<PAGE>
 
 
 
 
                            SYQUEST TECHNOLOGY, INC.
 
 
                               1996 ANNUAL REPORT
<PAGE>
 
TO OUR SHAREHOLDERS:
 
  Fiscal 1996 was a year of major change for your company. As Chairman, I am
pleased to report that there have been substantive accomplishments,
particularly in the latter half of the year. We added a new management team,
crystallized the Company's marketing and selling strategy, completed new
financing, restructured operations, consolidated our manufacturing facilities,
built a broad distribution network, and replaced our older products with two
new product lines.
 
  SyQuest is in a turnaround mode and has experienced a significant loss for
the fiscal year. Your new management team is dedicated to revitalizing SyQuest
and returning it to profitability. This executive staff brings to the Company a
rich base of relevant experience from the data storage, computer systems,
semiconductor and software industries, combined with individual records of
successful turnarounds. The team has refocused the company on its area of
strength, the high-performance segment of the removable cartridge hard disk
drive market.
 
  The markets for SyQuest products, while historically segmented vertically
into applications such as graphics, pre-press and desktop publishing, have
evolved over the last two years to encompass all areas of computing.
 
  Multimedia and graphic-intensive applications once limited to the Macintosh
environment and trained professional designers, now are available on Windows-
based Intel PCs installed in homes and offices everywhere. Computer users
download documents, graphics, audio and video clips from the Internet. Typical
desktop PC users develop multimedia presentations, edit audio and video files
and manage large volumes of data through backup and archival. Operating systems
too, are growing in size.
 
  This expanding world of applications and information has created an
insatiable appetite for storage--one that cannot be satisfied by internal fixed
hard drives alone. To meet these needs, SyQuest provides a removability factor,
which coupled with hard drive speed and performance, is attractive to all PC
market segments. Market research for our industry projects strong demand for
removable storage through the end of the decade.
 
  During the last nine months, SyQuest has totally revamped its product lines,
introducing two product families. Our new removable cartridge hard drives
continue to win awards and garner recommended ratings from the trade press.
 
  For SyJet, they include:
 
  .  PC Magazine's coveted Editor's Choice award
 
  .  Windows Magazine Recommended exclusive WIN List (displacing the only
     competitive product in the market)
 
  .  New Media Magazine's 1997 Hyper Award for innovative technology
 
  .  Stellar "First Looks" from MacUser; 4-star rating from Macworld; 4-
     diamonds from MacWeek
 
  For EZFlyer, they include:
 
  .  A Consumer Report recommendation
 
  .  PC Magazine's coveted Editor's Choice award
 
  .  Windows Magazine Recommended exclusive WIN List
 
  .  Highly recommended by Pre (prepress) magazine
 
  These awards are not only a testimony to the depth of our technology and
capability of our people, but also are indicative of where we are in our
turnaround. With the introduction of these two new product families behind us,
we are now in a position to focus on revenue growth.
<PAGE>
 
  A series of financing activities were completed as our fiscal year ended that
fundamentally improved our balance sheet and our ability to compete in the
marketplace. We converted more than $38.5 million of accounts payable into
notes payable ranging in duration from 12 to 36 months. Over $11 million in
debt was converted to company stock by leading suppliers. Earlier, in June, we
completed $20 million in equity financing. In October, we completed $30 million
and in November an additional $8.5 million in new equity financing, made
possible by amendments approved at a special stockholders meeting to increase
the number of shares outstanding to 60 million.
 
  During the last quarter of FY1996, we experienced improvement in gross
margins due to cost reduction through improvements in costs of materials,
significant reductions in scrap and rework, and improvements in our
manufacturing yield.
 
  In September, we announced a proposed joint venture with Legend Group, the
largest computer systems manufacturer and distributor in the People's Republic
of China, to manufacture and distribute SyQuest removable cartridge hard drives
and products in China. This anticipated alliance will provide SyQuest access to
what is potentially the world's largest consumer market and will contribute to
our ability to supply products worldwide by significantly expanding SyQuest's
manufacturing capacity.
 
  SyQuest experienced many changes during fiscal 1996 in order to begin the
recovery from its serious market and financial conditions. Your management team
is committed to continuing this turnaround and to returning value to you, our
shareholders. We ask for your continued patience and support as we enter our
next phase in this turnaround.
 
LOGO
Edward L. Marinaro
Chairman of the Board of Directors
<PAGE>
 
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--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                ---------------
 
                                  FORM 10-K/A
                                AMENDMENT NO. 2
 
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended September 30, 1996
 
                                       OR
 
          [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                        COMMISSION FILE NUMBER: 0-19674
 
                            SYQUEST TECHNOLOGY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                               94-2793941
    (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
 
    47071 BAYSIDE PARKWAY, FREMONT,                     94538
              CALIFORNIA                              (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
                                 (510) 226-4000
              (REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                                ---------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (TITLE OF CLASS)
 
  Indicate by checkmark 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.
                                 Yes  X  No
 
  Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[_]
 
  The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of Common Stock on November 30, 1996,
as reported by Nasdaq, was approximately $78,663,000. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
 
  The number of outstanding shares of the registrants' Common Stock on November
30, 1996, was 15,830,753.
 
                   DOCUMENTS INCORPORATED BY REFERENCE: NONE.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
 
                          FORWARD LOOKING STATEMENTS
 
  IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, BELIEFS, EXPECTATIONS AND INTENTIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS." SYQUEST
UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS
TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF. READERS
SHOULD CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES EXCHANGE COMMISSION,
INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN
1997 AND ANY CURRENT REPORTS ON FORM 8-K FILED BY THE COMPANY.
 
ITEM 1. BUSINESS
 
GENERAL
 
  SyQuest Technology, Inc. ("SyQuest"/1/ or the "Company") designs, develops,
manufactures, and markets removable hard disk cartridges, associated disk
drives and free-standing storage systems. The Company's products combine the
advantages of fixed hard disk drives with the benefits of removability, which
include unlimited incremental expansion of data storage capacity, transfer and
sharing of data and software among personal computers, and backup, archival
storage and physical security of data. The Company's principal products have
been 5.25 inch and 3.5 inch cartridges, drives and storage systems used with
personal computers and work stations manufactured and sold by manufacturers of
such products. These products are typically purchased by distributors, mail
order firms, national retail chains, value added resellers, original equipment
manufacturers ("OEMs") for integration into their equipment, government
contractors and others for resale to the end users.
 
INDUSTRY BACKGROUND
 
  All computer systems use one or more types of memory. Internal semiconductor
or main memory is extremely fast but also expensive and is therefore used in
limited quantities. As a result, auxiliary memory devices, such as disk
drives, have long been used to provide additional memory capacity for
operating systems, application programs and user data.
 
  Today's personal computers and workstations typically use fixed disk drives
as their primary auxiliary storage device. Other auxiliary memory devices
include SyQuest's removable disk cartridges and disk drives, removable drives
(where the entire drive unit is removable rather than only the disk), standard
and high capacity floppy diskettes and drives, tapes and tape drives, magneto
optical media and drives, phase change optical media and drives, WORM (Write
Once Read Many) optical media and drives, CD-ROM (Compact Disk--Read Only
Memory) optical media and drives, CD-R (Compact Disk Rewritable) optical media
and drives, and flash memory devices.
 
  The Company believes that its removable disk cartridges and disk drives are
the most appropriate auxiliary memory device for various business applications
due to their combination of interchangeability, performance and cost.
--------
  /1/ "SyQuest," "SQ555," "SQ400," "SQ5110C," "SQ800," "SQ5200," "SQ2000,"
"SQ3105," "SQ310," "SQ3270," "SQ327," "EZ135," and "SQ3135," "SQ135," "SQ1100"
and "SQ110" are trademarks of the Company. This Annual Report also includes
trademarks of companies other than SyQuest Technology, Inc.
 
                                       1
<PAGE>
 
TECHNOLOGY
 
  The Company believes that it has developed and continues to refine a
sophisticated and proprietary removability technology relating to its product
designs and manufacturing processes. Features of this technology include:
 
  .  specialized air flow design to provide a sufficiently clean environment
     inside the cartridge for reliable operation;
 
  .  ramp loading mechanics and microcode to load the heads reliably over the
     spinning disk when the cartridge is inserted and to enable the heads to
     retract from the disk before the cartridge is removed;
 
  .  cartridge loading mechanisms to position the disk consistently over the
     drive hub with centering accuracies that are measured in micro inches;
 
  .  closed loop servo electronics and microcode to enable the cartridge to
     achieve high track densities in spite of the variations in centering
     inherent in removable disk cartridges;
 
  .  multiple zone recording to decrease bits per track and data transfer
     rates in the inner tracks of the disk so that variations in centering of
     the disk do not impair reading and writing accuracy;
 
  .  adaptive microcode to perform system control functions, such as track
     buffer control, actuator control and spin motor control, so as to
     compensate intelligently for variations in disks to ensure
     interchangeability and permit the use of wider tolerance mechanical
     components;
 
  .  servo track writing techniques to permit interchangeability of
     cartridges without compromising data retrievability; and
 
  .  advanced tribology (the science of design, friction, wear and
     lubrication of interacting surfaces) to achieve head flying heights over
     removable cartridge disks comparable to those of fixed Winchester disk
     drives.
 
PRODUCTS
 
  The Company's principle products are 5.25 inch and 3.5 inch removable
Winchester disk drives, associated cartridges and system products.
 
 5.25 Inch Products
 
  The Company's 5.25 inch drive and cartridge products are designed and
developed by the Company's engineering staff in Fremont, California. The 5.25
inch product line (including SyQuest branded systems products) accounted for
44% of the Company's net revenues in fiscal 1996 compared to 60% in fiscal
1995 and 72% in fiscal 1994. The 5.25 inch product line includes:
 
  SQ555 & SQ400. The 44 megabyte SQ555 drive and associated SQ400 cartridge,
first introduced in 1988, operate at a typical seek time of 20 milliseconds
and support a burst asynchronous data transfer rate of 1.25 megabytes per
second. The SQ555 was discontinued and phased out of production during the
second quarter of fiscal 1995. The Company continues to manufacture and sell
SQ400 cartridges.
 
  SQ5110C & SQ800. The 88 megabyte SQ5110C drive and SQ800 cartridge, first
introduced in 1991, operate at a typical seek time of 20 milliseconds and
support a burst synchronous data transfer rate of 4 megabytes per second. The
SQ5110C can both read and write SQ400 and SQ800 cartridges. This drive was
phased out of production in the second quarter of 1996, but cartridges remain
in production and are expected to remain in production into 1997.
 
  SQ5200 & SQ2000. The 200 megabyte SQ5200 drive and SQ2000 cartridge,
introduced in 1994, operate at a typical seek time of 16 milliseconds and
support a burst synchronous data transfer rate of 5 megabytes per second. The
SQ5200 can read and write both SQ400 and SQ800 as well as SQ2000 cartridges.
The SQ5200 and SQ2000 products are still in production and are expected to
remain in production throughout 1997.
 
 
                                       2
<PAGE>
 
 3.5 Inch Products
 
  The Company's 3.5 inch drive and cartridge products are designed and
developed at SyQuest development centers in Boulder, Colorado and in Campbell,
California. The 3.5 inch product line (including SyQuest branded systems)
accounted for 56.0% of the Company's net revenues in fiscal 1996 compared to
40% in fiscal 1995 and 27% in fiscal 1994. The product line includes:
 
  SQ3270 and SQ327. The 270 megabyte SQ3270 drive and associated SQ327
cartridge, first introduced in 1993, operate at a typical seek time of 13.5
milliseconds and support a burst data transfer rate of 4 megabytes per second.
The SQ3270 can read and write the SQ310 cartridge (a 105 megabyte cartridge
developed for the SQ3105 drive which was discontinued at the beginning of the
fiscal year) as well as the SQ327 cartridge. The SQ3270 family of drives was
discontinued in the fourth quarter of fiscal 1996 as the new generation of
SyQuest drives began to come on line, but the SQ327 cartridges will continue
in production.
 
  EZ3135 and SQ135. The 135 megabyte SQ3135 drive and SQ135 cartridge, first
introduced in the fourth quarter of 1995, operate at a typical seek time of
13.5 milliseconds and support a burst data transfer rate of 5 megabytes per
second. Marketed primarily as a bridge product to the new generation EZFlyer
230 drives and cartridges, production of this drive was discontinued in the
fourth quarter of fiscal 1996, but the SQ135 cartridges will continue in
production.
 
  EZFlyer 230 and SQ230. The 230 megabyte EZFlyer 230 and associated SQ230
cartridge, first shipped in volume in the fourth quarter of fiscal 1996,
operate at a typical seek time of 13.5 milliseconds and support a sustained
data transfer rate of 2.4 megabytes per second. The EZFlyer is able to read
and write SQ135 cartridges as well as SQ230 cartridges.
 
  SyJet 1.5GB and SQ15000. The SyJet 1.5GB drive and associated SQ15000
cartridge represent a new generation of removable storage devices for SyQuest.
The SyJet operates at a typical seek time of 12 milliseconds and delivers
burst data transfer rates of 10 megabytes per second. The Company commenced
beta test shipments of the SyJet in September 1996, and commenced limited
production shipments in December 1996.
 
 Systems Products
 
  SyQuest also designs, develops, manufactures and markets storage systems
which incorporate the Company's 5.25 inch and 3.5 inch drives and cartridges.
A system generally consists of a drive, a cartridge and additional components
necessary for a user to attach and operate the system to his computer. These
products, which include the EZFlyer 230, EZ3135 and 200SS subsystems, are
marketed under the SyQuest brand name to national retail chains, commercial
distributors, computer mail order houses and others.
 
MARKETS AND CUSTOMERS
 
  The Company markets and sells its products through manufacturer
representatives and SyQuest's direct sales force to VADs (Value Added
Distributors), commercial and industrial distributors, systems integrators,
retail sales channels (computer specialty retailers, computer superstores,
computer mail order outlets, etc.) and OEMs. As the market for the Company's
products has become increasingly segmented, diverse sales channels have
developed. While the market for the majority of the Company's products has
been focused on distributors, VADs and systems integrators, the Company's
sales to retailers and superstores have increased from nearly zero in 1994 to
over 11% of the total net revenue in fiscal 1996. The Company believes this
trend will continue into the near future.
 
  The Company believes that continuing advancements and increased end user
accessibility to applications with heavy storage demands such as multimedia,
digital audio and music, digital video, the Internet, computer graphics,
digital photography and large programs such as Windows 95, will benefit the
Company's market by continuing to create a need for more storage. This basic
need is addressed by the "endless" storage design offered by cartridge-based
peripheral devices like SyQuest's and competitive products.
 
 
                                       3
<PAGE>
 
  The Company plans to aggressively develop marketing strategies (channel
marketing programs, national and consumer advertising campaigns, aggressive
merchandising, etc.) and commit financial resources for these market
strategies in an attempt to capture additional market share and presence. With
the new generation of products being introduced in 1997, the Company will also
make an effort to increase its level of business in the OEM market. There can
be no assurance, however, that these efforts will result in increases to the
Company's sales.
 
  The majority of SyQuest's business is done through commercial distributors
throughout the world. The largest single distributor of SyQuest products is
Ingram Micro, which accounted for approximately 10% of the Company's total
revenue in fiscal 1996.
 
  Recently, the Company and Legend Group ("Legend"), the largest computer
systems manufacturer and distributor in the People's Republic of China,
executed a distribution agreement whereby Legend has become the exclusive
distributor of the Company's products in the developing Chinese market.
 
  A growing segment of the Company's business is the retail/superstore
channel, which now accounts for over 11% of the Company's worldwide revenues.
The largest superstore reseller of SyQuest products in fiscal 1996 was
CompUSA, which accounted for 2.6% of the Company's total net revenue. In the
mail order retail channel, MAC/Micro Warehouse continued to be the largest
reseller as it represented nearly 8% of SyQuest's net revenue for fiscal 1996.
 
  At the end of September, 1996, the Company had 7 direct sales personnel
located in 5 offices in the United States, 4 direct sales representatives in
Asia, Australia and the Far East located in 4 offices, and 3 direct sales
representatives in Europe located in 3 offices. North American sales
represented 57% of the Company's total net revenue in fiscal 1996.
 
MANUFACTURING
 
  The Company manufactures high volume, mature products in Malaysia. In
addition, the Company assembles system products and manufactures initial
production quantities of new products in Fremont, California.
 
  The Company currently has manufacturing relationships with Nomai, S.A.
("Nomai") for cartridges and others for manufacture and subassembly of
components. The Company has filed lawsuits against Nomai and Maxell in France
alleging copyright and patent infringement and in the United States regarding
various related claims, including royalty payments owed by Nomai under a
previous arrangement. In November 1996, the Company and two individuals owning
a controlling interest in Nomai announced the execution of a letter of intent
proposing a transaction in which the Company would acquire a controlling
interest in Nomai from those individuals in exchange for shares of the
Company's Common Stock, and would commence a tender offer to acquire up to
100% of the publicly held shares of Nomai. On November 25, 1996, however, the
Company announced that plans to acquire Nomai have been terminated, adding
that it intends to pursue vigorously all available causes of action against
Nomai. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Affect Future Results--Reliance on
Manufacturing Relationships; Nomai Lawsuits" and "Legal Proceedings."
 
  The Company and Legend Group ("Legend"), the largest computer systems
manufacturer and distributor in the People's Republic of China, have announced
the intention to form a joint venture company for the manufacture and
distribution of the Company's removable cartridge hard drives and products in
China. The Company would provide the proposed joint venture company with
training and manufacturing know-how to insure that the joint venture had the
requisite skills to manufacture the Company's removable cartridge hard drives
and products. The Company and Legend have begun the process of negotiating
definitive agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results--
Reliance on Manufacturing Relationships; Nomai Lawsuits."
 
                                       4
<PAGE>
 
  The Company's drive manufacturing operations consist of incoming quality
inspection of components, assembly and test of subassemblies, final assembly
of drives, pretest, burn-in of drives and customer simulation tests. The
cartridge production lines involve extensive media parametric and tribology
testing, assembly of the disk onto a hub, balancing of the cartridge, mapping
of media defects, servowriting and formatting of each cartridge.
 
  The manufacture of removable cartridge disk drives and disk cartridges is
complicated and difficult. In the past, the Company experienced manufacturing
difficulties, including quality problems, resulting in low yields impacting
the Company's ability to meet sales demand. While the Company is not currently
experiencing any quality problems of a material nature in the manufacturing
process, there can be no assurance that the Company will not experience
manufacturing problems in the future. Any disruption of the Company's
manufacturing could adversely affect the Company's business and results of
operations. Foreign manufacturing is subject to various risks, including
changes of governmental policies, transportation delays and interruptions, and
the imposition of tariffs and import/export controls.
 
  The Company obtains almost all subassemblies and components from outside
sources located principally in the United States and Asia. Several of these
components are available through limited or single sources. In the past, the
failure to obtain sufficient quantities of certain key components or to obtain
components of satisfactory quality has caused production delays. Prolonged
disruptions in the supply of any key components used in the Company's
manufacturing processes could adversely affect the Company's operating results
and damage customer relationships. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors That May Affect
Future Results--Shortages of Critical Components; Absence of Supply Contracts;
Suppier Workouts" and "--Reliance on Manufacturing Relationships; Nomai
Lawsuits."
 
RESEARCH AND DEVELOPMENT
 
  SyQuest's strategy is to focus its research and development efforts on
advancing its proprietary removability technology. At the same time, the
Company takes advantage of developments in the fixed Winchester disk drive
industry by purchasing standard components from vendors that sell to
manufacturers of fixed Winchester disk drives. SyQuest's removability
technology includes both product designs and manufacturing processes and is
built upon expertise in mechanical, electrical and firmware engineering as
well as in tribology.
 
  The Company's current product development efforts are directed toward both
high performance drives and cartridges and a value line of products. SyQuest
makes extensive use of computer-aided design tools in mechanical, electrical,
firmware and circuit board design areas.
 
  In fiscal 1996, 1995 and 1994, the Company's research and development
expenses were $25.9 million, $23.9 million and $18.0 million, respectively.
 
  The data storage industry is subject to rapid technological change and short
product life cycles. Data storage manufacturers continually strive for larger
data storage capacities, higher performance and lower costs. Meeting these
demands is more difficult and complicated for manufacturers of removable
cartridge drives such as SyQuest than for fixed drive manufacturers. In order
to remain competitive, the Company must continue to design, develop,
manufacture, market and sell new products in a timely manner. The Company may
also identify and pursue opportunities for affiliation and/or acquisition to
complement its existing technology base. To this end, the Company has incurred
and expects to continue to incur significant product research and development
expenditures. However, there can be no assurance that SyQuest will be able to
introduce cost effective and competitive new products in a timely manner. If
the Company is unable to do so, its future operating results will be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Affect Future Results--Technological
Change and New Products."
 
                                       5
<PAGE>
 
COMPETITION
 
  The removable data storage industry is intensely competitive and is
characterized by rapid technological change which can cause substantial shifts
in pricing and product capabilities. The principle competitive factors in the
industry include price, performance, storage capacity, ease of use, customer
consumption, state of the personal computer market, customer service and time-
to-volume production. In addition, smaller form factors, aesthetic appeal,
ruggedness, compatibility and interfaces are important factors. Many of the
Company's competitors have greater financial, marketing and technological
resources than the Company, and there can be no assurance that the Company
will be able to compete effectively. In particular, several of the Company's
competitors have significantly greater cash reserves than the Company which
may enable them to better withstand intense price competition and/or develop
technology over the long term.
 
  The Company believes that its products compete most directly with other
removable media data storage devices, such as disk drives offered by Iomega
Corporation and magneto optical disk drives. While the Company pioneered the
technology used in the Winchester removable cartridge hard disk drive and for
many years enjoyed a unique position in the industry having little direct
competition, the competitive scene changed due to the activities of two
companies. The Company's most direct competition comes from Nomai, which
manufactures Winchester cartridges compatible with many SyQuest systems, and
Iomega, whose Winchester-based Jaz drive competes directly with the Company's
3.5-inch products and is considered by the Company as similar in price and
performance to the Company's SyJet drive. Today, only Iomega and Nomai
manufacture Winchester-based removable cartridge disk drive products. Also
noted as competition is Iomega's Zip product, based on a high-density floppy-
disk technology, which has gained a large following in the Company's core
markets and effectively enlarged the removable storage market at the retail
level, and which competes with the EZFlyer 230.
 
