Use this link to rapidly review the documentIndex

---

---

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|ý                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|--------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended March 26, 2004
|or                                           
|o                                             | 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
incorporation or organization)

(I.R.S. Employer
Identification Number)One StorageTek Drive, Louisville, Colorado

80028-4309(Address of principal executive offices)

(Zip Code)


Registrant's
telephone number, including area code303-673-5151

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.
ý Yes       
o No

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
ý Yes      
o No   The registrant had 112,289,181 shares
of common stock outstanding as of May 3, 2004.

---

# STORAGE TECHNOLOGY
CORPORATION 
INDEX TO FORM 10-Q 
March 26, 2004

|                                                                                                                         | PAGE
|------------------------------------------------------------------------------------------------------------------------ | ----
|PART I - FINANCIAL INFORMATION                                                                                           |     
|Item 1 - Financial Statements                                                                                            |     
|Consolidated Balance Sheets                                                                                              |     
|Consolidated Statements of Operations                                                                                    |     
|Consolidated Statements of Cash Flows                                                                                    |     
|Consolidated Statements of Changes in Stockholders' Equity                                                               |     
|Consolidated Statements of Comprehensive Income                                                                          |     
|Notes to Consolidated Financial Statements                                                                               |     
|Item 2 - Management's Discussion and Analysis of Financial
                         
Condition and Results of Operations |     
|Item 3 - Quantitative and Qualitative Disclosures about Market Risk                                                      |     
|Item 4 - Controls and Procedures                                                                                         |     
|PART II - OTHER INFORMATION                                                                                              |     
|Item 1 - Legal Proceedings                                                                                               |     
|Item 2 - Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities                               |     
|Item 6 - Exhibits and Reports on Form 8-K                                                                                |     
|Signatures                                                                                                               |     

2

---

# STORAGE TECHNOLOGY CORPORATION 
CONSOLIDATED BALANCE SHEETS 
(In Thousands, Except Share Amounts)

|                                                         | 03/26/04 |  | 12/26/03 |          
|-------------------------------------------------------- | -------- |  | -------- | ---------
|
|ASSETS                                                   |          |  |          |          
|Current assets:                                          |          | 
|Cash and cash equivalents                                |          |  | $        | 1,035,921
|Short-term investments                                   |          |  |          | 2,625    
|Accounts receivable                                      |          |  |          | 482,908  
|Inventories                                              |          |  |          | 105,480  
|Deferred income tax assets                               |          |  |          | 135,794  
|Other current assets                                     |          |  |          | 4,309    
|                                                         |          |  |          |          
|Total current assets                                     |          |  |          | 1,767,037
|                                                         |          |  |         
|Long-term investments                                    |          |  |          | 34,413   
|Property, plant, and equipment                           |          |  |          | 194,170  
|Spare parts for maintenance                              |          |  |          | 46,332   
|Deferred income tax assets                               |          |  |          | 93,659   
|Other assets                                             |          |  |          | 133,259  
|                                                         |          |  |          |          
|Total assets                                             |          |  | $        | 2,268,870
|                                                         |          |  |          |          
|                                                         |          |  |         
|LIABILITIES                                              |          | 
|Current liabilities:                                     |          |  |          |          
|Current portion of long-term debt                        |          |  | $        | 1,272    
|Accounts payable                                         |          |  |          | 105,207  
|Accrued liabilities                                      |          |  |          | 472,732  
|Income taxes payable                                     |          |  |          | 242,572  
|Other current liabilities                                |          |  |          | 38,503   
|                                                         |          |  |          |          
|Total current liabilities                                |          |  |          | 860,286  
|                                                         |          |  |         
|Long-term debt                                           |          |  |          | 10,659   
|                                                         |          |  |          |          
|Total liabilities                                        |          |  |          | 870,945  
|                                                         |          |  |          |          
|Commitments and contingencies (Note 4 and 7)             |          | 
|                                                         |          |  |         
|STOCKHOLDERS EQUITY                                     |          |  |          |          
|Common stock, $0.10 par value, 300,000,000 shares        |          | 
|authorized; 112,669,286 shares issued at March 26, 2004, |          | 
|and 111,135,483 shares issued at December 26, 2003       |          |  |          | 11,267   
|Capital in excess of par value                           |          |  |          | 1,026,624
|Retained earnings                                        |          |  |          | 432,421  
|Accumulated other comprehensive loss                     |          |  |          | (24,459  
|Treasury stock, 1,000,000 shares at March 26, 2004,      |          | 
|and 299,677 shares at December 26, 2003, at cost         |          |  |          | (29,190  
|Unearned compensation                                    |          |  |          | (18,738  
|                                                         |          |  |          |          
|Total stockholders' equity                               |          |  |          | 1,397,925
|                                                         |          |  |          |          
|Total liabilities and stockholders' equity               |          |  | $        | 2,268,870
|                                                         |          |  |          |          

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

3

---

# STORAGE TECHNOLOGY CORPORATION 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited) 
(In Thousands, Except Per Share Amounts)

|                                               | Quarter Ended | 
|---------------------------------------------- | ------------- | 
|
|Revenue:                                       |               | 
|Storage products                               |               | 
|Storage services                               |               | 
|                                               |               | 
|Total revenue                                  |               | 
|                                               |               | 
|Cost of revenue:                               |               | 
|Storage products                               |               | 
|Storage services                               |               | 
|                                               |               | 
|Total cost of revenue                          |               | 
|                                               |               | 
|Gross profit                                   |               | 
|                                               |               | 
|Research and development costs                 |               | 
|Selling, general, and administrative expense   |               | 
|                                               |               | 
|Operating profit                               |               | 
|                                               |               | 
|Interest income                                |               | 
|Interest expense                               |               | 
|                                               |               | 
|Income before income taxes                     |               | 
|                                               |               | 
|Provision for income taxes                     |               | 
|                                               |               | 
|Net income                                     |               | 
|                                               |               | 
|EARNINGS PER COMMON SHARE                      |               | 
|                                               |               | 
|Basic earnings per common share                |               | 
|                                               |               | 
|Weighted-average shares                        |               | 
|                                               |               | 
|Diluted earnings per common share              |               | 
|                                               |               | 
|Weighted-average and dilutive potential shares |               | 
|                                               |               | 

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

4

---

# STORAGE TECHNOLOGY CORPORATION 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited) 
(In Thousands)

|                                                     | Quarter Ended | 
|---------------------------------------------------- | ------------- | 
|
|OPERATING ACTIVITIES                                 |               | 
|Cash received from customers                         |               | 
|Cash paid to suppliers and employees                 |               | 
|Interest received                                    |               | 
|Interest paid                                        |               | 
|Income taxes paid                                    |               | 
|                                                     |               | 
|Net cash provided by operating activities            |               | 
|                                                     |               | 
|INVESTING ACTIVITIES                                 |               | 
|Proceeds from sale of investments                    |               | 
|Purchases of property, plant, and equipment          |               | 
|Proceeds from sale of property, plant, and equipment |               | 
|Other assets                                         |               | 
|                                                     |               | 
|Net cash used in investing activities                |               | 
|                                                     |               | 
|FINANCING ACTIVITIES                                 |               | 
|Purchases of common stock                            |               | 
|Proceeds from employee stock plans                   |               | 
|Proceeds from other debt                             |               | 
|Repayments of other debt                             |               | 
|                                                     |               | 
|Net cash provided by (used in) financing activities  |               | 
|                                                     |               | 
|Effect of exchange rate changes on cash              |               | 
|                                                     |               | 
|Increase in cash and cash equivalents                |               | 
|Cash and cash equivalents - beginning of the period  |               | 
|                                                     |               | 
|Cash and cash equivalents - end of the period        |               | 
|                                                     |               | 
|RECONCILIATION OF NET INCOME TO NET CASH             |               | 
|PROVIDED BY OPERATING ACTIVITIES                     |               | 
|Net income                                           |               | 
|Depreciation and amortization expense                |               | 
|Inventory writedowns                                 |               | 
|Translation loss                                     |               | 
|Other non-cash adjustments to income                 |               | 
|Decrease in accounts receivable                      |               | 
|(Increase) decrease in other current assets          |               | 
|(Increase) decrease in inventories                   |               | 
|Increase in spare parts                              |               | 
|(Increase) decrease in deferred income tax assets    |               | 
|Decrease in accounts payable                         |               | 
|Decrease in accrued liabilities                      |               | 
|Decrease in other current liabilities                |               | 
|Increase (decrease) in income taxes payable          |               | 
|                                                     |               | 
|Net cash provided by operating activities            |               | 
|                                                     |               | 

