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 24, 1999
                                       OR
         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
              For the transition period from _______ to ________

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

                          Commission File Number 1-7534
                         --------------------------

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

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

         One StorageTek Drive,                          80028-4309
         Louisville, 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) - 100,009,620 shares outstanding at
October 29, 1999.


<PAGE>


                                                                       Form 10-Q
                                                                          Page 2




               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                               INDEX TO FORM 10-Q
                               September 24, 1999

                                                                          PAGE
                                                                          ----
PART I - FINANCIAL INFORMATION

      Item 1 - Financial Statements

              Consolidated Balance Sheet                                    3

              Consolidated Statement of Operations                          4

              Consolidated Statement of Cash Flows                          5

              Notes to Consolidated Financial Statements                    6

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

      Item 3 - Quantitative and Qualitative Disclosures about
                 Market Risk                                               27



PART II - OTHER INFORMATION

      Item 1 - Legal Proceedings                                           28

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

      Exhibit Index                                                        32






<PAGE>


                                                                       Form 10-Q
                                                                          Page 3




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


                                                          09/24/99    12/25/98
                                                       ------------------------
                                                        (Unaudited)
ASSETS
Current assets:
 Cash and cash equivalents                              $  236,314  $  231,985
 Accounts receivable                                       714,825     755,931
 Inventories (Note 2)                                      329,435     261,808
 Deferred income tax assets                                116,522     114,715
                                                        ----------  ----------
     Total current assets                                1,397,096   1,364,439

Property, plant and equipment, net                         333,003     320,946
Spare parts for maintenance, net                            46,408      33,395
Deferred income tax assets                                  16,127      15,875
Other assets                                               111,705     108,289
                                                        ----------  ----------
                                                        $1,904,339  $1,842,944
                                                        ==========  ==========

LIABILITIES
Current liabilities:
 Credit facilities (Note 3)                             $  362,914  $  276,673
 Current portion of long-term debt                           5,620       1,722
 Accounts payable                                          132,688     136,555
 Accrued liabilities                                       395,464     332,758
 Income taxes payable                                       52,864      78,400
                                                        ----------  ----------
     Total current liabilities                             949,550     826,108
Long-term debt                                              21,146      17,260
                                                        ----------  ----------
     Total liabilities                                     970,696     843,368
                                                        ----------  ----------
Commitments and contingencies (Note 4)

STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares authorized;
  100,045,905 shares issued at September 24, 1999, and
  100,338,353 shares issued at December 25, 1998            10,004      10,034
Capital in excess of par value                             820,470     834,778
Retained earnings                                          110,542     159,254
Treasury stock of 113,774 shares at September 24, 1999,
  and 117,271 shares at December 25, 1998                   (2,334)     (2,409)
Unearned compensation                                       (5,039)     (2,081)
                                                        ---------- ------------
     Total stockholders' equity                            933,643     999,576
                                                        ----------  ----------
                                                        $1,904,339  $1,842,944
                                                        ==========  ==========


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


<PAGE>


                                                                       Form 10-Q
                                                                          Page 4




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



                                      Quarter Ended        Nine Months Ended
                                 --------------------------------------------
                                  09/24/99   09/25/98     09/24/99   09/25/98
                                 --------------------------------------------
Revenue                           $573,730   $571,060   $1,745,635 $1,598,257
Cost of revenue                    343,409    304,788    1,021,455    842,923
                                   -------    -------    ---------  ---------

  Gross profit                     230,321    266,272      724,180    755,334

Research and product development
  costs                             66,225     60,880      212,325    171,800
Selling, general, administrative
  and other income and
  expense, net                     150,732    122,955      440,293    355,818
Litigation expense (Note 4)         16,274                  98,582
Restructuring expense (Note 5)      16,082                  36,328
                                  --------   --------    ---------  ---------

  Operating profit (loss)          (18,992)    82,437      (63,348)   227,716


Interest expense                    (6,765)    (2,689)     (15,397)    (5,138)
Interest income                        712      1,975        2,733     12,345
                                   -------   --------    ---------  ---------
  Income (loss) before income
    taxes                          (25,045)    81,723      (76,012)   234,923


Benefit (provision) for income
  taxes                              9,000    (31,100)      27,300    (89,300)
                                 ---------   --------    ---------  ---------

  Net income (loss)              $ (16,045) $  50,623    $ (48,712) $ 145,623
                                  ========   ========    =========  =========




EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per
  share                          $  (0.16) $    0.50     $   (0.49)  $   1.38
                                  ========  ========     =========  =========


Weighted-average shares            99,743    102,178        99,800    105,242
                                  =======    =======     =========   ========


Diluted earnings (loss) per
  share                          $  (0.16)  $    0.48     $   (0.49)  $   1.35
                                  =======    ========     =========   ========

Weighted-average and dilutive
  potential shares                 99,743    104,723        99,800    108,030
                                  =======   ========     =========   ========






        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
                                                  --------------------------
                                                     09/24/99      09/25/98
                                                  --------------------------
OPERATING ACTIVITIES
Cash received from customers                        $ 1,758,507 $ 1,544,947
Cash paid to suppliers and employees                 (1,689,248) (1,389,800)
Interest received                                         2,733      12,345
Interest paid                                           (13,738)     (4,182)
Income tax refunded (paid), net                           6,240     (92,907)
                                                     ----------  ----------
   Net cash provided by operating activities             64,494      70,403
                                                     ----------  ----------
INVESTING ACTIVITIES
Short-term investments, net                                          77,275
Purchases of property, plant and equipment, net         (90,734)    (70,239)
Business acquisitions, net                               (6,400)
Other assets, net                                        (4,782)     (9,774)
                                                     ----------  ----------
Net cash used in investing activities                  (101,916)     (2,738)
                                                     ----------  ----------
FINANCING ACTIVITIES
Proceeds from credit facilities, net                     86,241     330,000
Repayments of other debt, net                            (1,239)     (3,863)
Repurchases of common stock                             (35,226)   (458,270)
Proceeds from employee stock plans                       14,843      25,744
                                                     ----------   ---------
   Net cash provided by (used in)
     financing activities                                64,619    (106,389)
                                                     ----------   ---------
   Effect of exchange rate changes on cash              (22,868)        197
                                                     ----------   ---------
Increase (decrease) in cash and cash equivalents          4,329     (38,527)

   Cash and cash equivalents - beginning
     of the period                                      231,985     256,319
                                                     ----------   ---------
Cash and cash equivalents - end of the period       $   236,314  $  217,792
                                                     ==========   =========

RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
   PROVIDED BY OPERATING ACTIVITIES
Net income (loss)                                   $   (48,712) $  145,623
Depreciation and amortization expense                    98,603      91,719
Translation loss                                         18,418       1,052
Litigation                                               98,582
Restructuring                                             7,977
Other non-cash adjustments to income                      7,137       4,531
(Increase) decrease in accounts receivable               18,224     (53,310)
Increase in inventories                                 (65,556)    (57,273)
Increase in spare parts, net                            (25,502)    (14,605)
(Increase) decrease in deferred income tax assets, net   (6,031)      4,764
Decrease in accounts payable and accrued liabilities    (21,455)    (38,627)
Decrease in income taxes payable                        (17,191)    (13,471)
                                                     ----------   ---------
   Net cash provided by operating activities        $    64,494  $   70,403
                                                     ==========   =========

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


<PAGE>

                                                                       Form 10-Q
                                                                          Page 6



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


NOTE 1 - BASIS OF PREPARATION / SIGNIFICANT ESTIMATES

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

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities,  the  disclosure  of
contingent  assets and  liabilities as of the date of the financial  statements,
and the reported amounts of revenue and expenses during the periods. Significant
estimates  have been made by management  in several  areas  including the future
obligations associated with the Company's restructuring activities (see Note 5).
Actual results could differ materially from these estimates making it reasonably
possible that a change in these estimates could occur in the near term.

NOTE 2 - INVENTORIES

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

                                              09/24/99          12/25/98
                                             ---------------------------
      Raw materials                           $ 65,301          $ 46,672
      Work-in-process                           67,600            76,839
      Finished goods                           196,534           138,297
                                               -------           -------
                                              $329,435          $261,808
                                               =======           =======

NOTE 3 - DEBT AND FINANCING ARRANGEMENTS

The Company has an unsecured  revolving  credit  facility (the  Revolver)  which
expires  in  October  2001.  The  credit  limit  available  under the  Revolver,
$312,500,000 as of September 24, 1999, is reduced by $12,500,000 on the last day
of each calendar  quarter.  The interest rates under the Revolver  depend on the
repayment period of the advance selected.  The weighted average interest rate on
the  advances at September  24, 1999 was 6.92%.  The Company had  borrowings  of
$290,000,000  and had issued letters of credit for  approximately  $50,000 under
the Revolver as of September 24, 1999. The remaining  available credit under the
Revolver as of September 24, 1999, was approximately  $22,450,000.  The Revolver
contains  certain  financial  and other  covenants,  including  restrictions  on
payment of cash dividends on the Company's common stock.