  Although the Company believes that its products offer performance and
certain other advantages over most other removable media storage devices
available today, the Company believes that the price/performance levels of
existing removable media products will improve and that other companies will
introduce new removable media storage devices. Accordingly, the Company
believes that its products will face intense competition from makers of
removable storage products based on other technologies. These technologies and
some of their respective developers include: (optical) Panasonic, Pinnacle
Micro, Maxoptics, Fujitsu; (rewritable CD) Toshiba, Sony, Phillips, Panasonic,
MKE; and (LS-120) MKE, OR Technology, Compaq and Swan Instruments. In
addition, the Company may face increased competition in the future from
alternative data storage and retrieval technologies such as high-capacity
floppy disk drives, rewritable CD drives and DVD devices. In particular, a
consortium comprising Compaq Computer, 3M, Insite and Matsushita-Kotobuki
Electronics Industries Ltd. has announced and is selling the LS120, a high-
capacity floptical drive that is compatible with conventional floppy disks.
Each of Mitsubishi Electric Corp. and Mitsumi has also announced that it plans
to manufacture a high capacity, floppy drive that is downward compatible with
existing floppy diskettes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--Competition."
 
BACKLOG
 
  The Company's sales are primarily for delivery of standard products
according to standard purchase orders, which may be subject to change or
cancellation by the customer without significant penalties. The quantity
actually purchased, as well as the shipment schedules, therefore, are
frequently revised to reflect changes in the customer's needs. At times when
price competition is intense and price moves are frequent, the Company
believes that most customers may place purchase orders below their projected
needs in order to obtain the most favorable pricing. Conversely, at times when
the industry's participants are on allocation, the Company believes that
certain customers may place purchase orders beyond their projected needs in
order to obtain a greater portion of such allocation. In light of these
factors, backlog as of any particular date may not be indicative of the
Company's actual revenues for any succeeding period, and, therefore, is not
material to an evaluation of the Company's future revenue.
 
                                       6
<PAGE>
 
PATENTS AND LICENSES
 
  Since its inception, the Company has been issued more than 60 U.S. and
foreign patents relating to certain features or components of its disk drive
and cartridge products. Many of these patents, however, do not pertain to the
Company's recent product generation. The Company has approximately 100 pending
U.S. and foreign patent applications, although there can be no assurances that
such applications will mature into patents. No assurance can be given that any
patents issued to the Company will not be challenged, invalidated or
circumvented. In addition to potential patent protection, the Company relies
on the laws of unfair competition, copyright, trademark and trade secrets to
protect its proprietary rights. The Company also utilizes nondisclosure
agreements and internal secrecy procedures. No assurance can be given that the
protective measures taken by the Company will be sufficient to preclude
competitors from developing competing or similar technologies or products.
 
  The Company has been and may in the future be notified that it may be
infringing patent or other proprietary rights. None of these notifications has
resulted in any litigation against the Company, but there can be no assurance
that litigation will not be commenced in the future. If infringement is
established, the Company could be required to pay damages and be enjoined from
selling the infringing products or practicing the infringing processes.
Moreover, if the Company were unable to alter its products or processes to
avoid the infringement claim, it might be required to obtain licenses and
there can be no assurance that necessary licenses could be obtained on
satisfactory terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--Dependence on Proprietary Technology."
 
EMPLOYEES
 
  As of November 30, 1996, the Company had a total of 1,904 full time
employees of which 209 were in research and development, 1,413 were in
manufacturing, 103 were in quality assurance, 74 were in marketing, sales and
support, and 105 were in finance and administration. Of the total number of
employees, the Company has 273 employees located in North America, 29
employees located in Europe, 9 employees located in Singapore, 1,586 employees
in Malaysia, 2 employees in Australia and 5 employees in Japan. The Company
makes use of temporary employees, primarily in manufacturing, who are hired on
an as-needed basis. None of the Company's employees is represented by a labor
union. The Company has experienced no material work stoppages and believes
that its employee relations are good.
 
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
 
  See Note 2 to the Company's Consolidated Financial Statements set forth in
Item 8 of this Annual Report on Form 10-K for financial information concerning
SyQuest's foreign and domestic operations and export sales, which information
is incorporated herein by reference.
 
                                       7
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company's corporate offices, including research and development,
domestic manufacturing, quality assurance, marketing, sales and support, and
finance and administration are located in Fremont, California. The Company
owns its manufacturing facility in Penang, Malaysia; the building is 100,000
square feet and the total land area leased by the Company at such site is
193,432 square feet. The lease on the Penang land area expires in 2050.
SyQuest or one of its subsidiaries leases the facilities described in the
following table:
 
<TABLE>
<CAPTION>
                           SIZE      EXPIRATION OF
        LOCATION         (SQ. FT.)       LEASE              PRINCIPAL USE
        --------         ---------   -------------- ----------------------------
<S>                      <C>         <C>            <C>
Fremont, California.....  139,311(1) April 1999     Administration,
                                                     Manufacturing and Research
                                                     and Development
Singapore...............    9,225    February 1997  Administration
Boulder, Colorado.......   13,896    November 1999  Research and Development
Campbell, California....   11,461    June 1997      Research and Development
Amsterdam, the              7,700(2) March 2000     Unoccupied
 Netherlands............
Ismaning, Germany.......   56,000    September 1999 Administration
                          -------
    Total...............  237,593
                          =======
</TABLE>
--------
(1) Consists of two adjacent buildings
(2) The Company is in the process of assigning its Amsterdam office space and
    anticipates that such assignment will be completed no later than the
    second quarter of fiscal 1997.
 
  The Company also leases or rents office space for sales in the greater
metropolitan areas of Washington, D.C.; Wylie, Texas; Pembroke and Boca Raton,
Florida; Raleigh, North Carolina; Los Angeles and Fremont, California;
Singapore; Paris, France; London and Edinburgh, United Kingdom; Stuttgart and
Weingarten/Ravensburg, Germany; Milan, Italy; Tokyo, Japan; and Sydney,
Australia.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company has been named as a defendant in four putative class action
lawsuits. Two of the actions, Ravens, et al. v. Iftikar, et al. (filed April
2, 1996) and Bellezza, et al. v. Iftikar, et al. (filed May 24, 1996) have
been brought in the United State District Court for the Northern District of
California and have been assigned to the Honorable Vaughn Walker
(collectively, the "Federal Lawsuit"). Certain current and former officers and
directors also have been named as defendants in the Federal Lawsuit.
Plaintiffs have petitioned the Court to consolidate the foregoing complaints
into one consolidated action. That request, as well as other procedural
matters which arose during a July 18, 1996, case management conference, is
under consideration. The plaintiffs in the Federal Lawsuit purport to
represent a class of all persons who purchased the Company's Common Stock
between October 21, 1994 and February 1, 1996. The Federal Lawsuit alleges
that the defendants violated the federal securities laws through material
misrepresentations and omissions. The third suit, a purported class action
entitled Gary S. Kaufman v. SyQuest Technology, Inc., et al., was filed on
March 25, 1996, in the Superior Court of the State of California for the
County of Alameda (the "Kaufman Lawsuit"). Certain current and former
executive officers and directors of the Company are also named as defendants
in the Kaufman Lawsuit. The plaintiffs in the Kaufman Lawsuit purport to
represent a class of all persons who purchased the Company's Common Stock
between May 2, 1995, and February 2, 1996. The Kaufman Lawsuit alleges that
defendants violated various California laws through material
misrepresentations and omissions. Unspecified damages are sought. The fourth
purported class action entitled Ravens, et al. v. Iftikar, et al., was filed
on October 11, 1996 in the Superior Court of the State of California for the
County of Alameda (the "Ravens Lawsuit"). The Ravens Lawsuit alleges that the
Company and certain of its former officers and directors violated various
California laws through material representations and omissions between October
21, 1994 and February 2, 1996, and is purportedly brought on behalf of persons
who purchased stock during that period. Unspecified damages are sought. The
Ravens Lawsuit has been consolidated with the Kaufman Lawsuit. Plaintiffs are
preparing a consolidated complaint. The Company intends to defend the cases
vigorously.
 
                                       8
<PAGE>
 
  On May 14, 1996, the Company was served with a shareholder's derivative
action filed in Alameda County, California, Superior Court entitled John
Nitti, et al. v. Syed Iftikar, et al. On July 22, 1996, plaintiffs filed an
amended complaint. The action seeks to recover unspecified and punitive
damages on behalf of the Company from current and former officers and
directors of the Company for alleged breach of fiduciary duty, unjust
enrichment and waste of corporate assets. The Company is a nominal defendant
in the action. The complaint alleges that the officers and directors issued
false and misleading information and sold shares of the Company's stock at
artificially inflated prices. The allegations are essentially the same as
those in the putative class actions. The Company intends to defend this case
vigorously.
 
  A third party has notified the Company that it believes the Company
infringes on six U.S. patents. It is the Company's belief that the claims are
without merit or that the infringement claims related to component parts
purchased from vendors. The Company also believes that in the event the third
party prevails on its claims, the Company will be indemnified by its vendor
for any liability arising from the alleged infringements and that this matter
will not have a material adverse effect upon its financial condition or
results of operations.
 
  The Company has filed suit against Nomai, S.A. (Nomai) and Maxell in France
for copyright and patent infringement, and though it did not obtain the
temporary injunction sought against Nomai prohibiting the sale and
distribution of Nomai's 200 megabyte cartridges, the underlying suit
continues. The Company has also initiated an arbitration proceeding against
Nomai seeking payment of outstanding royalties of approximately $1 million.
The arbitration process began in May 1995, in San Jose, California.
 
  From time to time, the Company is involved in litigation that it considers
to be in the normal course of its business. Other than set forth above, the
Company is not engaged in any legal proceedings as of the date hereof which
the Company expects individually or in the aggregate to have a material
adverse effect on the Company's financial condition or results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  The Company held a Special Meeting of its stockholders on September 26,
1996. All of the proposals submitted to the stockholders at the meeting were
approved, and the vote on such proposals is described below:
 
  1. A proposal to amend the Company's Certificate of Incorporation to
     increase the number of authorized shares of Common Stock from 20,000,000
     to 60,000,000 was approved by the following vote:
 
<TABLE>
     <S>                        <C>
     For....................... 9,240,216
     Against................... 1,237,995
     Abstain...................    87,414
     Broker Non-Vote...........         0
</TABLE>
 
  2. A proposal to allow the issuance by the Company of additional shares of
     Common Stock to the holders of the Company's 7% Cumulative Convertible
     Preferred Stock, Series 1, upon conversion was approved by the following
     vote:
 
<TABLE>
     <S>                        <C>
     For....................... 4,100,593
     Against...................   832,417
     Abstain...................   113,801
     Broker Non-Vote........... 5,518,814
</TABLE>
 
  3. A proposal to increase the number of shares issuable under the Company's
     1991 Stock Option Plan from 4,428,524 shares to 6,000,000 shares was
     approved by the following vote:
 
<TABLE>
     <S>                        <C>
     For....................... 2,854,778
     Against................... 2,123,841
     Abstain...................   121,442
     Broker Non-Vote........... 5,465,564
</TABLE>
 
 
                                       9
<PAGE>
 
  4. A proposal to increase the number of shares issuable under the Company's
     1992 Non-Employee Director Stock Option Plan from 250,000 shares to
     500,000 shares was approved by the following vote:
 
<TABLE>
     <S>                        <C>
     For....................... 3,007,448
     Against................... 2,216,623
     Abstain...................   138,942
     Broker Non-Vote........... 5,202,572
</TABLE>
 
  A proposal to amend the Company's 1992 Non-Employee Director Stock Option
  Plan to increase the annual grants of options to the non-employee directors
  and to provide for a one-time option grant to purchase 30,000 shares to new
  non-employee directors (which one-time grant was also made to each non-
  employee director as of the date of stockholder approval of the amendments)
  was approved by the following vote:
 
<TABLE>
     <S>                        <C>
     For....................... 7,788,555
     Against................... 2,236,833
     Abstain...................   132,952
     Broker Non Vote...........   407,285
</TABLE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
  SyQuest's Common Stock, $.001 par value, was first offered to the public on
December 18, 1991 and since that time has been traded in the over-the-counter
market as a Nasdaq National Market security under the symbol SYQT. The
following table sets forth, during the periods indicated, high and low closing
sales prices in the Nasdaq National Market system for the last two fiscal
years:
 
<TABLE>
<CAPTION>
     FISCAL YEAR ENDED
     SEPTEMBER 30, 1995                                          HIGH     LOW
     ------------------                                         ------- -------
        <S>                                                     <C>     <C>
        First Quarter.......................................... $18 3/4 $   10
        Second Quarter......................................... $18 1/2 $10 5/8
        Third Quarter.......................................... $15 3/4 $10 5/8
        Fourth Quarter......................................... $19 1/8 $12 1/2
<CAPTION>
     FISCAL YEAR ENDED
     SEPTEMBER 30, 1996                                          HIGH     LOW
     ------------------                                         ------- -------
        <S>                                                     <C>     <C>
        First Quarter.......................................... $13 1/2 $ 8 7/8
        Second Quarter......................................... $11 1/4 $ 4 7/8
        Third Quarter.......................................... $18 7/8 $ 4 3/8
        Fourth Quarter......................................... $ 8 5/8 $    5
</TABLE>
 
  The Company's policy is to retain its earnings to finance future growth and
it has paid no dividends in the last two fiscal years. The Company does not
anticipate declaring cash dividends on its Common Stock in the forseeable
future. In addition, the payment of cash dividends is restricted by certain of
the Company's borrowing arrangements. See Note 4 of Notes to Consolidated
Financial Statements. As of November 30, 1996, there were approximately 427
stockholders of record. Because many of such shares are held by brokers and
other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders.
 
                                      10
<PAGE>
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
  The following selected consolidated financial data is derived from the
audited consolidated financial statements of SyQuest. The data should be read
in conjunction with the consolidated financial statements, related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Items 7 and 8 of this Annual Report.
 
<TABLE>
<CAPTION>
                                          YEARS ENDED SEPTEMBER 30,
                                -----------------------------------------------
                                  1996       1995      1994     1993     1992
                                ---------  --------  -------- -------- --------
                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                             <C>        <C>       <C>      <C>      <C>
CONSOLIDATED STATEMENTS OF
 INCOME DATA:
  Net revenues................. $ 200,407  $299,544  $221,001 $206,362 $174,852
  Gross profit (loss)..........   (48,286)   51,047    60,659   75,281   59,142
  Income(loss) from operations.  (130,676)  (17,101)    5,120   19,278   17,592
  Net income(loss)(1)(2)....... $(136,651) $(11,786) $  5,405 $ 15,212 $ 13,583
INCOME (LOSS) PER SHARE(3):
  Income(loss) before
   cumulative effect of change
   in method of accounting for
   income taxes................ $  (12.38) $  (1.07) $   0.43 $   1.23 $   1.14
  Net income (loss)............ $  (12.38) $  (1.07) $   0.46 $   1.23 $   1.17
</TABLE>
 
<TABLE>
<CAPTION>
                                                  SEPTEMBER 30,
                                  ----------------------------------------------
                                    1996       1995     1994     1993     1992
                                  ---------  -------- -------- -------- --------
                                                 (IN THOUSANDS)
<S>                               <C>        <C>      <C>      <C>      <C>
CONSOLIDATED BALANCE SHEET DATA:
  Working capital...............  $ (37,351) $ 62,340 $ 72,652 $ 69,638 $ 56,183
    Total assets................     75,181   164,684  139,501  120,503  105,109
    Total stockholders' equity
     (deficit)..................    (30,353)   83,188   90,845   89,544   76,900
</TABLE>
--------
(1) In 1994, the Company changed its method of accounting for income taxes
    from the deferred method to the liability method. The effect of the
    accounting change was to increase 1994 net income and income per share by
    $346,000 and $0.03, respectively.
(2) Net income includes a credit to income of $346,000 for the cumulative
    effect of the change in method of accounting for income taxes for the year
    ended September 30, 1994 and extraordinary credits of $300,000, resulting
    from the utilization of net operating loss carryforwards for the year
    ended September 30, 1992.
(3) See Note 1 of Notes to Consolidated Financial Statements for an
    explanation of the method used to determine the number of shares used to
    compute per share amounts.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
 
  Revenue, gross profit and net income declined substantially in fiscal 1996.
Revenue for fiscal 1996 was $200.4 million, a decline of $99.1 million from
fiscal 1995; the gross loss in fiscal 1996 was $48.3 million, as compared to a
gross profit of $51.0 million in fiscal 1995; net losses in fiscal 1996 were
$136.7 million as compared to a loss of $11.8 million in fiscal 1995. The
decrease in revenue can be primarily attributed to a substantial decline in
average selling prices (ASPs) of the EZFlyer 135 and SQ3270 products
(EZ135/SQ3270). In addition to EZ135/SQ3270 pricing, the Company's revenue was
affected by an ongoing trend of declining selling prices and unit volumes for
the Company's mature 5.25 inch products, partially offset by the successful
introduction of the EZFlyer 230 in the fourth quarter of the fiscal year. The
Company was not able to reduce its manufacturing costs as rapidly as ASPs
declined, especially with respect to the EZ135/SQ3270 products. These products
generated negative gross profits for most of fiscal 1996 and, along with
declining ASPs and unit sales of the 5.25 inch products, were the primary
cause for the large losses incurred by the Company. Inventory
 
                                      11
<PAGE>
 
reserves, excess non-cancellable purchase commitments, and restructuring
charges accounted for approximately $28.6 million of the fiscal 1996 net loss.
As of September 30, 1996, the Company had a negative working capital of $37.4
million and a negative net worth of $30.4 million. With the consumption of
available working capital, the Company was unable to meet a significant
portion of its financial obligations to key suppliers and the supply of
certain materials was disrupted. In the second half of the fiscal year,
management changes were made and the Company initiated significant changes in
financing, manufacturing operations, business processes, and product focus,
including discontinuing the EZ135/SQ3270 products.
 
FISCAL 1996 COMPARED TO FISCAL 1995
 
NET REVENUES
 
  Fiscal 1996 revenues declined by 33% to $200.4 million from $299.5 million
in fiscal 1995. The revenue reduction can be attributed to sharply reduced
prices for the Company's EZ135 and SQ3270 3.5 inch products, and reduced unit
sales and lower ASPs for all 5.25 inch platform drives and cartridges (down
50% from fiscal year 1995), which were partially offset by the successful
introduction of the EZFlyer 230 in the fourth quarter of fiscal 1996. From
fiscal 1995 to fiscal 1996, ASPs for 5.25 inch drives and subsystems declined
9%, 3.5 inch drive and subsystem ASPs declined 37% and cartridge ASPs declined
29%. Cartridge revenue as a percentage of total revenue was 49% in both fiscal
years. Cartridge unit sales volume declined 3% from fiscal 1995 to fiscal 1996
while unit drive volume decreased 4% for the same period. The Company's mature
5.25 inch products comprised 44% of revenue in fiscal 1996 after representing
60% of revenue in fiscal 1995. While a substantial portion of the Company's
revenue in fiscal 1996 was derived from the current family of 5.25 inch drives
and cartridges, the Company expects that this line of products will continue
to decline as a portion of future revenue.
 
  The Company reached volume production with the EZFlyer 135 (EZ135) in the
first quarter of fiscal 1996; however, during that quarter the Company
experienced certain vendor related component supply and quality problems which
limited its ability to fill its open customer backlog. Over the balance of
fiscal 1996, a competitor marketed a product with a lower cost structure than
the EZ135, causing the Company to lower its price in order to maintain market
share. In the second quarter of fiscal 1996, the Company decided to cease
production of the EZ135 drive as soon as economically possible, and sales of
EZ135 drives ended in the fourth quarter of fiscal 1996. However, cartridge
production and sales traditionally continue beyond the final production of the
associated drive in the removable cartridge disk drive industry. EZ135
cartridges are expected to contribute a significant portion of the Company's
revenue in fiscal 1997.
 
  The Company's EZFlyer 230, a new 3.5 inch product that began shipping in the
fourth quarter of fiscal 1996, contributed approximately 6% of total revenue
for the year. Management believes the EZFlyer 230 and future products
utilizing the EZFlyer platform will contribute a significant portion of the
Company's revenue for fiscal 1997.
 
  The data storage industry is subject to rapid technological change and short
product life cycles. Data storage manufacturers continually strive for larger
data storage capacities, higher performance and lower costs. Meeting these
demands is more difficult and complicated for manufacturers of removable
cartridge drives such as SyQuest than for fixed drive manufacturers. In order
to remain competitive, the Company must continue to design, develop,
manufacture, market and sell new products in a timely manner. To this end, in
the fourth fiscal quarter of 1996 the Company announced a 1.5 gigabyte, 3.5
inch product (SyJet) but has not yet commenced volume production. The Company
believes the SyJet will contribute a significant portion of its fiscal 1997
revenue. However, there can be no assurance that SyQuest will be able to
introduce this or other cost effective and competitive new products in a
timely manner. If the Company is unable to do so, its future operating results
will be adversely affected.
 
GROSS PROFIT (LOSS)
 
  The gross loss for the year ended September 30, 1996 was $48.3 million
compared to a gross profit of $51.0 million in the previous fiscal year. The
negative gross margin as a percentage of net revenue was 24% in fiscal
 
                                      12
<PAGE>
 
1996 compared to a positive gross margin of 17% in fiscal 1995. The decline in
gross margin is primarily attributable to losses incurred on the sale of and
reserves established for the EZ135/SQ3270 systems, and ongoing reductions in
ASP and unit sales for the Company's current line of 5.25 inch products.
 
  The Company made a strategic decision in fiscal 1995 to enter the growing
SOHO (Small Office/Home Office) marketplace and acquire market share with the
EZ135 rather than wait until it could introduce a low cost, low-end product.
Due to competitive pressures, the Company reduced selling prices in order to
maintain market share, but was unable to make corresponding reductions in
manufacturing costs. As a result, the EZ135 and another subsystem product, the
SQ3270, were sold for most of fiscal 1996 at negative gross margins. This was
a significant factor in the Company's substantial operating loss in fiscal
1996.
 
  In addition, the Company experienced a general decline in product prices
which reduced the gross profit margins of its 5.25 inch and 3.5 inch drives,
subsystems and cartridges. The decline in cartridge ASPs from fiscal 1995 to
fiscal 1996 was 29%. Average 5.25 inch drive and subsystem prices decreased
approximately 9% for the same period. From fiscal 1995 to fiscal 1996, EZ135
subsystem ASPs declined 30% and SQ3270 drives and subsystem ASPs declined 16%.
During fiscal 1996, EZ135 and SQ3270 drive and subsystem ASPs declined 45% and
58%, respectively. Rapid price declines are common in the disk drive industry
and there can be no assurance that the Company will be able to achieve
manufacturing cost reductions or introduce higher capacity products, which
generally have higher selling prices per unit, rapidly enough to offset the
pricing pressures on lower capacity products.
 
