<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

(Mark One)

/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1997
                                       or

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER:  0-22015

STORAGE DIMENSIONS, INC.

DELAWARE                              77-0324887
(State of Incorporation)              (IRS Employer ID No.)

1656 McCARTHY BLVD., MILPITAS, CALIFORNIA 95035
(Address of principal offices)

Registrant's telephone number, including area code:  (408) 954-0710

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 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   / /

The number of shares outstanding of the Registrant's Common Stock as of
September 30, 1997 was 7,915,011, $0.005 par value.
<PAGE>
 
                            STORAGE DIMENSIONS, INC.

                                   FORM 10-Q

                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
                         PART I - FINANCIAL INFORMATION
 

                                                                                            PAGE
<S>                                                                               <C>
Item 1.  Condensed Consolidated Financial Statements (Unaudited)
         Condensed Consolidated Balance Sheets                                                    3
         Condensed Consolidated Statements of Income                                              4
         Condensed Consolidated Statements of Cash Flows                                          5
         Notes to Condensed Consolidated Financial Statements                                     6
 
Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                                      8
 
 
PART II - OTHER INFORMATION
 
 
Item 1.  Legal Proceedings                                                                        17
 
Item 2.  Change in Securities                                                                     17
 
Item 3.  Defaults upon Senior Securities                                                          17
 
Item 4.  Submission of Matters to a Vote of Security Holders                                      17
 
Item 5.  Other Information                                                                        17
 
Item 6.  Exhibits and Reports on Form 8-K                                                         18
</TABLE>

                                       2
<PAGE>
 
                            STORAGE DIMENSIONS, INC.

                                   FORM 10-Q

                         PART I - FINANCIAL INFORMATION



  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                            STORAGE DIMENSIONS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                           September 30,        December 31,
                                                                1997                1996
                                                         ------------------  ------------------
                        ASSETS
<S>                                                      <C>                 <C>
Current assets:
  Cash and cash equivalents                                         $ 7,119             $ 1,682
  Accounts receivable, net                                           11,562              11,939
  Inventories                                                         6,388               6,304
  Prepaid and other                                                     766                 858
                                                                    -------             -------
          Total current assets                                       25,835              20,783
Property and equipment, net                                           1,920               2,115
                                                                    -------             -------
Total assets                                                        $27,755             $22,898
                                                                    =======             =======
 
       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable                                                  $ 3,918             $ 5,061
  Accrued liabilities                                                 3,442               3,580
  Short-term borrowings                                                 136               9,629
                                                                    -------             -------
          Total current liabilities                                   7,496              18,270
 
Total stockholders' equity                                           20,259               4,628
                                                                    -------             -------
Total liabilities and stockholders' equity                          $27,755             $22,898
                                                                    =======             =======
</TABLE>


     See accompanying Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>
 
                            STORAGE DIMENSIONS, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                         Three Months Ended                      Nine Months Ended
                                                            September 30,                          September 30,
                                                       1997                1996               1997                1996
                                                ------------------  ------------------  -----------------  ------------------
<S>                                             <C>                 <C>                 <C>                <C>
Net sales                                                 $16,852             $18,494            $54,322             $52,745
 
Cost of sales                                              10,797              11,480             34,993              33,386
                                                          -------             -------            -------             -------
   Gross profit                                             6,055               7,014             19,329              19,359
 
Operating expenses
  Research and development                                  1,506               1,616              4,770               4,365
  Sales and marketing                                       4,347               3,507             12,605              10,129
  General and administrative                                1,092                 927              3,105               2,705
  Advisory fee                                                 --                  91                 --                 273
                                                          -------             -------            -------             -------
     Total operating expenses                               6,945               6,141             20,480              17,472
                                                          -------             -------            -------             -------
Operating income                                             (890)                873             (1,151)              1,887
Other income (expense), net                                    48                (286)              (148)               (892)
                                                          -------             -------            -------             -------
Income (loss) before provision for income                    (842)                587             (1,299)                995
 taxes
   Provision for income taxes                                  50                  37                 73                  55
                                                          -------             -------            -------             -------
Net income (loss)                                         $  (892)            $   550            $(1,372)            $   940
                                                          =======             =======            =======             =======
 
Net income (loss) per share                               $ (0.11)            $  0.10            $ (0.19)            $  0.17
                                                          =======             =======            =======             =======
Weighted average common and
   common equivalent shares outstanding                     7,873               5,562              7,415               5,518
                                                          =======             =======            =======             =======
</TABLE>