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

5

---

# STORAGE TECHNOLOGY CORPORATION 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY 
(Unaudited) 
(In Thousands)

|                                |  |  |  |         | Accumulated |   |        |   |  
|------------------------------- |  |  |  | ------- | ----------- | - | ------ | - | -
|
|
|
|Balances, December 26, 2003     |  |  |  | 111,135 |             | $ | 11,114 |   | $
|                                |  |  |  |         |             |   |        |   |  
|Components of comprehensive     |  |  |  |         |             |   |        |  
|income:                         |  | 
|Net income                      |  |  |  | --      |             |   | --     |   |  
|Other comprehensive income      |  |  |  | --      |             |   | --     |   |  
|                                |  |  |  |         |             |   |        |   |  
|Total comprehensive income      |  |  |  | --      |             |   | --     |   |  
|                                |  |  |  |         |             |   |        |   |  
|Shares  issued upon exercise of |  | 
|stock options                   |  |  |  | 1,669   |             |   | 167    |   |  
|Shares  repurchased under stock |  |  |  |         |             |   |        |   |  
|repurchase program              |  |  |  | --      |             |   | --     |   |  
|Restricted stock activity       |  |  |  | 197     |             |   | 19     |   |  
|Other                           |  |  |  | (332    | )           |   | (33    | ) |  
|                                |  |  |  |         |             |   |        |   |  
|Balances, March 26, 2004        |  |  |  | 112,669 |             | $ | 11,267 |   | $
|                                |  |  |  |         |             |   |        |   |  

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

6

---

# STORAGE TECHNOLOGY CORPORATION 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(Unaudited) 
(In Thousands)

|                                                                    | Quarter Ended | 
|------------------------------------------------------------------- | ------------- | 
|
|Net income                                                          |               | 
|                                                                    |               | 
|Other comprehensive income (loss):                                  |               | 
|                                                                    |               | 
|Foreign currency hedging contracts:                                 |               | 
|Net gain (loss) on foreign  currency cash flow hedges,              |               | 
|net of tax expense (benefit) of $583 and $(3,036)                   |               | 
|Reclassification  adjustment for net losses included in net income, |               | 
|net of tax benefit of $3,457 and $1,415                             |               | 
|                                                                    |               | 
|Unrealized gain on marketable securities:                           |               | 
|Holding gain, net of tax expense of $142 and $413                   |               | 
|Reclassification  adjustment for net gains included in net income,  |               | 
|net of tax expense of $415 and $0                                   |               | 
|                                                                    |               | 
|Other comprehensive income (loss)                                   |               | 
|                                                                    |               | 
|Comprehensive income                                                |               | 
|                                                                    |               | 

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

7

---

# STORAGE TECHNOLOGY CORPORATION 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

# NOTE 1  BASIS OF PREPARATION

The accompanying interim consolidated
financial statements of Storage Technology Corporation and its wholly owned subsidiaries
(StorageTek or the Company) have been prepared on substantially the same basis as the
Companys annual consolidated financial statements and should be read in conjunction
with the Companys Annual Report on Form 10-K for the year ended December 26, 2003.
In the opinion of management, the interim consolidated financial statements reflect all
adjustments necessary for the fair presentation of results for the periods presented, and
such adjustments are of a normal, recurring nature. Certain prior year amounts have been
reclassified to conform to the current year presentation.

The consolidated results for interim
periods are not necessarily indicative of expected results for the full fiscal year.

NOTE 2  STOCK-BASED
COMPENSATION PLANS

The Company accounts for stock-based
compensation plans under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Stock-based compensation reflected in net
income is related to restricted stock.

The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based compensation (in
thousands, except per share amounts):

|                                                  | Quarter Ended | 
|------------------------------------------------- | ------------- | 
|
|Net income, as reported                           |               | 
|                                                  |               | 
|Add: Stock-based compensation expense included in |               | 
|reported net income, net of related tax effects   |               | 
|                                                  |               | 
|Deduct: Total stock-based compensation expense    |               | 
|determined under fair value based method for all  |               | 
|awards, net of related tax effects                |               | 
|                                                  |               | 
|Pro forma net income                              |               | 
|                                                  |               | 
|                                                  |               | 
|Earnings per share:                               |               | 
|Basic, as reported                                |               | 
|Basic, pro forma                                  |               | 
|                                                  |               | 
|Diluted, as reported                              |               | 
|Diluted, pro forma                                |               | 

8

---

# NOTE 3  INVENTORIES

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

|                | 03/26/04 |  | 12/26/03 |        
|--------------- | -------- |  | -------- | -------
|Raw materials   |          |  | $        | 19,067 
|Work-in-process |          |  |          | 18,140 
|Finished goods  |          |  |          | 68,273 
|                |          |  |          |        
|                |          |  | $        | 105,480
|                |          |  |          |        

# NOTE 4  LITIGATION

The Company is involved in a number
of pending legal proceedings that arise from time to time in the ordinary course of
business. Management believes that any liability as a result of adverse outcomes in such
proceedings would not have a material adverse effect on the financial condition of the
Company taken as a whole. However, 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 condition 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  OPERATIONS OF BUSINESS SEGMENTS

The Company is organized into two
reportable business segments based on the definitions provided in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information: storage
products and storage services. The storage products segment includes sales of tape, disk,
network, and other miscellaneous products. The storage services segment includes
maintenance and support services, as well as professional services.

The Company does not have any
intersegment revenue, and segment operating performance is evaluated based on gross
profit. The aggregate gross profit by segment equals the consolidated gross profit, and
the Company does not allocate research and development costs; selling, general, and
administrative expense; interest income; interest expense; or provision for income taxes
to the segments. The following table shows revenue and gross profit by segment (in
thousands):

|                   | Quarter Ended | 
|------------------ | ------------- | 
|
|Revenue:           |               | 
|Storage products   |               | 
|Storage services   |               | 
|                   |               | 
|Total revenue      |               | 
|                   |               | 
|Gross profit:      |               | 
|Storage products   |               | 
|Storage services   |               | 
|                   |               | 
|Total gross profit |               | 
|                   |               | 

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

|                               | Quarter Ended | 
|------------------------------ | ------------- | 
|
|Tape products                  |               | 
|Disk products                  |               | 
|Network products               |               | 
|Other                          |               | 
|                               |               | 
|Total storage products revenue |               | 
|                               |               | 

9

---

# NOTE 6  EARNINGS
PER COMMON SHARE

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

|                                            | Quarter Ended | 
|------------------------------------------- | ------------- | 
|
|Net income                                  |               | 
|                                            |               | 
|Weighted average common shares outstanding: |               | 
|Basic                                       |               | 
|Effect of dilutive common stock equivalents |               | 
|                                            |               | 
|Diluted                                     |               | 
|                                            |               | 
|Earnings per common share:                  |               | 
|Basic                                       |               | 
|Diluted                                     |               | 

For the quarters ended March 26,
2004, and March 28, 2003, options to purchase 3,633,948 and 2,299,369 shares of common
stock, respectively, were excluded from the computation of diluted earnings per share
because the exercise price of the options was greater than the average market price of the
Companys common stock, and therefore, the effect would have been antidilutive.