<PAGE>
                                                               Form 10-Q, Page 7


In January 1999,  the Company  entered into a $150,000,000  unsecured  revolving
credit facility (the  $150,000,000  Revolver) which expires in January 2000. The
interest rates under the $150,000,000 Revolver depend on the repayment period of
the advance selected and may range from the London  Interbank  Offered Rate plus
1.00% to the bank's base rate.  As of  September  24,  1999,  the Company had no
borrowings issued against the $150,000,000  Revolver.  The $150,000,000 Revolver
contains certain  financial and other covenants,  including  restrictions on the
payment of the cash dividends on the Company's common stock.

The Company has a financing  agreement with a bank that provides for the sale of
promissory  notes in the principal amount of up to $140,000,000 at any one time.
The agreement,  which expires in January 2001,  provides for  commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of September 24, 1999, the Company had outstanding  borrowings of $72,914,000
under this financing  agreement and had committed to borrowings  between October
1999 and  December  2000 in the  cumulative  principal  amount of  approximately
$452,972,000.  The notes must be repaid  only to the  extent of future  revenue.
Obligations  under the agreement are not  cancelable by the Company or the bank.
Gains and losses  associated with changes in the underlying  foreign  currencies
are deferred during the commitment period and recognized as an adjustment to the
revenue  supporting  the note  repayment  at the time  the  bank  purchases  the
promissory  notes. The promissory  notes,  together with accrued  interest,  are
payable in U.S.  dollars within 40 days from the date of issuance.  The weighted
average interest rate of the outstanding  promissory notes at September 24, 1999
was 6.87%.  Under the terms of the agreement,  the Company is required to comply
with certain  covenants  and,  under certain  circumstances,  may be required to
maintain a collateral account, including cash and qualifying investments,  in an
amount not less than the outstanding promissory notes.

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  concerning an optical disk drive storage  development  project  entered
into in 1981 which was  unsuccessful  and  terminated  in 1985.  The suit sought
injunctive relief and damages in the amount of  $2,400,000,000.  On December 28,
1995, the court granted the Company's  motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997,  the Court of Appeals  reversed  the District  Court's  judgment and
remanded the case to the  District  Court for further  proceedings.  On July 15,
1999, the District Court dismissed with prejudice Stuff's claims relating to the
Company's  alleged use of the optical disk  technology,  and  dismissed  without
prejudice all of the remaining  claims. On August 30, 1999, Stuff filed a notice
of appeal with the Colorado Court of Appeals seeking to overturn the decision of
the District  Court.  The Company  continues to believe that Stuff's  claims are
wholly  without  merit and  intends to  vigorously  defend any  further  actions
arising from this complaint.

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
District Court granted the  plaintiffs'  request to proceed as a class action on
the ADEA claims. On November 9, 1998, the District Court granted the plaintiffs'
<PAGE>
                                                               Form 10-Q, Page 8


request  to  proceed  as a class on the  ERISA  claims.  On March 1,  1999,  the
District  Court denied the Company's  appeal on the  certification  of the ERISA
class.  Approximately  1,300  persons are  eligible  members of the ERISA class,
which includes approximately 400 members of the ADEA class. The plaintiffs seek,
among other things, compensatory damages in an unspecified amount, including the
value of back pay and benefits;  reinstatement as employees or alternatively the
value of future earnings and benefits;  and exemplary or liquidated damages. The
Company has filed an answer denying both the ADEA and ERISA claims and has filed
motions for summary judgment  regarding both claims and for  decertification  of
the ADEA class.  On September 1, 1999, at a hearing  before the District  Court,
the Court vacated the trial date  scheduled for October 1999. The District Court
has  scheduled  oral  arguments  on the pending  motions on November 19, 1999. A
trial  date  will not be  scheduled  until the  District  Court has ruled on the
pending motions.

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 all 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.

On October 8, 1999,  the Company and  Odetics,  Inc.  (Odetics)  entered  into a
settlement  agreement  regarding two patent  infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995,  alleging
infringement of various claims in U.S. Patent No.  4,779,151 (the "151 Patent").
The Company agreed to pay $100,000,000 to Odetics for a fully paid up license to
the 151 Patent;  $80,000,000 of which was paid at the time of the settlement and
the  remainder  to be  paid in  equal  annual  installments  of  $10,000,000  in
September in each of 2000 and 2001. The Company  recognized a pre-tax expense of
$82,308,000 for actual damages and post-judgment  interest in the second quarter
of 1999 in connection  with these legal actions.  As a result of the settlement,
the Company  recognized an additional  $15,486,000  pre-tax expense in the third
quarter of 1999 to reflect the present value of the final settlement payments.

The Company also settled a number of less significant legal actions resulting in
a pre-tax expense of $788,000 during the third quarter of 1999.

NOTE 5 - RESTRUCTURING

On April 15, 1999, the Company announced plans to restructure certain aspects of
its  business.  The  elements  of the  restructuring  plan  included a voluntary
reduction in  headcount as well as the  elimination  of certain  lower  priority
research  and  product  development  projects.  The  headcount  reductions  were
targeted in the areas of research and product  development,  administrative  and
manufacturing.

The Company's accounting policies with respect to its restructuring are in
accordance with the guidance provided in the  consensus  opinion of the Emerging
Issues Task Force (EITF) in
<PAGE>
                                                               Form 10-Q, Page 9


connection with EITF Issue No.  94-3 (EITF  94-3) and  Statement  of  Financial
Accounting Standards  (SFAS)  No  121.  EITF  94-3  generally  requires,  with
respect  to recognition  of severance  expenses,  management  approval of the
restructuring plan,  communication of benefit arrangements to employees, and the
determination of the employees to be terminated.  SFAS No. 121 generally
requires that assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell.

During the third quarter and nine months of 1999, the Company incurred a pre-tax
expense  of  $16,082,000   and   $36,328,000,   respectively,   related  to  the
restructuring.  The  following  table  summarizes  the activity in the Company's
reserves during the nine months of 1999 associated  with the  restructuring  (in
thousands of dollars):

                              Employee         Asset      Other Exit
                              Severance      Writedowns      Costs    Total
                            ------------------------------------------------
Restructuring expense         $ 24,686       $ 6,680       $4,962   $ 36,328
Cash payments                  (21,671)                              (21,671)
Asset writedowns                              (6,680)                 (6,680)
                              --------       -------       ------   --------
Balances, September 24, 1999  $  3,015       $     0       $4,962   $  7,977
                              ========       =======       ======   ========

The employee severance expense of $24,686,000  consists of separation expense of
$22,816,000  payable to approximately  680 employees who irrevocably  elected to
participate  in a voluntary  separation  program  prior to the end of the fiscal
quarter;  salary expense of $1,770,000 to employees  prior to their  termination
date, but subsequent to their last day of work; and estimated outplacement costs
of  $100,000.  The  majority of the  remaining  employee  severance  reserves of
$3,015,000  as of September  24,  1999,  are expected to be paid within the next
three months.

The asset writedowns of $6,680,000  relate to engineering  assets that have been
or will be disposed  of prior to  year-end,  in  connection  with the  Company's
decision to discontinue  certain lower priority research and product development
projects.

The other exit costs of $4,962,000  relate to costs  associated with terminating
contractual  future  purchase  obligations  associated  with the  manufacture of
certain  products that were  discontinued in connection with the  restructuring.
These costs will be paid within the next three months.

On October 28, 1999,  the Company  announced  plans to further  restructure  its
business.  For further discussion of this restructuring,  see Note 8 "Subsequent
Events."

NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS No.
133 requires all derivatives to be recognized as either assets or liabilities on
the  consolidated  balance  sheet  and be  measured  at their  fair  value.  The
corresponding change in fair value of the derivative instrument will be recorded
in the earnings of the  Company,  net of any change in fair value of the related
hedged  item,  or as a component  of  comprehensive  income  depending  upon the
intended use and designation.
<PAGE>
                                                              Form 10-Q, Page 10


In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--an amendment of FASB Statement No. 133."  SFAS No. 137 has
the effect of delaying the required adoption date of SFAS No. 133 for the
Company until January 2001.  The Company is currently evaluating the impact of
SFAS No. 133 on its financial statements and its plans for
adopting the new accounting standard.

