FORM 10-Q

==============================================================================


                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

         [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                       SECURITIES EXCHANGE ACT OF 1934

              FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1998

                                      OR

         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _______ to ________

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

                        COMMISSION FILE NUMBER 1-7534

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



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

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

  2270 South 88th Street, Louisville,                          80028-4309
               Colorado

    (Address of principal executive                            (Zip Code)
               offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. /X/ YES / / NO

                     APPLICABLE ONLY TO CORPORATE ISSUERS

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

Common stock ($.10 Par Value) - 99,833,815  shares  outstanding at October 30,
1998.


<PAGE>
                                                               Form 10-Q, Page 2



               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                              INDEX TO FORM 10-Q
                              SEPTEMBER 25, 1998

                                                                          PAGE
                                                                          ----
PART I - FINANCIAL INFORMATION

      Item 1 - Financial Statements

              Consolidated Balance Sheet                                    3

              Consolidated Statement of Operations                          4

              Consolidated Statement of Cash Flows                          5

              Consolidated Statement of Changes in
                 Stockholders' Equity                                       6

              Notes to Consolidated Financial Statements                    7

      Item 2 - Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                       11

PART II - OTHER INFORMATION

      Item 1 - Legal Proceedings                                           24

      Item 6 - Exhibits and Reports on Form 8-K                            26


<PAGE>
                                                               Form 10-Q, Page 3



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

                                                          09/25/98
                                                        (Unaudited)   12/26/97
                                                        ----------------------
ASSETS
Current assets:
 Cash and cash equivalents                              $  217,792  $  256,319
 Short-term investments                                                 77,275
 Accounts receivable                                       657,541     627,981
 Inventories (Note 2)                                      265,511     205,461
 Deferred income tax assets                                101,936     102,575
                                                         ---------   ---------
     Total current assets                                1,242,780   1,269,611
Property, plant and equipment, at cost                     304,276     305,122
Spare parts for maintenance, at cost                        29,639      27,523
Deferred income tax assets                                  33,409      37,468
Other assets                                               105,155     100,293
                                                         ---------   ---------
                                                        $1,715,259  $1,740,017
                                                         =========   =========

LIABILITIES
Current liabilities:
 Revolving credit facility (Note 3)                     $  330,000
 Current portion of long-term debt                           1,688  $    3,282
 Accounts payable                                          124,770     103,483
 Accrued liabilities                                       327,957     406,384
 Income taxes payable                                       81,719      95,256
                                                         ---------   ---------
     Total current liabilities                             866,134     608,405
Long-term debt                                              17,948      19,109
                                                         ---------   ---------
     Total liabilities                                     884,082     627,514
                                                         ---------   ---------

Commitments and contingencies (Note 4)


STOCKHOLDERS' EQUITY
Common stock, $.10 par value,  150,000,000 shares 
  authorized;  99,863,464 shares issued at 
  September 25, 1998, and 108,008,082 shares 
  issued at December 26, 1997 (Note 6)                       9,986      10,800
Capital in excess of par value                             719,278   1,161,997
Retained earnings (accumulated deficit)                    106,629     (39,017)
Treasury stock of 117,271 shares at 
  September 25, 1998, and 918,896 shares at 
  December 26, 1997                                         (2,409)    (18,874)
Unearned compensation                                       (2,307)     (2,403)
                                                         ---------   ---------
     Total stockholders' equity                            831,177   1,112,503
                                                         ---------   ---------
                                                        $1,715,259  $1,740,017
                                                         =========   =========


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



<PAGE>
                                                               Form 10-Q, Page 4



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

                                      Quarter Ended        Nine Months Ended 
                                  -------------------------------------------
                                  09/25/98   09/26/97     09/25/98   09/26/97
                                  -------------------------------------------
Sales revenue                     $405,357   $371,235   $1,127,350 $1,038,764
Maintenance revenue                165,703    153,933      470,907    442,023
                                   -------    -------    ---------  ---------
  Total revenue                    571,060    525,168    1,598,257  1,480,787
                                   -------    -------    ---------  ---------

Cost of sales                      207,549    201,818      570,651    567,016
Cost of maintenance                 97,239     83,565      272,272    243,323
                                   -------    -------    ---------  ---------
  Total cost of revenue            304,788    285,383      842,923    810,339
                                   -------    -------    ---------  ---------

  Gross profit                     266,272    239,785      755,334    670,448

Research and product development
  costs                             60,880     52,445      171,800    149,403
Marketing, general, administrative
  and other income and expense, 
  net                              122,955    120,597      355,818    338,251
                                   -------    -------    ---------  ---------

  Operating profit                  82,437     66,743      227,716    182,794

Interest income                      1,975      8,807       12,345     23,693
Interest expense                    (2,689)      (820)      (5,138)    (3,484)
                                   -------    -------    ---------  ---------

  Income before income taxes        81,723     74,730      234,923    203,003

Provision for income taxes         (31,100)   (20,200)     (89,300)   (54,900)
                                   -------    -------    ---------  ---------

  Net income                      $ 50,623   $ 54,530   $  145,623 $  148,103
                                   =======    =======    =========  =========


EARNINGS PER COMMON SHARE (NOTE 6)

Basic earnings per share          $   0.50   $   0.44   $     1.38 $     1.21
                                   =======    =======    =========  =========
Weighted-average shares            102,178    123,189      105,242    122,890
                                   =======    =======    =========  =========


Diluted earnings per share        $   0.48   $   0.44   $     1.35 $     1.19
                                   =======    =======    =========  =========
Weighted-average and dilutive
  potential shares                 104,723    125,196      108,030    125,104
                                   =======    =======    =========  =========


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


<PAGE>
                                                               Form 10-Q, Page 5



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


                                                        Nine Months Ended     
                                                    ------------------------
                                                      09/25/98    09/26/97
                                                    ------------------------
OPERATING ACTIVITIES
Cash received from customers                        $ 1,544,947 $ 1,540,974
Cash paid to suppliers and employees                 (1,389,800) (1,162,562)
Interest received                                        12,345      22,738
Interest paid                                            (4,182)     (2,667)
Income taxes paid                                       (92,907)    (52,089)
                                                     ----------  ----------
   Net cash provided by operating activities             70,403     346,394
                                                     ----------  ----------
INVESTING ACTIVITIES
Short-term investments, net                              77,275    (216,834)
Purchase of property, plant and equipment, net          (70,239)    (39,824)
Other assets                                             (9,774)     16,243
                                                     ----------  ----------
   Net cash used in investing activities                 (2,738)   (240,415)
                                                     ----------  ----------
FINANCING ACTIVITIES
Repurchases of common stock (Note 6)                   (458,270)    (40,726)
Repayments of other debt                                 (3,863)     (3,513)
Proceeds from revolving credit facility                 330,000
Proceeds from employee stock plans                       25,744      17,373
                                                     ----------  ----------
   Net cash used in financing activities               (106,389)    (26,866)
                                                     ----------  ----------
   Effect of exchange rate changes on cash                  197     (12,979)
                                                     ----------  ----------
Increase (decrease) in cash and cash equivalents        (38,527)     66,134
   Cash and cash equivalents - beginning of the
     period                                             256,319     388,401
                                                     ----------  ----------
Cash and cash equivalents - end of the period       $   217,792 $   454,535
                                                     ==========  ==========

