DEF 14A 1 Def14a DLTSage TM Tape Security PX500 Series Quantum Annual Report 06

User Manual: DLTSageTM Tape Security PX500 Series

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Fiscal 2006 Annual Report

and Proxy Statement

Contents:

Letter to Stockholders

Notice of 2006 Annual

Meeting and Proxy

Statement

2006 Annual Report on

Form 10-K

Stockholder Information

To Our Stockholders:

In 2002, we strategically transitioned Quantum to focus

exclusively on the market for backup, recovery and archive. It

was our belief that this would be an area ripe for innovation and

growth as more and more companies require their data to be both

protected and more accessible, creating stringent system

availability requirements and ever-expanding capacity needs. In

fact, backup capacity continues to grow by more than 50% each

year and shows no sign of abating. Part of what is driving this

growth is the increasing awareness by companies of the need for

disaster recovery and data protection. We are seeing more and

more mid-sized businesses starting to deploy backup data

centers, and there is a greater focus on the need to protect the increasing amount of corporate

data in remote branch offices and remote locations.

Meanwhile, recovery time objectives continue to shorten as the cost of downtime per hour ranges

from a damaging $18,000 for a small business to upwards of $1 million for a large business. As

such, disk-based backup continues to gain momentum as a near line storage alternative within a

tiered storage environment. To increase the utilization and efficiency of primary storage and

improve recovery time, data can be quickly moved from active storage to disk-based storage

solutions before it is ultimately moved to tape for archive. While disk-based backup solutions are

significantly cheaper than primary storage, tape-based archive is still the best way to lower

storage and recovery costs by a factor of two over any other investment, with 85% of all digital

archive capacity still stored on tape media today.

Security is also becoming an increasingly important dimension of storage. In 2005, there were

130 publicly disclosed data breaches exposing the personal information of 55 million Americans.

While this is not a new phenomenon, recent regulations, with even more on the way, stipulate

that consumers must be notified of a breach in security related to their personal data. Such highly

visible disclosures have caused embarrassment for several companies, including Bank of

America, Citicorp and Marriott. As a result, security has emerged as a critical concern for

businesses of all sizes, with significant focus on protecting data stored on tape cartridges that are

transported offsite.

It is evident that backup, archive and recovery is a dynamic area with considerable opportunity

as customers seek more efficient and effective ways to securely retain, protect and rapidly

recover ever-increasing volumes of data.

2006 A Pivotal Year

Fiscal 2006 was a pivotal year for Quantum as it executed against many of the priorities that

were set over the last couple of years. In doing so, we substantially improved Quantum’s

competitiveness across a broad range of areas, including our cost structure, manufacturing

processes and product positioning with the launch of an unprecedented number of new products.

We also strengthened our ability to service and market to our customers, built upon our branded

strategy, and extended our growth platform with the introduction of new disk-based backup

appliances and a value-added security framework.

Specific highlights for the year include:

• Completing the integration of Certance into our operations

• Launching a record number of new products, including:

o Four tape automation products: SuperLoader™ 3 and the PX500 Series (PX502,

PX506 and PX510)

o Four storage devices: DLT-S4, DLT-V4, SDLT 600A and GoVault™

o Three disk-based backup appliances: DX3000, DX5000 and DPM5500

• Significantly increasing shipments of our new SuperLoader 3 and PX500 Series libraries

every quarter since launch

• Expanding into new vertical markets with SDLT 600A, the first data tape drive specifically

designed for professional video

• Increasing volume sales of our SDLT 600 and VS160 tape drives by 75 and 44 percent,

respectively

• Growing branded sales as a percentage of revenue from 23 percent in fiscal year 2005 to 30

percent in fiscal year 2006

• Increasing sales of LTO tape drives in excess of double digits every quarter in fiscal year

2006

• Introducing the first phase of a multi-layered data security framework with DLTSage™ Tape

Security, a firmware feature that uses an electronic key to prevent or allow reading and

writing of data on a tape cartridge

• Being recognized as the highest-rated, pure-play storage vendor in Computer Reseller News’

Channel Champions Survey for the third consecutive year

• Winning a NorthFace ScoreBoardSM Award for exemplary customer service from Omega

Management Group Corp. and being honored as the winner of a Service & Support

Professionals Association (SSPA) 2006 STAR Award for Best Practices

Financial Results

The accomplishments we made in delivering on our goals were reflected in our financial results

for the fiscal year. In fiscal 2006, we saw revenues grow for the first time in three years,

primarily due to strong growth within our LTO product line that was added through the Certance

acquisition, despite continued pricing pressures on older products, as well as volume sales

declines of such products and product transition-related issues that impacted our overall

performance. We achieved a second consecutive year of non-GAAP profitability, with non-

GAAP net income increasing by 44 percent. We also remained aggressive in controlling costs,

as both GAAP and non-GAAP operating expenses as a percentage of revenue continued their

declines from previous years. In fact, on a year-over-year basis, non-GAAP operating expenses

were relatively flat, even though fiscal 2006 reflected a full year’s worth of Certance costs

compared to just a quarter in fiscal 2005. And as new products were completed and launched

through the year, we made corresponding reductions in research and development investments.

In addition, we were able to achieve positive cash flow from operations for the year.

Total revenue was $834 million for the full fiscal year 2006. Non-GAAP net income for this

period was $18.8 million, or ten cents per diluted share, compared to non-GAAP net income of

$13.0 million or seven cents per diluted share for fiscal year 2005. Our GAAP net loss was

$42.0 million, or 23 cents per diluted share for fiscal year 2006, compared to a net loss of $3.5

million, or two cents per diluted share for fiscal year 2005. The increased GAAP net loss for

fiscal 2006 compared to fiscal 2005 was primarily due to charges related to the legal settlement

with StorageTek, higher restructuring costs and the fact that fiscal year 2005 results included a

one-time tax benefit resulting from a favorable resolution of IRS audits.

A quantitative reconciliation of any GAAP to non-GAAP financial measure included in this

letter can be found in our quarterly earnings press releases for fiscal year 2006 located under

“Quarterly Earnings” in the Investor Relations section of our website at www.quantum.com.

Forward and Onward

Quantum’s strategic priorities for the near term are three-fold. First, we want to develop a

stronger execution platform that leverages Quantum’s breadth to create sustainable cost and

quality advantages. Second, we want to build on our leading independent tape business by

capitalizing on our unique position as a developer of tape drives, automation systems and media.

Third, we want to create a growth platform beyond tape with solutions that include disk,

software and services and that are optimized for tiered storage environments.

With this in mind, we announced in early May that we will be acquiring Advanced Digital

Information Corporation (ADIC). This combination will create one of the industry’s largest,

independent storage companies with combined revenues currently exceeding $1.2 billion and one

that will be able to address customers’ evolving data protection requirements with the most

comprehensive, integrated and best-of-breed set of solutions for securely storing, managing,

protecting and recovering their data. We will also be able to provide customers greater support

with larger and better leveraged sales and service capabilities. In addition, the combined

company will enable Quantum to drive synergies to create an efficient operational structure that

can produce tangible financial benefits. We will also capitalize on revenue growth opportunities

through enhanced market access with a well-balanced OEM, branded and geographic business.

Lastly, the new company will be able to more effectively invest in a leadership product roadmap

that can gain critical mass and extend our growth platform.

While we have made tremendous strides in recent years to turn Quantum into a company that is

more efficient, competitive and better positioned in the marketplace, we know that more remains

to be done for us to consistently deliver long-term growth and profitability. We are committed

to building upon these efforts and to executing against our objectives to accomplish this.

Thank you for your continued support.

Rick Belluzzo

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 for Quantum Corporation

This letter contains certain "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Specifically, the statements relating to: (1) our expectations regarding future demand for back-up, archive and recovery solutions, including

demand for tape-based backup and archive solutions; (2) our beliefs and expectations about our prospects in fiscal year 2007 and beyond,

including our strategic priorities; (3) our ability to complete our acquisition of ADIC and successfully integrate its operations into ours, including

expected synergies from the acquisition and the effect of the acquisition on Quantum’s financial position; (4) the storage and macro-economic

environments; and (5) our beliefs regarding customer expectations, and our ability to capitalize on the market opportunities, are forward-looking

statements within the meaning of the Safe Harbor. These statements are based on management's current expectations and are subject to risks and

uncertainties that could cause actual results to differ materially, including, without limitation, the risk that we may not successfully execute to our

product roadmaps and timely ship our products, the risk that lower sales volumes and continuing price and cost pressures could lead to lower

gross margins, media royalties from media manufacturers coming in at lower levels than expected, acceptance of, or demand for, our products

being lower than anticipated, and the risk that we may not consummate our acquisition of ADIC or fail to successfully integrate ADIC, its

products and employees into Quantum after the closing and achieve expected synergies. More detailed information about these risks, and

additional risks, are set forth under "Risk Factors" in the Company’s Form 10-K for the annual period ended March 31, 2006 included with this

letter. Quantum expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information,

future events or otherwise.

QUANTUM CORPORATION

______________________

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

______________________

TO BE HELD ON

August 28, 2006

TO THE STOCKHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Quantum Corporation (the “Company” or

“Quantum”), a Delaware corporation, will be held on Monday, August 28, 2006 at 9:00 a.m., Pacific Daylight Time, at

Quantum’s corporate headquarters at 1650 Technology Drive, San Jose, CA 95110, for the following purposes:

1. To elect eight directors to serve until the next Annual Meeting of Stockholders or until their successors are elected and

qualified;

2. To ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of the Company

for the fiscal year ending March 31, 2007; and

3. To transact such other business as may properly come before the meeting or any adjournment thereof.

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

Only stockholders of record at the close of business on June 30, 2006 are entitled to notice of and to vote at the meeting

and any adjournment thereof.

All stockholders are cordially invited to attend the meeting in person. However, to ensure your representation at the

meeting, you are urged to vote, sign, date and return the enclosed proxy as promptly as possible in the postage-prepaid envelope

enclosed for that purpose. Any stockholder attending the meeting may vote in person even if he or she previously returned a

proxy.

By Order of the Board of Directors,

Shawn D. Hall

Vice President, General Counsel and Secretary

San Jose, California

July 11, 2006

QUANTUM CORPORATION

PROXY STATEMENT

INFORMATION CONCERNING SOLICITATION AND VOTING

General

The enclosed proxy is solicited on behalf of Quantum Corporation (the “Company” or “Quantum”) for use at the Annual

Meeting of Stockholders to be held August 28, 2006 at 9:00 a.m., Pacific Daylight Time, or at any adjournment or

postponement thereof (the “Annual Meeting” or “Meeting”), for the purposes set forth herein and in the accompanying Notice

of Annual Meeting of Stockholders. The Annual Meeting will be held at the Company’s corporate headquarters at 1650

Technology Drive, San Jose, CA 95110. The Company’s telephone number is (408) 944-4000 and the Internet address for its

website is http://www.quantum.com.

These proxy solicitation materials were mailed on or about July 11, 2006 to all stockholders entitled to notice of and to

vote at the Meeting. A copy of the Company’s Annual Report to Stockholders for the year ended March 31, 2006 (“Fiscal

2006”), including financial statements, was sent to the stockholders of the Company prior to or concurrently with this Proxy

Statement.

Record Date; Outstanding Shares

Stockholders of record at the close of business on June 30, 2006 (the “Record Date”) are entitled to notice of and to vote at

the Meeting. At the Record Date, 188,984,708 shares of the Company’s Common Stock, $0.01 par value (the “Common

Stock”), were issued and outstanding. The closing price of the Common Stock on the Record Date, as reported by the New

York Stock Exchange, was $2.62 per share.

Revocability of Proxies

Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies

may be revoked by (i) filing a written notice of revocation bearing a later date than the proxy with the Secretary of the

Company (currently Shawn D. Hall) at or before the taking of the vote at the Meeting, (ii) duly executing a later dated proxy

relating to the same shares and delivering it to the Secretary of the Company at or before the taking of the vote at the Annual

Meeting or (iii) attending the Meeting and voting in person (although attendance at the Meeting will not in and of itself

constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy must be delivered to the Secretary of

the Company, or hand delivered to the Secretary of the Company at or before the taking of the vote at the Meeting.

Voting and Solicitation

Each share of Common Stock has one vote, as provided in the Company’s Amended and Restated Certificate of

Incorporation. Accordingly, a total of 188,984,708 votes may be cast at the Meeting. Holders of Common Stock vote together

as a single class on all matters covered by this Proxy Statement. For voting with respect to the election of directors,

stockholders may cumulate their votes. Cumulative voting will allow you to allocate among the director nominees, as you see

fit, the total number of votes equal to the number of director positions to be filled multiplied by the number of shares you hold.

For example, if you own 100 shares of Common Stock, and there are eight directors to be elected at the Annual Meeting, you

could allocate 800 "FOR" votes (eight times one-hundred) among as few or as many of the eight nominees to be voted on at the

Meeting as you choose. See “PROPOSAL ONE — ELECTION OF DIRECTORS — REQUIRED VOTE.”

The cost of soliciting proxies will be borne by the Company. The Company has not retained the services of a solicitor. The

Company may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in

forwarding solicitation material to such beneficial owners. Proxies may also be solicited by certain of the Company’s directors,

officers and regular employees, without additional compensation, personally or by telephone, email or otherwise.

Stockholder Proposals (Other than for Nominees to the Board of Directors)

Proposals of stockholders of the Company which are to be presented at the Company’s annual meeting of stockholders for

the year ended March 31, 2007 must be received by the Secretary of the Company no later than March 29, 2007 to be

considered for inclusion in the proxy materials relating to that meeting.

Alternatively, under the Company’s Bylaws, a proposal that the stockholder does not seek to include in the Company’s

proxy materials for the 2007 annual meeting must be received by the Secretary of the Company not less than sixty (60) days nor

more than ninety (90) days prior to the meeting; provided, however, that in the event that less than seventy (70) days notice or

prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must

be so received not later than the close of business on the tenth day following the day on which such notice of the date of the

annual meeting was mailed or such public disclosure was made. The stockholder’s submission must include the information

specified in the Company’s Bylaws.

Proposals not meeting the requirements of the preceding paragraph will not be entertained at the 2007 annual meeting.

Stockholders should contact the Secretary of the Company in writing at 1650 Technology Drive, Suite 700, San Jose CA

95110, to make any submission or to obtain additional information as to the proper form and content of submissions.

The Company has not been notified by any stockholder of his or her intent to present a stockholder proposal from the floor

at this year’s Annual Meeting. The enclosed proxy card grants the proxy holders discretionary authority to vote on any matter

(other than stockholder proposals relating to nominees to the Board of Directors) properly brought before the Annual Meeting.

Stockholder Proposals (for Nominees to the Board of Directors)

Nominations of persons for election to the Board of Directors of the Company may be made by a stockholder of the

Company entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in the

Company’s Bylaws. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made

pursuant to timely notice in writing to the Secretary of the Company. To be timely, a stockholder’s notice must be delivered to

or mailed and received at the principal executive offices of the Company not less than twenty (20) days nor more than sixty

(60) days prior to the meeting. The stockholder’s submission must include the information specified in the Company’s Bylaws.

Proposals not meeting the requirements of the preceding paragraph will not be entertained at the 2007 annual meeting.

Stockholders should contact the Secretary of the Company in writing at 1650 Technology Drive, Suite 700, San Jose CA

95110, to make any submission or to obtain additional information as to the proper form and content of submissions.

The Company has not been notified by any stockholder of his or her intent to present any stockholder proposals for

nominees to the Board of Directors from the floor at this year’s Annual Meeting.

Quorum; Abstentions; Broker Non-Votes

A majority of the shares of Common Stock issued and outstanding on the Record Date will constitute a quorum for the

transaction of business at the Annual Meeting.

While there is no definite statutory or case law authority in Delaware as to the proper treatment of abstentions, the

Company believes that abstentions should be counted for purposes of determining both (i) the presence or absence of a quorum

for the transaction of business and (ii) the total number of shares entitled to vote at the Annual Meeting (“Votes Cast”) with

respect to a proposal (other than the election of directors). In the absence of controlling precedent to the contrary, the Company

intends to treat abstentions in this manner. Accordingly, abstentions will have the same effect as a vote against the proposal.

Broker non-votes (i.e., votes from shares held of record by brokers as to which the beneficial owners have given no voting

instructions) will be counted for purposes of determining the presence or absence of a quorum for the transaction of business,

but will not be counted for purposes of determining the number of Votes Cast with respect to the particular proposal on which

the broker has expressly not voted. Accordingly, broker non-votes will not affect the outcome of the voting on a proposal that

requires a majority of the Votes Cast. Thus, a broker non-vote will make a quorum more readily attainable, but the broker non-

vote will not otherwise affect the outcome of the vote on a proposal.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s Section 16 officers, directors and persons who own more than

10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the

Securities and Exchange Commission (the “SEC”). Such executive officers, directors and greater than ten-percent stockholders

are also required by SEC rules to furnish the Company with copies of all forms that they file pursuant to Section 16(a). Based

solely on its review of the copies of such reports received by the Company, or on written representations from certain reporting

persons, the Company believes that all filing requirements were met during Fiscal 2006.

PROPOSAL ONE

ELECTION OF DIRECTORS

Nominees

There are eight nominees for election to the Company’s Board of Directors this year. All of the nominees are currently

serving on the Company’s Board. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the

nominees named below. Each nominee has consented to be named as a nominee in the Proxy Statement and to serve as a

director if elected. In the event that additional persons are nominated at the time of the Annual Meeting, the proxy holders

intend to vote all proxies received by them in such a manner (in accordance with cumulative voting) as will ensure the election

of as many of the nominees listed below as possible (or, if new nominees have been designated by the Board, in such a manner

as to elect such nominees). In such event, the specific nominees for whom such votes will be cumulated will be determined by

the proxy holders. The Company is not aware of any reason that any nominee will be unable or will decline to serve as a

director. The term of office of each person elected as a director will continue until the next annual meeting of stockholders or

until a successor has been elected and qualified. There are no arrangements or understandings between any director or executive

officer and any other person pursuant to which he or she is or was to be selected as a director or officer of the Company.

The Board’s key roles include, but are not limited to: (i) the selection and evaluation of the Company’s Chief Executive

Officer (“CEO”), and overseeing CEO succession planning; (ii) advising the CEO and management on the Company’s

fundamental strategies; (iii) reviewing and approving the CEO’s objectives; (iv) approving acquisitions, divestitures and other

fundamental corporate actions; (v) advising the CEO on the performance of senior management, and fundamental

organizational changes, including succession planning; and (vi) approving the annual operating financial plan.

The names of the nominees and certain information about them as of June 1, 2006, are set forth below.

Name of Nominee Age Director

Since Principal Occupation Since

Richard E. Belluzzo ………............ 52 2002 Chief Executive Officer of Quantum, 2002

Chairman of the Board of Quantum, 2003

Michael A. Brown ……………….. 47 1995 Chairman of the board of Line 6, 2005

Former Chairman of Quantum, 2003

Thomas S. Buchsbaum†…………… 56 2005 Independent Consultant, 2005

Alan L. Earhart* ……..................... 62 2003 Independent Consultant, 2001

Edward M. Esber, Jr.*+ †………… 53 1988 Chairman and President of The Esber Group, 1991

Elizabeth A. Fetter+………………. 47 2005 Director and Consultant, 2005

John M. Partridge+ ………………. 57 2005 President and Chief Executive Officer of Inovant, 1999

Steven C. Wheelwright*†………… 62 2004 Professor and University Administrator, 1970

* Member of Audit Committee.

+ Member of Leadership and Compensation Committee.

† Member of the Corporate Governance and Nominating Committee.

Except as set forth below, each of the nominees has been engaged in his or her principal occupation described above during

the past five years. There are no family relationships between any directors or executive officers of the Company.

Mr. Richard E. Belluzzo has been Chief Executive Officer since joining the Company in September 2002 and Chairman of

the Board since July 2003. Before joining Quantum, from September 1999 to May 2002, Mr. Belluzzo held senior management

positions with Microsoft Corp., most recently President and Chief Operating Officer. Prior to Microsoft, from January 1998 to

September 1999, Mr. Belluzzo was Chief Executive Officer of Silicon Graphics, Inc. Before his tenure at Silicon Graphics,

from 1975 to January 1998, Mr. Belluzzo was with Hewlett-Packard, most recently as Executive Vice President of the

computer organization. Currently Mr. Belluzzo is a member of the board of directors of PMC-Sierra and JDS Uniphase, and is a

member of the board of trustees for Golden Gate University.

Mr. Michael A. Brown served as Chief Executive Officer of Quantum from September 1995 to September 2002 and as

Chairman of its Board of Directors from May 1998 to July 2003. From 1993 to September 1995, he was President of the

Company’s desktop group, from 1992 to 1993 he was Chief Operating Officer responsible for the Company’s hard disk drive

business, and from 1984 to 1992 he held various marketing position with the Company. Mr. Brown also serves as Chairman of

the board of directors of Line 6 and on the boards of EqualLogic, Nektar Therapeutics and Symantec Corporation.

Mr. Thomas S. Buchsbaum has been an independent consultant since March 2005. Prior to that, Mr. Buchsbaum served as

vice president of the U.S. Federal Business Segment, as well as vice president and general manager of the K12 and Higher

Education customer segments of Dell, Inc. from March 1997 to March 2005. Before Dell, Mr. Buchsbaum spent ten years at

Zenith Data Systems, a computer manufacturing company, until February 1997, where he was general manager for the federal

systems business unit and general manager of the state and local government and education segments. Mr. Buchsbaum served

as a director on the board and compensation committee of Group 1 Software, an application software provider, from 1989 to

2004. Mr. Buchsbaum also serves as an advisor to the board of Dick Blick Holdings and is a member of the Advisory Board of

Augmentix Corp. Mr. Buchsbaum is a member of the Company’s Corporate Governance and Nominating Committee.

Mr. Alan L. Earhart has been an independent consultant since 2001. From 1970 to 2001, Mr. Earhart held a variety of

positions with Coopers & Lybrand and its successor entity, Pricewaterhouse Coopers LLP, an accounting and consulting firm,

including most recently as the Managing Partner for Pricewaterhouse Coopers’ Silicon Valley office. Mr. Earhart also serves on

the board of directors and as Chairman of the audit committees of Foundry Networks and of Monolithic Power Systems, Inc.

and on the Board of Directors and the audit committee of Network Appliance. Mr. Earhart is the Chairman of Quantum’s Audit

Committee.

Mr. Edward M. Esber Jr. has served as Chairman and President of The Esber Group, a strategy consulting firm, since

February 1991. Mr. Esber has also been an angel investor in The Angels Forum since 1997. Mr. Esber is Chairman of the

Company’s Leadership and Compensation Committee and a member of the Company’s Corporate Governance and Nominating

Committee and of the Company’s Audit Committee.

Ms. Elizabeth A. Fetter served as president and CEO of QRS Corp., a retail supply chain software and services company,

from October 2001 to November 2004. Prior to joining QRS in 2001, Ms. Fetter was president and CEO of NorthPoint

Communications, a broadband services company from March 1999 to April 2001 and vice president and general manager of the

Consumer Services Group at US West (now Qwest), a telecommunications company, from January 1998 to March 1999.

Before US West, she was an officer at SBC/Pacific Bell, where she held a number of senior leadership positions. Ms. Fetter

also serves on the boards of Symmetricom, Berbee Inc. (a privately held company) and several non-profit organizations. Ms.

Fetter is a member of the Company’s Leadership and Compensation Committee.

Mr. John M. Partridge has served as President and Chief Executive Officer of Inovant, a transaction processing company

and a wholly owned subsidiary of Visa, since October 1999. Prior to that, from March 1998 to August 1999, he was Senior

Vice President of Program Management and Chief Information Officer for UNUM Corporation, a disability insurance

company. Before UNUM, he worked for Banco de Credito del Peru from August 1983 to March 1998 and Wells Fargo Bank

from April 1974 to July 1983. Mr. Partridge also serves on the board of directors of Inovant and Delta Dental. Mr. Partridge is

a member of the Company’s Leadership and Compensation Committee.

Mr. Steven C. Wheelwright has been a Professor at Harvard Business School since July 1970 and Senior Associate Dean at

Harvard Business School since July 2003 and from September 1995 to June 2000. From July 1979 to June 1988, Mr.

Wheelwright was a professor at the Stanford Graduate School of Business. Outside of his academic career, Mr. Wheelwright

was Vice President of Sales in a family-owned printing business from July 1973 to June 1974 and a consultant to numerous

companies from July 1970 to June 2000. He previously served on Quantum's board of directors from 1989 to 2000. He also

serves on the board of directors of Zions BanCorp. and is chairman of the board of Harvard Business School Publishing. Mr.

Wheelwright is Chairman of the Company’s Corporate Governance and Nominating Committee, a member of the Company’s

Audit Committee, and the Company’s lead independent director.

Board Independence

Quantum's Corporate Governance Principles provide that a majority of the Board shall consist of independent directors.

The Board has determined that each of the director nominees standing for election, except for Richard E. Belluzzo and Michael

A. Brown, and each member of each Board Committee, has no material relationship with Quantum (either directly or as a

partner, shareholder or officer of an organization that has a relationship with Quantum) and is independent within the meaning

of Quantum’s director independence standards. These standards reflect all applicable regulations, including the rules of the

New York Stock Exchange and the Securities and Exchange Commission.

Board Meetings and Committees

The Board of Directors of the Company held a total of six (6) meetings during Fiscal 2006. In addition, in Fiscal 2006, the

non-management directors held four (4) meetings without management present. During Fiscal 2006, no director attended fewer

than 75% of the meetings of the Board and the meetings of committees, if any, upon which such director served. All of our

directors are expected to attend each meeting of the Board and the committees on which they serve and are encouraged to

attend annual stockholder meetings, to the extent reasonably possible. All of our directors who were elected at our 2005

Annual Meeting, except for Mr. Esber, attended our 2005 Annual Meeting.

The Company has an Audit Committee, Leadership and Compensation Committee, and Corporate Governance and

Nominating Committee. Steven Wheelwright is the Company’s lead independent director and as such presides at the non-

management directors’ meetings.

The Audit Committee of the Board currently consists of Mr. Earhart, Chairman of the Committee, Mr. Esber and Mr.

Wheelwright, all of whom are independent directors and financially literate, as defined in the applicable New York Stock

Exchange listing standards and SEC rules and regulations. In addition to serving as a Chairman of the Company’s Audit

Committee, Mr. Earhart also serves as a member of the audit committees of Foundry Networks, Monolithic Power Systems and

Network Appliance, all of which are public companies. Mr. Earhart has informed the Board that aside from his service on these

four audit committees, his professional endeavors include only occasional consulting services with respect to financial and

accounting matters. The Board believes that Mr. Earhart’s simultaneous service on the audit committees of several public

companies may help provide valuable perspective on potential financial and accounting matters and other issues that may arise,

including with respect to corporate governance best practices. After discussion with Mr. Earhart concerning his service on the

Company’s Audit Committee and competing demands on his time, the Board has determined that Mr. Earhart’s simultaneous

service on the audit committees of three other public companies does not impair his ability to effectively serve on the

Company’s Audit Committee. The Audit Committee, which generally meets at least twice per quarter, once prior to quarterly

earnings releases and again prior to the filing of the Company’s quarterly and annual financial statements, appoints the

Company’s independent registered public accounting firm and is responsible for approving the services performed by the

Company’s independent registered public accounting firm and for reviewing and evaluating the Company’s accounting

principles and its systems of internal accounting controls. At each meeting, the Audit Committee first meets with Company

management and the Company’s independent registered public accounting firm in order to review financial results and conduct

other appropriate business. Then, the Audit Committee typically meets with the Company’s independent registered public

accounting firm, without the presence of management. The Audit Committee held a total of nine (9) meetings during Fiscal

2006.

The Leadership and Compensation Committee of the Board is currently composed of Mr. Esber, Chairman of the

Committee, Ms. Fetter and Mr. Partridge, all of whom are independent directors, as defined in the applicable New York Stock

Exchange listing standards. The Leadership and Compensation Committee generally meets in conjunction with Board meetings

and at other times as deemed necessary by the Committee or the Board. The Company’s lead independent director, Mr.

Wheelwright, typically attends the Committee meetings. The Committee's primary mission is to ensure the Company provides

and designs appropriate leadership and compensation programs to enable the successful execution of its corporate strategy and

objectives and to ensure the Company's programs and practices are competitive and consistent with corporate governance best

practices. The Committee has responsibility for reviewing the Company's strategy and practices relating to the attraction,

retention, development, performance and succession of its leadership team. The Committee also has responsibility for

approving all compensation packages for the Company’s Section 16 officers, including the CEO. The Leadership and

Compensation Committee held a total of six (6) meetings during Fiscal 2006.

The Corporate Governance and Nominating Committee is currently composed of Mr. Wheelwright, Chairman of the

Committee, Mr. Buchsbaum and Mr. Esber, all of whom are independent directors, as defined in the applicable New York

Stock Exchange listing standards. The Corporate Governance and Nominating Committee, which meets at least twice annually,

assists the Board by identifying and recommending prospective director nominees, develops corporate governance principles

for Quantum and advises the Board on corporate governance matters, advises the Board regarding Board composition,

procedures and committees, recommends to the Board a lead independent director, oversees the evaluation of the Board, and

considers questions of possible conflicts of interest of Board members and of senior executives. The Corporate Governance and

Nominating Committee will consider nominees recommended by stockholders pursuant to the procedures outlined in the

Company’s Bylaws and as set forth below. The Corporate Governance and Nominating Committee held three (3) meetings

during Fiscal 2006.

Each of our committees is governed by a written charter, copies of which are posted on our website. The Internet address

for our website is http://www.quantum.com, where the charters may be found by clicking “Investors” from the home page and

selecting “Corporate Governance.” A free printed copy of the charters also is available to any stockholder who requests it from

Quantum’s Investor Relations Department at the address stated below in the Section of this Proxy Statement entitled

“Communicating with the Company” or who submits an online request by visiting the Company’s website at

http://www.quantum.com, where the request form may be found by clicking “Investors” from the home page and selecting

“Contact Investor Relations.”

COMMUNICATING WITH THE COMPANY

Consideration of Director Nominees

Stockholder Recommendations and Nominations

Recommendations

It is the policy of the Corporate Governance and Nominating Committee to consider recommendations for candidates to the

Board from stockholders. A stockholder that desires to recommend a candidate for election to the Board must direct the

recommendation in writing to Quantum Corporation, attention: Company Secretary, 1650 Technology Drive, Suite 700, San

Jose, CA 95110. The letter must include the candidate’s name, contact information, detailed biographical data, relevant

qualifications (in light of Quantum’s established director considerations, as described below), information regarding any

relationships between the candidate and Quantum, a statement from the recommending stockholder in support of the candidate,

references, and a written indication by the candidate of her or his willingness to serve, if elected.

Nominations

A stockholder that desires to nominate a person directly for election to the Board must meet the deadlines and other

requirements set forth in Section 2.5 of Quantum’s Bylaws, and the rules and regulations of the Securities and Exchange

Commission. Quantum’s Bylaws can be found on our website. The Internet address for our website is

http://www.quantum.com, where the Bylaws may be found by clicking “Investors” from the home page and then selecting

“Corporate Governance.”

Identifying and Evaluating Nominees for Director

The Corporate Governance and Nominating Committee uses the following procedures to identify and evaluate individuals

recommended or offered for nomination to the Board:

• The Committee regularly reviews the current composition and size of the Board.

• The Committee annually evaluates the performance of the Board as a whole and the performance and qualifications of

individual members of the Board eligible for re-election at the annual meeting of stockholders.

• In evaluating and identifying candidates, the Committee has the authority to retain and terminate any third party search

firm that is used to identify director candidates, and has the authority to approve the fees and retention terms of any

search firm.

• The Committee reviews the qualifications of any candidate who has been properly recommended or nominated by a

stockholder, as well as any candidate who has been identified by management, individual members of the Board or, if

the Committee determines, a search firm. Such review may, in the Committee’s discretion, include a review solely of

information provided to the Committee or may also include discussions with persons familiar with the candidate, an

interview with the candidate or other actions that the Committee deems proper, including the retention of third parties

to review potential candidates.

