Edgar Filing: QUANTUM CORP /DE/

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2007

¨	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

Incorporated Pursuant to the Laws of the State of Delaware

IRS Employer Identification Number 94-2665054

1650 Technology Drive, Suite 800, San Jose, California 95110

(408) 944-4000

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 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 x 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

As of the close of business on January 31, 2008, approximately 205.5 million shares of Quantum Corporation’s common stock were issued and outstanding.

QUANTUM CORPORATION

INDEX


		Page Number
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Statements of Operations	1

	Condensed Consolidated Balance Sheets	2

	Condensed Consolidated Statements of Cash Flows	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Submission of Matters to a Vote of Security Holders	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

SIGNATURE		48

EXHIBIT INDEX		49

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per-share data)

(Unaudited)


	Three Months Ended						Nine Months Ended
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Product revenue	$	185,130		$	234,949		$	551,734		$	570,993
Service revenue		40,628			37,923			119,740			83,460
Royalty revenue		26,75			29,027			75,312			84,411

Total revenue		252,511			301,899			746,786			738,864
Cost of product revenue		133,885			184,932			412,623			464,275
Cost of service revenue		31,453			27,951			90,421			62,935
Restructuring charges related to cost of revenue		—			—			237			—

Total cost of revenue		165,338			212,883			503,281			527,210
Gross margin		87,173			89,016			243,505			211,654
Operating expenses:
Research and development		20,127			30,245			68,985			78,407
Sales and marketing		39,371			36,524			108,980			86,243
General and administrative		18,787			18,048			58,290			46,399
Restructuring charges		98			545			9,429			7,288
In-process research and development		—			—			—			14,700

		78,383			85,362			245,684			233,037

Income (loss) from operations		8,790			3,654			(2,179	)		(21,383	)
Interest income and other, net		331			2,243			6,200			6,273
Interest expense		(10,952	)		(15,266	)		(48,785	)		(25,974	)

Loss before income taxes		(1,831	)		(9,369	)		(44,764	)		(41,084	)
Income tax provision		559			155			678			2,692

Net loss	$	(2,390	)	$	(9,524	)	$	(45,442	)	$	(43,776	)

Basic and diluted net loss per share	$	(0.01	)	$	(0.05	)	$	(0.22	)	$	(0.23	)
Basic and diluted weighted-average common and common equivalent shares		204,243			194,087			201,211			190,814

See accompanying notes to Condensed Consolidated Financial Statements.

QUANTUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)


	December 31, 2007 (Unaudited)			March 31, 2007 (1)
Assets
Current assets:
Cash and cash equivalents	$	83,420		$	60,581
Marketable securities		—			35,000
Accounts receivable, net of allowance for doubtful accounts of $6,777 and $6,431, respectively		209,803			149,435
Inventories		73,657			91,153
Deferred income taxes		14,713			17,137
Other current assets		30,597			33,155

Total current assets		412,190			386,461
Long-term assets:
Property and equipment, less accumulated depreciation		40,447			50,241
Service parts for maintenance, less accumulated amortization		78,147			82,361
Purchased technology, less accumulated amortization		81,685			106,524
Other intangible assets, less accumulated amortization		79,379			92,077
Goodwill		388,670			390,032
Other long-term assets		13,270			18,133

Total long-term assets		681,598			739,368

	$	1,093,788		$	1,125,829

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	98,201		$	92,292
Accrued warranty		22,063			30,669
Deferred revenue, current		69,543			57,617
Current portion of long-term debt		4,000			25,000
Accrued restructuring charges		4,473			13,289
Other accrued liabilities		87,027			110,583

Total current liabilities		285,307			329,450
Long-term liabilities:
Deferred revenue, long-term		28,988			27,634
Deferred income taxes		14,310			16,751
Long-term debt		356,000			337,500
Convertible subordinated debt		160,000			160,000
Other long-term liabilities		13,941			53

Total long-term liabilities		573,239			541,938
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 1,000,000 shares authorized; 205,491 and 197,817 shares issued and outstanding at December 31, 2007 and March 31, 2007, respectively		332,831			308,387
Accumulated deficit		(104,707	)		(60,472	)
Accumulated other comprehensive income		7,118			6,526

Total stockholders’ equity		235,242			254,441

	$	1,093,788		$	1,125,829

(1)	Derived from the March 31, 2007 audited Consolidated Financial Statements included in the Annual Report on Form 10-K, as amended, of Quantum Corporation for fiscal 2007, as filed with the Securities and Exchange Commission on November 21, 2007.

See accompanying notes to Condensed Consolidated Financial Statements.

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	December 31, 2007			December 31, 2006
Cash flows from operating activities:
Net loss	$	(45,442	)	$	(43,776	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		20,411			20,057
Amortization		58,497			38,254
Realized gain on sale of investment		(2,122	)		—
In-process research and development		—			14,700
Gain on Ireland facility closure		—			(476	)
Deferred income taxes		(18	)		(29	)
Share-based compensation		10,424			6,547
Fixed assets written off in restructuring		568			382
Changes in assets and liabilities, net of effects from acquisition and sale of subsidiary:
Accounts receivable		(60,368	)		(5,204	)
Inventories		10,464			18,574
Service parts for maintenance		(7,426	)		(13,924	)
Accounts payable		14,214			(23,108	)
Income taxes payable		33			978
Accrued warranty		(8,606	)		(5,822	)
Deferred revenue		13,280			8,051
Accrued restructuring charges		(8,314	)		(12,962	)
Other assets and liabilities		(1,491	)		(10,624	)

Net cash used in operating activities		(5,896	)		(8,382	)
Cash flows from investing activities:
Purchases of marketable securities		(65,000	)		(564,758	)
Proceeds from sale of marketable securities		100,000			624,757
Purchases of property and equipment		(17,356	)		(11,255	)
Proceeds from sale of Ireland facility		—			6,000
Proceeds from sale of investment		5,441			—
Proceeds from sale of subsidiary, net of cash sold		2,176			—
Payments made in connection with business acquisitions, net of cash acquired		—			(545,385	)

Net cash provided by (used in) investing activities		25,261			(490,641	)
Cash flows from financing activities:
Borrowings of long-term debt, net		441,953			486,683
Repayments of long-term debt		(452,500	)		(7,750	)
Proceeds from issuance of common stock, net		14,021			6,460

Net cash provided by financing activities		3,474			485,393
Net increase (decrease) in cash and cash equivalents		22,839			(13,630	)
Cash and cash equivalents at beginning of period		60,581			123,298

Cash and cash equivalents at end of period	$	83,420		$	109,668

Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest	$	35,275		$	17,963
Income taxes, net of refunds	$	(3,260	)	$	1,635
Value of common stock tendered in satisfaction of employees’ income taxes on vesting of employee share-based awards	$	1,304		$	163
Fair value of stock and options issued in connection with business acquisitions	$	—		$	14,541

See accompanying notes to Condensed Consolidated Financial Statements

QUANTUM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of Business

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”) (NYSE: QTM), founded in 1980, is a leading global storage company specializing in backup, recovery and archive solutions. Combining focused expertise, customer-driven innovation and platform independence, we provide a comprehensive, integrated range of disk, tape and software solutions supported by our sales and service organization. We work closely with a broad network of value-added resellers (“VARs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving data protection needs.

Note 2: Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Quantum and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. The interim financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of March 31, 2007 has been derived from the audited financial statements at that date. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended March 31, 2007, included in our Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission on November 21, 2007.

On August 22, 2006, we completed our acquisition of Advanced Digital Information Corporation (“ADIC”). ADIC’s results of operations and cash flows are included in our Condensed Consolidated Statements of Operations and Cash Flows from this date.

Certain prior period balances in the Condensed Consolidated Financial Statements have been reclassified to conform to current period presentation. In the Condensed Consolidated Statements of Operations, we began presenting revenue and cost of revenue separately for products and services in the first quarter of fiscal 2008 because our service revenue exceeded 10% of our total revenue. We have made a corresponding adjustment to the Condensed Consolidated Statement of Operations for the three and nine months ended December 31, 2006. Our accounting policy for service revenue and cost of revenue is described in Note 3 below. For the three and nine months ended December 31, 2006, we reclassified $1.9 million and $5.7 million, respectively, from research and development expense and $0.9 million and $2.7 million, respectively, from sales and marketing expense to general and administrative expense to conform to the fiscal year 2008 presentation of the allocation of information technology expenses within operating expenses in the Condensed Consolidated Statement of Operations. In the Condensed Consolidated Balance Sheet as of March 31, 2007, we reclassified $6.5 million from accounts payable to other accrued liabilities. These reclassifications have no effect on total assets, stockholders’ equity, net loss or cash flows as previously presented.

Note 3: Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of our audited Consolidated Financial Statements are disclosed in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007, as filed with the Securities and Exchange Commission on November 21, 2007. Significant accounting policies adopted in fiscal 2008 are disclosed below.

Service Revenue and Service Cost of Revenue

Service revenue is derived from contracts for field support provided to our branded customers, in addition to installation and integration services and repair services that are not otherwise included in the base price of the product. See our revenue recognition policy in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007, as filed with the Securities and Exchange Commission on November 21, 2007. Service cost of revenue excludes costs associated with basic warranty support on new branded and OEM products.

We classify expenses as service cost of revenue by estimating the portion of our total cost of revenue that relates to providing field support to our customers under contract, installation and integration services and repair services. These estimates are based upon a variety of factors, including the nature of the support activity and the level of infrastructure required to support the activities from which we earn service revenue. In the event our service business changes, our estimates of cost of service revenue may be impacted.

Note 4: Stock Incentive Plans and Share-based Compensation

Our stock incentive plans (“Plans”) are broad-based, long-term retention programs that are intended to attract and retain talented employees and align stockholder and employee interests. The Plans provide for the issuance of stock options, stock appreciation rights, stock purchase rights and long-term performance awards to our employees, consultants, officers and affiliates. The Plans have 115.7 million shares of stock authorized of which 23.5 million shares of stock were available for grant as of December 31, 2007.

We also have an employee stock purchase plan (“Purchase Plan”) that allows for the purchase of stock at 85% of fair market value at the date of grant or the exercise date, whichever value is less. There were 12.4 million shares available for issuance as of December 31, 2007.

Share-Based Compensation

Share-based compensation charges were (in thousands):


	Three Months Ended				Nine Months Ended
	December 31, 2007		December 31, 2006		December 31, 2007		December 31, 2006
Share-based compensation
Cost of revenue	$	584	$	333	$	1,522	$	854
Research and development		984		717		2,901		1,757
Sales and marketing		861		563		2,444		1,404
General and administrative		1,476		927		3,557		2,532

	$	3,905	$	2,540	$	10,424	$	6,547

Share-based compensation (by type of award)
Stock options	$	1,732	$	1,488	$	4,551	$	3,914
Stock purchase plan		499		338		1,393		990
Restricted stock		1,674		714		4,480		1,643

	$	3,905	$	2,540	$	10,424	$	6,547

The Black-Scholes option pricing model is used to estimate the fair value of options granted under our Plans and rights to acquire stock granted under our Purchase Plan.