     See accompanying Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
 
                            STORAGE DIMENSIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                               Nine Months Ended
                                                                                  September 30,
                                                                            1997                1996
                                                                     ------------------  -------------------
<S>                                                                  <C>                 <C>
Cash flows from operating activities:
  Net income (loss)                                                            $(1,372)             $   940
  Adjustments to reconcile net income to cash provided
     by (used in) operating activities:
     Depreciation and amortization                                                 924                  834
     Compensation expense from stock and stock options                             101                   50
     Changes in assets and liabilities:
       Accounts receivable                                                         377               (2,837)
       Inventory                                                                   (84)               1,934
       Prepaid expenses and other assets                                            92                 (384)
       Accounts payable                                                         (1,143)                 248
       Accrued liabilities                                                        (138)                (460)
                                                                               -------              -------
          Net cash provided by (used in) operating activities                   (1,243)                 325
                                                                               -------              -------
 
Cash flows from investing activities:
  Acquisition of property and equipment                                           (729)                (742)
                                                                               -------              -------
 
Cash flows from financing activities:
  Proceeds from issuance of Common Stock, net                                   16,902                   --
  Payments to repurchase Series A Preferred Stock                                   --                 (133)
  Proceeds (repayments) from short-term borrowings                              (9,493)               1,043
                                                                               -------              -------
          Net cash provided by financing activities                              7,409                  910
                                                                               -------              -------
Net increase (decrease) in cash and cash equivalents                             5,437                  493
 
Cash and cash equivalents at beginning of period                                 1,682                  363
                                                                               -------              -------
Cash and cash equivalents at end of period                                     $ 7,119              $   856
                                                                               =======              =======
 
 
Supplemental disclosure of cash flow information:
  Cash paid during the period for interest                                     $   101              $   360
                                                                               =======              =======
  Cash paid during the period for income taxes                                 $   373              $    25
                                                                               =======              =======
</TABLE>


     See accompanying Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                            STORAGE DIMENSIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)



1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

        The accompanying unaudited condensed consolidated financial statements
have been prepared by Storage Dimensions, Inc. (the "Company") in accordance
with generally accepted accounting principles for interim financial information
and, pursuant to rules and regulations of the Securities and Exchange
Commission, reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations of the Company
for the interim periods presented. The results of operations for the three month
and nine month periods ended September 30, 1997 are not necessarily indicative
of the operating results to be expected for the full fiscal year or future
operating periods.

2.   INVENTORIES

        Inventories are stated at the lower of cost (using the first-in, first-
out method) or market and consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                      September 30,      December 31,
                                                          1997               1996
                                                    -----------------  -----------------
<S>                                                 <C>                <C>
Inventory:
  Raw material and purchased components                        $2,908             $2,539
  Work in progress                                              1,790              1,639
  Finished goods                                                1,690              2,126
                                                               ------             ------
                                                               $6,388             $6,304
                                                               ======             ======
</TABLE>
3.   STOCKHOLDERS' EQUITY

        On March 11, 1997 the Company effected its initial public offering of
2,700,000 shares of common stock at an offering price of $7.00 per share (the
"Offering"). The net proceeds from the Offering were $16,627,000 after payment
of underwriting discounts and Offering expenses. Net proceeds were used to pay
down the Company's short-term line of credit and pay off the Company's
subordinated promissory note to Maxtor Corporation, a stockholder.

        In conjunction with the Offering, the Company effected a one-for-four
reverse stock split of all outstanding Common Stock and increased the authorized
Common Stock to 40,000,000 shares, par value $0.005. In addition, the Company
increased the authorized Preferred Stock to 10,000,000 shares of undesignated
Preferred Stock, par value $0.005. As of September 30, 1997, the Company had
7,915,011 shares outstanding of Common Stock and no shares outstanding of
Preferred Stock.

4.   NET INCOME (LOSS) PER SHARE

        Net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the conversion of all shares of the Company's Series A
Convertible Preferred Stock into Common Stock. Per share amounts also give
retroactive effect to the one-for-four reverse split of all shares of Common
Stock (and an adjustment to the conversion price of the Series A Convertible
Preferred Stock) as described in Note 3. Pursuant to the requirements of the
Securities and Exchange Commission, common equivalent shares comprised of
preferred stock and stock options (using the treasury stock method and the
initial public offering price of $7.00 per share) issued subsequent to January
22, 1996 have been included in the computations for all periods presented prior
to or inclusive of the March 11, 1997 Offering effective date. In the three
months 

                                       6
<PAGE>
 
ended September 30, 1997, common equivalent shares are not included in the
computation of net income (loss) per share due to the anti-dilutive effect.