NOTE 7 - OPERATIONS OF BUSINESS SEGMENTS

The Company is organized into three reportable segments based on the definitions
of  segments  provided  under SFAS No. 131  "Disclosures  about  Segments  of an
Enterprise and Related  Information":  storage  products,  storage  services and
storage management  software.  The storage products segment sells tape, disk and
network products for the mainframe and client-server  computing  environment and
for the storage area network (SAN) market. The storage services segment provides
support  services  for  the  Company's  and  third-party  products,  integration
services,   storage  consulting  and  managed  storage  services.   The  storage
management  software segment sells and licenses  software tools and applications
for improving storage product  performance and simplifying  information  storage
management.

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

                                Quarter Ended               Nine Months Ended
                          -----------------------------------------------------
                          09/24/99         09/25/98        09/24/99    09/25/98
                          -----------------------------------------------------
Revenue:
  Storage products         $355,726         $380,938     $1,097,364  $1,076,923
  Storage services          171,620          163,023        520,707     459,458
  Storage management
   software                  46,384           27,099        127,564      61,876
                            -------          -------      ---------  ----------
    Total revenue          $573,730         $571,060     $1,745,635  $1,598,257
                            =======          =======      =========  ==========

Gross profit:
  Storage products         $148,329         $175,888     $  453,377  $  511,689
  Storage services           50,252           68,473        178,633     196,991
  Storage management
    software                 31,740           21,911         92,170      46,654
                           --------         --------      ---------   ---------
    Total gross profit     $230,321         $266,272     $  724,180  $  755,334
                           ========          =======      =========   =========



NOTE 8 - SUBSEQUENT EVENTS

On October 28, 1999,  the Company  announced  plans to further  restructure  its
business.  This  restructuring is intended to reduce investments in or eliminate
certain of the Company's  storage service  offerings,  increase focus on certain
core  products  and storage  management  software  offerings,  and  re-align the
corporate infrastructure.
<PAGE>
                                                              Form 10-Q, Page 11





               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                               SEPTEMBER 24, 1999


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


Historical  statements  made herein are  accurate  only as of the date of filing
this Form 10-Q with the  Securities  and Exchange  Commission  and may be relied
upon only as of that date.

GENERAL

The Company  reported a net loss for the third quarter ended September 24, 1999,
of $16.0  million on revenue of $573.7  million,  compared to net income for the
third quarter in 1998 of $50.6 million on revenue of $571.1 million.  A net loss
of $48.7  million was  reported  for the nine months of 1999 on revenue of $1.75
billion, compared to net income of $145.6 million for the nine months of 1998 on
revenue of $1.60 billion.  The Company's  reported results for the third quarter
and nine  months of 1999  include  one-time  pre-tax  expenses  associated  with
litigation  of $16.3  million  and $98.6  million,  and  restructuring  of $16.1
million and $36.3 million, respectively. Excluding the one-time expenses, net of
tax, the Company  would have earned net income of $4.7 million and $37.7 million
during the third quarter and nine months of 1999, respectively.

Revenue  during the third quarter of 1999 was  unchanged,  compared to the third
quarter of 1998,  as  revenue  growth in the  storage  management  software  and
storage  services  segments was offset by a decrease in revenue from the storage
products segment.  Revenue during the nine months of 1999 increased 9%, compared
to the same period in 1998, with revenue growth in all of the Company's business
segments. Gross profit margins decreased to 40% and 41% during the third quarter
and nine months of 1999,  respectively,  compared to 47% for the same periods in
1998, due to decreased profit margins in all of the Company's business segments.

Many of the Company's  customers  undertake detailed  procedures relating to the
evaluation,  testing,  implementation and acceptance of the Company's  products,
software and  services.  This  evaluation  process  results in a variable  sales
cycle,  and makes it  difficult  to predict if or when  revenue  will be earned.
Further,  gross  margins may be adversely  impacted in an effort to complete the
sales  cycle.  Revenue  and  operating  profits  during the third  quarter  fell
significantly short of the Company's  expectations due principally to shortfalls
in revenue and
<PAGE>
                                                              Form 10-Q, Page 12


gross  margins in North  America.  While revenue in North America
increased  in the third  quarter of 1999 as compared to the same period in 1998,
gross margins declined in terms of both gross margin dollars and as a percentage
of revenue.  The Company  believes a portion of this  shortfall  was due to some
customers  delaying  purchasing  decisions in  anticipation  of possible  issues
associated  with the year 2000,  particularly  with respect to tape products and
Virtual Storage Manager(TM) (VSM) targeted for the mainframe market. For further
discussion  of issues  with the year  2000,  see "Risk  Factors  That May Affect
Future Results - Risks Associated with the Year 2000" below.

The  Company's  financial  results may continue to be adversely  impacted by its
variable sales cycle,  particularly  in advance of and into the first quarter of
2000.  Future financial results are also dependent upon the Company's ability to
manage  its costs  and  operating  expenses  in line with  revenue;  the  timely
development,   manufacture  and  introduction  of  new  products,  software  and
services; successfully managing the development of new direct and indirect sales
channels;  the  implementation  of its  storage  area  network  (SAN);  and  the
implementation  of its restructuring  programs.  For the discussion of these and
other risk factors, see "Restructuring" and "Risk Factors That May Affect Future
Results," below.

On October 15, 1999, the Company announced that it has engaged Goldman,  Sachs &
Co.  and  McKinsey & Company to assist  the  Company in its  on-going  strategic
analysis, evaluation, and consideration of various strategic alternatives. These
strategic  alternatives  may  include  financial  restructuring,   acquisitions,
divestitures,  spin-offs,  joint ventures,  and business combinations that could
include sales,  mergers,  or partnerships.  The  implementation of any strategic
alternatives  may have a  significant  impact on the Company's  future  reported
financial  results.  The  implementation of various  strategic  alternatives may
result in significant one-time charges associated with the disposition of assets
or  recognition  of  liabilities.   The   implementation  of  various  strategic
alternatives may also require significant financing activities.  There can be no
assurances  that  the  Company's   analysis  and   implementation  of  strategic
alternatives  will be successful or that if additional  financing is required to
implement a strategy,  that this financing can be completed on terms  acceptable
to the Company.  The Company's operating results may be adversely affected while
it completes the analysis and  implementation of various strategic  alternatives
due to potential  disruptions of customers,  employees,  suppliers and strategic
partners.

On October 28, 1999,  the Company  announced  plans to further  restructure  its
business.  This  restructuring is intended to reduce investments in or eliminate
certain of the Company's storage service and product  offerings,  increase focus
on certain core product and storage management software offerings,  and re-align
the corporate  infrastructure.  These  restructuring  activities are expected to
begin in the fourth quarter of 1999. As the  restructuring  plan is in the early
stages  of its  development,  the  amount  of the  restructuring  expense  to be
recognized  in the  fourth  quarter  of  1999  or in the  year  2000  cannot  be
determined at this time. However,  this restructuring  charge may be material to
the operating  results in the fourth quarter of 1999 and into the year 2000. The
amount of the  restructuring  expense  is  dependent  upon a number  of  factors
including  whether the Company is  successful  in its efforts to divest  certain
businesses.  The targeted  reductions in positions  associated  with the initial
phase of the  restructuring  are  estimated to be  approximately  1,500 to 1,750
people. The Company expects the restructuring  activities to be completed by the
end of the second quarter of 2000 and is expected to yield annualized savings of
approximately  $150 million.  There can be no assurance  that the  restructuring
activities described above will be successful or sufficient to allow the Company
to realize the expected annualized savings. See "Liquidity and Capital Resources
- Available
<PAGE>
                                                              Form 10-Q, Page 13


Financing  Lines," below for a discussion  of the potential  effect these
activities may have on the Company's available financing lines.