# NOTE 7 
INDEMNIFICATIONS AND WARRANTIES

Financial Accounting Standards Board
(FASB) Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, requires that a liability be recorded in the guarantors balance sheet
upon issuance of certain guarantees. FIN 45 also requires additional disclosures about the
guarantees an entity has issued, including a rollforward of the entitys product
warranty liabilities.

In the normal course of business, the
Company is party to a variety of agreements under which it may be obligated to indemnify
the other party for certain matters. These obligations typically arise in contracts where
the Company customarily agrees to hold the other party harmless against losses arising
from a breach of representations or covenants for certain matters such as title to assets
and intellectual property rights associated with the sale of products. The Company also
has indemnification obligations to its officers and directors. The duration of these
indemnifications varies, and in certain cases, is indefinite. In each of these
circumstances, payment by the Company depends upon the other party making an adverse claim
according to the procedures outlined in the particular agreement, which procedures
generally allow the Company to challenge the other partys claims. In certain
instances, the Company may have recourse against third parties for payments made by the
Company.

The Company is unable to reasonably
estimate the maximum potential amount of future payments under these or similar agreements
due to the unique facts and circumstances of each agreement and the fact that certain
indemnifications provide for no limitation to the maximum potential future payments under
the indemnification. The Company has not recorded any liability for these indemnifications
in the accompanying consolidated balance sheets; however, the Company does accrue losses
for any known contingent liability, including those that may arise from indemnification
provisions, when future payment is both probable and reasonably estimable.

The Company provides warranties
associated with the sale of its products. The Companys standard product warranties
provide for the repair or replacement of products that fail to meet their published
specifications. In situations where a product fails its essential purpose to the customer,
the Company may also be responsible for refunding the purchase price of the product if the
Company cannot remedy the product failure. The Company establishes a warranty liability
for the estimated cost of warranty-related claims at the time revenue is recognized. The
following table summarizes information related to the Companys warranty reserves (in
thousands):

|                               | Quarter Ended | 
|------------------------------ | ------------- | 
|
|Balance at beginning of period |               | 
|Accruals for warranties issued |               | 
|Adjustments to warranties      |               | 
|Amortization                   |               | 
|                               |               | 
|Balance at end of period       |               | 
|                               |               | 

10

---

# ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

All assumptions, anticipations,
expectations, and forecasts contained in the following discussion regarding our business,
future products, business plans, financial results, performance, and future events are
forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Our 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. Forward-looking statements can
typically be identified by the use of words such as may, will,
should, expects, plans, anticipates,
believes, estimates, predicts, intends,
potential, continue, or the negative of such terms, or other
comparable words. Forward-looking statements also include the assumptions underlying or
relating to any such statements. The forward-looking statements contained in this Form
10-Q represent a good-faith assessment of our future performance for which management
believes there is a reasonable basis. We disclaim any obligation to update the
forward-looking statements contained herein, whether as a result of new information,
future events, or otherwise, except as may be otherwise required by law.

FIRST QUARTER 2004
FINANCIAL OVERVIEW

The first quarter of 2004 represented
the fifteenth consecutive quarter of year-over-year earnings growth and the seventh
consecutive quarter of year-over-year revenue growth. Total revenue for the first quarter
of 2004 was $515 million, an increase of 7% compared to the same period in 2003. Revenue
increased 1% as adjusted to reflect constant foreign currencies. We had revenue growth in
both of our business segments in the first quarter of 2004, with a 5% increase in storage
products revenue and an 11% increase in storage services revenue. The increase in storage
products revenue was primarily due to growth in tape and disk product sales. Within the
storage services segment, we had double-digit growth in both our maintenance and
professional services revenue. We had a solid improvement in total gross profit margin in
the first quarter of 2004, compared to the same period in 2003, as a result of an increase
in storage products gross profit margin due to favorable product mixes. Operating expense
increases during the first quarter of 2004, compared to the same period in 2003, were
primarily due to unfavorable foreign currency movements and employee headcount increases
associated with new sales resources to help us increase sales coverage.

We continued to strengthen our
balance sheet and cash flows during the first quarter of 2004. Total cash and investments
increased $13 million to $1.07 billion as of March 26, 2004. Our operations continue to be
self-funded and our debt-to-capitalization ratio remains constant at 1%.

Through our strong balance sheet and
cash flows, we believe that we are firmly positioned to exploit future opportunities. Our
primary challenge for the future is to continue to grow revenue while maintaining strong
cost controls. We believe revenue growth can be achieved primarily through the successful
execution of our Information Lifecycle Management (ILM) strategy. In 2004, we will
continue to focus on improving our sales productivity in all of our geographic regions,
particularly in Europe. We believe that organizational changes we made in Europe in 2003
will enable this improvement. A potential risk to successfully growing our revenue and
earnings in the future is the impact of global economic conditions on information
technology spending.

11

---

SELECTED CONSOLIDATED
STATEMENT OF OPERATIONS DATA

The following table presents
Consolidated Statements of Operations data stated as a percentage of total revenue, except
for segment gross profit, which is stated as a percentage of the applicable segment
revenue. The table also presents the percentage change based on the dollar amounts of each
of the items.

|                                              |  |  | Percentage Increase |      
|--------------------------------------------- |  |  | ------------------- | -----
|
|
|
|
|Storage products                              |  |  |                     | 57.2 
|Storage services                              |  |  |                     | 42.8 
|                                              |  |  |                     |      
|Total revenue                                 |  |  |                     | 100.0
|                                              |  |  |                     |      
|Gross profit:                                 |  | 
|Storage products                              |  |  |                     | 49.2 
|Storage services                              |  |  |                     | 42.3 
|                                              |  |  |                     |      
|Total gross profit                            |  |  |                     | 46.3 
|                                              |  |  |                    
|Operating expenses:                           |  | 
|Research and development costs                |  |  |                     | 9.4  
|Selling, general, and administrative expenses |  |  |                     | 31.6 
|                                              |  |  |                     |      
|Operating profit                              |  |  |                     | 5.3  
|Interest income                               |  |  |                     | 0.6  
|Interest expense                              |  |  |                     | (0.1 
|                                              |  |  |                     |      
|Income before income taxes                    |  |  |                     | 5.8  
|Provision for income taxes                    |  |  |                     | 1.3  
|                                              |  |  |                     |      
|Net income                                    |  |  |                     | 4.5  
|                                              |  |  |                     |      

The following table presents
supplemental data for storage products revenue stated as a percentage of total storage
products revenue, and the percentage change based on the dollar amounts of each of the
items.

|                                             |  |  | Percentage Increase |      
|-------------------------------------------- |  |  | ------------------- | -----
|
|
|
|Supplemental data - storage products revenue |  |  |                     |      
|Tape products                                |  |  |                     | 75.7 
|Disk products                                |  |  |                     | 15.0 
|Network products                             |  |  |                     | 5.8  
|Other                                        |  |  |                     | 3.5  
|                                             |  |  |                     |      
|Total storage products revenue               |  |  |                     | 100.0
|                                             |  |  |                     |      

12

---

REVENUE AND GROSS PROFIT
MARGIN

Storage Products

Our storage products revenue
primarily consists of sales of tape, disk, and network products, including related
software, for the mainframe and open-systems markets. The open-systems market consists of
products designed to operate in the UNIX, NT, and other non-MVS operating environments.

