QUANTUM CORP /DE/, S-4, 1999-03-26

QUANTUM CORP /DE/
S-4, 1999-03-26
COMPUTER STORAGE DEVICES

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<PAGE>

As filed with the Securities and Exchange Commission on March 26, 1999
Registration No. 333-

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

--------------

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

--------------

QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
Delaware 3572 94-2665054
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

--------------

Richard L. Clemmer
Chief Financial Officer
Quantum Corporation
500 McCarthy Blvd.
Quantum Corporation Milpitas, CA 95035
500 McCarthy Blvd. (408) 894-4000
Milpitas, CA 95035 (Name and address, including zip code,
(408) 894-4000 and telephone number, including area
(Address, including zip code, and code, of agent for service)
telephone number, including area code,
of Registrant's principal executive
offices)

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With copies to:
<TABLE>
<S> <C>
Steven E. Bochner Raymond W. Wagner
Jeffrey A. Herbst Simpson Thacher & Bartlett
Gil M. Labrucherie 425 Lexington Avenue
Wilson Sonsini Goodrich & Rosati New York, NY 10017-3954
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
</TABLE>

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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.

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If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]

--------------

CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Proposed Aggregate Amount of
Securities to be Amount to Maximum Offering Offering Registration
Registered be Registered Price per Share Price(3) Fee(3)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quantum Corporation--
DSSG Common Stock, par
value $0.01 per
share (1)............ N/A N/A (3) (3)
- --------------------------------------------------------------------------------------
Rights to Purchase
Series B Junior
Participating
Preferred Stock, par
value $0.01 per share
(2).................. N/A N/A N/A N/A
- --------------------------------------------------------------------------------------
Quantum Corporation--
HDDG Common Stock, par
value $0.01 per
share (1)............ N/A N/A (3) (3)
- --------------------------------------------------------------------------------------
Rights to Purchase
Series C Junior
Participating
Preferred Stock, par
value $0.01 per share
(2).................. N/A N/A N/A N/A
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
(1) If the tracking stock proposal described herein is approved by the
stockholders, each share of the Registrant's Common Stock, par value $0.01
per share (the "Existing Common Stock"), will be changed into one share of
Quantum Corporation--DSSG Common Stock, par value $0.01 per share ("DSSG
Stock") and 0.5 of a share (the "Ratio") of Quantum Corporation--HDDG
Common Stock, par value $0.01 per share ("HDDG Stock"). The number of
shares of DSSG Stock being registered is equal to the number of shares of
Existing Common Stock outstanding immediately before the tracking stock
proposal is implemented, and the number of shares of HDDG Stock being
registered is equal to the Ratio times the number of shares of shares of
Existing Common Stock outstanding immediately before the tracking stock
proposal is implemented. In accordance with Rule 457(o) under the
Securities Act of 1933, as amended (the "Securities Act"), the number of
shares being registered is not included in the table.
(2) Prior to the occurrence of certain events, the rights to purchase Series B
Junior Participating Preferred Stock, par value $0.01 per share, and the
rights to purchase Series C Junior Participating Preferred Stock, par value
$0.01 per share (collectively, the "Rights"), will not be evidenced
separately from the related DSSG Stock or HDDG Stock. The value, if any, of
the Rights is reflected in the market price of the related DSSG Stock or
HDDG Stock. Accordingly, no separate fee is paid.
(3) An aggregate offering price of $2,924,527,547 has been estimated and an
aggregate registration fee of $813,019 is being paid for the DSSG Stock and
the HDDG Stock being registered. Such amounts have been estimated solely
for the purpose of calculating the registration fee pursuant to Rule
457(f)(1) under the Securities Act, based on a price of $17.469 per share
of the Existing Common Stock, calculated on the basis of the average high
and low prices of shares of Existing Common Stock on the Nasdaq National
Market tier of The Nasdaq Stock Market on March 24, 1999, as reported in
published financial sources.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information is not complete and may be changed. We may not sell these +
+securities until the registration statement filed with the Securities and +
+Exchange Commission is effective. This prospectus is not an offer to sell +
+these securities and it is not soliciting an offer to buy these securities in +
+any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 26, 1999

Proxy Statement and Prospectus of

QUANTUM CORPORATION

Special Meeting of Stockholders to be
Held at 10 A.M., Local Time, on [ ], 1999

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<TABLE>
<S> <C>
DSSG COMMON STOCK HDDG COMMON STOCK
</TABLE>

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To Our Stockholders

You are invited to attend a special meeting of our stockholders, to be held
at our headquarters at 500 McCarthy Boulevard, Milpitas, California 95035.