• The Committee will evaluate each candidate in light of the general and specific considerations that follow. The

Committee evaluates all nominees, whether or not recommended by a stockholder, in the same manner, as described in

this Proxy Statement.

• After reviewing and considering all candidates presented to the Committee, the Committee will recommend a slate of

director nominees to be approved by the full Board.

• The Committee will endeavor to promptly notify, or cause to be notified, all director candidates of its decision as to

whether to nominate such individual for election to the Board.

General Considerations

A candidate will be considered in the context of the current perceived needs of the Board as a whole. Generally, the

Committee believes that candidates and nominees must reflect a Board that is comprised of directors who (i) are predominantly

independent, (ii) are of high integrity, (iii) have qualifications that will increase overall Board effectiveness and (iv) meet other

requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to audit

committee members.

Specific Considerations

Specific considerations include the following:

• The current size and composition of the Board, and the needs of the Board and its committees.

• Previous experience serving on a public company board, or as a member of the senior management of a public

company.

• The possession of such knowledge, experience, skills, expertise and diversity so as to enhance the Board's ability to

manage and direct the affairs and business of the Company.

• Key personal characteristics such as strategic thinking, objectivity, independent judgment, integrity, intellect, and the

courage to speak out and actively participate in meetings.

• Knowledge of, and familiarity with, information technology.

• The absence of conflicts of interest with the Company’s business.

• A willingness to devote a sufficient amount of time to carry out his or her duties and responsibilities effectively,

including a commitment to serve on a committee.

• Whether the candidate is committed to serve on the Board for an extended period of time.

• Diversity of thinking or background.

• Such other factors as the Committee may consider appropriate.

The Company believes that all of the nominees for election to our Board meet the general and specific considerations

outlined above.

All of the nominees for election to our Board have previously served as Quantum directors.

Communications to the Board

Stockholders may contact any of our directors by writing to them c/o Quantum Corporation, attention: Company Secretary,

1650 Technology Drive, Suite 700, San Jose, CA 95110, or by email at BoardofDirectors@Quantum.com. Stockholders and

employees who wish to contact the Board or any member of the Audit Committee to report questionable accounting or auditing

matters may do so anonymously by using the address above and designating the communication as “confidential.”

Alternatively, concerns may be reported anonymously by phone or via the world-wide-web to the following toll-free phone

number or Internet address 1-866-ETHICSP (1-866-384-4277); www.ethicspoint.com. These resources are operated by

Ethicspoint, an external third-party vendor that has trained professionals to take calls, in confidence, and to report concerns to

the appropriate persons for proper handling. Communications raising safety, security or privacy concerns, or that otherwise

relate to improper activities will be addressed in an appropriate manner.

Director Compensation

During Fiscal 2006, each director who was not an employee of the Company (each, a “Non-Management Director”)

received a base annual retainer of $42,000, plus an additional annual retainer of $7,500 for each committee on which such

director served as a member. The aggregate retainer is paid 75% in cash and 25% in restricted stock. The restricted stock vests

50% upon grant and 50% after one year from the grant date provided that the director continues to be a member of Quantum’s

Board at that time. No per-meeting fees are paid. In addition, the Chairman of each Board Committee and the lead

independent director received the following annual retainers, all of which were paid in cash: $10,000 for the Chairman of the

Audit Committee and for the lead independent director and $7,500 for the Chairman of the Leadership and Compensation

Committee and for the Chairman of the Governance and Nominating Committee.

Options and restricted stock are granted to Non-Management Directors under the 2003 Nonemployee Director Equity

Incentive Plan (“Director Plan”), which was approved by the Company’s stockholders at the 2003 annual meeting of

Stockholders. The Board, in its discretion, selects Non-Management Directors to whom options may be granted, the time or

times at which such options may be granted, the number of shares subject to each grant and the period over which such options

become exercisable. During Fiscal 2006, Michael A. Brown, Alan L. Earhart, Edward M. Esber, Jr., and Steven C.

Wheelwright each received an option to purchase 18,750 shares of Common Stock. Mary Agnes Wilderotter, who left the

Company’s Board in Fiscal 2006, also received an option to purchase 18,750 shares of Common Stock. John M. Partridge,

who joined the Board in February 2005, received an option to purchase 9,375 shares of Common Stock. All options were

granted at an exercise price of $2.89. These options will fully vest on September 1, 2006. In addition, in Fiscal 2006, Quantum

granted to each of Elizabeth A. Fetter and Thomas S. Buchsbaum, both of whom joined the Board in that fiscal year, an option

to purchase 45,000 shares of Common Stock at the following exercise prices: $2.89 for Ms. Fetter’s option and $2.98 for Mr.

Buchsbaum’s option. The options granted to Ms. Fetter and Mr. Buchsbaum vest 25% approximately one year after they are

granted. Thereafter, the remaining options vest 1/36th per month over the next three years. All options granted to Non-

Management Directors in Fiscal 2006 contain the following terms: (i) the exercise price per share of Common Stock was 100%

of the fair market value of the Company’s Common Stock on the date the option was granted; (ii) the options expire seven

years after the date of grant; and (iii) the option may be exercised only while the director remains a director or within 12 months

after the date the director ceases to be a director of the Company, or such longer period as may be determined by the

administrator of the Director Plan. On November 14, 2005, the Leadership and Compensation approved an amendment to each

existing Board member stock option grant with a grant price greater than the closing price of Quantum’s stock on November

14, 2005 of $2.98 so that it terminates 12 months following termination of Board service rather than 90 days following such

termination, which had traditionally been the post-termination exercise period. Board member stock option grants with grant

prices less than $2.98 were not amended and continue to terminate 90 days following the termination of Board service.

The Board generally may amend or terminate the Director Plan at any time and for any reason, except that the Board will

obtain stockholder approval for material amendments to such plan, as required by the rules of the New York Stock Exchange.

Employee directors are not compensated for their service on the Board or on committees of the Board.

Leadership and Compensation Committee Interlocks and Insider Participation in Compensation Decisions

The members of the Company’s Leadership and Compensation Committee are Edward M. Esber, Jr., Chairman of the

Committee, Elizabeth A. Fetter and John M. Partridge. No member of the Leadership and Compensation Committee is

currently, nor has any been at any time since the formation of the Company, an officer or employee of the Company or any of

its subsidiaries. Likewise, no member of the Leadership and Compensation Committee has entered into a transaction, or series

of similar transactions, in which they will have a direct or indirect material interest adverse to the Company.

Required Vote

Each stockholder voting in the election of directors may cumulate such stockholder’s votes and give one candidate a

number of votes equal to the number of directors to be elected multiplied by the number of votes to which the stockholder’s

shares are entitled. Alternatively, a stockholder may distribute the stockholder’s votes on the same principle among as many

candidates as the stockholder would like, provided that votes cannot be cast for more than eight (8) candidates. However, no

stockholder shall be entitled to cumulate votes for a candidate unless such candidate’s name has been properly placed in

nomination according to the Company’s Bylaws and notice of the intention to cumulate votes is received at the principal

executive offices of the Company at least twenty (20), and no more than sixty (60), days prior to the Annual Meeting. The

proxy holders may exercise discretionary authority to cumulate votes and to allocate such votes among management’s

nominees in the event that additional persons are nominated at the Annual Meeting for election of directors.

If a quorum is present and voting, the eight nominees for director receiving the highest number of votes will be elected to

the Board. Votes withheld from any director are counted for purposes of determining the presence or absence of a quorum, but

have no other legal effect under Delaware law. See “Quorum; Abstentions; Broker Non-Votes.”

MANAGEMENT RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES LISTED ABOVE.

PROPOSAL TWO

RATIFICATION OF APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board has selected Ernst & Young LLP as the Company’s independent registered public accounting firm to audit the

financial statements of the Company for the fiscal year ending March 31, 2007. The Board recommends that stockholders vote

for ratification of such appointment. In the event of a vote against such ratification, the Board of Directors will reconsider its

selection. A representative of Ernst & Young LLP is expected to be available at the Annual Meeting with the opportunity to

make a statement if such representative desires to do so, and is expected to be available to respond to appropriate questions. The

affirmative vote of a majority of the Votes Cast is required to ratify the appointment of Ernst & Young LLP.

MANAGEMENT RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ERNST &

YOUNG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE

FISCAL YEAR ENDING MARCH 31, 2007.

EXECUTIVE COMPENSATION

Summary Compensation

The following table shows, as to any person serving as Chief Executive Officer during Fiscal 2006 and each of the four

other most highly compensated executive officers (the “Named Executive Officers”), information concerning compensation

paid for services to the Company in all capacities during Fiscal 2006, as well as the total compensation paid to each such

individual for the Company’s previous two fiscal years.

SUMMARY COMPENSATION TABLE

Annual Compensation Long-Term Compensation (1)

Name and Principal Position Fiscal

Year Salary ($) Bonus ($)

Other

Annual

Compensation

($)(2)

Restricted

Stock

Awards

($)(3)

Securities

Underlying

Options/S

ARs

(#)

All Other

Compensation

($)(4)

Richard E. Belluzzo …………………

Chief Executive Officer and Chairman

of the Board(*)

2006

2005

2004

648,269

597,692

600,000

—

250,000

—

89,093

(5)

—

81,900

—

(6)

—

2,000,000

7,115

5,977

1,615

Anthony E. Carrozza ………………

Senior Vice President of Worldwide

Sales

2006

2005

2004

315,000

313,788

315,000

—

10,000

—

78,314

150,866

138,327

(7)

(8)

(9)

61,838

73,711

—

(10)

(11)

262,500

52,500

100,000

5,900

6,370

5,810

Edward J. Hayes, Jr. …..………………

Executive Vice President and Chief

Financial Officer(**)

2006

2005

2004

350,004

269,234

—

20,000

10,000

—

24,735

296,000

—

(12)

(13)

325,000

400,000

—

7,069

3,431

—

Howard L. Matthews, III ……………

President and Chief Operating

Officer(***)

2006

2005

2004

280,003

37,019

—

(14) —

—

1,013,956

485,072

—

(15)

(16)

261,000

—

(17)

1,500,000

—

4,906

—

Jim L. Wold …………………………...

Senior Vice President, Removable

Storage and Automation(****)

_____________________

2006

2005

2004

264,615

46,723

—

78,699

196,834

—

(18)

(19)

61,838

28,875

—

(20)

(21)

462,500

127,500

—

2,869

—

(*) The amounts listed in the table reflect compensation paid to Mr. Belluzzo as Chief Executive Officer.

(**) Mr. Hayes, Jr. has been Executive Vice President and Chief Financial Officer of the Company since July 2004.

(***) Mr. Howard Matthews, III became the Company’s President and Chief Operating Officer on June 1, 2005.

(****) Mr. Wold has been the Company’s Senior Vice President, Removable Storage and Automation since January 2005.

(1) The Company has not granted any stock appreciation rights and does not have any long-term incentive plans, as that term

is defined in regulations promulgated by the SEC.

(2) Other annual compensation in the form of perquisites and other personal benefits, securities or property has been omitted

in those cases where the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total annual

salary and bonus reported for such executive officer.

(3) The restricted stock values set forth in the table are calculated as of the grant date while the footnotes to the numbers listed

in the table give a value as of March 31, 2006.

(4) Represents 401(k) plan matching contributions.

(5) $62,288 represents reimbursement for relocation expenses and $26,805 represents reimbursement for tax liabilities in

connection with reimbursement for these relocation expenses.

(6) Represents 35,000 shares of restricted stock, all of which vested on July 1, 2005. Based on the stock price on March 31,

2006, the value of the aggregate restricted stock holdings was $130,550. No dividends were paid on the restricted stock

holdings and Quantum currently does not expect to pay any dividends on such restricted stock holdings in the future.

(7) Represents sales commissions.

(8) $100,866 represents sales commissions and $50,000 represents loan forgiveness pursuant to the terms of a forgivable loan

granted to Mr. Carrozza on May 18, 2000. The loan was in the amount of $200,000, forgivable over four years, and

accrued interest at an annual rate of 8%.

(9) $88,327 represents sales commissions and $50,000 represents loan forgiveness pursuant to the terms of the forgivable loan

granted to Mr. Carrozza on May 18, 2000. See Note 8.

(10) Represents 21,250 shares of restricted stock, of which 5,313 shares vested on July 1, 2006, 5,313 shares are scheduled to

vest on July 1, 2007 and 5,312 shares are rescheduled to vest on each of July 1, 2008 and July 1, 2009, provided that Mr.

Carrozza continues to be employed by Quantum on those future dates. The value of the aggregate restricted stock

holdings, calculated as if they were fully vested as of March 31, 2006, was $79,263. No dividends were paid on the

restricted stock holdings and Quantum currently does not expect to pay any dividends on such restricted stock holdings in

the future.

(11) Represents, 26,400 shares of restricted stock, of which 3,650 shares vested on April 1, 2005, 5,500 shares vested on July 1,

2005, 10,250 shares vested on January 1, 2006, 3,500 shares vested on July 1, 2006 and 3,500 shares are scheduled to vest

on July 1, 2007, provided that Mr. Carrozza continues to be employed by Quantum on that future date. Based on the stock

price on March 31, 2006, the value of the aggregate restricted stock holdings was $98,472. No dividends were paid on the

restricted stock holdings and Quantum currently does not expect to pay any dividends on such restricted stock holdings in

the future.

(12) Represents 8,500 shares of restricted stock, of which 2,125 shares vested on July 1, 2006 and 2,125 shares are scheduled to

vest on each of July 1, 2007, July 1, 2008 and July 1, 2009, provided that Mr. Hayes continues to be employed by Quantum

on those future dates. The value of the aggregate restricted stock holdings, calculated as if they were fully vested as of

March 31, 2006, was $31,705. No dividends were paid on the restricted stock holdings and Quantum currently does not

expect to pay any dividends on such restricted stock holdings in the future.

(13) Represents 100,000 shares of restricted stock, of which 50,000 shares vested on July 1, 2004 and 25,000 vested on each of

July 1, 2005 and July 1, 2006. The value of the aggregate restricted stock holdings, calculated as if they were fully vested

as of March 31, 2006, was $373,000. No dividends were paid on the restricted stock holdings and Quantum currently does

not expect to pay any dividends on such restricted stock holdings in the future.

(14) Represents salary payments made by Quantum to Mr. Matthews as a Certance employee after Quantum’s acquisition of

Certance LLC.

(15) $25,000 represents reimbursement for commuting expenses, $825,000 represents severance payments pursuant to the

Transaction Bonus and Severance Protection Letter, dated January 4, 2005, between Mr. Matthews and Certance LLC, and

$163,956 represents payments for Certance LLC stock options made in connection with Quantum’s acquisition of Certance

LLC.

(16) $75,000 represents severance payments and $410,072 represents a transaction bonus paid to Mr. Matthews pursuant to a

Transaction Bonus and Severance Protection Letter, dated January 4, 2005 between Mr. Matthews and Certance LLC.

(17) Represents 100,000 shares of restricted stock, of which 25,000 vested on June 1, 2006 and 25,000 are scheduled to vest on

each of June 1, 2007, June 1, 2008 and June 1, 2009, provided that Mr. Matthews continues to be employed by Quantum

on those future dates. The value of the aggregate restricted stock holdings, calculated as if they were fully vested as of

March 31, 2006, was $373,000. No dividends were paid on the restricted stock holdings and Quantum currently does not

expect to pay any dividends on such restricted stock holdings in the future.

(18) Represents payments for Certance LLC stock option made in connection with Quantum’s acquisition of Certance LLC.

(19) Represents a transaction bonus paid to Mr. Wold pursuant to a Transaction Bonus and Severance Protection Letter, dated

January 4, 2005 between Mr. Wold and Certance LLC.

(20) Represents 21,250 shares of restricted stock, of which 5,313 shares vested July 1, 2006, 5,313 shares are scheduled to vest

on July 1, 2007 and 5,312 shares are scheduled to vest on each of July 1, 2008 and July 1, 2009, provided that Mr. Wold

continues to be employed by Quantum on those future dates. The value of the aggregate restricted stock holdings,

calculated as if they were fully vested as of March 31, 2006, was $79,263. No dividends were paid on the restricted stock

holdings and Quantum currently does not expect to pay any dividends on such restricted stock holdings in the future.

(21) Represents 10,500 shares of restricted stock, of which 3,500 shares fully vested on January 25, 2006 and 3,500 shares are

scheduled to vest on each of January 25, 2007 and January 25, 2008, provided that Mr. Wold continues to be employed by

Quantum on those future dates. The value of the aggregate restricted stock holdings, calculated as if they were fully vested

as of March 31, 2006, was $39,165. No dividends were paid on the restricted stock holdings and Quantum currently does

not expect to pay any dividends on such restricted stock holdings in the future.

Stock Option Grants and Exercises

The following tables show, as to each Named Executive Officer, information concerning stock options granted during

Fiscal 2006.

OPTION GRANTS IN FISCAL 2006

Individual Grants

Number of

Securities

Underlying

Options Granted

Percent of Total

Options Granted to

Employees in Fiscal

Year 2006

Expiration

Potential Realizable Value

at Assumed Annual Rates

of Stock Price

Appreciation

for Option Terms (3)

Name (#)(1) (2)

Exercise

Price

($/share) Date 5% ($) 10% ($)

Richard E. Belluzzo………... — — — — — —

Anthony E. Carrozza..……… 200,000 3.33% $2.62 05/31/2012 213,222 496,861

………... 62,500 1.04% $2.92 06/28/2012 74,296 173,141

Edward J. Hayes, Jr. ……….. 300,000 4.99% $2.62 05/31/2012 319,833 745,292

………... 25,000 0.42% $2.92 06/28/2012 29,718 69,256

Howard L. Matthews, III…… 1,500,000 24.97% $2.62 05/31/2012 1,599,166 3,726,459

Jim L. Wold ………………… 400,000 6.66% $2.62 05/31/2012 426,444 993,722

…………... 62,500 1.04% $2.92 06/28/2012 74,296 173,141

(1)

The exercise price of each option is determined by the Leadership and Compensation Committee of the Board of Directors and

in Fiscal 2006 was not less than 100% of the fair market value of the Common Stock on the date of grant. The options may be

exercised only while the optionee provides services to the Company or within such period of time following termination of the

optionee’s services to the Company as is determined by the Board. The options for the Named Executive Officers listed above

expire approximately seven years from the date of grant and vest monthly over four years beginning at or about the time o

grant.

(2) Based on options to purchase an aggregate of 6,007,929 shares of the Company’s Common Stock granted to employees of the

Company in Fiscal 2006, including the Named Executive Officers.

(3) Potential realizable value is based on an assumption that the stock price of the Common Stock appreciates at the annual rate

shown (compounded annually) from the date of grant until the end of the option term. These numbers are calculated based on

the regulations promulgated by the SEC based on an arbitrarily assumed annualized compound rate of appreciation of the

market price of 5% and 10% from the date the option was granted to the end of the option term, less the exercise price. Actual

gains, if any, on option exercises are dependent on the future performance of the Common Stock.

The following table provides information regarding options exercised by Named Executive Officers during Fiscal 2006 and

options held by them at fiscal year end.

AGGREGATED OPTION EXERCISES IN FISCAL 2006 AND

FISCAL YEAR-END OPTION VALUES

Acquired on

Value

Realized

Number of Securities

Underlying Unexercised Options

Held at Fiscal Year-End (#)

Value of Unexercised In-the-

Money Options Held at Fiscal

Year-End ($) (2)

Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable

Richard E. Belluzzo…………………… — — 3,277,777 722,223 1,368,888 171,112

Anthony E. Carrozza…………………. — — 409,061 249,209 208,125 255,050

Edward J. Hayes, Jr.………………….. — — 227,082 497,918 194,749 469,751

Howard L. Matthews, III…………….. — — 0 1,500,000 0 1,680,000

Jim L. Wold………………………….. — — 121,040 468,960 129,687 502,763

(1)

Total value realized is calculated based on the fair market value of the Common Stock at the close of business on the date o

exercise, less the exercise price.

(2) Total value of unexercised options is based on $3.74 per share of Common Stock, the fair market value of the Common Stock

as of March 31, 2006, less the exercise price.

Employment Terms, Termination of Employment and Change-In-Control Arrangements

The Company entered into agreements (the “Agreements”) with its Named Executive Officers whereby in the event that

there is a “change of control” of the Company (which is defined in the Agreements to include, among other things, a merger or

sale of all or substantially all of the assets of the Company or a reconstitution of the Company’s Board) and, within 18 months

of the change of control, there is an “Involuntary Termination” of such executives’ employment, then the executives are entitled

to specified severance compensation and benefits. The Agreements define “Involuntary Termination” to include, among other

things, any termination of the employee by the Company without “cause” or a significant reduction of the employee’s duties

without such employee’s express written consent.

For the CEO, the principal severance benefits are as follows: (1) 300% of the CEO’s then established base compensation;

(2) 300% of the average of the CEO’s actual annual bonuses received over the previous two (2) years; (3) payment of COBRA

premiums for twelve (12) months; (4) vesting of any unvested equity-based compensation award then held by the CEO; and (5)

if applicable, a gross-up payment in the amount of any excise tax incurred by the CEO as a result of the benefits received under

the Agreement. For the other Named Executive Officers the principal benefits are: (1) 200% of the officer’s then established

base compensation; (2) 200% of the average of the officer’s actual annual bonuses received over the previous two (2) years; (3)

payment of COBRA premiums for twelve (12) months; (4) vesting of any unvested equity-based compensation award then held

by the officer; and (5) if applicable, a gross-up payment in the amount of any excise tax incurred by the officer as a result of the

benefits received under the Agreement. The purpose of the Agreements is to ensure that the Company will have the continued

dedication of its officers by providing such individuals with compensation arrangements that are competitive with those of

other corporations, to provide sufficient incentive to the individuals to remain with the Company, to enhance their financial

security, as well as protect them against unwarranted termination in the event of a change of control.

If Mr. Belluzzo is constructively terminated or involuntarily terminated by the Company other than for “cause”, he will

receive a payment in the amount of 18 months base salary. If Mr. Belluzzo leaves the Company within four (4) years of his start

date of September 3, 2002, he must repay his $1,000,000 real estate compensation supplement, less $250,000 for each year of

employment; provided that should he leave pursuant to a constructive termination or an involuntary termination (other than for

“cause”), the repayment will be determined as if Mr. Belluzzo had been employed by the Company for an additional twelve

(12) months following his termination date.

In connection with the termination of Mr. Gannon as the Company’s President and Chief Operating Officer on May 27,

2005, the Company entered into an agreement to pay Mr. Gannon $500,010 in cash in a single lump sum and $123,067.50 in

cash, representing the cash value of his unvested restricted stock valued as of the termination date. In addition, the vesting of

his unvested stock options has been accelerated by 12 months and the exercise period for his vested stock options was extended

to May 26, 2006. He is also entitled to receive relocation assistance through June 2006 in an amount currently estimated to be

$107,658. In accordance with the terms of a forgivable loan that Quantum had granted to Mr. Gannon on October 18, 2001,

Quantum released Mr. Gannon from any obligation to repay the outstanding principal portion of and interest accrued on this

loan in the total amount of $31,000.

In connection with the termination of Mr. Kreigler’s employment as the Company’s Senior Vice President and General

Manager of the Storage Systems business unit on June 1, 2005, the Company entered into an agreement to pay Mr. Kreigler

$304,500 in a single lump sum.

In connection with the hiring of Howard L. Matthews III as the Company’s President and Chief Operating Officer as of

June 1, 2005, Quantum entered into an employment offer letter with Mr. Matthews pursuant to which Mr. Matthews receives an

annual salary of $350,000 and pursuant to which he received 1,500,000 stock options and 100,000 shares of restricted stock.

25% of the stock options fully vested on June 1, 2006 and the remainder will vest monthly thereafter at the rate of 1/48th of the

original grant amount over the following three years. 25% of the restricted stock vested on June 1, 2006 and 25% is scheduled

to vest on each of June 1, 2007, June 1, 2008 and June 1, 2009, provided that Mr. Matthews continues to be employed by

Quantum on such dates. To assist with commuting expenses, Quantum will also pay Mr. Matthews $25,000 in cash annually.

In the event the employment of Mr. Matthews is terminated involuntarily other than for “cause”, where there has not occurred a

change of control, he will receive: i) the equivalent of 52 weeks base salary; ii) the equivalent of 12 months benefits coverage;

and iii) the greater of a) accelerated vesting of 50% of his unvested stock options and restricted stock, or b) 12 months of

accelerated vesting of his unvested stock options and restricted stock. On January 4, 2005, Mr. Matthews entered into a

Transaction Bonus and Severance Protection Letter with Certance LLC, which was subsequently acquired by Quantum.

Pursuant to this agreement, Mr. Matthews received a cash transaction bonus of $410,072 and severance benefits of $900,000

due to the termination of his employment with Certance LLC.

In connection with the hiring of Mr. Hayes as Chief Financial Officer as of July 1, 2004, Quantum and Mr. Hayes entered

into an employment offer letter pursuant to which Mr. Hayes receives an annual salary of $350,000 and pursuant to which he

received 400,000 stock options and 100,000 shares of restricted stock. 25% of the stock options vested on July 1, 2005 and the

remainder vests monthly thereafter at the rate of 1/48th of the original grant amount over the following three years. 50% of the

restricted stock vested on July 1, 2004, 25% vested on July 1, 2005 and the remaining 25% vested on July 1, 2006. In the event

the employment of Mr. Hayes is terminated involuntarily where there has not occurred a change of control, he will receive: i)

the equivalent of 52 weeks base salary; ii) the equivalent of 12 months benefits coverage; and iii) the greater of a) accelerated

vesting of 50% of his unvested stock options and restricted stock, or b) 12 months of accelerated vesting of his unvested stock

options and restricted stock.

REPORT OF THE LEADERSHIP AND COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS1

Introduction

The Leadership and Compensation Committee (the “Committee”) of the Board of directors consists of Edward M. Esber,

Jr., John M. Partridge and Elizabeth A. Fetter. Mary Agnes Wilderotter served on the Committee until her resignation from the

Board on March 1, 2006. Mr. Esber serves as Chairman of the Committee. None of these individuals had any interlocking

relationships and all qualify as “outside directors” and “nonemployee directors” as defined by the Internal Revenue Code and

the Securities Exchange Act of 1934, respectively. During fiscal year 2006 the Committee met six times.

The Committee has responsibility for annually reviewing and approving the Company’s total compensation philosophy,

strategy and practices and administering the Company’s executive compensation plans and stock incentive plans. The

Committee reviews the Company’s strategy and practices relating to the retention, development, performance and succession of

its employees and approves all compensation actions for the Company’s executive officers including all Named Executive

Officers. The Company’s Human Resource organization and independent compensation consultants provide support to the

Committee.

1 This report of the Leadership and Compensation Committee of the Board of Directors shall not be deemed “soliciting material,” nor is it to be filed with the

SEC, nor incorporated by reference in any filing of the Company under the Securities Act of 1933, or the Securities Exchange Act of 1934, whether made

before or after the date hereof and irrespective of any general incorporation language in any such filing.

A more complete description of the Committee’s charter and responsibilities may be found on the Company’s website.

The Internet address for the website is http://www.quantum.com, where the charter may be found by clicking “Investors” from

the home page and selecting “Corporate Governance.”

General Total Compensation Philosophy

The objectives of the Company’s total compensation philosophy are to:

• Enable the achievement of the Company’s long and short term strategic goals

• Attract and retain the best talent needed to accomplish those strategies

• Ensure compensation levels are competitively benchmarked against a peer group

• Provide a strong link between pay and performance on both an individual and Company level

• Align long term incentives with stockholders’ interests

• Take into consideration economic and market conditions

This philosophy applies to all employees, with a more significant level of variability and compensation at risk as an

employee’s level of responsibility increases. The Company incorporates these objectives in the design of the following

components:

• Base salary

• Performance-based short-term incentives

• Periodic grants of stock-based compensation, such as stock options and/or restricted stock which have

performance-based and/or time-based vesting requirements

• Discounted Company stock through a tax-qualified employee stock purchase plan

• Health and welfare benefits

• Retirement benefits

Executive Total Compensation Methodology

A considerable amount of the Committee’s work relates to the determination of total compensation for the Company’s

Chief Executive Officer (CEO) and the other executive officers.

Total compensation for the Company’s CEO and other executive officers includes those components offered to the general

employee population, as well as executive perquisites, change in control agreements and participation in the Company’s non-

tax qualified deferred compensation plan.

Each year, the Committee benchmarks its compensation pay practices and determines the compensation levels for its

executive officers using a group of peer companies.

For each Named Executive Officer, the Committee uses compensation data provided by its independent compensation

consultants, derived from a group of selected peer companies. For fiscal year 2006, this peer group was comprised of twenty-

one companies of similar industry, business focus, financial performance, state of growth and size. The Committee relies on its

independent compensation consultants to determine the peer group for the Company, which is officially reviewed and approved

by the Committee on an annual basis. For other executive officer positions, the Committee considers third-party survey data

selected according to similar criteria as the peer group.

In addition, the Committee and management annually determine the appropriate use of stock-based compensation,

balancing these factors against financial considerations, such as the projected impact on stockholder dilution and the projected

expense.

It is the Company’s practice to target its executive total compensation package to approximate the median percentile total

compensation package of similarly positioned executive officers in the Company’s peer group. The Company’s performance, as

measured against corporate financial performance targets, will determine annual compensation levels.

Named Executive Officer Total Compensation Components

The principal components of the total compensation for the Named Executive Officers are described below:

Base Salary

Base salaries for each of the Named Executive Officers are set by the Chief Executive Officer, in consultation with the

Committee, after considering factors such as position, responsibility, competitive environment, corporate size, corporate

performance, overall experience and individual performance.

Base salaries are reviewed annually and adjusted as necessary to recognize outstanding individual performance,

promotions and competitive levels. Base salaries paid to the Named Executive Officers are reflected in the Summary

Compensation Table of this Proxy Statement.

Short-Term Incentive Compensation

All of Quantum’s executive officers, including the Named Executive Officers, but excluding the CEO, participate in the

Quantum Incentive Plan (“the Incentive Plan”). The purpose of the Incentive Plan is to motivate and reward the achievement of

Company objectives that create stockholder value and provide competitive compensation. Under the Incentive Plan, each of the

Named Executive Officers is eligible to earn a bonus up to an established percentage (40-70%) of annual base salary,

depending upon achievement of specific performance goals. The Incentive Plan may be based upon one or more of the

following performance measures: earnings per share, net income, operating cash flow, pre-tax net income, return on assets,

return on equity, return on sales, revenue, non-GAAP operating income or total stockholder return. Bonuses are payable in

cash under the Incentive Plan only if the minimum performance goals approved by the Committee at the beginning of the

performance period are achieved.

For fiscal year 2006, the Committee selected non-GAAP operating income as the financial performance measure for the

Incentive Plan participants. While the specific non-GAAP operating income performance goals were not fully achieved, the

Company did achieve a minimum level of performance against those goals and, in accordance with the Incentive Plan

guidelines, limited bonus payments were awarded to certain of the executive officers who made significant contributions

towards the achievement of the Company’s long-term strategic objectives. Information about the bonuses paid to the Named

Executive Officers for fiscal year 2006 is shown in the Summary Compensation Table of this Proxy Statement.

Long-Term Incentive Compensation

A key component of the total compensation package for the Company’s Name Executive Officers is in the form of stock-

based compensation. The Company’s 1993 Long-Term Incentive Plan (“LTIP”) provides long-term incentive compensation for

employees of the Company, including each of the Named Executive Officers.

The primary objective of the LTIP is to align the interests of employees with those of stockholders by providing them with

significant equity interests in the Company, thereby providing incentive to maximize stockholder value. The LTIP also utilizes

vesting periods to encourage retention and to reward long-term commitment to the Company. The Committee is responsible for

determining, subject to the terms of the plan, the size of the stock pool used each year. In addition, the Committee reviews and

approves all individual employee grants, the timing of those grants, the exercise price and the number of shares subject to each

grant. In fiscal year 2006, each option granted was granted at the market value of the underlying Common Stock on the date of

the grant. All options have a seven-year term and generally vest over a four-year period based upon continued employment.

