against the
Company.  On August 30,  1999,  Stuff  filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Subsequently,  the
parties have filed various appellate  briefs.  Oral arguments before the Appeals
Court  occurred  on August 8,  2000.  On August 17,  2000,  the Court of Appeals
remanded the case back to the District  Court for a trial on the factual  issues
relating to the  interpretation  of the language embodied in the 1990 Settlement
Agreement. The Company filed a Petition for Rehearing with the Court of Appeals.
On October 12, 2000, the Court of Appeals modified its decision,  but denied the
Company's  Petition for  Rehearing.  On or about  November 7, 2000,  the Company
filed a Petition for Certiorari with the Supreme Court of Colorado.  The Company
continues to believe that Stuff's claims are wholly without merit and intends to
defend vigorously any further actions arising from this complaint.

On June 29, 1995,  Odetics,  Inc. filed a patent  infringement  suit against the
Company alleging  infringement of various patents.  During the second quarter of
1999, the Company recognized a pre-tax expense of $82,308,000 in connection with
the resolution of this  litigation.  As a result of the settlement,  the Company
recognized an  additional  $15,486,000  pre-tax  expense in the third quarter of
1999 to reflect the present value of the final settlement payments.  The Company
also settled a number of less significant  legal actions  resulting in a pre-tax
expense of $788,000 during the third quarter of 1999.

The Company is also involved in various other less  significant  legal  actions.
While the Company currently  believes that the amount of any 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 - RESTRUCTURING
----------------------

On October  28,  1999,  the  Company  announced  a broad  restructuring  program
intended  to  return  the  Company  to   profitability.   Key  elements  of  the
restructuring plan included:

o  an anticipated  reduction of  approximately  1,200 to 1,400  positions,  with
   approximately  550  positions  eliminated  during  fiscal  year  1999 and the
   remaining positions eliminated by the end of the third quarter of 2000;

o  a reduction in investment in certain  businesses,  including  consulting  and
   integration services and managed storage services;

o  a recommitment  to the Company's core strengths of tape  automation,  virtual
   storage and open storage area networks  (including  related  maintenance  and
   professional services);

o  modifications  to the  sales  model  in North  America  intended  to  improve
   productivity and increase account coverage and growth;

o  other  organizational and operational  changes intended to improve efficiency
   and competitiveness.



<PAGE>
                               Form 10-Q, Page 8


The  elements  of  the  restructuring   included  an  involuntary  reduction  in
headcount,  the  elimination  of a  significant  number  of  temporary  employee
positions,  and managing the replacement of terminating  employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.

During the third quarter and nine months of 2000, the Company  incurred  pre-tax
expenses  of  $3,376,000   and   $27,176,000,   respectively,   related  to  the
restructuring. As of September 29, 2000, the Company had substantially completed
all currently planned restructuring  activities.  The following table summarizes
the activity in the Company's  restructuring  reserves during the nine months of
2000 (in thousands of dollars):

                                  Employee      Asset     Other Exit
                                 Severance     Writedowns   Costs      Total
                                 ----------    ---------- ----------   ------
  Balances, December 31, 1999     $  3,917                           $  3,917
  Restructuring expense             21,456     $ 5,258     $   462     27,176
  Cash payments                    (25,373)                           (25,373)
  Asset writedowns                              (5,258)       (462)    (5,720)
                                   -------      ------      ------    -------
  Balances, June 30, 2000         $      0     $     0     $     0   $      0
                                   =======      ======      ======    =======

Employee  severance expense of $21,456,000 was recognized during the nine months
of 2000 in  connection  with the  restructuring.  This  expense is  comprised of
separation charges related to the fixed and determinable severance payments owed
to approximately  1,100 employees who were  involuntarily  terminated during the
nine months of 2000 in connection with the restructuring.

Asset writedowns of $5,258,000 were recognized during the nine months of 2000 in
connection  with the  restructuring.  The  asset  writedowns  are  comprised  of
$2,301,000  related to the spin-off of the Company's  managed  storage  services
business and  $2,957,000  related to the  impairment  writedown of assets at the
Company's manufacturing facility in Toulouse, France. The Company has engaged in
activities to sell the Toulouse  facility and the impairment charge was required
to reflect the  Company's  estimate of the fair value of the  facility  upon its
anticipated sale.

Other exit costs of  $462,000  were  recognized  during the nine months of 2000.
Other exit costs are comprised of $326,000  associated with legal and accounting
expenses  incurred  in  connection  with the  spin-off  of the  managed  storage
services business and $136,000 related to excess lease space in Canada.

The Company incurred  pre-tax expenses of $16,082,000  during the third quarter,
and  $36,328,000   during  the  nine  months  of  1999,  in  connection  with  a
restructuring  program  announced  on  April  15,  1999,  which  provided  for a
reduction in  headcount as well as the  elimination  of certain  lower  priority
research and development programs.

NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

In June 1998, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities on the Consolidated  Balance Sheet at
their fair  value.  The  corresponding  change in fair  value of the  derivative
instrument  will  be  recognized   either  in  the  Consolidated   Statement  of
Operations,  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 of the instrument.

In June 1999,  the FASB issued SFAS No. 137,  "Accounting  for  Derivative
Instruments  and Hedging  Activities  --  Deferral  of the  Effective  Date of
FASB  Statement  No.  133 -- an amendment of FASB


<PAGE>
                               Form 10-Q, Page 9


Statement  No.  133." SFAS No. 137 has the effect of delaying  the required
adoption  date of SFAS  No.  133 for the  Company  until  the  first  day of the
Company's  fiscal  year  2001.  In June  2000,  the FASB  issued  SFAS  No.  138
"Accounting for Certain Derivative  Instruments and Certain Hedging  Activities"
--  an  amendment  of  SFAS  No.  133.  SFAS  No.  138  addresses  a  number  of
implementation  issues associated with SFAS No. 133. The Company  anticipates it
will adopt  SFAS No.  133 and its  associated  interpretations  on the  required
adoption  date.  While  the  adoption  of these  new  accounting  standards  for
derivatives will change the  presentation on the Consolidated  Balance Sheet and
Consolidated  Statement of Operations for certain foreign currency exchange rate
sensitive  financial  instruments  held  by  the  Company,  the  new  accounting
standards are not currently  expected to have a material impact on the Company's
financial position or results of operations.

In December  1999, the SEC staff issued Staff  Accounting  Bulletin No. 101 (SAB
101), "Revenue  Recognition in Financial  Statements." SAB 101 provides guidance
regarding the  recognition,  presentation and disclosure of revenue in financial
statements  filed with the SEC.  In June 2000,  the SEC issued SAB 101B that has
the effect of delaying  the required  adoption of SAB 101 for the Company  until
the fourth quarter of 2000. The Company currently believes SAB 101 will not have
a material effect on its financial position or results of operations.

NOTE 7 - OPERATIONS OF BUSINESS SEGMENTS
----------------------------------------

In the first quarter of 2000,  the Company  changed its  reportable  segments to
reflect  changes in its business  operations  resulting  from its  restructuring
activities.  The Company is now organized into two reportable  segments based on
the  definitions  of segments  provided under SFAS No. 131,  "Disclosures  about
Segments of an Enterprise and Related Information": storage products and storage
services.  The  principal  effect of this  change  was the  reclassification  of
storage management  software from a separate reportable segment to its inclusion
within  the  storage  products  segment,  and the  reclassification  of  storage
integration  products from the storage  services segment to the storage products
segment.  The 1999  quarterly  segment data has been  restated to conform to the
current year presentation.

The storage products segment sells tape, disk,  network,  and other products for
the enterprise and client-server  computing  environments.  The storage products
segment includes  products designed for storage area networks (SAN) and software
tools and applications for improving storage product performance and simplifying
information   storage   management.   The  storage   services  segment  provides
maintenance  services for the  Company's  and third party  products,  as well as
storage  consulting   services  associated  mainly  with  SAN,  virtual  storage
technologies and software solutions.

The  Company  does not have  any  intersegment  revenue  and  evaluates  segment
performance  based on gross profit.  The sum of the segment gross profits 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.