At the special meeting, you will be asked to consider and adopt a tracking
stock proposal recommended by our board of directors. We propose to adopt an
amended and restated certificate of incorporation which would create two new
classes of common stock called "DSSG stock" and "HDDG stock." DSSG stock is
intended to reflect separately the performance of our DLTtape(TM) and storage
systems business. HDDG stock is intended to reflect separately the performance
of our hard disk drive business.

If stockholders approve the tracking stock proposal, each share of your
existing common stock will be changed into one share of DSSG stock and 0.5 of a
share of HDDG stock. We expect to effect the tracking stock proposal shortly
following the special meeting and expect the tracking stock proposal to be tax-
free to you and us. We will seek the listing of both the DSSG stock and the
HDDG stock on the Nasdaq National Market tier of The Nasdaq Stock Market under
the symbols "QDSS" and "QHDD," respectively.

At the special meeting, you will also be asked to consider and approve a
proposal to amend our employee stock purchase plan.

Our board of directors unanimously recommends that you vote in favor of the
tracking stock proposal and the proposal to amend our employee stock purchase
plan. This proxy statement and prospectus provides you with detailed
information about the proposals. We encourage you to read this entire document
carefully.

Michael A. Brown
Chairman of the Board
and Chief Executive Officer

The tracking stock proposal involves certain risks.
Please read the "Risk Factors" beginning on page 11.

Neither the Securities and Exchange Commission nor
any state securities commission has approved or
disapproved of these securities or determined if
this proxy statement and prospectus is truthful or
complete. Any representation to the contrary is a
criminal offense.

This proxy statement and prospectus is dated [ ], 1999 and is first
being mailed to stockholders on [ ], 1999.
<PAGE>

HOW YOU CAN OBTAIN MORE INFORMATION

This proxy statement incorporates important business and financial
information that is not included in or delivered with this document. You
may request a copy of this information at no cost, by writing or
telephoning us at the following address:

Quantum Corporation
500 McCarthy Boulevard
Milpitas, California 95035
Attention: Investor Relations
Telephone: 1-408-324-7044

To obtain timely delivery, you must make this request no later than five
business days before [ ], 1999, the date of the special meeting.

<PAGE>

[QUANTUM LOGO]

Notice of Special Meeting
of Stockholders
to be Held on [ ], 1999

[ ], 1999

We hereby give notice that a special meeting of our stockholders will be
held at our headquarters at 500 McCarthy Boulevard, Milpitas, California. The
special meeting will begin at 10:00 a.m., local time, and will be held for the
following purposes and to transact any other business as may properly come
before the meeting or any adjournments of the meeting:

1. To consider and act upon a proposal to adopt an amended and restated
certificate of incorporation under which each outstanding share of our
existing common stock will be changed into one share of DSSG stock and 0.5
of a share of HDDG stock; and

2. To consider and act upon a proposal to adopt amendments to the
Quantum Corporation Employee Stock Purchase Plan.

The attached proxy statement and prospectus contains information relating to
the two proposals.

Your board of directors has fixed the close of business on [ ], 1999 as
the record date to determine the stockholders entitled to notice of and to vote
at the special meeting. Only the stockholders of record at the close of
business on that date will be entitled to vote at the meeting. A list of those
stockholders will be available for inspection before or at the meeting. The
transfer books of Quantum will not be closed.