For fiscal year 2006, the Committee continued the Company’s long-term incentive philosophy of utilizing a mix of stock

options and restricted stock.

For fiscal year 2006, a mix of stock options and restricted stock were awarded to each of the Named Executive Officers. In

determining the size of the awards, the Committee considered the value of grants awarded to executive officers in comparable

positions at peer group companies, the Company’s and the individual executive officer’s performance against plan, currently

outstanding equity awards and the projected impact on stockholder dilution.

The Committee did not continue the use of the Key Performance Leadership Bonus Plan (“Bonus Plan”) for certain Named

Executive Officers in fiscal year 2006.

Employee Stock Purchase Plan

The Company offers the ability for all employees to acquire the Company’s stock through a tax-qualified employee stock

purchase plan. This plan allows employees to purchase the Company stock at a 15% discount to the market price.

Health and Welfare Benefits

The Company offers health, welfare and other benefit programs to all employees. The Company shares the cost of health

and welfare benefits with its employees, the cost of which is dependent on the level of coverage an employee elects. The health

and welfare benefits offered to employees are the same as those offered to each of the Named Executive Officers.

Retirement Benefits

The Company offers retirement benefits to its US-based employees through a tax-qualified 401(k) Savings Plan. The

Company also has a non-tax qualified deferred plan which allows select employees to contribute a portion of their base salary

and short term incentives to an irrevocable trust for the purposes of deferring federal and state income taxes. Employees direct

their own investments in these retirement plans, which do not include Company stock. For employees outside the United

States, the Company offers similar retirement benefits that are consistent with local market practices. Each of the Named

Executive Officers is able to participate in the Company’s non-qualified deferred compensation plan, in addition to the

Company’s 401(k) plan. Information about the retirement benefits paid to each of the Named Executive Officers is shown on

the Summary Compensation Table of this Proxy Statement.

Perquisites

The Company offers company-paid financial counseling and tax preparation services to all vice presidents, including each

of the Named Executive Officers. The Company does not own or use non-commercial aircraft on a time-share or rental basis.

Additionally, the Company has not entered into any new loan arrangements with any of its Named Executive Officers.

Change in Control Agreements

In accordance with the Company’s policy, in April 2005, the Company entered into change in control agreements with all

vice presidents, including each Named Executive Officer, to provide protection upon involuntary termination following a

change in control. These agreements replaced similar agreements that expired at that time. Details about the benefits under the

change in control agreements are reflected in the section of this Proxy Statement, entitled, “Employment Terms, Termination of

Employment and Change-In-Control Arrangements.”

Chief Executive Officer Performance and Total Compensation

Mr. Belluzzo is formally evaluated in his role as Chairman and CEO of the Company. The Committee, together with all

the other directors, established and approved the performance criteria and objectives used to evaluate Mr. Belluzzo’s fiscal year

2006 performance. A variety of factors are used to evaluate Mr. Belluzzo’s performance, including Company performance,

leadership, strategic planning, management succession planning and his external/customer relationships.

Annually, the Committee and the lead independent director lead the review of Mr. Belluzzo’s performance and discuss the

evaluation results with him.

The process of determining the total compensation for Mr. Belluzzo and the factors taken into consideration in such

determination are generally the same as the process and factors used in determining the compensation of all other Named

Executive Officers.

For fiscal year 2006, the Committee increased Mr. Belluzzo’s base salary from $600,000 per year to $650,000 per year.

The Committee believes this pay level to be competitive, appropriate and reasonable, based on industry compensation

benchmarks and related data.

Mr. Belluzzo does not participate with the other Named Executive Officers in the Incentive Plan. The Committee has

established a separate bonus plan for Mr. Belluzzo. For fiscal year 2006, the Committee maintained Mr. Belluzzo’s bonus

target under this bonus plan at 100% of his base salary. The Committee believes Mr. Belluzzo’s total target cash compensation

opportunity is currently in line with competitive market practices.

When setting bonus targets for Mr. Belluzzo, the Committee develops and approves specific performance measures and

goals. Bonuses are paid only if the performance goals that the Committee sets at the beginning of the fiscal year (or other

performance period selected by the Committee) are achieved. For fiscal year 2006, the Committee selected non-GAAP net

income as the financial performance measure for Mr. Belluzzo, along with certain individual performance objectives. Mr.

Belluzzo’s actual bonus is determined according to a formula the Committee develops at the time the Committee sets the

performance goals, based on the level of achievement against those performance goals. For fiscal year 2006, the net income

goal was not achieved and therefore Mr. Belluzzo did not receive a bonus payment.

A key component of Mr. Belluzzo’s total compensation package is in the form of stock-based compensation. The process

of determining any stock awards for Mr. Belluzzo is generally the same as the process and factors used in determining that for

each of the Named Executive Officers.

In fiscal year 2004, Mr. Belluzzo was granted an option to purchase 2,000,000 shares of Company stock at an exercise

price of $3.78 per share, with 50% of those options to vest monthly over four years and the remaining 50% to vest monthly over

2 years. While the grant was intended to cover fiscal years 2005, 2006 and 2007, the Committee will continue to make

decisions on Mr. Belluzzo’s total compensation package to ensure that it is reasonable, retentive and aligned with the

Company’s strategies and objectives. No further stock was granted to Mr. Belluzzo in fiscal year 2006.

Information about total compensation paid to Mr. Belluzzo is reflected in the Summary Compensation Table of this Proxy

Statement.

Discretion

From time to time and on a discretionary basis, the Company may award long-term incentives to reward outstanding

performance or encourage retention. The Committee will continue to have discretion as to whether short-term or long-term

incentives for the Company’s Names Executive Officers will be paid in cash, stock options, restricted stock, restricted stock

units or a combination thereof. The Committee also retains discretion to modify the level of any award as appropriate.

Tax Deductibility of Executive Compensation

Under Section 162(m) of the Internal Revenue Code, the Company generally receives a federal income tax deduction for

compensation paid to any of its Named Executive Officers only if the compensation is less than $1,000,000 or is “performance

based” under Section 162(m). Mr. Belluzzo’s bonus plan, the Incentive Plan, and the 1993 Long-Term Incentive Plan have

been designed to permit the Committee to pay compensation that will qualify as “performance-based” compensation under

Section 162(m). Thus, the Company may continue to receive a federal income tax deduction for such compensation. The

Committee retains the discretion to pay non-deductible compensation to the extent consistent with the Company’s interests and

taking into consideration the financial effects such actions may have on the Company.

Conclusion

The Committee believes that the Company’s total compensation philosophy and leadership development programs:

• Align with the interests of the Company and stockholders

• Link compensation directly to corporate performance

• Assist in attracting and retaining experienced and talented executives

• Are reasonable and effective

The Committee will continue to monitor the Company’s philosophy and programs to ensure effectiveness, appropriateness

and alignment with the Company’s corporate performance.

Submitted by Members of the Leadership and Compensation Committee:

Edward M. Esber, Jr., Chairman

Elizabeth Fetter

John M. Partridge

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS2

The Audit Committee was established primarily to: i) provide oversight of Quantum’s accounting and financial reporting

processes and the audit of Quantum’s financial statements; and ii) assist the Board of Directors in the oversight of: (a) the

integrity of Quantum’s financial statements; (b) Quantum’s compliance with legal and regulatory requirements; (c) the

independent registered public accounting firm’s performance, qualifications and independence; and (d) the performance of

Quantum’s internal audit function.

The Audit Committee is composed solely of independent directors, as defined in the applicable New York Stock Exchange

and SEC Rules. It is governed by a written charter (the “Charter”) adopted and approved by the Board, a copy of which may be

found on our website located at http://www.quantum.com, by clicking “Investors” from the home page and selecting

“Corporate Governance.” Our Board has determined that Alan L. Earhart is an audit committee financial expert as defined by

SEC rules.

In accordance with Audit Committee policy and the requirements of law, all services to be provided by the Company’s

independent registered public accounting firm, Ernst & Young LLP (“E&Y”), are pre-approved by the Audit Committee. This

is to avoid potential conflicts of interest that could arise if the Company received specified non-audit services from its auditing

firm. Annually, the Audit Committee pre-approves appropriate audit, audit-related and tax services (which are listed on a

general approval schedule) that E&Y may perform for the Company. Where such services are expected to require more than

ten hours of billable E&Y senior partner (or the equivalent) time, the Company must notify the Audit Committee of E&Y’s

performance of such services. For all services to be performed by E&Y that are not specified in the general pre-approval

schedule, the Company must obtain specific engagement approval from the Audit Committee for such services in advance. The

Audit Committee has delegated to a subcommittee (comprised solely of members of the Audit Committee) the authority to

receive all notifications and requests relating to E&Y’s performance of services for the Company. The Audit Committee will

review and make changes to the services listed under the general approval schedule on an annual basis and otherwise from time

to time as necessary.

The Audit Committee, after appropriate review and discussion, determined that it had fulfilled its responsibilities under the

Charter this year. The Audit Committee has reviewed and discussed the Consolidated Financial Statements for fiscal year 2006

with management and the Company’s independent registered public accounting firm; and management represented to the Audit

Committee that Quantum’s Consolidated Financial Statements were prepared in accordance with generally accepted accounting

principles. This review included a discussion with management of the quality, not merely the acceptability, of Quantum’s

accounting principles, the reasonableness of significant estimates and judgments, and the clarity of disclosure in Quantum’s

Consolidated Financial Statements. The Audit Committee discussed with the Company’s independent registered public

accounting firm matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication

with Audit Committees”, including the independence of the independent registered public accounting firm. The Audit

Committee received from the independent registered public accounting firm the written disclosures and the letter from the

auditors required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees”. In

reliance on these views and discussions, and the report of the Company’s independent registered public accounting firm, the

Audit Committee has recommended to the Board, and the Board has approved, the inclusion of the audited Consolidated

Financial Statements in Quantum’s Annual Report on Form 10-K for the year ended March 31, 2006 for filing with the SEC.

MEMBERS OF THE AUDIT COMMITTEE

Alan L. Earhart, Chairman

Edward M. Esber, Jr.

Steven C. Wheelwright

2 This report of the Audit Committee of the Board of Directors shall not be deemed “soliciting material,” nor is it to be deemed filed with the SEC, nor

incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,

whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table shows the fees billed for various professional services by E&Y for fiscal years 2006 and 2005:

Amounts in thousands Fiscal Year

2006

2005

Audit Fees (1) $ 2,385 $ 3,020

Audit-related Fees (2) 17 127

Tax Compliance Fees (3) 252 265

Tax Consulting Fees (3) 69 185

Total

$ 2,723 $ 3,597

(1) Audit fees include the audit of Quantum’s annual financial statements, review of financial statements included in

Quantum’s Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered

public accounting firm in connection with foreign statutory and regulatory filings or engagements for those fiscal

years and include services in connection with assisting the Company in its compliance with its obligations under

Section 404 of the Sarbanes-Oxley Act and related regulations. Audit fees also include advice on audit and

accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, including

the application of proposed accounting rules, statutory audits required by non-U.S. jurisdictions and the preparation of

an annual “management letter” containing observations and discussions on internal control matters.

(2) This category consists of assurance and related services performed by E&Y that are reasonably related to the

performance of the audit or review of Quantum’s financial statements and are not reported above under “Audit Fees.”

The services for the fees disclosed under this category are for acquisitions.

(3) This category consists of professional services rendered by E&Y for tax compliance and tax consulting. The tax

compliance services principally include preparation and/or review of various tax returns, assistance with tax return

supporting documentation, and tax return audit assistance. The tax consulting services principally include advice

regarding mergers and acquisitions, international tax structure, and other strategic tax planning opportunities.

Representatives of E&Y attended all regular meetings of the Audit Committee in fiscal year 2006.

PERFORMANCE GRAPH(3)

The following graph compares the cumulative total return to stockholders of the Company’s Common Stock at March 31,

2006, for the period since March 31, 2001, to the cumulative total return over such period of (i) the NASDAQ Stock Market

(U.S.) Index, and (ii) the S & P Computer Storage & Peripherals Index. The graph assumes the investment of $100 on March

31, 2001 in Common Stock and in each of the indices listed on the graph and reflects the change in the market price of the

Common Stock relative to the changes in the noted indices at March 31, 2002, March 31, 2003, March 31, 2004, March 31,

2005, and March 31, 2006. The performance shown below is based on historical data and is not indicative of, nor intended to

forecast, future price performance of the Common Stock.

This section is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference in any filing of the Company

under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof

and irrespective of any general incorporation language in any such filing.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

AMONG QUANTUM CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX

AND THE S & P COMPUTER STORAGE & PERIPHERALS INDEX

100

120

140

160

3/01 3/02 3/03 3/04 3/05 3/06

QUANTUM CORPORATION

NASDAQ STOCK MARKET (U.S.)

S & P COMPUTER STORAGE & PERIPHERALS

* $100 invested on 3/31/01 in stock or index-including reinvestment of dividends.

Fiscal year ending March 31.

www.researchdatagroup.com/S&P.htm

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of June 1, 2006 certain information with respect to the beneficial ownership of the

Company’s Common Stock by (i) each person known by the Company to be the beneficial owner of more than five percent of

the outstanding shares of Common Stock, (ii) each of the Company’s directors, (iii) each of the Named Executive Officers and

(iv) all current directors and executive officers as a group. Unless otherwise indicated, the business address for the beneficial

owners listed below is 1650 Technology Drive, Suite 700, San Jose, CA 95110.

Name

Number of Shares

Beneficially Owned (1)

______________________________

Approximate

Percentage of

Shares Owned (2)

_____________________

Elm Ridge Capital Management, LLC …………………………….. 10,126,775 (3) 5.36%

3 West Main Street, 3rd Floor

Irvington, NY 10533

Legg Mason, Inc. …………………………………………………… 16,030,849 (4) 8.48%

100 Light Street

Baltimore, MD 21202-1099

Noonday Asset Management, L.P. …………………………………. 11,058,853 (5) 5.85%

227 West Trade Street, Suite 2140

Charlotte, NC 28202

NWQ Investment Management Company, LLC …….……………… 32,718,524 (6) 17.32%

2049 Century Park East, 4th Floor

Los Angeles, CA 90067

Private Capital Management, Inc …………………………………... 39,949,569 (7) 21.14%

8889 Pelican Bay Blvd., Suite 500

Naples, FL 34108

Richard E. Belluzzo ………………………………………..……… 3,541,787 (8) 1.87%

Michael A. Brown ……………………………………….….……… 94,783 (9) *

Thomas S. Buchsbaum ……………………………………………… 0 (10) *

Anthony E. Carrozza …………………………………….….……… 494,982 (11) *

Alan L. Earhart ……………………………………………...……… 63,997 (12) *

Edward M. Esber, Jr. …………………………………….….……… 224,829 (13) *

Elizabeth A. Fetter ………………………………………………….. 4,372 (14) *

Edward J. Hayes, Jr. ….………………………………………..…… 396,000 (15) *

Howard L. Matthews, III …...……………………………….……… 506,250 (16) *

John M. Partridge ………………………………………...……….… 22,496 (17) *

Steven C. Wheelwright ……………………………………………… 132,947 (18) *

Jim L. Wold …………..……………………………………..……… 215,380 (19) *

All directors and executive officers as a group (16 persons) ..……... 6,903,173 (20) 3.65%

(*) Less than 1%.

(1) Except pursuant to applicable community property laws or as indicated in the footnotes to this table, to the Company’s

knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares

of Common Stock shown as beneficially owned by such stockholder.

(2) Applicable percentage ownership is based on 188,950,866 shares of Common Stock outstanding as of June 1, 2006.

Beneficial ownership is determined in accordance with the rules of the SEC, based on factors including voting and

investment power with respect to shares. Shares of Common Stock subject to options currently exercisable, or exercisable

within 60 days after June 1, 2006, are considered beneficially owned by the holder, but such shares are not deemed

outstanding for computing the percentage ownership of any other person.

(3) Information is based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2006. Elm

Ridge Capital Management LLC is a limited liability company. Ronald Gutfleish is affiliated with Elm Ridge Capital

Management LLC. Each of Mr. Gutfleish and Elm Ridge Capital Management LLC have shared voting and dispositive

power with respect to all such shares. Mr. Gutfleish disclaims beneficial ownership of the shares except to the extent of his

pecuniary interest in such shares.

(4) Information is based on Schedule 13G filed with the Securities and Exchange Commission on February 14, 2006 by CAM

North America, LLC, Salomon Brothers Asset Management Inc. and Smith Barney Fund Management LLC, all affiliated

companies of Legg Mason, Inc, which purchased Citigroup Global Markets Inc.’s Asset Management division effective

December 1, 2005.

(5) Information is based on a Schedule 13G filed with the Securities and Exchange Commission on March 16, 2006 by

Noonday Asset Management, L.P., a Delaware limited partnership and certain of its affiliates.

(6) Information is based on a Schedule 13G/A filed with the Securities and Exchange Commission on May 24, 2006 by

Investment Management Company, LLC, an investment advisor and a Delaware limited liability corporation.

WQ states

in such filing that the securities of the Company reported on such Schedule 13G/A are beneficially owned by clients o

NWQ Investment Management Company, LLC.

(7) Information is based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2006 by

Private Capital Management, L.P., a Delaware limited partnership (“PCM”), Bruce S. Sherman, the Chief Executive

Officer of PCM, and Gregg J. Powers, President of PCM. PCM, Mr. Sherman and Mr. Powers have shared voting power

and shared dispositive power with respect to all 39,949,569 shares. Of these shares, Mr. Sherman and Mr. Powers disclaim

eneficial ownership of those shares held by PCM’s clients and managed by PCM. Mr. Sherman and Mr. Powers disclaim

the existence of a group.

(8) Represents 32,529 shares of Common Stock and 3,509,258 shares subject to Common Stock options that were exercisable

at June 1, 2006 or within sixty (60) days thereafter.

(9) Represents 73,785 shares of Common Stock, of which 2,782 shares are restricted shares, and 20,998 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to fully vest on September 13, 2006, provided that Mr. Brown continues to be a director of the Company at that

time.

(10) None of the granted Common Stock options were exercisable at June 1, 2006, or within sixty (60) days thereafter.

(11) Represents 55,671 shares of Common Stock, of which 28,250 are restricted shares, and 439,311 shares subject to Common

Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are scheduled

to vest as follows: 8,813 shares on each of July 1, 2006 and July 1, 2007 and 5,312 shares on each of July 1, 2008 and July

1, 2009, provided that Mr. Carrozza continues to be employed by Quantum on such dates.

(12) Represents 9,622 shares of Common Stock, of which 3,279 shares are restricted shares, and 54,375 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to fully vest on September 13, 2006, provided that Mr. Earhart continues to be a director of the Company at that

time.

(13) Represents 52,073 shares of Common Stock, of which 4,273 shares are restricted shares, and 172,756 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to fully vest on September 13, 2006, provided that Mr. Esber continues to be a director of the Company at that

time. The Esber Family Trust holds 40,000 shares.

(14) Represents 4,372 shares of Common Stock, of which 2,186 shares are restricted shares. The restricted shares are

scheduled to fully vest on September 13, 2006, provided that Ms. Fetter continues to be a director of the Company at that

time.

(15) Represents 108,500 shares of Common Stock, of which 33,500 are restricted shares, and 287,500 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to vest as follows: 27,125 shares on July 1, 2006 and 2,125 shares on each of July 1, 2007, July 1, 2008 and July

1, 2009, provided that Mr. Hayes continues to be employed by Quantum on such dates.

(16) Represents 100,000 shares of Common Stock, of which 75,000 are restricted shares, and 406,250 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to vest as follows: 25,000 shares on each of June 1, 2007, June 1, 2008 and June 1, 2009, provided that Mr.

Matthews continues to be employed by Quantum on such dates.

(17) Represents 6,559 shares of Common Stock, of which 3,279 shares are restricted shares and 15,937 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to fully vest on September 13, 2006, provided that Mr. Partridge continues to be a director of the Company at

that time.

(18) Represents 10,616 shares of Common Stock, of which 3,776 shares are restricted shares and 122,331 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are

scheduled to fully vest on September 13, 2006, provided that Mr. Wheelwright continues to be a director of the Company

at that time.

(19) Represents 45,173 shares of Common Stock, of which 28,250 are restricted shares, and 170,207 shares subject to Common

Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter. The restricted shares are scheduled

to vest as follows: 5,313 shares on each of July 1, 2006 and July 1, 2007, 5,312 shares on each of July 1, 2008 and July 1,

2009, and 3,500 shares on each of January 25, 2007 and January 25, 2008, provided that Mr. Wold continues to be

employed by Quantum on such dates.

(20) Represents 695,339 shares of Common Stock, some of which are restricted shares, and 6,207,834 shares subject to

Common Stock options that were exercisable at June 1, 2006 or within sixty (60) days thereafter.

CERTAIN TRANSACTIONS

The Company has entered into indemnification agreements with its executive officers, directors and certain significant

employees containing provisions that are in some respects broader than the specific indemnification provisions contained in the

General Corporation Law of Delaware. These agreements provide, among other things, for indemnification of the executive

officers, directors and certain significant employees in proceedings brought by third parties and in stockholder derivative suits.

Each agreement also provides for advancement of expenses to the indemnified party.

The Company has entered into agreements with its Non-Management Directors whereby in the event that there is a

“change of control” of the Company (which is defined in the agreements to include, among other things, a merger or sale of all

or substantially all of the assets of the Company or a reconstitution of the Company’s Board) and, within 18 months of the

change of control, the Director’s performance of services as a Board member terminates other than as a result of death or

Disability (as defined in the Agreement), then, to the extent that any portion of any equity-based compensation awards held by

such Director is not vested at the time of termination, all such unvested awards will automatically vest.

Please also see the disclosure under the Section “Employment Terms, Termination of Employment and Change-In-Control

Arrangements” of this Proxy Statement.

COMMUNICATING WITH THE COMPANY

We have from time-to-time received calls from stockholders inquiring about the available means of communication with the

Company. If you would like to receive information about the Company, without charge, you may use one of these convenient

methods:

(1)

To view the Company’s website on the Internet, use the Company’s Internet address located at www.quantum.com.

The Company’s website includes product, corporate and financial data, job listings, recent earnings releases, a delayed

stock price quote, and electronic files of this Proxy Statement and the Company’s Form 10Ks, Form 10Qs, and Annual

Reports to Stockholders. Internet access has the advantage of providing you with recent information about the

Company throughout the year. The Company’s Code of Business Conduct and Ethics and the Company’s Corporate

Governance Principles can also be found on the Company’s website at http://www.quantum.com, by clicking

“Investors” from the home page and selecting “Corporate Governance.” Requests to receive by mail a free copy o

printed financials and of the Company’s Code of Business Conduct and Ethics and its Corporate Governance Principles

can also be submitted by contacting the Company’s Investor Relation Department at the address stated below or on-

line by visiting the Company’s website at http://www.quantum.com, where the request form may be found by clicking

“Investors” from the home page and selecting “Contact Investor Relations.”

(2)

To reach our Investor Relations Department, please call or send correspondence to:

Quantum Corporation

Attention: Investor Relations Department

1650 Technology Drive

Suite 700

San Jose, CA 95110

Tel (local): 408-944-4450

Fax: 408-944-6544

Email: IR@quantum.com

OTHER MATTERS

The Company knows of no other matters to be submitted at the Annual Meeting. Any proposal that a stockholder intends

to submit for consideration at the Annual Meeting must be received by the Secretary of the Company not later than the close of

business on the tenth day following the mailing date of this Notice. Any such submission must include the information

specified in the Company’s Bylaws. If any other matters properly come before the Meeting, it is the intention of the persons

named in the enclosed form of proxy to vote the shares they represent as the Board of Directors may recommend.

BY THE ORDER OF THE BOARD OF DIRECTORS

Dated: July 11, 2006 Shawn D. Hall

Vice President, General Counsel and Secretary

VOTE BY INTERNET—www.proxyvote.com

QUANTUM CORPORATION

C/O ADP

51 MERCEDES WAY,

EDGEWOOD, NY 11717

Use the Internet to transmit your voting instructions and for electronic delivery o

information up until 11:59 P.M. Eastern Time the day before the cut-off date or

meeting date. Have your proxy card in hand when you access the web site and

follow the instructions to obtain your records and to create an electronic voting

instruction form.

ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER

COMMUNICATIONS

If you would like to reduce the costs incurred by Quantum Corporation in mailing

proxy materials, you can consent to receiving all future proxy statements, proxy

cards and annual reports electronically via e-mail or the Internet. To sign up for

electronic delivery, please follow the instructions above to vote using the Internet

and, when prompted, indicate that you agree to receive or access shareholder

communications electronically in future years.

VOTE BY PHONE—1-800-690-6903

Use any touch-tone telephone to transmit your voting instructions up until 11:59

P.M. Eastern Time the day before the cut-off date or meeting date. Have you

proxy card in hand when you call and then follow the instructions.

VOTE BY MAIL

Mark, sign, and date your proxy card and return it in the postage-paid envelope we

have provided or return it to Quantum Corporation, c/o ADP, 51 Mercedes Way,

Edgewood, NY 11717.

TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS

FOLLOWS: QUCORP KEEP THIS PORTION FOR YOUR RECORDS

THIS PROXY VOTING CARD IS VALID ONLY WHEN SIGNED AND DATED. ETACH AND RETURN THIS PORTION ONLY

QUANTUM CORPORATION

THE DIRECTORS RECOMMEND A VOTE “FOR” ITEMS 1 AND 2

Vote On Directors

For All Withhold All For All Except

1. Proposal to elect 01) Richard E. Belluzzo, 02) Michael A. Brown,

03) Thomas S. Buchsbaum, 04) Alan L. Earhart, 05) Edward M. Esber, Jr.,

06) Elizabeth A. Fetter, 07) John M. Partridge and 08) Steven C.

Wheelwright to the Board of Directors.

  

To withhold authority to vote, mark “For All Except”

and write the nominee’s number on the line below.

Vote On Proposal

For Against Abstain

2. Proposal to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of

the Company for the fiscal year ending March 31, 2007.   

3. In their discretion, upon such other matters that may properly come before the meeting or any adjournments or

postponements thereof.

The shares represented by this proxy, when properly executed, will be voted in the manner directed herein by the

undersigned Stockholder(s). If no direction is made, this proxy will be voted FOR items 1 and 2. If any other matters

properly come before the meeting, the persons named in this proxy will vote in their discretion.

To cumulate votes as to a particular nominee as explained in the Proxy Statement, check the box to the right and indicate

the name(s) and the number of votes to be given to such nominee(s) on the reverse side of this card. Please do not check

the box unless you want to exercise cumulative voting.



Include your title if you are signing as an attorney, executor, administrator, trustee or guardian, or on behalf of a

c rporation or partnership. All joint owners must sign. o

______________________________________

Signature [PLEASE SIGN WITHIN BOX] Date

________________________________

Signature (Joint Owners) Date

QUANTUM CORPORATION

Annual Meeting of Stockholders — August 28, 2006

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned stockholder(s) of Quantum Corporation, a Delaware Corporation, hereby

acknowledge(s) receipt of the Proxy Statement dated July 11, 2006, and hereby appoint(s) Richard E.

Belluzzo and Shawn D. Hall, and each of them, proxies and attorneys-in-fact, with full power to each of

substitution, on behalf and in the name of the undersigned, to represent the undersigned at the Annual

Meeting of Stockholders of Quantum Corporation, to be held August 28, 2006 at 9:00 a.m., Pacific

Daylight Time, at Quantum’s corporate headquarters at 1650 Technology Drive, San Jose, CA 95110, and

at any adjournments or postponements thereof, and to vote (including cumulatively, if required) all shares

of Common Stock which the undersigned would be entitled to vote if then and there personally present, on

all matters set forth on the reverse side.

IF YOU VOTE BY TELEPHONE OR BY INTERNET, DO NOT MAIL THE PROXY CARD. YOUR

TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE IN THE SAME

MANNER AS IF YOU VOTED YOUR PROXY CARD EXCEPT FOR THE CUMULATIVE VOTING

FEATURE APPLICABLE TO THE ELECTION OF DIRECTORS, WHICH IS ONLY AVAILABLE BY

VOTING THE PROXY CARD.

CUMULATE__________________________________________________________________________

______________________________________________________________________________________

(If you noted cumulative voting instructions above, please check the corresponding box on the reverse side.)

PLEASE MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE

ENCLOSED ENVELOPE.

(Continued, and to be signed and dated, on the reverse side.)

As filed with the Securities and Exchange Commission on June 12, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended March 31, 2006

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

For the transition period from ____________ to ____________

Commission file number 1-13449

QUANTUM CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware 94-2665054

(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

1650 Technology Drive Suite 700, San Jose, California 95110

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 944-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

QUANTUM CORPORATION-DLT & STORAGE SYSTEMS GROUP COMMON STOCK NEW YORK STOCK EXCHANGE

RIGHTS TO PURCHASE SERIES B JUNIOR PARTICIPATING PREFERRED STOCK NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:

4.375% CONVERTIBLE SUBORDINATED NOTES DUE 2010

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES [ ] NO [X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES [ ] NO [X]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) 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]

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition

of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large accelerated filer Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]

The aggregate market value of Quantum Corporation’s common stock, $0.01 par value per share, held by nonaffiliates of the

Registrant was approximately $247.0 million on September 26, 2005, the last day of the Registrant’s most recently completed second

fiscal quarter, based on the closing sales price of the Registrant’s common stock on that date on the New York Stock Exchange. For

purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common

stock and shares held by officers and directors of the Registrant have been excluded in that such persons may be deemed to be

affiliates. This determination of affiliate status is not necessarily conclusive.

As of the close of business on June 1, 2006, there were approximately 189.0 million shares of Quantum Corporation’s common stock

issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on August 28, 2006, which the

Registrant will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this

report, is incorporated by reference in Part III of this Form 10-K to the extent stated herein.

INDEX

Page

Number

PART I

Item 1 Business. 3

Item 1A Risk Factors. 14

Item 1B Unresolved Staff Comments. 26

Item 2 Properties. 26

Item 3 Legal Proceedings. 26

Item 4 Submission of Matters to a Vote of Security Holders. 26

PART II

Item 5

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities.

Item 6 Selected Financial Data. 27

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. 29

Item 7A Quantitative and Qualitative Disclosures About Market Risk. 48

Item 8 Financial Statements and Supplementary Data. 49

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 84

Item 9A Controls and Procedures. 84

Item 9B Other information. 85

PART III

Item 10 Directors and Executive Officers of the Registrant. 85

Item 11 Executive Compensation. 89

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters. 94

Item 13 Certain Relationships and Related Transactions. 97

Item 14 Principal Accountant Fees and Services. 97

PART IV

Item 15 Exhibits and Financial Statement Schedules. 98

SIGNATURE 103

POWER OF ATTORNEY 104

PART I

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,

and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this report usually contain

the words “will,” “estimate,” “anticipate,” “expect”, “believe” or similar expressions and variations or negatives of these words.