RECONCILIATION OF NET INCOME TO NET CASH
  PROVIDED BY OPERATING ACTIVITIES
Net income                                          $   145,623 $   148,103
Depreciation and amortization expense                    91,719      86,728
Translation loss                                          1,052      16,432
Other adjustments to income                               4,531      14,146
(Increase) decrease in accounts receivable              (53,310)     37,603
(Increase) decrease in inventories                      (57,273)     13,233
Increase in spare parts for maintenance, net            (14,605)     (2,043)
Decrease in net deferred income tax asset                 4,764      15,537
Increase (decrease) in accounts payable and 
  accrued liabilities                                   (38,627)     29,381
Decrease in income taxes payable                        (13,471)    (12,726)
                                                     ----------  ----------
   Net cash provided by operating activities        $    70,403 $   346,394
                                                     ==========  ==========


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



<PAGE>
                                                               Form 10-Q, Page 6



<TABLE>
<CAPTION>
   

                                                         STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                                                    CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                           (Unaudited)
                                                                   (In Thousands of Dollars)

                                                                        Retained                        
                                                       Capital in       Earnings                        
                                            Common      Excess of    (Accumulated   Treasury      Unearned  
                                            Stock       Par Value       Deficit)     Stock      Compensation        Total
                            -------------------------------------------------------------------------------------------------     
<S>                                      <C>           <C>             <C>         <C>            <C>                <C>
                                                                                                                                  
  Balances, December 26, 1997, as                                                      
    previously reported                  $  5,400      $1,161,997      $(33,617)   $(18,874)      $(2,403)        $1,112,503
  2-for-1 stock split in the form
    of a stock dividend (Note 6)            5,400                        (5,400)                         
                                          -------       ---------       -------     -------        ------          ---------
  Balances, December 26, 1997,                                                         
    as restated                            10,800       1,161,997       (39,017)    (18,874)       (2,403)         1,112,503
  Shares issued under stock purchase                                                   
    plan, and for exercises of options                                                  
    (1,515,248 shares, including 808,254                                                
    shares issued from treasury)               71          14,771                    16,601                           31,443
  Repurchases of common stock                                                          
    (8,822,500 shares) (Note 6)              (882)       (370,403)                                                  (371,285)
  Final price adjustment for                                                           
    common stock repurchased                                                            
    in October 1997 (Note 6)                              (87,030)                                                   (87,030)
  Net income                                                            145,623                                      145,623
  Other                                        (3)            (57)           23        (136)           96                (77)
                                          -------       ---------       -------     -------        ------          ---------
  Balances, September 25, 1998           $  9,986      $  719,278      $106,629    $ (2,409)      $(2,307)        $  831,177
                                          =======       =========       =======     =======        ======          =========


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

</TABLE>

<PAGE>
                                                               Form 10-Q, Page 7



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


NOTE 1 - BASIS OF PREPARATION
-----------------------------

The  accompanying   consolidated  financial  statements  of  Storage  Technology
Corporation and its subsidiaries  (StorageTek or the Company) have been prepared
in accordance with the Securities and Exchange Commission  requirements for Form
10-Q. In the opinion of management,  these  statements  reflect all  adjustments
necessary for the fair  presentation of results for the periods  presented,  and
such adjustments are of a normal,  recurring  nature.  For further  information,
refer to the  consolidated  financial  statements and footnotes  included in the
Company's Annual Report on Form 10-K for the year ended December 26, 1997.


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

Inventories consist of the following (in thousands of dollars):

                                              09/25/98          12/26/97
                                           -----------------------------
      Raw materials                          $  47,834         $  32,607
      Work-in-process                           90,454            57,235
      Finished goods                           127,223           115,619
                                               -------           -------
                                              $265,511          $205,461
                                               =======           =======


NOTE 3 - DEBT AND FINANCING ARRANGEMENTS
----------------------------------------

The  Company  has  a  $350,000,000  unsecured  revolving  credit  facility  (the
Revolver)  which expires in October 2001. The credit limit  available  under the
Revolver will be reduced by $12,500,000 on the last day of each calendar quarter
beginning December 31, 1998. The interest rates under the Revolver depend on the
type of advance  selected.  The basic  advance  rate is not less than the London
Interbank Offered Rate (LIBOR) plus 0.625%  (approximately 6.01% as of September
25,  1998).  The  Revolver  contains  certain  financial  and  other  covenants,
including  restrictions on the Company's payment of cash dividends on its common
stock. As of September 25, 1998, the Company had borrowings of $330,000,000  and
had issued letters of credit for approximately  $100,000 under the Revolver. The
remaining  available  credit under the Revolver as of  September  25, 1998,  was
approximately  $19,900,000.  The interest rate on the $330,000,000 of borrowings
under the Revolver varied from approximately 6.22% to 8.50%.

The Company has a financing  agreement with a bank that provides for the sale of
promissory  notes in the principal amount of up to $140,000,000 at any one time.
The agreement,  which expires in January 2000,  provides for  commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
The notes must be repaid only to the extent of future revenue of the Company and
obligations  under the agreement are not  cancelable by the Company or the bank.
Transaction gains and losses related to the notes are deferred and recognized as
an adjustment  to the revenue  supporting  the note  repayment.  The  promissory
notes,  together with accrued  interest,  are payable in U.S.  dollars within 40
days from the date of
<PAGE>
                                                               Form 10-Q, Page 8


issuance and bear interest at rates no less than the LIBOR
rate plus 0.35%  (approximately 5.74% as of September 25, 1998). Under the terms
of the agreement,  the Company is required to comply with certain covenants and,
under certain  circumstances,  may be required to maintain a collateral account,
including  cash and  qualifying  investments,  in an  amount of no less than the
outstanding  promissory  notes.  As of September  25,  1998,  the Company had no
outstanding  borrowings and had committed to borrowings between October 1998 and
December 1999 in the cumulative principal amount of approximately $331,120,000.


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

In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder  County,  Colorado,  District  Court against the
Company and certain  subsidiaries.  The suit alleged that the Company breached a
1990  settlement  agreement  that had resolved  earlier  litigation  between the
parties.  The suit  sought  injunctive  relief  and  damages  in the  amount  of
$2,400,000,000.  On December 28, 1995, the court dismissed the complaint.  Stuff
appealed  the  dismissal to the Colorado  Court of Appeals.  In April 1996,  the
trial court stayed  discovery on the  Company's  counterclaim  for breach of the
covenant not to sue pending  resolution of the appeal.  In March 1997, the Court
of Appeals  reversed the District  Court's judgment and remanded the case to the
District Court for further  proceedings.  In December 1997, the Colorado Supreme
Court rejected the Company's petition seeking a reversal of this decision. A new
trial date has not been set. The case is in the discovery phase.