By order of the board of directors,

Richard L. Clemmer

Executive Vice President, Finance, Chief Financial Officer and
Secretary
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers About the Tracking Stock Proposal................... 1
Proxy Statement Summary................................................... 2
Quantum Corporation Selected Financial Information........................ 8
DSSG Selected Financial Information....................................... 9
HDDG Selected Financial Information....................................... 10
Risk Factors.............................................................. 11
Where You Can Find More Information....................................... 21
Information About the Special Meeting and Voting.......................... 22
Date, Time and Place of Meeting.......................................... 22
Record Date.............................................................. 22
Proposals to be Considered at the Meeting................................ 22
Vote Required to Approve the Proposals................................... 22
Quorum................................................................... 22
Procedure for Voting by Proxy............................................ 22
Proposal 1--The Tracking Stock Proposal................................... 23
Description of the Tracking Stock Proposal............................... 23
Background of and Reasons for the Tracking Stock Proposal................ 23
Recommendation of the Board of Directors................................. 25
Management and Allocation Policies....................................... 25
Dividend Policy.......................................................... 30
Description of DSSG Stock and HDDG Stock................................. 30
Restated Rights Agreement................................................ 38
Certain Anti-Takeover Provisions of Delaware Law and the Restated
Certificate of Incorporation, the By-laws and the Restated Rights
Agreement............................................................... 40
United States Federal Income Tax Considerations.......................... 41
Nasdaq Listings.......................................................... 42
Exchange Procedures...................................................... 42
Stock Transfer Agent and Registrar....................................... 42
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Advisors..................................................... 43
Effect on Existing Options and Convertible Notes....................... 43
No Dissenters' Rights.................................................. 43
Quantum Corporation--Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 43
Results of Operations Consolidated...................................... 43
Business of DSSG........................................................ 52
DSSG--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 60
Business of HDDG........................................................ 66
HDDG--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 75
Proposal 2--Adoption of Amendments to Quantum Corporation Employee Stock
Purchase Plan.......................................................... 81
Price Range and Dividends on Existing Common Stock...................... 85
Information About Stockholder Proposals................................. 85
Expenses of Solicitation................................................ 85
Legal Opinions.......................................................... 86
Experts................................................................. 86
Index to Financial Statements........................................... F-1
Quantum Corporation--
Report of Independent Auditors......................................... F-2
Independent Auditors' Report........................................... F-3
Financial Statements................................................... F-4
DSSG--Independent Auditors' Report and Financial Statements............. F-29
HDDG--Independent Auditors' Report and Financial Statements............. F-51
Annex I: Restated Certificate of Incorporation
Annex II: Amended Quantum Corporation Employee Stock Purchase Plan
</TABLE>

1
<PAGE>

QUESTIONS AND ANSWERS
ABOUT THE TRACKING STOCK PROPOSAL

If you have any questions relating to the matters discussed in this
document, please call our Investor Relations Department at (408) 324-7044.

Q. Why am I receiving this proxy statement?

A. We are distributing this proxy statement and prospectus to you in connection
with a proposal to adopt an amended and restated certificate of
incorporation which would create two new classes of common stock. We are
also distributing this proxy statement in connection with proposals to adopt
amendments to our employee stock purchase plan.

Q. What are the new common stocks?

A. The new common stocks are the DSSG stock and the HDDG stock. We refer to the
DSSG stock and the HDDG stock together as the "common stock."

. The DSSG stock is intended to reflect the separate performance of our
DLTtape and storage systems business. We refer to this business as the
"DLT & Storage Systems group" or "DSSG."

. The HDDG Stock is intended to reflect the separate performance of our
hard disk drive business. We refer to this business as the "Hard Disk
Drive group" or "HDDG."

Investors commonly refer to this type of common stock as "tracking stock,"
"targeted stock" or "letter stock," because the stock is intended to
"track" or "target" the separate performance of a group of assets or a
division of a company.

Q. How will I benefit from the tracking stock proposal?

A. Following the issuance of the DSSG stock and the HDDG stock, you will be
able to invest in either or both stocks depending upon your investment
objectives.

Q. What kind of financial information will I receive in the future?

A. You will continue to receive consolidated financial information for Quantum
as a whole. In addition, you will receive separate operating results and
other business and financial information for both DSSG and HDDG.

Q. What will my existing shares represent if everything takes place as
proposed?

A. Each share of your existing common stock will be changed into one share of
DSSG stock and 0.5 of a share of HDDG stock.

Q. Will the tracking stock proposal result in a change of control of Quantum?

A. No.

Q. Will the tracking stock proposal result in a spin-off?

A. No. This proposal will not result in a distribution or spin-off of our
assets or liabilities. Holders of DSSG stock and HDDG stock will continue to
be stockholders of a single company and subject to all risks associated with
an investment in Quantum and all of our businesses, assets and liabilities.