All forward-looking statements including, but not limited to, (1) our expectations regarding continued demand for our tape

media cartridges, (2) our expectation that media royalties will continue to be a significant source of our DLT revenues, gross

margins, operating income and cash flow, (3) our expectation that we will continue to derive a substantial majority of our

revenue from products based on our tape technology, (4) our expectation that we will incur additional future charges for

anticipated restructurings, including the amounts of future payments and annualized cost savings, (5) our intention to pursue

product initiatives in order to further improve gross margins, increase operating efficiencies and effectiveness, and reduce

operating costs, (6) our belief that strong competition in the tape drive, tape media and tape automation systems markets will

result in further price erosion, (7) our belief regarding our ability to cover the remaining tax liability under the Tax Sharing and

Indemnity Agreement with Maxtor, (8) our belief that our existing cash and capital resources will be sufficient to meet all

currently planned expenditures and sustain our operations for the next 12 months, (9) our expectation that we will return to

profitability, (10) our belief that our ultimate liability in any infringement claims made by any third parties against us will not

be material to us, (11) our expectation that we will make additional acquisitions in the future, (12) our expectations about the

timing and maximum amounts of our future contractual payment obligations, (13) our belief that our total foreign exchange rate

exposure is not significant, are inherently uncertain as they are based on management’s expectations and assumptions

concerning future events, and they are subject to numerous known and unknown risks and uncertainties, and (14) our

expectation regarding the timing of our new product introductions. Readers are cautioned not to place undue reliance on these

forward-looking statements, which speak only as of the date hereof. As a result, our actual results may differ materially from

the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those

described herein include, but are not limited to, (1) the amount of orders received in future periods; (2) our ability to timely ship

our products; (3) uncertainty regarding IT spending and the corresponding uncertainty in the demand for tape drives and tape

automation products; (4) our continued receipt of media royalties from media manufacturers at or above historical levels; (5) a

continued trend toward centralization of storage; (6) our ability to achieve anticipated pricing, cost and gross margin levels,

particularly on tape drives, given lower volumes and continuing price and cost pressures; (7) the successful execution of our

strategy to expand our businesses into new directions; (8) our ability to successfully introduce new products; (9) our ability to

achieve and capitalize on changes in market demand; (10) acceptance of, and demand for, our products; (11) our ability to

maintain supplier relationships; and (12) those factors discussed under “Trends and Uncertainties” elsewhere in this Annual

Report on Form 10-K. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to

update information in any forward-looking statement.

ITEM I. Business

Business Description

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”) (NYSE:DSS), founded in 1980, a global leader in storage,

delivers highly reliable backup, recovery and archive solutions that meet demanding requirements for data integrity and

availability with superior price/performance and comprehensive service and support. We offer customers of all sizes an

unparalleled range of solutions, from leading tape drive and media technologies, autoloaders, and libraries to disk-based backup

systems. We are the world's largest volume supplier of both tape drives and tape automation and have pioneered the

development of disk-based systems optimized for backup and recovery.

Business Summary

We have two data storage business segments: the Tape Drive business and the Storage Systems business. Our Tape Drive

business consists of tape drive and tape media cartridge products and service. Our Storage Systems business consists of tape

automation, disk-based backup systems, and service.

While continuing to develop and introduce new products in the storage market, we have also continued to take steps to reduce

costs in order to return to profitability and rationalize our operations following past acquisitions. Since 2001, our business has

experienced declining total revenues, lower gross margins, and operating losses. Major factors contributing to these trends were

increased competition from other computer equipment manufacturers and a continuously challenging operating environment.

Both of these factors resulted in generally lower unit prices and unit sales. In the recent years, we have taken numerous cost

reduction actions and have acquired companies with complementary technologies to offset the impact of the long-term financial

trends. These steps are aimed at eventually returning us to profitability on a consistent basis.

Tape Drive business

In our Tape Drive business, we design, develop, license, service, and market tape drives, which include both value and

performance drives, as well as tape media cartridges. Our value drives, the DLT-V drives, are targeted at the “value” or “price

sensitive” segment of the tape drive market. Our performance tape drives, DLT-S drives, are targeted at the “performance

sensitive” segment of the tape drive market. Most of our media revenue comes from royalties paid to us by manufacturers who

license our tape media cartridge technology. Both DLT and Super DLTTM products are used to back up large amounts of data

stored on network servers. DLT and Super DLTTM are based on our half-inch Digital Linear Tape (“DLT”) technology that is

used in mid-range UNIX and NT system backup and archive applications.

DLT and Super DLTTM drives store data on DLTtape and Super DLTtapeTM media cartridges, respectively. Historical use

of tape drives has shown that drives use many tape media cartridges per year in archival and backup processes. This historical

use suggests that the installed base of tape drives will result in continued demand for tape media cartridges. Our tape media

cartridges are manufactured and sold by licensed third party manufacturers and, to a lesser extent, directly by us. As a result of

the Certance Holdings and its subsidiaries (“Certance”) acquisition in January 2005, we acquired tape drive and media products

based on the following technologies: Linear Tape Open (“LTO”) Ultrium, Digital Audio Tape (“DAT”)/Digital Data Storage

(“DDS”), and Travan. In addition, we acquired Certance’s design and manufacturing capabilities related to recording heads

used in tape drives. LTO Ultrium technology solutions provide data protection for midrange through enterprise networks.

DAT/DDS products offer data protection for small to midsize business networks. Travan products are designed to reliably and

economically protect the data of mobile and home office users. Tape drives accounted for 40%, 37%, and 41% of total revenue

in fiscal years 2006, 2005 and 2004, respectively. Tape media accounted for 12%, 9%, and 9% of total revenue in fiscal years

2006, 2005 and 2004, respectively.

We receive a royalty on tape media cartridges sold by our licensees. We prefer that a substantial portion of our tape media

cartridge sales occur through this license model because this minimizes our operational risks, asset investments and expenses

and provides an efficient distribution channel. We believe that the large installed base of tape drives and our licensing of tape

media cartridges are of strategic importance to us because they contribute to both our direct sales of tape media cartridges and

also provide us with royalty income from our licensing partners. Media royalties have been a significant source of our gross

margins, operating results and cash flow, and this trend is expected to continue. Tape media royalties accounted for 16% of

total revenue in each of fiscal years 2006, 2005 and 2004.

In fiscal years 2004 and 2005 substantially all of our tape drive product manufacturing was outsourced to Jabil Circuit Inc.

("Jabil") in Penang, Malaysia and Mitsumi Electric Co. Ltd. (“Mitsumi”) in the Philippines. However, since our acquisition of

Certance on January 5, 2005, some of our tape drives and head assemblies are manufactured for Certance products in our

facility in Penang, Malaysia and by Panasonic Shikoku Electronics Co., Ltd (“PSEC”) in Japan. We are in the process of

moving manufacturing away from several of our contract manufacturers to our in-house facility in Penang, Malaysia.

Storage Systems business

In our Storage Systems business, we design, develop, manufacture, market and sell the broadest portfolio of tape autoloaders

and libraries and are one of the pioneers in the disk-based backup market, providing systems that emulate a tape library but are

optimized for backup and recovery. Excellent service and support capabilities are key elements of our offerings. Our products

serve the entire midrange data storage market from desktop to enterprise-class customers and are used to backup, recover and

archive data in networked computing environments. With the Certance acquisition, we expanded our tape automation business

by adding Certance’s complementary DDS-4, DAT-72 and LTO-3 autoloader products to our product portfolio. Some of our

tape automations systems are manufactured in our facilities in Penang, Malaysia, Costa Mesa, California and Colorado Springs,

Colorado. All of our disk-based backup systems are built in Costa Mesa, California. Jabil together with Flextronics

International, Ltd. (“Flextronics”), Mitsumi, PSEC and Buero- und Datentechnik GmbH & Co. KG (“BDT”) manufacture our

remaining tape automation systems. The Storage Systems business accounted for 32%, 38%, and 34% of total revenue in fiscal

years 2006, 2005 and 2004, respectively.

Strategy Update

Fiscal year 2006 was a pivotal year for Quantum as we continued to improve our competitiveness across a broad range of areas

including our cost structure, manufacturing processes, and product positioning with the launch of an unprecedented set of new

products. We also strengthened our ability to service and market to our customers, built upon our branded strategy and

extended our growth platform with the introduction of new disk-based backup appliances and a value added security suite that

addresses today’s data protection concerns.

Operational Platform

Quantum remained aggressive in controlling costs in fiscal year 2006 as we continued to streamline our operations. For the

fiscal year 2006, operating expenses as a percentage of revenue continued to decline from previous years. In fact, total

operating expenses only increased 3% from fiscal year 2005 even though fiscal year 2006 reflected additional expenses

associated with Certance for the entire year whereas fiscal year 2005 reflected Certance related expenses for only one quarter.

As new products were completed and launched throughout the year, we made corresponding increases in research and

development investments. Also, during the year, we fully integrated Certance into our operations.

New Products

In fiscal year 2006, Quantum launched a record number of new products across almost every major product category. We

expanded our automation systems offerings with the introduction of a new autoloader and tape libraries: Superloader 3 and the

PX500 series. We introduced four new storage devices: DLT-S4, DLT-V4, LTO-2 half-height (“HH”) and GoVaultTM. The

DLT-S4 is Quantum’s new enterprise-class tape drive that delivers the industry’s highest capacity at 1.6 terabytes (“TB”) per

cartridge and twice the capacity of LTO-3. The GoVaultTM is a rugged, removable hard drive that is designed for small and

medium sized businesses and remote offices. We also continued to extend our leadership in virtual tape technology based on

our Echelon Disk Platform with three new disk-based backup appliances (DX3000, DX5000 and DPM5500).

In addition, we announced a comprehensive, multilayered security framework that addresses the growing concern about

information security. As such, we introduced DLTSage™ Tape Security to our newer tape drives, including the DLT-V4 and

DLT-S4. In its simplest form, DLTSage™ Tape Security uses an electronic key to prevent or allow reading and writing of data

on a tape cartridge.

Looking Forward

Our priorities will be focused on a few key strategies. First, we will remain vigilant in identifying opportunities that will

provide for gross margin and overall cost structure improvements. To help attain this priority, manufacturing will be moved

from several of our contract manufacturers to our in-house facility in Penang, Malaysia. Additionally, over the last few

quarters of fiscal year 2006, we have integrated our marketing and sales functions and made significant changes to our product

lines to achieve enhanced product positioning and lower cost platforms between the Tape Drive business and the Storage

Systems business. Beginning in fiscal year 2007, research and development functions will also be integrated. To reflect these

changes and the way management is running the business, we will be moving toward a single reporting unit by the first quarter

of fiscal year 2007. Second, we want to build on our leading independent tape business by capitalizing on our unique position

as the independent developer of tape drives, tape media and automation systems. Last, we want to create a growth platform

beyond tape with solutions that include disk, software and services that are optimized for tiered storage environments. On May

2, 2006, we entered into an agreement to acquire Advanced Digital Information Corporation (“ADIC”), which, if

consummated, we believe will contribute to fulfilling these priorities by helping to create a profitable storage business, attaining

greater revenue diversity and opportunity by gaining market access and creating a stronger growth platform for back-up,

recovery and archive solutions.

Products

Our products include:

Tape Drive business

Quantum’s Tape Drive business offers a broad set of backup products representing all major tape technology segments –

DLT®

LTO

DAT/DDS and Travan

–

for entr

to enter

rise work environments. These technolo

ies are offered b

Quantum and through Original Equipment Manufacturers (“OEMs”) system and automation brands such as Dell, Hewlett-

Packard, International Business Machines Corporation (“IBM”), Overland Storage Inc., ADIC, and Sun Microsystems, Inc.

(“Sun”) (through its recent acquisition of Storage Technology Corporation). Quantum also sells a full range of storage media

offerings to complement each tape drive technology.

• DLT® Technology

Quantum’s line of DLT tape® technology drives and media has delivered competitive capacity and proven reliability for

more than ten product generations. The DLT Technology roadmap is designed to provide an ideal foundation for the future

by delivering the combination of ultra-high capacity, network-optimized performance, and reliability that dynamic backup

and archival environments will require.

DLT-S Series

The performance line of DLT products includes the DLT-S4, SDLT 600 and the SDLT 320 drives. These drives deliver a

full range of capacities from 320 gigabytes (“GB”) up to an industry-leading 1.6 TB compressed and transfer rates up to 432

GB/hour compressed. Quantum also offers a full line of Super DLTtape media cartridges and cleaning cartridges.

DLT-V Series

The value line of DLT products includes the DLT-V4, DLT VS160 and DLT VS80 drives and associated tape media

cartridges. With compressed capacities from 80 GB to 320 GB and compressed transfer rates from 22 GB/hour to 72

GB/hour, these drives are universally available for cost-effective backup.

• LTO Technology

Designed with a six-generation roadmap that is targeted to deliver up to 6.4 TB of compressed capacity and compressed

transfer rates up to 1.9 TB/hour in generation 6, LTO Technology is an industry-leading tape solution for enterprise-class

performance backup in workgroup, departmental and enterprise servers.

The latest generation LTO-3 drive offers 800 GB of compressed capacity and a compressed transfer rate of 490 GB/hour.

The LTO-2 drive offers 400 GB of compressed capacity and compressed transfer rates of 187 GB/hour. Quantum’s first-to-

market, value-optimized LTO-2 HH internal drive features reliable and affordable tape data protection targeted to medium

and large businesses. The LTO-2 HH drive attempts to balance price with increased capacity and performance, providing the

most affordable entry into the LTO family. Quantum also offers a full range of LTO tape media and cleaning cartridges.

• DAT/DDS Technology

DAT/DDS Technology targets data protection for small businesses. Quantum’s DAT 72 tape drive solutions deliver

compressed capacities of up to 72 GB, compressed transfer rates of up to 25.2 GB/hour and are backward compatible to

DDS-4 and DDS-3 products. Quantum also offers a full range of DAT 72 and DDS tape media and cleaning cartridges.

• Travan Technology

Travan Technology offers more affordable data protection drives for workstations and entry-level servers and offers

compressed capacities of up to 40 GB and compressed transfer rates of up to 14.4 GB/hour. With easy-to-use interfaces

such as Advanced Technology Attachment Packet Interface(“ATAPI”)/Integrated Drive Electronics (“IDE”), Small

Computer System Interface (“SCSI”) and Universal Serial Bus (“USB”) 2.0, these backup solutions offer affordable

simplicity and are backward compatible to multiple generations of Travan products.

Storage Systems business

Quantum’s tape libraries, autoloaders and disk-based backup systems automatically manage and protect business-critical data

in network environments. Our modular solutions include simple-to-manage systems for workgroup, departmental, mid-range,

and enterprise-class applications. Our automated systems are fully compatible with major hardware platforms and are

supported by nearly 30 popular data management applications including popular packages such as VERITAS NetBackup,

VERITAS Backup Exec, Legato NetWorker, Microsoft Data Protection Manager, Computer Associates BrightStor,

CommVault Galaxy, HP OmniBack and IBM Tivoli.

Quantum’s Storage Systems products are divided into the following two categories to reflect different go-to-market business

models.

• High-Volume Products

High-volume products are sold mainly through third-party distributors, value-added resellers (“VARs”) and OEMs and include

the new GoVault™ removable drive, Autoloader DDS-4, Autoloader DAT 72, ValueLoader™, SuperLoader™, and the M-

Series family of tape libraries featuring the M1500, M1800 and M2500. The ValueLoader line will be replaced by the

SuperLoader 3 autoloader, while the M-Series libraries will eventually be replaced by the new PX500-Series libraries, which

offer more capacity at lower price points.

GoVault Removable Drive

Quantum’s newly-introduced GoVault drive is an easy-to-use, removable and ruggedized backup, archive and disaster

recovery solution which combines the best attributes of disk and tape. GoVault utilizes a server-embedded dock with

removable disk cartridges in 40, 80 or 120 GB capacities. GoVault is designed to offer small businesses an alternative to

existing data protection technologies.

Autoloader DDS-4

The Autoloader DDS-4 is an entry-level backup automation product for PC or small workgroup data protection. Featuring a

single DDS-4 tape drive and a single six-cartridge removable magazine, it offers up to 240GB of compressed capacity with

performance up to 20 GB/hour compressed.

Autoloader DAT 72

The Autoloader DAT 72 is the next step up for small workgroup data protection with a single DAT 72 tape drive and a six-

cartridge removable magazine. It accommodates up to 432 GB of compressed capacity with performance up to 26 GB/hour

compressed.

ValueLoader

The ValueLoader is designed for the desktop or standard 19-inch rack and uses a single DLT VS80, DLT VS160, SDLT 320,

LTO-2 or LTO-3 tape drive with an eight-cartridge capacity and provides up to 6.4 TB of compressed data storage and 576

GB/hour throughput compressed.

SuperLoader

The SuperLoader tape library is a scalable tape autoloader that has been joined by a new, more cost-effective SuperLoader 3

model. This family of products provides up to 12.8 TB of compressed capacity and 490 GB/hour throughput in a 2U (U is a

standard of measure equaling 1.75” high) rack-mount form factor and is a modular, high-density tape automation solution

designed for the workgroup environment. Both products include one or two 8-cartridge removable active magazines and are

available with a barcode reader for high performance inventory management. Depending on model, the SuperLoader family

supports a single DLT1, DLT-V4, SDLT 320, SDLT 600, LTO-2 or LTO-3 tape drive and includes on-board, Web-based

remote management.

M-Series Libraries

The M-Series family of tape libraries is comprised of the M1500, M1800 and M2500, which are modular automation systems

that customers can link together as their storage needs grow. The M1500 is a modular library that is rack mountable and

available with one or two tape drives and 21 (SDLT) or 25 (LTO) cartridges. The M1800 has double the performance and

capacity of the M1500 and can accommodate up to four drives and 50 cartridges. The M2500 supports up to six drives and

100 cartridges and can be combined with the M1500 and/or M1800 to provide customers with scalability and investment

protection. The M-Series supports SDLT 320, SDLT 600, LTO-2 or LTO-3 tape drives. Interchangeable removable

magazines make it easy to bulk load and storage cartridges. Capacity ranges from 3.4TB in a single M1500 to 40TB in a

sin

le M2500. Performance ran

es from 58GB/hour in a sin

le M1500 to over 1.7TB/hour in a sin

le M2500. The M-Series

libraries scale up to 20 drives and 300 cartridges providing top-end capacity of 120TB and performance over 5.7TB/hour.

Redundant power supplies can be ordered for high availability applications. The M-Series libraries also support the Fibre

Channel interface for connection to Storage Area Networks (“SANs”).

PX500-Series Libraries

The newest Quantum automated tape libraries are the cost-efficient PX500-Series. Like the M-Series, the PX500 libraries

feature a modular, rackmountable design that allows customers to stack and interlink multiple units as their storage

requirements change over time. The linked units function as a single larger library thus simplifying operation. The PX502

library supports up to two tape drives and 38 LTO or 32 SDLT cartridges. The PX506 library can be expanded to six tape

drives and 100 LTO or 88 SDLT cartridges. The PX510 can accommodate up to 10 tape drives and 201 LTO or 171 SDLT

cartridge slots. All PX500 models supports LTO-2, LTO-3 and SDLT 600 tape drives that can be combined to handle mixed

media requirements. Interchangeable removable magazines make it easy to bulk load and store cartridges. Web-based library

management simplifies remote monitoring and operation, while a redundant power option provides high availability. Capacity

ranges from 15.2 TB compressed in a single PX502 to 80.4 TB compressed in a single PX510. Performance ranges from 576

GB/hour compressed in a single PX502 to over 2.9 TB/hour in a single PX510. The PX500 Series libraries easily scale up to

22 drives and 438 cartridges providing maximum capacity of 175 TB and performance over 6.3 TB/hour. Fibre Channel is

available for SAN connectivity.

• Enterprise Products

Enterprise products are sold through third-party distributors, VARs, OEMs, and directly to key account end customers. These

products require a higher level of customer engagement to complete a more complex storage systems sale and include the PX-

Series libraries and our Echelon Platform of disk-based backup systems, including the DX-Series of virtual tape systems and

appliances and the new DPM5500 disk-based backup appliance.

PX720 Library

Quantum’s flagship enterprise tape library is the PX720, the fifth-generation enterprise tape automation platform developed by

Quantum. Accommodating up to 20 tape drives and up to 726 LTO/642 SDLT cartridges in a single chassis, the PX720

provides more than 8.6 TB/hour of compressed throughput performance and over 1 petabyte (PB) compressed capacity with

DLT-S4 tape drives. It supports SDLT 320, SDLT 600, DLT-S4, LTO-2 and LTO-3 tape drives and a mixed-media option

allows customers to combine different media and tape technologies in a single unit. The PX720 is designed for high

availability and includes fully redundant power and cooling, proactive component-level monitoring, and remote library

management. Further flexibility is provided by the ability to mix SCSI, Gigabit Ethernet (“GbE”)/Network Data Management

Protocol (“NDMP”), routed and native Fibre Channel interfaces, programmable load ports and removable magazines. Multiple

PX720 libraries can be linked together to provide up to 100 drives for up to 43TB/hour performance and up to 3,336

LTO/2,968 SDLT cartridges, for a total capacity of over 5 PB compressed using DLT-S4 tape drives.

Echelon Platform of Disk-Based Backup Systems

Quantum’s Echelon Platform of Disk-Based Backup Systems include the DX-Series of virtual tape systems and appliances

which emulate a tape library and are designed to seamlessly integrate into existing backup environments without changes to

policies or procedures. Supported by every major backup software vendor, the DX-Series provides user definable virtual tape

drives and cartridges to meet data center requirements. Designed specifically for extremely fast and reliable backup and

restore operations, the DX-Series architecture includes redundant and hot-swappable components that deliver up to 166 TB

compressed usable capacity and up to 3 TB/hr performance. The Redundant Array of Independent Disks (“RAID”)

architecture allows continuous backup and restore operations even if there is a disk drive failure. The failed drive can be hot

swapped for a new one while the system continues operation. The new Optyon™ hardware-

ased data compression option can

double capacity without buying double the hardware. A Web-based Graphical User Interface (“GUI”) provides system

management along with event monitoring and notification. The DX-Series complements tape libraries by allowing them to be

dedicated to archive operations and to meet the need to create copies of data on removable media for disaster recovery and

regulatory compliance. The DX30 and DX100 high-capacity systems targeted at large enterprises have been complemented

with the release of the new DX3000 and DX5000 systems that bring the advantages of disk-based backup to smaller

enterprises with lower capacity requirements.

DPM5500 Disk-Based Backup Appliances

The new DPM5500 leverages the strength of Microsoft's Data Protection Manager software to provide a turnkey appliance that

provides a quick plug-and-play solution to protect data on Windows servers. Data changes are tracked and backed up quickly

with multiple recovery points to meet aggressive recovery time requirements. Data is protected with a RAID architecture that

allows the system to continue full operation without data loss even if there is a failure of any disk drive in the system.

Redundant power supplies and fans provide additional uptime benefits. The systems provide usable capacity between 3.6TB

and 7.2TB. A Web-based GUI provides system management along with event monitoring and notification.

• StorageCare Services

StorageCare™ services are a group of services that support Quantum products from purchase through product life.

StorageCare services include product installation and integration, warranty support, spare part sales, and on-site service

agreements. The new StorageCare Guardian service provides proactive real-time monitoring of customer’s Quantum libraries

and disk-based backup systems. Even before a customer becomes aware that a problem has occurred, error condition and

hardware failure information can be securely transmitted over the Internet to Quantum Customer Service where remote

diagnostics can be run and a service call initiated. Faster response by technicians armed with the right parts means improved

system availability for Quantum customers.

NOTE: Capacity and performance listed above are native (non-compressed) specifications. Capacity and performance can be

doubled using 2:1 data compression.

For more information about our products, please visit our website at www.quantum.com. The contents of our website are not

incorporated by reference into this Form 10-K.

Customers

Our tape drives have achieved broad market acceptance in the mid-range network server market with leading computer

equipment manufacturers such as Hewlett-Packard, Dell, Sun, (through its recent acquisition of StorageTek), Overland Storage

Inc. and ADIC. Customers for our Storage Systems products, including tape automation systems, include Hewlett-Packard,

Dell, EMC Corporation (“EMC”), IBM and Bell Microproducts Inc.

Because the leading computer equipment manufacturers have a dominant market share of the computer systems into which our

products are incorporated, our sales are concentrated with several key customers. Sales to the top five customers in fiscal year

2006 represented 49% of revenue, compared to 52% of revenue in fiscal year 2005 and 51% of revenue in fiscal year 2004.

Sales to Hewlett-Packard were 18% of revenue in fiscal year 2006, compared to 22% of revenue in fiscal year 2005, and 26%

of revenue in fiscal year 2004. Sales to Dell increased to 18% of revenue in fiscal year 2006, compared to 17% of revenue in

fiscal year 2005 and 14% of revenue in fiscal year 2004. Refer to Note 16 “Business Segment Information and Geographic

Information” to the Consolidated Financial Statements for revenues from external customers, operating income (loss) and total

assets by operating segments.

These sales concentrations do not include revenues from sales of our media that were sold directly to our top five customers by

our licensees, for which we earn royalty revenue, or revenues from sales of tape libraries sold to our top five customers by our

other OEM tape drive customers.

Sales and Marketing

We market our products directly to third-party distributors, VARs, OEMs, and end customers, through our worldwide sales

force.

We support international sales and operations by maintaining sales offices throughout the world. Our international revenue,

including sales to foreign subsidiaries of U.S. companies, was 33% of our total revenue in fiscal year 2006 compared to 43% of

our total revenue in fiscal year 2005 and 40% of our total revenue in fiscal year 2004. Refer to Note 16 “Business Segment

Information and Geographic Information” to the Consolidated Financial Statements for revenues and indentifiable long-lived

assets by region.

Strategic Licensing Partners

Fuji Photo Film Co., Ltd. (“Fuji”), Hitachi Maxell, Ltd. (“Maxell”), and Sony Corporation (“Sony”) are qualified

manufacturers of DLTtape media cartridges for Quantum. Maxell and Fuji are also licensed to manufacture Super DLTtape

media cartridges. Our license agreements with Fuji, Maxell, and Sony allow those companies to independently sell tape media

cartridges for which we receive royalties. These strategic license agreements expand the market for DLTtape and Super

DLTtape products and provide customers with multiple channels for obtaining tape media cartridges.

Fuji, Maxell, Sony, TDK Corporation (“TDK”) and Imation Corporation (“Imation”) are also qualified manufacturers of LTO

Ultrium media for the LTO program, of which Quantum is a member. LTO's license agreements with each of the Ultrium

media manufacturers allows those companies to independently sell Ultrium tape media cartridges, and Quantum obtains a share

of the royalties paid to LTO resulting from such independent sales.

Manufacturing

Since our acquisition of Certance on January 5, 2005, we manufacture some of our tape drives and head assemblies for those

drives in our facility in Penang, Malaysia and some of our tape automations systems in our facilities in Penang, Malaysia, Costa

Mesa, California and Colorado Springs, Colorado. All of our disk-based backup systems are built in Costa Mesa, California.

We outsource the manufacturing of all of our remaining tape drives, head assemblies and tape automation systems. Jabil,

Mitsumi and PSEC manufacture our remaining tape drives. Lafe (China) Corporation Limited (“Lafe”)is building our

remaining head assemblies and Jabil together with Flextronics International, Ltd. (“Flextronics”), Mitsumi, PSEC and BDT

manufacture our remaining tape automation systems. Third parties also manufacture all of our tape media cartridges. Some of

our products go through final configuration in our facilities in Costa Mesa, California; Colorado Springs, Colorado; and Irvine,

United Kingdom. In fiscal year 2006 and beyond, we will focus on moving products from several of our contract

manufacturers to our in-house facility in Penang, Malaysia. Although we have a small number of contract manufacturers, each

manufacturer produces different products. As a result, we have a single source of supply for each product (except for some of

our tape media cartridges). In addition, certain components and sub-assemblies included in our products are obtained from

single source suppliers or a limited group of suppliers. Most of these suppliers and our contract manufacturers are located

outside of the United States. For a discussion of risks associated with these suppliers and our outsourcing strategy, see the

following in Risk Factors:

• “A portion of our manufacturing, including service repair, is outsourced to Jabil and other third party

contract manufacturers. If we cannot obtain our products and parts from these third parties in a cost

effective and timely manner that meets our customers’ expectations, this could materially and adversely

impact our business, financial condition, and results of operations.”

• “Our reliance on a limited number of third party suppliers could result in significantly increased costs

and delays in the event these suppliers experience shortages or quality problems, and, as a result, our

business, financial condition and operating results may be materially and adversely affected.”

• “A significant portion of our manufacturing and sales operations occurs in foreign locations; we are

increasingly exposed to risks associated with conducting our business internationally. Many of our

acilities and those of important customers and suppliers are located near known earthquake fault zone

or in geographic areas susceptible to other natural disasters, which could disrupt our business and

require us to curtail or cease operations.”

Research and Development

We invested approximately $107.4 million, $96.7 million, and $103.5 million in research and development in fiscal years 2006,

2005, and 2004, respectively. We are focusing our research and development efforts on the development of new tape drives,

tape automation systems, disk-based backup systems, software storage architectures, and other storage systems and services. In

particular, we are currently developing future generations of DLT-S, DLT-V, DAT, and LTO drives. We are also continuing to

focus on a full range of tape automation products, including autoloaders, modular libraries and high-end enterprise libraries for

the mid-range market. We maintain research and development facilities in Boulder, Colorado; Colorado Springs, Colorado;

Costa Mesa, California; Santa Maria, California, and Irvine, California.

Competition

Competition in the mid-range network market for tape drives is intense. In this market we compete primarily with Hewlett-

Packard, IBM, and Sony. Hewlett-Packard, IBM, and Quantum are part of the “LTO program”, which develops tape drive

products using LTO technology. Such products target the high-capacity data storage market and compete with products based

on Super DLTtape technology. Key competitive factors in the tape storage market include capacity, transfer rate, reliability,

durability, scalability, compatibility and cost. In addition to competing with our products, Hewlett-Packard sells our products

and remains one of our top five customers.

Competition in tape automation systems and disk based data protection systems is also intense. In this market, ADIC, Overland

Storage Inc., EMC and Sun (through its recent acquisition of StorageTek) offer competing tape automation systems and data

protection systems.

Our tape storage products, both tape drives and tape automation systems, also compete with other storage technologies, such as

hard disk drives (“HDD”). The competition from hard disk drives as an alternative backup solution has increased and may

continue to increase, especially if the hard disk drive price-to-performance ratio continues to decline. For a discussion of risks

associated with competing technologies, see Risk Factors - “We derive almost all of our revenue from products incorporating

tape technology. If competition from alternative storage technologies continues or increases, our business, financial condition

and operating results would be materially and adversely harmed.”

In both segments of our business, strong competition has resulted in price erosion and we expect this trend to continue.

Warranty and Service

We generally warrant our products against defects for 6 to 48 months from the date of sale and provide warranty service on tape

drives on a return-to-factory basis. Our tape automation systems may carry service agreements available to customers to extend

or upgrade the warranty service. We perform services from our facilities in Dundalk, Ireland and Penang, Malaysia, to support

warranty and service obligations for tape drives and automation products. During fiscal year 2006, we started transitioning our

repair activities from our Dundalk, Ireland facility to Jabil Hungary to effectively lower repair costs. We also provide tape

library warranty service from our facility in Irvine, California. Jabil Global Service provides screen and repair services in

Mexico and Hungary for North America and Europe, Middle East and Asia (“EMEA”) tape drives. In addition, we employ

various other third party service providers throughout the world that perform tape drive, tape library and automation services

for us.

Backlog

We manufacture our products based on forecasts of customer demand. We also place inventory in strategic locations in order to

enable certain key customers to obtain inventories as needed. Orders are generally placed by customers on an as-needed basis.

In general, customers may cancel or reschedule orders without penalty. For these reasons, we do not believe that orders are an

accurate measure of backlog and, therefore, we believe that customer orders that are not yet shipped (referred to as backlog) are

not a meaningful indicator of future revenues or material to an understanding of our business.

Employees

We had approximately 2,320 employees worldwide as of March 31, 2006.

Technology

We develop and protect our technology and know-how, principally in the field of data storage. We presently hold 383 United

States patents and have 182 pending United States patent applications. In general, these patents have a 20-year term from the

first effective filing date for each patent. We also hold a number of foreign patents and patent applications for certain of our

products and technologies. Although we believe that our patents and applications have significant value, rapidly changing

computer industry technology means that our future success will also depend heavily on the technical competence and creative

skills of our employees.

From time to time, third parties have asserted that our manufacture and sale of our products and services have infringed their

patents. We conduct ongoing investigations into these assertions and presently believe that either licenses are not required or

that any licenses ultimately determined to be required could be obtained on commercially reasonable terms. However, we

cannot provide assurance that such licenses are presently obtainable, or if later determined to be required, could be obtained on

commercially reasonable terms, if at all.