        In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share." This
statement is effective for the Company's year ending December 31, 1997. The
statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. If the Company had adopted the statement for the
nine month periods ended September 30, 1997 and 1996, the Company's basic net
income (loss) per share and dilutive net income (loss) per share would have been
the same as the Company's reported net income (loss) per share for each period
presented.

                                       7
<PAGE>
 
                            STORAGE DIMENSIONS, INC.

                                   FORM 10-Q

                         PART I - FINANCIAL INFORMATION



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

        The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements included elsewhere herein.

IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS

        This quarterly report on Form 10-Q contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements as a result of the risks set forth in the
following discussion, and in particular, the risks discussed below under the
caption "Additional Factors that Could Affect Operating Results."

OVERVIEW

        Storage Dimensions designs, manufactures, markets and supports high-
performance data storage systems for open systems network applications. The
Company currently focuses on the PC-LAN market by developing and marketing a
broad family of disk and tape storage systems designed to satisfy the high-
performance, fault-tolerance and high-availability requirements of its
customers, while at the same time reducing the life-cycle cost of ownership. In
line with its open systems strategy, the Company also develops and supports
selected products for the Unix market. The Company's products are sold through
its own end-user sales force in combination with multi-tiered distribution
channels .


RESULTS OF OPERATIONS

        Net Sales. Net sales of $16.9 million for the three months ended
        ---------
September 30, 1997 decreased 8.9% compared to $18.5 million for the three months
ended September 30, 1996. The decrease in net sales was primarily attributable
to sales force productivity issues, as approximately 50% of the Company's direct
sales force has been hired within the last six months. In addition, OEM business
was affected by the timing of orders from a major customer.

        Net sales of $54.3 million for the nine months ended September 30, 1997
represented a 3.0% increase over the $52.7 million for the same nine-month
period of last year.  Net sales growth resulted from increased sales of tape-
based products, as well as drive-based products released in late 1996 and in the
nine months of 1997, including: products incorporating dynamic growth and
reconfiguration capability (DGR); enterprise storage products for Windows NT-
based environments; and new products incorporating 9 gigabyte disk drives.   In
addition, net sales for the current nine months included new OEM-custom business
that was introduced in late 1996.

        Gross Profit. Gross profit for the third quarter of 1997 was $6.1
        ------------
million, or 35.9% of net sales, compared to $7.0 million, or 37.9% in the third
quarter of 1996. The 2.0% decrease in gross profit margin was largely
attributable to a shift in enterprise systems product mix favoring lower margin
RAIDPro and tape systems business.

                                       8
<PAGE>
 
        Gross profit for the nine months ended September 30, 1997 was $19.3
million, or 35.6% of net sales, compared to $19.4 million, or 36.7% for the nine
months of 1996. The 1.1% decrease in gross profit margin year-to-date resulted
primarily from inventory write-downs in connection with supplier-driven price
reductions on 9 and 4 gigabyte drives in the second quarter of 1997. Past and
future performance of the Company's gross margin is impacted by a variety of
factors including: competition, product configuration, the mix of direct versus
indirect sales, the mix of enterprise and OEM products sold in any given period,
the availability of new products and product enhancements which tend to carry
higher gross margins than established products, and the cost and availability of
components.

        Research and Development. Research and development expenses consist
        ------------------------
primarily of employee compensation, prototype expenses and fees paid to outside
consultants. Research and development expenses for the third quarter of 1997
totaled $1.5 million or 8.9% of net sales, in line with the $1.6 million or 8.7%
of net sales for the third quarter of 1996. The increase in research and
development expenses as a percentage of net sales during the third quarter of
1997 resulted from lower revenues between the two periods.

        On a year-to-date basis, research and development expenses totaled $4.8
million, or 8.8% of net sales for 1997, versus $4.4 million or 8.3% of net sales
for the same period in 1996, representing a 9.3% increase in spending year-to-
date as compared to the same period last year. This increase in research and
development spending was attributable to increased product development efforts
related to the introduction of RAIDPro and software development efforts in
connection with RAIDScape, a Java-based enterprise storage management software
solution. The Company will continue to make necessary investments in research
and development in order to remain competitive, therefore these expenditures may
increase in absolute dollars in future periods and will fluctuate as a
percentage of net sales.