  In the second half of fiscal 1996, management changes were made and the
Company initiated changes in product focus, financing, manufacturing
operations, and business processes. The EZ135/SQ3270 drive products were
declared "end-of- life" in the second fiscal quarter, with remaining inventory
and purchase commitments being managed to minimize cash requirements. The
final sales of the EZ135/SQ3270 drive products were completed in the fourth
fiscal quarter of 1996. The discontinuing of the EZ135/SQ3270 drives resulted
in charges to cost of goods sold of approximately $21.4 million in fiscal
1996, including $8.1 million of obsolete and excess inventories and $13.3
million for non-cancellable purchase commitments. The Company further granted
customers an opportunity to return EZ135 product for a refund. This resulted
in significant product returns in the third and fourth quarters of fiscal
1996. The Company incurred a charge to earnings of approximately $2.5 million
to write-off the portion of those returns which could not be resold.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
  Selling, general and administrative expenses were $51.7 million for fiscal
1996 versus $44.3 million for fiscal 1995. The increase in expenses was
primarily attributable to an increase of $3.8 million in provisions for bad
debt and an increase in legal expenses from $1.2 million to $2.3 million
primarily attributable to various legal proceedings in which the Company is
engaged. The Company also incurred an increase of approximately $1.9 million
in general and administrative costs in fiscal 1996 over fiscal 1995, due to
duplicate administrative costs during the transition of manufacturing
operations from Singapore to Malaysia.
 
  The Company continued to invest in its sales and marketing efforts despite
the decline in revenue from fiscal 1995 to fiscal 1996 as it endeavored to
increase the market presence of the Company's products.
 
RESEARCH AND DEVELOPMENT EXPENSES
 
  Research and development expenses totalled $25.9 million in fiscal 1996, an
increase of $2.0 million from fiscal 1995. This represents 12.9% of revenue in
fiscal 1996, compared to 8.0% in fiscal 1995. The increase in spending is
primarily due to increased headcount and related costs. The increase as a
percentage of revenue is due to the increase in expense and the decline of
revenue from fiscal 1995 to fiscal 1996. The Company believes that it must
continue to make significant investments in R&D in order to effectively
implement its product strategy and continues to make these investments despite
the decline in revenue from 1995 to 1996.
 
 
                                      13
<PAGE>
 
RESTRUCTURING EXPENSES
 
  Restructuring expenses were incurred during fiscal 1996 for the transfer of
manufacturing operations previously located in Singapore to the Company's
facility in Penang, Malaysia to lower costs and eliminate excess capacity, and
for the relocation of the Company's European headquarters from the Netherlands
to Germany. Restructuring charges from discontinued operations in Singapore
included $1.4 million for severance and other benefits affecting approximately
1,500 employees, $0.6 million for site closure and related costs and $1.6
million for write-off of capital assets. The shutdown was completed in the
third quarter of fiscal 1996. Restructuring charges related to the movement of
the Company's European headquarters to Germany totalled $1.1 million and
included severance costs and write-off of capital assets in the Netherlands,
as well as certain legal expenses.
 
OTHER INCOME AND EXPENSES
 
  Other expenses in fiscal 1996 include $2.1 million in losses incurred on the
sale of excess and obsolete fixed assets and approximately $0.6 million in
foreign exchange losses. These expenses were partially offset by a $0.7
million gain realized on the disposition of common stock of a third party used
to reduce certain debt owed to one of the Company's suppliers.
 
INTEREST INCOME AND EXPENSE
 
  The Company incurred $1.2 million of interest expense on its borrowings and
earned $0.2 million of interest income on its investments in fiscal 1996. The
interest expense for fiscal 1996 was primarily the result of borrowings under
the Company's bank lines of credit. There were no borrowings and interest
income on investments was $1.1 million in fiscal 1995.
 
INCOME TAXES
 
  The provision for income taxes was $3.0 million in fiscal 1996 as compared
to a net tax benefit of $3.7 million in fiscal 1995. The provision in 1996 was
primarily due to an increase in the deferred tax asset valuation allowance
which exceeded the expected tax benefit computed by applying the federal
statutory rate to the fiscal 1996 loss. Realization of the net deferred tax
asset of $50 million as of September 30, 1996 is dependent on future earnings,
the timing and amount of which are uncertain. Accordingly, as of September 30,
1996, a valuation allowance in an amount equal to the net deferred tax asset
has been recorded. In fiscal 1995, the Company recorded a tax benefit of $3.7
million representing an effective tax rate of 24%. The effective rate was less
than the federal statutory rate primarily due to foreign losses for which no
current income tax benefit could be recognized and the provision for income
taxes on foreign earnings previously considered to be permanently reinvested
offshore.
 
  The Company has been in negotiations with Malaysian authorities for a tax
holiday exempting at least part of the profits of its Penang, Malaysia
operation from taxes. While there can be no assurance that the Company will be
successful in negotiating or that it will be able to meet the conditions of
the tax holiday, Management believes it will be able to realize a tax holiday
in Malaysia in the future.
 
  The Company's manufacturing operations in Singapore, prior to their
relocation to Penang, Malaysia, operated under a tax holiday that expired in
September 1996. The tax holiday had no impact on net income in fiscal 1996 or
1995.
 
FISCAL 1995 COMPARED TO FISCAL 1994
 
NET REVENUES
 
  Fiscal 1995 net revenues increased by 36% to $299.5 million from $221.0
million in fiscal 1994. The net revenue growth was attributed to several
factors; strong demand for the Company's higher capacity drive and
 
                                      14
<PAGE>
 
cartridge products which accounted for 62% of fiscal 1995 net revenues,
continued demand for the Company's lower capacity cartridges, and the fourth
quarter introduction and market acceptance of the EZ135 systems products
targeted for the SOHO (small office/home office) market. Unit shipments of the
Company's drive products increased by 47% resulting in a 71% increase in drive
net revenues in fiscal 1995. Cartridge unit shipments increased 46%, yielding
a 13% increase in fiscal 1995 cartridge net revenues. System net revenues, on
the strength of the EZ135 product line, increased 163% in fiscal 1995.
 
  Net revenues from 5.25 inch form factor products declined from 72% of net
revenues in fiscal 1994 to 60% of net revenues in fiscal 1995 while 3.5 inch
form factor net revenues increased to 40% of net revenues in fiscal 1995 from
27% in fiscal 1994.
 
  The Company achieved volume shipments of its EZ135 drive and cartridge
products in the fourth quarter of fiscal 1995. During the quarter the Company
experienced certain vendor related component supply and quality problems which
limited its ability to fill its open customer backlog.
 
  Selling prices of the Company's mature, lower capacity products continued to
decline in fiscal 1995. In order to stay competitive in the 5.25 inch
cartridge market the Company reduced the selling prices of its 44 megabyte and
88 megabyte cartridges by approximately 30% in the second quarter of fiscal
1995.
 
  Cartridge sales as a percentage of net revenues decreased from 58% in fiscal
1994 to 48% in fiscal 1995. The decline is attributable to pricing actions
taken on the 44 megabyte and 88 megabyte cartridges along with the shift in
sales to higher capacity products which require fewer cartridges to store the
same quantity of data.
 
  Sales to customers outside of North America, which are primarily denominated
in U.S. dollars, increased from $85.7 million or 39% of net revenues in fiscal
1994 to $117.4 million or 39% of net revenues in fiscal 1995. In addition, the
Company believes that a portion of its products sold to customers in North
America are resold by such customers outside of North America.
 
GROSS PROFIT
 
  In fiscal 1995, gross profit totaled $51.0 million, a decline of $9.6
million or 16% from the $60.7 million reported in fiscal 1994. Gross margin in
fiscal 1995 was 17% compared to 27% in fiscal 1994. The decline in gross
margin is primarily attributable to losses incurred on the sale of and
reserves established for the EZ135 systems. The Company made a strategic
decision to enter the explosively growing SOHO marketplace and acquire market
share rather than wait until it could introduce a low cost, low-end product.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
  Selling, general and administrative expenses in fiscal 1995 of $44.3 million
were up 17.4% compared to fiscal 1994 expenses of $37.6 million, and as a
percentage of net revenues declined to 14.8% in fiscal 1995 from 17.0% in
fiscal 1994. Primary contributors to the increase were staffing additions of
$2.5 million in support of the revenue growth and a $3.1 million increase in
advertising and promotional activities. Bad debt expenses declined by $1.1
million as a result of unusually high funding requirements in fiscal 1994
while legal expenses declined by $2.1 million resulting from the settlement in
fiscal 1994 of certain litigation with Iomega and others.
 
RESEARCH AND DEVELOPMENT EXPENSES
 
  In fiscal 1995, research and development expenses increased 33.0% to $23.9
million from $18.0 million in fiscal 1994. As a percentage of net revenues,
research and development expenses were 8.0% in fiscal 1995 compared to 8.1% in
fiscal 1994. During the year the Company devoted significant resources to its
research, development and advanced manufacturing engineering groups to enhance
existing products and develop higher capacity products on existing platforms.
In addition, the Company created a dedicated engineering group focusing
strictly on low cost derivatives of the low end EZ135 product line and
continued its engineering efforts on the 110 megabyte, 1.8 inch drive which
commenced shipping in the fourth quarter of fiscal 1995.
 
                                      15
<PAGE>
 
INTEREST INCOME
 
  Interest income for fiscal 1995 was $1,134,000, relatively flat when
compared to $1,193,000 in fiscal 1994. In spite of lower average cash and
short term investment balances throughout the year, interest income remained
flat due to higher prevailing interest rates.
 
PROVISION FOR INCOME TAXES
 
  The Company recorded a tax benefit of $3.7 million in fiscal 1995
representing an effective tax rate of 24%. The effective tax rate was less
than the federal statutory rate primarily due to foreign losses for which no
current income tax benefit could be recognized and the provision for taxes on
foreign earnings previously considered to be permanent reinvested offshore. In
fiscal 1994, the Company recorded a $1.6 million provision for income taxes
representing an effective tax rate of 24%. The fiscal 1994 effective tax rate
was less than the federal statutory rate primarily due to the permanent
reinvestment offshore of a portion of the tax holiday earnings of the
Company's Far East operations and the utilization of federal tax credits.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  At September 30, 1996, the Company's net worth was negative $30.4 million
compared to positive $83.2 million at September 30, 1995, and the Company's
working capital at September 30, 1996 was negative $37.4 million compared to
positive $62.3 million at September 30, 1995. The decrease in working capital
during fiscal 1996 was primarily attributable to continuing losses from
operations.
 
  Due to the financial losses and associated decreases in working capital, the
Company experienced interruptions in the supply of key components in the first
half of fiscal 1996. As a result of negotiations held with key suppliers to
refinance outstanding liabilities, approximately $50.8 million of accounts
payable was converted to fixed payment notes and debentures, payable over six
months to three years. Subsequently, certain of the suppliers have exchanged
the notes for the Company's Common Stock, including $2.3 million converted as
of September 30, 1996. See "Factors That May Affect Future Results--Shortages
of Critical Components; Absence of Supply Contracts; Supplier Workouts." As a
result of the Company's completion of recent financing transactions and other
efforts by management to improve SyQuest's balance sheet, a number of the
Company's suppliers have begun to transition from doing business with the
Company on a C.O.D. basis and are selling to the Company under more standard
commercial terms. Many of SyQuest's key suppliers are continuing to do
business with SyQuest on a C.O.D. basis only, however, which places demands on
the Company's available cash resources that may limit its financial
flexibility and its ability to meet market demand for its products.
 
  In addition to the operational impacts of limited cash resources, the
Company may experience other effects in the future such as higher interest
rates, inability to borrow without collateral and higher financing costs with
regard to capital. Limitations on cash resources also restricted the ability
of the Company to increase SyJet production in the first quarter of fiscal
1997 to the levels desired by the Company.
 
  The Company has financed its working capital needs through a combination of
existing cash resources, reduced inventories and accounts receivable,
increased asset-based borrowings, and a series of capital financing
transactions completed during calendar 1996. The Company's balance of cash and
short-term investments decreased by $26 million during fiscal 1996, leaving
the Company with cash and short-term investments of $3.7 million at September
30, 1996.
 
  The accounts receivable balance was $30.3 million at September 30, 1996, a
decline of $25.3 million from the end of fiscal 1995. The decline in accounts
receivable was due to lower sales experienced in fiscal 1996 compared to
fiscal 1995 and an increase in the level of reserve for doubtful accounts.
Inventories, net of reserves, decreased $23.7 million during fiscal 1996 and
totaled $10.6 million at September 30, 1996. The decline in inventories is
attributable to the Company's second quarter decision to discontinue further
production of the SQ3270 and EZ135 products, reduced sales levels and improved
inventory management techniques introduced in the second half of fiscal 1996.
 
                                      16
<PAGE>
 
  Borrowings under the Company's bank lines of credit amounted to $19.3
million at September 30, 1996. There were no borrowings outstanding at
September 30, 1995. As of September 30, 1996, the Company has a line of credit
agreement with a financial institution, expiring January 31, 1997. Borrowings
under the agreement bear interest at the highest "LIBOR" (London Interbank
Offered Rate) rate during the month plus 4.825% and are subject to the higher
of a minimum interest rate of 8% per annum or $10,000 per month, regardless of
borrowings. The interest rate as of September 30, 1996 was 10.25%. The total
borrowings are limited to the lesser of $30 million or 75 percent of the
Company's eligible accounts receivable. The Agreement also places limitations
on additional borrowings and payment of dividends. As of September 30, 1996,
approximately $14.7 million of borrowings were outstanding and approximately
$5.3 million was available for borrowing under the agreement. The Company is
in discussions with the financial institution for extension of the credit
facility. Management believes the Company's relations with the institution are
good, but there can be no assurances that it will be successful in negotiating
an extension to the credit agreement on terms acceptable to the Company.
 
  In fiscal 1996, the Company entered into a credit agreement with a bank in
Penang, Malaysia. The agreement provides for a term loan equivalent to
approximately $4.2 million, an overdraft facility of approximately $.8 million
and a short-term line of credit for inventory financing. The term loan is
repayable in 120 monthly installments and bears interest at the rate of 1.0%
over the bank's base lending rate while the short-term borrowings bear
interest at varying rates and become due every 180 days. The credit available
under this agreement is secured by factory buildings owned by SyQuest
Technology (M) SDN BHD and is further secured by a corporate guarantee from
SyQuest Technology, Inc. At September 30, 1996 there was approximately $3.6
million outstanding against the term loan, $.5 million outstanding against the
overdraft facility and approximately $4.0 million outstanding against the
inventory line of credit. The interest rates for the term loan and the short-
term line of credit as of September 30, 1996 were 9.15% and 8.275%,
respectively.
 
  In May 1996, the Company exchanged 4,155 common shares of a privately-held
French company for a reduction of $2.8 million of debt with one of the
Company's suppliers.
 
  In June 1996, the Company sold 20,000 shares of 7% Cumulative Preferred
Stock for $20 million in gross proceeds. In October 1996, the Company sold
5,500 shares of Convertible Preferred Stock for $5.5 million in gross proceeds
and sold 24,500 shares of Series 2 Preferred Stock for $24.5 million in gross
proceeds. In November 1996, the Company sold 1,500,000 shares of its Common
Stock for approximately $8.5 million to an international investment firm and
granted that investor warrants to purchase up to 1,875,000 shares of Common
Stock, depending on, among other things, the number of shares of Common Stock
owned by such investor on July 12, 1997.
 
  In July 1996, the Company issued a $7.7 million, 6% Convertible Subordinated
Debenture (the "Debenture") to one of its suppliers, of which a portion is
convertible into Common Stock of the Company. Subsequently, the Company worked
out repayment schedules with several of its other major suppliers and
converted approximately $43.1 million of accounts payable and other
obligations to notes payable reflecting extended repayment terms. From late
September 1996, through October 30, 1996, the Company exchanged with four of
these suppliers approximately $11.6 million of notes payable for an aggregate
of 1,874,837 shares of the Company's Common Stock. Approximately $31 million
of the notes payable remained outstanding following the conversion of $11.6
million in notes to equity.
 
  The terms of these financings are described in three Current Reports on Form
8-K dated, respectively, June 14, 1996, October 31, 1996 and November 11,
1996, the contents of which are hereby incorporated by reference.
 
  During fiscal 1996, the Company used $50.7 million in cash for operating
activities and an additional $17.8 million of cash for the purchase of
equipment and leasehold improvements. Based on current estimates, the Company
expects to spend less than $5 million for capital assets in fiscal 1997. There
can be no assurance, however, that the Company's actual spending will not
exceed its forecasts. The Company believes that, based on a number of events
occurring, the current sources of the financing available to the Company will
be sufficient to fund the Company's operations only into the second quarter of
fiscal 1997, and the Company will need additional
 
                                      17
<PAGE>
 
funds for new products, to fund working capital required to increase sales and
to pay suppliers. Management's financial plans for fiscal 1997 anticipate
raising additional equity capital in order to stimulate business and take
advantage of market opportunities. As discussed in Note 15, during the first
quarter of fiscal 1997, the Company raised approximately $38 million of
additional equity from investors. Management is currently pursuing other
investment opportunities and expects to raise additional financing during the
second quarter of fiscal 1997. There can be no assurance, however, that such
financing would be available when needed, if at all, or on favorable terms. If
results of operations for fiscal 1997 do not meet management's expectations,
or additional capital is not available, management has the ability and intent
to reduce certain expenditures so as not to require additional capital
resources. The precise amount and timing of the Company's funding needs cannot
be determined accurately at this time, and will depend on a number of factors,
including the market demand for the Company's products, the progress of the
Company's product development efforts, the availability of critical
components, the Company's strategic alliances for the manufacture of its
products, and the Company's management of inventories and accounts receivable,
and whether key suppliers will grant payment terms for the purchase of
materials and services.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
 
BUSINESS RE-ENGINEERING
 
  Management expects to continue the strategic and process changes mentioned
above into fiscal 1997 and to continue investing in the re-engineering of the
Company. In December, 1996, the Company shipped limited quantities of the
SyJet 1.5GB, a 3.5 inch, 1.5 gigabyte high performance product. Subject to the
availability of additional cash resources, the Company expects to commence
volume production of this product in January, 1997. In addition, the Company
continues to invest in developing both higher performance and lower cost
product lines. Management further expects to invest in promoting the Company's
market presence throughout fiscal 1997, including various advertising and
other promotional programs.
 
  During fiscal 1996, new product launch processes were revised to include
formal cost reduction and controlled introduction of products to
manufacturing. Research and development efforts were re-focused to take
advantage of the Company's technological leadership in Winchester-based
removable cartridge disk drives and pursue the typically higher margins of
high performance products relative to the markets the EZ135 competed in. The
Company established a marketing strategy which emphasizes efforts to re-
establish the Company's presence in the strategically important retail and
distribution channels.
 
  However, to support the planned activities, additional capital resources are
required in the second fiscal quarter of 1997 and there can be no assurance
that the Company will be able to obtain needed funding on satisfactory terms
or that it will be successful in implementing its business re-engineering
plans. Management is aggressively pursuing additional equity investments in
the Company as well as strategic partnerships in manufacturing and marketing
its products. The inability to obtain needed funding on satisfactory terms
would have a material adverse affect on the Company's business and financial
results.
 
NEED FOR ADDITIONAL FINANCING; FUTURE CAPITAL NEEDS
 
  The Company incurred losses in its fiscal year ended September 30, 1995, and
in each quarter of its fiscal year ended September 30, 1996. To meet its
working capital needs, the Company has engaged in a series of financing
transactions.
 
  As of September 30, 1996, the Company had $3.2 million in unrestricted cash
and cash equivalents. During fiscal 1996, the Company used $50.7 million of
cash in operating activities and an additional $17.8 million of cash for the
purchase of equipment and leasehold improvements. The Company believes that,
based on a number of events occurring, the current sources of financing
available to the Company will be sufficient to fund the Company's planned
level of operations only into the second quarter of fiscal 1997, and the
Company will need additional funds for new product introduction, for
production and working capital and to pay suppliers. The Company is presently
negotiating other possible equity investments into the Company but there can
be no
 
                                      18
<PAGE>
 
assurance that any of such negotiations will be successful. The precise amount
and timing of the Company's funding needs cannot be determined at this time,
and will depend upon a number of factors, including the market demand for the
Company's products, the progress of the Company's product development efforts,
the availability of critical components, the Company's strategic alliances, if
any, for the manufacture of its products, and the Company's inventory and
accounts receivable management. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the stockholders of
the Company will be reduced, stockholders may experience additional dilution,
and such securities may have rights, preferences and privileges senior to
those of holders of the Company's Common Stock. See "Factors That May Affect
Future Results--Convertible Securities, Warrants and Options; Potential
Dilution and Adverse Impact on Additional Financing." There can be no
assurance that funds required by the Company in the future will be available
on terms satisfactory to the Company. The inability to obtain needed funding
on satisfactory terms would have a material adverse effect on the Company's
business and financial results.
 
RISK OF LOSING NASDAQ LISTING
 
  On September 16, 1996, the Company was given a temporary exception from the
net tangible asset and capital surplus listing requirements of the Nasdaq
National Market. The listing exception was conditioned on the Company's
ability to file a pro forma balance sheet as of September 30, 1996, indicating
net tangible assets of at least $2.0 million. On October 31, 1996, the Company
filed with Nasdaq and the Commission an unaudited pro forma balance sheet (the
"Pro Forma Balance Sheet") showing sufficient net tangible assets, based on
the Company's best estimate at that time of its losses for the fiscal year
ended September 30, 1996. There can be no assurance that the Company's
estimate in the Pro Forma Balance Sheet was accurate. Based on this filing,
the National Association of Securities Dealers approved the continued listing
of the Company's Common Stock on the Nasdaq National Market.
 
  The Company has continued to incur losses, however, and there can be no
assurance that the Company will continue to meet the net tangible asset,
capital and surplus, or other listing requirements of the Nasdaq National
Market in the future. Should the Company fail to meet such listing standards,
it may be delisted from the Nasdaq Stock Market. Trading, if any, in the
listed securities would thereafter be conducted on the Electronic Bulletin
Board or the National Quotation Bureau's "pink sheets." As a result, an
investor may find it difficult to dispose of, or to obtain accurate quotations
of the price of, the Company's securities. This would likely have a material
and adverse effect on the market price of the Company's Common Stock and on
the Company's ability to raise additional capital.
 