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

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

On October 3, 1995,  certain  former  employees of the Company filed suit in the
U.S.  District  Court for the  District of Colorado  against  the  Company.  The
amended suit alleges  violations of the Age  Discrimination  in  Employment  Act
(ADEA) and the  Employee  Retirement  Income  Security  Act (ERISA)  between the
period of April 13, 1993, and December 31, 1996. On November 26, 1997, the Court
granted the  plaintiffs'  request to proceed as a collective  action 
<PAGE>
                                                               Form 10-Q, Page 9


on the ADEA claims. On November 6, 1998, the Court issued a ruling from the 
bench granting the plaintiffs' request to proceed as a class on the ERISA 
claims.  Approximately 1,266 persons are eligible members of the ERISA class, 
which includes approximately  400  persons of the ADEA class.  The  plaintiffs  
seek, among other things,  compensatory damages in an unspecified amount, 
including the value of back pay and benefits; reinstatement as employees or  
alternatively the value of future  earnings and benefits;  and exemplary or 
liquidated damages.  The Company has filed an answer  denying both the ADEA and 
ERISA claims. A trial has been set for October 1999.

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


NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
---------------------------------------------

In June 1997, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 131,  "Disclosures about Segments of
an Enterprise  and Related  Information."  SFAS No. 131,  which is effective for
fiscal years  beginning  after  December 15, 1997,  establishes  new  disclosure
requirements for operating segments,  including products,  services,  geographic
areas,  and major  customers.  The Company  will adopt SFAS No. 131 for the 1998
fiscal year, but does not expect the new accounting  standard to have a material
impact on the Company's reported financial results.

In March 1998, the American  Institute of Certified  Public  Accountants  issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed  or Obtained  for  Internal  Use." SOP 98-1,  which is  effective  for
transactions  in fiscal  years  beginning  after  December  15,  1998,  provides
guidance on accounting for the costs of computer software  developed or obtained
for internal use. The Company will adopt SOP 98-1 for the 1999 fiscal year,  but
does not expect the new SOP to have a material effect on its reported  financial
results.

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

<PAGE>
                                                              Form 10-Q, Page 10


NOTE 6 - COMMON STOCK
---------------------

In May 1998,  the Company's  board of directors  authorized a two-for-one  stock
split  effective  in the  form of a 100%  stock  dividend  paid on the  close of
business June 26, 1998, to  shareholders of record on June 5, 1998. All earnings
per common share amounts,  references to common stock, and  stockholders  equity
amounts  have been  restated  as if the stock  dividend  had  occurred as of the
earliest period presented.

In connection with the 16,000,000  shares of common stock repurchased in October
1997, the Company paid $87,030,000 as a final purchase price adjustment in April
1998. During the first nine months of 1998, the Company  repurchased and retired
an aggregate of 8,822,500  shares of its common stock through a  combination  of
privately  negotiated  and open market  repurchase  transactions.  The aggregate
purchase price for those  transactions  was $272,365,000  after  considering the
effects of a price adjustment of $98,875,000  received by the Company in October
1998.  The  shares  repurchased  during the first  nine  months of 1998  include
7,472,500 shares repurchased  pursuant to the Company's plan to repurchase up to
$800,000,000 of its common stock which was announced in October 1997, as well as
1,350,000 shares repurchased under an existing stock repurchase program.


<PAGE>
                                                              Form 10-Q, Page 11



                  STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                              SEPTEMBER 25, 1998


ALL ASSUMPTIONS, ANTICIPATIONS, EXPECTATIONS AND FORECASTS CONTAINED IN THE
FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE PRODUCT AND BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS.  THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY  BECAUSE OF A NUMBER OF RISKS AND
UNCERTAINTIES, SOME OF THESE RISKS ARE DETAILED BELOW IN "RISK FACTORS THAT MAY
AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS FORM 10-Q.

STATEMENTS MADE HEREIN ARE ACCURATE ONLY AS OF THE DATE OF FILING THIS FORM 10-Q
WITH THE SECURITIES  AND EXCHANGE COMMISSION AND MAY ONLY BE RELIED UPON AS OF
THAT DATE.  THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION ON
FORECASTS CONTAINED HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.


GENERAL
-------

The Company  reported net income for the third quarter ended September 25, 1998,
of $50.6  million on revenue of $571.1  million,  compared to net income for the
same period in 1997 of $54.5 million on revenue of $525.2 million. Net income of
$145.6  million  was  reported  for the nine  months of 1998 on revenue of $1.60
billion, compared to net income of $148.1 million for the nine months of 1997 on
revenue of $1.48 billion.

Revenue  increased  9% and 8% during the third  quarter and nine months of 1998,
respectively,  compared to the same periods in 1997.  The increase in revenue is
primarily a result of  increased  sales of  client-server  tape and disk storage
products,  and online mainframe products. The increase was partially offset by a
decline in sales  revenue from  Nearline(R)  mainframe  products.  Overall gross
profit margin increased to 47% during the third quarter and nine months of 1998,
respectively,  compared  to 46% and  45% for the  same  periods  in  1997.  This
increase  was  principally  due to  increased  sales of  higher-margin  software
products and cost reductions achieved in the Company's manufacturing processes.

The Company's future revenue and operating results are  significantly  dependent
upon effectively managing several new Nearline product introductions;  sustained
demand for  mainframe  products  in their  traditional  markets;  expanding  the
Company's  market presence in the  client-server  and  network-attached  storage
environments;  developing new applications  for its products;  and expanding its
distribution  channels.  For the discussion of these and other risk factors, see
"Risk Factors That May Affect Future Results" below.

The Company's cash and short-term  investment  balances decreased $115.8 million
during the nine months of 1998  primarily due to cash payments of $458.3 million
associated  with  the  Company's  common  stock  repurchase   programs  and  net
investments in property, plant and equipment of $70.2 million. These repurchases
and  investments  were  partially  funded  by  borrowings  under  the  Company's
revolving credit facility of $330 million, a reduction of short-term investments
of $77.3 million, and cash generated from operating activities of $70.4 million.
<PAGE>
                                                              Form 10-Q, Page 12


The  following  table,  stated  as  a  percentage  of  total  revenue,  presents
Consolidated  Statement of Operations  information  and revenue by product line,
which includes both product sales and maintenance revenue.