We have signed a patent cross-licensing agreement with IBM and have agreed to a time-limited, mutual patent, non-assertion

agreement with Maxtor covering certain technologies and patents of each party. In fiscal year 2006, we entered into a patent

cross license agreement with Sun (through its recent acquisition of StorageTek) where each party received a license to six of the

other party’s patents on a nonexclusive, worldwide basis. In connection with this cross license agreement, Storage Technology,

Inc. (“StorageTek”) dismissed a patent lawsuit against Quantum that had been pending in the United States District Court for

the District of Colorado. We may enter into patent cross-licensing agreements with other third parties in the future as part of

our normal business activities. These agreements, when and if entered into, would enable us to use certain patents owned by

these third parties and to enable these third parties to use certain patents that we own.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports

filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available on our website at

www.quantum.com when such reports are available on the Securities and Exchange Commission website. The contents of our

website are not incorporated into this Form 10-K.

New York Stock Exchange Certification

Quantum submitted the certification of its Chief Executive Officer required by the New York Stock Exchange (“NYSE”)

Listing Standards, Section 303A.12(a), relating to Quantum's compliance with the NYSE Corporate Governance Listing

Standards, to the NYSE on October 7, 2005 with no qualifications.

EXECUTIVE OFFICERS OF QUANTUM CORPORATION

Set forth below are the names, ages (as of June 1, 2006), positions and offices held by, and a brief account of the business

experience of each executive officer of Quantum.

Name Age Position with Quantum

Barbara L. Barrett 57 Vice President, Human Resources

Richard E. Belluzzo 52 Chairman and Chief Executive Officer

Anthony E. Carrozza 51 Senior Vice President, Worldwide Sales

Shawn D. Hall 37 Vice President, General Counsel and Secretary

Edward J. Hayes Jr. 51 Executive Vice President and Chief Financial Officer

Jesse C. Parker 63 Senior Vice President, Manufacturing and Operations

Philip M. Ritti 55 Vice President and General Manager, Media Storage Solutions

Jim L. Wold 48 Senior Vice President, Removable Storage and Automation

Howard L. Matthews, III 51 President and Chief Operating Officer

Ms. Barrett joined Quantum in 1999 and has been Vice President of Human Resources since July 2003. Prior to assuming her

current role, Ms. Barrett held other human resources management positions within the company, most recently Vice President,

Human Resources of the DLTtape business. Before joining Quantum, Ms. Barrett held leadership positions at companies in the

telecommunications and utilities industries in a variety of human resource functions, including compensation, training,

consulting and organizational development.

Mr. Belluzzo has been Chief Executive Officer since joining the Company in September 2002 and Chairman of the Board since

July 2003. Before joining Quantum, from September 1999 to May 2002, Mr. Belluzzo held senior management positions with

Microsoft Corp., most recently as President and Chief Operating Officer. Prior to Microsoft, from January 1998 to September

1999, Mr. Belluzzo was Chief Executive Officer of Silicon Graphics Inc. Before his tenure at Silicon Graphics, from 1975 to

January 1998, Mr. Belluzzo was with Hewlett-Packard, most recently as Executive Vice President of the computer

organization. Currently Mr. Belluzzo is a member of the board of directors of PMC-Sierra, as well as JDS Uniphase, and is a

member of the board of trustees for Golden Gate University.

Mr. Carrozza has been Senior Vice President of Worldwide Sales for Quantum since February 2004. He has been with

Quantum for 18 years in a variety of sales and management positions. From November of 2000 to February 2004, Mr.

Carrozza was Vice President, Worldwide Sales for the DLTtape business. Other roles held by Mr. Carrozza at Quantum

include Vice President of Worldwide Sales Strategy and Business Planning, Director of Central Region Sales and Director,

Worldwide Compaq Account Team. Mr. Carrozza has over 28 years of sales and sales management experience and, prior to

joining Quantum in 1987, spent four years at Iomega Corp.

Mr. Hall joined Quantum in 1999 as Corporate Counsel and assumed the role of Vice President, General Counsel and Secretary

in 2001. Prior to Quantum, Mr. Hall worked at the law firms of Skadden, Arps and Willkie Farr & Gallagher, where he

practiced in the areas of mergers and acquisitions and corporate finance, representing numerous public and private technology

companies.

Mr. Hayes has been Executive Vice President and Chief Financial Officer of Quantum since July 2004. From April 2001 to

March 2003, Mr. Hayes held senior management positions with DirecTV Broadband, Inc., most recently as President and Chief

Executive Officer of DirecTV Broadband, Inc., and with Telocity, Inc. as Executive Vice President and CFO, DirecTV

Broadband, Inc.’s predecessor company. He has also held senior financial management positions at other multinational

companies such as Lucent Technologies, Unisys Corporation, Asea Brown Boveri, and Credit Suisse First Boston. Mr. Hayes

is currently an independent board director and member of the Audit Committee for publicly-traded Alaska Communications

Systems Group, Inc. and an independent board director and Chairperson of the Audit Committee for privately-held New Wave

Research, Inc.

Mr. Matthews was appointed as Quantum's President and Chief Operating Officer effective June 1, 2005. Prior to joining

Quantum, from March 2002 to January 2005, he was the President and CEO of Certance, a data storage solutions company

acquired by Quantum. Prior to joining Certance, from 1999 to March 2002, he served as Chairman of the board of Directors of

Matthews, White & Company, a consulting and advisory services group, and, from 1994 to 1999, was a principal of Matthews

Consulting. During this period, Mr. Matthews served in a number of interim executive management positions and

assisted clients with the development of their growth and financing strategies.

Mr. Parker joined Quantum in November 2002 as Vice President of Manufacturing Operations for the Tape Drive Division and

was appointed Senior Vice President of Manufacturing and Operations for the total Company in January 2005. Before joining

Quantum, from November 2000 to November 2002, Mr. Parker was Executive Vice President of Operations and a Director of

Benchmark Storage Innovations, Inc (“Benchmark”). Prior to Benchmark, over a span of 17 years, Mr. Parker held executive

level positions at several companies in the storage industry, such as Conner Technology, Seagate Technology, Conner

Peripherals, Archive Corporation and MiniScribe Corporation.

Mr. Ritti has been Vice President and General Manager for Media Storage Solutions since July 2000. Mr. Ritti joined Quantum

in 1997 as Director of Media Marketing where he was responsible for promoting the Quantum brand and managing the

licensing aspects of the media business. Before joining Quantum, Mr. Ritti worked 15 years for Ampex Corporation in

marketing, engineering and general management positions. Prior to Ampex, Mr. Ritti worked for FMC Corporation in finance

and marketing positions.

Mr. Wold joined Quantum as Senior Vice President, Removable Storage and Automation business in January 2005. Prior to

joining Quantum, from 1994 to January 2005, Mr. Wold held several positions with Certance, a global supplier of tape drives

and data protection solutions acquired by Quantum in January 2005, and its predecessor companies, most recently as Vice

President of Engineering. Prior to that, Mr. Wold spent 13 years with Iomega Corporation holding a variety of positions

including Manufacturing Engineer, Engineering Manager, and Director of Manufacturing and Engineering.

ITEM 1A. Risk Factors

RISK FACTORS

THE READER SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF

THE OTHER INFORMATION INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K, BEFORE MAKING AN

INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES

FACING QUANTUM. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT

ARE CURRENTLY DEEMED IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS AND OPERATIONS. THIS

ANNUAL REPORT ON FORM 10-K CONTAINS “FORWARD-LOOKING” STATEMENTS THAT INVOLVE RISKS

AND UNCERTAINTIES. PLEASE SEE PAGE 3 OF THIS REPORT FOR ADDITIONAL DISCUSSION OF THESE

FORWARD-LOOKING STATEMENTS.

A large percentage of our sales come from a few customers, and these customers have no minimum or long-term

purchase commitments. The loss of, or a significant reduction in demand from, one or more key customers could

materially and adversely affect our business, financial condition, and operating results.

Our sales have been and continue to be concentrated among a few customers. Sales to our top five customers in fiscal year 2006

represented 49% of total revenue. This sales concentration does not include revenues from sales of our media that our licensees

sold to our top five customers, for which we earn royalty revenue. Furthermore, customers are not obligated to purchase any

minimum product volume and our relationships with our customers are terminable at will.

In fiscal year 2006, Hewlett-Packard and Dell contributed approximately 18% each to our revenue. Over this time period, the

revenue contribution from Hewlett-Packard has declined. If this trend continues, or if we experience a significant decline in

revenue from Dell, we could be materially and adversely affected. There is additional risk regarding Hewlett-Packard since it

markets and manufactures its own LTO and DDS/DAT tape drives and media in competition with our LTO, DDS/DAT,

DLTtape® and Super DLTtapeTM platforms. To the extent that Hewlett-Packard reduces its purchases of our products in favor

of its own, or is successful in gaining share in the market with its tape drive products at the expense of our products, our tape

drive and media revenues, operating results and financial condition could be materially and adversely affected.

In addition, many of our tape products are primarily incorporated into larger storage systems or solutions that are marketed and

sold to end-users by our large OEM customers. Because of this, we have limited market access to these end-users, limiting our

ability to reach and influence their purchasing decisions. These market conditions further our reliance on these large OEM

customers. Thus if they were to significantly reduce, cancel or delay their orders with us, our results of operations could be

materially adversely affected.

From time to time we make acquisitions, such as the contemplated acquisition of ADIC. The failure to successfully

integrate recent or future acquisitions could harm our business, financial condition, and operating results.

As a part of our business strategy, we have in the past and expect in the future to make acquisitions, or significant investments

in, complementary companies, products or technologies, such as in the contemplated acquisition of ADIC. If we fail to

successfully integrate such acquisitions, it could harm our business, financial condition, and operating results. Risks that we

may face in our efforts to integrate any recent or future acquisitions include, among others:

• Failure to realize anticipated synergies and benefits from the acquisition;

• Difficulties in assimilating and retaining employees;

• Potential incompatibility of business cultures;

• Diversion of management’s attention from ongoing business concerns;

• Coordinating infrastructure operations in a rapid and efficient manner;

• The potential inability to maximize our financial and strategic position through the successful incorporation of acquired

technology and rights into our products and services;

• Insufficient revenues to offset increased expenses associated with the acquisition;

• Costs and delays in implementing or integrating common systems and procedures;

• Reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;

• Impairment of existing customer, supplier and strategic relationships of either company;

• Insufficient cash flows from operations to fund the working capital and investment requirements;

• Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such

markets have stronger market positions;

• The possibility that we may not receive a favorable return on our investment, the original investment may become

impaired, and/or we may incur losses from these investments;

• Dissatisfaction or performance problems with the acquired company;

• The assumption of risks of the acquired company that are difficult to quantify, such as litigation;

• The cost associated with the acquisition; and

• Assumption of unknown liabilities or other unanticipated adverse events or circumstances.

Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of

any transaction. We cannot provide assurance that we will be able to successfully integrate any business, products,

technologies or personnel that we may acquire in the future, and our failure to do so could harm our business, financial

condition, and operating results.

If we draw on our contemplated $500 million credit facility with Key Bank, we will substantially increase our debt,

which could adversely affect our cash flow and prevent us from fulfilling our obligations.

In the event that we consummate our acquisition of ADIC, we intend to draw down our $500 million credit facility with Key

Bank, which will add a significant amount of indebtedness and interest expense to our obligations under our current

indebtedness. Our level of indebtedness presents risks to investors, including the possibility that we may be unable to generate

cash sufficient to pay the principal of and interest on our indebtedness when due.

Our substantial debt could have important consequences, such as:

• Making it more difficult or impossible for us to make payments on the notes or any other indebtedness or obligations;

• Requiring us to dedicate a portion of our cash flow from operations and other capital resources to debt service, thereby

reducing our ability to fund working capital, capital expenditures and other cash requirements;

• Increasing our vulnerability to adverse economic and industry conditions;

• Limiting our flexibility in planning for, or reacting to, changes and opportunities in, the electronics manufacturing

industry, which may place us at a competitive disadvantage; and

• Limiting our ability to incur additional debt on acceptable terms, if at all.

Our operating results depend on new product introductions, which may not be successful, in which case our business,

financial condition, and operating results may be materially and adversely affected.

To compete effectively, we must continually improve existing products and introduce new ones, such as our recently

introduced PX500-Series libraries, the DLT S-4 and GoVault. We have devoted and expect to continue to devote considerable

management and financial resources to these efforts. We cannot provide assurance that:

• We will introduce new products in the time frame we are forecasting;

• We will not experience technical, quality, performance-related or other difficulties that could prevent or delay the

introduction of, and market acceptance of, new products;

• Our new products will achieve market acceptance and significant market share, or that the markets for these products

will continue or grow as we have anticipated;

• Our new products will be successfully or timely qualified with our customers by meeting customer performance and

quality specifications because a successful and timely customer qualification must occur before customers will place

large product orders; or

• We will achieve high volume production of these new products in a timely manner, if at all.

If we are not successful in timely completion of our new product qualifications and then ramping sales to our key customers,

our revenue and results of operations could be adversely impacted. In addition, if the quality of our products is not acceptable

to our customers, this could result in customer dissatisfaction, lost revenue, and increased warranty and repair costs.

Competition has increased, and may increasingly intensify, in the tape drive and tape automation markets as a result of

competitors introducing products based on new technology standards, which could materially and adversely affect our

business, financial condition, and results of operations.

We compete with companies that develop, manufacture, market, and sell tape drive and tape automation products. The principal

competitors for our tape drive products include Hewlett-Packard, IBM, and Sony. These competitors are aggressively trying to

advance and develop new technologies and products to compete successfully against our technologies and products. For

instance, LTO technology, which was developed by Certance, Hewlett-Packard and IBM, targets the high-capacity data backup

market and competes directly with our products based on Super DLTtapeTM technology. Hewlett-Packard and IBM thus

compete not only with our Super DLTtapeTM products but now compete with the LTO product offerings that we acquired

through our acquisition of Certance. This competition has resulted in a trend, which is expected to continue, toward lower

prices and lower margins earned on our DLTtape® and Super DLTtapeTM drives and media. Additionally, over the last two

years, our DLT and Super DLTtapeTM drives have lost market share to LTO based products, and we cannot provide assurance

that our tape technology based products will not continue to lose market share to LTO based products in the future. In addition,

the 2003 merger between Hewlett-Packard and Compaq resulted in a larger competitor in the tape drive and tape automation

markets with substantially greater resources and a potentially greater market reach with products that compete directly with

ours. These factors, and additional factors, such as the possibility of industry consolidation, when combined with the current

environment of intense competition, which has resulted in reduced shipments of our tape drive products, could result in a

further reduction in our prices, volumes and margins, which could materially and adversely impact our business, financial

condition, and results of operations.

Our tape automation products compete with product offerings of ADIC, Overland Data Inc., EMC, and Sun (due to its recent

acquisition of StorageTek), which offer tape automation systems incorporating DLTtape® and Super DLTtapeTM technology as

well as LTO technology. Increased competition has resulted in increased price competition. If this trend continues or worsens,

if competition further intensifies, or if industry consolidation occurs, our sales and gross margins could decline, which could

materially and adversely affect our business, financial condition and results of operations.

We have taken considerable steps towards reducing our cost structure and may take further cost reduction actions. The

steps we have taken and may take in the future may not reduce our cost structure to a level appropriate in relation to

our future sales and therefore, these anticipated cost reductions may be insufficient to bring us back to profitability.

In the last four years, we have recorded significant restructuring charges and made cash payments in order to reduce our cost of

sales and operating expenses to rationalize our operations following past acquisitions and in response to adverse economic,

industry and competitive conditions. We may take future steps to further reduce our operating costs. These steps and additional

future restructurings in response to rationalization of operations following future acquisitions or to adverse changes in our

business and industry may require us to make cash payments that, if large enough, would materially and adversely affect our

liquidity. We may be unable to reduce our cost of sales and operating expenses at a rate and to a level consistent with a future

potential adverse sales environment, which may adversely affect our business, financial condition, and operating results.

We derive almost all of our revenue from products incorporating tape technology. If competition from alternative

storage technologies continues or increases, our business, financial condition, and operating results would be materially

and adversely harmed.

We derive almost all of our revenue from products that incorporate some form of tape technology and we expect to continue to

derive a substantial majority of our revenue from these products for the foreseeable future. As a result, our future operating

results depend on the continued market acceptance of products employing tape drive technology. Our tape products, including

tape drives and automation systems, compete with other storage technologies, such as hard disk drives. Hard disk drives have

experienced a trend toward lower prices while capacity and performance have increased. If products incorporating other

technologies gain comparable or superior market acceptance, or their costs decline far more rapidly than tape drive and media

costs, the competition resulting from these alternative technologies would increase as customers turn toward those alternative

technologies with an acceptable price/performance offering relative to tape drives and automation systems. We are working to

address this risk through our own targeted investment in alternative technologies, but if a migration to alternative technologies

occurs, and we are not successful in our efforts, our business, financial condition, and operating results would be materially and

adversely affected.

Our tape media business generates a relatively high gross margin rate, which significantly impacts the total company

gross margin rate. If we were to experience a significant decline in the tape media or tape royalty gross margin rate,

our business, financial condition, and operating results would be materially and adversely affected.

Our tape royalty and media gross margin rates and revenues are dependent on many factors, including the following factors:

• The pricing actions of other media suppliers;

• The size of the installed base of tape drives that use our tape cartridges;

• The performance of our strategic licensing partners, which sell our tape media cartridges;

• The relative growth in units of our newer tape drive products, since the associated media cartridges typically sell at

higher prices than the media cartridges associated with older tape drive products;

• The relative mix of media purchased directly from us as compared to our licensees;

• The media consumption habits and rates of end users;

• The pattern of tape drive retirements; and

• The level of channel inventories.

Competition from other tape technologies has had a significant negative impact on our income from media as well as on our

sales of tape drives. Similarly, competition among media suppliers has periodically resulted in intense, price-based competition

for media sales, which also affects media income. If either of these competitive factors continues or intensifies, it would further

erode tape drive unit sales, tape drive installed base, media units and media pricing. To the extent that our Quantum branded

media revenue and media royalties are dependent upon media pricing and the quantity of media consumed by the installed base

of our tape drives, reduced media prices, or a reduced installed tape drive base, would result in further reductions in our

Quantum branded media and media royalty revenue and gross margin rates. This would materially and adversely affect our

business, financial condition, and results of operations.

Third party infringement claims could result in substantial liability and significant costs, and, as a result, our business,

financial condition, and operating results may be materially and adversely affected.

From time to time, third parties allege our infringement of and need for a license under their patented or other proprietary

technology. While we currently believe the amount of ultimate liability, if any, with respect to any such actions will not

materially affect our financial position, results of operations, or liquidity, the ultimate outcome of any litigation is uncertain.

Adverse resolution of any third party infringement claim could subject us to substantial liabilities and require us to refrain from

manufacturing and selling certain products. In addition, the costs incurred in intellectual property litigation can be substantial,

regardless of the outcome. As a result, our business, financial condition, and operating results could be materially and adversely

affected.

A significant portion of our manufacturing and sales operations occurs in foreign locations; we are increasingly exposed

to risks associated with conducting our business internationally. Many of our facilities and those of important

customers and suppliers are located near known earthquake fault zones or in geographic areas susceptible to other

natural disasters, which could disrupt our business and require us to curtail or cease operations.

We manufacture and sell our products in a number of different markets throughout the world. Following the acquisition of

Certance, an increasing number of our products are internally manufactured at a facility in Penang, Malaysia. As a result of our

global manufacturing and sales operations, we are subject to a variety of risks that are unique to businesses with international

operations of a similar scope, including the following:

• Import and export duties and value-added taxes;

• Import and export regulation changes that could erode our profit margins or restrict our exports;

• Political risks and natural disasters, including earthquakes, especially in emerging or developing economies;

• Potential restrictions on the transfer of funds between countries;

• Inflexible employee contracts in the event of business downturns;

• Adverse movement of foreign currencies against the U.S. dollar (the currency in which our results are reported); and

• The burden and cost of complying with foreign laws.

Any or all of these risks could have a material adverse effect on our business.

Our quarterly operating results could fluctuate significantly, and past quarterly operating results should not be used to

predict future performance.

Our quarterly operating results have fluctuated significantly in the past and could fluctuate significantly in the future. As a

result, our past quarterly operating results should not be used to predict future performance. Quarterly operating results could be

materially and adversely affected by a number of factors, including, but not limited to:

• An inadequate supply of tape media cartridges;

• Reduced demand from our OEM customers;

• Customers canceling, reducing, deferring or rescheduling significant orders as a result of excess inventory levels, weak

economic conditions or other factors;

• Declines in network server demand;

• Product ramp cycles;

• Failure to complete shipments in the last month of a quarter during which a substantial portion of our products are

typically shipped; or

• Increased competition.

If we fail to meet our projected quarterly results, our business, financial condition, and results of operations may be materially

and adversely harmed.

If we do not successfully manage the changes that we have made and may continue to make to our infrastructure and

management, our business could be disrupted, and that could adversely impact our results of operations and financial

condition.

Managing change is an important focus for us. Following the acquisition of Certance, one of our important initiatives involves

combining and integrating the information technology (“IT”) infrastructures of the companies, including our enterprise resource

planning (“ERP”) systems, and adapting our business processes and software to the requirements of the new organization. We

are also managing several significant initiatives involving our operations, including efforts to reduce the number of contract

manufacturers and suppliers we use, the outsourcing of our repair capabilities and the related closing of our facility in Dundalk,

Ireland. In addition, we continue to reduce headcount to streamline and consolidate our supporting functions as appropriate

following past acquisitions and in response to market or competitive conditions. If we are unable to successfully manage the

changes that we implement, and detect and address issues as they arise, it could disrupt our business and adversely impact our

results of operations and financial condition.

If we fail to protect our intellectual property or if others use our proprietary technology without authorization, our

competitive position may suffer.

Our future success and ability to compete depends in part on our proprietary technology. We rely on a combination of

copyright, patent, trademark, and trade secrets laws and nondisclosure agreements to establish and protect our proprietary

technology. We currently hold 383 United States patents and have 182 United States patent applications pending. However, we

cannot provide assurance that patents will be issued with respect to pending or future patent applications that we have filed or

plan to file or that our patents will be upheld as valid or will prevent the development of competitive products or that any

actions we have taken will adequately protect our intellectual property rights. We generally enter into confidentiality

agreements with our employees, consultants, customers, potential customers, and others as required, in which we strictly limit

access to, and distribution of, our software, and further limit the disclosure and use of our proprietary information. Despite our

efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or

technology. Our competitors may also independently develop technologies that are substantially equivalent or superior to our

technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws

of the United States.

Because we may order components from suppliers in advance of receipt of customer orders for our products which

include these components, we could face a material inventory risk.

Historically, we have relied primarily on third parties to manufacture our products. However, we have begun to manufacture

more of our products ourselves and anticipate that we will continue to increase the proportion of our products that we

manufacture ourselves. Managing such a build-up of our in-house manufacturing capabilities presents a number risks that

could materially and adversely affect our financial condition. For instance, as part of our component planning, we place orders

with or pay certain suppliers for components in advance of receipt of customer orders. We occasionally enter into negotiated

orders with vendors early in the manufacturing process of our storage products to ensure that we have sufficient components for

our new products to meet anticipated customer demand. Because the design and manufacturing process for these components is

complicated, it is possible that we could experience a design or manufacturing flaw that could delay or even prevent the

production of the components for which we previously committed to pay. We also face the risk of ordering too many

components, or conversely, not enough components, since supply orders are generally based on forecasts of customer orders

rather than actual customer orders. In addition, in some cases, we make non-cancelable order commitments to our suppliers for

work-in-progress, supplier’s finished goods, custom sub-assemblies and Quantum-unique raw materials that are necessary to

meet our lead times for finished goods. If we cannot change or be released from supply orders, we could incur costs from the

purchase of unusable components, either due to a delay in the production of the components or other supplies or as a result of

inaccurately predicting supply orders in advance of customer orders. Our business and operating results could be materially and

adversely affected as a result of these increased costs.

A portion of our manufacturing, including service repair, is outsourced to Jabil and other third party contract

manufacturers. If we cannot obtain our products and parts from these third parties in a cost effective and timely

manner that meets our customers’ expectations, this could materially and adversely impact our business, financial

condition, and results of operations.

A number of our tape drive and tape automation products are manufactured for us by Jabil or other contract manufactures. We

face a number of risks as a result of this outsourced manufacturing, including, among others:

• Sole source of product supply

In each case, our contract manufacturer is our sole source of supply for the tape drive and/or tape automation

products they manufacture for us. Because we are relying on one supplier, we are at greater risk of experiencing

component shortages or other delays in customer deliveries that could result in customer dissatisfaction and lost

sales, which could materially damage customer relationships and result in lost revenue.

• Cost and purchase commitments

We may not be able to control the costs we would be required to pay our contract manufacturers for the products

they manufacture for us. They procure inventory to build our products based upon a forecast of customer demand

that we provide. We would be responsible for the financial impact on the contract manufacturer of any reduction or

product mix shift in the forecast relative to materials that they had already purchased under a prior forecast. Such a

variance in forecasted demand could require us to pay them for finished goods in excess of current customer

demand or for excess or obsolete inventory and generally incur higher costs. As a result, we could experience

reduced gross margins and larger operating losses based on these purchase commitments.

• Quality

We will have limited control over the quality of products produced by our contract manufacturers. Therefore, the

quality of the products may not be acceptable to our customers and could result in customer dissatisfaction, lost

revenue, and increased warranty costs.

Any or all of these risks could have a material adverse effect on our business.

We do not control licensee pricing or licensee sales of tape media cartridges. To the extent that our royalty revenue is

dependent on the prices of cartridges sold by our licensees, should these licensees significantly lower prices on the media

products that they sell, such reduced pricing would lower our royalty revenue, which would materially and adversely

affect our business, financial condition, and operating results.

We receive a royalty fee based on sales of our tape media cartridges by Fuji, Maxell, Imation and Sony. Under our license

agreements with these companies, each of the licensees determines the pricing and number of units of tape media cartridges that

it sells. To the extent that our royalty revenue is based on the prices of cartridges sold by our licensees, our royalty revenue will

vary depending on the level of sales and prices set by the licensees. In addition, lower prices set by licensees could require us to

lower our prices on direct sales of tape media cartridges, which would reduce our revenue and margins on these products. As a

result, lower prices on our tape media cartridges would reduce media revenue, which could materially and adversely affect our

business, financial condition, and operating results.

We have incurred significant losses over the last few years. If we remain unprofitable and are unable to generate

positive cash flow from operating activities, our ability to service our debt and fund our other business requirements, as

well as obtain additional capital in the future, could be jeopardized, our business could suffer, and our assets could be

impaired.

Our ability to meet our debt service obligations and to fund working capital, capital expenditures, acquisitions, research and

development and other general corporate needs will depend upon our future financial performance. Our future financial

performance will be subject to financial, business and other factors affecting our operations, some of which are beyond our

control. If our losses from operations were to persist at current levels or worsen, we may not have sufficient cash resources to

service our debt and maintain access to our credit facilities. We cannot provide assurance that we will generate sufficient cash

flow from operations, or that future borrowings or equity financing will be available on commercially reasonable terms or at all,

or available in an amount sufficient to enable us to pay our debt or fund other liquidity needs. If we are unable to generate

sufficient cash flow and/or are unable to service our outstanding debt obligations, we may have to reduce or delay capital

expenditures planned for replacements, improvements and expansions, and/or sell assets, thereby affecting our ability to remain

competitive and adversely affecting our business.

We must devote substantial resources to new product development, manufacturing, and sales and marketing activities to be

competitive in our markets. Historically, cash flow from operating activities has provided us with a significant portion of the

cash and liquidity that we have required in order to invest in product development, manufacturing, and sales activities. Until or

unless we return to consistent, profitable generally accepted accounting principles (“GAAP”) operating results, we will have

significantly less liquidity to invest in our business, which could have a material adverse impact on our business, results of

operations, liquidity, and financial condition.

Our ability to achieve profitability may be adversely impacted by higher energy prices to the extent that we, or our key

suppliers experience higher energy costs which we are unable to offset or recover in the form of higher prices for our products

and services.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees, and

proposed changes in accounting for equity compensation will adversely affect earnings.

Beginning in our first quarter of fiscal year 2007, Financial Accounting Standards Board (“FASB”) issued SFAS No. 123

(revised 2004) Share-Based Payment ("SFAS No. 123R"), which requires us to recognize compensation expense in our

statement of operations for the fair value of unvested employee stock options at the date of adoption and new stock options

granted to our employees after the adoption date over the related vesting periods of the stock options. The requirement to

expense stock options granted to employees reduces their attractiveness to Quantum because the expense associated with these

grants may result in future compensation charges. In addition, the expenses recorded may not accurately reflect the value of our

stock options because the option pricing models used to estimate fair value were not developed for use in valuing employee

stock options and are based on highly subjective assumptions, including the option’s expected life and the price volatility of the

underlying stock. Alternative compensation arrangements that can replace stock option programs may also negatively impact

profitability. Stock options remain an important employee recruitment and retention tool, and we may not be able to attract and

retain key personnel if we reduce the scope of our employee stock option program following the adoption of SFAS No. 123R.

Our employees are critical to our ability to develop and design systems that advance our productivity and technology goals,

increase our sales goals and provide support to customers. Accordingly, as a result of the requirement under SFAS No. 123R to

recognize the fair value of stock options as compensation expense, beginning in the first quarter of fiscal year 2007, our future

profitability can be expected to be reduced. See also Recent Accounting Pronouncements in Note 2 “Summary of Significant

Accounting Policies” to the Consolidated Financial Statements: SFAS No. 123 (revised 2004) Share-Based Payment ("SFAS

No. 123R”).

Our stock price could become more volatile if certain institutional investors were to increase or decrease the number of

shares they own. In addition, there are other factors and events that could affect the trading prices of our common

stock.

Five institutional investors own approximately 58% of our common stock. If any or all of these investors were to decide to

purchase additional shares or to sell some or all of the common shares they currently own, that may cause our stock price to be

more volatile. For example, there have been instances in the past where a shareholder with a significant equity position begins

selling shares, putting downward pressure on our stock price for the duration of their selling activity. In these situations, selling

pressure outweighs buying demand and our stock price declined.

Trading prices of our common stock may fluctuate in response to a number of other events and factors, such as:

• General economic conditions;

• Changes in interest rates;

• Fluctuations in the stock market in general and market prices for high technology companies in particular;

• Quarterly variations in our operating results;

• New products, services, innovations and strategic developments by our competitors or us, or business combinations and

investments by our competitors or us;

• Changes in financial estimates by us or securities analysts and recommendations by securities analysts,

• Changes in our capital structure, including issuance of additional debt or equity to the public; and

• Strategic acquisitions.

Any of these events and factors may cause our stock price to rise or fall and may adversely affect our business and financing

opportunities.

We are exposed to general economic conditions which, if these conditions were to deteriorate, could result in

significantly reduced sales levels and significant operating losses, which would materially and adversely affect our

business, financial condition, and operating results.

If we experience adverse economic conditions in the United States and throughout the world economy, our business, operating

results, and financial condition could be further adversely and materially impacted. We have taken actions in the past to reduce

our cost of sales and operating expenses in order to address the adverse conditions. A prolonged continuation or worsening of

sales trends could require us to take additional actions to further reduce our cost of sales and operating expenses in future

quarters in order to align these costs with reduced revenue. We may be unable to reduce our cost of sales and operating

expenses at a rate and to a level consistent with such a future adverse sales environment. If we are required to undertake further

expense reductions, we may incur significant additional incremental restructuring charges associated with such expense

reductions that are disproportionate to sales, thereby materially and adversely affecting our business, financial condition, and

operating results.

Our reliance on a limited number of third party suppliers could result in significantly increased costs and delays in the

event these suppliers experience shortages or quality problems, and, as a result, our business, financial condition, and

operating results may be materially and adversely affected.

We depend on a limited number of suppliers for components and sub-assemblies, including recording heads, media cartridges,

and integrated circuits, all of which are essential to the manufacture of tape drives and tape automation systems.

If component shortages occur, or if we experience quality problems with component suppliers, shipments of products could be

significantly delayed and/or costs significantly increased, and as a result, our business, financial condition, and operating results

could be materially and adversely affected. In addition, we qualify only a single source for many components and sub-

assemblies, which magnifies the risk of future shortages.