Storage products revenue increased in
the first quarter of 2004, compared to the same period in 2003, primarily due to an
increase in tape and disk product sales. We had a 3% increase in tape product sales that
was driven by strength in our Virtual Storage Manager (VSM) system revenue, which
increased 40% from the first quarter of 2003. We also had a 5% increase in tape drive
revenue due primarily to increased sales of third-party tape drives. Disk product revenue
increased 18% in the first quarter of 2004, led by a 32% increase in open-systems disk
product revenue. The increase in open-systems disk product revenue was partially offset by
an 8% decrease in enterprise disk products.

Storage products gross profit margin
increased in the first quarter of 2004, compared to the same period in 2003, primarily due
to a shift in product mix toward our higher margin products, led by the strength of our
VSM sales. Product mix, channel mix, and further operational efficiencies will be key
factors for maintaining storage products gross profit margin. With respect to product mix,
continued success in VSM sales will be essential in maintaining the improved product
margins experienced in the first quarter of 2004.

Storage Services

Our storage services revenue
primarily consists of revenue associated with the maintenance and support of StorageTek
products and third-party storage products, as well as professional services revenue
associated with various storage consulting activities.

Storage services revenue increased in
the first quarter of 2004, compared to the same period in 2003, primarily due to a 10%
increase in maintenance and support services revenue. We also had continued strong revenue
growth from professional service offerings. Professional services revenue accounted for
11% of total storage services revenue in the first quarter of 2004, consistent with the
same period in 2003.

Storage services gross profit margin
remained largely unchanged in the first quarter of 2004, compared to the same period in
2003, but did increase slightly compared to the fourth quarter of 2003 due to the
additional investments in resources within the services arena that we made in 2003 in
order to expand our reach into new markets. If professional services become a greater
portion of our service revenue, we expect that the resulting change in our services mix
would adversely impact our storage services gross profit margin.

13

---

RESEARCH AND PRODUCT
DEVELOPMENT

Research and product development
costs decreased 4% during the first quarter of 2004, compared to the same period in 2003.
This decrease is consistent with the trend we have experienced since 2001, although we
expect research and development costs for the full year of 2004 to be fairly consistent with 2003 levels.
These decreases have been achieved primarily through the implementation
of engineering initiatives designed to improve research and development productivity,
increase strategic alignment, and reduce non-essential spending. We continue to align our
engineering functions to support the aims of our ILM strategy and improve productivity.

SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSE

Selling, general, and administrative
expense (SG&A) increased 16% during the first quarter of 2004, compared to the same
period in 2003. Approximately half of this increase was due to the unfavorable impacts of
foreign currency movements on the operating expenses of our international operations. The
remaining increase was due primarily to the additional investments we made in sales
personnel as part of our ongoing efforts to increase revenue. As we make investments in
sales resources with a focus on revenue growth, we also continue to evaluate our expenses
to identify opportunities where we can become more efficient and effective. Consequently,
as a percentage of revenue, we expect that SG&A expense for the full year of 2004 will
be similar to the 27% level in 2003.

INTEREST INCOME AND
EXPENSE

Interest income and expense were
largely unchanged for the first quarter of 2004 compared to the same period in 2003.
Although our cash and investments balance has been steadily increasing, decreasing
interest rates have kept our interest income from increasing proportionally. See
LIQUIDITY AND CAPITAL RESOURCES for further discussion of our debt and
financing arrangements.

INCOME TAXES

Our effective tax rate was 22% for
the first quarter of 2004, compared to 30% for the same period in 2003. Our effective tax
rate is impacted by a variety of factors, including the overall effectiveness of our
global manufacturing strategies and changes in our estimates regarding the resolution of
open tax matters. We continue to recognize increased tax benefits associated with our
manufacturing operations in Puerto Rico and, based on our current estimates, we believe
that some of the potential tax contingencies previously identified should be reduced. We
expect the effective tax rate in the first quarter of 2004 to be in effect for the full
year based on currently available information.

We are subject to regular audits by
federal, state, and foreign tax authorities. These audits may result in proposed
assessments that may result in additional tax liabilities. Our income taxes payable
balance as reported on the Consolidated Balance Sheet is comprised primarily of tax
contingencies that we believe are both probable and reasonably estimable.

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, we have determined that we will more likely than not realize $229.5
million of deferred income tax assets as of March 26, 2004. Our valuation allowance of
approximately $22.9 million as of March 26, 2004, relates principally to foreign net
operating loss carryforwards.

14

---

CRITICAL ACCOUNTING
ESTIMATES AND ASSUMPTIONS

Our critical accounting estimates and
assumptions are disclosed in our Annual Report on Form 10-K for the year ended December
26, 2003. We have made no changes to those policies during the three months ended March
26, 2004.

LIQUIDITY AND CAPITAL
RESOURCES

Sources and Uses of Cash

The following table summarizes our
cash flows from continuing operations (in thousands):

|                     | Quarter Ended
|-------------------- | -------------
|
|Operating activities |              
|Investing activities |              
|Financing activities |              

Our cash and cash equivalents balance
increased $34.3 million during the first quarter of 2004, primarily a result of cash
flows generated by our operating activities.

In the first quarter of 2004, we used
$29.2 million of cash to purchase shares of the Companys stock under the publicly
announced share repurchase program, which was mostly offset by $27.8 million of proceeds
from employee stock plans.

Future Sources and Uses
of Cash

We expect that cash flows from
operations will continue to serve as our principal source of liquidity, and we believe
that we have adequate working capital and financing capabilities to meet our anticipated
operating and capital requirements for the next 12 months. However, cash flows from
operations could be negatively impacted by a decrease in demand for our products and
services as a result of rapid technological changes and other risks described under
FACTORS THAT MAY AFFECT FUTURE RESULTS.

In January 2004, our Board of
Directors authorized a share repurchase program to acquire up to 1,000,000 shares of
common stock per quarter through 2005. The intent of the repurchase program is to
generally offset dilution created by shares issued under employee stock plans. We intend
to fund the repurchases through cash flows from operations. We continue to review and
evaluate alternative uses for our cash, including additional share repurchase programs,
potential acquisitions, and investments in additional technologies to strengthen our ILM
offerings.

Cash flows from operations can be
supplemented by our $75 million revolving credit facility (the Revolver) that expires in
October 2004. The interest rates for borrowing under the Revolver are dependent on our
Total Debt to rolling four quarter Earnings Before Interest Expense, Taxes, Depreciation,
and Amortization (EBITDA) ratio and the term of the outstanding borrowings. The rate
ranges from the applicable LIBOR plus 1.75% to 2.50% or the agent banks base rate
plus 0.00% to 0.50%. We pay a 0.50% per annum commitment fee on any unused borrowings. We
had no outstanding borrowings under the Revolver as of March 26, 2004. The Revolver is
secured by our U.S. accounts receivable and U.S. inventory, and contains certain financial
and other covenants, including a prohibition on the payment of cash dividends.

15

---

Over the longer term, we may choose
to fund our operations through the issuance of additional equity or debt financing. The
issuance of equity or convertible debt securities could result in dilution to our
stockholders, and we cannot provide any assurance that such additional long-term
financing, if required, could be completed on favorable terms.