                                    Quarter Ended       Nine Months Ended 
                                  ----------------------------------------
                                  09/25/98 09/26/97     09/25/98  09/26/97
                                  ----------------------------------------
Revenue:

   Nearline products                 61.8%    66.8%        62.7%     65.7%
   Online products                   27.1     21.5         26.0      22.6
   Network and other products        11.1     11.7         11.3      11.7
                                    -----    -----        -----     -----
     Total revenue                  100.0    100.0        100.0     100.0
Cost of revenue                      53.4     54.3         52.7      54.7
                                    -----    -----        -----     -----
     Gross profit                    46.6     45.7         47.3      45.3
Research and product development
  costs                              10.7     10.0         10.8      10.1
Marketing, general, administrative
  and other income and expense, net  21.5     23.0         22.3      22.9
                                    -----    -----        -----     -----
     Operating profit                14.4     12.7         14.2      12.3
Interest income, net                 (0.1)     1.5          0.5       1.4
                                    -----    -----        -----     -----
     Income before income taxes      14.3     14.2         14.7      13.7
Provision for income taxes           (5.4)    (3.8)        (5.6)     (3.7)
                                    -----    -----        -----     -----
     Net income                       8.9%    10.4%         9.1%     10.0%
                                    =====    =====        =====     =====


REVENUE
-------

NEARLINE PRODUCTS

Revenue from the Company's  Nearline  products  remained  unchanged in the third
quarter of 1998 and increased 3% for the nine months of 1998, as compared to the
same  periods  in 1997,  as  increased  sales  of  TimberWolf(TM),  a family  of
OPENstorage(TM) tape libraries designed for client-server attachment, was offset
by a decrease in sales revenue from earlier  generation  Nearline  products,  as
well as decreased sales revenue from  TimberLine(R)  9490, a 36-track  cartridge
subsystem;  and  RedWood(R)  SD-3,  a  high-capacity  cartridge  subsystem.  The
decrease in  TimberLine  and RedWood  sales revenue was primarily due to pricing
pressures  and  delays  in  customer  purchase  decisions  associated  with  the
evaluation of new tape solutions  currently under development by the Company, as
well as a continuation of the shift in customer storage requirements.

The rate of revenue  growth in the Company's  mainframe tape products has slowed
as  customers  shift  their  storage  requirements  from  the  mainframe  to the
client-server  and  network-attached  environments.  Future  revenue  growth for
Nearline  products is dependent upon the continued  success of TimberWolf in the
client-server market and the successful  introduction of new tape products.  The
Virtual  Storage  Manager (VSM), a mainframe  data storage  management  solution
designed to improve  performance,  cartridge  utilization,  and overall  storage
management in the mainframe environment, is currently in the beta test and early
ship phase with initial revenue  contribution  anticipated in the fourth quarter
of 1998. The 9840, a high-performance tape drive designed for both the mainframe
and  client-server  environments  is also in the beta test and early  ship phase
with initial revenue contribution anticipated in the fourth quarter of 1998. The
Company's  financial  results in both the fourth quarter of 1998 and during 1999
will be significantly  dependent on the successful  introduction of both VSM and
the 

<PAGE>
                                                              Form 10-Q, Page 13


9840. The introduction of both VSM and the 9840 involves integrating complex
designs,  manufacturing  processes,  and  collaborating  with  suppliers  of key
components.  The failure of a key  component,  a design flaw, or an inability to
obtain sufficient components,  could cause a delay in the introduction of VSM or
the 9840,  or result in  increased  manufacture  or  warranty  costs and have an
adverse  effect on financial  results in the fourth  quarter of 1998 or in 1999.
The transition to these new products may impact sales of the Company's  existing
mainframe  Nearline  products as customers  evaluate  these new tape  solutions.
There can be no assurance  that the Company will be  successful  in managing the
introduction of VSM and the 9840.


ONLINE PRODUCTS

Revenue from the Company's  online  products  increased 37% and 24% in the third
quarter and nine months of 1998,  respectively,  compared to the same periods in
1997,  due to increased  sales of mainframe  products  under the  Company's  OEM
agreement with International Business Machines Corp. (IBM); as well as increased
sales of the Company's products targeted for the client-server environment.

Approximately  20% of the Company's  total revenue  during the third quarter and
nine months of 1998,  respectively,  was derived from sales of online  mainframe
storage  products  to IBM.  There  can be no  assurance  that  sales to IBM will
continue  at  current  volumes in future  periods  as IBM is not  subject to any
long-term volume purchase commitments.  Further, the Company anticipates it will
continue to experience pricing pressure in future periods due to scheduled price
decreases provided for under the terms of the agreement.  See "Risk Factors That
May Affect Future  Results - Dependence  on IBM," for further  discussion of the
risks associated with the OEM agreement.

Success in the  client-server  disk storage  market is critical to the Company's
plans for future revenue growth. While sales of client-server disk products have
increased  in the first  nine  months of 1998,  the  Company  must gain  further
acceptance  for  its  disk  products  in an  intensely  competitive  market  and
successfully develop cost-effective, high-volume distribution channels for these
products in order to accelerate the revenue growth in this market.  There can be
no  assurance  that the Company will be  successful  in its  client-server  disk
initiative.


NETWORK AND OTHER PRODUCTS

Revenue from network and other  products  increased 4% in the third  quarter and
nine  months  of  1998,  respectively,  compared  to the same  periods  in 1997,
primarily  due to an  increase  in  software  revenue  and  maintenance  revenue
associated with third party products.  Revenue from network products was largely
unchanged in the third  quarter and nine months of 1998, as compared to the same
periods in 1997.

Future  revenue  growth from network  products is dependent  upon the  Company's
ability to successfully implement its storage area network (SAN) strategy during
the next year. The SAN strategy  integrates both storage and networking products
to create an open storage  utility.  Growth will  require,  among other  things,
timely  development  and  introduction  of new SAN solutions and  development of
effective distribution channels for these products.

<PAGE>
                                                              Form 10-Q, Page 14


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

Overall  gross profit  margins  increased  to 47% in the third  quarter and nine
months of 1998,  respectively,  compared to 46% and 45% for the same  periods in
1997.

Gross profit on product  sales  increased  to 49% in the third  quarter and nine
months of 1998, compared to 46% and 45% for the third quarter and nine months of
1997,  respectively.  This increase is primarily a result of increased  sales of
higher-margin  software  products and cost reductions  achieved in the Company's
manufacturing  processes. The increase in gross profit as a percent of sales was
partially offset by a shift in sales from  higher-margin  mainframe  products to
lower-margin client-server products, and a shift from higher-margin direct sales
channels to lower-margin indirect sales channels.

Gross  profit  on  maintenance  revenue  decreased  to 41% and 42% in the  third
quarter and nine months of 1998,  respectively,  compared to 46% and 45% for the
same periods in 1997. The decline is principally  attributable  to lower margins
associated  with the Company's  consulting  services  business  which  generally
carries lower margins than the traditional maintenance business.