<PAGE>
                               Form 10-Q, Page 10


The  revenue  and gross  profit by  segment  are as  follows  (in  thousands  of
dollars):

                               Quarter Ended             Nine Months Ended
                           ----------------------      ----------------------
                           09/29/00      09/24/99       09/29/00     09/24/99
                           --------      --------      ---------     --------
Revenue:
Storage products          $325,301      $416,392       $  975,308   $1,258,188
Storage services           161,316       157,338          483,455      487,447
                           -------       -------        ---------    ---------
     Total revenue        $486,617      $573,730       $1,458,763   $1,745,635
                           =======       =======        =========    =========


Gross profit:
  Storage products        $146,047      $183,265       $  396,806   $  555,845
  Storage services          61,375        47,056          174,901      168,335
                           -------       -------        ---------    ---------
     Total gross profit   $207,422      $230,321       $  571,707   $  724,180
                           =======       =======        =========    =========

The following table provides supplemental  financial data regarding revenue from
the Company's storage products segment (in thousands of dollars):

                               Quarter Ended             Nine Months Ended
                           ----------------------      ----------------------
                           09/29/00      09/24/99       09/29/00     09/24/99
                           --------      --------      ---------    ---------
Tape products              $249,006      $286,312      $761,157    $  859,674
Disk products                32,226        86,771       104,392       297,038
Network and other products   44,069        43,309       109,759       101,476
                            -------       -------       -------     ---------
  Total storage  products
    revenue                $325,301      $416,392      $975,308    $1,258,188
                            =======       =======       =======     =========

NOTE 8 - EARNINGS (LOSS) PER SHARE
----------------------------------

The  following  table  presents the  calculation  of basic and diluted  earnings
(loss) per share (in thousands, except per share amounts):

                                Quarter Ended             Nine Months Ended
                            ----------------------      ----------------------
                            09/29/00      09/24/99       09/29/00     09/24/99
                            --------      --------      ---------    ---------

 Net income (loss)          $  6,270     $(16,045)      $(32,617)    $(48,712)
                             =======      =======        =======      =======
 Denominator:
 Basic weighted-average
   shares                    101,300       99,743        100,871       99,800
 Effect of dilutive
   shares                        764
                             -------      -------        -------      -------
 Diluted weighted-average
   and dilutive potential
   shares                    102,064       99,743        100,871       99,800
                             =======      =======        =======      =======
 Basic earnings (loss)
   per share                $   0.06     $  (0.16)      $  (0.32)    $  (0.49)
                             =======      =======        =======      =======
 Diluted earnings (loss)
   per share                $   0.06     $  (0.16)      $  (0.32)    $  (0.49)
                             =======      =======        =======      =======

Stock options to purchase  12,640,860  shares of common stock were excluded from
the  computation of diluted  earnings per share for the quarter ended  September
29,  2000,  as the  exercise  price of the options was greater  than the average
market price of the Company's common stock. Stock options to purchase 12,787,883
shares of common stock were excluded from the  computation  of diluted  earnings
per share for the nine months ended  September  29, 2000,  as these  options are
antidilutive as a result of the net loss incurred.


 <PAGE>
                               Form 10-Q, Page 11


NOTE 9 - SUBSEQUENT EVENT - EMPLOYEE STOCK OPTION EXCHANGE PROGRAM
------------------------------------------------------------------

On  November 6, 2000,  the Company  made an  exchange  offer (the  Exchange)  to
approximately  1,300  employees  of the  Company to  exchange  stock  options to
purchase  common  stock,  par value $.10 per share,  of the Company  (the Common
Stock) that have a per share exercise price of $17.50 or greater, whether or not
vested (Eligible  Options) for shares of restricted common stock, at an exchange
ratio of four  option  shares  surrendered  for each share of  restricted  stock
received.  The shares of  restricted  stock will vest  one-third  on each of the
first,  second and third annual anniversary dates of November 20, 2000, the date
upon  which  the  Exchange  will  close  (the  Exchange   Date).   The  Exchange
specifically  precludes the Chairman of the Board, President and Chief Executive
Officer of the Company and all  corporate  vice  presidents  of the Company from
participating  in the Exchange.  Both the stock options and the restricted stock
involved in the Exchange are subject to the Company's  Amended and Restated 1995
Equity Participation Plan (the 1995 Plan).

In order to be eligible to participate in the Exchange  (Eligible  Participant),
the  employee  must  not have  received  any  stock  options  in the six  months
preceding  the Exchange  Date.  An Eligible  Participant  must  exchange all the
Eligible  Options  held.  In  general,  if the  employment  of an  employee  who
participates in the Exchange  terminates  prior to the vesting of all the shares
of restricted  stock  received in the Exchange,  the employee  shall forfeit the
unvested  shares of  restricted  stock.  If the  employment  of such employee is
terminated  as a result of death,  Disability  or a Reduction in Force (as those
terms are defined in the 1995 Plan) following a change of control, all shares of
restricted   stock   received  by  that  employee  in  the  Exchange  will  vest
immediately.  Any Eligible  Participants  electing to participate in the Program
will be ineligible  for any stock option  grants,  additional  restricted  stock
awards,  stock appreciation  rights or other equity-based  awards by the Company
for a period of six months  following the Exchange Date. The Exchange is subject
to  acceptance  by the Company on the Exchange  Date.  In  addition,  if, on the
Exchange  Date,  the closing  price of the  Company's  common stock is $15.00 or
greater,  the Exchange will be  automatically  terminated and no options will be
exchanged for any shares of restricted  stock.  If all the Eligible  Options are
exchanged,  the number of  outstanding  shares of common stock will  increase by
approximately 1,410,000 as a result of the Exchange.

The non-cash deferred compensation  associated with the restricted stock will be
recognized  ratably over the three-year vesting schedule of the restricted stock
to be  issued  in the  Exchange.  The  non-cash  deferred  compensation  will be
recognized on an  accelerated  basis to the extent that shares of the restricted
stock vest on an accelerated basis in the situations described above and will be
reduced  to the  extent  that a  participant  forfeits  his  or  her  shares  of
restricted  stock  received in the Exchange prior to vesting.  The  compensation
amount is unaffected by future changes in the price of the common stock.

None of the Eligible Options are currently included as dilutive potential shares
in the  calculation  of diluted  earnings per share  because all of the Eligible
Options have  exercise  prices in excess of the current fair market value of the
common stock. All issued and outstanding shares of restricted stock are included
in the calculation of diluted earnings per share, regardless of whether vested.


<PAGE>
                               Form 10-Q, Page 12



                      STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                               SEPTEMBER 29, 2000

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 within
the  meaning  of the  Private  Securities  Litigation  Reform  Act of 1995.  The
Company's actual results may differ materially  because of a number of risks and
uncertainties.  Some of these  risks are  detailed  below in  "Factors  That May
Affect  Future  Results" and  elsewhere in this Form 10-Q.  The  forward-looking
statements  contained herein represent a good-faith  assessment of the Company's
future  performance for which management  believes there is a reasonable  basis.
The  Company  disclaims  any  obligation  to update  forward-looking  statements
contained herein, except as may be otherwise required by law.

GENERAL
-------

The Company  reported net income for the third quarter ended September 29, 2000,
of $6.3  million on revenue of $486.6  million,  compared to a net loss of $16.0
million for the third quarter of 1999 on revenue of $573.7  million.  A net loss
of $32.6  million was  reported  for the nine months of 2000 on revenue of $1.46
billion,  compared to a net loss of $48.7 million for the nine months of 1999 on
revenue of $1.75 billion.  The Company's  reported results for the third quarter
and nine months of 2000 include  one-time  pre-tax  expenses of $3.4 million and
$27.2  million,  respectively,  associated  with  restructuring.  Excluding  the
one-time  pre-tax  charges,  the Company  would have reported net income of $8.4
million and a net loss of $15.0 million during the third quarter and nine months
of 2000, respectively.  The Company's reported results for the third quarter and
nine months of 1999  include  one-time  pre-tax  expenses  of $32.4  million and
$134.9 million,  respectively,  associated  with  litigation and  restructuring.
Excluding the one-time pre-tax charges, the Company would have earned net income
of $4.7 million and $37.7  million  during the third  quarter and nine months of
1999, respectively.

Many of the Company's  customers  undertake detailed  procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products and
services.  This evaluation  process results in a variable sales cycle, and makes
it  difficult  to predict if or when  revenue  will be  earned.  Further,  gross
margins may be adversely  impacted in an effort to complete the sales cycle. The
Company's  financial results may be adversely  impacted in future periods by its
variable  sales cycle.  Future  financial  results are also  dependent  upon the
Company's  ability  to  manage  its costs and  operating  expenses  in line with
revenue;  the timely  development,  manufacture and introduction of new products
and services;  successfully  managing the development of new direct and indirect
sales channels; and the implementation and execution of its storage area network
(SAN) strategy.  For a discussion of these and other risk factors,  see "Factors
That May Affect Future Results," below.