CONVERTIBLE SECURITIES, WARRANTS AND OPTIONS; POTENTIAL DILUTION AND ADVERSE
IMPACT ON ADDITIONAL FINANCING
 
  On July 15, 1996, the Company issued a 6% Convertible Subordinated Debenture
to a supplier in the amount of $7.7 million repayable in thirty-six (36) equal
monthly installments. The debenture agreement allows the holder to convert up
to $2,775,000 of the principal amount of the debenture into no more than
400,000 shares of the Company's Common Stock at the conversion price of
$6.9375 per share. As of September 30, 1996, none of the principal of the
debenture had been converted to Common Stock.
 
  As of October 31, 1996, the Company had outstanding options and warrants to
purchase an aggregate of 3,448,938 shares of Common Stock, at a weighted
average exercise price of approximately $7.13 per share. The Company is also
obligated to issue additional warrants to acquire up to 3,136,786 shares of
Common Stock and up to 12,078,347 shares of Common Stock upon conversion of
the 7% Cumulative Preferred Stock, the Convertible Preferred Stock and the
Series 2 Preferred Stock (the "Preferred Stock"), based on the conversion
prices of the Preferred Stock at December 20, 1996. The exact number of shares
of Common Stock issuable upon conversion of Preferred Stock and exercise of
warrants issued pursuant to such conversion cannot be estimated with certainty
because, generally, such issuances of Common Stock will vary inversely with
the market price of the Common Stock at the time of such conversion, and there
is no cap on the number of shares of Common Stock that may be issuable. The
number of warrants and shares of Common Stock issuable upon
 
                                      19
<PAGE>
 
conversion of the Preferred Stock is also subject to various adjustments to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. Further, the Company may, at its election, choose to issue
additional shares of Common Stock in lieu of cash dividends due to the holders
of the 7% Cumulative Preferred Stock and the Series 2 Preferred Stock.
 
  In addition, on November 13, 1996, the Company sold to an investor an
additional 1,500,000 shares of Common Stock that will become freely tradeable,
subject to compliance with applicable securities laws, on approximately
February 12, 1997. As part of this same transaction, the Company issued a
warrant that will become exercisable for between 375,000 shares and 1,875,000
shares of Common Stock, depending on a number of factors, principally the
price of the Company's Common Stock.
 
  As of September 30, 1996, Warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $10.88 per share had been
issued as partial compensation for value received in the placement of the
Company's 7% Cumulative Convertible Preferred Stock. Those Warrants are
exercisable at the option of the holders on or before July 30, 1999.
 
  To the extent that such options and warrants are exercised, shares of Common
Stock are issued in lieu of cash dividends or convertible securities are
converted (and the warrants issuable upon such conversion are exercised),
substantial dilution of the interests of the Company's stockholders is likely
to result and the market price of the Common Stock may be materially adversely
affected. Such dilution will be greater if the future market price of the
Common Stock decreases. For the life of such warrants, options and convertible
securities, the holders will have the opportunity to profit from a rise in the
price of the underlying securities. The existence of such warrants, options
and convertible securities is likely to affect materially and adversely the
terms on which the Company can obtain additional financing, and the holders of
such warrants, options and convertible securities can be expected to exercise
them at a time when the Company would otherwise, in all likelihood, be able to
obtain additional capital by an offering of its unissued capital stock on
terms more favorable to the Company than those provided by such warrants,
options and convertible securities.
 
  The Company has filed registration statements on Form S-8 under the Act to
register shares of Common Stock subject to stock options and the Company's
employee stock purchase plan that will permit the resale of such shares,
subject to Rule 144 volume limitations applicable to affiliates of the Company
and vesting restrictions. The Company has also filed a registration statement,
Registration Statement No. 333-17119, to permit resale of the Common Stock
issuable upon exercise of the warrants and conversion of the convertible
securities described above. Additional shares of Common Stock issuable upon
conversion of the 7% Cumulative Preferred Stock are being offered pursuant to
a prospectus included in Registration Statement No. 333-7369. Such registered
shares can be sold without any holding period or sales volume limitations.
 
UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCTS
 
  The Company's future success will depend upon market acceptance of its new
products and upon the Company's ability to establish its new products as
industry standards. The Company introduced its EZFlyer 230 in June 1996. The
EZFlyer 230 is a newly designed product for the Company with 230 megabytes of
capacity, which the Company began to ship in significant volume in July 1996.
While the Company believes that early indications of market acceptance of the
EZFlyer 230 are favorable, the product has only recently been introduced and
there can be no assurance that the level of acceptance will continue or grow
due to uncertainties regarding the market for the EZFlyer 230 and the
competition it is facing. The Company continues to refine the EZFlyer 230 and
there can be no assurance that the Company will not experience problems or
delays if and when it attempts to manufacture and ship the EZFlyer 230 in
higher volumes.
 
  On August 7, 1996, the Company announced that it had commenced taking orders
for its new 3.5 inch, 1.5 gigabyte SyJet system products. The Company has
begun limited production and has made limited shipments in the first quarter
of fiscal 1997. The Company intends to increase production and shipments in
the second fiscal quarter of 1997; however, there can be no assurance that the
Company will be able to introduce this new product
 
                                      20
<PAGE>
 
successfully and in a timely manner or that the product will be accepted in
the market. Limitations on cash resources restricted the ability of the
Company to increase SyJet production in the first quarter of fiscal 1997 to
the levels desired by the Company.
 
  The SyQuest technology is different from the most widely used data storage
devices today (hard disk drives, floppy disk drives and CD-ROM drives). No new
type of read/writable data storage device has achieved widespread market
acceptance in recent years and there can be no assurance that the Company's
new products will achieve market acceptance. Whether the Company's new
products will achieve significant market acceptance will depend upon a number
of factors, including the price, performance and other characteristics of
competing solutions introduced by other vendors, the timing of the
introduction of such products, and the success of the Company in establishing
OEM arrangements for the Company's new products. See "Factors That May Affect
Future Results--Competition" and "- Shortages of Critical Components; Absence
of Supply Contracts; Supplier Workouts." There can be no assurance that the
Company will be successful in satisfying any of these factors. In addition,
the two formats of removable-media storage which have gained widespread market
acceptance to date--floppy disk drives and CD-ROM drives--are both used by
software manufacturers as a means of software distribution. The Company's
products are not currently used for software distribution. The failure of the
Company's new products to achieve widespread commercial acceptance would have
a material adverse effect on the Company's business and financial results.
 
INTRODUCTION OF EZFLYER 230; DISCONTINUATION OF EZ135
 
  The Company's EZ135 products accounted for 16% of the Company's sales in the
last quarter of fiscal 1995, 42% in the first quarter of fiscal 1996, 46% in
the second quarter of fiscal 1996, 45% in the third quarter of fiscal 1996 and
approximately 16% in the fourth quarter of fiscal 1996. Although sales of
EZ135 products contributed significantly to the Company's revenue during the
last quarter of the 1995 fiscal year and the majority of fiscal year 1996, the
Company sold EZ135 units at a significant loss due to cost issues which could
not be corrected as the Company had originally anticipated, and due to
competitive pressures requiring the selling price to continue to decline in
the market. The Company discontinued sales of the EZ135 during the fourth
quarter of fiscal 1996.
 
  The Company introduced its EZFlyer 230 on June 3, 1996. Commercial shipments
of the EZFlyer 230 commenced in June 1996, and the Company began to ship the
EZFlyer 230 in significant volume in July 1996. Revenue in the fourth fiscal
quarter of 1996 was $12.7 million for the EZFlyer 230, representing 28% of
total revenue. There can be no assurance that the market acceptance of the
EZFlyer 230 will continue or that the level of acceptance will grow.
 
SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF SUPPLY CONTRACTS; SUPPLIER
WORKOUTS
 
  Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers.
During the 1996 fiscal year, the Company experienced disruption in its supply
of certain components for a number of reasons including the shortage of cash
to pay suppliers. Component shortages due to limited cash availability
affected the Company's ability to produce EZFlyer 230 products and limited the
Company's ability to implement certain cost reduction and productivity
improvement plans. Moreover, the Company may continue to experience difficulty
in the future in obtaining a sufficient supply of many key components due to
the shortage of cash to pay suppliers and other reasons. A disruption in the
supply of key components would have a material adverse affect on the Company's
ability to generate sales and the ability to cuccessfully launch the SyJet
products.
 
  The Company recently completed the process of working out repayment terms
with its key suppliers. On July 15, 1996, the Company issued a $7.7 million 6%
Convertible Subordinated Debenture to one of its suppliers pursuant to which
up to 400,000 shares of Common Stock could be issued to such supplier at a
conversion price of $6.9375 per share. Subsequently, the Company negotiated
with other suppliers to extend the payment dates on amounts owed, converting
approximately $43.1 million of accounts payable and other obligations to all
of
 
                                      21
<PAGE>
 
those suppliers, to notes payable reflecting extended repayment terms. In
September and October 1996, the Company exchanged certain of those notes
payable for an aggregate of 1,874,837 shares of Common Stock. As a result of
the Company's completion of recent financing transactions and other efforts by
management to improve SyQuest's balance sheet, a number of Company suppliers
have begun to transition from doing business with the Company on a C.O.D.
basis and are selling to the Company under more standard commercial terms.
Many of SyQuest's key suppliers are continuing to do business with SyQuest on
a C.O.D. basis only, however, which places demands on the Company's available
cash resources that may limit its financial flexibility and its ability to
meet market demand for its products.
 
  The Company purchases all of its sole and limited source components and
equipment pursuant to purchase orders placed from time to time and has no
guaranteed supply arrangements. The inability to obtain sufficient components
and equipment, to obtain or develop alternative sources of supply at
competitive prices and quality, or to avoid manufacturing delays could prevent
the Company from producing sufficient quantities of its products to satisfy
market demand, result in delays in product shipments, increase the Company's
material or manufacturing costs, or cause an imbalance in the inventory levels
of certain components. Moreover, difficulties in obtaining sufficient
components may cause the Company to modify the design of its products to use a
more readily available component, and such design modifications may result in
increased costs and product performance problems. Any or all of these problems
could in turn result in the loss of customers, provide an opportunity for
competing products to achieve market acceptance and otherwise adversely affect
the Company's business and financial results.
 
COMPETITION
 
  The data storage industry is highly competitive. The Company believes that
its products compete most directly with other removable-media data storage
devices, such as disk drives offered by Iomega Corporation and magneto optical
disk drives. Although the Company believes that its products offer performance
and certain other advantages over most other removable-media storage devices
available today, the Company believes that the price/performance levels of
existing removable-media products will improve and that other companies will
introduce new removable-media storage devices. Accordingly, the Company
believes its products will face increasingly intense competition. In
particular, a consortium comprising Compaq Computer, 3M, Insite and
Matsushita-Kotobuki Electronics Industries Ltd. has announced and is selling
the LS120, a high- capacity floptical drive that is compatible with
conventional floppy disks. Each of Mitsubishi Electric Corp. and Mitsumi has
also announced that it plans to manufacture a high capacity, floppy drive that
is downward compatible with existing floppy diskettes. If successfully
marketed, these drives would compete with the Company's EZ products. The
Iomega Zip drive, a high capacity floppy disk drive, is a competitor to
EZFlyer 230. The JAZ drive is Iomega's first removable hard drive and competes
directly with SyQuest's products. In addition, to the extent that SyQuest
drives are used for incremental primary storage capacity, they also compete
with conventional hard disk drives. Finally, the leading suppliers of
conventional hard disk drives could at any time determine to enter the
removable-media storage market.
 
  As new and competing removable-media storage solutions are introduced, it is
possible that the first such solution to achieve a significant market presence
will emerge as an industry standard and achieve a dominant market position. If
such is the case, there can be no assurance that the Company's products would
achieve significant market acceptance, particularly given the Company's size
and market position relative to its competitors.
 
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
 
  The Company operates in an industry that is subject both to rapid
technological change and rapid change in consumer demands. For example, over
the last 10 years the typical hard disk drive included in a new personal
computer has increased in capacity from approximately 40 megabytes (MBs) to 1
gigabyte (GB) or more, while the market price per megabyte of a hard disk
drive has dramatically decreased. The Company's future success will depend in
significant part on its ability to develop and introduce, in a continuous and
timely manner, new
 
                                      22
<PAGE>
 
removable disk drive products with improved features, and to develop and
manufacture those new products within a cost structure that enables the
Company to sell such products at lower prices than those of comparable
products today. In addition, the Company depends on technological developments
from other vendors for the components in its products (such as heads,
semiconductor devices and media). The Company has recently introduced its
EZFlyer 230 which is targeted for sale to the Company's traditional customer
base in the desktop publishing, prepress and service bureau segments, as well
as to a broad array of users in the SOHO (Small Office/Home Office) market
segment. The SyJet 1.5 GB removable cartridge hard drive is targeted towards
computer, audio and video OEMs, as well as retail, the Company's traditional
customer base and the SOHO market segment. The Company believes that this
product will compete with the Iomega JAZ. There can be no assurance that the
Company will be successful in developing, manufacturing and marketing cost
effective products (including the EZFlyer 230 and the SyJet 1.5 GB) that meet
both the performance and price demands of the data storage market.
 
DEPENDENCE ON STRATEGIC MARKETING ALLIANCE
 
  The Company's business strategy depends in significant part on establishing
successful strategic alliances with a variety of key companies within the
computer, audio and video industries. Among the types of alliances
contemplated by the Company's business strategy are: OEM arrangements with
personal computer, audio and video manufacturers that will include SyQuest
products as a standard feature or factory-installed option in their personal
computers; reseller arrangements (including private and co-branding
arrangements) with major vendors of computer products covering the resale of
the Company's products by such companies; and licensing arrangements under
which the Company grants certain computer manufacturers on a royalty-bearing
basis the right to manufacture and sell its drives or media. Moreover, the
Company believes that establishing strategic alliances (especially OEM
arrangements) is critical to the success of its business, and there can be no
assurance that the Company will be successful in doing so. In addition, the
Company's strategic alliances are generally not covered by binding contracts
and may be subject to unilateral termination by the Company's strategic
partners, and may also require the Company to share control over its
manufacturing and marketing programs and technologies.
 
RELIANCE ON MANUFACTURING RELATIONSHIPS; NOMAI LAWSUITS
 
  The Company plans to continue to use independent parties to manufacture for
the Company a portion of the Company's components. The Company currently has
manufacturing relationships with Nomai, S.A. ("Nomai") for cartridges and with
others for manufacture and subassembly of components. The Company has filed
lawsuits against Nomai in France alleging copyright and patent infringement
and in the United States regarding various related claims, including royalty
payments owed by Nomai under a previous arrangement. On November 18, 1996, the
Company and Herve Frouin and Marc Frouin (the "Frouins"), owners of a
controlling interest in Nomai, announced the execution of a letter of intent
proposing a transaction (the "Proposed Transaction") in which the Company
would acquire a controlling interest in Nomai from the Frouins in exchange for
3,422,968 shares of the Company's Common Stock, and would commence a tender
offer to acquire up to 100% of the publicly held shares of Nomai. On November
25, 1996, however, the Company announced that plans to acquire Nomai have been
terminated, adding that it intends to pursue vigorously all available causes
of action against Nomai.
 
  In September 1996, the Company and Legend Group ("Legend"), the largest
computer systems manufacturer and distributor in the People's Republic of
China, announced an intention to form a joint venture company for the
manufacture and distribution of the Company's removable cartridge hard drives
and products in China. In addition, Legend would become the exclusive
distributor of Company products in the developing Chinese market. The Company
would provide the proposed joint venture company with training and
manufacturing know-how to insure that the joint venture had the requisite
skills to manufacture the Company's removable cartridge hard drives and
products. It is anticipated that both Legend and the Company would contribute
the capital required for the joint venture. The Company and Legend have
entered into a Memorandum
 
                                      23
<PAGE>
 
of Understanding under which Legend would invest up to $20 million in the
Company. The definitive terms of this investment are being negotiated, and the
completion of any such investment (currently proposed for the first calendar
quarter of 1997) may require approval of the Company's stockholders pursuant
to Nasdaq listing rules and may be subject to a waiting period pursuant to the
Hart-Scott-Rodino Act. In December, 1996, the Company and Legend announced a
distribution agreement whereby Legend has become the exclusive distributor of
the Company's products in the developing Chinese market.
 
  There can be no assurance that the Company will be successful in prosecuting
its lawsuit against, or in maintaining its manufacturing relationships with,
Nomai, that the joint venture or financing agreement with Legend will be
consummated or successful, or that the Company will successfully establish
additional relationships in the future or successfully manage such
manufacturing relationships. The lawsuit against Nomai and either the
completion of or failure to complete the proposed transactions with Legend
could have numerous consequences that could affect the Company materially and
adversely. The Company's manufacturing relationships are generally not covered
by binding contracts and may be subject to unilateral termination by the
Company's manufacturing partner. Moreover, there can be no assurance that
third-party manufacturers will be willing or able to meet the Company's
quantity or quality requirements for manufactured products.
 
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
 
  The Company has experienced and in the future may continue to experience
significant fluctuations in its quarterly operating results. Factors such as
price reductions, the introduction and market acceptance of new products,
product returns, the availability of critical components and the lower gross
margins associated with the Company's newly introduced products could
contribute to this quarterly variability. Moreover, the Company's expense
levels are based in part on expectations of future sales levels, and a
shortfall in expected sales could therefore result in a disproportionate
decrease in the Company's results of operations. As a result of these and
other factors, it is likely that the Company's operating results in some
future period will be below the expectations of investors, which would
probably result in a significant reduction in the market price of the Common
Stock.
 
DEPENDENCE ON PROPRIETARY TECHNOLOGY
 
  The Company's success depends heavily on the establishment and maintenance
of proprietary technologies. The Company relies on a combination of patent,
copyright and trade secret law to protect the technology in its drives and
cartridges. The Company holds numerous U.S. and foreign patent applications
relating to its drives and hard disk cartridges. Many of these patents,
however, do not pertain to the Company's recent product generations, and there
can be no assurance that additional patents will issue in the future. There
can be no assurance that the steps taken by the Company to protect its
technology will be adequate to prevent misappropriation of its technology by
third parties, or that third parties will not be able independently to develop
similar technology. In particular, the Company's sales have been and will
continue to be materially adversely affected when parties develop cartridges
compatible with the Company's disk drives.
 
  From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. A third party notified the
Company in June 1995, that such party believes the Company infringes on six of
its U.S. patents. It is the Company's belief that the claims are without merit
or that the infringement claims relate to component parts purchased from
vendors. The Company also believes that if the third party prevails on its
claims, the Company will be indemnified by its vendor for any liability
arising from the alleged infringements and that this matter will not have a
material effect upon its financial condition or results of operations.
 
  Patent and similar litigation frequently is complex and expensive and its
outcome can be difficult to predict. There can be no assurance that the
Company will prevail in any proceedings that may be commenced against the
Company. In addition, certain technology used in the Company's products is
licensed from third parties. The termination of any such license arrangements
could have a material adverse effect on the Company's business and financial
results.
 
 
                                      24
<PAGE>
 
INTERNATIONAL OPERATIONS
 
  International sales generated a significant portion of the Company's
revenues in fiscal years 1995 and 1996, and the Company expects international
sales to continue to constitute a significant percentage of its total sales in
the future. The international portion of the Company's business is subject to
a number of inherent risks, including difficulties in building and managing
foreign operations and foreign reseller networks, the differing product needs
of foreign customers, fluctuations in the value of foreign currencies, import-
export duties and quotas, and regulatory, economic or political changes.
Moreover, the Company relies on foreign companies for the supply of certain
critical components and is increasingly relying on foreign companies for the
manufacture of certain of its products, and these relationships may be subject
to some of the same risks affecting its international sales. There can be no
assurance that these factors will not materially and adversely affect the
Company's international sales and its overall business and financial
performance.
 
  The Company's international sales are predominantly denominated in U.S.
dollars. Accordingly, a significant increase in the valuation of the U.S.
dollar and the resultant increase in the price of the Company's foreign
currency priced products could have a material adverse effect on the Company's
sales.
 
MANAGEMENT CHANGES; DEPENDENCE ON KEY PERSONNEL
 
  The Chairman of the Board, the President and Chief Executive Officer, the
Executive Vice President and Chief Financial Officer, the Executive Vice
President-Sales, the Chief Technical Officer, the Executive Vice President-
Operations, and the Vice President-Marketing, have all just recently joined
the Company. Syed Iftikar, the Company's former Chairman of the Board,
President and Chief Executive Officer, ceased to be an officer of the Company
on June 13, 1996 and resigned as a director on August 15, 1996.
 
  The Company's success will depend in large part upon the capabilities of the
new management team. The inability of such individuals to become familiar with
the widespread operations of the Company and its subsidiaries and turn around
the financial situation of the Company could have a material adverse effect on
the Company. The Company's success will also depend in significant part upon
its ability to attract and retain highly-skilled management and other
personnel. Competition for such personnel in the computer industry is intense,
and the Company has from time to time experienced difficulty in finding
sufficient numbers of qualified professional and production personnel. The
Company has had a number of other executive officers leave the Company over
the last six months. There can be no assurance that the Company will be
successful in attracting and retaining the quantity and quality of personnel
that it needs.
 
VOLATILITY OF STOCK PRICE; ABSENCE OF DIVIDENDS
 
  The market prices for shares of high technology companies including the
securities of SyQuest have been volatile. The Company's Common Stock has
recently experienced substantial levels of short selling, which has depressed
the market price, and increased the volatility of the market price, of the
Company's Common Stock. Factors such as announcements of technological
innovations or new products by the Company or its competitors, variations in
the Company's quarterly operating results, continued high levels of short
selling of the Common Stock, or general economic or stock market conditions
unrelated to the Company's operating performance may have material adverse
effects on the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation, if instituted against the Company, could result in
substantial costs and a diversion of management attention and resources. See
"Risk Factors--Class Action and Shareholder Derivative Lawsuits."
 
  In addition, the Company believes that electronic bulletin board postings
regarding the Company on America Online and other similar services, certain of
which have in the past contained false information about Company developments,
have in the past and may in the future contribute to volatility in the market
price of the Common Stock. Any information concerning the Company, including
projections of future operating results,
 
                                      25
<PAGE>
 
appearing in such on-line bulletin boards or otherwise emanating from a source
other than the Company should not be relied upon as having been supplied or
endorsed by the Company.
 