The  markets for most of the  Company's  products  are subject to intense  price
competition.  The Company  anticipates  that price  competition for its Nearline
products  will  continue to be a major  factor as it expands its presence in the
client-server  storage market and as customers  evaluate new mainframe  Nearline
products  currently  planned for introduction in the fourth quarter of 1998. The
Company  anticipates  that the product  sales  margins for its online  mainframe
products will decline in future periods due to scheduled price  reductions under
the terms of the OEM agreement  with IBM. In addition,  the Company  anticipates
the price competition in the  client-server  market will continue in the future.
The  Company's   ability  to  sustain  or  improve   product  sales  margins  is
significantly  dependent  upon its ability to  continue to reduce  manufacturing
costs in all of its product lines as well as increasing  sales of  higher-margin
software  products.  Product  sales  margins  also may be affected by  inventory
reserves and writedowns resulting from rapid technological changes and delays in
gaining market acceptance for new products. Maintenance margins may be adversely
affected in the future as a result of increased  competition  and lower  margins
associated with the Company's consulting services business.


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

Research and product development expenditures increased 16% and 15% in the third
quarter and nine months of 1998,  respectively,  compared to the same periods in
1997. The increased investment in new product development  activities during the
third quarter and nine months of 1998 was partially  offset by funding  received
from Compaq Computer Corp. (Compaq) for certain research and product development
activities for client-server data storage solutions and networking products, and
from IBM for  enhancements  to the  Company's  mainframe  online  products.  The
Company's research and product development expenditures are expected to continue
to  increase  in the  fourth  quarter  of 1998  and in 1999 as a  result  of the
significant  product  development  activities  currently  underway in all of the
Company's  products.  The  Company  also  currently  anticipates  a  decline  of
approximately   $40  million  in  the  level  of  annual  research  and  product
development  funding  received from  third-parties in 1999, as compared to 1998.
The expected increase in research and product development expense as a result of
the 


<PAGE>
                                                              Form 10-Q, Page 15


decreased funding,  could be partially offset due to reduced spending as the
Company is consolidating various research and product development efforts.


MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
--------------------------------------------

Marketing, general, administrative and other income and expense (MG&A) increased
2% and 5% in the third quarter and nine months of 1998,  respectively,  compared
to the same  periods in 1997.  The  increase is  primarily a result of increased
investment in internal business and financial  information systems. The increase
was partially offset by reduced  accruals for employee bonus and  profit-sharing
payments in 1998,  as compared  to 1997,  as the Company did not attain  certain
goals in the first  nine  months of 1998.  MG&A for the third  quarter  and nine
months of 1997 also included gains  realized on the sale of accounts  receivable
of  approximately  $10.5 million and $22.6  million,  respectively.  The Company
anticipates  that MG&A expense will increase in 1999 as the Company  expands its
direct distribution channels for its mainframe storage products and solutions.


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

Interest  income  decreased  78% and 48% in the third quarter and nine months of
1998, respectively, compared to the same periods in 1997, primarily because of a
decrease in cash available for investment.  Interest expense  increased 228% and
47% in the third  quarter  and nine  months  of 1998,  as  compared  to the same
periods in 1997, due to an increase in short-term borrowings under the Company's
revolving  credit  agreement.  The  decrease in interest  income and increase in
interest  expense  was  largely  due to the  cash  requirements  related  to the
Company's  stock  repurchase  program.  See  Note  6 of  NOTES  TO  CONSOLIDATED
FINANCIAL  STATEMENTS  for further  discussion  of the  Company's  common  stock
repurchase programs.


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

The  Company's  effective tax rate  increased  from 27% for the third quarter of
1997  to 38% for the  third  quarter  of  1998  as the  Company  has  recognized
substantially  all of its remaining net deductible  temporary  differences,  tax
credit  carryforwards and net operating loss carryforwards in the United States.
The  Company's  remaining  deferred  income  tax asset  valuation  allowance  of
approximately $22.9 million as of September 25, 1998, relates principally to net
deductible temporary differences and net operating loss carryforwards associated
with the Company's foreign subsidiaries.


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

WORKING CAPITAL

The Company's cash and short-term  investments balances decreased $115.8 million
during the nine months of 1998  primarily due to cash payments of $458.3 million
associated  with  the  Company's  common  stock  repurchase   programs  and  net
investments in property, plant and equipment of $70.2 million. These repurchases
and investments were partially  funded through  borrowings of $330 million under
the Company's revolving credit facility,  a reduction of short-term  investments
of $77.3 million, and cash generated from operating activities of $70.4 million.
<PAGE>
                                                              Form 10-Q, Page 16


In connection with the 16 million shares of common stock  repurchased in October
1997,  the Company paid $87.0 million as a final  purchase  price  adjustment in
April 1998.  During the first nine months of 1998,  the  Company  purchased  and
retired  an  aggregate  of 8.8  million  shares of its  common  stock  through a
combination of privately negotiated and open market repurchase transactions. The
aggregate  purchase  price for  those  transactions  was  $272.4  million  after
considering the effects of a price  adjustment of $98.9 million  received by the
Company in October 1998. The shares  repurchased during the first nine months of
1998 include 7.5 million  shares  repurchased  pursuant to the Company's plan to
repurchase up to $800 million of its common stock which was announced in October
1997,  as well  as 1.3  million  shares  repurchased  under  an  existing  stock
repurchase program.

The current  ratio  decreased  to 1.4 as of September  25, 1998,  from 2.1 as of
December 26, 1997, primarily due to cash and short-term  investments utilized to
fund the stock  repurchase  programs.  Inventory  increased  $60.1  million from
December 26, 1997, to September 25, 1998,  primarily due to increased  inventory
levels for Nearline and online  products.  Accounts  receivable  increased $29.6
million from December 26, 1997, to September 25, 1998,  primarily as a result of
the  implementation  of new  financial  information  systems and  administrative
processes.


AVAILABLE FINANCING LINES

The  Company  has a  $350  million  unsecured  revolving  credit  facility  (the
Revolver)  which expires in October 2001. The credit limit  available  under the
Revolver  will be  reduced  by $12.5  million  on the last day of each  calendar
quarter  beginning  December  31, 1998.  The  interest  rates under the Revolver
depend on the type of advance selected.  The basic advance rate is not less than
the London Interbank Offered Rate (LIBOR) plus 0.625% (approximately 6.01% as of
September  25,  1998).  The  Revolver   contains  certain  financial  and  other
covenants,  including restrictions on the Company's payment of cash dividends on
its common stock.  As of September 25, 1998,  the Company had borrowings of $330
million and had issued  letters of credit for  approximately  $100,000 under the
Revolver.  The remaining available credit under the Revolver as of September 25,
1998, was approximately $19.9 million.  The interest rate on the $330 million of
borrowings under the Revolver varied from approximately 6.22% to 8.50%.