In April 1999, the Company first announced plans to restructure its business. In
October  1999,  the Company  announced  more broad  restructuring  plans.  These
restructuring  activities were intended to return the Company to  profitability.
As of September 29, 2000, the Company had substantially  completed all currently
planned  restructuring  activities.  The  Company  estimates  annual  savings of
approximately  $40 million will be realized  during 2000 in connection  with the
April  1999   restructuring.   The  Company   anticipates   annual   savings  of
approximately  $150  million  will  result  from  the  restructuring  activities
initiated in October  1999.  Because the October 1999  restructuring  activities
were  implemented  in stages  throughout  the nine  months of 2000,  the Company
anticipates the realized savings for the year 2000 will be slightly in excess of
$100  million.  There  can be no  assurance  that the  restructuring  activities
described above will be successful or sufficient to allow the Company to realize
the expected annualized savings or that additional  restructuring activities may
not be required in future periods. The Company is currently



<PAGE>
                               Form 10-Q, Page 13


evaluating  its market  strategy and  anticipates it will announce this strategy
during  the fourth  quarter  of 2000.  See  "Restructuring,"  below for  further
discussion of the restructuring activities.

The Company's  operating  activities  provided cash of $276.7 million during the
nine months of 2000  compared to cash of $64.5  million  provided by  operations
during the same period in 1999. The increase in cash  generated from  operations
during  the nine  months  of 2000,  compared  to the same  period  in 1999,  was
primarily  the result of progress in the Company's  efforts to more  effectively
manage working  capital and net income tax refunds of $61.3 million  received in
the nine months of 2000 as compared to $6.3  million in the nine months of 1999.
Working  capital  benefits were  realized  during the nine months of 2000 in the
form of  reductions  in accounts  receivable  days sales  outstanding  and lower
inventory  levels.  See "Liquidity and Capital Resources -- Working Capital" for
additional  discussion  of working  capital.  Cash used in investing  activities
decreased  from $101.9  million  during the nine months of 1999 to $67.3 million
during the nine  months of 2000  primarily  due to  efforts  to control  capital
spending on property, plant and equipment.  Cash used in financing activities of
$187.3 million during the nine months of 2000 reflects debt repayments of $196.5
million offset by proceeds received from employee stock purchase plans.

The  following  table,  stated  as  a  percentage  of  total  revenue,  presents
Consolidated Statement of Operations information:

                                    Quarter Ended      Nine Months Ended
                                 ----------------------------------------
                                  09/29/00  09/24/99   09/29/00  09/24/99
                                 ---------  --------   --------  --------
Storage products:
   Tape products                     51.2%    49.9%        52.2%     49.3%
   Disk products                      6.6     15.1          7.2      17.0
   Network and other products         9.0      7.6          7.5       5.8
                                    -----    -----        -----     -----
     Total storage products          66.8     72.6         66.9      72.1
Storage services                     33.2     27.4         33.1      27.9
                                    -----    -----        -----     -----
     Total revenue                  100.0    100.0        100.0     100.0
Cost of revenue                      57.4     59.9         60.8      58.5
                                    -----    -----        -----     -----
     Gross profit                    42.6     40.1         39.2      41.5
Research and product development
  costs                              13.0     11.5         13.2      12.2
Selling, general, administrative
  and other income and expense, net  26.5     26.3         27.1      25.2
Restructuring expense                 0.7      2.8          1.9       2.1
Litigation expense                             2.8                    5.6
                                    -----    -----        -----     -----
     Operating profit (loss)          2.4     (3.3)        (3.0)     (3.6)
Interest income (expense), net       (0.4)    (1.1)        (0.4)     (0.8)
                                    -----    -----        -----     -----
     Income (loss) before income
       taxes                          2.0     (4.4)        (3.4)     (4.4)
Benefit (provision) for income
  taxes                              (0.7)     1.6          1.2       1.6
                                    -----    -----        -----     -----
     Net income (loss)                1.3%    (2.8)%       (2.2)%    (2.8)%
                                    =====    =====        =====     =====

REVENUE
-------

STORAGE PRODUCTS

The Company's storage products revenue includes sales of tape, disk, and network
and other products for the enterprise and client-server markets, including SANs.
Revenue  generated from storage products  decreased 22% during the third quarter
and nine months of 2000, respectively, compared to the same periods in 1999.



<PAGE>
                               Form 10-Q, Page 14


Tape Products

Tape product  revenue  decreased  13% and 11% during the third  quarter and nine
months of 2000,  respectively,  compared to the same periods in 1999,  primarily
due to the  negative  impact  from  parts  shortages  from  two  suppliers,  and
decreased revenue from TimberLine(R) 9490, a 36-track cartridge  subsystem;  the
TimberWolf series of client-server automated tape products;  PowderHorn(R) 9310,
an automated cartridge system library;  and other earlier generation  enterprise
tape products.  The decrease in revenue from these products  reflects both lower
selling  prices  and  decreases  in the  number  of units  sold.  These  revenue
reductions also reflect the continued  shift in the marketplace  from enterprise
to  client-server  tape  products.  These  declines  were  partially  offset  by
increased  sales  of  the  L-series  client-server  tape  libraries,   the  9840
high-performance tape drive (9840) and Virtual Storage Manager(R) (VSM).

Future  revenue growth from tape products is dependent  upon  increasing  market
acceptance  of VSM, the 9840,  and the L-series tape  libraries,  as well as the
timely  introduction  of new tape  products  and  enhancements  which are in the
design,  preliminary  engineering or engineering validation testing phase. There
can be no assurances  that the Company will be  successful in increasing  market
acceptance for these products,  or that new tape products and enhancements  will
be introduced in a timely  manner.  See "Factors That May Affect Future  Results
New Products and  Services;  Emerging  Markets,"  for a discussion  of the risks
associated with the  introduction of new products.  See "Factors that May Affect
Future  Results  -  Sole  Source  Suppliers,"  for a  discussion  of  the  risks
associated with suppliers.

Disk Products

Disk product  revenue  decreased  63% and 65% during the third  quarter and nine
months of 2000,  respectively,  compared to the same periods in 1999,  primarily
due to a decrease in OEM sales to International  Business  Machines  Corporation
(IBM) of disk storage products and software designed for the enterprise  market.
Sales to IBM have been  reduced to an  insignificant  level and the Company does
not anticipate any  significant  sales revenue from IBM in the future.  Sales of
OPENstorage(TM)  Disk products also decreased  during the third quarter and nine
months of 2000.  These  decreases were  partially  offset by direct sales of the
Company's 9500 Shared  Virtual Array (SVA) disk products.  While the Company has
recently introduced new OPENstorage Disk products and enhancements to SVA, there
can be no assurance  that the  Company's  current and future disk  products will
gain additional  market  acceptance or that the current declines in disk product
revenue will not continue in the future.

Network and Other Products

Network and other product  revenue  increased 2% and 8% during the third quarter
and nine months of 2000, respectively, compared to the same periods in 1999. The
majority of the network and other  product  revenue  during the third quarter of
2000  related to third party  hardware and  software  sales  designed to provide
networking and integration solutions for the SANs marketplace.  In October 2000,
the  Company  introduced  the  StorageNet(TM)  6000  series  of  storage  domain
managers.  See "Risk Factors That May Affect  Future  Results - New Products and
Services;  Emerging Markets," for a discussion of risks associated with both the
introduction of new products, as well as risks associated with the SANs market.

Future revenue growth in the Company's storage products segment is significantly
dependent  upon the  continued  demand  for its  client-server  tape  automation
products,   developing  a  successful  disk  sales  strategy,   and  the  timely
development and market  acceptance of network products designed for the emerging
SANs market.  There can be no assurances  that the Company will be successful in
these  endeavors.  See "Factors That May Affect Future  Results -- New Products,
Markets and Distribution  Channels;  Emerging  Markets," for a discussion of the
risks  associated  with the  introduction  and  manufacture  of new products and
distribution channels.


<PAGE>
                               Form 10-Q, Page 15


STORAGE SERVICES

The Company's  storage services revenue  primarily  includes revenue  associated
with the maintenance of the Company's and third party storage products,  as well
as storage consulting and integration services revenue. Storage services revenue
increased 3% and  decreased 1% during the third quarter and nine months of 2000,
respectively,  compared to the same  periods in 1999.  The  increase  during the
third quarter of 2000 is primarily  due to the Company's  progress in a business
initiative designed to capture all billable maintenance revenue.

There can be no  assurance  that  storage  service  revenue  will not decline in
future periods as a result of a decline in  maintenance  revenue as the customer
base continues to shift to the client-server  marketplace.  Maintenance  revenue
may also be adversely  affected in future  periods to the extent older  products
currently  under  maintenance  contracts  are  replaced by newer  products  with
extended warranties.