1
<PAGE>

PROXY STATEMENT SUMMARY

This summary, together with the "Questions and Answers About the Tracking
Stock Proposal" on the preceding page, highlights important selected
information from this document. To understand the tracking stock proposal fully
and for a more complete description of the legal terms of the tracking stock
proposal, you should read carefully this entire document and the documents we
have referred you to. We have included page references parenthetically to
direct you to a more complete description of the topics presented in this
summary.
Quantum

Our businesses are DSSG and HDDG. Our principal executive offices are
located at 500 McCarthy Boulevard, Milpitas, California 95035, and our
telephone number is (408) 894-4000.

DSSG (page 52)

DSSG designs, develops, manufactures, licenses and markets DLTtape drives
and media, tape libraries and solid state storage systems. DLTtape is DSSG's
half-inch tape technology that is the de facto industry standard for data back-
up in the mid-range server market. According to International Data Corporation,
DSSG was the worldwide revenue leader for all classes of tape drives in
calendar year 1997 and is projected to have been the leader in calendar year
1998. According to Dataquest, DLTtape drives are projected to have accounted
for 24% of total tape drive market revenue in calendar year 1998, up from 2% in
calendar year 1994. DSSG is also a leader in the tape library market for mid-
range servers. DSSG's acquisition of ATL Products, Inc. in October 1998 allowed
it to become the first provider of tape libraries that serve the entire tape
library market from desktop to data center.

DSSG now offers a broad range of storage solutions and continues to build
its system-level expertise. As a result, DSSG believes it will be able to
design more intelligent storage devices, sub-systems and total storage
solutions. DSSG plans to enter the rapidly emerging market for network attached
storage appliances with appliances designed to meet workgroup-level
requirements.

HDDG (page 66)

HDDG designs, develops and markets a diversified product portfolio featuring
leading-edge technology in the desktop hard disk drive and the high-end hard
disk drive markets--as well as the emerging market for hard disk drive
applications in consumer electronics. HDDG has been the leading volume supplier
of hard disk drives for the desktop market for each of the past six years.

HDDG designs desktop hard disk drives to meet the storage requirements of
entry-level to high-performance desktop PCs in home and business environments.
HDDG also designs high-end hard disk drives for the demanding storage needs of
network servers, workstations and storage subsystems. These high-end hard disk
drives are used for data-intensive environments and applications, such as data
warehousing, digital content creation, digital video, file servers, financial
services, Internet and intranet services, mechanical computer aided design,
multimedia, online transaction processing, RAID (redundant array of independent
disk) systems, software development and workgroup computing.

The Special Meeting

Proposals to be Considered at the Meeting

You are asked to consider and vote upon the following proposals at the
special meeting:

. Proposal 1: The tracking stock proposal (page 23).

. Proposal 2: Adoption of amendments to the Quantum Corporation Employee
Stock Purchase Plan (page 81).

If either Proposal 1 or Proposal 2 is approved, we will implement it whether or
not the other proposal is approved.

Vote Required to Approve the Proposals (page 22)

The following stockholder votes are required for approval of the proposals:

. Proposal 1: The favorable vote of the holders of a majority of the
outstanding shares of our existing common stock.

2
<PAGE>

. Proposal 2: The favorable vote of the holders of a majority of the shares
of our existing common stock represented in person or by proxy at the
special meeting.

Our directors and executive officers beneficially owned approximately [ ]%
of the outstanding shares of our existing common stock on [ ], 1999.
Comparison of Existing Common Stock with DSSG Stock and HDDG Stock (page 30)

We have set forth in the following table a comparison of our existing common
stock and the DSSG stock and HDDG stock. You should keep in mind that you will
remain stockholders of a single company. DSSG and HDDG are not separate legal
entities. As a result, you will continue to be subject to all of the risks
associated with an investment in Quantum and all of our businesses, assets and
liabilities. Financial effects from one group that affect our consolidated
results of operations or financial condition could, if significant, affect the
results of operations or financial condition of the other group.

<TABLE>
<CAPTION>
Existing The Tracking Stock Proposal
Common ---------------------------------------------
Stock DSSG Stock HDDG Stock
-------------- --------------------- ---------------------
<S> <C> <C> <C>
Dividends: Historically, We presently do not We presently do not
we have not anticipate paying anticipate paying
paid dividends dividends. Dividends dividends. Dividends
on the are at the discretion are at the discretion
existing of our board of of our board of
common stock. directors. directors.
Dividends are
at the
discretion of
our board of
directors.

Voting Rights: One vote per One vote per share. More than, less than
share. or exactly one vote
per share depending
on the relative
market values of the
two classes of common
stock.