Stock Options

The weighted-average estimated values of employee stock option grants, as well as the weighted-average assumptions used in calculating these values during the third quarter and first nine months of fiscal 2008 and 2007, were based on estimates at the date of grant as follows:


	Three Months Ended						Nine Months Ended
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Option life (in years)		3.8			4.2			3.8			4.2
Risk-free interest rate		3.89	%		4.65	%		4.54	%		4.96	%
Stock price volatility		44	%		59	%		45	%		61	%
Dividend yield		—			—			—			—
Weighted-average grant date fair value	$	1.38		$	1.19		$	1.25		$	1.13

Stock Purchase Plan

Under the Purchase Plan, rights to purchase shares are granted during the second and fourth quarter of each fiscal year. The value of rights to purchase shares granted in the second quarter of fiscal 2008 and 2007, respectively, was estimated at the date of grant. No rights to purchase shares were granted during the third quarter of fiscal 2008 or 2007. The weighted-average fair values and the assumptions used in calculating fair values during the nine month periods ended December 31, 2007 and 2006 were as follows:


	Nine Months Ended
	December 31, 2007			December 31, 2006
Option life (in years)		0.5			0.5
Risk-free interest rate		5.04	%		5.17	%
Stock price volatility		36	%		41	%
Dividend yield		—			—
Weighted-average grant date fair value	$	0.77		$	0.55

Restricted Stock

The fair value of the restricted stock awards granted is the intrinsic value as of the respective grant date since the restricted stock awards are granted at no cost to the employees. The weighted-average grant date fair values of restricted stock awards granted during the third quarter and first nine months of fiscal 2008 were $2.99 and $3.02, respectively. The weighted-average grant date fair values of restricted stock awards granted during the third quarter and first nine months of fiscal 2007 were $2.21 and $1.58, respectively.

Stock Activity

Stock Options

A summary of activity relating to our stock options follows (options and aggregate intrinsic value in thousands):


	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of March 31, 2007	36,259		$	3.62
Granted	4,817			3.17
Exercised	(5,731	)		2.21
Expired	(274	)		11.57
Forfeited	(5,822	)		5.42

Outstanding as of December 31, 2007	29,249			3.38	4.59	$	10,569

Vested and expected to vest at December 31, 2007	26,423			3.48	4.49		9,358

Exercisable as of December 31, 2007	18,354			3.89	4.01		6,304

Restricted Stock

A summary of activity relating to our restricted stock follows (shares in thousands):


	Shares		Weighted- Average Grant Date Fair Value
Nonvested at March 31, 2007	3,714		$	1.69
Granted	3,451			3.02
Vested	(1,300	)		2.32
Forfeited	(717	)		1.58

Nonvested at December 31, 2007	5,148			2.44

Note 5: Sale of Malaysia Subsidiary

On July 1, 2007 we sold a Malaysia subsidiary to a third party contract manufacturer (“the Purchaser”) for approximately $8.3 million in cash. We effectively sold the assets of our Malaysian manufacturing operation, including the facility, inventory and other assets and the Purchaser assumed certain liabilities in the sale. There was no gain or loss from this sale. We received net proceeds of $2.2 million, net of cash sold. In connection with the sale agreement, a workforce of approximately 600 employees employed by us at June 30, 2007 transferred their employment to the Purchaser on July 1, 2007. The value of assets sold to and liabilities assumed by the Purchaser on July 1, 2007 was as follows (in thousands):


	Amount
Cash and cash equivalents	$	6,140
Inventories		7,031
Property and equipment, net		5,111
Other assets		422
Accounts payable		(8,305	)
Other accrued liabilities		(2,083	)

	$	8,316

Note 6: Acquisition of Advanced Digital Information Corporation

On August 22, 2006 (the “Acquisition Date”), we completed our acquisition of ADIC, a publicly traded provider of storage solutions for the open systems marketplace, pursuant to the terms of the Agreement and Plan of Merger (“Merger Agreement”), dated May 2, 2006. ADIC’s results of operations are included in our Condensed Consolidated Statements of Operations and Cash Flows from the Acquisition Date. We acquired ADIC to expand our global sales force, market access, and product offerings into the enterprise and data management software space.

The total purchase price for ADIC is comprised of (in thousands, except share and per-share data):


	Amount
Acquisition of 63.4 million shares of outstanding common stock of ADIC at $12.25 per share:
In cash (62.9 million shares)	$	770,612
In exchange for Quantum stock (0.5 million ADIC shares converted to 1.9 million Quantum shares)		4,070
Fair value of ADIC stock options assumed		10,471
Acquisition related transaction costs		7,791

Total purchase price	$	792,944

Pursuant to the Merger Agreement, each outstanding share of ADIC common stock was converted into the right to receive either (a) $12.25 in cash or (b) a number of shares of Quantum common stock equal to the number of ADIC shares of common stock multiplied by 3.461, with ADIC stockholders given the choice to elect to receive cash, stock or a combination of the two.

As of August 22, 2006, ADIC had approximately 2.5 million stock options outstanding. Based on the exchange ratio of 5.9756 calculated in accordance with the formula in the Merger Agreement, we assumed the outstanding options of ADIC, which are exercisable for an aggregate of 14.7 million shares of Quantum common stock.

The fair value of options assumed was calculated using a Black-Scholes valuation model with the following assumptions for vested and unvested options assumed, respectively: expected life of 1.4 to 2.7 years, risk-free interest rate of 5.22% and 5.07%, expected volatility of 36.8% to 45.8% and no dividend yield. The portion of the estimated fair value of unvested ADIC options related to future service is being recognized over the remaining vesting period.

The total purchase price was allocated to ADIC’s net tangible and identifiable intangible assets based on their estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill (in thousands):


	Amount
Current assets	$	390,262
Property and equipment		29,758
Service parts for maintenance		16,067
Long-term assets		2,349
Intangible assets		190,278
Goodwill		341,492
Current liabilities *		(155,076	)
Long-term liabilities		(36,886	)
In-process research and development		14,700

Total purchase price	$	792,944

*	Current liabilities include approximately $13.6 million of a restructuring liability related to the acquisition. The restructuring liability is primarily related to the severance benefits for pre-merger ADIC employees at the time of the acquisition.

Goodwill and long-term liabilities both decreased $1.4 million from March 31, 2007 due primarily to settlement of a German tax contingency and a net decrease in the estimate of severance benefits to be paid to certain pre-merger ADIC employees. In performing our purchase price allocation, we considered, among other factors, our intention for future use of acquired assets, analyses of historical financial performance and estimates of future performance of ADIC’s products. The fair value of intangible assets was based, in part, on a valuation using a discounted cash flow approach and other valuation techniques as well as certain estimates and assumptions. The following table sets forth the components of intangible assets associated with the acquisition and the weighted-average amortization period (fair value in thousands):


	Fair Value		Amortization (Years)
Purchased technology	$	92,493	4.7
Customer lists		92,600	7.1
Trademarks		4,700	5.8
Non-compete agreements		485	5.0

Total intangible assets acquired	$	190,278	5.9

Purchased technology, which comprises products that have reached technological feasibility, includes products in most of ADIC’s product lines, principally the ADIC Scalar^® i2000^TM and Scalar i500^TM libraries and StorNext^® data management software. It also includes a combination of ADIC processes, patents and trade secrets related to the design and development of ADIC’s products. This proprietary know-how can be leveraged to develop new technology and improve our products. Customer lists represent the underlying relationships and agreements with ADIC’s installed customer base.

We expensed in-process research and development (IPR&D) upon acquisition as it represented incomplete ADIC research and development projects that had not reached technological feasibility and had no alternative future use as of the Acquisition Date.

Technological feasibility is established when an enterprise has completed all planning, designing, coding and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features and technical performance requirements.

The value assigned to IPR&D of $14.7 million was determined by considering the importance of each project to our overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows using a discount rate of 18% to their present value based on the percentage of completion of the IPR&D projects. Purchased IPR&D relates to projects associated with the ADIC Scalar i2000 and Scalar i500 products that had not yet reached technological feasibility as of the Acquisition Date and had no alternative future use.

Note 7: Marketable Securities and Other Investments

At December 31, 2007, we did not hold any marketable securities. During the three and nine months ended December 31, 2007 and December 31, 2006, sales of marketable securities resulted in no gains or losses.

Other investments consist of privately held technology companies and private technology venture limited partnerships that are recorded in other long-term assets on the Condensed Consolidated Balance Sheets. At December 31, 2007 and March 31, 2007, we held $1.8 million and $1.5 million, respectively, of investments in private technology venture limited partnerships that are accounted for under the equity method. We recorded a $0.3 million gain for the three and nine months ended December 31, 2007, related to these limited partnership investments. We recorded a $0.3 million loss for the three and nine months ended December 31, 2006, related to these limited partnership investments.

At December 31, 2007, we did not hold any investments in privately held technology companies compared to $3.5 million as of March 31, 2007. During the nine months ended December 31, 2007, we recognized a $0.3 million loss due to an other-than-temporary impairment of an investment in a privately held technology company that had been accounted for under the cost method. We also recognized a gain of $2.1 million from the sale of shares in a privately held technology company that completed an initial public offering during June 2007. During the three months ended December 31, 2007 and the three and nine months ended December 31, 2006, we recognized no gains or losses related to investments in privately held technology companies.

Gains and losses realized from these investments are included in interest and other income, net on the Condensed Consolidated Statements of Operations. We review non-marketable equity investments on a regular basis to determine if there has been any impairment of value which is other than temporary by reviewing their financial information, gaining knowledge of any new financing or other business agreements and assessing their operating viability.

Note 8: Inventories

Inventories consisted of the following (in thousands):


	December 31, 2007		March 31, 2007
Raw materials and purchased parts	$	25,434	$	45,011
Work in process		4,402		7,234
Finished goods		43,821		38,908

	$	73,657	$	91,153

Note 9: Goodwill and Intangible Assets

As of December 31, 2007 and March 31, 2007, goodwill and intangible assets, net of amortization, were $549.7 million and $588.6 million, respectively, and represented approximately 50% and 52% of total assets, respectively. We evaluate goodwill for impairment annually during the fourth quarter of our fiscal year, or more frequently when indicators of impairment are present.

Intangible Assets

Acquired intangible assets are amortized over their estimated useful lives, which generally range from one to ten years. In estimating the useful lives of intangible assets, we consider the following factors:

•

The cash flow projections used to estimate the useful lives of the intangible assets showed a trend of growth that was expected to continue for an extended period of time;

•

Our tape automation systems and our software products, in particular, have long development cycles and have experienced long product life cycles; and

•

Our ability to leverage core technology into backup, recovery and archive solutions and, therefore, to extend the lives of these technologies.

Following is the weighted average amortization period for our intangible assets:


		Amortization (Years)
Purchased technology		6.1
Customer lists		7.0
Trademarks		7.5
Non-compete agreements		1.3
All intangible assets		6.5

The following provides a summary of the carrying value of intangible assets that will continue to be amortized (in thousands):


	As of December 31, 2007							As of March 31, 2007
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Purchased technology	$	189,119	$	(107,434	)	$	81,685	$	189,119	$	(82,595	)	$	106,524
Trademarks		27,260		(21,871	)		5,389		27,260		(19,221	)		8,039
Non-compete agreements		2,000		(1,643	)		357		2,000		(1,568	)		432
Customer lists		108,272		(34,639	)		73,633		108,272		(24,666	)		83,606

	$	326,651	$	(165,587	)	$	161,064	$	326,651	$	(128,050	)	$	198,601

The total amortization expense related to intangible assets was (in thousands):


	Three Months Ended				Nine Months Ended
	December 31, 2007		December 31, 2006		December 31, 2007		December 31, 2006
Purchased technology	$	7,872	$	8,673	$	24,839	$	19,214
Trademarks		853		899		2,650		2,458
Non-compete agreements		25		25		75		42
Customer lists		3,324		4,414		9,973		7,407

	$	12,074	$	14,011	$	37,537	$	29,121

The total expected future amortization related to intangible assets is (in thousands):


	Amortization
Three months ending March 31, 2008	$	11,174
Fiscal 2009		40,203
Fiscal 2010		36,113
Fiscal 2011		28,679
Fiscal 2012 and thereafter		44,895

Total as of December 31, 2007	$	161,064

Note 10: Accrued Warranty and Indemnifications

The quarterly and year-to-date changes in the accrued warranty balance were (in thousands):


	Three Months Ended						Nine Months Ended
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Beginning balance	$	24,082		$	35,341		$	30,669		$	32,422
Warranties assumed from ADIC		—			—			—			6,945
Additional warranties issued		7,375			8,006			19,593			19,614
Settlements made in cash		(9,394	)		(9,802	)		(28,199	)		(25,436	)

Ending balance	$	22,063		$	33,545		$	22,063		$	33,545

Warranties

We generally warrant our products against defects for periods ranging from 12 to 39 months. A provision for estimated future costs and estimated returns for credit relating to warranty is recorded when products are shipped and revenue recognized. Our estimate of future costs to satisfy warranty obligations is primarily based on historical trends and, if believed to be significantly different from historical trends, estimates of future failure rates and future costs of repair including materials consumed in the repair and labor and overhead amounts necessary to perform the repair.