GROSS PROFIT
------------

Gross profit margins  increased to 43% for the third quarter of 2000 as compared
to 40% for the same period in 1999,  primarily as a result of  increased  profit
margins on services.  Gross profit margins  decreased to 39% for the nine months
of 2000, compared to 41% for same period in 1999, as a decrease in sales margins
more than offset an increase in service margins.

Gross profit margins for the Company's products segment increased to 45% for the
third  quarter  of 2000,  compared  to 44% for the  same  period  in 1999.  This
increase  reflects  sales of the recently  introduced  L-series tape  libraries,
which carry higher margins than the earlier generation Timberwolf automated tape
products they replace.  Gross profit margins for the Company's  products segment
decreased  to 41% for the  nine  months  of 2000,  compared  to 44% for the same
period in 1999. This decrease reflects  decreases in the selling prices for disk
products  and  earlier  generation  tape  products;   increased  sales  of  tape
cartridges for use in the 9840 which have lower profit margins;  increased sales
of third-party  network  products which have lower profit margins;  a decline in
sales  of  disk  products  to  IBM;  and  unfavorable   manufacturing  variances
associated with excess manufacturing capacity.

Gross profit margins for the services  segment  increased to 38% and 36% for the
third quarter and nine months of 2000, respectively, compared to 30% and 35% for
the same  periods  in 1999,  primarily  as a result of  reduced  headcount,  the
elimination of unprofitable  integration  businesses,  improvement in consulting
margins, and an overall reduction in maintenance costs.

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 an impact on the Company's  gross profit margins.
The  Company's  ability to sustain or improve  gross  margins is dependent  upon
gaining   operational   efficiencies  in  connection   with  the   restructuring
activities,   achieving  cost  improvements  associated  with  the  sourcing  of
production materials,  the implementation of internal pricing controls and asset
management  disciplines,  and driving improved  profitability from the Company's
continuing consulting services and integration activities. Storage product 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.



<PAGE>
                               Form 10-Q, Page 16


RESEARCH AND PRODUCT DEVELOPMENT
--------------------------------

Research and product  development  expenses decreased 5% and 9% during the third
quarter and nine months of 2000,  respectively,  compared to the same periods in
1999,  due to the  elimination  of several lower  priority  research and product
development  programs  in  connection  with  the  restructuring.  As part of the
restructuring,  the Company is focusing  research and development  activities on
the  core  businesses  of tape and  automation,  virtual  technologies,  and SAN
products  and  services.  See  "Restructuring,"  below,  for  discussion  of the
restructuring activities.

SELLING, GENERAL, ADMINISTRATIVE AND OTHER
------------------------------------------

Selling,  general,  administrative and other income and expense (SG&A) decreased
14% and 10%  during the third  quarter  and nine  months of 2000,  respectively,
compared  to the same  periods  in 1999,  primarily  as a  result  of  headcount
reductions and decreased selling expenses. Selling expenses decreased during the
third  quarter of 2000 as a result of  reduced  spending  on  product  marketing
activities,  as well as reduced bonus and commission  expenses  associated  with
declines in sales revenue.  General and administrative expenses decreased during
the third quarter of 2000 primarily due to reduced headcount.

LITIGATION
----------

In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder County,  Colorado,  District Court (the 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  concerning  an  optical  disk  drive  storage
development  project entered into in 1981 which was  unsuccessful and terminated
in 1985.  The suit  sought  injunctive  relief and damages in the amount of $2.4
billion.  On December 28, 1995, the District Court granted the Company's  motion
for summary  judgment and dismissed the complaint.  Stuff appealed the dismissal
to the  Colorado  Court of Appeals (the 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. On July 15, 1999, the District Court
again  dismissed,  with  prejudice,  all of Stuff's  material claims against the
Company.  On August 30,  1999,  Stuff  filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Subsequently,  the
parties have filed various appellate  briefs.  Oral arguments before the Appeals
Court  occurred  on August 8,  2000.  On August 17,  2000,  the Court of Appeals
remanded the case back to the District  Court for a trial on the factual  issues
relating to the  interpretation  of the language embodied in the 1990 Settlement
Agreement. The Company filed a Petition for Rehearing with the Court of Appeals.
On October 12, 2000, the Court of Appeals modified its decision,  but denied the
Company's  Petition for  Rehearing.  On or about  November 7, 2000,  the Company
filed a Petition for Certiorari with the Supreme Court of Colorado.  The Company
continues to believe that Stuff's claims are wholly without merit and intends to
defend vigorously any further actions arising from this complaint.

On June 29, 1995,  Odetics,  Inc. filed a patent  infringement  suit against the
Company alleging  infringement of various patents.  During the second quarter of
1999,  the Company  recognized a pre-tax  expense of $82.3 million in connection
with the  resolution  of this  litigation.  As a result of the  settlement,  the
Company  recognized an additional  $15.5  million  pre-tax  expense in the third
quarter of 1999 to reflect the present value of the final  settlement  payments.
The Company also settled a number of less significant legal actions resulting in
a pre-tax expense of $788,000 during the third quarter of 1999.

The Company is also involved in various other less  significant  legal  actions.
While the Company currently  believes that the amount of any 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,


<PAGE>
                               Form 10-Q, Page 17


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.

RESTRUCTURING
--------------

On October  28,  1999,  the  Company  announced  a broad  restructuring  program
intended  to  return  the  Company  to   profitability.   Key  elements  of  the
restructuring plan included:

o  an anticipated  reduction of  approximately  1,200 to 1,400  positions,  with
   approximately  550  positions  eliminated  during  fiscal  year  1999 and the
   remaining positions eliminated by the end of the third quarter of 2000;

o  a reduction in investment in certain  businesses,  including  consulting  and
   integration services and managed storage services;

o  a recommitment  to the Company's core strengths of tape  automation,  virtual
   storage and open storage area networks  (including  related  maintenance  and
   professional services);

o  modifications  to the  sales  model  in North  America  intended  to  improve
   productivity and increase account coverage and growth;

o  other  organizational and operational  changes intended to improve efficiency
   and competitiveness.

The  elements  of  the  restructuring   included  an  involuntary  reduction  in
headcount,  the  elimination  of a  significant  number  of  temporary  employee
positions,  and managing the replacement of terminating  employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.

During the third quarter and nine months of 2000, the Company  incurred  pre-tax
expenses  of $3.4  million  and  $27.2  million,  respectively,  related  to the
restructuring. As of September 29, 2000, the Company had substantially completed
all currently planned restructuring  activities.  The following table summarizes
the activity in the Company's  restructuring  reserves during the nine months of
2000 (in thousands of dollars):


                                  Employee      Asset     Other Exit
                                 Severance     Writedowns   Costs      Total
                                 ----------    ---------- ----------   ------
  Balances, December 31, 1999     $  3,917                           $  3,917
  Restructuring expense             21,456     $ 5,258     $   462     27,176
  Cash payments                    (25,373)                           (25,373)
  Asset writedowns                              (5,258)       (462)    (5,720)
                                   -------      ------      ------    -------
  Balances, June 30, 2000         $      0     $     0     $     0   $      0
                                   =======      ======      ======    =======


Employee  severance  expense of $21.5  million  was  recognized  during the nine
months of 2000 in connection with the  restructuring.  This expense is comprised
of separation  charges related to the fixed and determinable  severance payments
owed to approximately  1,100 employees who were involuntarily  terminated during
the nine months of 2000 in connection with the restructuring.

Asset writedowns of $5.3 million were recognized  during the nine months of 2000
in connection with the restructuring. The asset writedowns are comprised of $2.3
million  related to the  spin-off  of the  Company's  managed  storage  services
business and $3.0 million  related to the impairment  writedown of assets at the
Company's manufacturing facility in Toulouse, France. The Company has engaged in



<PAGE>
                               Form 10-Q, Page 18


activities to sell the Toulouse  facility and the impairment charge was required
to reflect the  Company's  estimate of the fair value of the  facility  upon its
anticipated sale.

Other exit costs of  $462,000  were  recognized  during the nine months of 2000.
Other exit costs are comprised of $326,000  associated with legal and accounting
expenses  incurred  in  connection  with the  spin-off  of the  managed  storage
services business and $136,000 related to excess lease space in Canada.

The Company incurred pre-tax expenses of $16.1 million during the third quarter,
and  $36.3  million  during  the nine  months  of  1999,  in  connection  with a
restructuring  program  announced  on  April  15,  1999,  which  provided  for a
reduction in  headcount as well as the  elimination  of certain  lower  priority
research and development programs.

The Company has now reached its goal of reducing 1,200 to 1,400 positions. A net
reduction of approximately 1,250 positions was achieved through a combination of
involuntary severances, limiting the replacement of terminating employees due to
normal attrition,  and eliminating certain contractors,  temporary employees and
other non-permanent positions.