The holders of the The holders of the
two classes of common two classes of common
stock will vote stock will vote
together as a single together as a single
class except in class except in
limited limited
circumstances. circumstances.

</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
Existing The Tracking Stock Proposal
Common ---------------------------------------------
Stock DSSG Stock HDDG Stock
-------------- --------------------- ---------------------
<S> <C> <C> <C>
Rights on Sale of All or None. If we sell all or If we sell all or
Substantially All Assets substantially all of substantially all of
of a Group: the assets attributed the assets attributed
to this group, we to this group, we
must either must either
(1) distribute an (1) distribute an
amount equal to the amount equal to the
net proceeds of the net proceeds of the
sale or (2) convert sale or (2) convert
each share into a each share into a
number of shares of number of shares of
HDDG stock at a 10% DSSG stock at a 10%
premium for the first premium for the first
five years following five years following
the implementation of the implementation of
the tracking stock the tracking stock
proposal and without proposal and without
any premium any premium
thereafter. We will thereafter. We will
not be required to do not be required to do
so if we receive in so if we receive in
the sale primarily the sale primarily
equity securities of equity securities of
the acquiror or its the acquiror or its
parent, and the parent, and the
acquiror or its acquiror or its
parent is or will be parent is or will be
primarily engaged in primarily engaged in
one or more one or more
businesses similar or businesses similar or
complementary to the complementary to the
business of this business of this
group. group.

Conversion at Option of None. Yes, (1) at a 10% Yes, (1) at a 10%
Quantum: premium for the first premium for the first
five years following five years following
the implementation of the implementation of
the tracking stock the tracking stock
proposal and (2) proposal and
without any premium (2) without any
either after such premium either after
five-year period or such five-year period
if, at any time, or if, at any time,
there are adverse there are adverse
U.S. federal income U.S. federal income
tax law developments. tax law developments.

Redemption in Exchange None. We may redeem this We may redeem this
for Stock of Subsidiary: stock in exchange for stock in exchange for
stock of our stock of our
subsidiaries that subsidiaries that
hold all of the hold all of the
assets and assets and
liabilities liabilities
attributed to this attributed to this
group. group.
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
Existing The Tracking Stock Proposal
Common ---------------------------------------------
Stock DSSG Stock HDDG Stock
-------------- --------------------- ---------------------
<S> <C> <C> <C>
Liquidation: Holders share Holders will share Holders will share
assets assets remaining for assets remaining for
remaining for distribution to distribution to
distribution holders of common holders of common
to holders of stock on a per share stock on a per share
common stock. basis in proportion basis in proportion
to the liquidation to the liquidation
units per share. Each units per share. The
share will have one number of liquidation
liquidation unit. units will be fixed
approximately two
months after the
implementation of the
tracking stock
proposal based on the
relative market
values of the two
classes of common
stock.
</TABLE>
Risk Factors (page 11)

When evaluating the tracking stock proposal, you should be aware that there
are many risks, including:

. an investment in a single company and all of our businesses, assets and
liabilities;

. that stockholders of each class of common stock will have limited rights
related to their group;

. that the relative voting power of the two classes of common stock which
will fluctuate based on their relative average market values;

. limited stockholder remedies for breach of fiduciary duties;

. the potential for the stock ownership of directors and officers to create
conflicts of interest;

. the potential for stockholders of each class of common stock to have
diverging or conflicting interests;

. the ability of our board of directors to change management and allocation
policies without stockholder approval;

. the ability of our board of directors to allocate financing costs between
groups that do not reflect the separate borrowing costs of the groups;

. limits on consideration to be received upon disposition of assets of one
group;

. the effects of our capital structure and variable vote per share on
potential acquisitions of one group or class of common stock;

. decisions that affect market values of a class of common stock could
affect voting and conversion rights;

. no assurances as to the market price or liquidity of the DSSG stock or
HDDG stock following the implementation of the tracking stock proposal;

. anti-takeover considerations could prevent stockholders from profiting
from an increase in the market value of their shares; and

. the lack of legal precedent and the recent Clinton Administration
proposal relating to the tax treatment of tracking stocks.

Management and Allocation Policies (page 25)

We have established policies designed to accomplish the fundamental
objective of the tracking stock proposal, which is to highlight the separate

5
<PAGE>

performance of each of DSSG and HDDG and to allow each group to focus on its
own business strategy and financial model. These policies establish guidelines
to help us allocate debt, corporate overhead, interest, taxes and other shared
activities between the two groups on an objective basis and to ensure that
transactions between DSSG and HDDG are made on terms that approximate those
that could be obtained from unaffiliated third parties.