        Sales and Marketing. Sales and marketing expenses consist primarily of
        -------------------
salaries, commissions, advertising, promotional costs, and customer service and
support expenses. Sales and marketing expenses for the third quarter of 1997
totaled $4.3 million, or 25.8% of net sales, versus $3.5 million or 19.0% of net
sales in the third quarter of 1996, representing a 24.0% increase in absolute
dollar spending. This increase was primarily attributable to compensation and
training expenses related to the expansion of the direct sales force. The
increase in sales and marketing expenses as a percentage of net sales during the
third quarter of 1997 was partly the result of lower revenues between the two
periods.

        On a year-to-date basis, sales and marketing expenses totaled $12.6
million, or 23.2% of net sales for 1997, versus $10.1 million or 19.2% of net
sales for the same period in 1996, representing a 24.4% increase in spending
year-to-date as compared to the same period last year. The Company will continue
to incur costs related to the expansion of its field sales force and will
continue to make investments in advertising, tradeshows and other promotional
efforts that may result in overall increases to sales and marketing expenses in
absolute dollar spending.

        General and Administrative. General and administrative expenses consist
        --------------------------
primarily of compensation expenses for employees performing the Company's
administrative functions. General and administrative expenses for the third
quarter of 1997 totaled $1.1 million or 6.5% of net sales, compared to $927,000
or 5.0% of net sales in the third quarter of 1996. The 17.8% increase in general
and administrative spending was attributable to recruiting costs and legal and
accounting costs associated with operating as a public Company.  The increase in
general and administrative expenses as a percentage of net sales during the
third quarter of 1997 was partly the result of lower revenues between the two
periods.

        On a year-to-date basis, general and administrative expenses totaled
$3.1 million or 5.7% of net sales, compared to $2.7 million or 5.1% of net sales
in 1996, representing a 14.8% increase in absolute dollar spending. The Company
believes that it will continue to incur increased administrative expenses in the
future associated with operating as a public Company.

                                       9
<PAGE>
 
        Other Income (Expense), Net.  Other Income (Expense), Net consists
        ---------------------------
primarily of interest income earned by the investment of cash and cash
equivalents partially offset by interest payments on outstanding debt. Other
income net of other expenses totaled $48,000 in the third quarter of 1997,
compared to net expenses of $286,000 in the third quarter of 1996. On a year-to-
date basis, the Company reported net expenses of $148,000 for the current period
versus net expenses of $892,000 for the same period of last year. This
improvement was largely the result of the repayment of debt with proceeds from
the Company's Offering and interest income earned from investment of the
remaining Offering proceeds.

        Provision for Income Taxes. In the third quarter of 1997, the Company
        --------------------------
recorded a $50,000 tax provision in connection with foreign tax and minimum
federal and state income tax requirements as compared to a $37,000 tax provision
in the same quarter of 1996. On a year-to-date basis, the Company recorded a
$73,000 tax provision versus a tax provision of $55,000 for the same period of
last year.


LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 1997 cash and cash equivalents amounted to $7.1
million compared to $1.7 million as of December 31, 1996. The increase resulted
from net financing activities including cash generated from the initial public
offering on March 11, 1997 after the repayment of short-term borrowings.

        The Company used cash for operating activities totaling $1.2 million
during the nine months ended September 30, 1997 and generated cash from
operating activities totaling $325,000 during the nine months ended September
30, 1996. The use of cash for operating activities in the nine months of 1997
was principally related to a reduction in accounts payable and was partially
offset by a decrease in accounts receivable. The cash generated from operating
activities in the nine months of 1996 was primarily attributable to a decrease
in inventories and operating income, and was partially offset by an increase in
accounts receivable.

        The Company used approximately $729,000 of cash during the nine months
ended September 30, 1997 to purchase capital equipment compared to $742,000
during the same period in 1996. Financing activities provided $7.4 million for
the nine months ended September 30, 1997, as net proceeds from the Company's
initial public offering were partly reduced by the repayment of short-term
borrowings. During the same period last year, the Company generated $910,000 in
cash from financing activities due to proceeds from short-term borrowings which 
were partially offset by cash used to buy back preferred stock.

        In May 1996, the Company entered into an $11.0 million revolving line of
credit with Congress Financial. The line of credit accrues certain commitment
fees, unused facility fees and interest on outstanding amounts at the prime rate
(8.5% at September 30, 1997) plus 0.75%, and is secured by the Company's
accounts receivables and inventories and fixed assets. As of September 30, 1997,
there was no balance outstanding.

        The Company currently has no significant capital commitments. The
Company believes that its existing cash, together with borrowing capacity and
any cash generated from operations will satisfy the Company's projected working
capital and other cash requirements for at least the next twelve months. There
can be no assurance, however, that the Company will not need additional capital
before such time.