The Company  estimates  annual  savings of  approximately  $40  million  will be
realized  during  2000 in  connection  with the April  1999  restructuring.  The
Company  anticipates  annual savings of  approximately  $150 million will result
from the  restructuring  activities  initiated  in  October  1999.  Because  the
restructuring  activities were implemented in stages  throughout the nine months
of 2000, the Company  anticipates the realized savings for the year 2000 will be
slightly in excess of $100 million. The Company does not anticipate any material
incremental operating expenses will be incurred on an on-going basis.

The Company has  restructured  its  business in the past in order to realign its
business  with its  product  and market  strategies,  or  establish  a more cost
efficient  business  structure.  The Company is currently  evaluating its future
market  strategy,  and  anticipates  it will announce its strategy in the fourth
quarter of 2000.  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  expense 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.

INTEREST INCOME AND EXPENSE
---------------------------

Interest  expense  decreased  $3.4 and $1.8 million during the third quarter and
nine months of 2000, respectively,  compared to the same periods in 1999, due to
decreased  borrowings  under  the  Company's  debt and  financing  arrangements.
Interest income increased $730,000 and $5.1 million during the third quarter and
nine  months  of  2000,  respectively,  compared  to the same  periods  in 1999,
primarily as a result of approximately $3.0 million of interest received related
to an income tax refund and an overall increase in available cash.

INCOME TAXES
------------

The Company's  effective tax rate  decreased  from 36% for the third quarter and
nine months of 1999, to 35% for the third quarter and nine months of 2000.

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
$164.5  million of deferred  income tax assets as of  September  29,  2000.  The
Company's valuation



<PAGE>
                               Form 10-Q, Page 19


allowance  of  approximately  $13.5  million as of September  29, 2000,  relates
principally to net deductible  temporary  differences,  tax credit carryforwards
and net operating  loss  carryforwards  associated  with the  Company's  foreign
subsidiaries.

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

Available Financing Lines

The Company has a revolving credit facility (the Primary Revolver) which expires
in October 2001.  The credit limit  available  under the Primary  Revolver ($250
million  as of  September  29,  2000) is  reduced  by $12.5  million on the last
business day of each  calendar  quarter.  The  interest  rates under the Primary
Revolver  depend  upon the  repayment  period of the  advance  selected  and the
Company's  rolling four quarter Total Debt to Earnings before Interest  Expense,
Taxes,  Depreciation and Amortization  (EBITDA) ratio.  Depending on the term of
the outstanding  borrowing,  the rate ranges from the applicable LIBOR plus 2.0%
to 2.5% or the agent  bank's base rate plus 0% to 0.50%.  The  weighted  average
interest  rate on the advances as of September 29, 2000,  was 9.5%.  The Company
had  borrowings  of $35 million and issued  letters of credit for  approximately
$50,000  under the Primary  Revolver as of  September  29, 2000.  The  remaining
available  credit  under the Primary  Revolver as of  September  29,  2000,  was
approximately $215.0 million.  Borrowings under the Primary Revolver are secured
by the  Company's  U.S.  accounts  receivable  and U.S.  inventory.  The Primary
Revolver contains certain financial and other covenants,  including restrictions
on payment of cash dividends on the Company's common stock.

The Company has also entered into a $150 million  revolving credit facility (the
Supplemental  Revolver)  which expires in January 2001. The interest rates under
the  Supplemental  Revolver  depend  upon the  repayment  period of the  advance
selected  and  the  Company's  EBITDA  ratio.  Depending  on  the  term  of  the
outstanding  borrowing,  the rate ranges from the applicable  LIBOR plus 2.0% to
2.5% or the  agent  bank's  base  rate  plus 0% to  0.50%.  The  Company  had no
borrowings outstanding under the Supplemental Revolver as of September 29, 2000.
Available credit under the  Supplemental  Revolver as of September 29, 2000, was
$150  million.  The  Supplemental  Revolver  is  secured by the  Company's  U.S.
accounts  receivable and U.S.  inventory.  The  Supplemental  Revolver  contains
certain financial and other covenants,  including restrictions on the payment of
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 $120 million at any one time.
The agreement,  which expires in January 2002,  provides for  commitments by the
bank to purchase  the  Company's  promissory  notes  denominated  in a number of
foreign  currencies.  As of September 29, 2000, the Company had promissory notes
of $61.6 million outstanding under this financing agreement and had committed to
borrowings  between  October 2000 and January 2002 in the  cumulative  principal
amount of  approximately  $252.9  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.  The weighted  average interest rate associated with the promissory
notes  outstanding as of September 29, 2000,  was 8.62%.  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 up to the  outstanding
balance of the promissory notes.


<PAGE>
                               Form 10-Q, Page 20


Working Capital

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 any additional long-term 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  26% as of
December 31,  1999,  to 11% as of September  29,  2000,  primarily  due to a net
decrease in borrowings of $189.6 million under the Company's credit  facilities.
See "Working Capital," above, for discussion of cash sources and uses.

Employee Stock Option Exchange Program

On  November 6, 2000,  the Company  made an  exchange  offer (the  Exchange)  to
approximately  1,300  employees  of the  Company to  exchange  stock  options to
purchase  common  stock,  par value $.10 per share,  of the Company  (the Common
Stock) that have a per share exercise price of $17.50 or greater, whether or not
vested (Eligible  Options) for shares of restricted common stock, at an exchange
ratio of four  option  shares  surrendered  for each share of  restricted  stock
received.  The shares of  restricted  stock will vest  one-third  on each of the
first,  second and third annual anniversary dates of November 20, 2000, the date
upon  which  the  Exchange  will  close  (the  Exchange   Date).   The  Exchange
specifically  precludes the Chairman of the Board, President and Chief Executive
Officer of the Company and all  corporate  vice  presidents  of the Company from
participating  in the Exchange.  Both the stock options and the restricted stock
involved in the Exchange are subject to the Company's  Amended and Restated 1995
Equity Participation Plan (the 1995 Plan).

The purpose of the Exchange is to:

o provide retention and performance incentives for key employees;
o align better the interests of key employee with those of the stockholders; and
o provide for the return of shares subject to surrendered options to the 1995
  Plan for use in future employee equity programs.

In order to be eligible to participate in the Exchange  (Eligible  Participant),
the  employee  must  not have  received  any  stock  options  in the six  months
preceding  the Exchange  Date.  An Eligible  Participant  must  exchange all the
Eligible  Options  held.  In  general,  if the  employment  of an  employee  who
participates in the Exchange  terminates  prior to the vesting of all the shares
of restricted  stock  received in the Exchange,  the employee  shall forfeit the
unvested  shares of  restricted  stock.  If the  employment  of such employee is
terminated  as a result of death,  Disability  or a Reduction in Force (as those
terms are defined in the 1995 Plan) following a change of control, all shares of
restricted   stock   received  by  that  employee  in  the  Exchange  will  vest
immediately.  Any Eligible  Participants  electing to participate in the Program
will be ineligible  for any stock option  grants,  additional  restricted  stock
awards,  stock appreciation  rights or other equity-based  awards by the Company
for a period of six months following the Exchange Date.

The Exchange is subject to  acceptance  by the Company on the Exchange  Date. In
addition,  if, on the Exchange Date,  the closing price of the Company's  common
stock is $15.00  per share or  greater  at the close of  trading on the New York
Stock  Exchange,  as  reported  subsequently  in The Wall  Street  Journal,  the
Exchange will be  automatically  terminated and no options will be exchanged for
any shares of  restricted  stock.  This price  provision  was  determined by the
Company's Board of Directors to be


<PAGE>
                               Form 10-Q, Page 21


necessary in order to limit the amount of the deferred compensation charge to be
recognized by the Company.  Based on the  four-for-one  exchange ratio set forth
above, if all of the Eligible  Options are exchanged,  the number of outstanding
shares of common stock will increase by  approximately  1,410,000 as a result of
the Exchange.  However,  the overhang  associated with unexercised stock options
will be reduced because all stock options surrendered under the Exchange will be
available for re-issuance under the 1995 Plan. Unexercised stock options, stated
as a percentage of the issued and outstanding shares,  represented approximately
11.7% as of September 29, 2000.  Assuming  that all of the Eligible  Options are
exchanged,  that percentage  would be reduced to  approximately  5.5%.  Further,
assuming  all of the Eligible  Options are  exchanged,  a pool of  approximately
15,770,000 shares (approximately 10,130,000 shares available as of September 29,
2000, plus approximately  4,230,000 shares available as a result of the Program)
would then become available for future employee equity plans.

