<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended                                 Commission File Number
    September 30, 1996                                            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, California                           94538
 (Address of principal executive offices)                           (Zip Code)
 
Registrant's telephone number, including area code:          (510) 226-4000

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 registrant's 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 [X].

     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 registrant's Common Stock on November 30, 1996 was 15,830,753.


                      DOCUMENTS INCORPORATED BY REFERENCE

     Specifically identified portions of the Proxy Statement for Registrant's
1997 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by
reference into Part III of this Annual Report on Form 10-K.

1
<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.


/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.

2
<PAGE>
 
     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.

     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.

3
<PAGE>
 
     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.

     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

4
<PAGE>
 
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. 

     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."

5
<PAGE>
 
     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."

     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,

6
<PAGE>
 
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."

     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 EZ Flyer 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

7
<PAGE>
 
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.

     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."

8
<PAGE>
 
     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.

9
<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 Netherlands...      7,700/2/   March 2000       Unoccupied
 
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.

10
<PAGE>
 
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.

     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.

11
<PAGE>
 
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>                 <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>                 <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>                 <C>
          For                          :                   2,854,778
          Against                      :                   2,123,841
          Abstain                      :                     121,442
          Broker Non-Vote              :                   5,465,564
</TABLE>

     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>                 <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>                 <C>
          For                          :                   7,788,555
          Against                      :                   2,236,833
          Abstain                      :                     132,952
          Broker Non Vote              :                     407,285

</TABLE>

12
<PAGE>
 
                                    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

           Fiscal Year Ended
           September 30, 1996                  High               Low
          ----------------------             --------           -------

          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.

13
<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
                                             ---------    --------    --------   --------   --------
<S>                                          <C>          <C>         <C>        <C>        <C> 
                                                       (in thousands, except per share data)
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
 
<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.

14
<PAGE>
 
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 EZ Flyer 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 EZ Flyer 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 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 EZ Flyer 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 EZ Flyer 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

15
<PAGE>
 
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 EZ Flyer 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 EZ Flyer 230 and future products
utilizing the EZ Flyer 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 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.

16
<PAGE>
 

     Selling, General & 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.

     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

17
<PAGE>
 
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 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.

18
<PAGE>
 
     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.

     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.

19
<PAGE>
 
     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.

20
<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.

21
<PAGE>
 
     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 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.

22
<PAGE>
 
     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 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.

23
<PAGE>
 
     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 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.

24
<PAGE>

     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 EZ Flyer 230 in June 1996.  The
EZ Flyer 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 EZ
Flyer 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 EZ Flyer 230 and the competition it
is facing.  The Company continues to refine the EZ Flyer 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 EZ Flyer 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 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.

25
<PAGE>
 
     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 EZ Flyer 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 EZ Flyer 230 on June 3, 1996.  Commercial
shipments of the EZ Flyer 230 commenced in June 1996, and the Company began to
ship the EZ Flyer 230 in significant volume in July 1996.  Revenue in the fourth
fiscal quarter of 1996 was $12.7 million for the EZ Flyer 230, representing 28%
of total revenue.  There can be no assurance that the market acceptance of the
EZ Flyer 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 EZ Flyer 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.

26
<PAGE>
 
     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
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 EZ Flyer 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.

27
<PAGE>
 
     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 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 EZ
Flyer 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 EZ Flyer 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.

28
<PAGE>
 
     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 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.

29
<PAGE>
 
     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.

     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.

30
<PAGE>
 
     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, 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.

31
<PAGE>
 
     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 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.

32
<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                       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 -- 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>

33
<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

34
<PAGE>
 
                           SyQuest Technology, Inc.
                          Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                           September 30,
                                                                      1996              1995
                                                                 --------------   ----------------
              ASSETS                                             (In Thousands, Except Share Data)
<S>                                                              <C>              <C>
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.

35
<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.

36
<PAGE>
 
                            SyQuest Technology, Inc.
           Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
 
                                                                            Additional   Treasury     Retained
                                     Preferred Stock      Common Stock       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.

37
<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.

38
<PAGE>
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     Supplemental information on noncash investing and financing activities, in
thousands:

Conversion of preferred to Common Stock                         $738
Conversion of accounts payable to Common Stock                $2,338

     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 were approximately $0.9
million.

39
<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.

40
<PAGE>
 
     Inventories

     Inventories are stated at the lower of cost (first-in, first-out
method) or market.

     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.

41
<PAGE>
 
     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).
 
     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.

42
<PAGE>
 
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.

          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.