ADDITIONAL FACTORS THAT COULD AFFECT FUTURE OPERATING RESULTS

        The Company's future operating results are subject to a number of risks
and uncertainties including those listed below.

                                       10
<PAGE>
 
History of Operating Losses; Potential Fluctuations in Quarterly Results
------------------------------------------------------------------------

        While the Company generated net income in 1996 and the first quarter of
1997, it incurred losses in the second and third quarters of 1997 and in each of
the quarters in 1993, 1994 and 1995. There can be no assurance that the Company
will resume or maintain profitability on a quarterly or annual basis.

        The Company's quarterly operating results have in the past varied and
may in the future vary significantly depending on a number of factors,
including: the level of competition; the size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by the Company's competitors; deferrals of customer orders in
anticipation of new products or product enhancements; changes in pricing by the
Company or its competitors; the impact of price protection measures and return
privileges granted by the Company to its distributors and VARs; the ability of
the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs and availability,
particularly with respect to hardware components obtained from sole sources;
hardware supply constraints; the Company's success in expanding its sales and
marketing programs; technological changes in the network storage system market,
in particular the PC-LAN storage system market; the mix of sales among the
Company's sales channels; levels of expenditures on research and development;
changes in Company strategy; personnel changes; and general economic trends and
other factors.

        Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Sales are also difficult to forecast because the PC-LAN
storage system market is rapidly evolving and the Company's sales cycles vary
substantially from customer to customer. The Company's customers generally have
the right to cancel orders at any time and to return the Company's products for
a refund. The cancellation of orders already placed and the return of products
could have a material adverse effect on the Company's operating results in any
quarter. Due to the typical timing of customer orders, the Company often ships
products representing a significant portion of its net sales for a quarter
during the last month of that quarter. Any significant deferral of these sales
could have a material adverse effect on the Company's results of operations in
any particular quarter. To the extent that the Company completes significant
sales earlier than expected, operating results for subsequent quarters may be
adversely affected. The Company's expense levels are based, in part, on its
expectations as to future sales. As a result, if sales levels are below
expectations, net income may be disproportionately affected.

        Over the past several years, the Company has transitioned its focus from
desktop subsystem products to enterprise RAID products for use primarily in PC-
LAN network applications. As a result, the Company has become increasingly
dependent on the market for these products and on its ability to compete
successfully in this market. Although the Company has experienced growth in its
net sales of enterprise and OEM products in prior periods, the Company's net
sales from its desktop products have declined during the same periods. In recent
periods, the level of net sales growth generated from the Company's enterprise
and OEM products has not sustained a consistent quarter-over-quarter growth in
total net sales. There can be no assurance that the Company will experience
sales growth with respect to its enterprise and OEM products in future periods.
Due to all of the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indicator of future performance. It is possible
that in some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially and adversely affected.

Reliance on Key Customers and Indirect Distribution Channels
------------------------------------------------------------

        The Company sells its products through a direct sales force and through
multi-tiered distribution channels. Approximately 70% of the Company's sales in
1996 were made through its indirect sales channels. In 1996, the Company's top
ten customers, of which six were distributors or VARs, accounted for
approximately 50% of the Company's total net sales. In particular, Xerox
Corporation, an OEM 

                                       11
<PAGE>
 
customer, and Tech Data Corporation, a distributor, accounted for approximately
13% and 8% of the Company's 1996 total net sales, respectively. In 1995, the
Company's top ten customers, of which eight were distributors or VARs, accounted
for approximately 51% of its total net sales, and Tech Data and Xerox accounted
for approximately 15% and 11% of the Company's total net sales, respectively.
The Company expects that a high percentage of its sales for the foreseeable
future will be through indirect channels and to a limited number of customers.
There can be no assurance that orders from existing customers will continue at
their historical levels, or that the Company will be able to obtain orders from
new customers. The Company generally has not entered into long-term volume
purchase contracts with its customers, and the Company's customers generally
have certain rights to extend or to delay the shipment of their orders. The
Company provides price protection to distributors such that, if the company
reduces the price of its products, distributors are entitled to a credit for the
difference between the new, reduced price and the price previously paid for
products held in the distributor's inventory at the time of the price reduction.
As a result, price reductions could have an immediate material adverse effect on
the Company's results of operations, depending upon distributor inventory levels
at the time of the price reduction. In 1995 and 1996, the Company issued
approximately $550,000 and $840,000, respectively, of credits in connection with
such price protection. The Company's distributors and VARs may also carry
competing product lines and could reduce or discontinue sales of the Company's
products, which could have a material adverse effect on the Company's operating
results. Although the Company believes that it provides adequate allowances for
product returns, there can be no assurance that actual returns will not exceed
recorded allowances which could have a material adverse effect on its operating
results. In addition, there can be no assurance that existing end-user customers
will not purchase their network storage equipment from the manufacturer that
provides their network computing systems and, as a result, reduce or eliminate
purchases from the Company. The loss of one or more of the Company's current
customers, particularly a principal customer, or cancellation or rescheduling of
orders already placed, could materially and adversely affect the Company's
business, operating results or financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Dependence on New Products; Rapid Technological Change
------------------------------------------------------