The non-cash  deferred  compensation  associated  with the Exchange is primarily
dependent  upon the share price of the common stock on the Exchange Date and the
number of Eligible  Options that are exchanged.  If all of the Eligible  Options
are  exchanged  and the price of the common stock on the Exchange Date is $10.00
per share,  the Exchange  would result in an  aggregate of  approximately  $14.1
million non-cash deferred compensation on a pre-tax basis. The non-cash deferred
compensation  associated  with the restricted  stock will be recognized  ratably
over the three-year vesting schedule of the restricted stock to be issued in the
Exchange.   The  non-cash  deferred   compensation  will  be  recognized  on  an
accelerated  basis to the extent that shares of the restricted  stock vest on an
accelerated  basis in the situations  described above and will be reduced to the
extent  that a  participant  forfeits  his or her  shares  of  restricted  stock
received in the Exchange prior to vesting.  The non-cash  deferred  compensation
will reduce the  Company's net income and may result in a decrease of the market
price of the common  stock.  The  compensation  amount is  unaffected  by future
changes in the price of the common stock. Implementing the Exchange may restrict
the Company's ability to engage in any pooling-of-interests mergers for a future
period. The Company has no present intent to enter into any pooling-of-interests
mergers.

None of the Eligible Options are currently included as dilutive potential shares
in the  calculation  of diluted  earnings per share  because all of the Eligible
Options have  exercise  prices in excess of the current fair market value of the
common stock. All issued and outstanding shares of restricted stock are included
in the calculation of diluted earnings per share,  regardless of whether vested.
The Exchange will likely decrease the Company's  diluted  earnings per share, at
least in the  short-term,  and may  result in a  corresponding  decrease  in the
market price of the common stock.

INTERNATIONAL OPERATIONS
------------------------

During  the third  quarter  and nine  months of 2000,  approximately  49% of the
Company's  revenue was generated by its  international  operations,  compared to
approximately  42% and 40% for the  third  quarter  and  nine  months  of  1999,
respectively.   The  Company  also  sells  products  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 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 U.S.  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, business and political conditions.
The Company is subject to the risks of  conducting
<PAGE>
                               Form 10-Q, Page 22


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 that 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 values 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  assets.  Gains and losses on the forward  contracts
used to hedge  anticipated  revenue are 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
September 29, 2000, and as of December 31, 1999,  would result in a hypothetical
loss of  approximately  $56.9  million  and  $54.9  million,  respectively.  The
increase in the hypothetical loss for the third quarter of 2000 is primarily due
to an increase in  outstanding  foreign  currency  options.  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  financial  instruments
would  be  offset  by  gains   associated  with  its  underlying   international
operations.

The Company  anticipates it will adopt SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging Activities" and its associated interpretations effective
on the first day of the Company's fiscal


<PAGE>
                               Form 10-Q, Page 23


year 2001. While the adoption of these new accounting  standards for derivatives
will change the presentation on the Consolidated  Balance Sheet and Consolidated
Statement  of  Operations  for the  foreign  currency  exchange  rate  sensitive
financial  instruments  described  above,  the new accounting  standards are not
currently expected to have a material impact on the Company's financial position
or  results of  operations.  See Note 6 of the Notes to  Consolidated  Financial
Statements  for  further   description  of  SFAS  No.  133  and  its  associated
interpretations.

The  Company had  outstanding  borrowings  under its  Primary  Revolver of $35.0
million as of September  29,  2000.  The interest  rate on these  borrowings  is
dependent  on the  LIBOR,  which  is  sensitive  to  interest  rate  changes.  A
hypothetical  10% adverse  movement in the LIBOR applied to the borrowings would
not have a material adverse effect on the Company's results of operations,  cash
flows, or financial position in 2000.

FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------

New Products and Services; Emerging Markets

The Company's  results of operations and  competitive  strength  depend upon its
ability to successfully develop,  manufacture and market innovative new products
and  services.  Short  product life cycles are  inherent in 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,  products and services is complex and
involves  uncertainties.  Delays in product  development,  manufacturing,  or in
customer  evaluation  and  purchasing  decisions  may make  product  transitions
difficult.  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, the
failure to obtain  sufficient  quantities of key  components,  or  manufacturing
constraints  could  adversely  affect  the  Company's  operating  and  financial
results. 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 assurance  that the Company will be able to manage  successfully
the development and introduction of new products and services in the future.

The Company  introduced  a  significant  number of new  products in October 2000
including the  StorageNet(TM)  6000,  the T9940  high-capacity  tape drive,  and
Virtual Storage Manager III, as well as enhancements to the Shared Virtual Array
9500. The Company's  results of operations and competitive  strength depend upon
its ability to successfully develop,  manufacture and market these new products.
Developing new technology and  introducing  new products is complex and involves
many uncertainties.  There can be no assurances that the Company will be able to
successfully gain adequate market acceptance for its new products.

The  Company's  future  financial  results  are  significantly   dependent  upon
successfully  competing in the rapidly growing emerging  client-server  and SANs
markets  and  replacing  its  earlier  generation  products  in  the  enterprise
environment with new technologies.  The Company currently is making  significant
investments in developing new products for these  markets,  particularly  in the
internet and e-commerce  businesses.  There can be no assurance that the Company
will be  successful  in these  activities.  The SANs  market is new and  rapidly
evolving.  The  Company's  operating  and  financial  results  may be  adversely
impacted  in the event the SANs  market  develops  slower  than  expected or the
Company's  products  fail  to gain  acceptance  in this  market.  The  Company's
traditional  maintenance  revenue base may be adversely  impacted as a result of
the shift from the enterprise to the client-server marketplace.
<PAGE>
                               Form 10-Q, Page 24


Competition

The markets for the Company's  products 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 involves factors such as
price and cost of the  Company's and its  competitors'  product  offerings,  the
timing and success of new products and offerings,  new product  introductions by
competitors,  and the ability to establish more effective distribution channels.
This competitive  environment  gives rise to aggressive  pricing  strategies and
puts pressure on gross profit margins. The Company's competitors include,  among
others, Compaq Computer Corporation,  EMC Corporation,  Hewlett-Packard Company,
Hitachi Ltd., IBM, Quantum Corporation,  and Sun Microsystems,  Inc. A number of
the  Company's  competitors  have  significantly  greater name  recognition  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 these  competitive  issues,  in part,
through its SAN strategy.

From  time-to-time,  two or more of the Company's  competitors may form business
alliances that compete with the Company.  For example,  during the third quarter
of 1999,  EMC  Corporation  acquired Data  General,  a supplier of the Company's
OPENstorage  Disk  products.   The  alliance  of  two  of  the  Company's  major
competitors could adversely affect the Company's ability to compete. A number of
the Company's  competitors  have formed  alliances with the stated  objective of
developing  interoperable SAN solutions.  In addition, the Company competes with
vendors with which it has established  relationships,  including Legato Systems,
Inc. and VERITAS Software Corporation. The Company also anticipates that it will
continue to establish distribution alliances 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 compete  successfully  against
other companies in these markets.

Significant Personnel Changes

The  Company  has  experienced  significant  changes  in  its  management  team,
including  the hiring,  resignation  and  retirement of members of its executive
management.  The Company  announced  in February  2000 that David E. Weiss,  the
Company's  Chairman  of the  Board of  Directors  (Board),  President  and Chief
Executive  Officer,  recommended  that  the  Board  ask him to  resign  from all
positions.  The Board accepted Mr. Weiss'  proposal and asked him to resign from
all such  positions  upon the election of a successor or at such earlier date as
the Board deemed  appropriate.  In February  2000,  the Company  also  announced
significant changes to its operating management, including the departure of
Victor Perez, the Company's Chief Operating Officer.

On July 11, 2000, the Board announced that Patrick J. Martin was selected as the
new Chairman of the Board, President and Chief Executive Officer. The Board also
accepted the resignation of Mr. Weiss from the same positions  immediately prior
to Mr. Martin's appointment. The Company may experience a delay between the time
the management team is formed and the time the team becomes fully productive.

The Company has experienced significant changes in the remainder of its employee
base as a result of the voluntary and involuntary severance programs implemented
in connection with its restructuring  activities, as well as increased levels of
employee  attrition.  The future success of the Company depends in large part on
its  ability to attract,  retain and  motivate  highly  skilled  employees.  The
Company faces  significant  competition for individuals with the skills required
to deliver the products and services  offered to its customers.  An inability to
successfully  deliver products and services required by its customers could have
an adverse effect on future operating results.