Our inter-group policies include:

. the centralized management of most financial activities;

. the allocation of indebtedness and preferred stock between groups or
entirely to one group;

. the accounting for transfers of cash or other property from one group to
the other group;

. access to our technology and know-how, other than products and services,
by the groups;

. transfers of assets between groups at fair value, including sales of
products and services between groups on terms that would be available
from unaffiliated third parties in commercial transactions;

. the allocation of corporate opportunities in the best interests of
Quantum; and

. the requirement that groups not engage in each other's principal
businesses, subject to an exception for joint transactions with each
other and with third parties, but permitting indirect competition in
certain situations.

United States Federal Income Tax Considerations (page 41)

We have been advised by our counsel that no gain or loss will be recognized
by you for federal income tax purposes as a result of the tracking stock
proposal. However, the Internal Revenue Service could disagree. There are no
court decisions or other authorities bearing directly on transactions similar
to the tracking stock proposal. In addition, the Internal Revenue Service has
announced that it will not issue rulings on the characterization of stock with
characteristics similar to the DSSG stock and the HDDG stock. Therefore, the
tax treatment of the tracking stock proposal is subject to some uncertainty.

Clinton Administration Proposal

A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to the DSSG stock or the HDDG stock.
If this proposal is enacted, we could be subject to tax on an issuance of DSSG
stock or HDDG stock after the date of enactment. If our stockholders approve
the tracking stock proposal, our board of directors currently intends to
implement the proposal, subject to further legislative developments relating to
the Clinton Administration tax proposal.

No Dissenters' Rights

You will not have dissenters' or appraisal rights under Delaware law if the
tracking stock proposal is implemented.

No Regulatory Approvals

No state or federal regulatory approvals are required for the tracking stock
proposal.

Proposal 2--Adoption of Amendments to the Quantum Corporation Employee Stock
Purchase Plan (page 81)

This proposal relates to amendments to the Quantum Corporation Employee
Stock Purchase Plan (the "purchase plan") which would:

. increase the number of shares available for issuance under the purchase
plan from 1,366,401 to ; and

. add an automatic share replenishment provision to the purchase plan which
will increase the number of shares reserved under the purchase plan each
year on April 1

6
<PAGE>

beginning in the year 2000 by the lesser of (1) shares, (2)
% of the outstanding common stock or (3) an amount determined by
our board of directors.

The purpose of the proposed amendments to the purchase plan is to increase
the number of shares available for issuance under the purchase plan. Our board
of directors believes that the proposed amendments are in the best interests of
Quantum and our stockholders for the following reasons:

. our board of directors believes the purchase plan serves to incentivize
current employees and to align their interests with those of our
stockholders;

. our board of directors believes that the purchase plan is an important
element of our strategy to attract and retain qualified employees in a
competitive market;

. the automatic replenishment provision will provide the purchase plan with
additional shares and avoid any adverse accounting consequences from
running out of shares during an offering period; and

. without the proposed share increase, we will exhaust the shares available
for issuance under the purchase plan this year.

It the tracking stock proposal is approved by our stockholders, additional
features will be added to the purchase plan to reflect the special features of
the tracking stock, including:

. two pools of stock reserved under the purchase plan, each with automatic
replenishment features, if this amendment is approved;

. a special mechanism for the purchase of shares from each pool so that
each participant purchases a proportionate number of shares of the HDDG
stock and the DSSG stock; and

. a modified change of control provision to reflect the tracking stock
capital structure.

Under the purchase plan, our board of directors has the authority to adopt
these amendments related to the tracking stock proposal without stockholder
approval.

Recommendation of the Board of Directors

Your board of directors has carefully considered each of these proposals and
believes that the approval of these proposals by the stockholders is advisable
and in the best interests of our company and our stockholders. Your board of
directors unanimously recommends that you approve each of these proposals.