The Company has a financing  agreement with a bank that provides for the sale of
promissory  notes in the principal amount of up to $140 million at any one time.
The agreement,  which expires in January 2000,  provides for  commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
The notes must be repaid only to the extent of future revenue of the Company and
obligations  under the agreement are not  cancelable by the Company or the bank.
Transaction gains and losses related to the notes are deferred and recognized as
an adjustment  to the revenue  supporting  the note  repayment.  The  promissory
notes,  together with accrued  interest,  are payable in U.S.  dollars within 40
days from the date of issuance and bear interest at rates no less than the LIBOR
rate plus 0.35%  (approximately 5.74% as of September 25, 1998). Under the terms
of the agreement,  the Company is required to comply with certain covenants and,
under certain  circumstances,  may be required to maintain a collateral account,
including  cash and  qualifying  investments,  in an  amount of no less than the
outstanding  promissory  notes.  As of September  25,  1998,  the Company had no
outstanding  borrowings and had committed to borrowings between October 1998 and
December  1999  in the  cumulative  principal  amount  of  approximately  $331.1
million.
<PAGE>
                                                              Form 10-Q, Page 17


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


TOTAL DEBT-TO-CAPITALIZATION

The Company's total  debt-to-capitalization  ratio increased from 2% at December
26, 1997, to 30% at September 25, 1998,  primarily due to short-term  borrowings
of $330  million  under the  Company's  Revolver,  coupled  with a  decrease  in
stockholders' equity as a result of the Company's common stock repurchases.  See
"Liquidity  and  Capital   Resources  -  Working  Capital"  above,  for  further
description of the Company's  common stock  repurchase  programs.  See Note 6 of
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS  for  further  discussion  of the
Company's common stock repurchase programs.


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

During  the third  quarter  and nine  months of 1998,  approximately  36% of the
Company's revenue was generated from  international  operations,  as compared to
approximately  33% and 34% for the  third  quarter  and  nine  months  of  1997,
respectively.  The Company  also sells its  products  through  certain  domestic
indirect  distribution channels that have end-user customers located outside the
U.S. The Company  expects  that it will  generate a  significant  portion of its
revenue  from  international  operations  in the  future.  The  majority  of the
Company's international operations involve transactions denominated in the local
currencies of countries within Western Europe;  principally Germany,  France and
the United  Kingdom;  Japan;  Canada and Australia.  An increase in the exchange
value of the U.S.  dollar reduces the value of revenue and profits  generated by
the Company's international operations. As a result, the Company's operating and
financial results can be materially affected by fluctuations in foreign currency
exchange  rates.  In an attempt  to  mitigate  the  impact of  foreign  currency
fluctuations,  the Company  employs a hedging  program  which  utilizes  foreign
currency   options   and  forward   exchange   contracts.   See   "Market   Risk
Management/Foreign Currency Exchange Risk" below.

The Company is subject to the risks of  conducting  business  outside the United
States,  including  changes in, or  impositions  of,  legislative  or regulatory
requirements  and trade  protection  measures,  tariffs,  quotas,  difficulty in
obtaining export licenses,  different tax structures,  foreign currency exchange
rate risks and other  factors  outside the  Company's  control.  Further, the
Company's  international  business  may be  affected  by  changes in demand
resulting from localized economic, political and market conditions.  There can 
be no assurances  that one or more of the  foregoing  factors will not have a 
material adverse effect on the Company's business or financial results in the 
future.

<PAGE>
                                                              Form 10-Q, Page 18



MARKET RISK MANAGEMENT/FOREIGN CURRENCY EXCHANGE RISK
-----------------------------------------------------

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

The Company has a financing agreement with a bank which provides for commitments
by the bank to  purchase  promissory  notes  denominated  in a number of foreign
currencies.  Transaction  gains and losses related to the notes are deferred and
recognized as an adjustment to the revenue  supporting the note  repayment.  See
"Liquidity and Capital Resources - Available  Financing Lines" above for further
discussions of the financing agreement.

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

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

A  hypothetical  10% adverse  movement in foreign  exchange rates applied to the
Company's  foreign  currency  exchange  rate  sensitive  instruments  held as of
December 26, 1997, and as of September 25, 1998,  would result in a hypothetical
loss of  approximately  $26.6  million  and  $55.3  million,  respectively.  The
increase in the  hypothetical  loss during the nine months of 1998 is  primarily
due to an  increase  in  committed  borrowings  under  the  financing  agreement
mentioned above.  These  hypothetical  losses do not take into consideration the
Company's underlying international operations.  The Company anticipates that any
hypothetical  loss associated with the Company's  foreign currency exchange rate
sensitive  instruments  would be offset by gains  associated with its underlying
international operations.
<PAGE>
                                                              Form 10-Q, Page 19



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

NEW PRODUCTS, MARKETS AND DISTRIBUTION CHANNELS

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

The Company currently has two new Nearline  products,  VSM and 9840, in the beta
test and early ship phase with initial revenue  contribution  anticipated in the
fourth  quarter  of 1998.  The  Company's  financial  results in both the fourth
quarter of 1998 and during 1999 are  significantly  dependent on the  successful
introduction  of VSM and the  9840.  The  introduction  of both VSM and the 9840
involves integrating complex designs, manufacturing processes, and collaborating
with suppliers of key components. The failure of a key component, a design flaw,
or an  inability  to obtain  sufficient  components,  could cause a delay in the
introduction of VSM or the 9840, or result in increased  manufacture or warranty
costs and have an adverse  effect on financial  results in the fourth quarter of
1998 or in 1999.  The  transition  to these new products may impact sales of the
Company's  existing  mainframe Nearline products as customers evaluate these new
tape solutions.

The Company  historically has generated a significant portion of its revenue and
operating  profits from  mainframe  products.  The rate of revenue growth in the
Company's  mainframe  tape products has slowed as customers  shift their storage
requirements from the mainframe to the client-server environment.  The Company's
future financial results are significantly  dependent upon the continued success
of the  TimberWolf  tape family in the  client-server  market and  significantly
increasing the Company's  presence in the client-server disk market. The Company
must also  establish  new  cost-effective  distribution  channels in order to be
successful in the  client-server  market.  There can be no  assurances  that the
Company will be successful in these activities.

The Company's increasing dependence on indirect distribution  channels,  such as
OEMs, value-added resellers and value-added  distributors,  will make production
and inventory  planning more complex.  In the event an indirect  partner adjusts
their ordering  pattern,  establishes a new relationship  with a competitor,  or
experiences  financial  difficulties,  the  Company's  operating  and  financial
results  may be  adversely  affected.  See  "Dependence  on IBM,"  below,  for a
discussion of specific issues associated with the Company's  distribution of its
mainframe online products.