The Company's cash balance increased $4.3 million during the nine months of 1999
as cash proceeds from operating and financing  activities  more than offset cash
used in investing activities.  Cash generated from financing activities of $64.6
million was mainly the result of increased  borrowings  of $86.2  million  under
credit  facilities,  and was partially  offset by cash payments of $35.2 million
associated with the Company's on-going common stock repurchase program to offset
dilution  from  employee  stock  and  option  plans.  The  Company's   operating
activities  provided  cash of $64.5  million  during the nine months of 1999, as
compared to cash of $70.4  million  generated  from  operations  during the nine
months of 1998. The decrease in cash generated from  operations  during 1999, as
compared to 1998, was primarily the result of decreased gross margins; increased
operating  expenses;  increased  levels of inventory  and spare parts;  and cash
payments associated with restructuring  activities.  This decrease was partially
offset by income  taxes  refunded  in 1999 of $6.2  million,  compared to income
taxes paid in 1998 of $92.9  million.  See  "Liquidity  and Capital  Resources -
Working Capital" for additional discussion of operating cash flows. Cash used in
investing activities of $101.9 million was primarily due to property,  plant and
equipment  purchases of $90.7 million.  On October 8, 1999, the Company paid $80
million to Odetics in connection  with the settlement of litigation.  See Note 4
of NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS  for further  discussion of the
Odetics settlement.

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

                                    Quarter Ended       Nine Months Ended
                                  ----------------------------------------
                                  09/24/99 09/25/98     09/24/99  09/25/98
                                  ----------------------------------------
Storage products:
   Tape products                     45.1%    42.4%        44.8%     42.8%
   Disk products                     13.1     21.3         14.9      21.1
   Network products                   3.8      3.0          3.2       3.5
                                    -----    -----        -----     -----
     Total storage products          62.0     66.7         62.9      67.4
Storage services                     29.9     28.6         29.8      28.7
Storage management software           8.1      4.7          7.3       3.9
                                    -----    -----        -----     -----
     Total revenue                  100.0    100.0        100.0     100.0
Cost of revenue                      59.9     53.4         58.5      52.7
                                    -----    -----        -----     -----
     Gross profit                    40.1     46.6         41.5      47.3
Research and product development
  costs                              11.5     10.7         12.2      10.8
Selling, general, administrative
  and other income and expense, net  26.3     21.5         25.2      22.3
Litigation expense                    2.8                   5.6
Restructuring expense                 2.8                   2.1
                                    -----    -----        -----     -----
     Operating profit (loss)         (3.3)    14.4         (3.6)     14.2
Interest income (expense), net       (1.1)    (0.1)        (0.8)      0.5
                                    -----    -----        -----     -----
     Income (loss) before income
       taxes                         (4.4)    14.3         (4.4)     14.7
Benefit (provision) for income
  taxes                               1.6     (5.4)         1.6      (5.6)
                                    -----    -----        -----     -----
     Net income (loss)               (2.8)%    8.9%        (2.8)%     9.1%
                                    =====    =====        =====     =====
<PAGE>
                                                              Form 10-Q, Page 14



The  following  table sets forth the gross profit  percentages  for each segment
calculated as gross profit for the segment divided by revenue for the segment.

                                    Quarter Ended        Nine Months Ended
                                 -----------------------------------------
                                  09/24/99    09/25/98    09/24/99  09/25/98
                                 -----------------------------------------

   Storage products                   41.7%    46.2%        41.3%     47.5%
   Storage services                   29.3%    42.0%        34.3%     42.9%
   Storage management software        68.4%    80.9%        72.3%     75.4%

REVENUE

STORAGE PRODUCTS

The Company's storage products revenue includes sales of tape, disk, and network
products for the mainframe and client-server  computing environments and for the
SAN market.  Revenue from storage products decreased 7% during the third quarter
of 1999, compared to the third quarter of 1998, and increased 2% during the nine
months of 1999,  compared to the same period in 1998. Revenue from tape products
increased  in both the third  quarter and nine  months of 1999,  compared to the
same periods of 1998, but was offset by decreased  revenue from disk products in
both periods.

Tape Products
Tape  product  revenue  increased  7% and 14% during the third  quarter and nine
months of 1999,  respectively,  compared to the same periods in 1998,  primarily
due to increased sales of the 9840  high-performance  tape drive and the related
tape media.  Increased revenue from the TimberWolf(TM)  family of automated tape
products designed for the  client-server  market also contributed to the revenue
increase.  Revenue  from  TimberLine(R)  9490, a 36-track  cartridge  subsystem;
PowderHorn(R)  9310, an automated  cartridge  system library;  and other earlier
generation  tape products  declined  during the third quarter and nine months of
1999, compared to the same periods in 1998, reflecting both lower selling prices
and  decreases in the number of units sold as the Company's  current  generation
tape products  gain market  acceptance.  The Company  believes that the sales of
tape products designed for the mainframe market have been adversely  impacted in
the third quarter of 1999 due to some customers  delaying testing and purchasing
decisions in anticipation of the year 2000.

Disk Products
Disk product  revenue  decreased  39% and 23% during the third  quarter and nine
months of 1999,  respectively,  compared to the same periods in 1998,  primarily
due to a decrease in revenue from OEM sales to International  Business  Machines
Corporation  (IBM)  of  Iceberg(R),  a disk  storage  product  designed  for the
mainframe  market.  The  Company  anticipates  that  Iceberg  sales  to IBM will
continue  to decrease  in the fourth  quarter of 1999 and the  Company  does not
anticipate  any  significant  revenue from sales of Iceberg to IBM in 2000.  See
"Risk  Factors  That May  Affect  Future  Results  -  Dependence  on IBM," for a
discussion of the risks  associated with IBM. While revenue from direct sales of
the 9393 Shared Virtual Array (SVA) increased in both the third quarter and nine
months of 1999,  as compared to the same  periods in 1998,  the amount of direct
sales of SVA did not meet the Company's  expectations  due to issues  associated
with  the  development  of this  new  direct  sales  channel.  Revenue  from the
OPENstorage(TM)  Disk  products was unchanged and increased in the third quarter
and nine
<PAGE>
                                                              Form 10-Q, Page 15


months of 1999,  respectively,  as  compared  to 1998.  The  Company's
OPENstorage  Disk products are currently  supplied through an OEM agreement with
Data  General  which  expires  during the second  quarter of 2000.  In the third
quarter  of 1999,  Data  General  merged  with EMC  Corporation,  a  significant
competitor of the Company. While the Company has plans to sell Sun Microsystems,
Inc.'s  (Sun) open  enterprise  disk  products  in the  future  under a recently
announced  worldwide OEM sales and marketing  agreement,  these new products are
currently  not  available.  There can be no assurance  that the Company will not
experience  decreased sales of disk products for the client-server market during
the transition from the Data General to the Sun product line.

Network Products
Network product revenue during the third quarter increased 29% and was unchanged
during the nine months of 1999,  compared to the same  periods in 1998.  Revenue
from network products designed for the SAN market increased in the third quarter
and nine months of 1999,  compared to the same periods in 1998.  The increase in
SAN network products was offset by decreased revenue from the earlier generation
network products during 1999.

The  Company's  financial  results may continue to be adversely  impacted by its
variable sales cycles,  particularly in advance of and into the first quarter of
2000.  Future  revenue  growth in the  Company's  storage  products  segment  is
significantly  dependent  upon the continued  demand for the 9840 and TimberWolf
tape products,  successfully  replacing the anticipated  decline in OEM sales of
Iceberg  to  IBM  with  direct  sales  of the  SVA  disk  product,  successfully
transitioning open disk sales from Data General to Sun, the timely  introduction
and acceptance of new disk products and enhancements, and gaining greater market
acceptance for SAN solutions.  There can be no assurances  that the Company will
be  successful  in these  endeavors.  See "Risk  Factors That May Affect  Future
Results - New Products,  Markets and  Distribution  Channels," for discussion of
the risks  associated with the  introduction and manufacture of new products and
distribution channels.

STORAGE SERVICES

Storage  services  include  support  service  revenue  from  the  Company's  and
third-party storage products,  as well as integration service revenue associated
with new applications,  storage consulting and managed storage services. Storage
services  revenue  increased 5% and 13% during the third quarter and nine months
of 1999,  respectively,  compared to the same periods in 1998,  due to growth in
storage consulting and integration services.  Revenue from the Company's support
services was largely unchanged during the third quarter and nine months of 1999,
compared to the same periods in 1998.

As a result of the restructuring  activities  announced on October 28, 1999, and
further  discussed under  "General,"  above, the Company  anticipates  decreased
revenue from its storage  services  segment as it reduces its investments in, or
eliminates, certain service offerings.