7
<PAGE>

QUANTUM CORPORATION SELECTED FINANCIAL INFORMATION
This summary of financial information of Quantum for the fiscal years 1994
to 1998 and for the nine months ended December 28, 1997 and December 27, 1998
should be read along with Quantum's audited and unaudited consolidated
financial statements contained in this proxy statement. Such summarized
financial information, other than the statement of operations data for fiscal
years 1994 and 1995 and the balance sheet data at March 31, 1994, 1995 and
1996, was taken from these financial statements. The financial statements for
the fiscal year periods are audited. The financial statements for the nine
month periods are unaudited, and we believe that they fairly present our
financial position, results of operations and cash flows for those periods.

A number of items affect the comparability of this information:

. Through May 1997, we consolidated the results of a recording heads
business acquired in October 1994. The recording heads business generated
losses from operations of $67 million, $70 million, $110 million and $9
million in fiscal years 1995 through 1998. In May 1997, we sold a 51%
interest in these operations to Matsushita-Kotobuki Electronics
Industries, Ltd. Subsequent losses of this joint venture using the equity
method of accounting were $66 million in fiscal year 1998 and $41 million
in the first half of fiscal year 1999. In October 1998, we and MKE agreed
to dissolve the joint venture and, as a result, we recorded a $101
million loss from the investment in the third quarter of fiscal year
1999.

. The results of operations for fiscal year 1998 and the third quarter of
fiscal year 1998 include the effect of a $103 million special charge,
primarily for inventory write-offs and losses on purchase commitments,
related to our high-end hard disk drive products.
<TABLE>
<CAPTION>
At or For the
Nine Months Ended
-------------------------
At or For the Years Ended March 31,
------------------------------------------------------- December 28, December 27,
1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenue................. $2,131,054 $3,367,984 $4,422,726 $5,319,457 $5,805,235 $4,519,516 $3,593,315
Gross profit............ 238,843 563,713 542,417 768,741 875,521 709,690 597,351
Research and development
expenses............... 89,837 169,282 239,116 291,332 321,741 236,797 254,859
Selling and marketing,
general and
administrative
expenses............... 115,925 160,424 207,558 235,878 258,395 204,021 196,141
Restructuring and other
charges................ 22,753 -- 209,122 -- -- -- --
Purchased in-process
research and
development expense.... -- 72,945 -- -- -- -- 89,000
Income (loss) from
operations............. 10,328 161,062 (113,379) 241,531 295,385 268,872 57,351
Loss from investee...... -- -- -- -- (66,060) (42,222) (142,050)
Net income (loss)....... $ 2,674 $ 81,591 $ (90,456) $ 148,515 $ 170,801 $ 168,108 $ (86,276)
Net income (loss) per
share:
Basic.................. $ 0.03 $ 0.90 $ (0.87) $ 1.27 $ 1.25 $ 1.26 $ (0.54)
Diluted................ $ 0.03 $ 0.76 $ (0.87) $ 1.04 $ 1.07 $ 1.05 $ (0.54)
Balance Sheet Data
Property, plant and
equipment, net......... $ 85,874 $ 280,099 $ 364,111 $ 407,206 $ 285,159 $ 266,785
Total assets............ 997,438 1,481,028 1,975,355 2,158,263 2,438,411 2,393,568
Total long-term debt,
convertible debt and
redeemable preferred
stock.................. 212,500 327,500 598,158 422,906 327,485 351,725
</TABLE>

8
<PAGE>

DSSG SELECTED FINANCIAL INFORMATION
This summary of financial information of DSSG for the fiscal years 1995 to
1998 and for the nine months ended December 28, 1997 and December 27, 1998
should be read along with DSSG's audited and unaudited combined financial
statements contained in this proxy statement. Such summarized financial
information, other than the statement of operations data for fiscal year 1995
and the balance sheet data at March 31, 1995 and 1996, was taken from these
financial statements. The financial statements for the nine month periods are
unaudited, and we believe that they fairly present the financial position,
results of operations and cash flows of DSSG for those periods.

A number of items affect the comparability of this information.

. In October 1994, DSSG acquired the DLTtape drive, DLTtape media and solid
state storage systems business from Digital Equipment Corporation, and
formed what is now DSSG. The results of operations for this business are
not included in our financial statements for periods prior to the
acquisition in fiscal year 1995.

. Prior to fiscal year 1999, almost all DLTtape media was sold directly by
DSSG. However, during fiscal year 1999, increased DLTtape media
availability allowed licensed third party DLTtape media manufacturers to
sell DLTtape media for which DSSG receives royalties. Royalty receipts by
DSSG are reported as royalty revenue, which is significantly lower than
the equivalent DLTtape media product revenue for DSSG. However, this
royalty model has generated income from operations comparable to that
generated by DLTtape media sales made directly by DSSG.