FACTORS THAT MAY AFFECT FUTURE RESULTS

We may be materially affected by
global economic and political conditions

Our ability to generate revenue
growth during the last several years was adversely affected by the slowdown in the global
economy as customers delayed their purchase decisions, reduced their information
technology spending budgets, increased their purchase authorization approval requirements,
and reduced their capital expenditures by maximizing the current capacities of their data
storage equipment. During the last several years, we implemented various cost-saving
measures to help mitigate the adverse effects of the slowdown in the global economy. We
cannot provide any assurance that a prolonged economic downturn will not have additional
adverse effects on our financial condition, results of operations, or our ability to
generate revenue growth. Furthermore, we cannot provide any assurance that our cost-saving
measures will be successful or sufficient to allow us to continue to generate improved
operating results in future periods.

Our financial condition and results
of operations could also be materially affected by unstable global political conditions.
Terrorist attacks or acts of war could significantly disrupt our operations and the
operations of our customers, suppliers, distributors, or resellers. We cannot predict the
potential impact on our financial condition or results of operations should such events
occur.

We may be materially affected by a
decrease in demand for our tape products or by an inability to maintain key competitive
advantages in tape

In the first quarter of 2004,
approximately 76% of our storage products revenue was generated by sales of our tape
products. Services associated with our tape products also represent a significant portion
of our storage services revenue. If overall demand for tape storage products declines, or
if we lose significant market share in tape, our financial condition and results of
operations could be materially affected.

One of the key competitive advantages
that our tape products have over competing disk products is that tape products store data
at a fraction of the price of disk storage. The price of disk storage continues to
decrease rapidly due to competition and decreasing manufacturing costs associated with new
disk drive technologies such as Advanced Technology Attachment (ATA) disk. We must
continue to develop and introduce new tape products that reduce the cost of tape storage
at a rate that is similar to or greater than the decline in disk storage costs in order to
maintain this competitive advantage. We cannot provide any assurance that we will be able
to reduce the cost of our tape products at a rate similar to the decline in disk storage
costs.

16

---

We may be materially affected by
competition and by our ability to execute our ILM strategy to address competition

The data storage industry is highly
competitive, and customers make their decisions based on a number of competitive factors.
We must address each of these factors effectively in order to successfully compete. If we
are unable to adapt our products and services to changes in these competitive factors, we
may lose market share to our competitors.

Our principal strategy for addressing
the competition and growing revenue is our ILM strategy. Our ILM strategy is intended to
capitalize on our ability to deliver complete storage solutions that satisfy customer
storage requirements, including tape, disk, and network products, together with associated
services. We achieved some initial success in our ILM strategy in 2003; however, we must
continue to develop and deliver on this strategy in the future in order to grow revenue.
We have also seen the adoption of strategies similar to our ILM strategy by our
competitors. We cannot provide any assurance that we will successfully execute our ILM
strategy or that this strategy will provide us with a competitive advantage in the data
storage industry.

We may be materially affected by the
risks associated with expanding our service offerings

Services contributed approximately
43% of our total revenue in the first quarter of 2004, compared to 41% for the same period
in 2003. This growth was partially driven by new service offerings such as storage
consulting services, implementation services, and storage management services. The
development and delivery of these new services are critical to the success of our plan to
deliver complete storage solutions to our customers. We must ensure that storage service
professionals have the necessary skill sets, experience, tools, and training to support
these new service offerings. Revenue growth from these new service offerings is needed to
offset possible future declines in maintenance revenue from our installed service base of
products under maintenance contracts as these products are displaced by sales of new
StorageTek products under warranty. Any failure to properly develop or deliver our new and
existing service offerings could have a material adverse effect on our financial condition
and results of operations.

We may be materially affected by
uneven sales patterns and by our ability to forecast customer demand accurately

In the past, our 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 percentage of total product sales are earned in the last weeks
or days of the quarter. We continued to experience these trends in the first quarter
of 2004. It is difficult to predict the extent to which these historical trends will
continue in the future. We cannot provide any assurance that we will be able to manage our
uneven sales patterns.

We prepare and update our forecasts
on a regular basis to predict customer demand for our products and services. If actual
demand exceeds predicted demand, we may not be able to meet customer requirements in a
timely manner due to sourcing, manufacturing, or service constraints. If actual demand is
less than predicted demand, we may have excess inventory or an underutilized employee
base. We cannot provide any assurance that we will be able to forecast customer demand
accurately or respond quickly to changes in customer demand.

17

---

Our gross profit margin may be
materially affected by product mix, channel mix, and resale of third-party products

We provide a variety of solutions to
meet customer needs, including tape, disk, and network products, along with associated
software and services. Our products and services contribute varying gross profit margins,
and the gross margin on a customers total solution is dependent on the amounts and
types of products or services involved. We cannot provide any assurance that our future
gross profit margin will be similar to our historical gross profit margin.

We market our solutions through a
combination of a direct sales organization and indirect channel partners. Direct sales to
the end-user customer usually result in higher gross profit margins than indirect channel
sales. We cannot provide any assurance that changes in our channel mix will not have a
material impact on gross profit margin in the future.

We sell a number of third-party
products, and our gross profit margin may be adversely affected if those products become a
larger portion of our total storage solutions. We may also be at a cost disadvantage in
acquiring third-party products that are manufactured by competitors.

We may be materially affected by our
ability to grow our indirect channels successfully

We are continually developing our
indirect distribution channels, including original equipment manufacturers (OEMs),
value-added distributors (VADs), value-added resellers (VARs), and other distributors.
Indirect channel sales contributed approximately 48% of our total product revenue in the
first quarter of 2004, compared to 50% in the same period in 2003. Increasing our sales
through these indirect channels is critical to expanding our reach into the growing
open-systems market. Successfully managing the interaction of our direct and indirect
channel efforts to effectively reach all of the potential customer segments for our
products and services is a complex process. We cannot provide any assurance that we will
be successful in expanding our indirect channel sales. Our ability to forecast future
demand for our products may be adversely affected by unforeseen changes in demand from our
indirect channel partners. Storage products gross profit margins may be adversely impacted
to the extent we continue to receive a larger portion of our sales through our indirect
channels in the future. Maintenance revenue may also be adversely affected in future
periods to the extent that customers of our indirect channel partners elect to purchase
maintenance services from our competitors. Our financial results may also be negatively
affected if the financial condition of one or more of our channel partners weakens.

We may be materially affected by the
risks associated with sole source suppliers

We purchase certain key parts,
components, and services from sole source suppliers who we believe are currently the only
providers that meet our specifications or for which alternative sources of supply are not
readily available.

18

---

The following table shows our significant sole source suppliers and the
products or services they provide:

|Name of supplier             |  | Product or service provided                                                        
|---------------------------- |  | -----------------------------------------------------------------------------------
|Imation Corporation          |  | T9840 and T9940 series tape media                                                  
|Sanmina-SCI Corporation      |  | Printed circuit boards and certain other manufacturing and repair services         
|LSI Logic Storage Systems    |  | D-Series disk products                                                             
|Fujitsu Electronics America  |  | Application-specific integrated circuits (ASICs) for various tape and disk products
|Philips Semiconductors       |  | ASICs for various tape and disk products                                           
|Herald Datanetics Ltd. (HDL) |  | Key component used in certain tape products                                        

We also obtain certain key parts and
components from less significant sole source suppliers. If a sole source supplier did not
continue to provide its products or services, we would need to identify and qualify other
acceptable suppliers. This process could take an extended period, and we cannot provide
any assurance that we could identify and qualify an alternative source on a timely basis
or at an acceptable quality or price. We cannot provide any assurance that significant
sole source suppliers will be able to meet our ongoing quality or delivery requirements.
Failure to meet these requirements may have a material adverse impact on our financial
condition and results of operations.