STORAGE MANAGEMENT SOFTWARE

Storage  management  software  revenue  increased  71% and 106% during the third
quarter and nine months of 1999,  respectively,  compared to the same periods in
1998,  primarily  due to  increased  revenue  from  VSM.  VSM is a data  storage
software solution designed to improve performance,  cartridge  utilization,  and
overall storage  management.  While revenue from VSM increased  during the third
quarter  and  nine  months  of 1999,  sales  of VSM did not  meet the
<PAGE>
                                                              Form 10-Q, Page 16


Company's expectations. The Company believes sales of VSM during the third
quarter of 1999 were  adversely  impacted  due  to  customers  delaying
purchase  decisions  in anticipation  of the year 2000. The increase in revenue
during the third quarter of 1999 was also  partially due to an increase of
third-party  software  license revenue of approximately $5.3 million.  Revenue
from SnapShot, which is designed for use with the Company's SVA disk products,
decreased in the third quarter and nine months of 1999,  compared to the same
period of 1998,  due to a decrease in units from OEM sales to IBM.

Future  revenue  growth  from  storage  management  software is  dependent  upon
increasing  market  acceptance for VSM.  Because VSM is a complex system,  it is
difficult  to  predict  the timing  and  extent  that VSM will gain  acceptance,
particularly  in advance of and into the first quarter of 2000.  There can be no
assurances that the Company will be successful in increasing  market  acceptance
for VSM. A significant  portion of the  Company's  storage  management  software
revenue has been derived from sales of SnapShot to IBM. The Company  anticipates
sales of SnapShot to IBM will continue to decline in the fourth  quarter of 1999
as the sales of Iceberg to IBM  decreases,  and the Company does not  anticipate
any  significant  revenue from sales of SnapShot to IBM in 2000. The Company has
recently  introduced  SnapShot  capabilities  for SVA for certain  client-server
platforms and has plans to introduce SnapShot for additional  platforms.  Future
revenue  growth from  Snapshot is  dependent  upon the timely  introduction  and
market   acceptance  of  future  releases  of  the  SnapShot  software  for  the
client-server  marketplace  as well as the success of the  Company's  efforts to
sell  SnapShot  through its direct  sales  channel.  See "Risk  Factors That May
Affect  Future  Results  -  Dependence  on IBM,"  for  discussion  of the  risks
associated with IBM.

GROSS PROFIT

Gross profit margins  decreased to 40% and 41% during the third quarter and nine
months of 1999, respectively,  compared to 47% for the same periods in 1998. The
gross profit margins decreased in all of the Company's business segments.  Gross
margins for the  Company's  products and software have been  adversely  affected
during 1999 by pricing  pressures  associated with  competitive  tape, disk, and
software  offerings  in North  America and Europe;  efforts to shorten the sales
cycles for its products and software in North America;  increased  sales of tape
cartridges which have lower profit margins;  a decline in the selling prices for
earlier  generation  tape  products;  and  unfavorable  manufacturing  variances
associated with excess manufacturing capacity. Gross margins associated with the
services  segment have decreased  principally  as a result of increased  revenue
contribution  from  lower-margin  consulting,  integration,  and managed storage
service offerings.  Storage service margins have also been adversely impacted by
significant  investments in the  development  of the consulting and  integration
services  business and increased  warranty  costs  associated  with certain tape
products.

The markets for the Company's products and services are subject to intense price
competition. The Company anticipates that price competition for its products and
services  will  continue to have a  significant  impact on the  Company's  gross
profit  margins.  The  Company's  ability to sustain or improve gross margins is
significantly   dependent  upon  its  ability  to  continue  to  reduce  product
manufacturing  costs and  increase  sales of  higher-margin  storage  management
software.  Storage product and storage management  software gross margins may be
affected in future periods by inventory  reserves and writedowns  resulting from
rapid technological changes or delays in gaining market acceptance for products.
While the  Company  anticipates  a  decrease  in revenue  from its  lower-margin
consulting,  integration,  and managed storage
<PAGE>
                                                              Form 10-Q, Page 17


services due to the restructuring announced on October 28, 1999,  the storage
services  gross profit  margins may continue to be adversely affected in the
fourth quarter of 1999 and into 2000 as these offerings are reduced or
eliminated.

RESEARCH AND PRODUCT DEVELOPMENT

Research and product development  expenses increased 9% and 24% during the third
quarter and nine months of 1999  respectively,  compared to the same  periods in
1998.  The Company  received  approximately  $10  million  and $30 million  less
research and product development funding from third-parties in the third quarter
and nine months of 1999, respectively,  as compared to the same periods in 1998.
Excluding  the  additional  funding  from  third-parties,  research  and product
development  expense decreased 6% and increased 5% in the third quarter and nine
months of 1999,  respectively,  as  compared  to the same  periods in 1998.  The
decrease in the third  quarter of 1999 is primarily  due to the  elimination  of
several lower priority research and product development programs associated with
the restructuring  activities.  See "Restructuring"  below for discussion of the
restructuring activities.

SELLING, GENERAL, ADMINISTRATIVE AND OTHER

Selling,  general,  administrative and other income and expense (SG&A) increased
23% and 24%  during the third  quarter  and nine  months of 1999,  respectively,
compared to the same periods in 1998.  The  increase for both the third  quarter
and nine months of 1999,  as compared to 1998,  was  primarily  due to increased
selling  expenses.  The  increase  in selling  expense  reflects  an increase in
commission and bonus rates, the addition of application  specialists  associated
with storage services,  an increase in the Company's  worldwide sales force, and
an increase in marketing  efforts.  The increase in selling  expense  during the
nine months of 1999 also reflects  increased bonuses and commissions  associated
with increased sales revenue.

LITIGATION

On October 8, 1999,  the Company and  Odetics,  Inc.  (Odetics)  entered  into a
settlement  agreement  regarding two patent  infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995,  alleging
infringement of various claims in U.S. Patent No.  4,779,151 (the "151 Patent").
The Company agreed to pay $100 million to Odetics for a fully paid up license to
the 151 Patent;  $80 million of which was paid at the time of the settlement and
the  remainder  to be  paid in  equal  annual  installments  of $10  million  in
September in each of 2000 and 2001. The Company  recognized a pre-tax expense of
$82.3  million  for actual  damages  and  post-judgment  interest  in the second
quarter of 1999 in  connection  with  these  legal  actions.  As a result of the
settlement,  the Company  recognized an additional $15.5 million pre-tax expense
in the  third  quarter  of  1999 to  reflect  the  present  value  of the  final
settlement payments.

The Company also settled a number of less significant legal actions resulting in
a pre-tax expense of $788,000 during the third quarter of 1999.

RESTRUCTURING

On April 15, 1999, the Company announced plans to restructure certain aspects of
its  business.  The  elements  of the  restructuring  plan  included a voluntary
reduction in  headcount as well as
<PAGE>
                                                              Form 10-Q, Page 18


the  elimination  of certain  lower  priority research  and  product
development  projects.  The  headcount  reductions  were targeted in the areas
of research and product  development,  administrative  and manufacturing.

During the third quarter and nine months of 1999, the Company incurred a pre-tax
expense  of $16.1  million  and  $36.3  million,  respectively,  related  to the
restructuring.  The  following  table  summarizes  the activity in the Company's
reserves during the nine months of 1999 associated  with the  restructuring  (in
thousands of dollars):

                              Employee          Asset     Other Exit
                              Severance      Writedowns      Costs    Total
                            ------------------------------------------------
Restructuring expense         $ 24,686       $ 6,680       $4,962   $ 36,328
Cash payments                  (21,671)                              (21,671)
Asset writedowns                              (6,680)                 (6,680)
                              --------       -------       ------   --------
Balances, September 24, 1999  $  3,015       $     0       $4,962   $  7,977
                              ========       =======       ======   ========

The employee  severance expense of $24.7 million consists of separation  expense
of $22.8 million payable to approximately 680 employees who irrevocably  elected
to participate in a voluntary  separation program prior to the end of the fiscal
quarter;  salary expense of $1.8 million to employees prior to their termination
date, but subsequent to their last day of work; and estimated outplacement costs
of $100,000.  The majority of the remaining  employee severance reserves of $3.0
million as of September 24, 1999,  are expected to be paid within the next three
months.

The asset writedowns of $6.7 million relate to engineering assets that have been
or will be disposed  of prior to  year-end,  in  connection  with the  Company's
decision to discontinue  certain lower priority research and product development
projects.

The other exit costs of $5.0 million relate to costs associated with terminating
contractual  future  purchase  obligations  associated  with the  manufacture of
certain  products that were  discontinued in connection with the  restructuring.
These costs will be paid within the next three months.

The Company does not expect it will incur any incremental  operating expenses on
an on-going basis as a result of the restructuring  announced on April 15, 1999.
The Company expects  annualized  savings of approximately  $40 million for these
restructuring  activities.  The  majority of these  savings  are  expected to be
realized  in  the  form  of  reduced   research  and  product   development  and
manufacturing expenses. There can be no assurance that the targeted savings will
be  achieved.  See Note 1 of  NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS  for
discussion of significant estimates.