Furthermore, the main supplier of recording heads for our products is located in China. Political instability, trade restrictions,

changes in tariff or freight rates, or currency fluctuations in China could result in increased costs and delays in shipment of our

products and could materially and adversely impact our business, financial condition, and operating results.

Some of our production processes and materials are environmentally sensitive, and new environmental regulation could

lead to increased costs, or otherwise adversely affect our business, financial condition, and results of operations.

We are subject to a variety of laws and regulations relating to, among other things, the use, storage, discharge and disposal of

chemicals, gases and other hazardous substances used in our manufacturing processes, air emissions, waste discharges, waste

disposal, as well as the investigation and remediation of soil and ground water contamination. A recent directive in the

European Union imposes a “take back” obligation on manufacturers for the financing of the collection, recovery and disposal of

electrical and electronic equipment. Additional European legislation will ban the use of some heavy metals including lead and

some flame retardants in electronic components beginning in July 2006. We are in the process of implementing procedures to

comply with this new legislation. However, this legislation may adversely affect our manufacturing costs or product sales by

requiring us to acquire costly equipment or materials, or to incur other significant expenses in adapting our manufacturing

processes or waste and emission disposal processes. Furthermore, environmental claims or our failure to comply with present

or future regulations could result in the assessment of damages or imposition of fines against us, or the suspension of affected

operations, which could have an adverse effect on our business, financial condition, and results of operations.

Our credit agreement contains various covenants that limit our discretion in the operation of our business, which could

have an adverse effect on our business, financial condition, and results of operations.

Our credit agreement contains numerous restrictive covenants that require us to comply with and maintain certain financial tests

and ratios, thereby restricting our ability to:

• Incur debt;

• Incur liens;

• Redeem or prepay subordinated debt;

• Make acquisitions of businesses or entities or sell certain assets;

• Make investments, including loans, guarantees, and advances;

• Make capital expenditures beyond a certain threshold;

• Engage in transactions with affiliates;

• Pay dividends or engage in stock repurchases; and

• Enter into certain restrictive agreements.

Our ability to comply with covenants contained in our credit agreement may be affected by events beyond our control,

including prevailing economic, financial, and industry conditions. Even if we are able to comply with all covenants, the

restrictions on our ability to operate our business could harm our business by, among other things, limiting our ability to take

advantage of financings, mergers, acquisitions, and other corporate opportunities.

Our credit agreement is secured by a pledge of all of our assets. If we were to default under our credit agreement and were

unable to obtain a waiver for such a default, the lenders would have a right to foreclose on our assets in order to satisfy our

obligations under the credit agreement. Any such action on the part of the lenders against us could have a materially adverse

impact on our business, financial condition, and results of operations.

In prior year periods, we violated certain financial covenants under our credit agreement and received waivers or

amendments for such violations. If in the future we violate financial covenants, it could materially and adversely impact

our financial condition and liquidity.

If our operating results do not improve in the future and we violate any financial or reporting covenant in our credit agreement

and receive a notice of default letter from our bank group, our credit line could become unavailable, and any amounts

outstanding could become immediately due and payable. If we were unsuccessful in securing a waiver of such violation or an

amendment to our credit agreement, we might have to restrict $2.5 million of our cash to cover the outstanding standby letters

of credit issued under the credit agreement.

Without the availability of the credit agreement, we would have to rely on operating cash flows and debt or equity

arrangements other than the credit agreement, if such alternative funding arrangements are available to us at all, in order to

maintain sufficient liquidity. If we were not able to obtain sufficient cash from our operations or from these alternative funding

sources under such circumstances, our operations, financial condition, and liquidity would be materially and adversely affected.

We may be sued by our customers for product liability claims as a result of failures in our data storage products.

We face potential liability for performance problems of our products because our end users employ our storage technologies for

the storage and backup of important data and to satisfy regulatory requirements. Although we maintain general liability

insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that

may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could

harm our business.

We must maintain appropriate levels of service inventories. If we have too little service inventory, we may experience

increased levels of customer dissatisfaction. If we have too much service inventory, we may incur financial losses.

We maintain levels of service inventories to satisfy future warranty obligations and also to earn service revenue to repair

products for which the warranty has expired. We estimate the required amount of service inventories based on historical usage

and forecasts of future warranty requirements, including estimates of failure rates and costs to repair, and out of warranty

revenue. Given the significant levels of judgment inherently involved in the process, we cannot provide assurance that we will

be able to maintain appropriate levels of service inventories to satisfy customer needs and to avoid financial losses from excess

inventory charges. If we are unable to maintain appropriate levels of service inventories, our business, financial condition, and

results of operations may be materially and adversely impacted.

Because we rely heavily on distributors and other resellers to market and sell our products, if one or more distributors

were to experience a significant deterioration in its financial condition or its relationship with us, this could disrupt the

distribution of our products and reduce our revenue, which could materially and adversely affect our business, financial

condition, and operating results.

In certain product and geographic segments we heavily utilize distributors and value added resellers to perform the functions

necessary to market and sell our products. To fulfill this role, the distributor must maintain an acceptable level of financial

stability, creditworthiness and the ability to successfully manage business relationships with the customers it serves directly.

Under our distributor agreements with these companies, each of the distributors determines the type and amount of our products

that it will purchase from us and the pricing of the products that it sells to its customers. If the distributor is unable to perform

in an acceptable manner, we may be required to reduce the amount of sales of our product to the distributor or terminate the

relationship. We may also incur financial losses for product returns from distributors or for the failure or refusal of distributors

to pay obligations owed to us. Either scenario could result in fewer of our products being available to the affected market

segments, reduced levels of customer satisfaction and/or increased expenses, which could in turn have a material and adverse

impact on our business, results of operations, and financial condition.

If the future outcomes related to the estimates used in recording tax liabilities to various taxing authorities result in

higher tax liabilities than estimated, then we would have to record tax charges, which could be material.

We have provided amounts and recorded liabilities for probable and estimable tax adjustments that may be proposed by various

taxing authorities in the U.S., states, and foreign jurisdictions. If events occur that indicate payments of these amounts will be

less than estimated, then reversals of these liabilities would create tax benefits being recognized in the periods when we

determine the liabilities have reduced. Conversely, if events occur which indicate that payments of these amounts will be

greater than estimated, then tax charges and additional liabilities would be recorded. In particular, various foreign jurisdictions

could challenge the characterization or transfer pricing of certain intercompany transactions. In the event of an unfavorable

outcome of such challenge, there exists the possibility of a material tax charge and adverse impact on the results of operations

in the period in which the matter is resolved or an unfavorable outcome becomes probable and estimable.

Maxtor’s failure to perform under the indemnification provisions of a tax sharing and indemnity agreement entered

into with us providing for payments to us that relate to tax liabilities, penalties, and interest resulting from the conduct

of our business prior to the Hard Disk Drive group disposition date could have a material adverse effect on our

business, financial condition, and operating results.

The Company entered into a Settlement Agreement with Maxtor on December 23, 2004, and included a Mutual General

Release and Global Settlement Agreement with Maxtor Corporation, the corporation to which Quantum sold its former Hard

Disk Drive business on April 2, 2001. Under this agreement, Maxtor has agreed to assume limited responsibility for payments

related to certain taxes, penalties, and interest resulting from the conduct of business by the Quantum Tape Drive and Storage

Systems group for all periods before our issuance of tracking stock and the conduct of the Quantum Hard Disk Drive group for

all periods before the disposition of the Hard Disk Drive group to Maxtor. If audit adjustments are successfully asserted with

respect to such conduct, and if Maxtor fails to indemnify us under this obligation or is not able to pay the reimbursement in full,

we would nevertheless be obligated, as the taxpayer, to pay the tax. As a result, we could experience a material adverse effect

on our business, financial condition, and operating results. Maxtor has recently been acquired by Seagate, which has assumed

Maxtor’s defense and indemnification obligations.

Maxtor’s failure to perform under the agreements in connection with contingent liabilities would harm our business,

financial condition, and operating results.

We may have contingent liabilities for some obligations assumed by Maxtor in connection with the disposition of the Hard

Disk Drive group, including real estate and litigation, and Maxtor’s failure to perform under these obligations could result in

significant costs to us that could have a materially adverse impact on our business, financial condition, and operating results.

Maxtor has recently been acquired by Seagate, which has assumed Maxtor’s defense and indemnification obligations.

The disposition of the Hard Disk Drive group may be determined not to be tax-free, which would result in us or our

stockholders, or both, incurring a substantial tax liability, which could materially and adversely affect our business,

financial condition, and results of operations.

Maxtor and Quantum have agreed not to request a ruling from the Internal Revenue Service, or any state tax authority

confirming that the structure of the combination of Maxtor with the Hard Disk Drive group will not result in any federal income

tax or state income or franchise tax to Quantum or the previous holders of the Hard Disk Drive common stock. Instead, Maxtor

and Quantum have agreed to effect the disposition and the merger on the basis of an opinion from our tax advisor, and a tax

opinion insurance policy issued by a syndicate of major insurance companies to us covering up to $340 million of tax loss

caused by the disposition and merger.

If the disposition of the Hard Disk Drive group is determined not to be tax-free and the tax opinion insurance policy does not

fully cover the resulting tax liability, we or our stockholders or both could incur substantial tax liability, which could materially

and adversely affect our business, financial condition, and results of operations. Maxtor has recently been acquired by Seagate,

which has assumed Maxtor’s defense and indemnification obligations.

The tax opinion insurance policy issued in conjunction with the disposition of the Hard Disk Drive group does not cover

all circumstances under which the disposition could become taxable to us, and as a result, we could incur an uninsured

tax liability, which could materially and adversely affect our business, financial condition, and results of operations.

In addition to customary exclusions from its coverage, the tax opinion insurance policy does not cover any federal or state tax

payable by us if the disposition becomes taxable to us as a result of a change in relevant tax law. We could incur uninsured tax

liability, which could materially and adversely affect our business, financial condition, and results of operations.

If we incur an uninsured tax liability as a result of the disposition of the Hard Disk Drive group, our financial condition

and operating results could be negatively affected.

If the disposition of the Hard Disk Drive group were determined to be taxable to Quantum, we would not be able to recover an

amount to cover the tax liability either from Maxtor or under the insurance policy in the following circumstances:

• If the tax loss were not covered by the policy because it fell under one of the exclusions from coverage under the tax

opinion insurance policy described above, insurance proceeds would not be available to cover the loss;

• If the tax loss were caused by our own acts or those of a third party that made the disposition taxable (for instance, an

acquisition of control of Quantum which began during the one-year period before and nine-month period following the

closing), Maxtor would not be obligated to indemnify us for the amount of the tax liability; or

• If Maxtor were required to reimburse us for the amount of the tax liability according to its indemnification obligations

under the Hard Disk Drive group disposition, but was not able to pay the reimbursement in full, we would nevertheless be

obligated, as the taxpayer, to pay the tax.

In any of these circumstances, the tax payments due from us could be substantial. In order to pay the tax, we would have to

either deplete our existing cash resources or borrow cash to cover our tax obligation. Our payment of a significant tax prior to

payment from Maxtor under Maxtor’s indemnification obligations, or in circumstances where Maxtor has no payment

obligation, could harm our business, financial condition, and operating results. Maxtor has recently been acquired by Seagate,

which has assumed Maxtor’s defense and indemnification obligations.

We are exposed to fluctuations in foreign currency exchange rates, and an adverse change in foreign currency exchange

rates relative to our position in such currencies could have a materially adverse impact on our business, financial

condition, and results of operations.

We do not use derivative financial instruments for hedge or speculative purposes. To minimize foreign currency exposure, we

use foreign currency obligations to match and offset net currency exposures associated with certain assets and liabilities

denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the

gains and losses on these foreign currency obligations. We have used in the past, and may use in the future, foreign currency

forward contracts to hedge our exposure to foreign currency exchange rates. To the extent that we have assets or liabilities

denominated in a foreign currency that are inadequately hedged or not hedged at all, we may be subject to foreign currency

losses, which could be significant.

Our international operations can act as a natural hedge when both operating expenses and sales are denominated in local

currencies. In these instances, although an unfavorable change in the exchange rate of a foreign currency against the U.S. dollar

would result in lower sales when translated to U.S. dollars, operating expenses would also be lower in these circumstances.

Also, since an insignificant amount of our current sales are denominated in currencies other than the U.S. dollar, we do not

believe that our total foreign exchange rate exposure is significant. Nevertheless, an increase in the rate at which a foreign

currency is exchanged for U.S. dollars would require more of that particular foreign currency to equal a specified amount of

U.S. dollars than before such rate increase. In such cases, and if we were to price our products and services in that particular

foreign currency, we would receive fewer U.S. dollars than we would have received prior to such rate increase for the foreign

currency. Likewise, if we were to price our products and services in U.S. dollars while competitors priced their products in a

local currency, an increase in the relative strength of the U.S. dollar would result in our prices being uncompetitive in those

markets. Such fluctuations in currency exchange rates could materially and adversely affect our business, financial condition,

and results of operations.

ITEM IB. Unresolved Staff Comments

Not applicable.

ITEM 2. Properties

Our headquarters are located in San Jose, California. We own or lease facilities in North America, Europe and Asia. The

following is a summary of the locations, functions and approximate square footage of those facilities as of March 31, 2006:

Location Function Square

Footage

North America

San Jose, CA Corporate headquarters 50,000 A

Costa Mesa, CA Tape drive research and development, logistics, manufacturing 158,000

Irvine, CA Tape automation administration, configuration, research and development and

service

117,000

Santa Maria, CA Tape heads research and development 13,000

Colorado Springs, CO Operations and administration 406,000 A

Boulder, CO Tape research and development 133,000 A

Other North America Sales offices 10,000

Europe

Dundalk, Ireland Tape configuration, distribution and service 112,000

Neuchatel, Switzerland European administration 5,000

Irvine, Scotland Logistics 43,000

Wokingham, UK Warehouse 16,000 A

Other Europe Sales, service and administrative offices 16,000 A

Asia

Tokyo, Japan Sales office and media procurement center 10,000

Singapore City, Singapore Sales office and distribution 7,000

Penang, Malaysia Tape drive and heads manufacturing and customer service 104,000

Other Asia Sales offices 5,000

A indicates that a facility is vacant, partially vacant, or sublet.

We believe that our existing facilities are adequate to meet our business needs through the next 12 months. However, there can

be no assurance that we will be able to obtain additional space to accommodate future needs or dispose of excess space as

required on reasonable terms. As of March 31, 2006, the Company owned the facilities in Dundalk, Ireland and Penang,

Malaysia. The Dundalk facility was sold subsequent to year-end.

ITEM 3. Legal Proceedings

For information regarding legal proceedings, refer to Note 14 “Litigation” to the Consolidated Financial Statements.

ITEM 4. Submission of Matters to a Vote of Security Holders

We did not submit any matters to a vote of security holders during the fourth quarter of fiscal year 2006.

PART II

ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Our common stock is traded on the New York Stock Exchange under the symbol “DSS”. As of June 1, 2006, the price of our

common stock was $3.00 per share. The prices per share reflected in the following table represent the range of high and low

closing prices for the quarters indicated.

Fiscal Year 2006 High Low

First quarter ended June 27, 2005 $ 2.96 $ 2.29

Second quarter ended September 26, 2005 $ 3.17 $ 2.66

Third quarter ended December 26, 2005 $ 3.19 $ 2.81

Fourth quarter ended March 31, 2006 $ 3.95 $ 3.02

Fiscal Year 2005 High Low

First quarter ended June 27, 2004 $ 3.88 $ 2.47

Second quarter ended September 26, 2004 $ 3.10 $ 2.09

Third quarter ended December 26, 2004 $ 3.03 $ 2.11

Fourth quarter ended March 31, 2005 $ 3.14 $ 2.51

Historically, we have not paid cash dividends on our common stock and do not intend to pay dividends in the foreseeable

future. Our ability to pay dividends is restricted by the covenants in our credit facility.

As of June 1, 2006, there were 1,877 Quantum stockholders of record including the Depository Trust Company, which holds

shares of Quantum common stock on behalf of an indeterminate number of beneficial owners.

The information required by this item regarding equity compensation plans is set forth in Item 12 of this Annual Report on

Form 10-K.

On July 30, 2003, we issued an aggregate of $160 million 4.375% convertible subordinated notes due 2010 in a private

placement transaction pursuant to Rule 144A under the Securities Act of 1933, as amended. Lehman Brothers, Morgan Stanley

and McDonald Investments, Inc. were the initial purchasers of the notes. In connection with the transaction, Quantum paid the

initial purchasers an aggregate fee of $4 million. The notes are convertible into common stock of Quantum at any time prior to

maturity of the notes at the conversion rate of 229.8851 shares per $1,000 principal amount of the notes. For further discussion

of the issuance, see Note 10 “Credit Agreements, Short-Term Debt and Convertible Subordinated Debt” to the Consolidated

Financial Statements of Quantum under Item 8 of this Annual Report on Form 10-K.

ITEM 6. Selected Financial Data

This summary of selected consolidated financial information of Quantum for fiscal years 2002 to 2006 should be read along

with our Consolidated Financial Statements contained in this Annual Report on Form 10-K. As a result of the disposition of the

HDD business on April 2, 2001 and the network attached storage (“NAS”) business on October 28, 2002, the selected financial

information below presents results of the HDD business and the NAS business as discontinued operations (refer to Note 19

“Discontinued Operations” to the Consolidated Financial Statements).

A number of items affect the comparability of selected financial information as discussed below:

• The results of continuing operations for fiscal year 2006, fiscal year 2005 and fiscal year 2004 included

restructuring charges of $18.6 million, $11.5 million and $15.2 million, respectively. These

restructuring charges were associated mainly with outsourcing manufacturing and cost reduction

activities.

• The results of continuing operations for fiscal year 2006 included loss on settlement charges from the

StorageTek legal settlement and cross license agreement of $18.6 million.

• The results of continuing operations for fiscal year 2003 included a cumulative effect of an accounting

change of $94.3 million related to the adoption of Statement of Financial Accounting Standards

(“SFAS”) No. 142 Goodwill and Other Intangible Assets and $58.7 million for a write-off of goodwill

related to the Storage Systems business. The results of continuing operations for fiscal year 2003 also

included $24.2 million of restructuring charges associated mainly with outsourcing manufacturing and

cost reduction activities and a $7.8 million charge for purchased in-

rocess research and development in

connection with the acquisition of SANlight.

• The results of continuing operations for fiscal year 2002 included the effect of $72.9 million of

restructuring charges associated with the disposition of the HDD business and other cost reduction

activities. The results of operations for fiscal year 2002 also included a $13.2 million charge for

purchased in-process research and development in connection with the acquisition of certain assets of

M4 Data.

• The results of discontinued operations for fiscal year 2002 included the gain on disposition of the HDD

business and a loss from the operations of the NAS business.

(In thousands except per share data)

For the year ended March 31,

Statement of Operations Data: 2006 2005 2004 2003 2002

Product revenue $ 705,606 $ 670,194 $ 677,259 $ 684,156 $ 820,365

Royalty revenue 128,681 123,974 131,125 186,653 209,310

Total revenue 834,287 794,168 808,384 870,809 1,029,675

Cost of revenue 601,847 558,689 556,725 603,646 652,070

Restructuring charges related to cost of revenue 512 - - - -

Total cost of revenue 602,359 558,689 556,725 603,646 652,070

Gross margin 231,928 235,479 251,659 267,163 377,605

Research and development expenses 107,407 96,680 103,471 111,926 111,451

Sales and marketing, general and administrative expenses 127,367 136,813 152,668 171,720 224,274

Goodwill impairment - - - 58,689 -

Restructuring charges 18,118 11,521 15,212 24,200 72,856

Purchased in-process research and development - - - 7,802 13,200

Loss from operations (20,964) (9,535) (19,692) (107,174) (44,176)

Loss from continuing operations (41,479) (3,496) (63,715) (132,088) (49,000)

Income (loss) from discontinued operations - - 1,693 (37,909) 91,502

Cumulative effect of an accounting change - - - (94,298) -

Net income (loss) $ (41,479) $ (3,496) $ (62,022) $ (264,295) $ 42,502

Loss per share from continuing operations:

Basic $

(0.23) $ (0.02) $ (0.36) $ (0.81) $ (0.32)

Diluted $

(0.23) $ (0.02) $ (0.36) $ (0.81) $ (0.32)

Net income (loss) per share:

Basic $

(0.23) $ (0.02) $ (0.35) $ (1.63) $ 0.27

Diluted $

(0.23) $ (0.02) $ (0.35) $ (1.63) $ 0.27

As of March 31,

Balance Sheet Data: 2006 2005 2004 2003 2002

Property, plant and equipment, net $ 38,748 $ 42,716 $ 40,377 $ 59,092 $ 76,405

Total assets $ 663,344 $ 724,614 $ 705,558 $ 921,729 $ 1,193,772

Total long-term convertible debt $ 160,000 $ 160,000 $ 160,000 $ 287,500 $ 287,500

Net current assets of discontinued operations $ - $ - $ - $ - $ 49,605

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Quantum Corporation (“Quantum”, the “Company”, “us”, “we”) (NYSE:DSS), founded in 1980, is a global leader in storage,

delivering reliable backup, recovery and archive solutions that meet demanding requirements for data integrity and availability

with superior price performance and comprehensive service and support.

Quantum has two data storage business segments: the Tape Drive business and the Storage Systems business. Our Tape Drive

business consists of tape drive and tape media products. We are the world’s largest supplier of half-inch cartridge tape drives.

Our DLTtape® Technology is a proprietary standard for tape backup, recovery and archive of business-critical data for the

mid-range enterprise. The installed base of our DLTtape® drives consumes tape media, which in turn generates media revenue

for the Company through either royalties paid to the Company by its licensee who manufacture media or through the sale of

Quantum branded tape media. Through the Certance acquisition in fiscal year 2005, we also offer tape drives aimed at a broad

range of markets, including Travan at the entry-level, DDS / DAT at the low-end, and LTO for mid-range enterprise customers.

The Certance acquisition also brought to Quantum revenues and profits from LTO media royalties, the manufacture of tape

heads and service.

Our Storage Systems business consists of tape automation systems and service and includes disk-based backup systems and

services. We offer the broadest portfolio of low-end tape autoloaders and mid-range to enterprise level libraries in the industry.

We are also one of the pioneers in the disk-based backup market, providing solutions incorporating disk arrays that emulate a

tape library but are optimized for backup and recovery.

We earn our revenue and profits from the sale of products, systems and services mostly to OEM and channel customers. We

face a variety of challenges and opportunities in responding to the dynamics of the technology arena which is characterized by

rapid change, evolving customer demands and intense competition, including competition with several companies who are also

significant customers of the Company. Our DLT and Super DLTtape™ drives have lost market share to LTO based products,

although some of this loss was mitigated with the acquisition of Certance, which manufacture LTO based products. These

challenges result in significant pricing pressures that we face on an on-going basis.

In fiscal year 2006, we made progress in reducing our costs and expenses over the course of the year and increasing the

effectiveness of our operational platform, and in introducing new products in both of our businesses. Our results were mixed,

however, as the newer products were not introduced until well into the second half of the year and revenues from these products

only partially offset the decline of older product revenues. Additionally, sales to one of our biggest customers declined in

recent quarters as that customer manufactures its own competing tape drive and media products.

In fiscal year 2006, we had total net revenues of $834 million. This represented an increase from fiscal year 2005, which was

$794 million, primarily due to increases in tape drive, media and royalty revenue from the acquisition of Certance, partially

offset by a decrease in revenue in the Storage Systems business. The Company’s revenue performance can be inherently

volatile from quarter to quarter due to product and media mix shifts, sales channel shifts, seasonal strength or weakness,

product platform transitions, and general IT spending conditions.

The Company’s overall gross margin percentage declined 1.9% points from 29.7% fiscal year 2005 to 27.8% in fiscal year

2006 primarily due to lower average unit prices on older products, not offset by average unit prices on the newer products.

Again, the Company’s gross margin percentage can be inherently volatile from quarter to quarter due to the portion of total

revenue attributable to media royalty, the mix between royalty and branded media revenue, the mix between low-end and high-

end automation products, and the mix between sales through our OEM relationships versus our branded enterprise sales force.

Prior to the Certance acquisition, Quantum had outsourced the manufacturing of its products to global contract manufacturers.

With the acquisition of Certance, the Company inherited vertically-integrated manufacturing capabilities for tape drives and

heads, located principally in Penang, Malaysia. In an effort to reduce costs and increase quality, manufacturing will be moved

from several of our contract manufacturers to our in-house facility in Penang, Malaysia. In fiscal year 2006, we continued to

reduce our on-going cost structure by reducing and consolidating our global workforce, consolidating our global property

portfolio and taking other discretionary expense reduction measures. These actions led to an operating expense level of

approximately $253 million (30.3% of revenues) in fiscal year 2006, versus roughly $245 million (30.9% of revenue) in the

prior fiscal year. Our fiscal year 2006 results included $18.6 million of restructuring charges, of which $9.0 million related to

the closing of the repair site in Dundalk, Ireland and the outsourcing of repair operations in the European region.

During fiscal year 2006, our operating activities generated positive cash flows of approximately $3 million. Our focus on cash

management remains a top priority and we plan to continue to improve our cash conversion cycle. The cash conversion cycle is

the duration between the purchase of inventories and services and the collection of the cash for the sale of our products and

services. As of March 31, 2006, we had a total cash, cash equivalents and marketable debt securities of approximately $223

million, down from the prior fiscal year ending balance of $250 million, primarily reflecting the $20 million payment for the

StorageTek legal settlement and cross license agreement along with business related capital expenditures, offset by the cash

generated from operations noted above.

The following discussion of our financial condition and results of operations is intended to provide information that will assist

in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and

the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect

our financial statements.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our discussion and analysis of the financial condition and results of operations is based on the accompanying Consolidated

Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United

States of America. The preparation of these statements requires us to make significant estimates and judgments about future

uncertainties that affect reported assets, liabilities, revenues and expenses and related disclosures. We base our estimates on

historical experience and on various other assumptions believed to be reasonable under the circumstances. In the event that

estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more

current information. We believe that the following accounting policies require our most difficult, subjective and complex

judgments because of the need to make estimates about the effect of matters that are inherently uncertain. The judgments and

uncertainties that affect the application of those policies in particular could result in materially different amounts being reported

under different conditions or using different assumptions.

Revenue Recognition

Revenue from sales of products to distributors, VARs, OEMs and end-users is recognized: when passage of title and risk of

ownership are transferred to customers; when persuasive evidence of an arrangement exists; when the price to the buyer is fixed

or determinable; and when collection is reasonably assured. In the period when the revenue is recognized for either OEMs or

distributors, allowances are provided for estimated future price adjustments, such as volume rebates, price protection, and

future product returns. Since we have historically been able to reliably estimate the amount of allowances required for future

price adjustments and product returns, we recognize revenue, net of projected allowances, upon shipment to our customers.

These allowances are based on the OEMs’ and distributors’ master agreements, programs in existence at the time the revenue is

recognized, historical information, contractual limits and plans regarding price adjustments and product returns. Revenue from

distributor arrangements is a significant portion of our total revenue. If we were unable to reliably estimate the amount of future

price adjustments and product returns in any specific reporting period, then we would be required to defer recognition of the

revenue until the right to future price adjustments and product returns lapsed and we were no longer under any obligation to

reduce the price or accept the return of the product.

Quantum licenses certain intellectual property to third party manufacturers under arrangements that are represented by master

contracts, allowing these third party manufacturers to manufacture and sell certain of our products. As consideration for

licensing the intellectual property, the licensees pay us a per-unit royalty for sales of their products that incorporate the licensed

technology. On a periodic basis, the licensees provide us with unit reports that include the quantity of units sold to end users

subject to royalties. We recognize revenue based on the unit reports, which are provided to us in a timely fashion. The unit

report substantiates that the delivery has occurred. Royalty revenue is measured by multiplying the units sold as reflected in the

unit reports by the royalty per unit in accordance with the royalty agreements. Royalty payments are made on a per unit basis at

a stipulated per unit amount.

When elements such as hardware and services are contained in a single arrangement, or in related arrangements with the same

customer, we allocate revenue to the separate elements based on relative fair value, provided we have fair value for all elements

of the arrangement. If in an arrangement we have fair value for undelivered elements but not the delivered element, we defer

the fair value of the undelivered elements and the residual revenue is allocated to the delivered elements. Undelivered elements

typically include installation and services. If fair value does not exist for undelivered elements, then revenue for the entire

arrangement is deferred until all elements have been delivered. Revenue from extended warranty and product service contracts

is initially deferred and recognized as revenue ratably over the contract period.

Stock-Based Compensation

We adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 Accounting for

Stock-Based Compensation as amended by SFAS No. 148 Accounting for Stock-Based Compensation —Transition and

Disclosure and provide pro forma disclosure using the Black-Scholes option pricing model to value our employee stock

options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, and

is not remeasured as a result of subsequent stock price fluctuations. The Black-Scholes option pricing model was developed for

use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option

pricing models require the input of highly subjective assumptions, including the expected stock price volatility. We use

projected volatility rates, which are based upon historical volatility rates.

Warranty expense and liability

We generally warrant our products against defects for 6 to 48 months from the date of sale and provide warranty service on tape

drives on a return-to-factory basis. Our tape automation systems may carry service agreements available to customers to extend

or upgrade the warranty service. We perform services from our facilities in Dundalk, Ireland and Penang, Malaysia, to support

warranty and service obligations for tape drives, automation systems and other storage products. During fiscal year 2006, we

started transitioning out of Dundalk, Ireland to Jabil Hungary. We also provide tape library warranty service from our facility in

Costa Mesa, California. Jabil Global Service provides screen and repair services in Reynosa, Mexico for North America tape

drives and in Hungary for EMEA tape drives. In addition, we employ various other third party service providers throughout the

world that perform tape drive, tape library and automation services for us.

We estimate future failure rates based upon both historical product failure data and anticipated future failure rates. Similarly,

we estimate future costs of repair based upon both historical data and anticipated future costs. The Company uses a model and

exercises considerable judgment in determining the underlying estimates. While our judgment requires an element of

subjectivity for all of our products (for example, historical rates of return are not completely indicative of future return rates and

we must therefore exercise judgment with respect to future deviations from our historical return rate), our judgment is subject to

a greater degree of subjectivity with respect to newly introduced products because of the lack of past experience with those

products upon which to base our estimates. We recently introduced a number of new products, of which we are in the early

stages of volume shipment and we are experiencing improved quality on our existing products which both influence failure

rates. When actual failure rates differ significantly from our estimates, we record the impact of these unforeseen costs or cost

reductions in subsequent periods and update our assumptions and forecasting models accordingly. As our new products mature

and we continue to experience improved quality on our existing products, we are able to improve our estimates with respect to

these products. Therefore, it is reasonably likely that we will have to update our assumptions for failure rates (and, therefore,

warranty expense liability) in the future, particularly given that we recently introduced a number of new products of which we

are in the early stages of volume shipment.

Similarly, we are in the process of consolidating and outsourcing manufacturing repair sites, which affect the future costs of

repair. Our expected costs associated with this outsourcing initiative consist of outsourcing product repairs to third parties,

with whom we negotiate on-going outsourcing arrangements, as well as transition costs from-in-house repair to outsourcing. If

the actual costs were to differ significantly from our estimates, we would record the impact of these unforeseen costs or cost

reductions in subsequent periods. For example, as disclosed in Note 9 “Accrued Warranty and Indemnifications” to the

Consolidated Financial Statements, we recorded adjustments to warranties issued in the prior fiscal year as additional

information impacting the calculation of warranty provision subsequently became available.

Inventory Valuation

Our inventory is stated at the lower of cost or market, with cost computed on a first-in, first-out basis (“FIFO”). Adjustments to

reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence, or impaired

balances. Factors influencing these adjustments include decline in demand, rapid technological changes, product life cycle and

development plans, component cost trends, product pricing, physical deterioration, and quality issues. Revisions to these

adjustments would be required if these factors differ from our estimates.