If future actual failure rates differ from our estimates, we would record the impact in subsequent periods. If future actual costs to repair were to differ significantly from our estimates, we would record the impact of these unforeseen cost differences in subsequent periods.

Indemnifications

We have certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. Other than certain product liabilities recorded as of December 31, 2007, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. Contingent liabilities associated with product liability may be mitigated by insurance coverage that we maintain.

In the normal course of business to facilitate transactions of our services and products, we indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our operating results, financial position or cash flows.

Note 11: Convertible Subordinated Debt, Long-Term Debt and Interest Rate Collar

Convertible subordinated debt

On July 30, 2003, we issued 4.375% convertible subordinated notes in the aggregate principal amount of $160 million 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.

Long-term debt

On August 22, 2006, we entered into a secured senior credit facility (“August 22, 2006 credit facility”) with a group of lenders that provided a $150 million revolving credit line, a $225 million term loan and a $125 million second lien term loan with maturity dates of August 22, 2009, August 22, 2012 and August 22, 2013, respectively.

On July 12, 2007, we entered into a senior secured credit agreement (“the new credit agreement”) with a different group of lenders, providing a $50 million revolving credit facility and a $400 million term loan. We borrowed $400 million on the term loan to repay all borrowings under our August 22, 2006 credit facility. The new credit agreement loans are secured by a blanket lien on all of our assets and contain certain financial and reporting covenants. We incurred and capitalized $8.1 million of loan fees related to the new credit agreement which are included in other long-term assets on our Condensed Consolidated Balance Sheet. These fees are being amortized to interest expense over the respective loan terms. In conjunction with the repayment of our August 22, 2006 credit facility, the unamortized debt costs of $8.1 million related to that borrowing were written off to interest expense in the second quarter of fiscal 2008 and are included as a component of amortization in the Condensed Consolidated Statements of Cash Flows. Additionally, we incurred $4.5 million in prepayment fees when we repaid our August 22, 2006 credit facility.

Under the new credit agreement, the $400 million term loan matures on July 12, 2014, but is subject to accelerated maturity on February 1, 2010 if we do not repay, refinance to extend the maturity date, or convert into equity the existing $160 million convertible subordinated debt prior to February 1, 2010. Interest accrues on the term loan at our option either, a prime rate plus a margin of 2.5%, or a three month LIBOR rate plus a margin of 3.5%. The interest rate on the term loan was 8.33% at December 31, 2007. Commencing September 30, 2007, we began to make required quarterly principal payments of $1.0 million on the term loan and we will make a final payment of all outstanding principal and interest at maturity. The term loan may be prepaid at any time, subject to an additional payment of 1.0% of the principal amount being prepaid for any prepayment made before July 12, 2008. In addition, on an annual basis commencing with the fiscal year ending March 31, 2008, we are required to perform a calculation of excess cash flow which may require an additional payment of the principal amount.

Under the new credit agreement we have the ability to borrow up to $50 million under a senior secured revolving credit facility which expires July 12, 2012. We currently have letters of credit totaling $2.3 million, reducing the available borrowings on the revolver to $47.7 million. Interest accrues on the revolving credit facility at our option either, a prime rate plus a margin of 2.5%, or a three month LIBOR rate plus a margin of 3.5%. Annually, we are required to pay a 0.5% commitment fee on undrawn amounts under the revolving credit facility.

During the third quarter of fiscal 2008, we made principal payments of $20 million on the term loan and incurred $0.2 million in prepayment fees. We did not borrow on the revolving credit facility. As of December 31, 2007, we were in compliance with the debt covenants and our outstanding term debt was $360 million.

Interest Rate Collars

We have an interest rate no cost collar instrument that fixes the interest rate on $87.5 million of our variable rate term loan between a three month LIBOR rate floor of 4.64% and a cap of 5.49% through December 2008. Whenever the three month LIBOR rate is greater than the cap, we receive from the financial institution the difference between 5.49% and the current three month LIBOR rate on the notional amount. Conversely, whenever the three month LIBOR rate is lower than the floor, we remit to the financial institution the difference between 4.64% and the current three month LIBOR rate on the notional amount. During the third quarter of fiscal 2008, the three month LIBOR rate was within the floor and cap.

The $87.5 million interest rate collar did not meet all of the criteria necessary for hedge accounting prescribed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. We record the change in fair market value in other accrued liabilities in the Condensed Consolidated Balance Sheets and in interest income and other, net in the Condensed Consolidated Statements of Operations. As of December 31, 2007, the cumulative loss on the interest rate collar was $0.6 million.

the cap, we receive from the financial institution the difference between 5.25% and the current three month LIBOR rate on the notional amount. Conversely, whenever the three month LIBOR rate is lower than the floor, we remit to the financial institution the difference between 2.68% and the current three month LIBOR rate on the notional amount.

We do not engage in hedging activity for speculative or trading purposes.

Note 12: Restructuring Charges

During fiscal 2007, management approved and began executing plans to restructure certain operations of Quantum and pre-merger ADIC to eliminate redundant costs resulting from the acquisition of ADIC, implement strategic roadmap decisions and improve efficiencies in operations.

In the third quarter of fiscal 2008, we continued to implement our roadmap decisions and actions to improve efficiencies in operations. The restructuring charges that resulted from these cost reduction efforts relate to consolidation of our operations. Substantial steps have been completed as of December 31, 2007, and the associated costs have been recorded.

The types of restructuring expense for the three and nine months ended December 31, 2007 and 2006 were (in thousands):


	Three Months Ended					Nine Months Ended
	December 31, 2007			December 31, 2006		December 31, 2007		December 31, 2006
By expense type
Severance and benefits (reversal)	$	(804	)	$	545	$	6,269	$	7,265
Facilities (reversal)		902			—		2,413		(359	)
Fixed assets		—			—		568		382
Other		—			—		416		—

	$	98		$	545	$	9,666	$	7,288

By cost reduction actions
Outsource certain manufacturing and repair functions	$	—		$	425	$	—	$	2,025
Consolidate operations supporting our business		98			120		4,102		5,263
Partner with third party on certain research and development efforts		—			—		5,564		—

	$	98		$	545	$	9,666	$	7,288

Fiscal 2008

During the third quarter of fiscal 2008, our restructuring severance and benefits resulted in a net $0.8 million reversal primarily due to certain employees transferring to fill open positions in other areas of the business and to a lesser extent other employees voluntarily terminating employment prior to fulfilling requirements in order to receive severance payments. We expect the severance and benefit restructuring charges to be paid to the impacted employees during the first half of calendar 2008. For the first nine months of fiscal 2008, net severance and benefits expenses of $6.3 million were primarily the result of our decision to partner with a third party on certain research and development efforts and to a lesser extent actions to improve efficiencies in operations, offset in part by the reversals described above.

We continued activities to consolidate our operations into fewer locations during the third quarter of fiscal 2008, further consolidating our European locations and operations. For the first nine months of fiscal 2008, our facility restructuring charges were the result of consolidation actions in Boulder, Colorado and in Europe as well as early termination fees on telephone and data services. We also recorded $0.6 million in fixed asset write-offs in the first nine months of fiscal 2008 related to disposal of fixed assets due to consolidating operations within our European locations.

In addition to the restructuring charges incurred in the first nine months of fiscal 2008, we had $0.5 million in net reversals related to restructuring costs associated with exiting activities of pre-merger ADIC in the first quarter of fiscal 2008 and no adjustments in either the second or third quarter of fiscal 2008. The reversals were primarily due to severance and benefits costs for employees whose positions were retained in a variety of functions throughout the world. These reversals were recognized in the first quarter of fiscal 2008 as a reduction of the liability assumed in the purchase business combination that had been included in the allocation of the cost to acquire ADIC and, accordingly, resulted in a decrease to goodwill rather than an expense reduction.

Fiscal 2007

We recorded charges of $0.5 million for severance and benefits associated with cost synergies identified during the third quarter of fiscal 2007 resulting from our evaluation and integration of ADIC. The majority of these charges were paid to the impacted employees during fiscal 2007 and the first part of fiscal 2008. In addition to the restructuring charges in the third quarter of fiscal 2007, a net reversal of $1.1 million of restructuring costs associated with exiting activities of ADIC was recorded, due in large part from new information regarding certain pre-merger ADIC employees. Since these costs were recognized as a liability assumed in the purchase business combination, the reversal resulted in a decrease to goodwill rather than a reduction of expense in that period.

We recorded expenses of $6.6 million for severance and benefits associated with cost synergies identified during the second quarter of fiscal 2007 resulting from our evaluation and integration of ADIC. The majority of these charges were paid to the impacted employees during fiscal 2007 and the first part of fiscal 2008. A $0.4 million facilities reversal resulted from determining higher utilization of a Colorado facility, and $0.4 million in fixed asset charges were recorded for assets impacted by the ADIC acquisition. In the first quarter of fiscal 2007, a $0.1 million net charge was recorded for severance as part of an effort to streamline our marketing and IT functions.

In addition to the restructuring expenses in the three and nine months ended December 31, 2006, the net restructuring costs associated with exiting activities of pre-merger ADIC were $14.8 million, consisting primarily of severance and benefits costs and, to a lesser extent, excess facilities obligations. These costs were recognized as a liability assumed in the purchase business combination and were included in the allocation of the cost to acquire ADIC and, accordingly, resulted in an increase to goodwill rather than an expense in the first nine months of fiscal 2007.

Restructuring activity during the three and nine months ended December 31, 2007 and the estimated timing of future payouts for cost reduction actions as of December 31, 2007 was (in thousands):


	For the three months ended December 31, 2007
	Severance and Benefits			Facilities			Other			Total
Balance as of September 30, 2007	$	6,614		$	1,869		$	657		$	9,140
Restructuring costs		—			902			—			902
Reversals		(804	)		—			—			(804	)
Cash payments		(4,379	)		(353	)		(58	)		(4,790	)
Non-cash charges		22			3			—			25

Balance as of December 31, 2007	$	1,453		$	2,421		$	599		$	4,473


	For the nine months ended December 31, 2007
	Severance and Benefits			Facilities			Fixed Assets			Other			Total
Balance as of March 31, 2007	$	10,747		$	792		$	—		$	1,750		$	13,289
Restructuring costs		9,110			2,413			568			562			12,653
Reversals		(3,343	)		—			—			(146	)		(3,489	)
Cash payments		(15,156	)		(787	)		—			(755	)		(16,698	)
Non-cash charges		95			3			(568	)		(812	)		(1,282	)

Balance as of December 31, 2007	$	1,453		$	2,421		$	—		$	599		$	4,473


	Severance and Benefits		Facilities		Other		Total
Estimated timing of future payouts:
Fiscal 2008	$	893	$	695	$	—	$	1,588
Fiscal 2009 to 2013		560		1,726		599		2,885

	$	1,453	$	2,421	$	599	$	4,473

The $4.5 million restructuring accrual as of December 31, 2007 is comprised of obligations for severance and benefits and vacant facilities for both Quantum and pre-merger ADIC in addition to noncancellable purchase obligations for research and development programs. The severance and benefits charges will be paid to the impacted employees during the first half of calendar 2008. We expect the noncancellable purchase obligations to be paid in the first quarter of fiscal 2009. The facilities charges relating to vacant facilities in Europe and the U.S. will be paid over their respective lease terms, which continue through fiscal 2013.