On October 28, 1999,  the Company  announced  plans to further  restructure  its
business.  For further discussions of this restructuring,  see "General" of this
Form 10-Q.

The Company has  restructured  its business in the past in order to re-align its
business  with its  products  and market  strategies,  or  establish a more cost
efficient business  structure.  There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to generate improved  operating  results in future periods.  It is possible that
additional  changes in the Company's business or in its industry may necessitate
<PAGE>
                                                              Form 10-Q, Page 19


additional  restructuring  expense in the future.  The necessity for  additional
restructuring  activities may result in expenses that adversely  affect reported
results of  operations  in the period the  restructuring  plan is  adopted,  and
require incremental cash payments.


INTEREST EXPENSE AND INCOME

Interest  expense  increased  $4.1  million and $10.3  million  during the third
quarter and nine months of 1999,  respectively,  compared to the same periods in
1998,  due to  increased  borrowings  under  the  Company's  credit  facilities.
Interest income decreased $1.3 million and $9.6 million during the third quarter
and nine months of 1999,  respectively,  compared  to the same  periods in 1998,
primarily as a result of a decrease in cash available for investment  during the
quarter.  See "Liquidity and Capital  Resources," for further  discussion of the
Company's working capital and credit facilities.

INCOME TAXES

The  Company's  effective tax rate  decreased  from 38% for the third quarter of
1998, to 36% for the third quarter of 1999.

Statement  of  Financial  Accounting  Standards  (SFAS)  No. 109  requires  that
deferred  income tax assets be  recognized  to the  extent  realization  of such
assets is more likely than not.  Based on the currently  available  information,
management  has  determined  that the Company  will more likely than not realize
$132.6  million of deferred  income tax assets as of  September  24,  1999.  The
Company's valuation allowance of approximately $24.1 million as of September 24,
1999,  relates  principally  to net  deductible  temporary  differences  and net
operating loss carryforwards associated with the Company's foreign subsidiaries.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

The Company's cash balance increased $4.3 million during the nine months of 1999
as cash proceeds from operating and financing  activities  more than offset cash
used in investing activities.  Cash generated from financing activities of $64.6
million was mainly the result of increased  borrowings  of $86.2  million  under
credit  facilities,  and was partially  offset by cash payments of $35.2 million
associated with the Company's on-going common stock repurchase program to offset
dilution  from  employee  stock  and  option  plans.  The  Company's   operating
activities  provided  cash of $64.5  million  during the nine months of 1999, as
compared to cash of $70.4  million  generated  from  operations  during the nine
months of 1998. The decrease in cash generated from  operations  during 1999, as
compared to 1998, was primarily the result of decreased gross margins; increased
operating  expenses;  increased  levels of inventory  and spare parts;  and cash
payments associated with restructuring  activities.  This decrease was partially
offset by income  taxes  refunded  in 1999 of $6.2  million,  compared to income
taxes paid in 1998 of $92.9 million. Cash used in investing activities of $101.9
million was  primarily due to property,  plant and equipment  purchases of $90.7
million.  On  October  8,  1999,  the  Company  paid $80  million  to Odetics in
connection  with the  settlement  of  litigation.  This  payment was funded with
available  working  capital and advances on the  Company's  unsecured  revolving
credit facilities.  See Note 4 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
further discussion of the Odetics settlement.
<PAGE>
                                                              Form 10-Q, Page 20


Available Financing Lines

The Company has an unsecured  revolving  credit  facility (the  Revolver)  which
expires in October 2001. The credit limit available  under the Revolver,  $312.5
million as of September 24, 1999, is reduced by $12.5 million on the last day of
each  calendar  quarter.  The interest  rates under the  Revolver  depend on the
repayment period of the advance selected.  The weighted average interest rate on
the  advances at September  24, 1999 was 6.92%.  The Company had  borrowings  of
$290.0 million and had issued letters of credit for approximately  $50,000 under
the Revolver as of September 24, 1999. The remaining  available credit under the
Revolver as of September 24, 1999, was approximately $22.5 million. The Revolver
contains  certain  financial  and other  covenants,  including  restrictions  on
payment of cash dividends on the Company's common stock.

In January 1999,  the Company  entered into a $150 million  unsecured  revolving
credit  facility (the $150 million  Revolver) which expires in January 2000. The
interest rates under the $150 million Revolver depend on the repayment period of
the advance selected and may range from the London  Interbank  Offered Rate plus
1.00% to the bank's base rate.  As of  September  24,  1999,  the Company had no
borrowings issued against the $150 million  Revolver.  The $150 million Revolver
contains certain  financial and other covenants,  including  restrictions on the
payment of the cash dividends on the Company's common stock.

The Company has a financing  agreement with a bank that provides for the sale of
promissory  notes in the principal amount of up to $140 million at any one time.
The agreement,  which expires in January 2001,  provides for  commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of  September  24,  1999,  the Company had  outstanding  borrowings  of $72.9
million under this financing  agreement and had committed to borrowings  between
October  1999  and  December  2000  in  the  cumulative   principal   amount  of
approximately  $453.0  million.  The notes must be repaid  only to the extent of
future  revenue.  Obligations  under the  agreement  are not  cancelable  by the
Company or the bank. Gains and losses  associated with changes in the underlying
foreign  currencies are deferred during the commitment  period and recognized as
an adjustment to the revenue  supporting the note repayment at the time the bank
purchases the  promissory  notes.  The promissory  notes,  together with accrued
interest,  are payable in U.S. dollars within 40 days from the date of issuance.
The  weighted  average  interest  rate of the  outstanding  promissory  notes at
September 24, 1999 was 6.87%.  Under the terms of the agreement,  the Company is
required to comply with certain covenants and, under certain circumstances,  may
be required to maintain a  collateral  account,  including  cash and  qualifying
investments, in an amount not less than the outstanding promissory notes.

The Company believes it has adequate working capital and financing  capabilities
to meet its  anticipated  operating  and  capital  requirements  for the next 12
months.  As a  result  of  one-time  expenses  associated  with  litigation  and
restructuring,  the Company  anticipates it may be required to obtain waivers or
amendments  to certain  financial  covenants of its credit  facilities or obtain
other  sources  of  financing.  There  can be no  assurance  that  any  waivers,
amendments,  or other  sources of  financing,  if required,  can be completed on
terms similar to those currently available to the Company. 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
<PAGE>
                                                              Form 10-Q, Page 21


no assurance  that any  additional  long-term  financing,  if  required,  can be
completed on terms acceptable to the Company.

Total Debt-to-Total Capitalization

The  Company's  total  debt-to-capitalization  ratio  increased  from  23% as of
December 25,  1998,  to 29% as of September  24,  1999,  primarily  due to a net
increase in borrowings of $86.2 million under short-term credit facilities.  See
"Working Capital" above for discussion of cash sources and uses.

INTERNATIONAL OPERATIONS

During the third  quarter  and nine  months of 1999,  approximately  42% and 40%
respectively,  of the  Company's  revenue  was  generated  by its  international
operations,  compared to approximately 36% for the third quarter and nine months
of 1998. The Company also sells products and software through domestic  indirect
distribution  channels that have end-user  customers  located outside the United
States.  The Company  expects  that it will  continue to generate a  significant
portion of its revenue from international operations in the future. The majority
of the Company's  international  operations involve transactions  denominated in
the local  currencies of countries within Western Europe,  principally  Germany,
France and the United Kingdom;  Japan; Canada and Australia.  An increase in the
exchange  value of the United  States  dollar  reduces  the value of revenue and
profits generated by the Company's  international  operations.  As a result, the
Company's  operating  and  financial  results  can  be  materially  affected  by
fluctuations in foreign  currency  exchange rates. In an attempt to mitigate the
impact of foreign currency fluctuations,  the Company employs a foreign currency
hedging program.  See "Market Risk Management / Foreign Currency Exchange Risk,"
below.

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

MARKET RISK MANAGEMENT / FOREIGN CURRENCY EXCHANGE RISK

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

The Company has a financing  agreement with a bank that provides for commitments
by the bank to  purchase  promissory  notes  denominated  in a number of foreign
currencies.  Gains and losses associated with changes in the underlying  foreign
currencies  are  deferred  during the

<PAGE>
                                                              Form 10-Q, Page 22


commitment  period and  recognized  as an adjustment  to the revenue  supporting
the note  repayment at the time the bank purchases the promissory notes. See
"Liquidity and Capital Resources - Available Financing Lines," for a description
of the financing agreement.