HDL is located in the Peoples
Republic of China (PRC). Our dependence on HDL is subject to additional risks beyond those
associated with other sole source 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. To date, we have not
experienced any material problems securing key components from HDL; however, we cannot
provide any assurance that we will not experience material problems in the future.

We may be materially affected by a
failure to obtain quality parts and components in a timely manner or by a failure to
effectively manage inventory levels

We generally use standard parts and
components for our products and believe that there are a number of alternative, competent
vendors for most of those parts and components. Certain suppliers have experienced
occasional technical, financial, or other problems that have delayed deliveries in the
past. An unanticipated failure of one of our suppliers to meet requirements for an
extended period, or the inability to secure comparable components in a timely manner,
could result in a shortage of key components or products, longer lead times, reduced
control over production and delivery schedules, and an inability to fulfill customer
orders in a timely manner.

We have reduced our inventory levels
by 4% in the first quarter of 2004, in addition to reductions of over 17% in 2003 and 27%
in 2002, primarily as a result of lean manufacturing initiatives. As we continue to move
toward a lean manufacturing environment, we will become increasingly dependent on a
limited supplier base to deliver quality parts and components in a timely manner. A
suppliers inability to deliver parts and components on a timely basis, or our
failure to effectively manage inventory levels, could have a material adverse effect on
our financial condition and results of operations.

We may be materially affected by
rapid technological change and evolving industry standards

Short product life cycles are
inherent in high-technology industries due to rapid technological change and evolving
industry standards. Our financial condition and results of operations depend on our
ability to respond effectively to these changes. We cannot provide any assurance that we
will be able to successfully develop, manufacture, and market innovative new products or
adapt our current products to new technologies or new industry standards. In addition,
customers may be reluctant to adopt new technologies and standards, or they may prefer
competing technologies and standards.

19

---

Storage area network (SAN) solutions
are an example of the rapid technological change in our industry. SAN technologies and
standards are continually evolving. We continue to develop the necessary product
modifications and professional services knowledge to implement our SAN solutions
successfully in various customer operating environments. Because the SAN market changes so
quickly, it is difficult to predict the future rate of adoption of our SAN solutions.

We may be materially affected by
risks associated with new product development

New product research and development
is complex and requires the investigation and evaluation of multiple alternatives, as well
as planning the design and manufacture of those alternatives selected for further
development. Research and development efforts could be adversely affected by any of the
following:

- Hardware and software design flaws
- Product development delays
- Changes in data storage technology
- Changes in operating systems
- Changes in industry standards

In addition, we have outsourced
software development for certain tape and network products. We cannot provide any
assurance that research and development activities will be successful in bringing new
products to market.

Manufacturing new products involves
integrating complex designs and processes, coordinating with suppliers for parts and
components, and managing manufacturing capacities to accommodate forecasted demand.
Failure to obtain sufficient quantities of parts and components, as well as other
manufacturing delays or constraints, could adversely affect the timing of new product
introductions. We have experienced product development and manufacturing delays in the
past that adversely affected our results of operations and competitive position.

We plan to introduce a number of
significant new products during 2004. When we introduce new products, we must effectively
manage the transition from our existing products to the new products. If we do not manage
the transition effectively, we may be subject to the following adverse effects:

- Excess or obsolete inventory
- Insufficient inventory or manufacturing capacity to meet customer demand
- Delayed customer purchases
- Lost sales if customers purchase from our competitors

In addition, sales of our new
products may replace some of the sales of our existing products. We cannot provide any
assurance that we will be able to successfully manage the development, introduction, or
transition of new products in the future.

20

---

We may be materially affected by the
risks associated with developing and protecting intellectual property

We depend on our ability to develop
new intellectual property that does not infringe on the rights of others. We cannot
provide any assurance that we will be able to continue to develop such new intellectual
property.

We rely on a combination of U.S.
patent, copyright, trademark, and trade secret laws to protect our intellectual property
rights. We enter into confidentiality agreements relating to our intellectual property
with our employees and consultants, and we include confidentiality provisions in license
and non-exclusive sales agreements with our customers.

We also file patent and trademark
registration applications with foreign governments; however, many foreign countries do not
have intellectual property laws that are as well developed as those of the United States.

Despite all of our efforts to protect
our intellectual property rights, unauthorized parties may attempt to copy or otherwise
obtain or use our intellectual property. Monitoring the unauthorized use of our
intellectual property is difficult, particularly in foreign countries. We cannot provide
any assurance that we will be able to adequately protect our intellectual property.

We may be materially affected if we
are unable to attract and retain our key employees

Our future success depends in large part
on our ability to attract and retain our key employees. During 2003 and the first quarter
of 2004, several changes were made with respect to the executive management team and their
organizational responsibilities. We face significant competition for individuals who
possess the skills required to sell our products and services, as well as design, develop,
manufacture, service, and market those products and services. An inability to successfully
attract and retain these employees could have an adverse effect on our future financial
condition and results of operations. Furthermore, there may be a delay between when
organizational announcements are made and when the organizations are fully effective.

We may be materially affected by the
risks of conducting business outside the United States

International operations accounted
for approximately 57% of our revenue in the first quarter of 2004, compared to 54% in the
same period in 2003. We also sell products through U.S. indirect channel partners that
have some of their end-user customers located outside the United States. We expect that we
will continue to generate a significant portion of our revenue from international
operations.

Our international business may be
affected by changes in demand resulting from global and localized economic, business, and
political conditions. We are subject to the risks of conducting business outside the
United States, including the following risks:

- Adverse political and economic conditions
- Impositions of tariffs or quotas
- Changes in laws or regulations
- Difficulty in obtaining export licenses
- Potentially adverse tax or labor laws
- The burdens of complying with a variety of foreign laws
- Longer payment cycles typically associated with international sales
- Other factors outside our control

21

---

We expect these risks to increase in
the future as we expand our operations in Eastern Europe, Latin America, and Asia. We
cannot provide any assurance that these factors will not have a material adverse effect on
our financial condition or results of operations in the future.

We may be materially affected by the
WEEE directive

The European Union has finalized the Waste
Electrical and Electronic Equipment (WEEE) directive, which regulates the collection,
recovery, and recycling of waste from electrical and electronic products, and the
Restrictions on the Use of Certain Hazardous Substances in Electrical and Electronic
Equipment (RoHS) directive, which bans the use of certain hazardous materials including
lead, mercury, cadmium, chromium, and halogenated flame-retardants. Under WEEE, we will be
responsible for financing operations for the collection, treatment, disposal, and
recycling of past and future covered products. Because the specific legal requirements
have not been finalized, we are presently unable to reasonably estimate the amount of any
costs that may be necessary in order to comply with WEEE. We cannot provide any assurance
that compliance with WEEE and RoHS will not have a material adverse effect on our
financial condition or results of operations.

Our manufacturing operations may be
materially affected by weather-related risks

We manufacture and assemble a
significant portion of our products in Puerto Rico. Our ability to perform these
activities may be significantly affected by weather-related risks beyond our control. We
believe that if the Puerto Rico facilities were significantly affected by adverse weather,
we could relocate to an alternative facility within a reasonable period of time; however,
we cannot provide any assurance that we would be able to relocate to that facility without
a material adverse impact on our financial condition or results of operations.