43
<PAGE>
 
3.   SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
                                                       September 30,
                                                      1996        1995
                                                     ------      ------
<S>                                                  <C>         <C>
                                                       (In Thousands)
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>

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%.

44
<PAGE>
 
          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.

     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>

45
<PAGE>
 
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
                                                           --------------   -------------
<S>                                                        <C>              <C>
                                                                   (In Thousands)
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                                   (5,582)         (8,417)
     Unremitted income of foreign subsidiaries                      --            (309)
     Depreciation of property, plant and equipment            --------         -------

                                                                (5,582)         (8,726)
     Total deferred tax liabilities                           --------         -------

                                                              $     --         $ 4,528
     Net deferred tax assets                                  ========         =======
</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 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.

46
<PAGE>
 
          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.

47
<PAGE>
 
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 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 qurter 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.

48
<PAGE>
 
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.

49
<PAGE>
 
          The following table summarizes stock option activity under the Plan
     and the Director Plan:
<TABLE>
<CAPTION>
                                                                 Option Price
                                             -----------------------------------------------------
                                             Shares            Per Share (range)         Aggregate
                                             ------         -----------------------      ---------
                                                   (In Thousands, Except Per Share Amounts)
                                                                Low       High
                                                                ---       ----
<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.

50
<PAGE>
 
11.  BONUS, PROFIT SHARING AND 401(K) SAVINGS AND RETIREMENT PLANS

          The Company has bonus and profit sharing plans that provide additional
     compensation to substantially all employees.  The profit sharing
     compensation is determined on an annual basis based principally on a
     percentage of income after taxes, before profit sharing, and the Company
     meeting certain objectives for the year.  Bonuses for officers and key
     management personnel are determined annually at the discretion of the Board
     of Directors.  Such determination considers the extent to which individuals
     and the Company meet objectives for the year.  The Company did not incur
     bonus or profit sharing expenses in 1996 or 1995.  The Company recorded
     bonus and profit sharing expenses of $455,000 in 1994.

          The Company adopted a 401(k) Savings and Retirement Plan (the "Savings
     Plan") to provide for voluntary salary deferral contributions on a pretax
     basis in accordance with Section 401(k) of the Internal Revenue Code of
     1986, as amended.  The Company has the option of matching a certain percent
     of each participant's contribution to the Savings Plan.  The Company's
     maximum contribution per participant was limited to $1,000 in 1996 and 1995
     and $500 in 1994.  The Company made matching contributions of $254,000,
     $242,000 and $135,000 in 1996, 1995, and 1994, respectively.

12.  COMMITMENTS

          The Company leases its United States facilities under noncancelable
     operating lease agreements. These leases terminate through 2001, and
     certain leases include five-year renewal options as well as provisions for
     adjustments to lease payments based on the fair market value of similar
     properties. The Company leases its Singapore facility under noncancelable
     lease agreements expiring in 1997. The Company leases its facilities in
     Amsterdam, Netherlands under a noncancelable lease agreement expiring in
     2000. The Company is in the process of assigning that lease, and expects
     the assignment to be completed no later than the second quarter of fiscal
     1997. Notwithstanding the anticipated assignment, the future lease payments
     for the Amsterdam facility have been included in the commitments schedule
     below.

          Total rent expense amounted to $2,507,000, $3,250,000, and $3,001,000
     for 1996, 1995, and 1994, respectively.  Future minimum rental commitments
     under non-cancelable operating leases are as follows (in thousands):
<TABLE>
   <S>                               <C>    
     1997                             $2,445                                  
     1998                              2,230                                  
     1999                              1,425                                  
     2000                                197                                  
     2001                                 13                                   
                                      ------                                  
     Total minimum lease payments     $6,310                                  
                                      ======                                   
</TABLE>

51
<PAGE>
 
13.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
                                                       Three Months Ended
                                        -------------------------------------------------
                                              (in thousands, except per share data)
                                         Dec. 31,    March 31,     June 30,    Sept. 30,
                                           1995         1996         1996         1996
                                        ----------   ----------   ----------   ----------
    <S>                                 <C>          <C>          <C>          <C>

     Net revenues                        $ 78,667     $ 47,445     $ 29,459     $ 44,836
     Gross profit (loss)                   (9,262)     (25,391)     (23,699)      10,066
     Income (loss) from operations        (30,886)     (50,702)     (41,604)      (7,484)
     Net income (loss)                    (33,801)     (51,105)     (41,317)     (10,428)

     Net income (loss) per share         $  (2.98)    $  (4.49)    $  (3.61)    $  (1.29)