<PAGE>
                                                              Form 10-Q, Page 20


DEPENDENCE ON IBM

Approximately  20% of the Company's  total revenue  during the third quarter and
nine  months of 1998,  respectively,  was  derived  from OEM sales of  mainframe
online products to IBM. The Company currently  anticipates that it will derive a
significant  portion of its sales revenue  during the fourth quarter of 1998 and
during 1999 from product sales to IBM.  However,  there can be no assurance that
sales to IBM will  continue at current  volumes in future  periods as IBM is not
subject  to  any  long-term  volume  purchase  commitments  under  a  worldwide,
non-exclusive OEM agreement entered into during December 1997. IBM may terminate
the agreement for convenience or for cause, or upon certain  instances of change
in  control  or  the  occurrence  of  certain  other  conditions.   The  Company
anticipates  that it will  continue  to  experience  pricing  pressure in future
periods due to scheduled price decreases provided for under the terms of the OEM
agreement.  The  Company's  success  under the OEM  agreement  is  significantly
dependent upon achieving certain product  development,  delivery and performance
milestones.  The  Company's  success is also  dependent  upon  IBM's  ability to
successfully market the mainframe online products, and developing and delivering
to the  Company  disk  drives  for  inclusion  in the  products.  Because of the
scheduled price decreases provided for under the OEM agreement, the Company must
continue to reduce costs and expenses associated with manufacturing the products
in order to achieve the expected  benefits  during the remaining term of the OEM
agreement.  The OEM  relationship may also cause the Company to incur additional
costs associated with unanticipated  increases or decreases in manufacturing and
inventory  volumes.  There can be no assurance that the Company will achieve the
milestones  contained in the OEM agreement or that IBM will successfully  market
these products in the future.

In December  1997,  the Company and IBM agreed to a  settlement  with the United
States  Department of Justice (DOJ)  concerning  the Company's OEM  relationship
with IBM. The terms of the  settlement  are contained in a consent  decree which
was  approved by the U.S.  District  Court for the District of Columbia on March
20, 1998. Under the terms of the consent decree, which expires in December 2002,
the Company  must  develop  complementary  domestic  distribution  channels  for
delivery  of its  online  products  in 1999 or the  Company  could be subject to
limitations  on its domestic sales to IBM in the future.  The Company's  current
OEM agreement  with IBM expires in December  2000.  IBM has indicated that it is
currently  developing a competitive  online  product.  As a result,  the Company
anticipates  that IBM will alter or reduce its  purchasing  patterns and may not
extend the relationship with respect to future products.  Failure to develop new
distribution   channels  for  the  Company's  mainframe  online  products  could
adversely affect the Company's  ability to sell its mainframe online products in
future periods.


COMPETITION

The markets for the Company's  products and services are intensely  competitive.
In the mainframe market, the Company's traditional  competitors include IBM, EMC
Corp. and Hitachi LTD.  Competition in the  client-server  market comes from the
Company's  traditional  rivals in the mainframe market, in addition to companies
focused on the client-server industry, such as Sun Microsystems Inc., Compaq and
Hewlett-Packard  Co. A number of the Company's  competitors  have  significantly
greater market presence and financial  resources than the Company.  In addition,
many of the Company's potential  customers in the client-server  market purchase
their storage  requirements  as part of a packaged  server and storage  product,
which may provide a competitive  advantage to the Company's rivals.  The Company
expects to address  this issue by  providing  superior  storage area network and
network-attached   storage  solutions  that  operate  
<PAGE>
                                                              Form 10-Q, Page 21


across  multiple  computer platforms and by establishing distribution 
relationships with these competitors.  The  Company  has  established  
relationships  with  some  of  its  competitors, including Compaq, IBM,  
Hewlett-Packard Co., NCR Corp., Groupe Bull, and Siemens Nixdorf 
Informationssysteme. There can be no assurances that the Company will be able to
successfully  compete  against  other  companies in the  mainframe  and
client-server markets.


VOLATILITY OF STOCK PRICE; EARNINGS FLUCTUATIONS

The trading price of the  Company's  common stock has  fluctuated  significantly
from  period-to-period  in the  past,  and may  fluctuate  significantly  in the
future.   Industry   conditions,  new  product  or  product   development
announcements  by the Company or its  competitors,  announced  acquisitions  and
joint ventures by the Company or its competitors,  broad market trends unrelated
to the Company's  performance,  changes in revenue or earnings  estimates by the
investment  community,  global economic conditions and foreign currency exchange
rate  fluctuations  are among the factors  that can affect the  Company's  stock
price. In addition,  if the Company's  reported  operating results are below the
expectations of stock market analysts and investors, there could be an immediate
and  significant  adverse  effect on the trading price of the  Company's  common
stock.

The Company's  financial and operating results may fluctuate in the future for a
number of reasons.  Factors such as  customers'  historical  tendencies  to make
purchase  decisions  near  the  end of the  calendar  year,  the  timing  of the
announcement   and   availability  of  new  products  by  the  Company  and  its
competitors, fluctuating foreign currency exchange rates, changes in the mix and
configuration of products sold, rapid price erosion, and the purchasing patterns
of  the  Company's  OEM  partners  and  global  economic   conditions  make  the
forecasting  of revenue  inherently  difficult and could cause  period-to-period
fluctuations in operating results.


SOLE SOURCE SUPPLIERS

The Company  generally  uses standard  parts and components for its products and
believes  that,  in most  cases,  there are a number of  alternative,  competent
vendors for most of those parts and  components.  Certain of the  Company's  key
components  and products are purchased  from single  suppliers  that the Company
believes are currently the only manufacturers of the particular  components that
meet the Company's  qualification  requirements and other  specifications or for
which alternative sources of supply are not readily available. In particular,  a
key  component  of the  Company's  tape  drive  heads is  supplied  by  Sumitomo
Corporation  on a sole source  basis.  Certain of the Company's  suppliers  have
experienced  occasional technical,  financial or other problems in the past that
have delayed  deliveries,  but without  significant  effect on the  Company.  An
unanticipated  failure  of any  sole  source  supplier  to  meet  the  Company's
requirements for an extended period, or an interruption in the Company's ability
to secure  comparable  components,  could have a material  adverse effect on the
Company's revenue and operating results. In the event a sole source supplier was
unable or unwilling to continue to supply components,  the Company would have to
identify and qualify  other  acceptable  suppliers.  This process  could take an
extended period,  and no assurance can be given that any additional source would
become  available  or  would  be  able  to  satisfy  the  Company's   production
requirements on a timely basis.


INFORMATION SYSTEMS TRANSITION

The  Company is in the process of  replacing  many of its  internal  information
systems with new, integrated  information systems that are complex and that will
affect numerous operational,  


<PAGE>
                                                              Form 10-Q, Page 22


transactional,  financial and reporting processes.  The transition to these new
systems and processes is expected to be completed in the first half of 1999,  
and involves a number of risks and  uncertainties.  The Company must 
successfully manage the transfer of critical information to the new systems,  
the integration of these systems, and the implementation of associated
process changes and employee training  programs.  The Company intends to conduct
extensive  tests on these  new  processes  prior to  implementing  the  systems;
however,  these tests may not be able to fully simulate the transition phase and
day-to-day operating environment.  There can be no assurance that the transition
to the new  information  systems will not cause  interruptions  in the Company's
critical business processes. Failure to successfully manage the transition could
adversely affect the Company's operating and financial results.