Service Inventories

We value our service inventories at the lower of cost or market. Service inventories consist of both component parts, which are

primarily used to repair defective units, and finished units, which are provided for customer use permanently or on a temporary

basis while the defective unit is being repaired. Cost is determined by the FIFO method and includes direct material, direct

labor, overhead and other direct costs. Market value for components is replacement cost or the cost of acquiring similar

products from our vendors. For finished goods, market value is the estimated selling price less costs to sell and dispose of the

inventories. While cost is readily determinable, the estimates of market involve significant estimates and judgments about the

future.

We carry service inventories because we generally provide product warranty for 6 to 48 months and earn revenue by providing

enhanced warranty and repair service outside this warranty period. We initially record our service inventories at cost and

evaluate the difference, if any, between cost and market at the end of each quarter. The determination of the market value of

service inventories is dependent on estimates, including the estimated amount of component parts expected to be consumed in

the future warranty and out of warranty service, the estimated number of units required to meet future customer needs, the

estimated selling prices of the finished units, and the estimated useful lives of finished units.

We record write-downs for the amount that the cost of service inventories exceeds our estimated market value. No adjustment

is required when market value exceeds cost.

Goodwill and Intangible Assets

We have a significant amount of goodwill and intangible assets on our balance sheet related to acquisitions. As of March 31,

2006, the net amount of $97 million of goodwill and intangible assets represented 15% of total assets.

As a result of adopting SFAS No. 142 Goodwill and Other Intangible Assets on April 1, 2002, we discontinued the

amortization of goodwill. Instead, goodwill was reviewed for impairment upon adoption of SFAS No. 142 and is reviewed

annually thereafter, or more frequently when indicators of impairment are present.

Intangible assets are carried and reported at acquisition cost, net of accumulated amortization subsequent to acquisition. The

acquisition cost is amortized over the estimated useful lives, which generally range from two years to ten years. Intangible

assets are reviewed for impairment whenever events or circumstances indicate impairment might exist in accordance with

SFAS No. 144 Accounting for the Impairment or Disposal of Long-lived Assets. Projected undiscounted net cash flows

expected to be derived from the use of those assets are compared to the respective net carrying amounts to determine whether

any impairment exists. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

The determination of the net carrying value of goodwill and intangible assets and the extent to which, if any, there is

impairment are dependent on material estimates and judgments on our part, including the useful life over which the intangible

assets are to be amortized, and the estimates of the value of future net cash flows, which are based upon further estimates of

future revenues, expenses and operating margins.

Restructuring Charges

In recent periods and over the past several years, we recorded significant restructuring charges related to the realignment and

restructuring of our business operations. These charges represented expenses incurred in connection with certain cost reduction

programs that we have implemented and consisted of the cost of involuntary termination benefits, separation benefits, stock

compensation charges, facilities charges and other costs of exiting activities or geographies.

The charges for severance and exit costs require the use of estimates, primarily related to the number of employees paid

severance, the amount of severance and related benefits to be paid, and the cost of exiting facilities, including estimates and

assumptions related to future maintenance costs, our ability to secure a sub-tenant, if applicable, and any sublease income to be

received in the future.

In the fourth quarter of fiscal year 2003, we became subject to SFAS No. 146 Accounting for Costs Associated with Exit or

Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized

when the liability is incurred rather than at the date of an entity’s commitment to an exit plan. The statement further establishes

fair value as the objective for initial measurement of the liability and that employee benefit arrangements requiring future

service beyond a “minimum retention period” be recognized over the future service period. In the second quarter of fiscal year

2005, severance charges became subject to SFAS No. 112 Employers’ Accounting for Postemployment Benefits since we

currently have a benefit plan with defined termination benefits based on years of service.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes, which requires that deferred tax

assets and liabilities be recognized for the effect of temporary differences between the carrying amounts of assets and liabilities

for financial reporting purposes and the amounts used for income tax purposes. SFAS No. 109 also requires that deferred tax

assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be

realized.

We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty

in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the

deferred tax assets.

Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for

purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this

valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Future income

tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our

valuation allowance.

Quantum believes that, based on current applicable tax laws, it has provided adequate amounts and recorded liabilities for

probable and estimable tax adjustments that may be proposed by various taxing authorities in the U.S., state, and foreign

jurisdictions. These estimated liabilities are recorded on a quarterly basis and estimates are revised based upon new

information that was not available at the time of prior estimates. Our estimates have in the past been subject to change and we

expect that some of our estimates will be subject to change in the future. While our estimated liabilities are recorded based

upon existing tax laws, events may occur in the future that indicate payments of these amounts will be less than estimated, in

which event, reversals of these liabilities would create tax benefits that we would recognize in the periods when we determine

that the liabilities have been reduced. Conversely, events may occur in the future that indicate that payments of these amounts

will be greater than estimated, in which event we would record tax charges and additional liabilities. For example, we may in

the future, decide to negotiate with tax authorities regarding our tax liability in a particular jurisdiction, which could result in a

different outcome than our expected liability. In addition, the regulatory audit statute of limitations for a particular jurisdiction

may expire without Quantum becoming subject to an audit by that jurisdiction or an audit may occur but result in a smaller tax

liability than we had estimated, and we would no longer be required to incur any or all of the liability for that audit, as the case

may be. For example, in the third quarter of fiscal year 2005, we reversed $15.6 million of contingent tax accruals related to a

more favorable than expected outcome of the IRS audit of the fiscal years ending March 31, 1997, 1998, and 1999.

RESULTS OF OPERATIONS FOR FISCAL YEARS 2006, 2005 AND 2004

RESULTS OF CONTINUING OPERATIONS

Revenue

(In thousands) For the year ended March 31, Increase / (decrease)

2006 2005 2004 2006 vs 2005 2005 vs 2004

% of

revenue

% of

revenue

% of

revenue % %

Tape drives $ 336,419 40.3% $ 296,039 37.3% $ 326,528 40.4% $ 40,380 13.6% $ (30,489) -9.3%

Tape media 102,351 12.3% 73,436 9.2% 75,097 9.3% 28,915 39.4% (1,661) -2.2%

Tape media royalty 128,681 15.4% 123,974 15.6% 131,125 16.2% 4,707 3.8% (7,151) -5.5%

Tape Drive Segment 567,451 68.0% 493,449 62.1% 532,750 65.9% 74,002 15.0% (39,301) -7.4%

Storage Systems

Segment 266,836 32.0% 300,719 37.9% 275,634 34.1% (33,883) -11.3% 25,085 9.1%

$ 834,287 100.0% $

794,168 100.0% $ 808,384 100.0% $ 40,119 5.1% $ (14,216) -1.8%

Tape Drive Segment Revenue

Tape Drive Segment revenue increased in fiscal year 2006 compared to fiscal year 2005 due to increased sales of tape drives

and media and royalty revenue related to the Certance acquisition in the fourth quarter of fiscal year 2005.

The increase in tape drives revenue in fiscal year 2006 compared to fiscal year 2005 is primarily driven by sales of tape drives

acquired through the Certance acquisition, partially offset by decreases in unit shipments across most product lines. Unit sales

of the newer replacement products did not offset the decline in unit sales of older products, such as the VS80 and SDLT 320.

The increase in tape media revenue in fiscal year 2006 compared to fiscal year 2005 primarily reflected an overall increase of

sales of tape media related to the Certance acquisition.

The increase in tape media royalties in fiscal year 2006 compared to fiscal year 2005 was substantially driven by a significant

increase in the media royalty revenue associated with the Certance acquisition, partially offset by lower media units sales sold

through our licensees.

Tape Drive Segment revenue decreased in fiscal year 2005 compared to fiscal year 2004 due to a decrease in tape drives

revenue, and to a lesser extent, tape media royalty revenue and media revenue, partially offset by an increase in tape drives

revenue and tape royalty revenue as a result of the acquisition of Certance in the fourth quarter of fiscal year 2005.

The decrease in tape drives revenue in fiscal year 2005 compared to fiscal year 2004 primarily reflected lower average unit

prices and lower unit shipments of older tape drives reaching end of life status, partially offset by increased unit shipments of

latest generation VS160 and the Super DLTTM600 tape drives and additional sales associated with the Certance acquisition.

This decline in tape drives revenue reflected intense competition, less demand from our key OEM customers, and that the

customer qualifications and the corresponding product sales ramp for the latest generation tape drives have taken longer than

we had anticipated.

The decrease in tape media revenue in fiscal year 2005 compared to fiscal year 2004 primarily reflects a decrease in unit sales

due to a decrease in the installed base of tape drives.

The decline in tape media royalties in fiscal year 2005 compared to fiscal year 2004 reflects lower tape media unit sales by our

media licensees, partially offset by an increase in media royalty revenue as a result of the acquisition of Certance in the fourth

quarter of fiscal year 2005. The decrease in tape media unit sales was caused by a corresponding decline in tape drive unit sales

in recent years since our tape drives consume and create demand for media. This has resulted in declining royalties because the

royalties are based on a combination of our licensees’ media revenue and unit sales.

Storage Systems Segment Revenue

The decrease in Storage Systems revenue in fiscal year 2006 compared to fiscal year 2005 was primarily due to decreases in

average unit prices and unit sales across most product lines, particularly in the OEM channel. There was a significant decline

in revenue from some of our larger OEM customers for some of our older products. This decrease was partially offset by unit

sales of the SuperLoader 3 and PX500 series, our newest storage systems products that started shipping during the second

quarter of fiscal year 2006. Sales of newer products have not gained enough traction to completely offset the decline in the

sales of older products.

The increase in Storage Systems revenue in fiscal year 2005 compared to fiscal year 2004 primarily reflected an increase in unit

sales of our autoloader product including ValueLoaders; enterprise class tape library including primarily PX720; and

corresponding service. Shipments of PX720 began in the last half of fiscal year 2004 and continued to increase.

Customers

The following table shows sales to top customers and sales by channel as percent of total revenue:

For the year ended March 31,

2006 2005 2004

Top five customers* 49% 52% 51%

Hewlett-Packard* 18% 22% 26%

Dell* 18% 17% 14%

Sales by channel

OEMs 41% 47% 50%

Third-party distributors 26% 18% 17%

Media royalty revenue, service revenue, sales to value-added resellers, and

sales to other direct customers 33% 35% 33%

100% 100% 100%

* These sales concentrations do not include revenues from sales of media that were sold directly to our top five customers by

our licensees, for which we earn royalty revenue.

Gross Margin

(In thousands) For the year ended March 31, Increase / (decrease)

2006 2005 2004 2006 vs 2005 2005 vs 2004

Tape Drive Segment gross margin $ 183,950 $ 162,545 $ 188,103 $ 21,405 $ (25,558)

Storage Systems Segment gross

margin 47,978 72,934 63,556 (24,956) 9,378

Quantum gross margin $ 231,928 $ 235,479 $ 251,659 $ (3,551) $ (16,180)

Tape Drive Segment gross margin

rate 32.4% 32.9% 35.3% -0.5% -2.4%

Storage Systems Segment gross

margin rate 18.0% 24.3% 23.1% -6.3% 1.2%

Quantum gross margin rate 27.8% 29.7% 31.1% -1.9% -1.4%

Tape Drive Segment Gross Margin

The increase in gross margin dollars in fiscal year 2006 compared to fiscal year 2005 reflected an increase in tape drive sales as

a result of the Certance acquisition, partially offset by lower average unit prices for most other products. Average unit prices

and sales have continued to decrease for our older products, including the VS80 and SDLT 320, while sales of the newer,

higher margin products have not gained enough traction to completely offset the decline in sales of these older products. This

occurrence, as well as a revenue contribution mix from media royalties to branded tape media due to more media product

offerings, contributed to the decrease in the gross margin rate in fiscal year 2006 as compared to the previous fiscal year. The

decrease in gross margin dollars in fiscal year 2005 compared to fiscal year 2004 reflected the impact of a decline in royalty

revenue of $7.2 million, a decline in tape drive unit shipments, and increased cost of repair due to volatility in repair drive

volume.

Storage Systems Segment Gross Margin

The decrease in gross margin dollars in fiscal year 2006 compared to fiscal year 2005 reflected a decrease in the average unit

prices for several of our products, partially offset by sales of newer, higher margin products. In particular, average unit prices

of our highest volume, but older products, such as the ValueLoader and SuperLoader continued to experience price erosion,

causing a deterioration of our gross margins and gross margin rates for those products.

The increase in gross margin in fiscal year 2005 compared to fiscal year 2004 reflected higher revenue, reflecting an increase in

unit sales of our autoloader product, enterprise class tape library and corresponding service. The gross margin increase also

reflected an increase in branded sales which tend to have higher gross margins than OEM sales.

Revenue and Gross Margin Rate Outlook

We operate in challenging and competitive markets. First, our products sell in a mature market with a restrictive distribution

channel dominated by a few OEMs. Sales to one of our biggest customers have declined in recent quarters as that customer

manufactures its own competing tape drive and media products. Additionally, over the past several years, our DLT and Super

DLT tape products have lost market share to LTO based products although some of this revenue loss was mitigated with the

acquisition of Certance, which manufactures LTO based products. Second, in fiscal year 2006, revenues were derived mostly

from our older products that continued to experience pricing and unit sales declines and we were unable to fully offset this

decrease from sales of our new products. In addition, we experienced product transition issues that further impacted revenues

and gross margin rates, including customers delaying purchasing decisions in anticipation of new products, early new product

manufacturing challenges and excess and obsolete inventory exposure. Finally, there is uncertainty in IT spending, and

particularly in the tape drive and automation segments of the storage market. Given other competing technologies, it is unclear

whether the tape drive and automation market segments will remain steady or decline. The associated gross margin rates were

primarily affected by the pricing erosion of older products that declined faster than our costs.

Looking to fiscal year 2007, we have introduced new products into the market that we hope will improve both market share and

average unit pricing. We will continue to make concerted efforts to increase our branded business, which generally provides

higher gross margin rates than OEM sales. Additionally, we continue to derive significant revenue and relatively high gross

margins from our media business, which was further strengthened by the Certance acquisition. Efforts to improve gross

margins are focused on lowering product cost structures through the consolidation of the manufacturing into Penang, Malaysia

and consolidation of suppliers so that we have fewer, more beneficial relationships with greater volume and scale that will

enable us to lower costs. Through improved product quality and cost management, our efforts are also focused on reducing

warranty and repair costs on all of our products.

On May 2, 2006, we entered into an agreement to acquire ADIC, which if consummated, we believe will provide revenue

growth and product and customer diversity as well as a stronger platform for back-up, recovery and archive solutions. This will

enable us to expand beyond tape with solutions that include software and services, and will provide greater market access for

our existing products. We also anticipate that the acquisition would provide greater gross margin improvements through

manufacturing synergies and a revenue mix change due to a shift to more end user customer sales and higher sales of branded

products.

We will continue to work toward capitalizing on our initiatives. However, there are numerous risks to the successful execution

of our business plans. For a discussion of some of the risks and uncertainties that impact our business, see “Risk Factors.”

Operating Expenses

(In thousands) For the year ended March 31, Increase / (decrease)

2006

% of

Segment

Revenue 2005

% of

Segment

Revenue 2004

% of

Segment

Revenue

2006 vs

2005

2005 vs

2004

Tape Drive Segment $ 140,157 24.7% $ 127,955 25.9% $ 142,152 26.7% $ 12,202 $ (14,197)

Storage Systems Segment 94,617 35.5% 105,538 35.1% 113,987 41.4% (10,921) (8,449)

Subtotal 234,774 28.1% 233,493 29.4% 256,139 31.7% 1,281 (22,646)

Restructuring charges 18,118 11,521 15,212 6,597 (3,691)

Total $ 252,892 $ 245,014 $ 271,351 $ 7,878 $ (26,337)

Research and Development Expenses

(In thousands) For the year ended March 31, Increase / (decrease)

2006

% of

Segment

Revenue 2005

% of

Segment

Revenue 2004

% of

Segment

Revenue 2006 vs 2005 2005 vs 2004

Tape Drive

Segment $ 74,681 13.2% $ 62,209 12.6% $ 69,228 13.0% $ 12,472 $ (7,019)

Storage Systems

Segment 32,726 12.3% 34,471 11.5% 34,243 12.4% (1,745) 228

Total $ 107,407 12.9% $ 96,680 12.2% $ 103,471 12.8% $ 10,727 $ (6,791)

Tape Drive Segment Research and Development Expenses

The increase in research and development expenses in fiscal year 2006 compared to fiscal year 2005 primarily reflected

additional headcount and expenses associated with our Certance acquisition, partially offset by cost reduction actions, including

reduced headcount as the Company integrated Certance and, to a lesser extent, completed new product launches. The decrease

in research and development expenses in fiscal year 2005 compared to fiscal year 2004 primarily reflected reduced headcount

expenses as a result of cost reduction actions.

Storage Systems Segment Research and Development Expenses

Research and development expenses in fiscal year 2006 decreased slightly compared to fiscal year 2005 due to the impact of

cost reduction actions, including reduced headcount, partially offset by an increase in material and labor investment in support

of new product launches that occurred within fiscal year 2006. Research and development expenses in fiscal year 2005 stayed

relatively flat compared to fiscal year 2004.

Sales and Marketing Expenses

(In thousands) For the year ended March 31, Increase / (decrease)

2006

% of

Segment

Revenue 2005

% of

Segment

Revenue

2004

% of

Segment

Revenue

2006 vs 2005 2005 vs 2004

Tape Drive

Segment $ 36,471

6.4% $ 31,796 6.4% $ 37,916 7.1% $ 4,675 $ (6,120)

Storage Systems

Segment 48,917 18.3% 55,233 18.4% 59,928 21.7% (6,316) (4,695)

Total $ 85,388

10.2% $ 87,029 11.0% $ 97,844 12.1% $ (1,641) $ (10,815)

Tape Drive Segment Sales and Marketing Expenses

The increase in sales and marketing expenses in fiscal year 2006 compared to fiscal year 2005 primarily reflected increased

headcount from the Certance acquisition and increased spending on marketing and consulting programs. The decrease in sales

and marketing expenses in fiscal year 2005 compared to fiscal year 2004 primarily reflected reduced marketing expenses and

reduced headcount as a result of cost reduction actions.

Storage Systems Segment Sales and Marketing Expenses

The decrease in sales and marketing expenses in the fiscal year 2006 compared to fiscal year 2005 reflected a reduction of

demo units and the impact of cost reduction actions, including reduced headcount. The decrease in sales and marketing

expenses in the fiscal year 2005 compared to fiscal year 2004 reflected decreased spending on marketing programs, reduced

headcount, and product advertising.

General and Administrative Expenses

(In thousands) For the year ended March 31, Increase / (decrease)

2006

% of

Segment

Revenue 2005

% of

Segment

Revenue 2004

% of

Segment

Revenue

2006 vs 2005 2005 vs 2004

Tape Drive

Segment $ 29,005 5.1% $ 33,950 6.9% $ 35,008 6.6% $ (4,945) $ (1,058)

Storage Systems

Segment 12,974 4.9% 15,834 5.3% 19,816 7.2% (2,860) (3,982)

Total $ 41,979 5.0% $ 49,784 6.3% $ 54,824 6.8% $ (7,805) $ (5,040)

Tape Drive Segment General and Administrative Expenses

The decrease in general and administrative expenses in fiscal year 2006 compared to fiscal year 2005 reflected decreased

spending for Sarbanes-Oxley related consulting expenses, general cost reduction actions, and lower legal costs partially offset

by increased headcount from the Certance acquisition. The decrease in general and administrative expenses in fiscal year 2005

compared to fiscal year 2004 partially reflected the impact of cost reduction actions which included reduced headcount and a

release of an expired liability, largely offset by increased legal expenses and the cost of implementing Sarbanes-Oxley Act

requirements.

Storage Systems Segment General and Administrative Expenses

The decrease in general and administrative expenses in fiscal year 2006 compared to fiscal year 2005 resulted from decreased

spending for Sarbanes-Oxley related consulting expenses, the impact of cost reduction actions, including reduced headcount,

and a general decline in discretionary spending. The decrease in general and administrative expenses in fiscal year 2005

compared to fiscal year 2004 resulted from the impact of cost reduction actions which included reduced headcount, partially

offset by the cost of implementing Sarbanes-Oxley Act requirements.

Restructuring Charges

The steps we have taken to return to profitability following our decline in revenue, the sale of the HDD business, and various

acquisition activities have resulted in numerous restructuring charges. We recognized restructuring charges of approximately

$18.6 million during fiscal year 2006 related to severance and benefits and facility costs for the outsourcing of certain

manufacturing and service functions and consolidation of other functions within the company. We have classified $0.5 million

of the charges associated with the Dundalk, Ireland site closure as a component of cost of revenue during fiscal year 2006.

Substantial steps have been completed as of March 31, 2006, and the associated costs have been recorded. Additional charges

may be incurred in the future related to these restructurings, particularly if the actual costs associated with vacant facilities and

other restructured activities are higher than estimated. Until we achieve sustained profitability, we may incur additional

charges in the future related to additional cost reduction steps; future costs that we may incur associated with future cost

reduction activities are not estimable at this time.

The following tables show the restructuring charges for fiscal years 2006, 2005, and 2004:

(In thousands) For the year ended March 31,

By expense type 2006 2005 2004

Severance and benefits $ 15,259 $ 9,465 $ 8,967

Facilities 2,859 1,996 4,979

Fixed assets and other 512 60 1,266

Total $ 18,630 $ 11,521 $ 15,212

By cost reduction actions

Outsource certain manufacturing and service functions $ 9,027 $ 2,540 $ 6,800

Consolidate the operations supporting our two business segments 9,603 8,970 5,300

Other general expense reduction - 11 3,112

Total $ 18,630 $ 11,521 $ 15,212

The following tables show the activity and the estimated timing of future payouts for cost reduction plans:

(In thousands) Severance

and benefits Facilities

Fixed

assets Other Total

Balance as of March 31, 2003 $ 870 $ 4,625 $ - $ 760 $ 6,255

Tape Drive Provision 4,490 4,811 275 - 9,576

Storage Systems Provision 4,816 353 991 - 6,160

Cash payments (6,431) (2,909) - (760) (10,100)

Non-cash charges (789) (2,048) (1,266) - (4,103)

Restructuring charge reversal (339) (185) - - (524)

Balance as of March 31, 2004 2,617 4,647 - - 7,264

Tape Drive Provision 7,604 - - - 7,604

Storage Systems Provision 4,112 2,441 - 60 6,613

Cash payments (8,216) (2,879) - (60) (11,155)

Non-cash charges and other (210) 284 - - 74

Restructuring charge reversal (2,251) (445) - - (2,696)

Balance as of March 31, 2005 3,656 4,048 - - 7,704

Tape Drive Provision 10,265 2,101 - 512 12,878

Storage Systems Provision 5,439 912 - - 6,351

Cash payments (8,736) (3,895) - - (12,631)

Non-cash charges and other (151) (21) - (512) (684)

Restructuring charge reversal (427) (172) - - (599)

Balance as of March 31, 2006 $ 10,046 $ 2,973 $ - $ - $ 13,019

Estimated timing of future payouts:

Fiscal Year 2007 $ 9,259 $ 1,881 $ - $ - $ 11,140

Fiscal Year 2008 to 2013 787 1,092 - - $ 1,879

$ 10,046 $ 2,973 $ - $ - $ 13,019

In fiscal year 2007, we expect to realize approximately $33.1 million of annualized cost savings from various restructuring

programs that occurred in fiscal year 2006. Of this $33.1 million, approximately $11.6 million of the savings is expected to

reflect reduced cost of revenue and the remaining savings reflect reduced operating expenses. The anticipated savings result

primarily from employee headcount reductions and reduced facility costs. However, many factors, including reduced sales

volume and price reductions, which have impacted gross margins in the past, and the addition of, or increase in, other operating

costs, may offset some or all of these anticipated savings.

For more information regarding Restructuring Charges, refer to Note 6 “Restructuring Charges” to the Consolidated Financial

Statements.

Goodwill and Amortization of Intangible Assets

The increase in the amortization expense associated with intangible assets in fiscal year 2006 compared to fiscal year 2005

reflects increased amortization expense as a result of the acquisition of Certance. The increase in fiscal year 2005 compared to

fiscal year 2004 reflects increased amortization expense as a result of the acquisition of Certance, partially offset by the

decreased amortization expense for certain intangibles associated with the acquisition of ATL that have been fully amortized in

fiscal year 2004.

The following table details intangibles asset amortization expense by classification within our Statements of Operations:

(In thousands) For the year ended March 31, Increase (Decrease)

2006 2005 2004 2006 vs 2005 2005 vs 2004

Cost of revenue $ 16,222 $ 13,131 $ 11,900 $ 3,091 $ 1,231

Research and development 581 1,446 1,702 (865) (256)

Sales and marketing 4,290 3,773 4,377 517 (604)

General and administrative 585 528 500 57 28

$ 21,678 $ 18,878 $ 18,479 $ 2,800 $ 399

We assessed the recoverability of our long-lived assets, including intangible assets with finite lives, in accordance with SFAS

No. 144 by comparing projected undiscounted net cash flows associated with those assets against their respective carrying

amounts to determine whether impairment exists. Impairment, if any, would be based on the excess of the carrying amount over

the fair value of those assets. As of March 31, 2006, no such impairment was identified with respect to our acquired intangible

assets.

Refer to Note 5 “Goodwill and Intangible Assets” to the Consolidated Financial Statements for further information on the effect

on goodwill and intangible assets of adopting and applying SFAS No. 142.

Interest Income and Other and Interest Expense

For the year ended March 31, Increase (Decrease)

(In thousands) 2006 2005 2004

2006 vs 2005 2005 vs 2004

Interest income and other, net $ 11,376 $ 8,612 $ 8,917 $ 2,764 $ (305)

Loss on settlement (20,517) - - 20,517 -

Interest expense (9,976) (11,212) (17,617) (1,236) (6,405)

$ (19,117) $ (2,600) $ (8,700) $ 16,517 $ (6,100)

Loss on debt extinguishment $ - $ - $ (2,565) $ - $ 2,565

Interest income and other, net increased in fiscal year 2006 compared to fiscal year 2005 mainly due to $1.3 million in

payments received from a funded benefit trust, a $0.7 million refund received for payroll withholdings and an $0.8 million

increase in interest income earned from higher yielding investments. Interest income and other, net stayed relatively flat in

fiscal year 2005 compared to fiscal year 2004.

The increase in loss on settlement was due to an $18.6 million charge from the StorageTek legal settlement and cross license

agreement settled in fiscal year 2006 and a $1.9 million charge related to another pending settlement.

The decrease in interest expense in fiscal year 2006 compared to fiscal year 2005 was mainly due to fewer letters of credit

outstanding. The decrease in interest expense in fiscal year 2005 compared to fiscal year 2004 was mainly due to the

redemption of the 7% Notes and issuance of $160.0 million of convertible notes at a lower rate of 4.375% in the second quarter

of fiscal year 2004.

During fiscal year 2004, we recorded a loss on debt extinguishment of $2.6 million, which included the redemption premium

and the write-off of unamortized debt issuance fees associated with the $287.5 million convertible debt that was redeemed.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes, which requires that deferred tax

assets and liabilities be recognized for the effect of temporary differences between the carrying amounts of assets and liabilities

for financial reporting purposes and the amounts used for income tax purposes. SFAS No. 109 also requires that deferred tax

assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be

realized.

The tax expense recorded for the fiscal year ending March 31, 2006 was $1.4 million compared to the tax benefit of $8.6

million recorded for the fiscal year ending March 31, 2005 and a tax expense of $32.8 million for the fiscal year ending March

31, 2004. The tax provisions for all fiscal years reflects foreign income taxes and state taxes. Additionally, during fiscal year

2005, Quantum recorded a tax benefit of $15.6 million offset by a tax expense of $3.5 million related to two discrete items.

The $15.6 million tax benefit related to a reduction in the contingent tax accrual resulting from a favorable resolution of the

Internal Revenue Service’s audit of our fiscal years ending March 31, 1997, 1998, and 1999. The $3.5 million tax expense

relates to the U.S. tax associated with our decision to pay a dividend from foreign subsidiaries as provided for under the

Homeland Reinvestment Act. The decision to repatriate foreign earnings was primarily based upon the significant U.S. cash

requirements of the Certance acquisition. The tax expense for fiscal year 2004 reflects foreign withholding taxes on royalty

income and a $21.3 million charge that was recorded to provide a valuation allowance against Quantum’s net deferred tax

assets. Income tax substantially decreased beginning July 1, 2004 due to the elimination of withholding taxes on royalty

income based upon the Japan-US Treaty.

The Company entered into a Settlement Agreement with Maxtor on December 23, 2004, and included a Mutual General

Release and Global Settlement Agreement with Maxtor Corporation, the corporation to which Quantum sold its former hard

disk drive business on April 2, 2001. Under the Settlement Agreement, Quantum and Maxtor:

(a) Settled, released and discharged each other from liability with respect to certain outstanding claims that the parties had

against each other, and which the parties may have against each other in the future, arising out of or related to the

disposition of the hard disk drive business to Maxtor, including claims related to the Tax Sharing and Indemnity

Agreement,

(b) Agreed that Quantum would be entitled to any refunds and be responsible for any deficiency with respect to the

resolution of the Internal Revenue Service’s audits of Quantum for the fiscal years ending March 31, 1997 through and

including March 31, 1999,

Revenue Service’s audit of Quantum for the fiscal years ending March 31, 2000 through and including March 31,

2002, and

(d) Amended certain provisions of the Tax Sharing Agreement, including:

• Section 1 of the Tax Sharing Agreement provided for the sharing of the tax liabilities of the hard disk drive

business acquired by Maxtor and the business retained by Quantum for periods prior to April 2, 2001. Prior to the

Settlement Agreement, Quantum and Maxtor disputed the operation of this section. Under the Settlement

Agreement all claims arising under this section are released and the section is terminated in its entirety.

• Section 3(a) of the Tax Sharing Agreement provided for Maxtor’s indemnity of Quantum for various taxes

attributable to periods prior to April 2, 2001. Under the Tax Sharing Agreement, this indemnity obligation was

limited to the sum of $142,000,000 plus 50% of the excess over $142,000,000. Under the Settlement Agreement,

Maxtor’s remaining tax indemnity liability under section 3(a) for all tax claims is limited to $8,760,000 as of the

date of the Agreement. As of March 31, 2006 $7.3 million remains as the indemnity liability. This amount is

based upon Quantum’s belief that this is the maximum amount of potential remaining tax liabilities which could

be due to various taxing authorities throughout the world. Maxtor has recently been acquired by Seagate, which

has assumed Maxtor’s defense and indemnification obligations.

The Company has provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses,

difficulty in predicting future results and belief that we cannot rely on projections of future taxable income to realize the

deferred tax assets.

Significant management judgment was required in determining our deferred tax assets, liabilities and valuation allowances for

purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this

valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Future income

tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our

valuation allowance.

Quantum believes that, based on current applicable tax laws, it has provided adequate amounts and recorded liabilities for

probable and estimable tax adjustments that may be proposed by various taxing authorities in the U.S., state, and foreign

jurisdictions. These estimated liabilities are recorded on a quarterly basis and estimates are revised based upon new

information that was not available at the time of prior estimates. Our estimates have in the past been subject to change and we

expect that some of our estimates will be subject to change in the future. While our estimated liabilities are recorded based

upon existing tax laws, events may occur in the future that indicate payments of these amounts will be less than estimated, in

which event reversals of these liabilities would create tax benefits that we would recognize in the periods when we determine

that the liabilities have been reduced. Conversely, events may occur in the future that indicate that payments of these amounts

will be greater than estimated, in which event we would record tax charges and additional liabilities. For example, we may in

the future decide to negotiate with tax authorities regarding our tax liability in a particular jurisdiction, which could result in a

different outcome than our expected liability. In addition, the regulatory audit statute of limitations for a particular jurisdiction

may expire without Quantum becoming subject to an audit by that jurisdiction or an audit may occur but result in a smaller tax

liability than we had estimated, and we would no longer be required to incur any or all of the liability for that audit, as the case

may be. For example, in the third quarter of fiscal year 2005, we reversed $15.6 million of contingent tax accruals related to a

more favorable than expected outcome of the IRS audit of the fiscal years ending March 31, 1997, 1998, and 1999.