Additional charges may be incurred in the future related to these restructurings, particularly if the actual costs associated with restructured activities are higher than estimated. During the remainder of fiscal 2008, we plan additional implementation of integration savings plans to reduce our ongoing cost structure by consolidating facilities. Until we achieve sustained profitability, we may incur additional charges in the future related to further cost reduction steps. Future charges that we may incur associated with future cost reduction activities are not estimable at this time.

Note 13: Income Taxes

We had a tax expense of $0.6 million for the three months ended December 31, 2007 as compared to $0.2 million for the three months ended December 31, 2006. The tax provisions for the third quarter of both fiscal 2008 and 2007 reflect expenses for foreign income taxes and state taxes. During the third quarter of fiscal 2007, the decision was made not to utilize the provisions of the Homeland Reinvestment Act for dividends paid from foreign subsidiaries on the fiscal 2006 income tax return that was filed during the quarter. The net decrease in tax expense due to this decision was $0.7 million.

The provision for the nine months ended December 31, 2007 and 2006 was $0.7 million and $2.7 million, respectively. The current year-to-date tax provision reflects foreign income taxes and state taxes of $3.0 million largely offset by a benefit of $2.3 million related to tax positions settled in foreign jurisdictions. The prior year-to-date tax provision reflects expenses for foreign and state income taxes of $2.1 million and $1.8 million for withholding taxes associated with the closure of our Neuchatel, Switzerland facility offset by a benefit related to an expected tax refund of $0.5 million for losses associated with the closure of our Ireland facility and a benefit of $0.7 million related to our decision not to utilize the dividend provisions of the Homeland Reinvestment Act on the fiscal 2006 income tax return filed during the third quarter of fiscal 2007.

As a result of our implementation of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109, Accounting for Income Taxes (“FIN No. 48”), we recognized a $1.2 million decrease to the April 1, 2007 accumulated deficit balance due to adjustments for certain unrecognized tax benefits. At April 1, 2007, we had approximately $15.9 million in total unrecognized tax benefits.

During the three and nine months ended December 31, 2007, we recorded a net decrease in our unrecognized tax benefits primarily due to closure of the examination of certain foreign subsidiaries. The total unrecognized tax benefit remaining at December 31, 2007 amounted to $12.3 million, including interest, and is included in other long-term liabilities on the December 31, 2007 Condensed Consolidated Balance Sheet. Of this total, $5.8 million, if recognized, would favorably affect the effective tax rate.

We recognize interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. At December 31, 2007 accrued interest and penalties totaled $1.4 million.

We file our tax returns as prescribed by the laws of the jurisdictions in which we operate. Our U.S. tax returns have been audited for years through 2002 by the Internal Revenue Service. In other major jurisdictions, we are generally open to examination for the most recent three to five fiscal years. Although timing of the resolution and closure on audits is highly uncertain, we do not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.

Note 14: Net Loss Per Share

Following is our computation of basic and diluted net loss per share (in thousands, except per-share data):


	Three Months Ended						Nine Months Ended
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Net loss	$	(2,390	)	$	(9,524	)	$	(45,442	)	$	(43,776	)

Divided by
Weighted average shares outstanding used to compute basic and diluted net loss per share		204,243			194,087			201,211			190,814

Basic and diluted net loss per share	$	(0.01	)	$	(0.05	)	$	(0.22	)	$	(0.23	)

The computations of diluted net loss per share for the periods presented exclude the effect of the following because the effect would have been antidilutive:

•

4.375% convertible subordinated notes issued in July 2003, which are convertible into 36.8 million shares of Quantum common stock (229.885 shares per $1,000 note) at a conversion price of $4.35 per share.

•

Options to purchase 29.2 million shares and 39.2 million shares of Quantum common stock, which were outstanding as of December 31, 2007 and 2006, respectively.

•

Unvested restricted stock of 5.1 million shares and 4.2 million shares at December 31, 2007 and 2006, respectively.

Note 15: Comprehensive Loss

Total comprehensive loss, net of tax, if any, for the three and nine months ended December 31, 2007 and 2006 was (in thousands):


	Three Months Ended						Nine Months Ended
	December 31, 2007			December 31, 2006			December 31, 2007			December 31, 2006
Net loss	$	(2,390	)	$	(9,524	)	$	(45,442	)	$	(43,776	)
Foreign currency translation adjustment		127			241			592			3,222
Unrealized gain (loss) on investments		—			(62	)		—			62

Total comprehensive loss	$	(2,263	)	$	(9,345	)	$	(44,850	)	$	(40,492	)

Note 16: Litigation

On May 18, 2006, a lawsuit was filed in King County Superior Court, Seattle, Washington, naming ADIC and its directors as defendants. The lawsuit is a purported class action filed by Richard Carrigan on behalf of an alleged class of ADIC’s shareholders. Plaintiff alleged, among other things, that the director defendants breached their fiduciary duties in approving the proposed acquisition of ADIC by Quantum that was publicly announced on May 2, 2006. The suit sought to enjoin the defendants from consummating the proposed acquisition and other relief. Though the acquisition was consummated August 22, 2006, the lawsuit remained pending and we continued discussions with the plaintiff to reach a resolution. In January 2007, the parties entered into a memorandum of understanding to settle the litigation and the parties submitted agreement to the Court for approval in May 2007, which was preliminarily approved. We received final approval of the terms of settlement during the second quarter of fiscal 2008.

On October 9, 2007, we filed a lawsuit against Riverbed Technology, Inc (“Riverbed”) in the U.S. District Court in the Northern District of California, alleging Riverbed’s prior and continuing infringement of a patent held by Quantum related to data deduplication technology. On November 13, 2007, Riverbed filed a countersuit against Quantum alleging our infringement of a data deduplication patent held by Riverbed. The parties are currently preparing for trial, which is scheduled for February 2009. Each suit seeks a permanent injunction against the other party, as well as the recovery of monetary damages, including treble damages for willful infringement. We believe that Riverbed’s claims are without merit, that Riverbed’s patent is invalid and we intend to defend ourselves vigorously. Due to the inherent uncertainty of litigation we cannot identify probable or estimable damages related to either lawsuit.

Note 17: Commitments and Contingencies

Lease commitments

We lease certain facilities under noncancellable lease agreements. Some of the leases have renewal options ranging from one to ten years and others contain escalation clauses and provisions for maintenance, taxes or insurance. See future minimum lease payments under operating leases and sublease income in Note 19 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007, as filed with the Securities and Exchange Commission on November 21, 2007.

Commitment for additional investment

As of December 31, 2007, we had commitments to provide an additional $1.3 million in capital funding towards investments we currently hold in two limited partnership venture capital funds. We will invest funds as required until our remaining commitments are satisfied.

Commitments to purchase inventory

We use contract manufacturers for certain manufacturing functions. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon our forecast of customer demand. We are responsible for the financial impact on the contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the contract manufacturer had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for finished goods in excess of current customer demand or for costs of excess or obsolete inventory. As of December 31, 2007, we had issued non-cancelable purchase orders for $62.3 million to purchase finished goods from our contract manufacturers and had accrued $4.5 million and $2.8 million as of December 31, 2007 and March 31, 2007, respectively, for finished goods in excess of current customer demand or for the costs of excess or obsolete inventory.

Note 18: Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies to other accounting pronouncements that require or permit fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is effective for us beginning in fiscal 2009. Adoption of this standard is not expected to have a significant impact on our consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses for which the fair value option has been elected will be reported in earnings. This statement is effective for us beginning in fiscal 2009. We are currently evaluating the impact this statement will have, if any, on our consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations — a Replacement of FASB Statement No. 141. The statement is to be applied prospectively for fiscal years beginning on or after December 15, 2008; therefore it applies to future business combinations. The statement requires more assets acquired and liabilities assumed in future business combinations to be measured at fair value as of the acquisition date. In addition, expenses incurred for all acquisition-related costs are to be expensed and liabilities related to contingent consideration are to be remeasured to fair value each subsequent reporting period. We will adopt SFAS No. 141(R) at the beginning of our 2010 fiscal year, or April 1, 2009. We are currently evaluating the impact this statement may have on our consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. The statement changes how noncontrolling interests in subsidiaries are measured to initially be measured at fair value and classified as a separate component of equity. SFAS No. 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. No gains or losses will be recognized on partial disposals of a subsidiary where control is retained. In addition, in partial acquisitions, where control is obtained, the acquiring company will recognize and measure at fair value all of the assets and liabilities, including goodwill, as if the entire target company had been acquired. The statement is to be applied prospectively for fiscal years beginning on or after December 15, 2008. We will adopt the statement on April 1, 2009, which is the beginning of our 2010 fiscal year. We are currently evaluating the impact this statement will have, if any, on our consolidated financial position or results of operations.

Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 such forward-looking statements including, but not limited to, (1) our expectation that we will continue to derive a substantial majority of our revenue from products based on our tape technology; (2) our expectations regarding the amounts and timing of any future restructuring charges, including cost savings resulting therefrom; (3) our belief that strong competition in the tape drive, tape media and tape automation systems markets will result in further price erosion; (4) our expectation that LTO royalties will continue to increase as the installed base grows and DLT royalties will further decline over time as its installed base continues to decrease; (5) 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; (6) our expectation that we will return to profitability; (7) our goals for our future operating performance, including our revenue growth, amount and mix, our expectations regarding revenue, gross margin and operating expenses for fiscal 2008 and our cash flows; (8) our belief that our ultimate liability in any infringement claims made by any third parties against us will not be material to us; (9) our belief that we may make additional acquisitions in the future; (10) our belief that our total foreign exchange rate exposure is not material; (11) our expectations regarding the benefits of our acquisition of ADIC, including that the combined company will allow us to grow our business and improve our results of operations; (12) our expectations regarding the timing of recognized compensation costs related to our equity awards; (13) our expectations relating to our growth in the disk, software and services markets; (14) our business objectives, key focuses, opportunities and prospects; and (15) our expectation that our emphasis on higher margin opportunities could result in additional declines in our OEM device revenue in the future, 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. 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 information technology spending and the corresponding uncertainty in the demand for tape drives and tape automation products; (4) our ability to realize anticipated benefits from the ADIC acquisition; (5) our ability to achieve anticipated pricing, cost and gross margin levels, particularly on tape drives, given lower volumes and continuing price and cost pressures; (6) the successful execution of our strategy to expand our businesses into new directions; (7) our ability to successfully introduce new products; (8) our ability to achieve and capitalize on changes in market demand; (9) our ability to pay down the principal and interest on our indebtedness; (10) our ability to maintain supplier relationships; and (11) those factors discussed under “Risk Factors” in Part II of this Quarterly Report on Form 10-Q. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement.

OVERVIEW

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a leading global storage company specializing in backup, recovery and archive. Combining focused expertise, customer-driven innovation and platform independence, we provide a comprehensive, integrated range of disk, tape and software solutions supported by our sales and service organization. We work closely with a broad network of value-added resellers (“VARs”), original equipment manufacturers (“OEMs”) and other suppliers to meet our customers’ evolving data protection needs.

We offer a broad range of solutions in the data storage market, providing performance and value to organizations of all sizes. We have a broad portfolio of disk-based backup solutions and are a leading provider of tape libraries and autoloaders, as well as a top supplier of tape drives and media. Our data management software provides technology for shared workflow applications and multi-tiered archiving in high-performance, large-scale storage environments. In addition, our service offerings include a broad range of coverage options to provide the level of support for the widest possible range of information technology environments, with service available in 180 countries.