        The network storage system market is characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies and increased storage capacities by the Company's
competitors and the emergence of new industry standards could render the
Company's existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to develop and to introduce new products
with increasing storage capabilities (including new software releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of its customers. The Company began shipping its entry-level storage system
product (RAIDPro) in the second quarter of 1997. There can be no assurance that
this product will achieve market acceptance. The failure of the Company to
achieve significant net sales from this product could have a material adverse
effect on the Company's business, operating results or financial condition.
There can be no assurance that the Company will be successful in developing and
marketing any other products that respond to technological changes or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products, or that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products, in
particular those for use with Windows NT, in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected.

        Network storage system products like those offered by the Company may
contain undetected software errors or failures when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in a loss of or
delay in market acceptance, which could have a material adverse effect on the
Company's business, operating results or financial condition. The Company's
standard warranty provides that if the system does not function to 

                                       12
<PAGE>
 
published specifications the Company will repair or replace the defective
component without charge. Although to date the Company's suppliers of hardware
components have generally covered the warranty costs associated with such
components, there can be no assurance that such manufacturers will continue to
be willing or able to cover such costs, and their failure to do so would result
in such costs being borne by the Company. There can be no assurance that the
Company's warranty costs will not be significant in the future. Significant
warranty costs, particularly those that exceed reserves, could have a material
adverse effect on the Company's business, operating results or financial
condition.

        The Company's agreements with its customers typically contain provisions
intended to limit the Company's exposure to potential product liability claims.
It is possible that the limitation of liability provisions contained in the
Company's agreements may not be effective. Although the Company has not received
any product liability claims to date, the sale and support of products by the
Company and the incorporation of products from other companies may entail the
risk of such claims. A successful product liability claim against the Company
could have a material adverse effect on the Company's business, operating
results or financial condition.


Dependence on Key Personnel
---------------------------

        The Company's future performance depends in significant part upon the
continued service of its key senior management, sales and technical personnel.
The Company provides incentives such as salary, benefits and option grants
(which are typically subject to vesting over four years) to attract and retain
qualified employees. In recent periods, the Company has experienced difficulties
retaining existing and attracting and training new, skilled personnel, which has
contributed to decreases in revenues in such periods. Any inability to attract,
train and retain skilled sales personnel in future periods or the loss of the
services of one or more of the Company's officers or other key employees, could
have a material adverse effect on the Company's business, operating results or
financial condition. The Company's future success also depends on its continuing
ability to attract and retain highly qualified technical and management
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical and management employees
or that it can attract, assimilate or retain other highly qualified technical
and management personnel in the future.


Dependence on Growth in the PC-LAN Market
-----------------------------------------

        Most of the Company's products address the PC-LAN market, in particular
NetWare and Windows NT applications. The Company currently intends to continue
to focus its development and marketing efforts on PC-LAN storage system
applications. While the Company may in the future evaluate opportunities outside
its target markets, no such products are currently under development. To date, a
significant portion of the Company's net sales have been derived from sales of
products for use with NetWare and Windows NT applications. The Company's future
financial performance will depend in large part on continued growth in the PC-
LAN market, in particular NetWare and Windows NT applications. There can be no
assurance that NetWare and Windows NT will remain the leading operating systems
in the PC-LAN market, or that the PC-LAN market will grow at rates currently
anticipated, or at all. If the PC-LAN market fails to grow or grows more slowly
than anticipated, or if PC-LAN storage systems based on emerging standards other
than NetWare or Windows NT and other standards adopted by the Company become
increasingly accepted by the market, the Company's business, operating results
and financial condition would be materially and adversely affected. During
recent years, segments of the computer industry have experienced significant
economic downturns characterized by decreased product demand, production over
capacity, price erosion, work slowdowns and layoffs. The Company's operations
may in the future experience substantial fluctuations from period to period as a
consequence of such industry patterns, general economic conditions affecting the
timing of orders from major customers and other factors affecting capital
spending. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, operating results or financial
condition.