  The Company has not paid any cash dividends since its inception, and it does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
 
CERTAIN MARKETING AND SALES RISKS
 
  As is common practice in its industry, the Company's arrangements with its
customers generally allow customers, in the event of a price decrease, credit
equal to the difference between the price originally paid and the new
decreased price on units in the customers' inventories on the date of the
price decrease. When a price decrease is anticipated, the Company establishes
reserves for amounts it estimates will be reimbursed to qualifying customers.
There can be no assurance that these reserves will be sufficient or that any
future returns or price protection charges will not have material adverse
effects on the Company's results of operations, particularly because future
results will depend heavily on recently introduced products for which the
Company has little or no operating history. In addition, customers generally
have stock rotation rights permitting them to return slower-moving products in
inventory within specified time periods in return for compensating orders of
other products. Any build-up of inventory at the Company or in its
distribution channels that does not sell through to end users could have
material adverse effects on the Company's operating results and financial
condition.
 
  As is typical in the industry, from time to time the Company experiences
product defects and product returns. There can be no assurance that the
Company will not experience quality or reliability problems in the future that
have material adverse effects on the Company's business and financial results.
 
  The Company markets its products primarily through computer product
distributors and retailers. Distribution channels for personal computers and
accessories have been characterized by rapid change, including consolidation
and financial difficulties of distributors. The loss or ineffectiveness of any
of the Company's major distributors could have a material adverse effect on
the Company's results of operations. In addition, since the Company grants
credit to its customers, a substantial portion of outstanding accounts
receivable are due from computer product distributors and certain large
retailers. At September 30, 1996, the customers with the three highest
outstanding accounts receivable balances totaled $12.03 million, or 28.9%, of
gross accounts receivable. The Company has no reason to believe these
receivable balances are uncollectible, but if any one or a group of these
customers' receivable balances should be deemed uncollectible, it would have a
material adverse effect on the Company's results of operations and financial
condition.
 
EFFECT OF ANTI-TAKEOVER PROVISIONS
 
  The Company's Board of Directors has the authority to issue up to 4,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares, which, under certain circumstances, could be
issued without any further vote or action by the Company's stockholders. To
date, an aggregate of 50,000 shares of preferred stock have been issued:
20,000 shares of 7% Cumulative Preferred Stock; 5,500 shares of Convertible
Preferred Stock and 24,500 shares of Series 2 Preferred Stock. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of these preferred shares and any preferred
stock that may be issued in the future. Such issuance, while providing
desirable flexibility in connection with possible financings and acquisitions
and other corporate purposes, could make it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. In
addition, preferred stock may have other rights, including economic rights,
senior to the Common Stock, and, as a result, the issuance thereof could have
a material adverse effect on the market value of the Common Stock. The Company
is also subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person first becomes an
"interested
 
                                      26
<PAGE>
 
stockholder," unless the business combination is approved in a prescribed
manner. The application of Section 203 could also have the effect of delaying
or preventing a change of control of the Company.
 
CLASS ACTION AND SHAREHOLDER DERIVATIVE LAWSUITS
 
  The Company has been named as a defendant in four punitive class action
lawsuits. For a full discussion, see Item 3, Legal Proceedings.
 
                                       27
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  For the years ended September 30, 1996, 1995, and 1994
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                         <C>
Report of Ernst & Young LLP, Independent Auditors..........................  29
Consolidated Balance Sheets--September 30, 1996, and 1995..................  30
Consolidated Statements of Operations--Years Ended September 30, 1996,
 1995, and 1994............................................................  31
Consolidated Statements of Stockholders' Equity--Years Ended September 30,
 1996, 1995, and 1994......................................................  32
Consolidated Statements of Cash Flows--Years Ended September 30, 1996,
 1995, and 1994............................................................  33
Notes to Consolidated Financial Statements.................................  35
</TABLE>
 
                                       28
<PAGE>
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders SyQuest Technology, Inc.
 
  We have audited the accompanying consolidated balance sheets of SyQuest
Technology, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SyQuest Technology, Inc. and subsidiaries at September 30, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
 
                                          Ernst & Young LLP
 
San Jose, California
December 11, 1996
 
                                      29
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                           -------------------
                                                             1996       1995
                                                           ---------  --------
                                                             (IN THOUSANDS,
                                                           EXCEPT SHARE DATA)
<S>                                                        <C>        <C>
                          ASSETS
Current assets:
  Cash and cash equivalents............................... $   3,470  $ 29,248
  Short-term investments..................................       200       400
  Accounts receivable.....................................    30,341    55,653
  Inventories.............................................    10,538    34,213
  Prepaid expenses and deposits...........................     2,471     2,066
  Deferred income taxes...................................       --     13,254
                                                           ---------  --------
Total current assets......................................    47,020   134,834
Property, equipment and leasehold improvements:
  Equipment...............................................    49,340    47,291
  Furniture and fixtures..................................     2,710     2,667
  Property and leasehold improvements.....................     9,896     7,832
                                                           ---------  --------
                                                              61,946    57,790
  Accumulated depreciation and amortization...............    34,765    31,070
                                                           ---------  --------
                                                              27,180    26,720
Other assets..............................................       981     3,130
                                                           ---------  --------
                                                           $  75,181  $164,684
                                                           =========  ========
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable........................................ $  23,917  $ 41,213
  Bank borrowings.........................................    19,268       --
  Accrued compensation and benefits.......................     3,811     5,206
  Provision for losses on purchase commitments............       --     10,510
  Accrued expenses and other liabilities..................    14,860    15,210
  Income taxes payable....................................     1,966       355
  Current portion, long-term debt.........................    20,549       --
                                                           ---------  --------
Total current liabilities.................................    84,371    72,494
Deferred rent.............................................       192       276
Long-term debt............................................    20,971       --
Deferred income taxes.....................................       --      8,726
Commitments and contingencies.............................       --        --
Stockholders' equity (deficit):
  Preferred stock, $.001 par value:
    Authorized shares--4,000,000; issued and outstanding
     shares--19,193 in 1996 and none in 1995..............        18       --
    Liquidation preference--$19,208
  Common stock, $.001 par value:
    Authorized shares--60,000,000; issued and outstanding
     shares--12,312,769 in 1996 and 11,323,974 in 1995....        14        13
  Additional paid-in capital..............................   102,580    79,489
  Treasury common stock at cost--1,225,000 shares in 1996
   and 1995...............................................   (12,855)  (12,855)
  Retained earnings (deficit).............................  (120,110)   16,541
                                                           ---------  --------
Total stockholders' equity (deficit)......................   (30,353)   83,188
                                                           ---------  --------
                                                           $  75,181  $164,684
                                                           =========  ========
</TABLE>
 
                            See accompanying notes.
 
                                       30
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                              YEARS ENDED SEPTEMBER 30,
                                       -----------------------------------------
                                           1996           1995          1994
                                       -------------  ------------  ------------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>            <C>           <C>
Net revenues.........................  $ 200,407      $299,544      $221,001
Cost of revenues.....................    248,693       248,497       160,342
                                       ---------      --------      --------
Gross profit(loss)...................    (48,286)       51,047        60,659
Operating expenses:                                                         
  Selling, general, and                                                     
   administrative (includes provision                                       
   for losses on accounts receivable                                        
   of $5,839 in 1996, $2,008 in 1995,                                       
   and $3,151 in 1994)...............     51,743        44,264        37,566
  Research and development...........     25,920        23,892        17,967
  Restructuring charges..............      4,727           --            -- 
                                       ---------      --------      --------
Total operating expenses.............     82,390        68,156        55,533
                                       ---------      --------      --------
Income (loss) from operations........   (130,676)      (17,109)        5,126
Other income and (expense)...........     (1,938)          468           337
  Interest income....................        192         1,134         1,193
Interest (expense)...................     (1,229)          --            -- 
                                       ---------      --------      --------
Income (loss) before income taxes and                                       
 cumulative effect of accounting                                            
 change..............................   (133,651)      (15,507)        6,656
  Provision (benefit) for income                                            
   taxes.............................      3,000        (3,721)        1,597
                                       ---------      --------      --------
  Income (loss) before cumulative                                           
   effect of accounting change.......   (136,651)      (11,786)        5,059
  Cumulative effect of change in                                            
   method of accounting for income                                          
   taxes.............................        --            --            346
                                       ---------      --------      --------
  Net income (loss)..................  $(136,651)     $(11,786)     $  5,405
                                       =========      ========      ========
  Income (loss) per share:                                                  
Primary:                                                                    
  Income(loss) before cumulative                                            
   effect of accounting change.......  $  (12.38)     $  (1.07)     $    .43
  Cumulative effect of accounting                                           
   change............................        --            --            .03
                                       ---------      --------      --------
  Net income (loss) per share........  $  (12.38)     $  (1.07)     $    .46
                                       =========      ========      ========
  Common and common equivalent shares                                       
   used in computing per share                                              
   amounts...........................     11,497        11,063        11,647
                                       =========      ========      ========
</TABLE>
 
 
                            See accompanying notes.
 
                                       31
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                          PREFERRED STOCK       COMMON STOCK
                          -------------------   --------------
                                                               ADDITIONAL TREASURY  RETAINED
                                                                PAID-IN    COMMON   EARNINGS
                          SHARES     AMOUNT     SHARES  AMOUNT  CAPITAL    STOCK    (DEFICIT)    TOTAL
                          -------    --------   ------  ------ ---------- --------  ---------  ---------
                                                     (IN THOUSANDS)
<S>                       <C>        <C>        <C>     <C>    <C>        <C>       <C>        <C>
BALANCE AT OCTOBER 1,
 1993...................       --          --   11,283   $12    $ 72,221  $ (5,611) $  22,922  $  89,544
Stock options exercised.       --          --       88   --          497       --         --         497
Shares issued under the
 Employee Stock Purchase
 Plan...................       --          --       79   --          736       --         --         736
Purchase of treasury
 stock at cost..........       --          --     (625)  --          --     (6,044)       --      (6,044)
Income tax benefit from
 stock options
 exercised..............       --          --      --    --          642       --         --         642
Stock option
 compensation...........       --          --      --    --           65       --         --          65
Net income..............       --          --      --    --          --        --       5,405      5,405
                           -------    --------  ------   ---    --------  --------  ---------  ---------
BALANCE AT SEPTEMBER 30,
 1994...................       --          --   10,825    12      74,161   (11,655)    28,327     90,845
Stock options exercised.       --          --      502     1       2,932       --         --       2,933
Shares issued under the
 Employee Stock Purchase
 Plan...................       --          --       97   --        1,061       --         --       1,061
Purchase of treasury
 stock at cost..........       --          --     (100)  --          --     (1,200)       --      (1,200)
Income tax benefit from
 stock options
 exercised..............       --          --      --    --        1,321       --         --       1,321
Stock option
 compensation...........       --          --      --    --           14       --         --          14
Net income (loss).......       --          --      --    --          --        --     (11,786)   (11,786)
                           -------    --------  ------   ---    --------  --------  ---------  ---------
BALANCE AT SEPTEMBER 30,
 1995...................       --          --   11,324    13      79,489   (12,855)    16,541     83,188
Stock options exercised.       --          --      386     1       1,421       --         --       1,422
Shares issued under the
 Employee Stock Purchase
 Plan...................       --          --       64   --          350       --         --         350
Issuance of preferred
 stock..................        20          19     --    --       18,981       --         --      19,000
Debt to equity
 conversion.............       --          --      371   --        2,338       --         --       2,338
Conversion of preferred
 stock to common stock..        (1)         (1)    168   --            1       --         --         --
Net income (loss).......       --          --      --    --          --        --    (136,651)  (136,651)
                           -------    --------  ------   ---    --------  --------  ---------  ---------
BALANCE AT SEPTEMBER 30,
 1996...................        19    $     18  12,313   $14    $102,580  $(12,855) $(120,110) $ (30,353)
                           =======    ========  ======   ===    ========  ========  =========  =========
</TABLE>
 
                            See accompanying notes.
 
                                       32
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                  YEARS ENDED SEPTEMBER 30,
                                                 -----------------------------
                                                   1996       1995      1994
                                                 ---------  --------  --------
                                                       (IN THOUSANDS)
<S>                                              <C>        <C>       <C>
OPERATING ACTIVITIES
Net income (loss)..............................  $(136,651) $(11,786) $  5,405
Adjustments to reconcile net income (loss) to
 net cash provided by (used in) operating
 activities:
  Depreciation and amortization................     10,578     8,052     7,129
    Deferred income taxes......................      4,528    (4,227)   (1,675)
    Stock option compensation..................        --         14        65
    Deferred rent..............................        (84)       12        34
    Loss on disposal of equipment and leasehold
     improvements..............................      6,782        99        63
  Changes in operating assets and liabilities:
    Accounts receivable........................     25,312    (8,934)  (14,569)
    Inventories................................     23,675   (22,065)   (1,487)
    Prepaid expenses and deposits..............       (405)     (359)     (991)
    Accounts payable...........................     13,413    15,161    11,036
    Accrued compensation and benefits..........     (1,395)    1,677      (437)
    Provision for losses on purchase
     commitments...............................      2,282    10,510       --
    Accrued expenses and other liabilities.....       (350)    5,455     2,058
    Income taxes payable (refundable)..........      1,611    (1,144)    3,462
                                                 ---------  --------  --------
Net cash provided by (used in) operating
 activities....................................    (50,704)   (7,535)   10,093

INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
 improvements..................................        --    (12,509)   (7,743)
Purchase of short-term investments.............        200    (3,178)   (7,603)
Proceeds from sale of short-term investments...    (17,820)    4,493     5,895
Investment in Silmag...........................        --     (2,100)      --
Other..........................................         (5)    1,301        44
                                                 ---------  --------  --------
Net cash used in investing activities..........    (18,295)  (11,993)   (9,407)

FINANCING ACTIVITIES
Purchase of treasury stock.....................        --     (1,200)   (6,044)
Payments of long-term debt.....................       (426)      --        --
Net borrowings under line of credit agreements.     22,875       --        --
Proceeds from sale of common stock and exercise
 of stock options and warrants.................      1,772     3,994     1,233
Proceeds from sale of preferred stock..........     19,000       --        --
                                                 ---------  --------  --------
Net cash provided by (used in) financing
 activities....................................     43,221     2,794    (4,811)
                                                 ---------  --------  --------
Decrease in cash and cash equivalents..........    (25,778)  (16,734)   (4,125)
Cash and cash equivalents at beginning of year.     29,248    45,982    50,107
                                                 ---------  --------  --------
Cash and cash equivalents at end of year.......  $   3,470  $ 29,248  $ 45,982
                                                 =========  ========  ========
</TABLE>
 
                            See accompanying notes.
 
                                       33
<PAGE>
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
  Supplemental information on noncash investing and financing activities, in
thousands:
 
<TABLE>
     <S>                                                                 <C>
     Conversion of preferred to Common Stock............................ $  738
     Conversion of accounts payable to Common Stock..................... $2,338
</TABLE>
 
  A number of suppliers converted approximately $31 million of net accounts
payable and purchase commitment liabilities into notes payable. The notes are
payable over six to thirty-six months and bear interest at approximately 10%.
 
  One supplier converted approximately $7.3 million of net accounts payable
and purchase commitment liabilities into a long-term, 6% Convertible
Subordinated Debenture.
 
  In the third quarter of fiscal 1996, the Company exchanged 4,155 common
shares of Silmag S.A. for a reduction of accounts payable in the amount of
$2.8 million with one of its suppliers. The Company realized a gain of $0.7
million on the exchange which is classified as other income.
 
  In the quarter ended September 30, 1996, the Company entered into a
Securities Purchase Agreement with a supplier to exchange 370,000 shares of
common stock for $2.3 million of debt.
 
  Cash paid for interest expense in fiscal year 1996 was approximately $0.9
million.
 
                                      34
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                              SEPTEMBER 30, 1996
 
1. SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF CONSOLIDATION
 
  The consolidated financial statements include the accounts of SyQuest
Technology, Inc. (the "Company" or "SyQuest") and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
 
BASIS OF PRESENTATION
 
  The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Over the last
two years the Company has experienced aggregate consolidated losses of
$148,437,000 including a net loss of $136,651,000 for the year ended September
30, 1996. Working capital (deficit) at September 30, 1996 was $(37,426,000) as
compared to $62,340,000 at September 30, 1995. Management's financial plans
for fiscal 1997 anticipate raising additional equity capital in order to
stimulate business and take advantage of market opportunities. As discussed in
Note 15, during the first quarter of fiscal 1997, the Company raised
approximately $38 million of additional equity from investors. Management is
currently pursuing other investment opportunities and expects to raise
additional financing during the second quarter of fiscal 1997. There can be no
assurance, however, that such financing would be available when needed, if at
all, or on favorable terms. If results of operations for fiscal 1997 do not
meet management's expectations, or additional capital is not available,
management has the ability and intent to reduce certain expenditures so as not
to require additional capital resources.
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Certain
prior year amounts have been restated to conform to the 1996 presentation.
 
CASH EQUIVALENTS
 
  The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Certain of the Company's
balances of cash and cash equivalents are subject to usage restrictions. See
Note 4.
 
SHORT-TERM INVESTMENTS
 
  The Company considers investments with an original maturity of more than
three months but less than twelve months to be short-term investments. Short-
term investments consist primarily of certificates of deposit, bankers
acceptances, commercial paper, and US Government agency debt securities.
 
  The Company classified its entire investment portfolio at September 30, 1996
and 1995 as available-for-sale. Available for sale securities are stated at
fair value with unrealized gains and losses included in stockholder's equity.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses are included in other income
(expense). The cost of securities is based on the specific identification
method. Short term investments at September 30, 1996 and 1995 are comprised of
certificates of deposit.
 
INVENTORIES
 
  Inventories are stated at the lower of cost (first-in, first-out method) or
market.
 
                                      35
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
 
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
  Property, equipment and leasehold improvements are stated on the basis of
cost. Equipment is depreciated over the estimated useful lives (three to five
years) of the assets using the straight-line method. Property and leasehold
improvements are amortized by the straight-line method over the shorter of the
life of the related asset or the term of the lease.
 
  In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
SFAS 121 requires the recognition of impairment of long-lived assets in the
event that the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Adoption of SFAS 121 is not expected to
have a material impact on the Company's financial position or results of
operations.
 
FOREIGN CURRENCY TRANSLATION AND FOREIGN CURRENCY TRANSACTIONS
 
  The functional currency of the Company's foreign subsidiaries is the US
dollar. Subsidiary financial statements are remeasured into US dollars for
consolidation. Foreign currency transaction gains (losses) of ($573,000),
$468,000, and $337,000 are included in other income and expense for 1996,
1995, and 1994, respectively.
 
REVENUE RECOGNITION
 
  The Company recognizes revenue upon shipment to customers and provides an
estimated allowance for returns based on the historical return history
experienced by the Company.
 
WARRANTY
 
  The Company generally warrants its products for one to five years. A
provision for estimated future warranty costs is recorded at the time of
shipment.
 
INCOME (LOSS) PER SHARE
 
  At September 30, 1996, the Company had 19,193 shares of convertible
preferred stock issued and outstanding with an assured incremental yield
embedded in the conversion terms. Included in the computation of earnings per
share is a $5.7 million charge for the embedded yield for the discount from
the average fair market value of the common stock for the five trading days
prior to September 30, 1996 times the number of common shares reserved for
conversion.
 
  Income per share for the year ended September 30, 1994 is based on the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options (using the treasury stock method).
Loss per share for years ending September 30, 1996 and 1995 is based on the
weighted average number of shares of common stock outstanding. All other
common equivalant shares would be antidilutive.
 
DERIVATIVE FINANCIAL INSTRUMENTS
 
  During fiscal 1995, the Company adopted Statement of Financial Accounting
Standards No. 119, "Disclosure about Financial Instruments and Fair Value of
Financial Instruments" (FAS 119).
 
                                      36
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
 
FAIR VALUES OF FINANCIAL INSTRUMENTS
 
  For certain of the Company's financial instruments, including cash and
equivalents, accounts receivable, notes payable, and accrued liabilities, the
carrying amounts approximate fair value due to their short maturities. The
Company further believes that the carrying amounts of its long-term
obligations approximate fair value due to the stability of interest rates
since the Company entered into the agreements.
 
OFF BALANCE SHEET RISK
 
  The Company may enter into foreign currency forward exchange contracts to
manage exposure related to certain foreign currency commitments and certain
foreign currency denominated balance sheet positions. The Company does not
enter into derivative financial instruments for trading purposes. At September
30, 1996, the Company had no forward exchange contracts. At September 30,
1995, the Company had forward exchange contracts totaling $12,300,000 for the
purchase of Singapore dollars, $2,313,000 of forward exchange contracts for
the purchase of Malaysian Ringgits and $830,000 of forward exchange contracts
for the purchase of Japanese Yen. All forward exchange contracts entered into
by the Company had maturities of 60 days or less.
 
  While the contract or notional amounts of the Company's forward exchange
contracts provide one measure of the volume of these transactions, they do not
represent the amount of the Company's exposure to credit risk. The amounts
potentially subject to credit risk (arising from the possible inability of
counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties obligations exceed the
obligations of the Company. The Company controls credit risk through credit
approvals, limits and monitoring procedures. Credit rating criteria for off-
balance sheet transactions are similar to those for investments.
 
EMPLOYEE STOCK PLANS
 
  The Company accounts for its stock option plans and the Employee Stock
Purchase Plan in accordance with provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees".
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company will adopt FAS 123
in fiscal 1997, however, the Company will continue to account for its employee
stock purchase plans in accordance with the provisions of APB 25. Accordingly,
SFAS 123 is not expected to have any material impact on the Company's
financial position or results of operations.
 
2. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
 
  The Company operates in one business segment, the development, production
and marketing of removable cartridge Winchester disk drives and associated
cartridges. The Company has a manufacturing facility in Penang, Malaysia which
produces the majority of the Company's drives and cartridges. The Company
sells primarily to distributors in the personal computer market. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral.
 
  One customer accounted for approximately 10% of revenues in 1996 and another
customer accounted for approximately 10% of revenues in 1995. Export sales by
domestic operations accounted for approximately 10%, 1%, and 3% of net
revenues in 1996, 1995, and 1994, respectively, and are made primarily to
Europe and Far East customers.
 