We earn our revenue from the sale of products, systems and services through an array of channel partners to reach end user customers, which range in size from small businesses and satellite offices to government agencies and large, multinational corporations. Our products are sold under both the Quantum brand name and under the names of various OEM customers. We face a variety of challenges and opportunities in responding to the competitive dynamics of the technology market which is characterized by rapid change, evolving customer demands and intense competition, including competition with several companies that are also significant customers.

We currently are focused on three primary objectives: to continue to expand market access, mainly by building a stronger branded business; to create a stronger growth platform, particularly by expanding our disk-based backup systems and our software businesses; and to improve our financial position, taking advantage of cost savings and enhanced revenue and profit opportunities from our acquisition of ADIC made in the prior fiscal year.

We have implemented significant changes over the last year to better align our investments, cost structure, partnerships and infrastructure around our strategy. We have worked to improve our operating model, particularly through our continued focus on growing the higher margin areas of our business. In addition, we are measuring our operating performance in terms of operating income and cash flow to allow us to pay down our term debt and reduce our interest costs. Implementation of our objectives is intended to result in improved short term performance while providing greater revenue growth potential.

During the third quarter of fiscal 2008, revenue decreased by $49.4 million to $252.5 million while gross margin increased to 34.5% from 29.5% in the same quarter last year. The revenue decrease was primarily due to a $49.8 million decrease in product revenue mainly from decreased revenue from tape automation systems and to a lesser extent decreased revenue from devices and media products. Our continued emphasis on sales of disk-based backup systems and software solutions resulted in a $2.2 million increase in our revenue from these products.

Although revenue decreased for the quarter compared to the same quarter of the prior year, our gross margin percentage increased 500 basis points primarily due to the change in sales mix as the proportion of product sales through our branded channels comprised 62% of non-royalty revenue in the third quarter of fiscal 2008 compared to 54% in the prior year. Sales of branded products typically generate higher gross margins than sales to our OEM customers. Our gross margin on products sold through both branded and OEM channels also increased compared to the prior year due to product mix and decreased cost of sales from implementation of cost cutting measures.

Operating expenses decreased for the current quarter compared to the prior year primarily due to decreased research and development costs. Research and development expenses decreased in the quarter primarily due to reduced compensation and other expenses from implementation of certain strategic and product line initiatives. Sales and marketing expenses increased in line with our emphasis on growing our branded business. Our operating income was the highest quarterly operating income result in three years due to the combination of increased gross margin percentage and decreased operating expenses.

During the quarter, we repaid $20 million of the term loan on our credit facility, and since August 2006, we have repaid 27%, or $137 million, of our acquisition-related debt. As of December 31, 2007, we had not borrowed from our revolving credit line, and our outstanding term debt balance was $360 million at an interest rate of 8.33%. Our weighted average interest rate on the term debt decreased to 8.70% for the third quarter of fiscal 2008 from 9.07% and 10.53% for the second and first quarters of fiscal 2008, respectively, due to terms of the new credit agreement entered into during the second quarter of fiscal 2008. Interest expense for the quarter was $4.3 million lower than the third quarter of fiscal 2007.

RESULTS OF OPERATIONS

We began presenting product and service revenue and cost of revenue separately in the first quarter of fiscal 2008. We made a corresponding reclassification to the Condensed Consolidated Statement of Operations for the three and nine months ended December 31, 2006. See Notes 2 and 3 of the Notes to Condensed Consolidated Financial Statements for additional information. The following discussion and analysis gives effect to this separate presentation.

The results for the first nine months of fiscal 2007 include the results of ADIC from August 22, 2006 while the third quarter of both fiscal 2008 and 2007 and the first nine months of fiscal 2008 include combined Quantum and ADIC results for the full periods.

Revenue


	Three Months Ended
(In thousands)	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Product revenue	$	185,130	73.3	%	$	234,949	77.8	%	$	(49,819	)	(21.2	)%
Service revenue		40,628	16.1	%		37,923	12.6	%		2,705		7.1	%
Royalty revenue		26,753	10.6	%		29,027	9.6	%		(2,274	)	(7.8	)%

Total revenue	$	252,511	100.0	%	$	301,899	100.0	%	$	(49,388	)	(16.4	)%


	Nine Months Ended
	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Product revenue	$	551,734	73.9	%	$	570,993	77.3	%	$	(19,259	)	(3.4	)%
Service revenue		119,740	16.0	%		83,460	11.3	%		36,280		43.5	%
Royalty revenue		75,312	10.1	%		84,411	11.4	%		(9,099	)	(10.8	)%

Total revenue	$	746,786	100.0	%	$	738,864	100.0	%	$	7,922		1.1	%

Total revenue decreased in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 primarily due to decreases in product revenue. For the first nine months of fiscal 2008 compared to fiscal 2007, total revenue increased primarily due to increases in service revenue from our acquisition of ADIC that were largely offset by decreases in product and royalty revenues.

Product Revenue

Our product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased $49.8 million for the third quarter of fiscal 2008 and decreased $19.3 million for the nine months ended December 31, 2007 compared to the respective prior year periods. The product revenue decrease in the third quarter of fiscal 2008 was primarily due to decreased revenue from tape automation systems and to a lesser extent decreased revenue from devices and media products. These decreases were partially offset by increased sales of disk-based backup systems and software solutions. The decrease in product revenue in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007 was primarily due to decreased revenue from sales of devices and media. The decrease in revenue from devices and media was partially offset by an increase in tape automation systems revenue and to a lesser extent an increase in sales of disk-based backup systems and software solutions, both of which are largely attributable to our acquisition of ADIC which was completed during the second quarter of fiscal 2007.

Tape automation systems revenue for the quarter decreased $29.6 million primarily due to decreased sales to our OEM customers. Tape automation systems revenue decreased in almost all product categories compared to the third quarter of fiscal 2007. The largest tape automation systems revenue declines for the quarter were in our entry level systems that are nearing the end of their product lives. For the nine months ended December 31, 2007, tape automation system sales increased $30.2 million from the same period last year primarily due to increased sales of our branded products. The nine months ended December 31, 2006 included slightly over four months of ADIC business, while the companies were fully combined for the nine months ended December 31, 2007. Our midrange tape automation line, including the Scalar^® i500^TM, was the strongest contributor to tape automation systems revenue and product sales growth in the first nine months of fiscal 2008, with sales to both branded and OEM customers.

Revenue from disk-based backup systems and software solutions increased $2.2 million in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. This increase was primarily due to sales of our DXi-Series disk-based products offset in part by declines in sales of our legacy disk-based products. For the nine months ended December 31, 2007, disk-based backup systems and software solutions revenue increased $16.6 million primarily due to sales of our midrange disk-based products and, to a lesser extent, sales of our StorNext^® software.

Product revenue from devices, which includes tape drives and removable hard drives, and non-royalty media sales declined $22.4 million and $66.0 million compared to the third quarter and first nine months of fiscal 2007, respectively, primarily due to decreased sales of mid-range drives sold to OEMs as our older tape drives reach their end of life. Branded media sales increased for the three months ended December 31, 2007 while OEM media sales decreased for both the three and nine months ended December 31, 2007 compared to the respective prior year periods. We de-emphasized sales of media due to market pricing that would have resulted in lower margins on the media products. We expect additional declines in our OEM device revenue in the future resulting from our emphasis on higher margin opportunities.

Service Revenue

Service revenue includes revenue from sales of hardware service contracts, product repair, installation and professional services. Sales of hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time, or both. Service revenue increased $2.7 million and $36.3 million compared to the third quarter and first nine months of the prior year, respectively, largely due to increased service contract revenues from branded customers.

Royalty Revenue

Tape media royalties decreased $2.3 million and $9.1 million in the third quarter and first nine months of fiscal 2008, respectively, due to lower media unit sales sold through our OEM customers. Royalties related to our newer LTO products have been increasing, but at a slower rate than declines in royalties from our maturing DLT products, where we experienced a net reduction in the installed base of DLTtape^® drives. We expect LTO royalties will continue to increase as the installed base grows and DLT royalties will further decline over time as its installed base continues to decrease.

Gross Margin


	Three Months Ended
(In thousands)	December 31, 2007		Gross margin%		December 31, 2006		Gross margin%		Change			% Change
Gross margin	$	87,173	34.5	%	$	89,016	29.5	%	$	(1,843	)	(2.1	)%
Product gross margin		51,245	27.7	%		50,017	21.3	%		1,228		2.5	%
Service gross margin		9,175	22.6	%		9,972	26.3	%		(797	)	(8.0	)%

	Nine Months Ended
	December 31, 2007		Gross margin%		December 31, 2006		Gross margin%		Change			% Change
Gross margin	$	243,505	32.6	%	$	211,654	28.6	%	$	31,851		15.0	%
Product gross margin		139,111	25.2	%		106,718	18.7	%		32,393		30.4	%
Service gross margin		29,319	24.5	%		20,525	24.6	%		8,794		42.8	%

The increase in gross margin percentage during the three and nine months ended December 31, 2007 compared to the prior year was largely due to an increase in the percentage of our product sales through branded channels. Branded sales comprised 62% and 61% of non-royalty revenue for the third quarter and first nine months of fiscal 2008, respectively, as compared to 54% and 52% for the respective prior year periods. Sales of branded products typically generate higher gross margins than sales to our OEM customers. The improvement in gross margin for the nine months was offset in part by increases in non-cash expenses, including an increase in amortization of intangible assets of $5.8 million compared to the prior year.

Product Margin

Product gross margin increased primarily due to the higher proportion of product sales through branded channels. In addition, our gross margin on products sold through both branded and OEM channels increased in the three and nine months ended December 31, 2007 compared to gross margins for product sales through branded and OEM channels for the same periods of the prior year due to a shift in sales mix toward higher margin tape automation systems, disk-based systems and software solutions. Also, during the third quarter and first nine months of fiscal 2008, we continued to implement cost cutting measures to decrease cost of sales compared to the same periods of fiscal 2007. The results from the cost cutting measures also contributed to improved product gross margins in the third quarter and first nine months of fiscal 2008.

Service Margin

For the three months ended December 31, 2007 service gross margin decreased from the same period last year. The decrease was primarily due to costs increasing at a higher rate than service revenues in the quarter, largely due to third party service costs. Service costs outpaced service revenue increases on both a dollar and a percentage basis for the third quarter of fiscal 2008.

For the nine months ended December 31, 2007, service gross margin decreased slightly from the same period last year. The decrease was primarily due to service costs outpacing service revenue increases on both a dollar and a percentage basis for the nine months ended December 31, 2007. Service revenue increased 43.5% while service costs increased 43.7%. For the nine month period, service revenue and service cost increases were primarily due to our acquisition of ADIC in August 2006.

Research and Development Expenses


	Three Months Ended
(In thousands)	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Research and development	$	20,127	8.0	%	$	30,245	10.0	%	$	(10,118	)	(33.5	)%

	Nine Months Ended
	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Research and development	$	68,985	9.2	%	$	78,407	10.6	%	$	(9,422	)	(12.0	)%

Research and development expenses decreased $10.1 million and $9.4 million in the third quarter and first nine months of fiscal 2008, respectively, compared to the prior year periods primarily due to reduced salaries and benefits expenses from reduced headcount. Decreased project material costs and external service provider expenses also contributed to lower research and development expenses in both the third quarter and first nine months of fiscal 2008, primarily due to product launches completed in the prior year. The nine months ended December 31, 2006 included slightly over four months of ADIC operations, while the companies were combined for the nine months ended December 31, 2007. During the first nine months of fiscal 2008, we restructured our research and development support services model to focus investments toward our target growth markets of disk-based systems and software solutions development and reduced investment in tape drive development. In addition, we commenced partnering with a third party on certain research and development efforts in the first quarter of fiscal 2008 which contributed to reduced research and development expenses during the remainder of fiscal 2008.