                                       13
<PAGE>
 
Competition
-----------

        The network storage system market is intensely competitive. The Company
competes primarily in the PC-LAN server storage market and experiences the
greatest competition from traditional suppliers of PC-LAN network servers, such
as Compaq Corporation, Hewlett-Packard Company and International Business
Machines Corporation, who market storage systems as part of their complete
computer systems. Storage Dimensions also competes against independent storage
system suppliers to the PC-LAN server market, including DEC Storage Works, MTI
Technology and Procom Technology, Inc. In addition, providers of storage for the
mainframe or UNIX-based markets, such as Auspex Systems, Inc., Data General
Corporation, EMC Corporation, Network Appliance, Inc., Storage Computer, Inc.
and Symbios Logic, Inc., could develop and market products that address the PC-
LAN storage systems market, and in particular Windows NT applications. Many of
the Company's current and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, to devote greater resources
to the development, promotion and sale of products than can the Company, or to
deliver competitive products at a lower end-user price. The Company also expects
that competition will increase as a result of industry consolidations. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, operating results or financial condition.

        The Company believes that the principal competitive factors affecting
its market include: fault-tolerant reliability, performance, ease of use,
scalability, configurability, price and customer service and support. There can
be no assurance that the Company will be able to successfully incorporate these
factors into its products and to compete against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition.

Dependence on Limited Number of Suppliers of High Quality Components
--------------------------------------------------------------------

        The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. For example, the
Company purchases disk drives primarily from Seagate Technology, Inc. and
Micropolis Corporation, DLT tape drives exclusively from Quantum Corporation and
DGR (Dynamic Growth and Reconfiguration) RAID controllers exclusively from
American Megatrends, Inc. The Company's reliance on its suppliers involves
several risks, including: an inadequate supply of required components; price
increases; late deliveries; and poor component quality. These risks are
particularly significant with respect to suppliers of disk drives because, in
order to meet product performance requirements, the Company must obtain disk
drives with extremely high quality and capacity. In addition, there is currently
a significant market demand for disk drives, tape drives and RAID controllers,
and from time to time the Company may experience component shortages, selective
supply allocations and increased prices of such components. Although to date the
Company has been able to purchase its requirements of such components, there can
be no assurance that the Company will be able to obtain its full requirements of
such components in the future or that prices of such components will not
increase. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results or financial condition. Such delays
could also damage relationships with current and prospective customers.

        In the past, due to the Company's quality requirements, the Company has
experienced delays in the shipments of its new products principally due to an
inability to qualify component parts from disk drive manufacturers and other
suppliers, resulting in delay or loss of product sales. The Company has
currently qualified disk drives manufactured by Seagate and Micropolis, tape
drives from Quantum, and RAID 

                                       14
<PAGE>
 
controllers from Mylex Corporation and American Megatrends. Although these
delays in the past have not had a material adverse effect upon the Company's
business, operating results or financial condition, there can be no assurance
that in the future any such delays would not have such a material adverse
effect.

Dependence on Proprietary Technology
------------------------------------

        Storage Dimensions' success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company has registered
its Storage Dimensions and LANStor trademarks and will continue to evaluate the
registration of additional trademarks as appropriate. The Company generally
enters into confidentiality agreements with its employees and with key vendors
and suppliers. The Company currently has one U.S. patent application pending
associated with the object-oriented layered architecture of its RAIDFlex array
management software. There can be no assurance that this patent will eventually
be issued, that the Company will develop proprietary products or technologies
that are patentable, that any patent issued in the future will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's ability to do business. The Company believes that the rapidly
changing technology in the computer storage industry makes the Company's success
dependent more on the technical competence and creative skills of its personnel
than on any patents it may be able to obtain.

        There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the storage system market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's target markets grows.
Any such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect on the Company's business, operating results or
financial condition. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.

Year 2000 Compliance
--------------------

        Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21/st/ century dates from 20/th/ century dates. As a result, in less
than three years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. There can be no assurance that the Company's
software products contain all necessary date code changes.

        The Company believes that the purchasing patterns of customers and
potential customers may be affected by the Year 2000 issues in a variety of
ways. Many companies are expending significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company. In addition, it is possible that certain of the Company
customers are purchasing support contracts only to ensure that they become Year
2000 compliant and that, once such customers believe they are Year 2000

                                       15
<PAGE>
 
compliant, they will not renew support contracts. If a significant number of the
Company's customers do not renew support contracts for this or other reasons,
the Company's business, operating results and financial conditions would be
adversely affected. Many potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including current Company customers, to
reevaluate their current ERP system needs, and as a result consider switching to
other systems or suppliers. Moreover, the Company believes that some customers
may be purchasing the Company's products as an interim solution to their Year
2000 needs until their current suppliers reach compliance. There can be no
assurance that such customers will purchase support services from the Company or
that they will upgrade beyond their current version of the Company's software
once their current software suppliers reach compliance. Any of the foregoing
could result in a material adverse effect on the Company's business, operating
results and financial condition.