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

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

A  hypothetical  10% adverse  movement in foreign  exchange rates applied to the
Company's  foreign  currency  exchange  rate  sensitive  instruments  held as of
September 24, 1999, and as of December 25, 1998,  would result in a hypothetical
loss of  approximately  $72.9  million  and  $59.2  million,  respectively.  The
increase in the  hypothetical  loss for the nine months of 1999 is primarily due
to an increase in forward exchange  contracts  outstanding.  These  hypothetical
losses do not take into  consideration  the Company's  underlying  international
operations.  The Company  anticipates that any hypothetical loss associated with
the Company's  foreign  currency  exchange rate sensitive  instruments  would be
offset by gains associated with its underlying international operations.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

New Products, Services and Software; Markets; and Distribution
Channels

The Company's  results of operations and  competitive  strength  depend upon its
ability to successfully develop, manufacture and market innovative new products,
services,  and  software.   Short  product  life  cycles  are  inherent  to  the
high-technology  market.  The  Company  must  devote  significant  resources  to
research  and product  development  projects  and  effectively  manage the risks
inherent  in new  product  transitions.  Developing  new  technology,  products,
services and software is complex and involves  uncertainties.  Delays in product
development,  manufacturing,  or in customer evaluation and purchasing decisions
can make product transitions  difficult.  In addition,  product transitions make
the process of production  and inventory  planning more difficult as the Company
must accurately anticipate product mix and configuration demands, and accurately
forecast  approximate  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
<PAGE>
                                                              Form 10-Q, Page 23


be able to  successfully  manage the  development  and  introduction of new
products, services, and software in the future.

The  manufacture  of new  products  involves  integrating  complex  designs  and
processes,  collaborating  with sole source  suppliers for key  components,  and
increasing  manufacturing  capacities to accommodate  demand. A design flaw, the
failure to obtain  sufficient  quantities  of key  components  or  manufacturing
constraints  could  adversely  affect  the  Company's  operating  and  financial
results.

The Company  historically has generated a significant portion of its revenue and
operating  profits from the  mainframe  market.  The rate of revenue  growth has
declined in the mainframe  market as a result of significant  price  competition
and as customers' purchase patterns transition to the client-server environment.
The  Company's  future  financial  results  are  significantly   dependent  upon
successfully  competing in the rapidly growing client-server and SAN markets and
replacing the earlier generation products in the mainframe  environment with new
technology.   The  Company  currently  is  making  significant   investments  in
developing  new  products  and  software  for  these  markets.  There  can be no
assurances  that the Company will be  successful  in these  activities.  The SAN
market is a new market and is rapidly  evolving.  The  Company's  operating  and
financial results may be adversely impacted in the event the SAN market develops
slower than expected or the Company's  products fail to gain  acceptance in this
market.

Many of the Company's customers undertake significant procedures relating to the
evaluation,  testing,  implementation and acceptance of the Company's  products,
software and  services.  This  evaluation  process  results in a variable  sales
cycle,  and makes it  difficult  to predict if or when  revenue  will be earned,
particularly  in  advance  of and into the year  2000,  as  customers  may delay
testing and purchase decisions in anticipation of the year 2000. Further,  gross
margins may be adversely impacted in an effort to complete the sales cycle.

The Company's business model involves the use of both its direct sales force, as
well as indirect distribution channels,  such as OEMs, value-added resellers and
value-added distributors. In order to be successful with this model, the Company
must  successfully  manage  the  mix of  these  different  sales  channels.  The
Company's operating and financial results may be adversely affected in the event
an indirect partner establishes a new relationship with a competitor,  delays or
changes its purchasing patterns, or experiences financial difficulties.

Dependence on IBM

During the third  quarter  and nine months of 1999,  OEM sales of  products  and
software to IBM declined to 8% and 10%,  respectively,  of the  Company's  total
revenue  compared to 20% in the same  periods of 1998.  The Company  anticipates
that IBM will  continue to reduce its  purchases  from the Company in the fourth
quarter of 1999 and does not  anticipate  any  significant  sales to IBM in 2000
under  the OEM  agreement.  The  Company  does  not  expect  IBM to  extend  the
relationship  beyond the current  contract  that  expires in December  2000 with
respect to future products and software, as IBM has announced a competitive disk
product.  The Company has expanded its direct sales  channel to sell its SVA and
SnapShot products.  Failure to successfully develop new high-volume distribution
channels for the Company's disk products and SnapShot  software could  adversely
affect the Company's  financial  results.  IBM's entry with a  competitive  disk
product may heighten the competitive pressures in the market for SVA and

<PAGE>
                                                              Form 10-Q, Page 24


further accelerate the price erosion that the Company is currently  experiencing
in the disk market.

Competition

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

From  time-to-time,  two or more of the Company's  competitors may form business
alliances  that compete with the Company.  For example,  in the first quarter of
1999, IBM and EMC Corporation  announced that they have entered into a strategic
business and technology alliance. In addition, during the third quarter of 1999,
EMC Corporation acquired Data General.  The Company's  OPENstorage Disk products
are currently  supplied through an OEM agreement with Data General which expires
during  the  second  quarter of 2000.  While the  Company  has plans to sell Sun
Microsystems, Inc.'s open enterprise disk product in the future under a recently
announced  multi-year,  worldwide OEM sales and marketing  agreement,  these new
products are currently not available.  Although the impact of these alliances on
the  Company's  business  is unclear at this time,  the  alliance  of two of the
Company's  major  competitors or partners could  adversely  affect the Company's
ability to compete in a number of its existing market segments.  A number of the
Company's competitors in the product,  services and software markets have formed
alliances with the stated objective of developing  interoperable  SAN solutions.
In the storage  management  software  market,  the Company competes with vendors
with which it has established  partnerships,  including Legato Systems, Inc. and
Veritas Software Corporation. The Company also anticipates that it will continue
to  establish  distribution  partnerships  with other  equipment  manufacturers,
software vendors and service providers to address competitive factors. There can
be no assurances that the Company will be able to  successfully  compete against
other companies in these markets.

Volatility of Stock Price / Earnings Fluctuations

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

The  Company's  financial and  operating  results may fluctuate  from quarter to
quarter due to a number of reasons.  In the past,  the  Company's  results  have
followed a seasonal  pattern,  which

<PAGE>
                                                              Form 10-Q, Page 25


reflects the tendency of customers to make their  purchase  decisions  at the
end of a  calendar  year.  During  any fiscal quarter,  a  disproportionately
large  portion  of the total  product  sales is recognized  in the last weeks
and days of the  quarter.  These  factors make the forecasting  of revenue
inherently  difficult.  Because the  Company  plans its operating  expenses  on
expected  revenue,  a  shortfall  in revenue  may cause earnings to be below
expectations in that period. A number of factors may cause revenue to fall below
expectations,  such as product and technology  transitions announced by the
Company or its  competitors;  delays in the availability of new products;
changes in the  purchasing  patterns of the  Company's  customers and
distribution  partners,  particularly  in advance of and into the year 2000; the
timing of customers'  acceptance of solutions;  rapid price erosion;  or adverse
global  economic  conditions.  The mix of sales  among  the  Company's  business
segments and sales  concentration  in  particular  geographic  regions may carry
different gross profit margins and may cause the Company's  operating margins to
fluctuate and impact earnings.

Manufacturing / Sole Source Suppliers

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

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

Certain  of the  Company's  suppliers  have  experienced  occasional  technical,
financial  or other  problems  in the past that  have  delayed  deliveries,  but
without significant effect on the Company. An unanticipated  failure of any sole
source supplier to meet the Company's  requirements for an extended  period,  or
the inability to secure comparable  components in a timely manner,  could result
in a shortage of key  components,  longer lead times,  and reduced  control over
production and delivery  schedules.  These factors could have a material adverse
effect on the  Company's  revenue  and  operating  results.  In the event a sole
source  supplier was unable or unwilling to continue to supply  components,  the
Company  would have to identify

<PAGE>
                                                              Form 10-Q, Page 26


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 or at a price acceptable to the Company.

Information Systems Transition

The Company has  replaced  many of its  internal  information  systems with new,
integrated  information systems. The implementation of these information systems
is complex and has affected numerous operational,  transactional, financial, and
reporting processes. The establishment of processes and training associated with
these  new   systems  are   continuing   and  involve  a  number  of  risks  and
uncertainties.  The Company  must  successfully  manage the process  changes and
employee training programs. There can be no assurance that the transition to the
new information  systems will not cause delays or interruptions in the Company's
critical business processes. Failure to successfully manage the transition could
adversely affect the Company's operating and financial results in the future.