Sales and Marketing Expenses


	Three Months Ended
(In thousands)	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change		% Change
Sales and marketing	$	39,371	15.6	%	$	36,524	12.1	%	$	2,847	7.8	%

	Nine Months Ended
	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change		% Change
Sales and marketing	$	108,980	14.6	%	$	86,243	11.7	%	$	22,737	26.4	%

The $2.8 million and $22.7 million increases in sales and marketing expense for the three and nine months ended December 31, 2007, respectively, were primarily due to increased salaries and benefits as a result of our larger branded sales force. We are focused on sales of our higher margin branded products, which typically require higher sales and marketing related expenses than sales through OEM channels. The nine months ended December 31, 2006 included slightly over four months of ADIC operations, while the companies were combined for the nine months ended December 31, 2007. Additionally, for the nine months ended December 31, 2007, amortization of intangibles related to our acquisition of ADIC increased $2.6 million compared to the nine months ended December 31, 2006.

General and Administrative Expenses


	Three Months Ended
(In thousands)	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change		% Change
General and administrative	$	18,787	7.4	%	$	18,048	6.0	%	$	739	4.1	%

	Nine Months Ended
	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change		% Change
General and administrative	$	58,290	7.8	%	$	46,399	6.3	%	$	11,891	25.6	%

The $0.7 million increase in general and administrative expenses for the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 was primarily due to increased infrastructure costs, including facility maintenance expenses and data and telecommunications costs to support the combined company. We also incurred legal expenses in the current quarter related to our activities to protect our intellectual property. Largely offsetting the increase was decreased salaries and benefits due to completion of integration and business streamlining initiatives that reduced headcount. Salaries and benefits during the third quarter of fiscal 2008 included share-based compensation expense of $1.5 million, $1.1 million of which was attributable to the modification of the vesting and exercise periods of stock awards held by certain employees. Share-based compensation was $0.9 million during the third quarter of fiscal 2007.

For the first nine months of fiscal 2008, the $11.9 million increase in general and administrative expense was primarily due to increased facilities and related expenses from our acquisition of ADIC. The companies were combined throughout the first nine months of fiscal 2008. ADIC was acquired in August 2006 and is included in our results for slightly over four months of fiscal 2007. Data and telecommunications costs and outside services to support our larger, combined company also contributed to the increased general and administrative costs for the nine months ended December 2007 compared to the prior year. Partially offsetting these increases were decreased salaries and benefits due to headcount reductions from implementation of integration and business streamlining initiatives. Salaries and benefits during the first nine months of fiscal 2008 included share-based compensation expense of $3.6 million, $1.8 million of which was attributable to the modification of the vesting and exercise periods of stock awards held by certain employees. Share-based compensation was $2.5 million during the first nine months of fiscal 2007.

Interest Income and Other, net


	Three Months Ended
(In thousands)	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Interest income and other, net	$	331	0.1	%	$	2,243	0.7	%	$	(1,912	)	(85.2	)%

	Nine Months Ended
	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Interest income and other, net	$	6,200	0.8	%	$	6,273	0.8	%	$	(73	)	(1.2	)%

The decrease in interest income and other, net for the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 was primarily due to decreased interest income. We had a lower average balance of interest-earning assets, including cash and cash equivalents and marketable securities, in the third quarter of fiscal 2008 than the third quarter of fiscal 2007. In addition, foreign exchange expense and costs of interest rate hedges required by our term debt agreement contributed to the decrease in the third quarter of fiscal 2008.

Interest income and other, net was relatively unchanged for the first nine months of fiscal 2008 as compared to the prior year. For the first nine months of fiscal 2008 interest income decreased due to a lower average balance of interest-earning instruments; however, this was largely offset by a realized gain on the sale of Data Domain shares we sold as a selling stockholder in the company’s initial public offering. We received the shares as consideration for a licensing fee relating to a patent cross licensing agreement that we entered into with Data Domain in the fourth quarter of fiscal 2007.

Interest Expense


	Three Months Ended
(In thousands)	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Interest expense	$	10,952	4.3	%	$	15,266	5.1	%	$	(4,314	)	(28.3	)%

	Nine Months Ended
	December 31, 2007		% of revenue		December 31, 2006		% of revenue		Change			% Change
Interest expense	$	48,785	6.5	%	$	25,974	3.5	%	$	22,811		87.8	%

The $4.3 million decrease in interest expense for the third quarter of fiscal 2008 was primarily due to a lower average debt balance resulting from principal payments over the past year. Also contributing to the decreased interest expense for the quarter was a lower average interest rate due to refinancing our acquisition related debt in the second quarter of fiscal 2008.

Interest expense increased $22.8 million for the nine months ended December 31, 2007 primarily due to costs related to retiring our prior debt facility, including recognizing the remaining $8.1 million outstanding balance of capitalized debt costs and $4.5 million in prepayment penalties. Also contributing to the increased interest expense was a higher average balance of long-term debt during the first nine months of fiscal 2008. Our average debt balance was lower for the first nine months of fiscal 2007 compared to fiscal 2008 because we did not draw upon our debt facilities until August 2006 to fund our acquisition of ADIC. As noted above, interest expense also includes the amortization of debt issuance costs for debt facilities. For further information, refer to Note 11 “Convertible Subordinated Debt, Long-Term Debt and Interest Rate Collar” in the Condensed Consolidated Financial Statements.

Income Taxes


	Three Months Ended
(In thousands)	December 31, 2007		% of pre-tax loss		December 31, 2006		% of pre-tax loss		Change			% Change
Income tax provision	$	559	30.5	%	$	155	1.7	%	$	404		260.6	%

	Nine Months Ended
	December 31, 2007		% of pre-tax loss		December 31, 2006		% of pre-tax loss		Change			% Change
Income tax provision	$	678	1.5	%	$	2,692	6.6	%	$	(2,014	)	(74.8	)%

We had tax expense of $0.6 million and $0.7 million for the three and nine months ended December 31, 2007 as compared to tax expense of $0.2 million and $2.7 million for the three and nine months ended December 31, 2006. The tax expense for the third quarter of fiscal 2008 and 2007 is primarily comprised of foreign income taxes and state taxes. The tax expense for the first nine months of fiscal 2008 reflects expenses for foreign income taxes and state taxes of $3.0 million largely offset by a benefit of $2.3 million related to tax positions settled in foreign jurisdictions. The tax expense for the first nine months of fiscal 2007 reflects expenses for foreign and state income taxes of $2.1 million and $1.8 million for withholding taxes associated with the closure of our Neuchatel, Switzerland facility offset by a benefit related to a tax refund of $0.5 million for losses associated with the closure of our Ireland facility and a benefit of $0.7 million related to our decision not to utilize the dividend provisions of the Homeland Reinvestment Act on the fiscal 2006 income tax return filed during the third quarter of fiscal 2007.

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 a reversal or decrease in this 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.

Restructuring

The types of restructuring expense for the three and nine months ended December 31, 2007 and 2006 were (in thousands):


	Three Months Ended					Nine Months Ended
	December 31, 2007			December 31, 2006		December 31, 2007		December 31, 2006
By expense type
Severance and benefits (reversal)	$	(804	)	$	545	$	6,269	$	7,265
Facilities (reversal)		902			—		2,413		(359	)
Fixed assets		—			—		568		382
Other		—			—		416		—

	$	98		$	545	$	9,666	$	7,288

By cost reduction actions
Outsource certain manufacturing and repair functions	$	—		$	425	$	—	$	2,025
Consolidate operations supporting our business		98			120		4,102		5,263
Partner with third party on certain research and development efforts		—			—		5,564		—

	$	98		$	545	$	9,666	$	7,288

Fiscal 2008

We continued activities to consolidate our operations into fewer locations during the third quarter of fiscal 2008, further consolidating our European locations and operations. For the first nine months of fiscal 2008 our facility restructuring charges were the result of consolidation actions in Boulder, Colorado and in Europe as well as early termination fees on telephone and data services. We also recorded $0.6 million in fixed asset write-offs in the first nine months of fiscal 2008 related to disposal of fixed assets due to consolidating operations within our European locations.

Fiscal 2007

Restructuring activity during the three and nine months ended December 31, 2007 and the estimated timing of future payouts for cost reduction actions as of December 31, 2007 was (in thousands):


	For the three months ended December 31, 2007
	Severance and Benefits			Facilities			Other			Total
Balance as of September 30, 2007	$	6,614		$	1,869		$	657		$	9,140
Restructuring costs		—			902			—			902
Reversals		(804	)		—			—			(804	)
Cash payments		(4,379	)		(353	)		(58	)		(4,790	)
Non-cash charges		22			3			—			25

Balance as of December 31, 2007	$	1,453		$	2,421		$	599		$	4,473


	For the nine months ended December 31, 2007
	Severance and Benefits			Facilities			Fixed Assets			Other			Total
Balance as of March 31, 2007	$	10,747		$	792		$	—		$	1,750		$	13,289
Restructuring costs		9,110			2,413			568			562			12,653
Reversals		(3,343	)		—			—			(146	)		(3,489	)
Cash payments		(15,156	)		(787	)		—			(755	)		(16,698	)
Non-cash charges		95			3			(568	)		(812	)		(1,282	)

Balance as of December 31, 2007	$	1,453		$	2,421		$	—		$	599		$	4,473


	Severance and Benefits		Facilities		Other		Total
Estimated timing of future payouts:
Fiscal 2008	$	893	$	695	$	—	$	1,588
Fiscal 2009 to 2013		560		1,726		599		2,885

	$	1,453	$	2,421	$	599	$	4,473

The $4.5 million restructuring accrual as of December 31, 2007 is comprised of obligations for severance and benefits and vacant facilities for both Quantum and pre-merger ADIC in addition to noncancellable purchase obligations for research and development programs. The severance and benefits charges will be paid to the impacted employees during the first half of calendar 2008. We expect the noncancellable purchase obligations to be paid in the first quarter of fiscal year 2009. The facilities charges relating to vacant facilities in Europe and the U.S. will be paid over their respective lease terms, which continue through fiscal 2013.

Amortization of Intangible Assets

The following tables detail intangible asset amortization expense by classification within our Condensed Consolidated Statements of Operations (in thousands):


	Three Months Ended
	December 31, 2007		December 31, 2006		Increase/ (decrease)
Cost of revenue	$	7,351	$	8,347	$	(996	)
Research and development		521		326		195
Sales and marketing		4,177		5,313		(1,136	)
General and administrative		25		25		—

	$	12,074	$	14,011	$	(1,937	)


	Nine Months Ended
	December 31, 2007		December 31, 2006		Increase/ (decrease)
Cost of revenue	$	23,907	$	18,064	$	5,843
Research and development		932		865		67
Sales and marketing		12,623		10,003		2,620
General and administrative		75		189		(114	)

	$	37,537	$	29,121	$	8,416

The decrease of intangible asset amortization for the third quarter of fiscal 2008 was primarily due to certain customer list intangibles becoming fully amortized prior to the third quarter of fiscal 2008. We also had purchased technology intangible assets related to the ADIC and a prior acquisition that were fully amortized by December 31, 2007.

The increase of intangible asset amortization for the nine months ended December 31, 2007 compared to the prior year is primarily due to the addition of purchased technology intangible assets and other intangible assets, such as customer lists and trademarks, from our acquisition of ADIC in August 2006. We began amortizing these additional intangible assets in August 2006 and recorded amortization expense for slightly over four months of the nine months ended December 31, 2006 compared to nine months of expense in the nine month period ended December 31, 2007. For further information regarding amortization of intangible assets, refer to Note 9 “Goodwill and Intangible Assets” to the Condensed Consolidated Financial Statements.