<CAPTION> 
                                         Dec. 31,     March 31,    June 30,     Sept. 30,
                                             1994         1995         1995         1995
                                         --------     --------     --------     --------
<S>                                      <C>          <C>          <C>          <C> 
     Net revenues                        $ 65,892     $ 76,490     $ 68,787     $ 88,375
     Gross profit (loss)                   15,927       21,460       18,427       (4,767)
     Income (loss) from operations          2,088        4,695        1,355      (25,247)
     Net Income (loss)                      1,923        3,686        1,711      (19,106)

     Net income (loss) per share         $   0.16     $   0.31     $   0.15     $  (1.70)

</TABLE>
14.  LITIGATION

          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, been brought in the United States 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 is 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.

52
<PAGE>
 
          The Company has certain insurance coverage with respect to the above
     claims, however, the amount of any ultimate claims on these actions and
     related insurance coverage is not presently determinable.

          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 damages 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.

          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.

          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.

          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.

15.  SUBSEQUENT EVENTS

          Between October 1, 1996 and October 31, 1996, the Company exchanged
     approximately $9.2 million of notes payable held by creditors for
     1,504,000 shares of Common Stock and associated registration rights.

          On October 8, 1996, the Company issued 5,500 shares of its Convertible
     Preferred Stock, Series 1, $.001 par value per share at a price of $1,000
     per share, to certain accredited investors. Net proceeds to the Company
     were approximately $5,225,000. The Convertible Preferred Stock is
     convertible into Common Stock at the option of the holders at any time
     after December 15, 1996.

53
<PAGE>
 
          The Convertible Preferred Stock is convertible into a number of Common
     Stock equal to $1,000 plus $50 for each year between October 25, 1996, and
     the conversion date, divided by a conversion price which is the lesser of
     $6.50 per share or 85% of the average closing market price of the Common
     Stock on the five trading days preceding the date of conversion. The
     Convertible Preferred Stock cannot be converted if the converting holder
     and its respective affiliates would beneficially own more than 4.9% of the
     Company's Common Stock at the time of conversion. Any Convertible Preferred
     Stock outstanding on October 31, 1998 will automatically convert to Common
     Stock on that date. In the event of liquidation, the holders of the
     Convertible Preferred Stock receive their Stated Value before the holders
     of Common Stock receive any cash or assets on liquidation. If the Company
     consolidates, merges or reclassifies its outstanding Common Stock, the
     holders of the Convertible Preferred Stock are entitled to receive the
     greater of their share of any consideration on an as-converted basis, or
     $1,250 per share of the Convertible Preferred Stock. The Convertible
     Preferred Stock is nonvoting, except as required by law. The holders of the
     Convertible Preferred Stock are not entitled to dividends. The Company also
     has certain redemption rights.

          The Company has filed a registration statement covering resale of
     shares of Common Stock issuable in connection with such conversions, and
     will make its best efforts to have the registration statement declared
     effective with respect to certain holders of the Convertible Preferred
     Stock no later than January 9, 1997, or with respect to other holders, no
     later than other subsequent dates. If the registration statement is not
     effective by such dates, or if sales cannot be made pursuant to the
     registration statement at any time after such dates, the conversion
     percentage shall be reduced 3% per month (prorated on a daily basis) and
     the fixed conversion price shall be reduced by $0.195 per month (prorated
     on a daily basis) for each month of delayed effectiveness or inability to
     sell.

          In accordance with the preferred stock agreement, the proceeds were
     placed in an escrow account. Terms of the escrow agreement require that the
     funds be used only for specific purposes and require that only certain of
     the Company's officers may request withdrawals and must certify that usage
     is in accordance with the escrow agreement.

          On October 8, 1996, the Company issued 24,500 shares of its 5%
     Cumulative Convertible Preferred Stock, Series 2, $.001 par value per share
     at a price of $1,000 per share to certain accredited investors.  Net
     proceeds to the Company were approximately $23,275,000.  The Convertible
     Preferred Stock is convertible into Common Stock at the option of the
     holders, any time after December 15, 1996.

          The Series 2 Preferred Stock is convertible to Common Stock at a
     conversion price which is the lesser of $6.50 per share or 85% of the
     average market price of the Common Stock on the five trading days prior to
     conversion. The Convertible Preferred Stock cannot be converted if the
     converting holder and its respective affiliates would beneficially own more
     than 4.9% of the Company's Common Stock at the time of conversion. In the
     event of liquidation, the holders of the Convertible Preferred Stock
     receive their original purchase price plus any accrued but unpaid
     dividends, before the holders of Common Stock receive any cash or assets on
     liquidation. If the Company consolidates, merges or reclassifies its
     outstanding Common Stock, the holders of the Convertible Preferred Stock
     are entitled to receive their share of consideration on an as-converted
     basis. The Convertible Preferred Stock is nonvoting, except as required by
     law. Dividends accrue on the Series 2 Preferred stock at an annual rate of
     5%. Such dividends are payable quarterly in cash or stock, at the Company's
     option. The Company also has certain redemption rights.