<PAGE>
                               Form 10-Q, Page 25


Changes in Sales Model for North America

The Company  historically  has  emphasized  the use of its direct sales force in
North America,  complemented by indirect  distribution  channels,  such as OEMs,
value-added  resellers and  value-added  distributors.  In  connection  with its
restructuring activities, the Company has implemented changes to its sales model
for North  America that the Company  expects will  improve  market  penetration,
increase sales  profitability,  reduce sales expense,  and expand the use of the
indirect  sales  channel.  This new sales model is  intended  to provide  better
coverage for new and existing end user customers, as well as enhancing reseller,
distributor and OEM alliances.  The Company has also reorganized its field sales
organizations  with the objective of better  serving  Fortune 500 customers with
enterprise-level product and service requirements.  A new sales organization was
also  formed  to  address  the needs of small and  medium-sized  customers  with
particular  emphasis on internet and e-commerce  businesses.  The reorganization
has adversely affected the Company's  financial results in 2000 due to increased
employee turnover.  There can be no assurance that the Company will not continue
to encounter disruptions to its sales as it completes the implementation of this
new sales  model and new sales  representatives  are  trained  on the  Company's
products and sales tools. The Company's  operating and financial  results may be
adversely affected by reduced margins on sales typically experienced in indirect
sales channels.

Ability to Develop and Protect Intellectual Property Rights

The Company relies heavily upon its ability to develop new intellectual property
rights  that do not  infringe  upon the  rights  of  others  in order to  remain
competitive and develop and  manufacture  products that are competitive in terms
of technology and cost.  There is no assurance that the Company will continue to
be able to develop such new intellectual property.

The Company relies upon a combination of U.S. patent,  copyright,  trademark and
trade secret laws to protect its intellectual  property rights.  With respect to
certain of the Company's international operations,  the Company does file patent
applications with foreign  governments.  However,  many foreign countries do not
have as  well-developed  laws as the United  States in  protecting  intellectual
property.  The Company enters into  confidentiality  agreements  relating to its
intellectual  property  with its  employees and  consultants.  In addition,  the
Company includes  confidentiality  provisions in most license and  non-exclusive
sales agreements with its indirect distributors and its customers.

Despite  all of the  Company's  efforts to  protect  its  intellectual  property
rights,  unauthorized parties may attempt to copy or otherwise obtain or use the
Company's  intellectual  property.   Monitoring  the  unauthorized  use  of  the
Company's  intellectual  property  rights is difficult,  particularly in foreign
countries.  There is no  assurance  that the Company will be able to protect its
intellectual property rights, particularly in foreign countries.

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 parts in satisfactory quantities after
a period of  pre-qualification  and product ramping.  Certain 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.  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 at a cost  acceptable  to the  Company and its
customers.  IBM is a single  source  supplier  for the disk  drives  used in the
Company's SVA disk product.



 <PAGE>
                               Form 10-Q, Page 26


Certain  suppliers have  experienced  occasional  technical,  financial or other
problems in the past that have delayed  deliveries.  During the third quarter of
2000,  the  Company's  supply  of flex  circuits  and  transducer  semiconductor
components for the 9840 tape drives were delayed due to  manufacturing  problems
experienced  by  suppliers.  While  the  Company  currently  believes  its  9840
component  supply issues have been addressed,  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 revenue  and  operating  results.  In the event a sole source
supplier was unable or unwilling to continue to supply  components,  the Company
would need to identify  and qualify  other  acceptable  suppliers.  This process
could take an extended period, and no assurance can be given that any additional
source  would  become   available  or  would  be  able  to  satisfy   production
requirements on a timely basis or at a price acceptable to the Company.

The Company is  dependent  upon a sole  subcontractor,  Herald  Datanetics  LTD.
(HDL),  to  manufacture a key component  used in certain tape  products.  HDL is
located in the People's  Republic of China (PRC).  To date,  the Company has not
experienced any material  problems with HDL. The Company's  dependence on HDL is
subject to additional  risks beyond those  associated with other sole suppliers,
including the lack of a well-established  court system or acceptance of the rule
of law in the PRC, the degree to which the PRC permits  economic reform policies
to continue,  the political  relationship  between the PRC and the United States
and broader political and economic factors,  such as whether the PRC is admitted
to the World Trade Organization.

Manufacturing

Significant  portions of the Company's  products are  manufactured in facilities
located in Puerto Rico.  The  Company's  ability to  manufacture  product may be
impacted by weather  related  risks  beyond the control of the  Company.  If the
Puerto Rico  manufacturing  facility was impacted by such an event,  the Company
may not have an alternative  source to meet the demand for its products  without
substantial  delays  and  disruption  to its  operations.  The  Company  carries
business  interruption  insurance  to  mitigate  some of the  risk.  There is no
assurance  that the Company  could  obtain  sufficient  alternate  manufacturing
sources or repair the  facilities  in a timely  manner to satisfy the demand for
its products.  Failure to fulfill manufacture demands could adversely affect the
Company's operating and financial results in the future.

The  Company,  along with the  computer  industry  as a whole,  has  experienced
delivery  delays,  increased lead times in ordering parts and components for its
products,  and rapid  changes in the demand by customers  for certain  products.
These longer lead times  coupled with rapid  changes in the demand for products,
could result in a shortage of parts and components and result in reduced control
over delivery  schedules and an inability to fulfill customer orders in a timely
manner.  The  complexities  of these  issues  are  increased  while the  Company
transitions  to newer  technologies  and  products.  These  factors could have a
material adverse effect on revenue and operating results.

Information Systems and Business Process Transitions

The Company replaced many of its internal information systems outside the United
States during 1999 with new  information  systems.  The Company also  introduced
significant  new  business  processes  in  conjunction  with these new  systems,
particularly  within  its  European  operations.  The  implementation  of  these
information  systems and  business  processes  has been complex and has affected
numerous operational,  transactional,  financial,  and reporting processes.  The
establishment  of  processes  and  training  associated  with these  information
systems  are  continuing  and involve a number of risks and  uncertainties.  The
Company  must  successfully  manage the  business  process  changes and employee
training  programs.  There can be no assurance  that the  transition  to the new
information systems and business processes will


<PAGE>
                               Form 10-Q, Page 27


not  cause  delays  or  interruptions  in the  Company's  business.  Failure  to
successfully   manage  the  transition  could  adversely  affect  the  Company's
operating and financial results in the future.

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  financial
performance  fails 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 the total  product  sales is
recognized  in the last weeks and days of the  quarter.  These  factors make the
forecasting  of revenue  inherently  difficult.  Because the  Company  plans its
operating  expenses based on expected revenue,  a shortfall in revenue may cause
earnings to be below  expectations in that period. A number of factors may cause
revenue to fall below expectations,  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 products;  rapid
price  erosion;  realignment  to the sales  force;  or adverse  global  economic
conditions.  The mix of sales among the  Company's  business  segments and sales
concentration in particular  geographic regions may carry different gross profit
margins and may cause the  Company's  operating  margins to fluctuate and impact
earnings.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

The  information  required  under this Item 3 is included  in the section  above
entitled "Market Risk Management / Foreign Currency Exchange Rate."



<PAGE>
                               Form 10-Q, Page 28



                      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 31,  1999,  filed with the  Commission  on March 10,
2000.

In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder County,  Colorado,  District Court (the 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  concerning  an  optical  disk  drive  storage
development  project entered into in 1981 which was  unsuccessful and terminated
in 1985.  The suit  sought  injunctive  relief and damages in the amount of $2.4
billion.  On December 28, 1995, the District Court granted the Company's  motion
for summary  judgment and dismissed the complaint.  Stuff appealed the dismissal
to the  Colorado  Court of Appeals (the 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. On July 15, 1999, the District Court
again  dismissed,  with  prejudice,  all of Stuff's  material claims against the
Company.  On August 30,  1999,  Stuff  filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Subsequently,  the
parties have filed various appellate  briefs.  Oral arguments before the Appeals
Court  occurred  on August 8,  2000.  On August 17,  2000,  the Court of Appeals
remanded the case back to the District  Court for a trial on the factual  issues
relating to the  interpretation  of the language embodied in the 1990 Settlement
Agreement. The Company filed a Petition for Rehearing with the Court of Appeals.
On October 12, 2000, the Court of Appeals modified its decision,  but denied the
Company's  Petition for  Rehearing.  On or about  November 7, 2000,  the Company
filed a Petition for Certiorari with the Supreme Court of Colorado.  The Company
continues to believe that Stuff's claims are wholly without merit and intends to
defend vigorously any further actions arising from this complaint.