Share-based Compensation

The following table summarizes the effects of share-based compensation resulting from the application of SFAS No. 123R to options and restricted stock awards and units granted under our Plans and rights to acquire stock under our Purchase Plan (in thousands):


	Three Months Ended				Nine Months Ended
	December 31, 2007		December 31, 2006		December 31, 2007		December 31, 2006
Share-based compensation
Cost of revenue	$	584	$	333	$	1,522	$	854
Research and development		984		717		2,901		1,757
Sales and marketing		861		563		2,444		1,404
General and administrative		1,476		927		3,557		2,532

	$	3,905	$	2,540	$	10,424	$	6,547

Share-based compensation (by type of award)
Stock options	$	1,732	$	1,488	$	4,551	$	3,914
Stock purchase plan		499		338		1,393		990
Restricted stock		1,674		714		4,480		1,643

	$	3,905	$	2,540	$	10,424	$	6,547

The increase in share-based compensation was primarily due to the increased shares of restricted stock that were expensed during the three and nine months ending December 31, 2007 as compared to the three and nine months ended December 31, 2006. In fiscal 2007 we began granting restricted stock rather than options as the primary equity component of employee compensation. We have continued this in fiscal 2008. The restricted stock granted in fiscal 2007 and 2008 will be expensed over two to four years, commensurate with the vesting period of the restricted stock.

LIQUIDITY AND CAPITAL RESOURCES


	As of or for Nine Months Ended
(In thousands, except DSO and Inventory turns)	December 31, 2007			December 31, 2006
Cash and cash equivalents	$	83,420		$	109,668
Marketable securities		—			41,749

Total cash, cash equivalents, and marketable securities	$	83,420		$	151,417
Days sales outstanding (“DSO”)		74.5			62.5
Inventory turns (Annualized)		9.3			7.9
Net cash used in operating activities	$	(5,896	)	$	(8,382	)
Net cash provided by (used in) investing activities	$	25,261		$	(490,641	)
Net cash provided by financing activities	$	3,474		$	485,393

Nine Months Ended December 31, 2007

The difference between reported net loss and cash used in operating activities during the nine months ended December 31, 2007 was primarily due to cash used to fund operations offset largely by non-cash items such as depreciation, amortization and share-based compensation. Cash used to fund operations during the period was primarily due to a $60.4 million increase in accounts receivable offset in part by a $14.2 million increase in accounts payable and a $13.3 million increase in deferred revenue. Accounts receivable increased primarily due to slower collections in fiscal 2008 after particularly strong collections during the fourth quarter of fiscal 2007. Accounts payable increased due to timing of payments to vendors and deferred revenue increased primarily due to increased sales of service contracts.

Cash provided by investing activities during the first nine months of fiscal 2008 reflects proceeds from the sale of marketable securities and investments of $105.4 million offset in part by $65.0 million in purchases of marketable securities. In addition, we purchased $17.4 million of property and equipment during the nine months ended December 31, 2007 primarily comprised of hardware and software related to our computer system conversions to bring us onto a single platform for our enterprise resource planning system and engineering test equipment for our DXi-Series products. We received $2.2 million in net proceeds from the sale of a Malaysia subsidiary in the second quarter of fiscal 2008.

Cash provided by financing activities during the first nine months of fiscal 2008 was primarily due to borrowings of $442.0 million offset by debt repayments of $452.5 million, as well as $14.0 million net proceeds received from the issuance of common stock related to employee stock incentive plans and our employee stock purchase plan. Borrowings and repayments were primarily due to borrowings under our new credit facility and repayment of our prior credit facility. Included in our total debt repayment is $40.0 million of principal payments our new term loan since its inception on July 12, 2007.

Nine Months Ended December 31, 2006

The difference between reported net loss and cash used in operating activities during the nine months ended December 31, 2006 was primarily due to non-cash items such as depreciation, amortization, in-process research and development and share-based compensation. Cash used to fund operations during the period reflects a decrease in accounts payable, an increase in service parts for maintenance and payments on accrued restructuring. This was partially offset by a decrease in inventories. Inventories decreased as a result of ongoing inventory reduction efforts and reduced inventory levels of certain end of life products. These decreased inventory levels also resulted in a decrease in accounts payable. Service parts for maintenance increased in order to meet the Restriction of Hazardous Substances (“RoHS”) compliance requirements in Europe and support our growing installed base. The cash outflow related to accrued restructuring was primarily due to severance payments made during the period related to restructuring obligations related to our acquisition of ADIC.

Cash used in investing activities during the first nine months of fiscal 2007 reflects $545.4 million of cash paid, net of cash acquired, for our acquisition of ADIC. Proceeds from the sale of short-term investments of $624.8 million were largely offset by purchases of short-term investments of $564.8 million. Additionally, we purchased $11.3 million of property and equipment and received $6.0 million in proceeds from the sale of the Ireland facility.

Cash provided by financing activities during the first nine months of fiscal 2007 was primarily related to borrowings of $496.5 million on new credit facilities, less loan fees of $9.8 million. Additionally, we received $6.5 million in net proceeds from the issuance of common stock. These cash proceeds were partially offset by debt repayments of $7.8 million.

Capital Resources and Financial Condition

We have made progress in reducing operating costs, and we will continue to focus on improving our operating performance, including increasing revenue 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 current levels, to sustain or improve gross margins, and to control 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 additional significant cash payments or otherwise be impacted by restrictions of available cash associated with our existing credit facilities.

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. As of December 31, 2007, we had credit available on our credit facility, described further in the “Long-Term Debt” section below.

Generation of positive cash flow from operating activities 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 the negative impact of increased competition in the backup, archive and recovery market. 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 financial objectives. Any inability to achieve consistent and sustainable net income and cash flow 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 the group lenders who provide our credit facility 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 or termination of the revolving credit line and term loans, or

•

Approve any other amendments of our credit facility we might seek to obtain in order to improve our business.

Any lack of renewal, waiver, or amendment, if needed, could result in the revolving credit line and term loan becoming unavailable to us and any amounts outstanding becoming immediately due and payable. In the case of our borrowings at December 31, 2007, this would mean $360 million would be immediately payable.

(iii)

Further impairment of our financial flexibility, which could require us to 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.

Convertible subordinated debt

Long-term debt

Interest Rate Collars

Under the terms of the new credit agreement, we are required to hedge floating interest rate exposure on 50% of our funded debt balance over the next two years beginning December 31, 2007 through December 31, 2009. During the third quarter of fiscal 2008, we entered into a separate interest rate no cost collar instrument effective as of December 31, 2007 that fixes the interest rate on $12.5 million of our variable rate term loan between a three month LIBOR rate floor of 2.68% and a cap of 5.25% through December 2008 and fixes the interest rate on $100 million of our variable rate term loan between the same floor and cap from December 2008 through December 2009. Whenever the three month LIBOR rate is greater than the cap, we receive from the financial institution the difference between 5.25% and the current three month LIBOR rate on the notional amount. Conversely, whenever the three month LIBOR rate is lower than the floor, we remit to the financial institution the difference between 2.68% and the current three month LIBOR rate on the notional amount.

We do not engage in hedging activity for speculative or trading purposes.

Off-Balance Sheet Commitments

As of December 31, 2007, we have commitments related to repayment of our debt as described in Note 11 to the Condensed Consolidated Financial Statements. We have commitments to purchase inventory of $62.3 million, described further in Note 17 to the Condensed Consolidated Financial Statements. We also have commitments related to our operating leases. For additional details refer to our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007, as filed with the Securities and Exchange Commission on November 21, 2007.

As of December 31, 2007, we have commitments to provide an additional $1.3 million in capital funding towards investments we currently hold in two limited partnership venture capital funds. Payments are made as capital calls are received, thus we cannot estimate when those payments will be made.

As of December 31, 2007, there was approximately $87.9 million remaining on our authorization to repurchase Quantum common stock. No stock repurchases were made during the nine months ended December 31, 2007. Our ability to repurchase common stock is restricted under our credit facilities.

Other than the warranty and indemnification obligations described in Note 10 to the Condensed Consolidated Financial Statements and the commitments described above or in our Form 10-K, as amended, for the fiscal year ended March 31, 2007 filed November 21, 2007, we do not have any other off-balance sheet arrangements.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our discussion and analysis of the financial condition and results of operations is based on the accompanying Condensed 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 or 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.

The critical accounting policies that involve significant judgments and estimates used in the preparation of our consolidated financial statements are disclosed in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007 filed with the SEC on November 21, 2007. Critical accounting policies that involve significant judgments and estimates adopted in fiscal 2008 are disclosed below.

Service Revenue and Service Cost of Revenue

Service revenue is derived from contracts for field support provided to our branded customers in addition to installation and integration services and repair services that are not otherwise included in the base price of the product. Service does not include revenue or costs associated with basic warranty support on new branded or OEM products. We classify expenses as service cost of revenue by estimating the portion of our total cost of revenue that relates to providing field support to our customers under contract, installation and integration services and repair services. These estimates are based upon a variety of factors, including the nature of the support activity, the cost of stocking and shipping service parts for maintenance and the level of infrastructure required to support the activities that comprise service revenue. In the event our service business changes, our estimates of cost of service revenue may be impacted.

RECENT ACCOUNTING PRONOUCEMENTS

See Note 18 “Recent Accounting Pronouncements” to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on our results of operations and financial condition.

Item 3.

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 marketable securities and interest expense on short-term and long-term borrowings.

Our cash equivalents and marketable securities consisted primarily of money market funds during the nine months ended December 31, 2007. The main objective of these investments is safety of principal and liquidity while maximizing return, without significantly increasing risk. A hypothetical 100 basis point decrease in interest rates would have resulted in an approximate $0.5 million decrease in interest income for the nine months ended December 31, 2007.

As of December 31, 2007, our senior credit facilities were comprised of a $50 million revolving credit facility expiring in June 2012 and a $400 million term loan maturing in July 2014. Interest on the revolving credit facility and the term loan is either, at our option, a prime rate plus a margin of 2.5% or LIBOR plus a margin of 3.5%. We had a $360 million balance at December 31, 2007 on the term loan and had not drawn on the revolving credit facility. A hypothetical 100 basis point increase in interest rates would have resulted in an approximately $3.0 million increase in interest expense for the nine months ended December 31, 2007.

As of December 31, 2007 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 11 “Convertible Subordinated Debt, Long-Term Debt and Interest Rate Collar” to the Condensed Consolidated Financial Statements).

We have an interest rate no cost collar instrument that fixes the interest rate on $87.5 million of our variable rate term loan between a three month LIBOR floor of 4.64% and a cap of 5.49% through December 2008. During the first nine months of fiscal 2008, the three month LIBOR rate was within the floor and cap; therefore, there was no impact to our interest expense from the interest rate collar.

Under the terms of our new credit agreement, we are required to hedge floating interest rate exposure on 50% of our funded debt balance over the next two years beginning December 31, 2007 through December 31, 2009. During the third quarter of fiscal 2008, we entered into a separate interest rate no cost collar instrument effective as of December 31, 2007 that fixes the interest rate on $12.5 million of our variable rate term loan between a three month LIBOR rate floor of 2.68% and a cap of 5.25% through December 2008 and fixes the interest rate on $100 million of our variable rate term loan between the same floor and cap from December 2008 through December 2009. The three month LIBOR was also within the floor and cap on the $12.5 million interest rate collar and did not impact interest expense.

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 nine months ended December 31, 2007, 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 a material effect on our consolidated financial position utilizing our current hedging strategy.

Item 4.

CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

QUANTUM CORPORATION

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

The information contained in Note 16 “Litigation” to the Condensed Consolidated Financial Statements is incorporated into this Part II, Item 1 by reference.

Item 1A.