We may be materially affected by
restructuring activities

We have recognized significant
restructuring charges in the past and it is possible that changes in our business,
industry, or in the global economy may necessitate restructuring activities in the future.
The necessity for restructuring activities may result in expenses that adversely affect
our financial condition and results of operations and may require incremental cash
payments.

# ITEM 3 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange
Rate Risk

Our primary market risk relates to
changes in foreign currency exchange rates. The functional currency for our foreign
subsidiaries is the U.S. dollar. A significant portion of our revenue is generated by our
international operations. The majority of our international operations involve
transactions denominated in the euro, Pound Sterling, and Japanese yen. An increase in the
exchange value of the U.S. dollar reduces the value of revenue and profits generated by
our international operations. As a result, our financial condition, results of operations,
and cash flows can be materially affected by changes in foreign currency exchange rates.
We attempt to mitigate this exposure as part of our foreign currency hedging program. The
primary goal of our foreign currency hedging program is to reduce the risk of adverse
foreign currency movements on the reported financial results of our non-U.S. dollar
transactions. Factors that could have an impact on the effectiveness of our hedging
program include the accuracy of forecasts and the volatility of foreign currency markets.
All foreign currency derivatives are authorized and executed pursuant to our policies. We
do not hold or issue derivatives or any other financial instruments for trading or
speculative purposes.

22

---

To implement our foreign currency
hedging program, we use foreign currency options and forwards. These derivatives are used
to hedge the risk that forecasted revenue denominated in foreign currencies might be
adversely affected by changes in foreign currency exchange rates. Foreign currency
forwards are also used to reduce our exposure to foreign currency exchange rate
fluctuations in connection with monetary assets and liabilities denominated in foreign
currencies.

A hypothetical 10% adverse movement
in foreign exchange rates applied to our foreign currency exchange rate sensitive
instruments held as of March 26, 2004, and as of December 26, 2003, would result in a
hypothetical loss in fair value of approximately $50.8 million and $59.2 million,
respectively. The decrease in the hypothetical loss is primarily due to a decrease in net
outstanding derivatives. These hypothetical losses do not take our underlying
international operations into consideration. We anticipate that any hypothetical loss
associated with our foreign currency exchange rate sensitive instruments would be
substantially offset by gains associated with our underlying international operations.

Interest Rate Risk

Changes in interest rates affect
interest income earned on our cash investments, as well as interest expense on short-term
borrowings. A hypothetical 10% adverse movement in interest rates applied to cash
investments would not have a material adverse effect on our financial condition, results
of operations, or cash flows.

Credit Risk

We are exposed to credit risk
associated with cash equivalents, investments, foreign currency options and forwards, and
trade receivables. We do not believe that our cash equivalents, investments, or foreign
currency derivatives present significant credit risks, because the counterparties to the
instruments consist of major financial institutions, and we manage the notional amount of
contracts entered into with any one counterparty. Substantially all trade receivable
balances are unsecured. The concentration of credit risk with respect to trade receivables
is limited by the large number of customers in our customer base and their dispersion
across various industries and geographic areas. Although we have a large number of
customers who are dispersed across different industries and geographic areas, a prolonged
economic downturn could increase our exposure to credit risk on our trade receivables. We
perform ongoing credit evaluations of our customers and maintain an allowance for
potential credit losses.

# ITEM 4  CONTROLS
AND PROCEDURES

Under the supervision and with the
participation of management, including the principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures
(as defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934) as
of March 26, 2004, the end of the period covered by this report. Based on their
evaluation, the principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective.

During the fiscal quarter ended March
26, 2004, there has been no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that has materially
affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

23

---

# PART II

# ITEM 1  LEGAL
PROCEEDINGS

For information regarding legal
proceedings, see Note 4 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
included in Part 1, Item 1, of this Form 10-Q, which information is incorporated by
reference into this Part II, Item 1.

# ITEM 2  CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table summarizes our
purchases of our equity securities during the first quarter of 2004:

| |                     |  |  |           |  |   | Total Number of |     | Maximum Number of
| | ------------------- |  |  | --------- |  | - | --------------- | --- | -----------------
|
|
|
| | 12/27/03 - 01/30/04 |  |  | --        |  | $ |                 | --  |                  
| | 01/31/04 - 02/27/04 |  |  | 842,700   |  |   | 29              | .20 |                  
| | 02/28/04 - 03/26/04 |  |  | 157,300   |  |   | 29              | .13 |                  
| |                     |  |  |           |  |  
| | Total               |  |  | 1,000,000 |  | $ | 29              | .19 |                  
| |                     |  |  |           |  |  

(1)    
          Excludes shares withheld to satisfy minimum tax withholding requirements
          associated with restricted stock lapses. 
         (2)    
          In January 2004, our Board of
          Directors authorized a stock repurchase program to acquire up to 1,000,000
          shares of common stock per quarter through 2005.

# 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 (previously filed as Exhibit 3.1 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Certificate of Amendment dated May 22, 1989, to the Restated Certificate of Incorporation
dated July 28, 1987 (previously filed as Exhibit 3.2 to the Companys Annual Report
on Form 10-K for the fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

---

|3.3 |  | Certificate of Second Amendment dated May 28, 1992, to the Restated Certificate of
Incorporation dated July 28, 1987 (previously filed as Exhibit 3.3 to the Companys
Annual Report on Form 10-K for the fiscal year ended December 29, 2000, filed on February
21, 2001, and incorporated herein by reference)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.4 |  | Certificate of Third Amendment dated May 21, 1999, to the Restated Certificate of
Incorporation dated July 28, 1987 (previously filed as Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended June 25, 1999, filed on August
9, 1999, and incorporated herein by reference)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.5 |  | Restated Bylaws of Storage Technology Corporation, as amended through November 16, 2002
(previously filed as Exhibit 3.5 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 27, 2002, filed on March 7, 2003, and incorporated herein by
reference)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10.1 1 |  | Storage Technology Corporation Amended and Restated 1987 Employee Stock Purchase Plan, as
amended through May 21, 2003 (previously filed as Exhibit 4.6 to the Companys
Registration Statement on Form S-8 (Registration No. 333-106930) filed on July 10, 2003,
and incorporated herein by reference)
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 1 |  | Storage Technology Corporation Amended and Restated 1995 Equity Participation Plan, as
amended through December 2001 (previously filed as Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2003, filed on
November 10, 2003, and incorporated herein by reference)
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 1 |  | Storage Technology Corporation Management by Objective Bonus Plan (previously filed as
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter
ended March 30, 2001, filed on May 14, 2001, and incorporated herein by reference)
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 1 |  | Storage Technology Corporation Amended and Restated Stock Option Plan for Non-Employee
Directors (previously filed as Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended June 28, 1996, filed on August 12, 1996, and
incorporated herein by reference)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 1 |  | Storage Technology Corporation Flexible Option Plan, dated December 2001 (previously filed
as Exhibit 10.5 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 28, 2001, filed on March 4, 2002, and incorporated herein by reference)
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 1 |  | Severance Agreement, dated as of July 1, 2001, between the Company and Robert S. Kocol
(previously filed as Exhibit 10.9 to the Companys Quarterly Report on Form 10-Q for
the fiscal quarter ended September 28, 2001, filed on November 8, 2001, and incorporated
herein by reference)
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