          The Company has filed a registration statement covering shares of
     Common Stock issuable in connection with the conversion of, or payable as
     dividends upon, the Convertible Preferred Stock and will make its best
     efforts to have the registration statement declared effective with respect
     to certain holders of the 5% Cumulative Convertible Preferred Stock no
     later than January 9, 1997, or with respect to other holders, no later than
     other subsequent dates. If the registration statement is not effective by
     such dates, or if sales cannot be made pursuant to the registration
     statement at any time after such dates, the conversion percentage and the
     fixed conversion rate shall be reduced at the rate of three percentage
     points per month (prorated on a daily basis) of delayed effectiveness or
     inability to sell.

          In accordance with the preferred stock agreement, the proceeds were
     placed in an escrow account. Terms of the escrow agreement require that the
     funds be used only for specific purposes and require that only certain of
     the Company's officers may request withdrawals and must certify that usage
     is in accordance with the escrow agreement.

54
<PAGE>
 
               On November 13, 1996, the Company issued 1,500,000 shares of
          common stock, par value $.001 per share, at a price of $5.6875 to a
          company (the "Purchaser").  Net proceeds to the Company were
          $8,531,300.  At the same time, the Company also granted the Purchaser
          a warrant to purchase additional shares of common stock at the same
          price per share.  The number of Warrant Shares available for purchase
          will not be less than 375,000 or more than 1,875,000.  The Warrant
          will expire November 13, 2001.


ITEM 9.   CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

               Not applicable


                                   PART III
                                        

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               The information required by this Item is incorporated by
          reference to the Company's definitive Proxy Statement for its Annual
          Meeting of Stockholders to be held in 1997 ("Proxy Statement"), to be
          filed with the Commission within 120 days after the end of the
          Company's fiscal year pursuant to General Instruction G(3) to Form 10-
          K.


ITEM 11.  EXECUTIVE COMPENSATION

               The information required by this Item is incorporated by
          reference to the Proxy Statement to be filed with the Commission
          within 120 days after the end of the Company's fiscal year pursuant to
          General Instruction G(3) to Form 10-K.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

               The information required by this Item is incorporated by
          reference to the Proxy Statement to be filed with the Commission
          within 120 days after the end of the Company's fiscal year pursuant to
          General Instruction G(3) to Form 10-K.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               The information required by this Item is incorporated by
          reference to the Proxy Statement to be filed with the Commission
          within 120 days after the end of the Company's fiscal year pursuant to
          General Instruction G(3) to Form 10-K.

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>
 
     (3)
--------------------------------------------------------------------------------
                                   EXHIBITS
 
Exhibit
Number                      Description of Document
--------------------------------------------------------------------------------
     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.

57
<PAGE>
 
      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.
         
      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.

58
<PAGE>
 
     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 with 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.
         
     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.

59
<PAGE>
 
     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.
          
     23.1      Consent of Ernst & Young LLP.
          
     27        Financial Data Schedule.
 
* 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.


                                       By: /s/Edwin L. Harper
                                           ________________________________
                                           Edwin L. Harper
                                           President and Chief Executive Officer



 Dated:  December 27, 1996


     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.
<TABLE>
<CAPTION>

      Signature                                     Title                            Date
      ----------                                    -----                            -----
<S>                               <C>                                          <C>


/s/ Edwin L. Harper               President, Chief Executive Officer           December 27, 1996
----------------------            and Director (Principal Executive Officer)
Edwin L. Harper

/s/ Henry C. Montgomery           Executive Vice President, Finance and        December 27, 1996
----------------------            Chief Financial Officer
Henry C. Montgomery

/s/ Edward L. Marinaro            Director and Chairman of the Board           December 27, 1996
----------------------
Edward L. Marinaro

/s/ Joseph Baia                   Director                                     December 27, 1996
----------------------
Joseph Baia

/s/ David I. Caplan               Director                                     December 27, 1996
----------------------
David I. Caplan

/s/ Donald P. Landry              Controller                                   December 27, 1996
----------------------
Donald P. Landry
</TABLE>

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