                                      37
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               SEPTEMBER 30, 1996
 
 
  The following tables summarize the Company's operations in different
geographic areas:
 
<TABLE>
<CAPTION>
                                                      ADJUSTMENTS
                           NORTH                          AND
                          AMERICA   EUROPE  FAR EAST  ELIMINATIONS CONSOLIDATED
                         ---------  ------- --------  ------------ ------------
                                            (IN THOUSANDS)
<S>                      <C>        <C>     <C>       <C>          <C>
1996
Sales to unaffiliated
 customers.............. $ 131,122  $57,235 $ 12,050   $     --     $ 200,407
Transfers between
 geographic locations... $  27,060  $21,718 $228,288   $(277,066)   $     --
Income (loss) from
 operations............. $(107,274) $   452 $(20,187)  $  (3,667)   $(130,676)
Identifiable assets..... $  33,837  $ 2,536 $ 49,626   $ (10,818)   $  75,181

1995
Sales to unaffiliated
 customers.............. $ 186,276  $   --  $113,268   $     --     $ 299,544
Transfers between
 geographic locations... $   8,590  $   --  $256,106   $(264,696)   $     --
Income (loss) from
 operations............. $ (20,973) $   --  $  5,618   $  (1,754)   $ (17,109)
Identifiable assets..... $  97,008  $   --  $ 73,483   $  (5,807)   $ 164,684

1994
Sales to unaffiliated
 customers.............. $ 144,123  $   --  $ 76,878   $     --     $ 221,001
Transfers between
 geographic locations... $  31,142  $   --  $166,037   $(197,179)   $     --
Income (loss) from
 operations............. $     793  $   --  $  4,395   $     (62)   $   5,126
Identifiable assets..... $ 106,411  $   --  $ 37,228   $  (4,138)   $ 139,501
</TABLE>
 
  Sales and transfers between geographic areas generally provide a profit after
coverage of all manufacturing costs. Income from operations is total net
revenues less operating expenses.
 
  The identifiable assets by geographic area are those assets used in the
Company's operations in each area.
 
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                               ----------------
                                                                1996     1995
                                                               -------  -------
                                                               (IN THOUSANDS)
<S>                                                            <C>      <C>
Accounts receivable:
  Accounts receivable......................................... $36,035  $58,488
  Less allowance for doubtful accounts........................  (5,694)  (2,835)
                                                               -------  -------
                                                               $30,341  $55,653
                                                               =======  =======
Inventories:
  Raw materials............................................... $ 5,005  $22,258
  Work-in-process.............................................   4,481    8,564
  Finished goods..............................................   1,052    3,391
                                                               -------  -------
                                                               $10,538  $34,213
                                                               =======  =======
Accrued expenses and other liabilities:
  Accrued warranty............................................ $ 6,757  $ 5,676
  Co-op advertising/Market development funds..................   2,999    5,314
  Other.......................................................   5,104    4,220
                                                               -------  -------
                                                               $14,860  $15,210
                                                               =======  =======
</TABLE>
 
                                       38
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
 
4. BORROWINGS
 
  At September 30, 1996, the Company had a line of credit agreement with a
financial institution, expiring January 31, 1997. Borrowings under the
agreement bear interest at the highest "LIBOR" (London Interbank Offered Rate)
rate during the month plus 4.825% (10.25% at September 30, 1996) and are
subject to the higher of a minimum interest rate of 8% per annum or $10,000 of
interest per month, regardless of borrowings. The total borrowings are limited
to the lesser of $30 million or 75 percent of the Company's eligible accounts
receivable and a compensating balance, included in cash and cash equivalents,
of $282,000 is required on the loan. The Agreement places limitations on
additional borrowings and payment of cash dividends. As of September 30, 1996,
approximately $14.7 million of borrowings were outstanding and approximately
$5.3 million was available for borrowing under the agreement.
 
  In March 1996, the Company entered into a loan agreement with a bank in
Penang, Malaysia. The line of credit, which is denominated in Malaysian
Ringgits, provides for a term loan equivalent to approximately $4.2 million
and an overdraft facility of approximately $.8 million. The term loan is
repayable in 120 monthly installments and bears interest at the rate of 1.0%
over the bank's base lending rate (9.15% at September 30, 1996). Amounts drawn
on the overdraft line are payable on demand. The line of credit is secured by
factory buildings owned by SyQuest Technology (M) SDN BHD. The term loan is
also covered by a corporate guarantee from SyQuest Technology, Inc. A
compensating balance, included in short-term investments, of approximately
$0.2 million is required on the loan. At September 30, 1996, there were
approximately $3.6 million of borrowings outstanding under this term loan, and
$0.5 million outstanding against the overdraft facility, bearing an interest
rate of 9.15%.
 
  On May 29, 1996, the Company entered into a loan agreement based on
inventories with the same bank in Penang, Malaysia and is due on demand. The
agreement, which is denominated in Malaysian Ringgits, provides for borrowing
equivalent to approximately $ 4.0 million and is due on demand. This loan is
also secured by factory buildings owned by SyQuest Technology, (M) SDN BHD,
and is covered by a corporate guarantee from SyQuest Technology, Inc. As of
September 30, 1996 there were approximately $4.0 million of borrowings
outstanding under this agreement at an interest rate of 8.275%.
 
  During fiscal 1996, the Company converted accounts payable and purchase
commitments with certain suppliers to notes payable. The aggregate amount due
on those notes as of September 30, 1996, was approximately $30.7 million. The
notes are payable over six to thirty-six months and bear interest of 10%.
 
  On July 15, 1996, the Company issued a 6% Convertible Subordinated Debenture
to a supplier in the amount of $7.7 million repayable in thirty-six (36)
equal monthly installments. The debenture agreement allows the holder to
convert up to $2,775,000 of the principal amount of the debenture into no more
than 400,000 shares of the Company's Common Stock at the conversion price of
$6.9375 per share. As of September 30, 1996, none of the principal of the
debenture had been converted to Common Stock.
 
                                      39
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                               SEPTEMBER 30, 1996
 
 
  Lines of credit, term loan and notes payable obligations consist of the
following:
 
<TABLE>
<CAPTION>
                                                    SEPTEMBER 30, SEPTEMBER 30,
                                                        1996          1995
                                                    ------------- -------------
                                                          (IN THOUSANDS)
<S>                                                 <C>           <C>
BANK BORROWINGS
  Line of Credit, interest payable at the rate of
   highest LIBOR rate plus 4.825% (10.25% at
   September 30, 1996).............................    $14,729        $--
  Line of Credit, principal and interest due on
   demand, interest rate 8.275%, secured by land
   and buildings...................................      4,010         --
  Overdraft rider to term loan.....................        529         --
                                                       -------        ----
    Total bank borrowings..........................     19,268         --
LONG-TERM DEBT
  Term Loan, principal payments deferred until July
   1997, interest rate 9.15% at September 30, 1996;
   secured by land and buildings...................      3,607         --
  Subordinated Debenture, $2,775,000 of principal
   can be converted to Common Stock................      7,252         --
  Notes Payable to suppliers, principal and
   interest payable over six to thirty-six months,
   interest rate 10%...............................     30,661         --
                                                       -------        ----
    Total long-term debt...........................     41,520         --
                                                       -------        ----
Total Debt.........................................     60,788         --
Less amounts due within one year...................     39,817         --
                                                       -------        ----
Due after one year.................................    $20,971        $--
                                                       -------        ----
</TABLE>
 
  Future minimum payments on lines of credit, term loan and notes payable are
as follows (in thousands):
 
<TABLE>
     <S>                                                                 <C>
     1997............................................................... $39,817
     1998...............................................................  15,260
     1999...............................................................   3,187
     2000...............................................................     361
     2001...............................................................     361
     Due after 2001.....................................................   1,802
                                                                         -------
     Total minimum payments............................................. $60,788
                                                                         =======
</TABLE>
 
                                       40
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
 
5. INCOME TAXES
 
  The income tax provisions for fiscal 1996, 1995, and 1994 consist of the
following:
 
<TABLE>
<CAPTION>
                                                        1996     1995     1994
                                                       -------  -------  ------
                                                           (IN THOUSANDS)
   <S>                                                 <C>      <C>      <C>
   FEDERAL:
     Current.......................................... $(1,528) $  (421) $1,455
     Deferred.........................................   3,197   (2,578)     79
                                                       -------  -------  ------
                                                         1,669   (2,999)  1,534
   STATE:
     Current..........................................     --       181     324
     Deferred.........................................   1,331     (928)   (279)
                                                       -------  -------  ------
                                                         1,331     (747)     45
   FOREIGN:
     Current..........................................     --        25      18
                                                       -------  -------  ------
   PROVISION (BENEFIT) FOR INCOME TAXES............... $ 3,000  $(3,721) $1,597
                                                       =======  =======  ======
</TABLE>
 
  Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and
are measured by applying enacted tax rates and laws to the taxable years in
which such differences are expected to reverse. The significant components of
the Company's deferred tax assets and liabilities were as follows:
 
<TABLE>
<CAPTION>
                                                     SEPTEMBER 30, SEPTEMBER 30,
                                                         1996          1995
                                                     ------------- -------------
                                                           (IN THOUSANDS)
<S>                                                  <C>           <C>
DEFERRED TAX ASSETS
  Credit carryforwards..............................   $  1,894       $ 1,773
  Receivable reserves...............................      2,979           879
  Warranty reserves.................................      1,575         1,152
  Inventory valuation reserve.......................      7,142         7,668
  Accrued expenses..................................      2,496         1,561
  Depreciation of property, plant and equipment.....        560           --
  Domestic and foreign tax net operating losses.....     38,997           728
  Other.............................................        --            221
                                                       --------       -------
Total deferred tax assets...........................     55,643        13,982
Valuation allowance.................................    (50,061)         (728)
                                                       --------       -------
Net deferred tax assets.............................      5,582        13,254
DEFERRED TAX LIABILITIES
  Unremitted income of foreign subsidiaries.........     (5,582)       (8,417)
  Depreciation of property, plant and equipment.....        --           (309)
                                                       --------       -------
Total deferred tax liabilities......................     (5,582)       (8,726)
                                                       --------       -------
Net deferred tax assets.............................   $    --        $ 4,528
                                                       ========       =======
</TABLE>
 
  Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of
 
                                      41
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
September 30, 1996 has been established to reflect these uncertainties. The
September 30, 1995 valuation allowance was provided for deferred tax assets
related to foreign net operating loss carryforwards.
 
  Approximately $702,000 of the deferred tax assets subject to the valuation
allowance at September 30, 1996 relates to the tax benefit of stock option
deductions. These benefits when realized, will be credited directly to
stockholders' equity and will not reduce the provision for income taxes. The
valuation allowance increased by $49,333,000 in fiscal 1996 and by $428,000 in
fiscal 1995.
 
  The reconciliation of income taxes provided at the federal statutory rate to
the income tax provision follows:
 
<TABLE>
<CAPTION>
                                                        1996     1995     1994
                                                      --------  -------  ------
                                                          (IN THOUSANDS)
   <S>                                                <C>       <C>      <C>
   Income taxes (benefit) computed at the federal
    statutory rate..................................  $(46,610) $(5,272) $2,263
   State income taxes (benefit) net of federal
    income taxes effect.............................       --      (511)     30
   Foreign losses for which no current tax benefit
    is recognizable.................................     1,366      --      --
   Taxes provided on earnings of foreign
    subsidiaries previously considered to be
    permanently invested in non-US operations.......       --     1,768     --
   Benefit from net earnings of foreign subsidiaries
    considered to be permanently invested in non-US
    operations......................................       --       --     (652)
   Utilization of tax credits.......................       --      (566)   (227)
   Valuation allowance for deferred tax assets......    48,244      427     300
   Other............................................       --       433    (117)
                                                      --------  -------  ------
                                                      $  3,000  $(3,721) $1,597
                                                      ========  =======  ======
</TABLE>
 
  Income taxes paid (refunded) were ($3,139,000), $1,600,000, and ($670,000),
in fiscal 1996, 1995, and 1994, respectively.
 
  The Company's manufacturing operations in Singapore operated under a tax
holiday that expired at the end of fiscal 1996. The tax holiday had no impact
on the net loss in fiscal 1996 and 1995. The net impact of the tax holiday in
fiscal 1994 was to increase net income by $518,130 ($0.04 per share). At
September 30, 1996, the Company no longer had any manufacturing operations in
Singapore.
 
  The Company has approximately $4,256,000 in foreign net operating loss
carryforwards. These carryforwards will expire in fiscal 1999 through fiscal
2001.
 
  At September 30, 1996, the Company had federal net operating loss
carryforwards of approximately $99,845,000. These carryforwards will expire in
2010 and 2011 if not utilized. The Company had state net operating loss
carryforwards of approximately $30,000,000 that will expire in 2001 if not
utilized. In addition, the Company had research and development tax credit
carryforwards for federal and state tax purposes of approximately $1,212,000
and $400,000, respectively. The federal tax credit carryforwards will expire
beginning in fiscal 2007 if not utilized. The Company anticipates that in
fiscal 1997, it may experience a "change of ownership" for tax purposes that
would result in an annual limitation on the utilization of domestic net
operating loss and tax credit carryforwards in future periods. The limitation
amount is determined at the point in time when the "ownership change" occurs.
 
6. RESTRUCTURING CHARGES
 
  In the quarter ended March 31, 1996, the Company developed and began
implementation of a plan to relocate the manufacturing capabilities in
Singapore to Penang, Malaysia. The relocation was completed in the
 
                                      42
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
third quarter of fiscal 1996. The Company recorded a $3.6 million charge for
direct costs related to exiting manufacturing facilities in Singapore. The
charge consisted of $1.6 million for the write-off of leasehold improvements,
$0.6 million for site closure and related costs and $1.4 million for staff
severance and retrenchment. As of September 30, 1996, substantially all of
these costs had been incurred, and no additional accrual was recorded.
 
  In the quarter ended June 30, 1996 the Company recorded a $1.9 million
charge for restructuring costs associated with the consolidation and closure
of several of its administrative support locations. Actual charge in the
quarter ended September 30, 1996, were approximately $0.5 million associated
with the write-off of fixed assets, $0.5 million of severance compensation,
and $0.1 million for remaining lease obligations. As of September 30, 1996,
the consolidation of one location was substantially complete, $0.8 million of
the charge was reversed due to the Company's decision to continue operations
at one of the locations, and $0.6 million remains accrued to cover remaining
exit costs.
 
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
  In the quarter ended June 30, 1996 the Company issued 20,000 shares of 7%
Cumulative Convertible Preferred Stock for approximately $19 million net of
issuance costs. The Preferred Stock is convertible into Common Stock at the
lesser of $11 per share or 77% of the average market price of the Common Stock
on the five trading days prior to the conversion, which conversion price is
subject to downward adjustment under certain circumstances. Rights relating to
the Common Stock issuable upon conversion and certain shares were negotiated
pursuant to Registration No. 333-7369. If the Common Stock is trading below $5
per share when the Preferred Stock converts, the Company may redeem the
Preferred Stock at 130% of the original purchase price, except that the
redemption price is reduced to 110% of the original purchase price to the
extent that the original purchase price of the Preferred Stock being redeemed
(plus one half the amount previously converted by the holders) exceeds $10
million. The Company must redeem all Preferred Shares which remain outstanding
on May 31, 1999, at 100% of original purchase price in cash or, at the
Company's option, in Common Stock. Should the Company's Common Stock no longer
be listed on the Nasdaq National Market, Small Cap or Electronic Bulletin
Board, the New York Stock Exchange or the American Stock Exchange, then the
repurchase price is 130% of the original purchase price. Under certain
circumstances, additional shares may be issued with any terms and without
stockholder approval.
 
  The preferred stockholders are entitled to receive cash dividends at the
rate of 7% of the stated value per annum. Dividends accrue from the date of
issuance through and including the date that the shares are converted or
redeemed. Dividends may be paid in cash or, at the Company's option, in Common
Stock based on the average closing market price on the five trading days
preceding the date of conversion.
 
  Holders of preferred shares have no voting rights. In the event of voluntary
or involuntary liquidation, the holders of the preferred shares are entitled
to receive in cash, before any amount is paid to holders of common stock, an
amount equal to the stated value of preferred share, plus any accrued and
unpaid dividends. As of September 30, 1996, 807 shares of Preferred Stock had
been converted into 168,311 shares of Common Stock in accordance with the
preferred stock agreement.
 
  As of September 30, 1996, warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $10.88 per share had been
issued as partial compensation for value received in the placement of the
Company's 7% Cumulative Convertible Preferred Stock. Those warrants are
exercisable at the option of the holders on or before July 30, 1999.
 
                                      43
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
 
8. TREASURY STOCK
 
  In 1993, the Board of Directors authorized the Company to repurchase up to
one million shares of the Company's Common Stock. In April 1994, the Board of
Directors authorized the Company to repurchase up to an additional 500,000
shares of the Company's Common Stock. There were no treasury stock
transactions during fiscal 1996. The Company acquired 100,000 and 625,000
shares of its Common Stock for approximately $1.2 million and $6.0 million
through open market transactions during fiscal 1995 and 1994, respectively.
The Company has acquired a total of 1,225,000 shares of its Common Stock as of
September 30, 1996. These shares are held as treasury stock at September 30,
1996.
 
9. STOCK OPTION PLANS AND COMMON STOCK RESERVED
 
  In 1991, the Company adopted the SyQuest Technology, Inc. 1991 Stock Option
Plan (the "Plan") covering 3,403,524 shares of Common Stock for issuance under
the Plan and assumed stock options currently outstanding under predecessor
stock option plans. The Plan provides for the issuance of incentive stock
options and non statutory stock options to officers, employees (including
directors who are also employees), consultants, independent contractors and
advisors to or of the Company or any parent, subsidiary or affiliate of the
Company. Options granted under the Plan are granted at fair value on the date
of grant and become exercisable within the times or upon the events determined
by the Stock Option Committee as set forth in the grant and expire within ten
years from the date of the grant. In 1995, the Company adopted an amendment to
the Plan to increase the authorized number of shares for the plan to
4,428,524. On September 26, 1996, the shareholders approved an amendment to
the Plan to increase the number of shares issuable under the Plan to
6,000,000. Other minor changes were made to the Plan to comply with changes in
Rule 16B3 under the Securities and Exchange Act of 1934. These changes did not
affect the terms of any existing options.
 
  In 1992, the Company adopted the 1992 Nonemployee Director Stock Option Plan
(the "Director Plan") and reserved 150,000 shares of Common Stock for
issuance. The Director Plan was amended in 1994 to increase the size of the
annual option grants. The Board of Directors administers the Director Plan. In
1995, the Company adopted an amendment to the Nonemployee stock option plan to
increase the authorized number of shares for the plan to 250,000. On September
26, 1996, the shareholders approved an amendment to the Director Plan to
increase the authorized number of shares to 500,000. Options are granted at
fair value on the grant date and options may only be granted to Directors who
are not employees of the Company or its subsidiaries (Outside Directors). All
option grants are automatic and nondiscretionary. After each annual meeting of
stockholders at which directors are elected, reelected, or continuing as
directors, each Outside Director shall be automatically granted an option or
options. These options are to purchase such number of shares of Common Stock
as necessary so that during each of the four immediately following twelve-
month periods of July 1 through June 30, such Outside Directors will have
stock options (including Company stock options granted under plans other than
the Director Plan) which become exercisable with respect to a minimum of
10,000 shares during each such period. Prior to 1994 the minimum was 2,500
shares during each such period. On September 26, 1996, the stockholders
approved a one-time grant of 30,000 options for each new Outside Director
which were not counted in determining annual grants in the future. Other minor
changes were made to the Director Plan to comply with changes in Rule 16 of
the Securities and Exchange Commission Act of 1934. As of September 30, 1996,
options to purchase 160,000 shares of Common Stock were outstanding under the
Director plan.
 
                                      44
<PAGE>
 
                           SYQUEST TECHNOLOGY, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                              SEPTEMBER 30, 1996
 
 
  The following table summarizes stock option activity under the Plan and the
Director Plan:
 
<TABLE>
<CAPTION>
                                                 OPTION PRICE
                                  --------------------------------------------
                                   SHARES     PER SHARE (RANGE)     AGGREGATE
                                  --------  ---------------------- -----------
                                               LOW        HIGH
                                            ---------- -----------
                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
   <S>                            <C>       <C>        <C>         <C>
   Outstanding at September 30,
    1993.........................    1,999  $      .30 $     28.25 $   17,433
     Granted.....................      750        9.00       11.63      7,189
     Exercised...................      (88)        .30       18.00       (497)
     Canceled....................     (360)       1.25       28.25     (5,948)
                                  --------  ---------- ----------- ----------
   Outstanding at September 30,
    1994.........................    2,301         .30       27.25     18,177
                                  --------  ---------- ----------- ----------
     Granted.....................      833       11.50       16.75     11,865
     Exercised...................     (502)        .30       12.50     (2,933)
     Canceled....................     (431)       7.50       27.25     (6,176)
                                  --------  ---------- ----------- ----------
   Outstanding at September 30,
    1995.........................    2,201         .30       24.25     20,933
                                  --------  ---------- ----------- ----------
     Granted.....................    2,247        4.94       11.38     13,877
     Exercised...................     (386)        .30       12.50     (1,421)
     Canceled....................   (1,306)        .30       24.25    (12,923)
                                  --------  ---------- ----------- ----------
   Outstanding at September 30,
    1996.........................    2,756  $      .30 $     24.25 $   20,466
                                  ========  ========== =========== ==========
</TABLE>
 
  At September 30, 1996, options to purchase 627,538 shares were exercisable,
and 1,813,926 shares were available for grant.
 
  The following table summarizes shares of Common Stock reserved for future
issuance by the Company under the Company's stock option and purchase plans as
of September 30, 1996:
 
<TABLE>
     <S>                                                               <C>
     1991 stock option plan........................................... 4,070,232
     Director stock option plan.......................................   500,000
      Shares reserved for conversion of preferred stock............... 4,020,318
      Shares reserved for conversion of warrants......................   100,000
     Employee stock purchase plan.....................................   203,133
                                                                       ---------
                                                                       8,893,683
                                                                       =========
</TABLE>
 
10. EMPLOYEE STOCK PURCHASE PLAN
 
  In 1992, the Company adopted the 1992 Employee Stock Purchase Plan (the
"Purchase Plan"), and 500,000 shares of Common Stock were reserved for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended.
 
  The Purchase Plan is implemented by a single offering for each six- month
period commencing on approximately February 1 and August 1 of each year. The
Purchase Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 15% of an employee's compensation, at a price equal to 85% of the lower
of the fair market value of the common stock as of the first day or as of the
last day of each offering period. As of September 30, 1996, 296,867 shares of
common stock had been issued under the Purchase Plan.
 