Related-Party Transactions

Quantum holds loans receivable from employees and officers of $0.1 million and $1.1 million as of March 31, 2006 and March

31, 2005, respectively. The loans are classified in other current assets or other long-term assets, depending on repayment terms,

and bear interest at rates ranging from 6% to 8% per annum.

The loans have provisions for forgiveness based on continued employment and are generally forgiven on a straight-line basis

over two years. The loan forgiveness is being recorded as compensation expense over the forgiveness period. In fiscal years

2006, 2005 and 2004, $0.2 million, $0.8 million and $0.5 million, respectively, were recorded as compensation expense for

loans forgiven.

RESULTS OF DISCONTINUED OPERATIONS

Loss from NAS discontinued operations, net of income taxes

We were previously engaged in the business of developing, manufacturing, and selling NAS solutions for the desktop,

workgroups and enterprises. These NAS products consisted primarily of server appliances that incorporated hard disk drives

and an operating system designed to meet the requirements of entry, workgroup, and enterprise computing environments, where

multiple computer users access shared data files over a local area network.

On October 7, 2002, we entered into an agreement with a privately held third party to sell certain assets and assign certain

contract rights related to our NAS business. The NAS assets that were sold included inventories for resale to customers, service

inventories, fixed assets and intellectual property. The proceeds from the sale included approximately $4.7 million in cash, $3.9

million in restricted equity securities of the buyer with an option to acquire additional equity securities, a secured promissory

note for $2.4 million issued by the buyer and the assumption by the buyer of $1.6 million of warranty liability in connection

with the prior installed base of NAS products. The sale was completed on October 28, 2002. The secured promissory note was

settled in the first quarter of fiscal year 2004 in exchange for the third party acquirer assuming additional obligations. The

restricted equity securities were sold in the second quarter of fiscal year 2005 for $5.1 million.

The following table summarizes the results of the NAS business for the year ended March 31, 2004:

(In thousands)

Gross Profit $ 1,064

Operating Expenses $ (629)

Income from discontinued operations $ 1,693

Income before income taxes $ 1,693

Net income from discontinued operations $ 1,693

The income from discontinued operations in fiscal year 2004 consisted of a reversal of an accrual for warranty expense on NAS

products sold by Quantum with the lapse of the warranty period and a reversal of remaining severance benefits accruals

associated with certain employees impacted by the disposition of the NAS business, which would have been payable by

Quantum had the employees been terminated by the acquirer of the NAS business within a set time from the acquisition date.

RECENT ACCOUNTING PRONOUNCEMENTS

See Recent Accounting Pronouncements in Note 2 “Summary of Significant Accounting Policies” to the Consolidated

Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of

adoption and effects on results of operations and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

As of or for the year ended March 31,

(In thousands) 2006 2005 2004

Cash and cash equivalents $ 123,298 $ 225,136 $ 214,607

Short-term investments $ 99,975 $ 25,000 $ 50,800

Days sales outstanding (DSO) 52.7 53.2 53.0

Inventory turns 7.7 9.7 11.5

Net cash provided by (used in) operating activities of continuing

operations $ 3,419 $ 26,260 $ (2,063)

Net cash provided by (used in) investing activities of continuing

operations $ (115,038) $ (19,548) $ 23,936

Net cash provided by (used in) financing activities of continuing

operations $ 9,781 $ 3,817 $ (29,000)

Fiscal Year 2006

Cash provided by operating activities during the year ended March 31, 2006 of $3.4 million reflected changes in working

capital that provided more cash than was used by the loss from operations, adjusted for non-cash items such as depreciation and

amortization, deferred income taxes, and compensation related to stock incentive plans.

The cash that was provided by working capital during the year ended March 31, 2006, was primarily due to a decrease in

accounts receivable primarily due to lower revenues in the fourth quarter of the fiscal year and improved DSOs, a decrease in

other assets and liabilities primarily due to a receipt of various tax refunds, and an increase in accrued restructuring charges.

These changes were partially offset by other working capital usages primarily due to a decrease in accounts payable and a

decrease in warranty reserves due to a lower installed based and improved product quality. The cash that was used by the loss

from operations, adjusted for non-cash items, included $20 million used to pay for the StorageTek legal settlement and cross

license.

Cash used in investing activities during the year ended March 31, 2006 of $115.0 million was primarily due to net purchases of

short-term investments, purchases of property and equipment, and approximately $20 million in payments made in relation to

the Certance acquisition.

Cash provided by the financing activities of operations during the year ended March 31, 2006 of $9.8 million related to net

proceeds from the exercise of employee stock options and activity related to the employee stock purchase plan, partially offset

by payments of short-term debt.

Fiscal Year 2005

Cash provided by operating activities during the year ended March 31, 2005 of $26.3 million reflected cash provided from the

loss from operations, adjusted for non-cash items such as depreciation and amortization, deferred income taxes, and

compensation related to stock incentive plans, partially offset by cash used for working capital changes.

The cash that was provided by the loss from operations, adjusted for non-cash items, was $40.4 million. This was partially

offset by working capital cash usage due to a decrease in income taxes payable due to a release of IRS related deferred taxes, a

decrease in warranty reserves due to a decrease in the installed base, a decrease in other liabilities and accounts payable

reflecting the impact of lower levels of operating expenses, partially offset by a decrease in accounts receivable.

Cash used in investing activities during the year ended March 31, 2005 of $19.6 million was primarily due to the payments

made in relation to the Certance acquisition and purchases of property and equipment, partially offset by net sales of short-term

investments, proceeds from sale of a Malaysian facility, and proceeds from sale of an equity investment.

Cash provided by the financing activities of operations in year ended March 31, 2005 of $3.8 million related to proceeds from

the exercise of employee stock options and activity related to the employee stock purchase plan, partially offset by principal

payments on short-term debt.

Fiscal Year 2004

Cash used in operating activities during the year ended March 31, 2004 of $2.1 million reflected changes in working capital that

used slightly more cash than was provided by the loss from operations, adjusted for non-cash items such as depreciation and

amortization, deferred income taxes, and compensation related to stock incentive plans. The use of cash in working capital that

resulted from our paying down of accounts payable and other liabilities was partially offset by cash provided by our reductions

in accounts receivable, inventories, and other assets.

Cash used in paying down accounts payable reflected the impact of lower levels of inventory and operating expenses, which in

turn result in lower accounts payable associated with these balances. Cash provided by accounts receivable was primarily due

to lower revenue levels causing lower replenishment of collected accounts receivable and improved DSOs.

Cash provided by investing activities during the year ended March 31, 2004 of $23.9 million primarily reflected net sales of

short-term investments, partially offset by purchases of property and equipment.

Cash used in financing activities during the year ended March 31, 2004 of $29 million primarily reflected the redemption of our

7% convertible subordinated notes and issuance of our 4.375% convertible subordinated notes. As a result, during fiscal year

2004 our cash and cash equivalents decreased by $7 million.

Pending Acquisition

On May 2, 2006, Quantum announced that it entered into a definitive Agreement and Plan of Merger (the “Merger

Agreement”) to acquire Advanced Digital Information Corporation, a Washington corporation (“ADIC”), for approximately

$803 million in cash paid to ADIC shareholders plus $8 million in direct costs of the acquisition. Pursuant to the terms of the

Merger Agreement, each outstanding share of ADIC common stock will be exchanged for cash equal to $12.25 without

interest, with the right to elect, in lieu of cash, 3.461 shares of Quantum common stock. The stock election is subject to pro-

ration such that Quantum will issue no more than approximately 10% of the total merger consideration in Quantum stock. In

addition, Quantum will assume all of ADIC’s outstanding employee stock options according to an option ratio defined in the

Merger Agreement. Consummation of the Merger is subject to customary conditions, including approval of the shareholders of

ADIC, and expiration or termination of the applicable Hart-Scott-Rodino waiting period and receipt of certain foreign antitrust

approvals. On April 27, 2006, Quantum entered into a commitment letter (the “Commitment Letter”) for a $500 million senior

credit facility with Keybank National Association (“KeyBank”). Quantum intends to use the proceeds from the Senior Credit

Facility (i) to fund a portion of the proposed Merger pursuant to the Merger Agreement, (ii) for working capital, and (iii) for

other general corporate purposes. Certain of the officers and directors of ADIC have entered into a voting agreement with

Quantum (the “Voting Agreements”). The Voting Agreements provide that each of the ADIC officers and directors party to

such Voting Agreements will vote all shares of capital stock of ADIC over which such person has voting control in favor of the

approval of the Merger Agreement and the Merger and against approval of any proposal made in opposition to or in

competition with the consummation of the Merger. The Voting Agreement terminates on the earlier of (i) the date of the

Merger, (ii) the date that the Merger Agreement has been validly terminated and (iii) May 2, 2007.

Capital Resources and Financial Condition

Although we were unprofitable over the last few fiscal years, we made progress in reducing operating costs, and we will

continue to focus on improving our operating performance, including increasing revenue, reducing costs, and improving

margins in an effort to return to consistent profitability and to generate positive cash flows from operating activities. We

believe that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, repayment of

debt, contractual obligations, and sustain operations for at least the next 12 months. This belief is dependent upon our ability to

maintain revenue around or above current levels, to maintain or improve gross margins, and to reduce operating expenses in

order to provide net income and positive cash flow from operating activities in the future. This belief also assumes we will not

be forced to make any significant cash payments or otherwise be impacted by restrictions of available cash associated with our

existing letters of credit and our credit facility.

Additionally, on May 2, 2006, we entered into an agreement to acquire ADIC, which if consummated, will be funded through

combined cash of both Quantum and ADIC and new debt financing. If this acquisition closes, resulting expenditures from the

acquisition will be funded through new financing and anticipated positive cash flow from operations. The cash flow from

operations will be a result of our belief that we will be able to manage our assets efficiently and achieve the financial

projections and associated synergies that are anticipated if the deal closes.

Should any of the above assumptions prove incorrect, either in combination or individually, it would likely have a material

negative effect on our cash balances and capital resources.

Generation of net income and positive cash flow from operating activities in a consistent and sustained manner has historically

been an important source of our cash to fund operating needs and, prospectively, will be required for us to fund our business

and to meet our current and long-term obligations. We have taken many actions to offset both the negative impact of lower

revenue and increased competition in our market segments. We cannot provide assurance that the actions we have taken in the

past or any actions we may take in the future will ensure a consistent, sustainable and sufficient level of net income and positive

cash flow from operating activities to fund, sustain or grow our businesses. Certain events that are beyond our control,

including prevailing economic, competitive, and industry conditions, as well as various legal and other disputes, may prevent us

from achieving these required financial objectives. Any inability to achieve consistent and sustainable net income and cash flow

profiles could result in:

(i) Restrictions on our ability to manage or fund our existing operations, which could result in a material and adverse effect

on our future results of operations and financial condition.

(ii) Unwillingness on the part of our bank group partners who provide our credit line to do any of the following:

• Provide a waiver or amendment for any covenant violations we may experience in future periods, thereby triggering a

default under and/or termination of the credit line; or

• Approve any other amendments of our credit line facility we might seek to obtain in order to improve our business.

Any lack of renewal, or waiver or amendment, if needed, could result in the credit line becoming unavailable to us and

any amounts outstanding becoming immediately due and payable. In the case of our secured senior credit facility, this

would mean the loss of our remaining standby letters of credit totaling $2.5 million.

(iii) Further impairment of our financial flexibility, which could require that we raise additional funding in the capital

markets sooner than we otherwise would, and on terms less favorable to us, if available at all.

Any of the above mentioned items, individually or in combination, would have a material and adverse effect on our results of

operations, available cash and cash flows, financial condition, access to capital and liquidity.

Credit line

In December 2002, we entered into a secured senior credit facility with a group of banks, providing us with a $100 million

revolving credit line and a $50 million synthetic lease that contains the same financial covenants as the revolving credit line. In

March 2004, we amended the secured senior credit facility to extend the maturity through March 2006 and adjusted several

covenant requirements. In January 2005, we amended the revolving credit line and the synthetic lease agreement to reflect the

Certance acquisition. The revolving credit line was amended to increase the line from $100 million to $145 million and to

adjust covenant requirements. The amount we can borrow under the revolving credit facility is limited by the amount of

accounts receivable and inventory. In October 2005, Quantum amended and restated the revolving credit line to extend the

maturity to October 2008, adjust covenant levels, and adjust the fee structure. In February 2006, we terminated the synthetic

lease. As of March 31, 2006, $2.5 million was committed to standby letters of credit. Refer to discussion in “Off Balance

Sheet Arrangements-Synthetic Lease Commitment” below.

Borrowings under the revolving credit line bear interest at either the London interbank offering rate (“LIBOR”) with option

periods of one to nine months or a base rate, plus a margin determined by a senior debt to earnings ratio as defined in the credit

agreement. As of March 31, 2006, there were no borrowings under the revolving credit line. The credit facility is secured by a

blanket lien on all of the assets of Quantum and contains certain financial and reporting covenants, which we are required to

satisfy as a condition of the credit line. As of March 31, 2006, we were in compliance with all of the covenants.

Off Balance Sheet Arrangements - Synthetic Lease Commitment

Prior to February 2006, Quantum had a five-year synthetic lease agreement with a group of financial institutions (collectively,

the “lessor”) for a campus facility in Colorado Springs, Colorado, comprised of three buildings, which would have expired in

December 2007. The lease for the three buildings was accounted for as an operating lease in accordance with SFAS No. 13

Accounting for Leases.

The lease agreement stipulated that upon the end of the lease term:

(1) Quantum may renew the lease if the lessor accepts a renewal at its discretion;

(2) Quantum may purchase the facility for approximately $50 million (the “stipulated sales price”); or

(3) If Quantum has paid all sums owing under the lease and is not otherwise in default under the lease or the credit line

facility at the end of the stated lease term, Quantum may find a third party to purchase the facility. In such event,

Quantum has guaranteed any shortfall between the net proceeds from the sale of the property to the third party and the

stipulated sales price, up to a maximum amount payable equal to 87.7% of the stipulated sales price, or $43.9 million.

In February 2006, Quantum terminated its existing synthetic lease agreement with the lessor and completed a sale –leaseback

transaction for this facility. Quantum sold the facility for $54.3 million and the total gain on this asset was approximately $3.2

million, of which $42,000 was recorded during the 2006 fiscal year. The remaining gain has been deferred and will be

recognized over the term of our lease with the purchaser. In connection with this sale, Quantum leased the facility from the

purchaser pursuant to three triple net leases with terms of 5, 7 and 15 years. The leases require Quantum to pay base monthly

rent over their terms in the aggregate amount of approximately $50 million, which is included in the Contractual Obligations

schedule below. Quantum expects to receive approximately $3.0 million under noncancelable subleases through fiscal year

2010.

Capital Resources

On July 30, 2003, we issued 4.375% convertible subordinated notes in an aggregate principal amount of $160 million due in

2010 in a private placement transaction. The notes are unsecured obligations subordinated in right of payment to all of our

existing and future senior indebtedness. The notes mature on August 1, 2010 and are convertible at the option of the holders at

any time prior to maturity into an aggregate of 36.8 million shares of Quantum common stock at a conversion price of $4.35 per

share. We cannot redeem the notes prior to August 5, 2008. We received net proceeds from the notes of $155.1 million after

deducting commissions and expenses.

Per the purchase agreement for the acquisition of M4 Data in April 2001, we issued $1.5 million debentures under the earn out

provisions during the year ended March 31, 2006. These debentures were also redeemed during the year ended March 31,

2006. We are not obligated to issue any additional debentures after fiscal year 2006.

As of March 31, 2006, there was approximately $87.9 million remaining on our authorization to repurchase Quantum common

stock. No stock repurchases were made during the year ended March 31, 2006. Our ability to repurchase common stock is

restricted under our credit facilities.

The table below summarizes our commitments as of March 31, 2006:

Contractual Obligations Payments Due by Period

(in thousands)

Less than 1

year 1 – 3 years 3 – 5 years

More than 5

years Total

Convertible subordinated debt (1) $ 7,000 $ 14,000 $ 168,750 $ - $ 189,750

Purchase obligations 68,691 - - - 68,691

Operating leases 13,945 21,976 17,208 39,684 92,813

Total contractual cash obligations $ 89,636 $ 35,976 $ 185,958 $ 39,684 $ 351,254

(1) Includes interest payment through August 1, 2010, the maturity date of the convertible subordinated debt.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of risks, including changes in interest rates and foreign currency fluctuations.

Market Interest Rate Risk

Changes in interest rates affect interest income earned on our cash equivalents and short-term investments, and interest expense

on short-term and long-term borrowings.

Our cash equivalents and short-term investments consist primarily of auction rate securities and money market funds during the

fiscal years ended March 31, 2006 and 2005. The main objective of these investments was safety of principal and liquidity

while maximizing return, without significantly increasing risk. A hypothetical 100 basis point parallel decrease in the interest

rate curve would have resulted in an approximate $1.2 million and $1.6 million annual decrease in interest income in fiscal

years 2006 and 2005, respectively.

As of March 31, 2006 and March 31, 2005, our senior credit facilities were comprised of a $145 million revolving line of credit

expiring in October 2008. Borrowings under the revolving credit line bear interest at either the London interbank offering rate

(“LIBOR”) with option periods of one to nine months or a base rate, plus a margin determined by a senior debt to Earnings

ratio as defined in the credit agreement. Our outstanding convertible subordinated notes in the aggregate principal amount of

$160 million have a fixed interest rate of 4.375% paid semi-annually in February and August, and mature on August 1, 2010

(refer to Note 10 “Credit Agreements, Short-Term Debt and Convertible Subordinated Debt” to the Consolidated Financial

Statements). In October 2005, Quantum amended and restated the revolving credit line to extend the maturity to October 2008,

adjust covenant levels, and adjust the fee structure.

We did not enter into derivative transactions related to our cash equivalents or short-term investments nor for our existing or

anticipated liabilities during the fiscal years ended March 31, 2006 and 2005.

Foreign Currency Exchange Rate Risk

As a multinational corporation, we are exposed to changes in foreign exchange rates. These exposures may change over time

and could have a material adverse impact on our financial results. During the fiscal years ended March 31, 2006 and 2005, we

did not utilize foreign currency forward contracts to manage the risk of exchange rate fluctuations because we believed that we

had a natural hedge through our worldwide operating structure. We do not anticipate any material effect on our consolidated

financial position utilizing our current hedging strategy.

ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Quantum Corporation – Financial Statements

Consolidated Statements of Operations for the years ended March 31, 2006, 2005 and 2004 50

Consolidated Balance Sheets as of March 31, 2006 and 2005 51

Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004 52

Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2006, 2005

and 2004 53

Notes to Consolidated Financial Statements 54

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm 81

Schedule II – Consolidated Valuation and Qualifying Accounts 83

QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per-share data)

For the year ended March 31,

2006 2005 2004

Product revenue $ 705,606 $ 670,194 $ 677,259

Royalty revenue 128,681 123,974 131,125

Total revenue 834,287 794,168 808,384

Cost of revenue 601,847 558,689 556,725

Restructuring charges related to cost of revenue 512 - -

Total cost of revenue 602,359 558,689 556,725

Gross margin 231,928 235,479 251,659

Operating expenses:

Research and development 107,407 96,680 103,471

Sales and marketing 85,388 87,029 97,844

General and administrative 41,979 49,784 54,824

Restructuring charges 18,118 11,521 15,212

252,892 245,014 271,351

Loss from operations (20,964) (9,535) (19,692)

Interest income and other, net 11,376 8,612 8,917

Loss on litigation settlement (20,517) - -

Interest expense (9,976) (11,212) (17,617)

Loss on debt extinguishment - - (2,565)

Loss before income taxes (40,081) (12,135) (30,957)

Income tax provision (benefit) 1,398 (8,639) 32,758

Loss from continuing operations (41,479) (3,496) (63,715)

Income from discontinued operations, net of income taxes - - 1,693

Net loss $ (41,479) $ (3,496) $ (62,022)

Loss per share from continuing operations

Basic $ (0.23) $ (0.02) $ (0.36)

Diluted $ (0.23) $ (0.02) $ (0.36)

Income per share from discontinued operations

Basic $ - $ - $ 0.01

Diluted $ - $ - $ 0.01

Net loss per share

Basic $ (0.23) $ (0.02) $ (0.35)

Diluted $ (0.23) $ (0.02) $ (0.35)

Weighted average common and common equivalent shares

Basic 184,063 181,111 176,037

Diluted 184,063 181,111 176,037

The accompanying notes are an integral part of these Consolidated Financial Statements.

QUANTUM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

March 31, March 31,

2006 2005

Assets

Current assets:

Cash and cash equivalents $ 123,298 $ 225,136

Short-term investments 99,975 25,000

Accounts receivable, net of allowance for doubtful accounts of $7,843 and $8,962 in

2006 and 2005, respectively 114,020 128,627

Inventories 88,963 67,091

Service inventories 57,316 55,216

Deferred income taxes 7,422 11,361

Other current assets 30,869 47,300

Total current assets 521,863 559,731

Long-term assets:

Property and equipment, less accumulated depreciation 38,748 42,716

Purchased technology, less accumulated amortization 41,237 55,075

Other intangible assets, less accumulated amortization 8,572 12,944

Goodwill 47,178 47,178

Other long-term assets 5,746 6,970

Total long-term assets 141,481 164,883

$ 663,344 $ 724,614

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable $ 67,306 $ 81,447

Accrued warranty 32,422 37,738

Accrued compensation 24,903 28,068

Income taxes payable 8,627 10,001

Accrued restructuring charges 13,019 7,704

Deferred revenue 22,107 20,489

Other accrued liabilities 46,894 57,510

Total current liabilities 215,278 242,957

Long-term liabilities:

Deferred income taxes 6,995 10,974

Convertible subordinated debt 160,000 160,000

Total long-term liabilities 166,995 170,974

Commitments and contingencies

Stockholders' equity:

Preferred stock:

Preferred stock, 20,000,000 shares authorized; - -

no shares issued as of March 31, 2006 and March 31, 2005

Common stock:

Common stock, $0.01 par value; 1,000,000,000 shares authorized;

188,840,566 and 183,875,344 shares issued and outstanding as of

March 31, 2006 and 2005, respectively 1,889 1,839

Capital in excess of par value 272,690 260,570

Retained earnings 3,622 45,101

Accumulated other comprehensive income 2,870 3,173

Stockholders' equity 281,071 310,683

$ 663,344 $ 724,614

The accompanying notes are an integral part of these Consolidated Financial Statements.

QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the year ended March 31,

2006 2005 2004

Cash flows from operating activities:

Loss from continuing operations $ (41,479) $ (3,496) $ (63,715)

Adjustments to reconcile loss from continuing operations to net cash

provided by (used in) operating activities:

Depreciation 20,759 22,195 29,702

Amortization 22,665 20,270 20,479

Deferred income taxes (40) 2 20,890

Compensation related to stock incentive plans 901 1,423 507

Impairment of manufacturing facility - - 2,001

Changes in assets and liabilities:

Accounts receivable 14,607 18,291 16,363

Inventories (21,872) 1,152 13,392

Service inventories (2,100) (2,849) (2,154)

Accounts payable (14,141) (1,520) (37,154)

Income taxes payable (1,374) (9,264) 3,610

Accrued warranty (5,316) (5,044) (11,567)

Accrued compensation (3,165) (7,666) 2,566

Accrued restructuring charges 5,315 (779) 2,228

Deferred revenue 1,618 2,958 904

Other assets and liabilities 27,041 (9,413) (115)

Net cash provided by (used in) operating activities 3,419 26,260 (2,063)

Cash flows from investing activities:

Purchases of short-term investments (1,748,925) (2,958,185) (2,183,510)

Proceeds from sale of short-term investments 1,673,950 2,983,985 2,229,710

Proceeds from sale of facility - 5,137 -

Proceeds from sale of equity investment - 5,138 -

Purchases of property and equipment (20,024) (19,792) (22,264)

Payments made in connection with business acquisitions, net of cash acquired (20,039) (35,831) -

Net cash provided by (used in) investing activities (115,038) (19,548) 23,936

Cash flows from financing activities:

Receipt of payment on receivable from Maxtor Corporation - - 95,833

Settlement of 7% convertible subordinated notes - - (287,500)

Issuance of 4.375% convertible subordinated notes (net of commissions and expense) - - 155,069

Principal payments of short-term debt (1,488) (2,048) -

Proceeds from issuance of common stock, net 11,269 5,865 7,598

Net cash provided by (used in) financing activities 9,781 3,817 (29,000)

Net increase (decrease) in cash and cash equivalents (101,838) 10,529 (7,127)

Cash and cash equivalents at beginning of period 225,136 214,607 221,734

Cash and cash equivalents at end of period $ 123,298 $ 225,136 $ 214,607

Supplemental disclosure of cash flow information:

Cash paid during the year for:

Interest $ 10,732 $ 10,820 $ 21,811

Income taxes, net of refunds $ (1,663) $ 1,390 $ 9,426

Notes payable issued in respect of M4 Data (Holdings) Ltd. acquisition $ - $ 1,511 $ 976

Deferred gain on sale-leaseback $ 3,140 $ - $ -

Common stock issued for achievement of certain earn out provisions of Benchmark

Storage Innovations Inc. acquisition $ - $ - $ 3,591

Value of common stock tendered in satisfaction of employees' income taxes on vesting

of employee stock options $ 351 $ 16 $ 351

The accompanying notes are an integral part of these Consolidated Financial Statements.

QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Common Stock

Capital

in Excess of

Par Value

Retained

Earnings

Accumulated

Other

Comprehensive

Income (Loss) Total

Shares Amount

Balances as of March 31, 2003 175,452 $ 1,755 $ 241,671 $ 110,619 $ 1,117 $ 355,162

Comprehensive income (loss):

Loss from continuing operations - - - (63,715) - (63,715)

Income from discontinued operations, net - - - 1,693 - 1,693

Net loss (62,022)

Other comprehensive income:

Foreign currency translation adjustments - - - - 1,714 1,714

Comprehensive loss (60,308)

Shares issued under employee stock purchase plan 2,792 28 5,385 - - 5,413

Shares issued under employee stock option plans, net 1,015 10 2,256 - - 2,266

Shares issued in connection with business acquisitions 1,058 11 3,498 - - 3,509

Stock compensation expense - - 507 - - 507

Balances as of March 31, 2004 180,317 1,804 253,317 48,597 2,831 306,549

Comprehensive loss:

Net loss - - - (3,496) - (3,496)

Other comprehensive income:

Foreign currency translation adjustments - - - - 342 342

Comprehensive loss (3,154)

Shares issued under employee stock purchase plan 2,191 20 4,630 - - 4,650

Shares issued under employee stock option plans, net 1,367 15 1,180 - - 1,195

Stock compensation expense - - 1,423 - - 1,423

Tax benefits related to stock option plans - - 20 - - 20

Balances as of March 31, 2005 183,875 1,839 260,570 45,101 3,173 310,683

Comprehensive loss:

Net loss - - - (41,479) - (41,479)

Other comprehensive loss:

Foreign currency translation adjustments - - - - (303) (303)

Comprehensive loss (41,782)

Shares issued under employee stock purchase plan 2,148 22 5,145 - - 5,167

Shares issued under employee stock option plans, net 2,818 28 6,074 - - 6,102

Stock compensation expense - - 901 - - 901

Balances as of March 31, 2006 188,841 $ 1,889 $ 272,690 $ 3,622 $ 2,870 $ 281,071

The accompanying notes are an integral part of these Consolidated Financial Statements.

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of Business

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”) (NYSE:DSS), founded in 1980, a global leader in storage,

delivers highly reliable backup, recovery and archive solutions that meet demanding requirements for data integrity and

availability with superior price/performance and comprehensive service and support. We offer customers of all sizes a wide

range of solutions, from leading tape drive and media technologies, autoloaders and libraries to disk-based backup systems. We

are the world's largest volume supplier of both tape drives and tape automation and have pioneered the development of disk-

based systems optimized for backup and recovery.

We have two data storage business segments: the Tape Drive business and the Storage Systems business. Our Tape Drive

business consists of tape drive and tape media cartridge products and service. Our Storage Systems business consists of tape

automation, disk-based backup systems, and service.

Note 2: Summary of Significant Accounting Policies

The preparation of the Consolidated Financial Statements of Quantum in conformity with generally accepted accounting

principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at

the date of the financial statements and the reported amount of revenues and expenses during the period. Quantum bases

estimates on historical experience and on various assumptions about the future that are believed to be reasonable based on

available information. Quantum’s reported financial position or results of operations may be materially different under different

conditions or when using different estimates and assumptions, particularly with respect to critical accounting policies, which

are discussed below. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in

subsequent periods to reflect more current information.

Financial Statement Presentation

The Network Attached Storage (“NAS”) business was sold on October 28, 2002. Accordingly, in the consolidated statements of

operations, the operating results of the NAS business have been classified as "Income (loss) from NAS discontinued operations,

net of income taxes".

The accompanying Consolidated Financial Statements include the accounts of Quantum and its wholly-owned subsidiaries. All

material intercompany accounts and transactions have been eliminated. Certain amounts in prior periods have been reclassified

to conform to the current presentation.

Revenue Recognition

Revenue from sales of products to distributors, VARs, Original Equipment Manufacturers (“OEMs”) and end-users is

recognized: when passage of title and risk of ownership are transferred to customers; when persuasive evidence of an

arrangement exists; when the price to the buyer is fixed or determinable; and when collection is reasonably assured. In the

period when the revenue is recognized for either OEMs or distributors, allowances are provided for estimated future price

adjustments, such as volume rebates, price protection, and future product returns. Since we have historically been able to

reliably estimate the amount of allowances required for future price adjustments and product returns, we recognize revenue, net

of projected allowances, upon shipment to our customers.

These allowances are based on the OEMs’ and distributors’ master agreements, programs in existence at the time the revenue is

recognized, historical information, contractual limits and plans regarding price adjustments and product returns. Revenue from

distributor arrangements is a significant portion of our total revenue. If we were unable to reliably estimate the amount of future

price adjustments and product returns in any specific reporting period, then we would be required to defer recognition of the

revenue until the right to future price adjustments and product returns lapsed and we were no longer under any obligation to

reduce the price or accept the return of the product.

Quantum licenses certain intellectual property to third party manufacturers under arrangements that are represented by master

contracts, allowing these third party manufacturers to manufacture and sell certain of our products. As consideration for

licensing the intellectual property, the licensees pay us a per-unit royalty for sales of their products that incorporate the licensed

technology. On a periodic basis, the licensees provide us with unit reports that include the quantity of units sold to end users

subject to royalties. We recognize revenue based on the unit reports, which are provided to us in a timely fashion. The unit

report substantiates that the delivery has occurred. Royalty revenue is measured by multiplying the units sold as reflected in the

unit reports by the royalty per unit in accordance with the royalty agreements. Royalty payments are made on a per unit basis at

a stipulated per unit amount.

When elements such as hardware and services are contained in a single arrangement, or in related arrangements with the same

customer, we allocate revenue to the separate elements based on relative fair value, provided we have fair value for all elements

of the arrangement. If in an arrangement we have fair value for undelivered elements but not the delivered element, we defer

the fair value of the undelivered elements and the residual revenue is allocated to the delivered elements. Undelivered elements

typically include installation and services. If fair value does not exist for undelivered elements, then revenue for the entire

arrangement is deferred until all elements have been delivered. Revenue from extended warranty and product service contracts

is initially deferred and recognized as revenue ratably over the contract period.

Warranty expense and liability

We generally warrant our products against defects for 6 to 48 months from the date of sale and provide warranty service on tape

drives on a return-to-factory basis. Our tape automation systems may carry service agreements available to customers to extend

or upgrade the warranty service. We perform services from our facility in Dundalk, Ireland and Penang, Malaysia, to support

warranty and service obligations for tape drives, automation systems and other storage products. During fiscal year 2006, we

started transitioning out of Dundalk, Ireland to Jabil Circuit Inc. (“Jabil”) in Hungary. We also provide tape library warranty

service from our facility in Costa Mesa, California. Jabil Global Service provides screen and repair services in Reynosa,

Mexico for North America tape drives and in Hungary for Europe, Middle East and Asia (“EMEA”) tape drives. In addition,

we employ various other third party service providers throughout the world that perform tape drive, tape library and automation

services for us.