Risks Associated with the Year 2000

The Company's  product lines include  information  storage products and software
which  collect,  move,  store,  share,  and protect  data.  In order to properly
process data,  the Company's  products must  successfully  manage and manipulate
data that includes  both 20th and 21st century  dates (Year 2000 Ready).  All of
the Company's  currently  offered products and software have been evaluated and,
provided they have been upgraded to include all recommended engineering changes,
the Company  believes  that they are Year 2000 Ready.  However,  there can be no
assurance  that the  Company's  current  products and software will be Year 2000
Ready in all environments. In addition, the Company does not currently intend to
develop modifications to certain of its older products and software to make them
Year 2000 Ready and has provided notification or otherwise made available to all
affected  customers  the potential  year 2000  problems with older  products and
software  in  order to raise  their  awareness.  The  Company  currently  has an
established worldwide 24 hour per day call center to assist customers. This call
center is staffed with full support service  employees who are trained to assist
customers with year 2000 issues that have been identified.

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

The Company has  replaced  many of its  internal  information  systems  with new
integrated  information  systems.  See "Information  Systems  Transition" above.
These new  systems  are  believed  to be Year 2000  Ready.  The Company has also
completed an assessment on its other critical internal  information systems that
are not being replaced to determine if they are Year 2000 Ready. The Company has
also completed assessing critical  non-information  systems to determine if they
are Year 2000 Ready. The remediation  programs for its critical  information and
non-information  systems  that  were  not  Year  2000  Ready  are  substantially
completed and tested.
<PAGE>
                                                              Form 10-Q, Page 27


The  costs  incurred  to date  directly  related  to the  Company's  remediation
activities  are  approximately  $3 million  and no future  costs  related to the
remediation activities are expected.  These remediation costs do not include the
costs associated with the Company's new information systems,  which are expected
to be Year 2000 Ready.  The Company has  invested  approximately  $41 million in
these new information systems as of September 24, 1999. No further investment is
expected in 1999 to make the  systems  Year 2000 Ready.  Although  all  critical
internal  information  and  non-information  systems  have been  remediated  and
tested,  manual  back-up  processes are being prepared for critical  areas.  All
information contained in the systems will be backed-up to tape media on December
31,  1999,  and all data  systems  will be  monitored  during  this  period  for
potential issues and as a precaution  against  unauthorized  access.  Failure to
fully identify all year 2000  dependencies  in the Company's  systems could have
material adverse  consequences,  including delays in the delivery or sale of the
Company's products, or cause the Company to incur unexpected additional costs.

The  Company  has  completed  an  assessment  of  the  possible  effects  on its
operations of the year 2000 readiness of key suppliers and vendors.  The Company
identified all critical vendors and suppliers and has ensured they are Year 2000
Ready. The Company has also identified alternative suppliers and vendors and has
stocked certain critical  components in the event such suppliers and vendors are
not Year 2000 Ready.  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's  revenue has been adversely  impacted in the third quarter of 1999
as some customers have delayed testing and purchasing  decisions in anticipation
of the year 2000,  particularly  with  respect  to tape  products  and  software
targeted for the  mainframe  market.  The adverse  consequences  resulting  from
customers'  year 2000 concerns  include,  decreased  spending on new information
storage  systems as customers  complete  their year 2000 testing  activities and
delays in customer purchase decisions once customers have verified the year 2000
readiness of their existing information systems. The Company believes the demand
for its  products,  particularly  in the  mainframe  market,  will be  adversely
affected  during the fourth  quarter of 1999 and the first  quarter of 2000,  as
these patterns continue.


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

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

<PAGE>
                                                              Form 10-Q, Page 28





               STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
                           PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS

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

In January 1994,  Stuff Technology  Partners II, a Colorado Limited  Partnership
(Stuff),  filed suit in Boulder  County,  Colorado,  District  Court against the
Company and certain  subsidiaries.  The suit alleged that the Company breached a
1990  settlement  agreement  that had resolved  earlier  litigation  between the
parties  concerning an optical disk drive storage  development  project  entered
into in 1981 which was  unsuccessful  and  terminated  in 1985.  The suit sought
injunctive  relief and damages in the amount of $2.4  billion.  On December  28,
1995, the court granted the Company's  motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997,  the Court of Appeals  reversed  the District  Court's  judgment and
remanded the case to the  District  Court for further  proceedings.  On July 15,
1999, the District Court dismissed with prejudice Stuff's claims relating to the
Company's  alleged use of the optical disk  technology,  and  dismissed  without
prejudice all of the remaining  claims. On August 30, 1999, Stuff filed a notice
of appeal with the Colorado Court of Appeals seeking to overturn the decision of
the District  Court.  The Company  continues to believe that Stuff's  claims are
wholly  without  merit and  intends to  vigorously  defend any  further  actions
arising from this complaint.

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
District Court granted the  plaintiffs'  request to proceed as a class action on
the ADEA claims. On November 9, 1998, the District Court granted the plaintiffs'
request  to  proceed  as a class on the  ERISA  claims.  On March 1,  1999,  the
District  Court denied the Company's  appeal on the  certification  of the ERISA
class.  Approximately  1,300  persons are  eligible  members of the ERISA class,
which includes approximately 400 members of the ADEA class. The plaintiffs seek,
among other things, compensatory damages in an unspecified amount, including the
value of back pay and benefits;  reinstatement as employees or alternatively the
value of future earnings and benefits;  and exemplary or liquidated damages. The
Company has filed an answer denying both the ADEA and ERISA claims and has filed
motions for summary judgment  regarding both claims and for  decertification  of
the ADEA class.  On September 1, 1999, at a hearing  before the District  Court,
the Court vacated the trial date  scheduled for October 1999. The District Court
has  scheduled  oral  arguments  on the pending  motions on November 19, 1999. A
trial  date  will not be  scheduled  until the  District  Court has ruled on the
pending motions.

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 all of these  actions  is  inherently  difficult  to
predict.
<PAGE>
                                                              Form 10-Q, Page 29


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.

On October 8, 1999,  the Company and  Odetics,  Inc.  (Odetics)  entered  into a
settlement  agreement  regarding two patent  infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995,  alleging
infringement of various claims in U.S. Patent No.  4,779,151 (the "151 Patent").
The Company agreed to pay $100 million to Odetics for a fully paid up license to
the 151 Patent;  $80 million of which was paid at the time of the settlement and
the  remainder  to be  paid in  equal  annual  installments  of $10  million  in
September in each of 2000 and 2001. The Company  recognized a pre-tax expense of
$82.3  million  for actual  damages  and  post-judgment  interest  in the second
quarter of 1999 in  connection  with  these  legal  actions.  As a result of the
settlement,  the Company  recognized an additional $15.5 million pre-tax expense
in the  third  quarter  of  1999 to  reflect  the  present  value  of the  final
settlement payments.

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 30







ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits

      10.1        Third Amendment, dated as of August 13, 1999,
                  between the Company and Bank of America, N.A., to
                  the Second Amended and Restated Contingent
                  Multi-Currency Note Purchase Commitment Agreement

      11.0        Computation of Earnings Per Share

      27.0        Financial Data Schedule


      Reports on Form 8-K

            On September  2, 1999,  the Company  filed a Current  Report on Form
            8-K,  under Item 5, regarding the Company's  announcement  on August
            27, 1999 updating the Company's litigation proceedings in respect to
            the Odetics, Stuff and ADEA claims.






<PAGE>
                                                              Form 10-Q, Page 31










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 5, 1999                             /s/ ROBERT S. KOCOL
-------------------------------       ------------------------------------------
            (Date)                                    Robert S. Kocol
                                                 Corporate Vice President
                                                and Chief Financial Officer
                                               (Principal Financial Officer)






       November 5, 1999                            /s/ THOMAS G. ARNOLD
-------------------------------       ------------------------------------------
            (Date)                                   Thomas G. Arnold
                                               Vice President and Corporate
                                                        Controller
                                              (Principal Accounting Officer)





<PAGE>
                                                              Form 10-Q, Page 32







                                  EXHIBIT INDEX


   Exhibit No.          Description

      10.1        Third Amendment, dated as of August 13, 1999,
                  between the Company and Bank of America, N.A., to
                  the Second Amended and Restated Contingent
                  Multi-Currency Note Purchase Commitment Agreement

      11.0        Computation of Earnings Per Share

      27.0        Financial Data Schedule