                                       16
<PAGE>
 
                            STORAGE DIMENSIONS, INC.

                                   FORM 10-Q

                          PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

        The Company is not involved in any material legal proceedings at this
time. However, there can be no assurances that the Company will not be subject
to legal proceedings in the future, which could have a material effect on the
Company's financial position. In addition, even if the ultimate outcome of such
legal proceedings is resolved in favor of the Company, the defense of such
litigation could entail considerable costs and diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations.

ITEM 2. CHANGE IN SECURITIES

        None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


        None.
 
ITEM 5. OTHER INFORMATION

        None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION> 

(a) EXHIBITS

<C>          <S>
       3.1*  Second Amended and Restated Certificate of Incorporation of the Registrant.
       3.2*  By-laws of the Registrant.
       4.1*  Form of Registrant's Common Stock Certificate.
      10.1*  Form of Director and Officer Indemnification Agreement.
      10.2*  1996 Stock Plan.
      10.3*  1996 Employee Stock Purchase Plan.
      10.4*  Loan and Security Agreement, dated May 16, 1996, by and between Congress Financial
             Corporation (Western) and the Registrant.
      10.5*  Stockholders Agreement, dated December 26, 1992, among the Registrant, Gene E. Bowles, Jr.,
             David A. Eeg, CP Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B, Capital
             Partners, Inc., FGS, Inc., Maxtor Corporation, and certain other management investors
      10.6*  Lease, dated October 8, 1993, between Registrant and Callahan-Pentz Properties,
             McCarthy Four.
      10.7*  First Amendment to Lease, dated June 28, 1995, between Registrant and Callahan-Pentz
             Properties, McCarthy Four.
      10.8*  Form of employment agreement between the Registrant and certain employees.
      11.1   Statement of computation of net income (loss) per share.
      27.1   Financial Data Schedule.
</TABLE>
____________
* Incorporated by reference from the Registrant's Registration Statement on Form
  S-1, effective March 11, 1997.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K have been filed during the quarter for which this report
is filed.

                                       17
<PAGE>
 
                                  SIGNATURES


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



                            Storage Dimensions, Inc. (Registrant)



                            /s/ Robert E. Bylin
                            ------------------------------------------
Date:  November 10, 1997    By:  Robert E. Bylin
                                 Senior Vice President, Finance
                                 and Chief Financial Officer


 



                            /s/ Gene E. Bowles, Jr.
                            ------------------------------------------
Date:  November 10, 1997    By:  Gene E. Bowles, Jr.
                                 Executive Vice President,
                                 Marketing and Customer Services

                                       18
<PAGE>
 
                                 EXHIBIT INDEX



<TABLE>
<CAPTION>

    EXHIBIT  NO.                                   DESCRIPTION
    ------------                                   -----------
<C>                <S>
             3.1*  Second Amended and Restated Certificate of Incorporation of the Registrant.
             3.2*  By-laws of the Registrant.
             4.1*  Form of Registrant's Common Stock Certificate.
            10.1*  Form of Director and Officer Indemnification Agreement.
            10.2*  1996 Stock Plan.
            10.3*  1996 Employee Stock Purchase Plan.
            10.4*  Loan and Security Agreement, dated May 16, 1996, by and between Congress Financial
                   Corporation (Western) and the Registrant.
            10.5*  Stockholders Agreement, dated December 26, 1992, among the Registrant, Gene E. Bowles,
                   Jr.,
                   David A. Eeg, CP Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B, Capital
                   Partners, Inc., FGS, Inc., Maxtor Corporation, and certain other management investors
            10.6*  Lease, dated October 8, 1993, between Registrant and Callahan-Pentz Properties,
                   McCarthy Four.
            10.7*  First Amendment to Lease, dated June 28, 1995, between Registrant and Callahan-Pentz
                   Properties, McCarthy Four.
            10.8*  Form of employment agreement between the Registrant and certain employees.
            11.1   Statement of computation of net income per share.
            27.1   Financial Data Schedule.
</TABLE>

____________
* Incorporated by reference from the Registrant's Registration Statement of Form
  S-1, effective, March 11, 1997.