                                      45
<PAGE>
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
DIRECTORS
 
  The Company's By-Laws provide that the number of directors shall not be less
than five nor more than nine, and the exact number of directors is currently
fixed at five. Directors will continue in office until the Annual Meeting of
Stockholders in 1997 and until their successors are elected and qualified. The
following sets forth certain information concerning the current directors:
 
  JOSEPH BAIA, age 65, has been Vice President of Operations at Indigita
Corporation since September 1996. From September 1995 to September 1996, Mr.
Baia was an independent consultant in the area of operations and management.
From 1994 to September 1995, Mr. Baia was a consultant to Q Logic Corporation
acting in the capacity of Vice President of Manufacturing and Quality. From
1988 to 1993, Mr Baia was President of Manufacturing Concepts and
Technologies, Inc., a consulting firm.
 
  DAVID I. CAPLAN, age 67, has been Chairman, President and Chief Executive
Officer of Objectivity, a software company, since 1992 and has been a director
of the Company since 1987. From 1988 to 1993, Mr. Caplan operated his own
management and technical consulting business for client companies in the
computer, computer peripheral products and software industries. During that
time, he served as Chief Executive Officer of several private companies on a
part-time basis.
 
  EDWIN L. HARPER, age 52, joined the Company as President in May 1996 and has
served as both President and Chief Executive Officer of the Company since June
1996. Prior to joining the Company, from May 1993 to April 1996, Mr. Harper
was President and Chief Executive Officer of Combyte, Inc., a manufacturer of
storage products. Mr. Harper was employed by Colorado Memory Systems, Inc., a
manufacturer of tape storage products, in various capacities from 1988 to
1993, including as President and Chief Executive Officer immediately prior to
his departure. Mr. Harper serves on the Board of Directors of McAfee
Associates, Inc. and Apex PC Solutions, Inc.
 
  C. RICHARD KRAMLICH, age 61, has been the Managing General Partner of New
Enterprise Associates, a venture capital firm, since 1978 and has been a
director of the Company since 1983. Mr. Kramlich is also a General Partner of
four affiliated venture capital investment funds. Mr. Kramlich serves on the
Board of Directors of Chalone, Inc., Sierra Monitor Corporation, Silicon
Graphics, Inc., Lumisys, Inc., Ascent Communications, Inc., Macromedia, Inc.,
and Graphix Zone, Inc.
 
  EDWARD L. MARINARO, age 58, has been Chairman of the Board of the Company
since May 1996 and has been a director since February 1996. From January 1996
through August 1996, Mr. Marinaro served as Vice Chairman of the Board of
Directors for Network Computing Devices ("NCD") and served as President and
Chief Executive Officer of NCD from September 1994 to January 1996. Prior to
that, from October 1989 to September 1994, he served as Director and Executive
Consultant to a number of companies, such as World Wide Technology, an
synchronous hardware and software products company; Computone Corporation, an
synchronous communication products company; and Radius Corporation, a
manufacturer of personal computer monitors, video graphic and multimedia
products. From June 1988 to October 1989, Mr. Marinaro was President and Chief
Operating Officer of Cipher Data Products, a tape storage company. Prior to
that, he held various management positions at Western Digital Corporation,
Memorex Corporation, Digital Corporation and IBM.
 
BOARD MEETINGS AND COMMITTEES
 
  The Board of Directors of the Company held a total of sixteen meetings
during fiscal 1996, and no director attended fewer than seventy-five percent
of the meetings of the Board of Directors and committees thereof, if any, on
which such director served and which meetings were held during the period that
such person served on the Board or such committee. The Board of Directors has
an Audit Committee, a Stock Option Committee, a Compensation Committee and a
Human Resources Committee.
 
 
                                      46
<PAGE>
 
  The Audit Committee, which consists of Messrs. Kramlich and Caplan, met two
times during fiscal 1996. The Audit Committee makes recommendations to the
Board of Directors concerning the employment of independent accountants, the
audited and unaudited financial statements of the Company, and the Company's
financial and accounting controls and systems.
 
  The Stock Option Committee, which consists of Messrs. Kramlich and Caplan,
met four times during fiscal 1996. This committee administers the Company's
1991 Stock Option Plan and authorizes the grant of options thereunder.
 
  The Compensation Committee, which consists of Messrs. Kramlich and Caplan,
met four times during fiscal 1996. This committee administers the Company's
1992 Employee Stock Purchase Plan and reviews proposals and makes
recommendations to the Board of Directors concerning corporate compensation
and benefits.
 
  The Human Resources Committee, which consists of Messrs. Kramlich and
Caplan, met four times during fiscal 1996. This committee reviews and makes
recommendations to the Board of Directors concerning matters involving
employees of the Company (other than matters within the authority of the
Compensation Committee or the Stock Option Committee), including incentive
programs generally, management methods, employee review procedures,
termination and disciplinary matters, plant security, employee attitudes,
prerequisite programs, and officer status changes.
 
  The Board of Directors has no nominating committee or any other committee
performing a similar function.
 
OTHER EXECUTIVE OFFICERS
 
  The following are additional executive officers of the Company. All
executive officers serve at the discretion of the Board of Directors, subject
to the terms of any employment agreements:
 
  CHESTER A. BROWN, Jr., age 58, was named Executive Vice President, Sales and
Marketing of the Company in February 1996. Prior to joining the Company, from
April 1994 to December 1995, he served as President and CEO of Cubic Memory
Incorporated, a direct random access memory array manufacturer. From February
1993 to April 1994, Mr. Brown was Vice President of Marketing and Operations
of Q Logic Corporation, a fast input/output semiconductor company. Mr Brown
has served as a member of the board of directors of Prisma Devices, Inc., a
high end video semiconductor company, from January 1990 until the present.
 
  HENRY J. MONTGOMERY, age 60, joined the Company as its Chief Financial
Officer of the Company and Executive Vice President, Finance in November 1996.
Prior to joining the Company, from September 1995 to November 1996, Mr.
Montgomery served as President and CEO for New Media Corporation, a privately
held company which provides PCMCIA products for the computer industry. Since
1986 Mr. Montgomery has served as Founder and Chairman of Montgomery Financial
Services Corporation and its predecessor firm, a private management consulting
financial and accounting services company. Mr. Montgomery has served on the
board of directors of Swift Energy Company, a public oil and gas company since
1987. Previously he served on the board of directors of Catalyst
Semiconductor, Inc. (1989-1995) and Southwall Technologies, Inc. (1972-1995).
 
  DALE W. PILGERAM, age 53, was named Vice President and Chief Technical
Officer of the Company in March 1996. Before joining the Company, from March
1994 to February 1996, Mr. Pilgeram was employed as a consultant with the
consulting firm of Time to Market Solutions. From August 1992 to February
1994, Mr. Pilgeram was Vice President of the Open Systems Storage Business
Unit at IBM and served as Vice President of Storage Products Development at
IBM from 1989 to 1991.
 
  JOSEPH B. SMITH, age 55, was named Executive Vice President, Global
Operations of the Company in September 1996. Previously, Mr. Smith was Vice
President of operations at Western Digital Corporation, a disk drive
manufacturer, from January 1987 until his retirement in July 1993.
 
                                      47
<PAGE>
 
  THOMAS C. TOKOS, age 44, joined the Company in December 1996 as Vice
President, General Counsel and Secretary. From October 1994 until joining the
Company, Mr. Tokos was Assistant General Counsel and Assistant Secretary of
VLSI Technology, Inc., a semiconductor manufacturer. Mr. Tokos was a partner
in the corporate law firm of Keck, Mahin & Cate from March 1993 to September
1994 and was associated with the corporate law firm of Shearman & Sterling
from 1988 to 1993.
 
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
 
  Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the National Association of Securities Dealers, Inc. Executive
officers, directors, and greater than ten percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. The Form 3 for director Joseph Baia, who became a director in
fiscal 1996, was not filed until October 30, 1996. Based solely on its review
of the copies of such forms received by it, or written representations from
certain reporting persons, the Company believes that all of its other
executive officers and directors complied with applicable filing requirements
during the fiscal year ended September 30, 1996.
 
                                      48
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION
 
GENERAL
 
  Shown below is information concerning the annual and long-term compensation
for services in all capacities to the Company for the fiscal years ended
September 30, 1996, 1995, and 1994 of the Chief Executive Office of the
Company and the four other most highly compensated executive officers with the
Company at the year ended September 30, 1996, along with information for the
two most highly compensated executive officers employed by the Company during
fiscal 1996 that are no longer with the Company (collectively the "Named
Executive Officers"). Compensation information is only included for those
years during which the named individual served as an executive officer of the
Company.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                          LONG TERM                         
                                                                         COMPENSATION                       
                                                    ANNUAL COMPENSATION     AWARDS                          
                                                    -------------------- ------------                       
                                                                          NUMBER OF                         
                                                                            SHARES                          
                                                                          UNDERLYING   ALL OTHER            
                                             FISCAL                        OPTIONS    COMPENSATION          
   NAME AND PRINCIPAL POSITIONS               YEAR  SALARY ($) BONUS ($)   GRANTED        ($)               
   ----------------------------              ------ ---------- --------- ------------ ------------          
   <S>                                       <C>    <C>        <C>       <C>          <C>                   
   Edwin L. Harper (1).....................   1996   113,665        0      390,000       14,175(2)          
    President and Chief Executive Officer                                                                                      
   Edward L. Marinaro (3)..................   1996    99,662        0      390,000        8,500(4)          
    Chairman of the Board                                                                                   
   Chester A. Brown........................   1996   161,267        0      100,000        1,000(5)          
    Executive Vice President, Sales                                                                                        
    and Marketing                                                                                           
   Dale W. Pilgeram (6)....................   1996   139,927        0      100,000        1,000(7)          
    Vice President, Chief Technical Officer                                                                                      
   Syed H. Iftikar (8).....................   1996   314,765        0       20,000        1,000(8)          
    Chairman of the Board,                    1995   320,811        0            0        1,000(9)          
    President and Chief Executive Officer     1994   319,992        0       45,000          500(9)          
   Michael J. Perez (10)...................   1996    16,538        0            0      188,574(11)         
    Senior Vice President-Finance,            1995   215,543        0            0            0             
    Chief Financial Officer                   1994   203,342        0            0            0             
   Robert E. Lyon (12).....................   1996   187,039        0        9,750            0             
    Vice President, Human Resources           1995   127,778        0       30,000            0              
</TABLE>
--------
 (1) Joined the Company in May 1996. Fiscal 1996 salary includes $29,423,
     deferred until fiscal 1997 at Mr. Harper's election. Such deferred
     compensation accrues interest at ten percent per annum, compounded
     quarterly.
 (2) Represents moving expenses.
 (3) Joined the Company in May 1996. Fiscal 1996 salary includes $29,423,
     deferred until fiscal 1997 at Mr. Marinaro's election. Such deferred
     compensation accrues interest at ten percent per annum, compounded
     quarterly.
 (4) Represents the Company's maximum contribution to Mr. Marinaro's 401(k)
     plan ($1,000), plus $7,500 paid to Mr. Marinaro for his attendance at
     meetings of the Board of Directors before he became Chairman of the
     Board.
 (5) Represents the Company's maximum contribution to Mr. Brown's 401(k) plan.
 (6) Includes $10,000 paid to Mr. Pilgeram as a private contractor prior to
     his employment with the Company.
 (7) Represents the Company's maximum contribution to Mr. Pilgeram's 401(k)
     plan.
 (8) Left the Company in July 1996.
 (9) Represents the Company's maximum contribution to Mr. Iftikar's 401(k)
     plan.
(10) Left the Company in October 1995.
(11) Represents severance compensation paid upon departure from the Company.
(12) Left the Company in August 1996.
 
                                      49
<PAGE>
 
  The following table sets forth information with respect to each grant of
options to purchase the Company's Common Stock made during the last fiscal
year to each of the Named Executive Officers named in the Summary Compensation
Table.
 
                         OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
                                                                          POTENTIAL
                                                                         REALIZABLE
                                                                          VALUE AT
                                                                       ASSUMED ANNUAL
                                                                       RATES OF STOCK
                                                                            PRICE
                                                                        APPRECIATION
                                                                         FOR OPTION
                                      INDIVIDUAL GRANTS                    TERM(3)
                         --------------------------------------------- ---------------
                                      % OF TOTAL
                         NUMBER OF     OPTIONS
                         SECURITIES   GRANTED TO  EXERCISE
                         UNDERLYING   EMPLOYEES   OR BASE
                          OPTIONS     IN FISCAL   PRICE(2)  EXPIRATION
NAME                     GRANTED(1)      YEAR    ($/SHARES)    DATE      5%      10%
----                     ----------   ---------- ---------- ---------- ------- -------
<S>                      <C>          <C>        <C>        <C>        <C>     <C>
Edwin L. Harper.........  390,000(4)    18.247     4.9380    05/13/01  415,026 893,773
Edward L. Marinaro......    5,000       0.2339     6.7180    02/28/03    7,239  15,589
                          385,000(5)   18.0135     4.9380    05/13/01  409,705 882,314
Chester A. Brown........   60,000(4)    2.8073     7.3750    02/28/01   95,362 205,364
                           40,000(4)    1.8715     4.9380    05/13/01   42,567  91,669
Dale W. Pilgeram........   40,000(4)    1.8715     7.0000    02/28/01   63,574 136,910
                           60,000(4)    2.8073     4.9380    05/13/01   63,850 137,504
Syed H. Iftikar (6).....   20,000(6)    0.9357    11.3750    02/28/01      (6)     (6)
Robert E. Lyon..........    7,500       0.3509     7.3750    02/28/01      (6)     (6)
                            2,250       0.1025     4.9380    05/13/01
Michael J. Perez........      --           --         --          --       --       --
</TABLE>
--------
(1) All options were granted under the Company's 1991 Stock Option Plan,
    except with respect to Mr. Marinaro, who has 5,000 shares under the 1992
    Non-Employee Directors Plan.
(2) Options were granted at an exercise price equal to the fair market value
    of the Company's Common Stock as determined by reference to the closing
    price reported on the Nasdaq National Market system on the last trading
    day prior to the date of grant. Exercise price and tax withholding
    obligations may be paid in cash or by an alternate method of payment if
    authorized by the Board of Directors, such as by delivery of already-owned
    shares subject to certain conditions, or pursuant to a cashless exercise
    procedure.
(3) Potential realizable value is based on an assumption that the market price
    of the stock appreciates at the stated rate, compounded annually, from the
    date of grant to the expiration date. These values are calculated as a
    result of regulations promulgated by the Securities and Exchange
    Commission and do not reflect the Company's estimate of future stock price
    appreciation. Actual gains, if any, are dependent on the future market
    price of the Company's stock. Gains are reported net of the option
    exercise price but before taxes associated with exercise.
(4) Options vest over four years.
(5) 128,334 vested immediately upon grant date and the remaining 261,666 will
    vest over three years.
(6) Not applicable to Mr. Iftikar's and Mr. Lyon's options, which expired on
    termination of their respective employment with the Company.
 
                                      50
<PAGE>
 
  The following table sets forth information with respect to option exercises
and year-end stock option values for each of the Named Executive Officers.
 
               AGGREGATED OPTIONS EXERCISED IN FISCAL YEAR 1996
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                   NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                                                  UNDERLYING UNEXERCISED     IN-THE-MONEY OPTIONS
                           SHARES                    OPTIONS AT FY-END           AT FY-END(1)
                          ACQUIRED      VALUE    ------------------------- -------------------------
          NAME           ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
          ----           ----------- ----------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>         <C>         <C>           <C>         <C>
Edwin Harper............       --          --          --       390,000          --      $536,250
Edward Marinaro.........       --          --      128,334      261,666     $176,459     $352,916
Chester Brown...........       --          --          --        40,000          --      $ 55,000
Dale Pilgeram...........       --          --          --        60,000          --      $ 82,500
Syed Iftikar............   231,623    $960,032      40,000          --           --           --
Robert Lyon.............       --          --        7,500          --           --           --
Michael Perez...........    25,000    $ 96,875         --           --           --           --
</TABLE>
--------
(1) Calculated as the difference between the market value of the Company's
    Common Stock at exercise date or fiscal year end, as the case may be, and
    the exercise price.
 
CHANGE OF CONTROL PROVISIONS
 
  The 1991 Stock Option Plan of the Company provides for the automatic
acceleration of the vesting of all options outstanding under the Plan on a
merger or consolidation of the Company in which the Company is not the
surviving corporation or on a sale of all or substantially all of the assets
of the Company, if the successor entity does not assume the outstanding
options or provide options in substitution for the outstanding options.
 
  Pursuant to a written agreement, if there is a change in control of the
Company, each of Mr. Harper and Mr. Marinaro, at his option, will be entitled
to twelve months salary, his outstanding options will immediately vest and his
health benefits continue for 12 months.
 
COMPENSATION OF DIRECTORS
 
  Each member of the Board of Directors who is not an employee of the Company
receives an annual retainer of $15,000 for serving as a director during the
fiscal year. Each nonemployee director was also paid a fee of $1,500 for each
Board meeting and $500 for each committee meeting attended. An amendment to
the 1992 Non-Employee Director Stock Option Plan granting each director a one
time option to acquire 30,000 shares of the Company's Common Stock was
approved at the special meeting of the stockholders of the Company on
September 26, 1996. Each director is also granted an option each year to
purchase 10,000 shares of the Company's Common Stock. All options are valued
at the fair market value of the Company's Common Stock on the date of the
grant.
 
EMPLOYMENT AGREEMENTS
 
  The Company has previously reported in its Form 10K/A filed January 28,1997,
that it has written employment agreements with certain named executive
officers. Although the information previously reported was correct, upon
further review, it has been determined that such agreements have not yet been
reduced to final form. The Company is in the process of completing these
written agreements, the final terms of which may vary from the terms
previously discussed in the Form 10K/A.
 
                                      51
<PAGE>
 
                            STOCK PERFORMANCE GRAPH
 
  The Stock Performance Graph below shall not be deemed incorporated by
reference in any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under either of such Acts.
 
  The following line graph compares the cumulative total returns to holders of
the Company's Common Stock during the fiscal periods since the Company's
initial public offering to September 30, 1996, with the NASDAQ Composite (US)
Index and a peer group constructed by the Company, comprising Connor
Peripherals, Inc., Maxtor Corporation, Micropolis Corporation, Quantum
Corporation, Western Digital Corporation, Iomega Corporation and Exabyte
Corporation.(/1/)
 
  The Stock Performance Graph assumes that $100 was invested on December 18,
1991, at the closing sale price for the Company's Common Stock and in the
NASDAQ Composite (US) Index and Peer Group, and that all dividends were
reinvested. No dividends have been declared or paid on the Company's Common
Stock. Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns. Returns for the Peer Group are
weighted based on market capitalization at each data point.
 
 
                       [PERFORMANCE GRAPH APPEARS HERE]

--------
(1) No data is available for Maxtor Corporation, Micropolis Corporation or
    Connor Peripherals, Inc. after February 1996 because these companies were
    acquired by other companies.
 
                                      52
<PAGE>
 
 
                               SYQUEST TECHNOLOGY
                       HISTORICAL QUARTERLY PRICE--CLOSE
          RELATIVE TO DISK DRIVE COMPANIES AND SELECTED MARKET INDICES
 
<TABLE>
<CAPTION>
                                         DEC 91  DEC 91  MAR 92  JUNE 92 SEP 92
                                         ------- ------- ------- ------- -------
<S>                                      <C>     <C>     <C>     <C>     <C>
SyQuest Technologies, Inc...............   100     122     107     165     135
Peer Group..............................   100     120     139     127     110
NASDAQ Composite (US)...................   100     109     112     104     109
<CAPTION>
                                         DEC 92  MAR 93  JUNE 93 SEP 93  DEC 93
                                         ------- ------- ------- ------- -------
<S>                                      <C>     <C>     <C>     <C>     <C>
SyQuest Technologies, Inc...............   200     101      84      82      78
Peer Group..............................   115      83      62      64      90
NASDAQ Composite (US)...................   126     129     131     142     145
<CAPTION>
                                         MAR 94  JUNE 94 SEP 94  DEC 94  MAR 95
                                         ------- ------- ------- ------- -------
<S>                                      <C>     <C>     <C>     <C>     <C>
SyQuest Technologies, Inc...............    86      75      83     139      95
Peer Group..............................   108      84      96     100      87
NASDAQ Composite (US)...................   139     135     144     142     155
<CAPTION>
                                         JUNE 95 SEP 95  DEC 95  MAR 96  JUNE 96
                                         ------- ------- ------- ------- -------
<S>                                      <C>     <C>     <C>     <C>     <C>
SyQuest Technologies, Inc...............   101     104      78      47      62
Peer Group..............................   121     123      77     110     272
NASDAQ Composite (US)...................   177     198     201     210     227
<CAPTION>
                                         SEP 96
                                         -------
<S>                                      <C>     <C>     <C>     <C>     <C>
SyQuest Technologies, Inc...............    50
Peer Group..............................   310
NASDAQ Composite (US)...................   235
</TABLE>
 
                                       53
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth beneficial ownership of Common Stock of the
Company as of December 20, 1996, by (i) each present director, (ii) each
executive officer of the Company, including certain former executive officers
of the Company named in the Summary Compensation Table set forth below, (iii)
all present directors and executive officers as a group, and (iv) all persons
known to the Company to be the beneficial owners of more than five percent of
the Company's Common Stock, the only class of voting securities of the Company
outstanding. The table does not include the holders of the Company's three
classes of convertible preferred stock (collectively, the "Preferred Stock")--
7% Cumulative Convertible Preferred Stock, Series 1 (the "7% Convertible
Preferred"), Convertible Preferred Stock, Series 1 (the "Convertible
Preferred"), and 5% Cumulative Convertible Preferred Stock, Series 2 (the
"Series 2 Preferred")--because a holder of Preferred Stock is not permitted to
convert shares of Preferred Stock at any time when the conversion would result
in such holder and its affiliates having beneficial ownership of more than
four and nine-tenths percent (the "4.9% Restriction") of the outstanding
Common Stock of the Company.(1)
 
<TABLE>
<CAPTION>
                                                   SHARES OF COMMON STOCK
                                                   BENEFICIALLY OWNED(1)
                                             ----------------------------------
     NAME                                    NUMBER OF SHARES PERCENT OF SHARES
     ----                                    ---------------- -----------------
     <S>                                     <C>              <C>
     Syed H. Iftikar (2)...................     1,096,678            6.72%
      Castlewood Systems
      5000 Hopyard Road, #330
      Pleasanton, CA 94588
     Fletcher International................     1,500,000            9.19%
      c/o Midland Bank Trust Corp. (Cayman)
      P.O. Box 1109, Mary Street
      Grand Cayman, Cayman Islands
      British West Indies
     SAE Magnetics.........................       992,717            6.08%
      185 Martindale Lane
      San Jose, CA 95119
     Edward L. Marinaro (3)................       128,334             *
     Edwin L. Harper.......................           --              *
     C. Richard Kramlich (4)...............       113,844             *
     Joseph Baia (5).......................        30,000             *
     David I. Caplan (6)...................        89,365             *
     Michael Perez.........................           --              *
     Chester Brown.........................           --              *
     Dale Pilgeram.........................           --              *
     Robert E. Lyon........................           --              *
      All current directors and executive
      officers of the Company as a group
      (10 persons).........................       263,334            1.61%
                                                                    -----
                                                                    24.46%
</TABLE>
--------
 *Less than one percent.
(1) At December 20, 1996, assuming the 4.9% Restriction did not apply to: (x)
    the outstanding 7% Convertible Preferred Stock was convertible into
    approximately 4,394,999 shares of Common Stock (21.21% of the outstanding
    shares of Common Stock) and holders of the 7% Convertible Preferred Stock
    also held 1,180,665 shares of Common Stock (7.23% of the outstanding
    shares of Common Stock); (y) the outstanding Convertible Preferred Stock
    was convertible into a total of 1,419,367 shares and warrants to purchase
    a total of 473,123 shares of Common Stock (10.39% of the outstanding
    shares of Common Stock); and (z) the Series 2 Preferred Stock was
    convertible into a total of 6,263,981 shares and warrants to purchase a
    total of 2,088,663 shares of Common Stock (33.84% of the outstanding
    shares of Common Stock). Except as otherwise noted, the persons named in
    the table are believed to have sole voting and investment power with
    respect to all shares of Common Stock shown as beneficially owned by them,
    subject to community property laws where applicable.
 