Risk Factors

THE READER SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q, 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 QUARTERLY REPORT ON FORM 10-Q CONTAINS “FORWARD-LOOKING” STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PLEASE SEE “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” OF THIS REPORT FOR ADDITIONAL DISCUSSION OF THESE FORWARD-LOOKING STATEMENTS.

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, are increasingly challenged by products using hard disk drive technology, such as Virtual Tape Libraries (VTL), standard disk arrays and Network Attached Storage (NAS). Hard disk drives have experienced a trend toward lower prices while capacity and performance have increased. If disk-based backup products gain comparable or superior market acceptance, or their costs decline more rapidly than tape drive and media costs, the competition resulting from these products would increase as customers migrate toward them, which could materially and adversely affect our business, financial condition and operating results.

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 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 DLTtape^TM technology. Hewlett-Packard and IBM thus compete not only with our Super DLTtape^TM 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 DLTtape^TM drives and media. Additionally, over the last two years, our DLT and Super DLTtape^TM 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. 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 Dell, EMC IBM and Sun, which offer tape automation systems incorporating DLTtape^® and Super DLTtape^TM 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 would materially and adversely affect our business, financial condition and results of operations.

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 2007 represented 42% 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 2007, sales to Dell contributed approximately 20% of our revenue. If we experience a significant decline in revenue from Dell, we 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.

We have incurred significant indebtedness, which constrains our ability to operate our business. Unless we are able to generate sufficient cash flows from operations to meet our debt service obligations, our business financial condition and operating results will be materially and adversely affected.

In connection with our acquisition of ADIC, we borrowed $496.5 million in August 2006, adding a significant amount of indebtedness and interest expense to our obligations. We refinanced our debt on July 12, 2007. As of December 31, 2007, the total amount outstanding from these borrowings was $360 million. Our level of indebtedness presents significant risks to investors, both in terms of the constraints that it places on our ability to operate our business and because of the possibility that we may not generate sufficient cash to pay the principal of and interest on our indebtedness as it becomes due.

Our substantial debt could have important consequences, such as:

•

Making it more difficult or impossible for us to make payments on our convertible subordinated notes or any other indebtedness or obligations;

•

Requiring us to dedicate a significant portion of our cash flow from operations and other capital resources to debt service, thereby reducing our ability to fund working capital, capital expenditures, research and development 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.

In addition, there is a risk that we may not be able to repay our debt obligations as they become due. We have incurred significant losses since 2001. Our ability to meet our debt service obligations (and fund our working capital, capital expenditures, acquisitions, research and development and other general corporate needs) will depend upon our ability to generate sufficient cash flow from operations. We cannot provide assurance that we will generate sufficient cash flow from operations to service these debt obligations, or that future borrowings or equity financing will be available to us on commercially reasonable terms or at all, or available in an amount sufficient to enable us to pay our debt obligations or fund our other liquidity needs. Unless we are able to improve our cash flows from operations we may not generate sufficient cash flow to service our debt obligations, which would require that we reduce or delay capital expenditures and/or sell assets, thereby affecting our ability to remain competitive and materially and adversely affecting our business. Such a failure to repay our debt obligations when due would also result in our default under our loan agreements, which would give our lenders the right to seize all of our assets. Any such inability to meet our debt obligations would therefore have a material and 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 current 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. In addition, we may seek to refinance certain of our indebtedness in the future. We cannot assure you that additional financing will be available on terms favorable to us, or at all.

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.

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 DXi series products, GoVault and enhanced Scalar i500 and Scalar i2000 products and next generation StorNext software. 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.

Our tape royalty business generates a relatively high gross margin contribution, significantly impacting the total company gross margin. If we were to experience a significant decline in royalty revenue and corresponding gross margin contribution, 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 depend 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.

From time to time we make acquisitions, such as our 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 our 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 savings and benefits from the acquisition;

•

Difficulties in assimilating and retaining employees;

•

Potential incompatibility of business cultures;

•

Coordinating geographically separate organizations;

•

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.

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, strategic decisions or 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.

Third party intellectual property 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 license discussion or 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.

In addition, certain products or technologies acquired or developed by us may include so-called “open source” software. Open source software is typically licensed for use at no initial charge. Certain open source software licenses, however, require users of the open source software to license to others any software that is based on, incorporates or interacts with, the open source software under the terms of the open source license. Although we endeavor to comply fully with such requirements, third parties could claim that we are required to license larger portions of our software than we believe we are required to license under open source software licenses. If such claims were successful, they could adversely impact our competitive position and financial results by providing our competitors with access to sensitive information that may help them develop competitive products. In addition, our use of open source software may harm our business and subject us to intellectual property claims, litigation or proceedings in the future because:

•

Open source license terms may be ambiguous and may subject us to unanticipated obligations regarding our products, technologies and intellectual property;

•

Open source software generally cannot be protected under trade secret law; and

•

It may be difficult for us to accurately determine the origin of the open source code and whether the open source software infringes, misappropriates or violates third party intellectual property or other rights.

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, any of which could, individually or in the aggregate have a material adverse effect on our business.

A significant portion of our manufacturing and sales operations and supply chain occurs in countries other than the United States. We also have sales outside the United States. A significant number of our products are manufactured in Malaysia by a contract manufacturer. Similarly, one of the suppliers of recording heads for our products is located in China. Because of these operations, we are subject to a number of risks including:

•

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;

•

Natural disasters, including earthquakes, typhoons and tsunamis;

•

Inflexible employee contracts and employment laws that may make it difficult to terminate employees in some foreign countries in the event of business downturns;

•

Adverse movement of foreign currencies against the U.S. dollar (the currency in which our results are reported);

•

Shortages in component parts and raw materials; 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.

We rely on indirect sales channels to market and sell our branded products. Therefore, the loss of or deterioration in our relationship with one or more of our resellers or distributors could negatively affect our operating results.

We sell the majority of our branded products to value-added resellers, or VARs, and to direct marketing resellers such as CDW Corporation, who in turn sell our products to end users, and to distributors such as Ingram Micro, Tech Data and others. We also have a growing relationship with EMC through which we make available our branded products that complement EMC’s product offerings. The success of these sales channels is hard to predict, particularly over time, and we have no purchase commitments or long-term orders from them that assure us of any baseline sales through these channels. Several of our resellers carry competing product lines that they may promote over our products. A reseller might not continue to purchase our products or market them effectively, and each reseller determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end user customers. Certain of our contracts with our distributors contain “most favored nation” pricing provisions mandating that we offer our products to these customers at the lowest price offered to other similarly situated customers. In addition, sales of our enterprise-class libraries, and the revenue associated with the on-site service of those libraries, are somewhat concentrated in specific customers, including government agencies and government-related companies. Our operating results could be adversely affected by any number of factors including:

•

A change in competitive strategy that adversely affects a reseller’s willingness or ability to distribute our products;

•

The reduction, delay or cancellation of orders or the return of a significant amount of products;

•

The loss of one or more of such resellers; or

•

Any financial difficulties of such resellers that result in their inability to pay amounts owed to us.

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 acquisitions of Certance and ADIC, one of our important initiatives involves combining and integrating the information technology infrastructures of the companies, including our enterprise resource planning 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 closure or sale of related facilities. 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 over 450 United States patents and have approximately 150 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.

Managing our manufacturing capabilities presents a number of 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, discontinued (end-of-life) components 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.

Some of our manufacturing, and our service repair, is outsourced to 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.

Some of our tape drive and tape automation products are manufactured for us by 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.

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.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees, and recent changes in accounting for equity compensation are adversely affecting earnings.

Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) Share-Based Payment (“SFAS No. 123R”), which we implemented at the beginning of fiscal 2007. We are required 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 fair value associated with these grants typically results 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. 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 2007, our future results of operations will be adversely impacted. See also Note 5 “Stock Incentive Plans and Share-based Compensation” to the Consolidated Financial Statements in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007, as filed with the Securities and Exchange Commission on November 21, 2007.

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 owned approximately 48% of our common stock as of March 31, 2007. 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.

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, the investigation and remediation of soil and ground water contamination, as well as requirements for the design of and materials used in our products. 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 has banned the use of some heavy metals including lead and some flame retardants in electronic components since July 2006. We have implemented 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.

We may be sued by our customers 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 technology errors and omissions 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.

In addition, we could potentially face claims for product liability from our customers if our products cause property damage or bodily injury. 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. 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 its agreements with Quantum could 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 liabilities for taxes, 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. In May 2006, Maxtor was acquired by Seagate, which 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 effected 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. In May 2006, Maxtor was acquired by Seagate, which 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. In May 2006, Maxtor was acquired by Seagate, which 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.

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.

Without the availability of the credit facility, we would have to rely on operating cash flows and debt or equity arrangements other than the credit facility, 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.

Item 2.

UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5.

OTHER INFORMATION

None.

Item 6.

EXHIBITS

The Exhibit Index beginning on page 49 of this report sets forth a list of exhibits.

SIGNATURE

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

QUANTUM CORPORATION

/s/ JON W. GACEK

Jon W. Gacek

Executive Vice President and

Chief Financial Officer

Dated: February 8, 2008

QUANTUM CORPORATION

EXHIBIT INDEX


			Incorporated by Reference
Exhibit Number		Exhibit Description	Form	File No.	Exhibit(s)	Filing Date

2.1		Agreement and Plan of Merger by and among Quantum Corporation, Agate Acquisition Corporation and Advanced Digital Information Corporation, dated as of May 2, 2006.	8-K	001-13449	2.1	May 5, 2006

3.1		Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-13449	3.1	August 16, 2007

3.2		Amended and Restated By-laws of Registrant, as amended.	10-K	001-13449	3.2	June 28, 2000

3.3		Certificate of Designation of Rights, Preferences and Privileges of Series B Junior Participating Preferred Stock.	S-3	333-109587	4.7	October 9, 2003

3.4		Certificate of Amendment of Amended and Restated By-laws of Registrant, effective August 23, 2007	8-K	001-13449	3.1	August 29, 2007

4.1		Amended and Restated Preferred Shares Rights Agreement between the Registrant and Harris Trust and Savings Bank.	S-4/A	333-75153	4.1	June 10, 1999

4.2		First Amendment to the Amended and Restated Preferred Shares Rights Agreement and Certification Of Compliance With Section 27 Thereof, dated as of October 28, 2002.	10-Q	001-13449	4.1	November 13, 2002

4.3		Stockholder Agreement, dated as of October 28, 2002, by and between Registrant and Private Capital Management.	10-Q	001-13449	4.2	November 13, 2002

4.4		Second Amendment to the Amended and Restated Preferred Shares Rights Plan, dated November 1, 2006.	8-K	001-13449	4.1	November 6, 2006

10.1		Indenture, dated as of July 30, 2003, between Registrant and U.S. Bank National Association, related to the Registrant’s convertible debt securities.	S-3	333-109587	4.1	October 9, 2003

10.2	*	Amended and Restated 1993 Long-Term Incentive Plan, effective November 10, 2007	8-K	001-13449	10.1	November 11, 2007

10.3	*	Amended and Restated Nonemployee Director Incentive Plan, effective November 10, 2007	8-K	001-13449	10.2	November 11, 2007

10.4	*	Form of Amended and Restated Chief Executive Officer Change-of-Control Agreement	8-K	001-13449	10.3	November 11, 2007

10.5	*	Form of Amended and Restated Officer Change-of-Control Agreement	8-K	001-13449	10.4	November 11, 2007

10.6	*	Form of Amended and Restated Director Change-of-Control Agreement	8-K	001-13449	10.5	November 11, 2007

31.1	‡	Certification of the Chairman and Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2	‡	Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1	†	Certification of the Chairman and Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit(s)	Filing Date

32.2†	Certification of the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

*	Indicates management contract or compensatory plan, contract or arrangement.

‡	Filed herewith.

†	Furnished herewith.