RISKS ASSOCIATED WITH THE YEAR 2000

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

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

The  Company is  currently  in the  process of  replacing  many of its  internal
information systems with new integrated  information  systems.  See "Information
Systems  Transition"  above.  These new  systems  are  believed  to be Year 2000
Compliant.  The Company has also  completed its assessment on its other critical
internal  information  systems which are not being replaced and has  implemented
remediation  programs  on  non-Year  2000  Compliant  systems.  The  Company  is
currently assessing critical non-information systems to determine if they are 
Year 2000 Compliant and anticipates this assessment will be completed by 
December 1998. The  remediation  programs for its  information and 
non-information  systems that are not Year 2000 Compliant are expected to be
substantially  completed  and tested by June 1999.  The  Company is evaluating 
contingency plans in the event of a system failure or delay.

The costs incurred to date directly  related to the  Company's remediation
activities  total  approximately  $2 million.  Future costs related to the 
remediation activities are not expected to exceed approximately $3 million;  
however the amount may change as the year 2000 activities  progress  during 
1999.  These  remediation  costs do not include the costs associated with the 
Company's new information systems,  which are expected to be Year 2000 
Compliant. The Company has invested approximately $30 million in these new 
information systems as of the end of the third quarter, and the future
investment in these systems is estimated to be  
<PAGE>
                                                              Form 10-Q, Page 23


approximately  $15 million.  While the Company has not yet  completed its year 
2000  remediation  and testing activities on its information and  
non-information  systems,  the Company does not currently  believe that these  
activities will have a material adverse effect on the Company's  operations and
financial results.  Delays in implementing new external information systems or a
failure to fully identify all year 2000 dependencies in the Company's systems 
could have material adverse consequences,  including delays in the delivery or 
sale of the Company's products, or cause the Company to incur unexpected 
additional costs.

The Company also has implemented a program to assess the possible effects on its
operations of the year 2000 readiness of key suppliers and vendors and is in the
process of receiving  information concerning the suppliers' and vendors' status.
The Company's dependence on suppliers and vendors, and therefore,  on the proper
functioning of their information systems and software,  means that their failure
to  address  year 2000  issues  could have a  material  effect on the  Company's
operations  and  financial  results.  The  Company  anticipates  completing  its
assessment  by the end of 1998.  Based on the  results  of the  assessment,  the
Company may identify alternative suppliers and vendors.

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


EURO CONVERSION

Effective  January 1, 1999,  eleven of the 15 member  countries  of the European
Union are  scheduled to adopt a single  European  currency,  the euro,  as their
common legal  currency.  Like many  companies  that  operate in Europe,  various
aspects of the Company's  business and financial  accounting will be affected by
the  conversion to the euro.  The Company is currently  evaluating  the European
pricing strategies for its products and services,  the legal implications of the
conversion  on  its   contractual   agreements,   and  its   accounting   system
capabilities.  While the Company has not yet  completed  its  evaluation  of the
impact of the  conversion,  it does not believe that the conversion  will impact
the  competitiveness of its products in Europe as significant price transparency
already exists. In addition, the Company does not believe that the conversion to
the euro will result in the cancellation of any significant contracts,  or cause
it to incur significant  adverse tax consequences,  or significantly  affect its
foreign  currency  risk  management  operations.  The Company  will  continue to
evaluate the impact of the euro conversion  going forward.  The Company believes
that its internal accounting,  order management, and finance and banking systems
will  accommodate  the  conversion  with minimal  modification.  There can be no
assurances that the conversion will not adversely impact the Company's  pricing,
tax, currency hedging strategies, or other systems and processes in the future.

<PAGE>
                                                              Form 10-Q, Page 24



               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                         PART II - OTHER INFORMATION



ITEM 1 - LEGAL PROCEEDINGS
--------------------------

See Part I,  Item 3 - Legal  Proceedings,  of the  Company's  Form  10-K for the
fiscal year ended December 26, 1997, filed with the Commission on March 6, 1998.

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

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

On October 3, 1995,  certain  former  employees of the Company filed suit in the
U.S.  District  Court for the  District of Colorado  against  the  Company.  The
amended suit alleges  violations of the Age  Discrimination  in  Employment  Act
(ADEA) and the  Employee  Retirement  Income  Security  Act (ERISA)  between the
period of April 13, 1993, and December 31, 1996. On November 26, 1997, the Court
granted the  plaintiffs'  request to proceed as a collective  action on the ADEA
claims. On November 6, 1998, the Court issued a ruling from the bench
granting the plaintiffs' request to proceed as a class on the ERISA claims.
Approximately 1,266 persons are eligible members of the ERISA class, which 
includes approximately  400  persons of the ADEA class.  The  plaintiffs  seek,
among other things,  compensatory damages in an unspecified amount, including 
the value of back pay and benefits; reinstatement as employees or  alternatively
the value of future  earnings and benefits;  and exemplary or liquidated  
damages.  The Company has filed an answer  denying both the ADEA and ERISA 
claims. A trial has been set for October 1999.

The Company  believes it has adequate legal defenses with respect to each of the
actions cited above and intends to  vigorously  defend  against  these  actions.
However,  it is reasonably  possible that these actions could result in outcomes
unfavorable  to the Company.  The Company is also involved in various other less
significant legal actions.  While the Company currently believes that the amount
of the ultimate potential loss would not be material to the Company's  financial
position,  the outcome of these actions is inherently  difficult to predict.  In
<PAGE>
                                                              Form 10-Q, Page 25


the event of an  adverse  outcome,  the  ultimate  potential  loss  could have a
material adverse effect on the Company's  financial position or reported results
of operations in a particular quarter. An unfavorable decision,  particularly in
patent  litigation,  could require material changes in production  processes and
products or result in the  Company's  inability to ship  products or  components
found to have violated third-party patent rights.

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

<PAGE>
                                                              Form 10-Q, Page 26



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

      (a)   Exhibits

      11.0        Computation of Earnings Per Common Share.

      27.0        Financial  Data  Schedule for nine months ended  September 25,
                  1998.

      (b)   Reports on Form 8-K

            No current  reports on Form 8-K were filed during the quarter  ended
            September 25, 1998.


<PAGE>
                                                              Form 10-Q, Page 27


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                           STORAGE TECHNOLOGY CORPORATION
                                                    (Registrant)


       November 6, 1998                          /s/ DAVID E. LACEY
-------------------------------      ------------------------------------------
            (Date)                                    David E. Lacey
                                                 Executive Vice President
                                               and Chief Financial Officer
                                              (Principal Financial Officer)



       November 6, 1998                         /s/ THOMAS G. ARNOLD
-------------------------------      ------------------------------------------
            (Date)                                   Thomas G. Arnold
                                         Vice President and Corporate Controller
                                              (Principal Accounting Officer)