                                      54
<PAGE>
 
(2) Includes 46,300 shares held of record by Shawn Iftikar, Jon Iftikar and
    Kristina Iftikar, members of Mr. Iftikar's family, and 795,000 shares held
    of record by Jessi Investments, a family partnership which is a 4.87%
    stockholder.
(3) Consists of options to purchase 128,334 shares, which are exercisable
    within 60 days after December 20, 1996.
(4) Includes options to purchase 45,000 shares, which are exercisable within
    60 days after December 20, 1996.
(5) Consists of options to purchase 30,000 shares, which are exercisable
    within 60 days after December 20, 1996.
(6) Includes options to purchase 60,000 shares, which are exercisable within
    60 days after December 20, 1996.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  None.
 
  Pursuant to the requirements of Section 13 or 15(d) 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.
 
                                          SYQUEST TECHNOLOGY, INC.
 
                                          By: /s/ Edwin L. Harper
                                              ----------------------------------
                                                     Edwin L. Harper
                                              President and Chief Executive
                                                         Officer
 
Dated: January 28, 1997
 
 
                                      55
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) The following documents are filed as a part of this Report:
 
    (1) Financial Statements. The following Consolidated Financial Statements
  of SyQuest Technology, Inc. and subsidiaries are included in Item 8 of this
  Annual Report on Form 10-K:
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
   <S>                                                                     <C>
   Report of Ernst & Young LLP, Independent Auditors......................  34
   Consolidated Balance Sheets--September 30, 1996 and 1995...............  35
   Consolidated Statements of Operations--Years Ended September 30, 1996,
    1995, and 1994........................................................  36
   Consolidated Statements of Stockholders' Equity (Deficit)--Years Ended
    September 30, 1996, 1995, and 1994....................................  37
   Consolidated Statements of Cash Flows--Years Ended September 30, 1996,
    1995 and 1994.........................................................  38
   Notes to Consolidated Financial Statements.............................  40
</TABLE>
 
    (2) Financial Statement Schedule. The following consolidated financial
  statement schedule of the Company and subsidiaries are filed as part of
  this Report and should be read in conjunction with the Consolidated
  Financial Statements of SyQuest Technology, Inc. and subsidiaries.
 
<TABLE>
<CAPTION>
                  SCHEDULE                                                 PAGE
                  --------                                                 ----
     <S>                                                                   <C>
     VIII--Valuation and Qualifying Accounts..............................  62
</TABLE>
 
  Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
 
                                      56
<PAGE>
 
                                    EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                          DESCRIPTION OF DOCUMENT
 -------                         -----------------------
 <C>     <S>
 3.1     Restated Certificate of Incorporation of the Company. Incorporated by
         reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
         for the fiscal period ended September 30, 1995.
 3.2     Amendment to Restated Certificate of Incorporation of the Company.
         Incorporated by reference to Exhibit 3.2 of the Company's Form S-3
         Registration Statement filed December 2, 1996 (File No. 333-17119), as
         amended and to be amended.
 3.3     By-Laws of the Company. Incorporated by reference to the Company's
         Registration Statement on Form S-1 (File No. 33-43656) filed on
         November 9, 1991.
 4.1     Specimen stock certificate, $.001 par value. Incorporated by reference
         to Amendment No. 2 to the Company's Registration Statement on Form S-1
         (File No. 33-43656) filed on December 10, 1991.
 4.2     Corrected Certificate of Designations, Preferences and Rights of 7%
         Cumulative Convertible Preferred Stock, Series 1. Incorporated by
         reference to Exhibit 3.1 of the Company's Current Report on Form 8-K
         dated June 14, 1996.
 4.3     Securities Purchase Agreement, dated as of May 31, 1996, by and among
         the Company and holders of 7% Cumulative Convertible Preferred Stock,
         Series 1. Incorporated by reference to Exhibit 10.1 of the Company's
         Current Report on Form 8-K dated June 14, 1996.
 4.4     Registration Rights Agreement dated as of May 31, 1996, by and among
         the Company and holders of 7% Cumulative Convertible Preferred Stock,
         Series 1. Incorporated by reference to Exhibit 10.2 of the Company's
         Current Report on Form 8-K dated June 14, 1996.
 4.5     6% Convertible Subordinated Debenture dated July 15, 1996.
         Incorporated by reference to Exhibit 10.3 of the Company's Form S-3
         Registration Statement No. 333-7369 ("Registration 333-7369").
 4.6     Registration Agreement dated July 15, 1996, among the Company and
         WISRS (Malaysia) SDN.BMP. Incorporated by reference to Exhibit 10.4 of
         Registration 333-7369.
 4.7     Certificate of Designations, Preferences and Rights of Convertible
         Preferred Stock, Series 1, as amended and agreed to be amended.
         Incorporated by Reference to Exhibit 3.1 to the Company's Current
         Report on Form 8-K/A dated October 31, 1996.
 4.8     Certificate of Designations, Preferences and Rights of 5% Cumulative
         Preferred Stock, Series 2. Incorporated by Reference to Exhibit 3.2 to
         the Company's Current Report on Form 8-K/A dated October 31, 1996.
 4.9     Securities Purchase Agreement dated as of October 8, 1996, among the
         Company and the buyers of the Convertible Preferred Stock, Series 1
         including the following exhibits: Form of Warrant, Form of
         Registration Rights Agreement, Form of Escrow Agreement and certain
         Schedules to the representations. Incorporated by Reference to Exhibit
         10.1 to the Company's Current Report on Form 8-K/A dated October 31,
         1996.
 4.10    Securities Purchase Agreement dated as of October 8, 1996, among the
         Company and certain buyers of the Series 2 Preferred Stock, including
         the following exhibits: Form of Escrow Agreement, Form of Warrant,
         Form of Registration Rights Agreement and certain Schedules to the
         representations. Incorporated by Reference to Exhibit 10.2 to the
         Company's Current Report on Form 8-K/A dated October 31, 1996.
 4.11    Securities Purchase Agreement dated as of October 8, 1996, among the
         Company and certain buyers of the Series 2 Preferred Stock, including
         the following exhibits: Form of Escrow Agreement, Form of Warrant,
         Form of Registration Rights Agreement and certain Schedules to the
         representations. Incorporated by Reference to Exhibit 10.3 to the
         Company's Current Report on Form 8-K/A dated October 31, 1996.
</TABLE>
 
 
                                       57
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                          DESCRIPTION OF DOCUMENT
 -------                         -----------------------
 
 
 <C>     <S>
 4.12    Securities Purchase Agreement dated as of October 8, 1996, among the
         Company and certain buyers of the Series 2 Preferred Stock, including
         the following exhibits: Form of Escrow Agreement, Form of Warrant,
         Form of Registration Rights Agreement and certain Schedules to the
         representations. Incorporated by Reference to Exhibit 10.4 to the
         Company's Current Report on Form 8-K/A dated October 31, 1996.
 4.13    Securities Purchase Agreement dated as of October 8, 1996, among the
         Company and certain buyers of the Series 2 Preferred Stock, including
         the following exhibits: Form of Escrow Agreement, Form of Warrant,
         Form of Registration Rights Agreement and certain Schedules to the
         representations. Incorporated by Reference to Exhibit 10.5 to the
         Company's Current Report on Form 8-K/A dated October 31, 1996.
 4.14    Securities Purchase Agreement dated as of September 27, 1996, between
         the Company and Atmel Corporation, including the exhibit Form of
         Registration Rights Agreement. Incorporated by Reference to Exhibit
         10.6 to the Company's Current Report on Form 8-K/A dated October 31,
         1996.
 4.15    Securities Purchase Agreement dated as of October 18, 1996, between
         the Company and Petronic International, Inc., including the exhibit
         Form of Registration Rights Agreement. Incorporated by Reference to
         Exhibit 10.7 to the Company's Current Report on Form 8-K/A dated
         October 31, 1996.
 4.16    Securities Purchase Agreement dated as of October 24, 1996, between
         the Company and SAE Magnetics (HK) Ltd., including the exhibit Form of
         Registration Rights Agreement. Incorporated by Reference to Exhibit
         10.8 to the Company's Current Report on Form 8-K/A dated October 31,
         1996.
 4.17    Securities Purchase Agreement dated as of October 25, 1996, between
         the Company and Freight Solutions International, including the exhibit
         Form of Registration Rights Agreement. Incorporated by Reference to
         Exhibit 10.9 to the Company's Current Report on Form 8-K/A dated
         October 31, 1996.
 4.18    Subscription Agreement dated November 12, 1996, between SyQuest
         Technology, Inc. and Fletcher International Limited, including the
         Annex Warrant Certificate issued November 13, 1996.
 10.1    Form of Indemnification Agreement between the Company and its
         directors*. Incorporated by reference to the Company's Registration
         Statement on Form S-1 (File No. 33-43656) filed on November 9, 1991.
 10.2    Form of Indemnification Agreement between the Company and its
         executive officers*. Incorporated by reference to Amendment No. 2 to
         the Company's Registration Statement on Form S-1 (File No. 33- 43656)
         filed on December 10, 1991.
 10.3    Industrial Space Lease dated May 15, 1990, between SyQuest Technology
         and Renco Investment Company covering property located at 47100
         Bayside Parkway in Fremont, California, with other documents related
         thereto. Incorporated by reference to the Company's Registration
         Statement on Form S-1 (File No. 33-43656) filed on November 9, 1991.
 10.4    Industrial Space Lease dated July 30, 1991, between SyQuest Technology
         and Renco Investment Company covering property located at Building
         #47, Bayside Parkway in Fremont, California, with other documents
         related thereto. Incorporated by reference to the Company's
         Registration Statement on Form S-1 (File No. 33-43656) filed on
         November 9, 1991.
 10.5    Tenancy of Flatted Factory Unit dated July 18, 1990, between SyQuest
         Technology (c) and Jurong Town Corporation covering property located
         at 30 Kallang Place, Singapore. Incorporated by reference to the
         Company's Registration Statement on Form S-1 (File No. 33-43656) filed
         on November 9, 1991.
 10.6    Tenancy of Flatted Factory Unit dated June 26, 1991, between SyQuest
         Technology International and Jurong Town Corporation covering property
         located at 19 Kallang Avenue, Singapore. Incorporated by reference to
         the Company's Registration Statement on Form S-1 (File No. 33-43656)
         filed on November 9, 1991.
</TABLE>
 
 
                                       58
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                          DESCRIPTION OF DOCUMENT
 -------                         -----------------------
 <C>     <S>
 10.7    Revolving Credit Agreement dated January 1, 1991, among SyQuest
         Technology, First Interstate Bank of California and Silicon Valley
         Bank, together with First Amendment related thereto. Incorporated by
         reference to the Company's Registration Statement on Form S-1 (File
         No. 33-43656) filed on November 9, 1991.
 10.8    Product License Agreement dated April 1, 1990, between SyQuest
         Technology and PrairieTek Corporation. Incorporated by reference to
         the Company's Registration Statement on Form S-1 (File No. 33-43656)
         filed on November 9, 1991.
 10.9    SyQuest Technology, Inc. 1991 Stock Option Plan, as amended*.
         Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1995.
 10.10   Form of Stock Option Grant for SyQuest Technology, Inc 1991 Stock
         Option Plan*. Incorporated by reference to the Company's Registration
         Statement on Form S-8 (File No. 33-46460) filed on March 18, 1992.
 10.11   Policy Regarding Options and Cash Bonuses to be Awarded to Employees
         of Iota Memories Corporation*. Incorporated by reference to the
         Company's Registration Statement on Form S-1 (File No. 33-43656) filed
         on November 9, 1991.
 10.12   1992 Non-Employee Director Stock Option Plan, as amended*.
         Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1995.
 10.13   1992 Employee Stock Purchase Plan, as amended. Incorporated by
         reference to the Company's Registration Statement on Form S-8 (File
         No. 33-48273) filed on June 9, 1992.
 10.14   Credit Agreement dated January 17, 1992, among the Company and Silicon
         Valley Bank and First National Bank of Boston. Incorporated by
         reference to the Company's Registration Statement on Form S-1 (File
         No. 33-47361) filed on April 21, 1992.
 10.15   Bonus Arrangements for Executive Officers*. Incorporated by reference
         to the Company's Annual Report on Form 10-K for the fiscal period
         ended September 30, 1995.
 10.16   Amendment No. 2 to Credit Agreement made as of June 10, 1993, among
         the Company, Silicon Valley Bank and First National Bank of Boston.
         Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1993.
 10.17   Line of Credit Agreement dated February 28, 1995, with Silicon Valley
         Bank, and Amendment No. 1 thereto. Incorporated by reference to the
         Company's Quarterly Report on Form 10-Q for the quarter ended March
         31, 1995.
 10.18   Line of Credit Agreement with Bank of America. Incorporated by
         reference to the Company's Quarterly Report on Form 10-Q for the
         quarter ended March 31, 1995.
 10.19   Amendment No. 2 to Silicon Valley Bank Credit Agreement and Limited
         Waiver dated November 21, 1995. Incorporated by reference to the
         Company's Current Report on Form 8-K dated November 21, 1995.
 10.20   Amendment No. 3 to Silicon Valley Bank Credit Agreement and Limited
         Waiver dated December 27, 1995. Incorporated by reference to the
         Company's Annual Report on Form 10-K for the fiscal period ended
         September 30, 1995.
 11.1    Computation of Earnings Per Share.
 21.1    Subsidiaries of the Company. Incorporated by reference to the
         Company's Registration Statement on Form S-1 (File No. 33-43656) filed
         on November 9, 1991.
 22.1    Published Report Regarding Special Stockholders Meeting on September
         26, 1996. Incorporated by reference to the Company's Current Report on
         Form 8-K/A dated October 31, 1996.
</TABLE>
 
 
                                       59
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER     DESCRIPTION OF DOCUMENT
 -------    -----------------------
 <C>     <S>
 23.1    Consent of Ernst & Young LLP.
 27      Financial Data Schedule.
 27      Financial Data Schedule.
</TABLE>
--------
* A management contract or compensatory plan or arrangement required to be
  filed as an Exhibit pursuant to Item 14(c) of this Report.
 
  (b) Reports on Form 8-K:
 
    A current report on Form 8-K, dated December 2, 1996, was filed by the
  Company reporting under Item 5 the Filing of a Registration Statement on
  Form S-3.
 
    A current report on Form 8-K, dated November 25, 1996, was filed by the
  Company reporting under Item 5 the Company's discontinuation of plans to
  acquire a controlling interest in Nomai.
 
    A current report on Form 8-K, dated November 11, 1996, was filed by the
  Company reporting under Item 5 the continuation of the Company's Nasdaq
  National Market listing and the execution of a Letter of Intent to acquire
  a controlling interest in Nomai, and under Item 9 the sale by the Company
  of equity securities pursuant to Regulation S.
 
    A current report on Form 8-K, dated October 31, 1996, and an amendment
  thereto were filed by the Company reporting under Item 5 the results of the
  Company's Special Meeting of Stockholders held September 26, 1996, the
  Company's filing with Nasdaq of a pro forma balance sheet evidencing the
  Company's compliance with the listing requirements of the Nasdaq National
  Market, and the Company's exchange of debt for equity with certain vendors,
  sale of Convertible Preferred Stock, Series 1 and sale of 5% Cumulative
  Convertible Preferred Stock, Series 2 and related warrants.
 
                                      60
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
 
                                          SyQuest Technology, Inc.
 
                                                    /s/ Edwin L. Harper
                                          By: _________________________________
                                                      EDWIN L. HARPER
                                               PRESIDENT AND CHIEF EXECUTIVE
                                                          OFFICER
 
Dated: April 16, 1997
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
              SIGNATURE                        TITLE                 DATE
 
         /s/ Edwin L. Harper           President, Chief         April 16, 1997
-------------------------------------   Executive Officer
           EDWIN L. HARPER              and Director
                                        (Principal
                                        Executive Officer)
 
       /s/ Henry C. Montgomery         Executive Vice           April 16, 1997
-------------------------------------   President, Finance
         HENRY C. MONTGOMERY            and Chief Financial
                                        Officer
 
       /s/ Edward L. Marinaro          Director and             April 16, 1997
-------------------------------------   Chairman of the
         EDWARD L. MARINARO             Board
 
           /s/ Joseph Baia             Director                 April 16, 1997
-------------------------------------
             JOSEPH BAIA
 
         /s/ David I. Caplan           Director                 April 16, 1997
-------------------------------------
           DAVID I. CAPLAN
 
        /s/ Donald P. Landry           Controller               April 16, 1997
-------------------------------------
          DONALD P. LANDRY
 
                                      61
<PAGE>
 
                            SYQUEST TECHNOLOGY, INC.
 
               SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                            BALANCE AT    ADDITIONS                  BALANCE AT
                            BEGINNING  CHARGED TO COSTS                END OF
        DESCRIPTION         OF PERIOD    AND EXPENSES   DEDUCTIONS     PERIOD
        -----------         ---------- ---------------- ----------   ----------
                                             (IN THOUSANDS)
<S>                         <C>        <C>              <C>          <C>
Year Ended September 30,
 1996:
  Allowance for doubtful
   accounts................   $2,835        $5,839       $(2,980)(1)   $5,694
Year Ended September 30,
 1995:
  Allowance for doubtful
   accounts................   $3,574        $2,008       $(2,747)(1)   $2,835
Year Ended September 30,
 1994:
  Allowance for doubtful
   accounts................   $2,003        $3,151       $(1,580)(1)   $3,574
</TABLE>
--------
(1) Represents uncollectable accounts written off.
 
                                       62
<PAGE>
 
DIRECTORS
 
Edward L. Marinaro, Chairman of the Board of the Company
 
Joseph Baia, Vice President, Operations; Indigita Corporation
 
Edwin L. Harper, President and CEO of the Company
 
Richard C. Kramlich, Managing General Partner of New Enterprise Associates
 
David I. Caplan, Chairman of the Board, President and CEO of Objectivity, Inc.
 
CORPORATE OFFICERS
 
Edwin L. Harper, President and Chief Executive Officer
 
Henry C. Montgomery, Executive Vice President and Chief Financial Officer
 
Dale Pilgeram, Vice President and Chief Technical Officer
 
Michael K. Clemens, Vice President and Treasurer
 
Thomas C. Tokos, Vice President, General Counsel and Secretary
 
Chet Brown, Executive Vice President, Sales and Marketing
 
Joe Smith, Executive Vice President, Global Operations
 
Robert Fisch, Vice President, Human Resources
 
Don Landry, Corporate Controller
 
VICE PRESIDENTS
 
Gary Marks, Vice President, Marketing
 
Richard Shulman, Vice President, Quality Assurance
 
Greg Peel, Vice President, Asia Pacific Sales
 
SHAREHOLDER INFORMATION
 
LEGAL COUNSEL
 
Shartsis, Friese & Ginsburg
 
San Francisco, California
 
INDEPENDENT AUDITORS
 
Price Waterhouse LLP
 
San Jose, California
 
REGISTRAR AND TRANSFER AGENT
 
Boston Equiserve
 
Boston, Massachusetts
 
ANNUAL MEETING
 
The annual meeting of stockholders will be held at 9 a.m. on May 6, 1997 at
SyQuest Technology, Inc., 47074 Bayside Parkway, Fremont, CA 94538
 
COMMON STOCK
 
The Company has not paid cash dividends on its common stock and does not plan
to pay cash dividends in the near future. The Company presently intends to
retain its earnings to finance the anticipated growth of the business. In
addition, the payment of cash dividends is restricted by certain of the
Company's borrowing arrangements.
 
CORPORATE INFORMATION
Corporate Headquarters
 
47071 Bayside Parkway
 
Fremont, California 94538
 
USA
 
telephone: 510/226-4000
 
fax: 510/226-4100
 
DOMESTIC OFFICES
 
Fairport, New York
 
Fremont, California
 
Los Angeles, California
 
Raleigh, North Carolina
 
OVERSEAS OFFICES
 
Edinburgh, Scotland
 
London, England
 
Paris, France
 
Singapore
 
Munich, Germany
 
Sydney, Australia
 
Tokyo, Japan
 
DISTRIBUTION CENTERS
 
Fremont, California
 
Edinburgh, Scotland
 
Munich, Germany
 
Tokyo, Japan
 
Singapore
 
ENGINEERING CENTERS
 
Boulder, Colorado
 
Campbell, California
 
Fremont, California
 
PRODUCTION CENTERS
 
Fremont, California
 
Penang, Malaysia