In December  1999,  the Company  filed suit in the U.S.  District  Court for the
Western District of Wisconsin against Cisco Systems, Inc. (Cisco), alleging that
Cisco  infringed  upon a certain  patent of the  Company  that Cisco used in its
products.  The Company filed an amended complaint on December 30, 1999, in which
the Company  alleged that Cisco had  infringed  upon a second patent used in its
products.  Cisco filed an answer in January 2000 denying the  Company's  claims,
alleging that the Company's  patents are invalid and asserting  that a microchip
used in one of the Company's  network  security  products  infringed upon one of
Cisco's  patents.  Cisco is seeking  unspecified  compensatory  damages  that it
asserts should be trebled,  along with injunctive  relief. The Company purchases
the alleged  infringing  microchip  from Level One (Level One), a subsidiary  of
Intel Corporation.  In March 2000, the case was transferred to the U.S. District
Court for the Northern  District of California.  Level One has been added to the
lawsuit as an additional defendant to Cisco's counterclaim. A claim construction
hearing is scheduled  for April 9, 2001 and a trial date is scheduled  for March
4, 2002. The parties have commenced discovery,  which is anticipated to continue
for several  months.  The Company  continues to believe that it has valid claims
against Cisco and valid defenses against Cisco's counterclaim.

On October 4,  2000,  the  Company  filed  suit in the U.S.  District  Court for
Minnesota  against Cisco, as  successor-in-interest  to NuSpeed Internet Systems
Inc.  alleging various trade secret  misappropriation,  corporate  raiding,  and
unfair  business  practices.  In the  previous  ten  months,  NuSpeed  had hired
approximately 26 of the Company's employees, the majority of whom were engineers
who were  developing  the  Company's  SN6000  product for joining  disparate and
otherwise incompatible computer networks. The Company has reason to believe that
Cisco is using the Company's confidential and proprietary information to develop
a product for joining disparate and otherwise incompatible computer networks.
Cisco has not yet answered the Company's complaint.


<PAGE>
                               Form 10-Q, Page 29


The Company is also involved in various other less  significant  legal  actions.
While the Company currently  believes that the amount of any 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.



<PAGE>
                               Form 10-Q, Page 30




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

(a)   Exhibits:
      --------

The  exhibits  listed below are filed as part of this  Quarterly  Report on Form
10-Q or are incorporated by reference into this Quarterly Report on Form 10-Q:

3.1   Restated  Certificate of Incorporation of Storage  Technology  Corporation
      dated July 28, 1987 (filed as Exhibit 3 to the Company's  Quarterly Report
      on Form 10-Q for the quarter  ended  September  25,  1987,  and as Exhibit
      3.1(ii) to the Company's  Quarterly  Report on Form 10-Q,  for the quarter
      ended  September 29, 1995,  filed on November 13, 1995,  and  incorporated
      herein by reference).

3.2   Certificate of Amendment  dated May 22, 1989, to the Restated  Certificate
      of  Incorporation  dated July 28,  1987  (filed as  Exhibit  (c)(1) to the
      Company's  Current Report on Form 8-K dated June 2, 1989, and incorporated
      herein by reference).

3.3   Certificate  of Second  Amendment  dated  June 2,  1992,  to the  Restated
      Certificate  of  Incorporation  dated July 28, 1987 (filed as Exhibit 3 to
      the Company's Quarterly Report on Form 10-Q for the quarter ended June 26,
      1992, and incorporated herein by reference).

3.4   Restated  Bylaws of Storage  Technology  Corporation,  as amended  through
      November 11, 1998 (filed as Exhibit 3.1 to the Company's Current Report on
      Form 8-K dated November 19, 1998, and incorporated herein by reference).

4.1   Specimen Certificate of Common Stock, $0.10 par value of Registrant (filed
      as Exhibit  (c)(2) as to the  Company's  Current  Report on Form 8-K dated
      June 2, 1989, and incorporated herein by reference).

4.2   Rights Agreement dated as of August 20, 1990,  between Storage  Technology
      Corporation and First Fidelity Bank, N.A., New Jersey, Rights Agent (filed
      as Exhibit 4.1 to the  Company's  Current  Report on Form 8-K dated August
      20, 1990, and incorporated herein by reference).

4.3   Certificate of  Designations  of Series B Junior  Participating  Preferred
      Stock (filed as Exhibit A to Exhibit 4.1 to the Company's  Current  Report
      on Form 8-K dated August 8, 1990, and incorporated herein by reference).

10.1(1) Fifth   Amendment  to  the  Second  Amended  and  Restated   Contingent
      Multicurrency Note Purchase Commitment  Agreement,  dated as of August 15,
      2000 between Storage Technology Corporation and Bank of America, N.A.

27.1(1) Financial Data Schedule.

(b) Reports on Form 8-K.
    --------------------

      On July 19,  2000,  the Company  filed a current  report on Form 8-K dated
      July 18, 2000,  pursuant to Item 5,  disclosing the appointment of Patrick
      J. Martin as the new Chairman of the Board,  President and Chief Executive
      Officer to succeed  David E.  Weiss whom the Board of  Directors  asked to
      resign from such positions.


<PAGE>
                               Form 10-Q, Page 31


      Reports on Form 8-K. (Cont.)
      ---------------------------

      On November 7, 2000,  the Company filed a current report on Form 8-K dated
      November 7, 2000,  pursuant to Item 5, disclosing the terms and conditions
      of the  Company's  offer to certain  employees to exchange  certain  stock
      options for shares of restricted stock.

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

(1)   Indicates exhibits filed with this Quarterly Report on Form 10-Q.



<PAGE>
                               Form 10-Q, Page 32



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.


                                           STORAGE TECHNOLOGY CORPORATION
                                                    (Registrant)




       November 9, 2000                         /s/ ROBERT S. KOCOL
-------------------------------      ------------------------------------------
            (Date)                                   Robert S. Kocol
                                              Corporate Vice President
                                             and Chief Financial Officer
                                            (Principal Financial Officer)






       November 9, 2000                        /s/ THOMAS G. ARNOLD
-------------------------------      ------------------------------------------
            (Date)                                   Thomas G. Arnold
                                       Vice President and Corporate Controller
                                             (Principal Accounting Officer)




<PAGE>
                               Form 10-Q, Page 33




                                  EXHIBIT INDEX
                                  -------------
(a)   Exhibits:

The  exhibits  listed below are filed as part of this  Quarterly  Report on Form
10-Q or are incorporated by reference into this Quarterly Report on Form 10-Q:

3.1   Restated  Certificate of Incorporation of Storage  Technology  Corporation
      dated July 28, 1987 (filed as Exhibit 3 to the Company's  Quarterly Report
      on Form 10-Q for the quarter  ended  September  25,  1987,  and as Exhibit
      3.1(ii) to the Company's  Quarterly  Report on Form 10-Q,  for the quarter
      ended  September 29, 1995,  filed on November 13, 1995,  and  incorporated
      herein by reference).

3.2   Certificate of Amendment  dated May 22, 1989, to the Restated  Certificate
      of  Incorporation  dated July 28,  1987  (filed as  Exhibit  (c)(1) to the
      Company's  Current Report on Form 8-K dated June 2, 1989, and incorporated
      herein by reference).

3.3   Certificate  of Second  Amendment  dated  June 2,  1992,  to the  Restated
      Certificate  of  Incorporation  dated July 28, 1987 (filed as Exhibit 3 to
      the Company's Quarterly Report on Form 10-Q for the quarter ended June 26,
      1992, and incorporated herein by reference).

3.4   Restated  Bylaws of Storage  Technology  Corporation,  as amended  through
      November 11, 1998 (filed as Exhibit 3.1 to the Company's Current Report on
      Form 8-K dated November 19, 1998, and incorporated herein by reference).

4.1   Specimen Certificate of Common Stock, $0.10 par value of Registrant (filed
      as Exhibit  (c)(2) as to the  Company's  Current  Report on Form 8-K dated
      June 2, 1989, and incorporated herein by reference).

4.2   Rights Agreement dated as of August 20, 1990,  between Storage  Technology
      Corporation and First Fidelity Bank, N.A., New Jersey, Rights Agent (filed
      as Exhibit 4.1 to the  Company's  Current  Report on Form 8-K dated August
      20, 1990, and incorporated herein by reference).

4.3   Certificate of  Designations  of Series B Junior  Participating  Preferred
      Stock (filed as Exhibit A to Exhibit 4.1 to the Company's  Current  Report
      on Form 8-K dated August 8, 1990, and incorporated herein by reference).

10.1(1) Fifth   Amendment  to  the  Second  Amended  and  Restated   Contingent
      Multicurrency Note Purchase Commitment  Agreement,  dated as of August 15,
      2000 between Storage Technology Corporation and Bank of America, N.A.

27.1(1) Financial Data Schedule.

----------------------------------------------------------------------------
(1)   Indicates exhibits filed with this Quarterly Report on Form 10-Q.