---

|10.7 1 |  | Restricted Stock Award Agreement, dated as of September 27, 2001, by and between the
Company and Robert S. Kocol (previously filed as Exhibit 10.9 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 28, 2001, filed on March 4, 2002,
and incorporated herein by reference)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 1 |  | Offer Letter, dated May 10, 2001, from the Company to Michael McLay (previously filed as
Exhibit 10.17 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein by reference)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 1 |  | Offer Letter, dated February 9, 2001, from the Company to Roger Gaston (previously filed
as Exhibit 10.20 to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 30, 2001, filed on May 14, 2001, and incorporated herein by reference)
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 1 |  | Promissory Note, dated May 11, 2001, from Michael McLay to the Company, in the principal
amount of $390,000 (previously filed as Exhibit 10.23 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on August 9, 2001,
and incorporated herein by reference)
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 1 |  | Promissory Note, dated May 11, 2001, from Michael McLay to the Company, in the principal
amount of $160,000 (previously filed as Exhibit 10.24 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on August 9, 2001,
and incorporated herein by reference)
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 1 |  | Form of LEAP Participation Agreement, dated April 30, 2001 (previously filed as Exhibit
10.25 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended
June 29, 2001, filed on August 9, 2001, and incorporated herein by reference)
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 1 |  | Offer Letter, dated July 16, 2001, from the Company to Roy Perry (previously filed as
Exhibit 10.28 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter
ended September 28, 2001, filed on November 8, 2001, and incorporated herein by reference)
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 1 |  | Offer Letter, dated June 27, 2001, from the Company to Angel Garcia (previously filed as
Exhibit 10.29 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter
ended September 28, 2001, filed on November 8, 2001, and incorporated herein by reference)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Credit Agreement, dated as of October 10, 2001, among the Company, the several financial
institutions thereto, Bank of America, N.A., as letter of credit issuing bank and sole
administrative agent for the Banks, Key Corporate Capital, Inc. as Documentation Agent,
Fleet National Bank as Syndication Agent, and Banc of America Securities LLC as sole lead
arranger and sole book manager (previously filed as Exhibit 10.13 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2001, filed on
November 8, 2001, and incorporated herein by reference)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Security Agreement, dated as of October 10, 2001, by and among the Company, Bank of
America, N.A., as Collateral Agent for itself and other Secured Parties referred to
therein (previously filed as Exhibit 10.14 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended September 28, 2001, filed on November 8, 2001, and
incorporated herein by reference)
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

|10.17 |  | Guaranty, dated as of October 10, 2001, by StorageTek Holding Corporation, in favor of the
Banks party to a certain Credit Agreement and Bank of America, N.A., as Agent and Issuing
Bank and Collateral Agent (previously filed as Exhibit 10.15 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2001, filed on
November 8, 2001, and incorporated herein by reference)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 1 |  | Form of Executive Severance Agreement (previously filed as Exhibit 10.32 to the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2002,
filed on May 13, 2002, and incorporated herein by reference)
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Master Services Agreement (MSA), between each of the Company, Electronic Data Systems
Corporation, and EDS Information Services L.L.C., dated as of April 1, 2002 (previously
filed as Exhibit 10.33 to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 29, 2002, filed on May 13, 2002, and incorporated herein by reference)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Authorization Letter #1 pursuant to the MSA, dated April 1, 2002 (previously filed as
Exhibit 10.34 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2002, filed on May 13, 2002, and incorporated herein by reference)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Authorization Letter #2 pursuant to the MSA, dated April 1, 2002 (previously filed as
Exhibit 10.35 to the Companys Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2002, filed on May 13, 2002, and incorporated herein by reference)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Master Secondary Storage Services Agreement, between the Company and Electronic Data
Systems Corporation, dated March 29, 2002 (previously filed as Exhibit 10.36 to the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2002,
filed on May 13, 2002, and incorporated herein by reference)
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 1 |  | Offer Letter, dated June 25, 2002, between the Company and Mark Roellig (previously filed
as Exhibit 10.28 to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended June 28, 2002, filed on August 12, 2002, and incorporated herein by
reference)
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 1 |  | Form of Indemnification Agreement, dated as of November 22, 2002, between the Company and
each director (previously filed as Exhibit 10.31 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 27, 2002, filed on March 7, 2003, and
incorporated herein
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 1 |  | Offer Letter, dated November 12, 2002, between the Company and Pierre Cousin (previously
filed as Exhibit 10.33 to the Companys Annual Report on Form 10-K for the fiscal
year ended December 27, 2002, filed on March 7, 2003, and incorporated herein by
reference)
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 1 |  | Agreement, dated December 1, 2002, between the Company and Pierre Cousin (previously filed
as Exhibit 10.34 to the Companys Annual Report on Form 10-K for the fiscal year
ended December 27, 2002, filed on March 7, 2003, and incorporated herein by reference)
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 1 |  | Amended and Restated CEO Employment Agreement, dated March 27, 2003, between the Company
and Patrick J. Martin (previously filed as Exhibit 10.36 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended March 28, 2003, filed on May 9, 2003, and
incorporated herein by reference)
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

|10.28 1 |  | Form of Executive Agreement, dated as of February 12, 2003, between the Company and each
executive officer (previously filed as Exhibit 10.37 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended March 28, 2003, filed on May 9, 2003, and
incorporated herein by reference)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Letter, dated July 24, 2003, from the Company to Bank of America, N.A. (previously filed
as Exhibit 10.32 to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended June 27, 2003, filed on August 8, 2003, and incorporated herein by
reference)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 1,2 |  | Offer Letter, dated December 12, 2003, between the Company and Mark Ward
|--------- |  | ------------------------------------------------------------------------

|10.31 1,2 |  | Offer Letter, dated March 1, 2004, between the Company and Eula Adams
|--------- |  | ---------------------------------------------------------------------

|31.1 2 |  | Certification  Pursuant to Exchange Act Rules 13a-14 and 15d-14,  as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------

|31.2 2 |  | Certification  Pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted
Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------

|32.1 2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|------ |  | ----------------------------------------------------------------------------------------------------------------------

|32.2 2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|------ |  | ----------------------------------------------------------------------------------------------------------------------

_________________

1  Contract or compensatory plan or
arrangement in which directors and/or officers participate 
2  Indicates exhibit filed with this Quarterly Report on Form 10-Q

(b)    
          Reports on Form 8-K.

Current report on Form 8-K, filed on
January 12, 2004, relating to an Item 9, Regulation FD Disclosure, regarding a press
release issued by the Company announcing higher-than-anticipated fourth quarter 2003
financial results.

Current report on Form 8-K, filed on
January 22, 2004, relating to an Item 9, Regulation FD Disclosure, regarding a share
repurchase program. Also relating to an Item 12, Results of Operations and Financial
Condition, regarding an announcement by the Company of its results of operations for the
fiscal quarter and fiscal year ended December 26, 2003, including a copy of the script of
the prepared remarks of the Companys Chief Executive Officer and Chief Financial
Officer from a conference call regarding such results of operations.

Amended current report on Form 8-K/A,
filed on January 23, 2004, relating to an Item 9, Regulation FD Disclosure, and an Item
12, Results of Operations and Financial Condition, replacing the copy of the script of the
prepared remarks of the Chief Financial Officer filed the previous day.

28

---

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.

|May 5, 2004(Date)
May 5, 2004(Date) |  | STORAGE TECHNOLOGY CORPORATION(Registrant)    /s/ ROBERT S. KOCOL
Robert S. KocolCorporate Vice Presidentand Chief Financial Officer(Principal Financial Officer)
/s/ THOMAS G. ARNOLD
Thomas G. ArnoldVice President and Corporate Controller(Principal Accounting Officer)
|--------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29