. During fiscal year 1997 and the first quarter of fiscal year 1998, DSSG's
supply of DLTtape drives was not sufficient to meet demand. As a result,
in the first half of fiscal year 1998 certain OEM customers began
building up larger inventories of DLTtape drives than were required for
their normal operations. As DSSG's manufacturing capacity increased and
DSSG was able to meet customer demand for DLTtape drives, certain
customers reduced their orders to lower inventories to more typical
levels. These actions resulted in reduced sales of DLTtape drives
beginning in the third quarter of fiscal year 1998 and more significantly
in the fourth quarter of fiscal year 1998 and the first quarter of fiscal
year 1999.

Historical per share information is omitted because the DSSG stock was not
part of the capital structure for the periods presented. However, pro forma net
income per share, reflecting the DSSG stock to be issued under the tracking
stock proposal, is presented for fiscal year 1998 and the first nine months of
fiscal year 1999.
<TABLE>
<CAPTION>
At or For the
Nine Months Ended
-------------------------
At or For the Years Ended March 31,
-------------------------------------- December 28, December 27,
1995 1996 1997 1998 1997 1998
-------- -------- -------- ---------- ------------ ------------
Statement of Operations
Data (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Product revenue......... $ 88,005 $335,565 $719,925 $1,162,725 $921,312 $827,938
Royalty revenue......... -- -- 8,088 27,075 12,495 84,717
-------- -------- -------- ---------- -------- --------
Total revenue.......... 88,005 335,565 728,013 1,189,800 933,807 912,655
Gross profit............ 32,752 126,610 270,339 502,214 391,605 406,650
Research and development
expenses............... 6,933 24,968 30,039 62,825 43,364 72,085
Selling and marketing,
general and
administrative
expenses............... 4,814 19,201 35,240 69,607 49,284 71,901
Purchased in-process
research and
development expense.... 4,218 -- -- -- -- 89,000
Income from operations.. 16,787 82,441 205,060 369,782 298,687 173,664
Net income (loss)....... $ (93) $ 34,973 $107,460 $ 223,659 $180,454 $ 65,124
Pro forma net income per
share:
Basic.................. $ 1.64 $ 0.41
Diluted................ $ 1.37 $ 0.39
Balance Sheet Data
Property, plant and
equipment, net......... $ 25,047 $ 30,135 $ 39,114 $ 57,399 $ 72,724
Total assets............ 118,476 238,337 437,925 792,070 937,195
Total long-term debt,
convertible debt and
redeemable preferred
stock ................. 242,482 310,150 281,937 218,324 234,484
</TABLE>

9
<PAGE>

HDDG SELECTED FINANCIAL INFORMATION
This summary of financial information of HDDG for the fiscal years 1994 to
1998 and for the nine months ended December 28, 1997 and December 27, 1998
should be read along with HDDG's audited and unaudited combined financial
statements contained in this proxy statement. Such summarized financial
information, other than statements of operations data for fiscal years 1994 and
1995 and the balance sheet data at March 31, 1994, 1995 and 1996, was taken
from these financial statements. The financial statements for the nine month
periods are unaudited and we believe that they fairly present the financial
position, results of operations and cash flows of HDDG for those periods.

A number of items affect the comparability of this information:

. Through May 1997, HDDG combined the results of a recording heads business
acquired from Digital Equipment in October 1994. These operations
generated operating losses of $67 million, $70 million, $110 million and
$9 million in fiscal years 1995 through 1998. In May 1997, Quantum sold a
51% interest in these operations to MKE. Subsequent losses of this joint
venture using the equity method of accounting were $66 million in fiscal
year 1998 and $41 million in the first half of fiscal year 1999. In
October 1998, Quantum and MKE agreed to dissolve the joint venture, and,
as a result, HDDG recorded an additional $101 million loss from the
investment in the third quarter of fiscal year 1999.

HDDG currently has two primary product lines; desktop hard disk drives and
high-end hard disk drives. HDDG has two separate business units that support
these two product lines. Recording heads produced by the recording heads
business were transferred to MKE and used in the manufacture of hard disk
drives for HDDG. The value at which the recording heads were transferred was
recorded as an offset to cost of sales.

Historical per share information is omitted because the HDDG stock was not
part of the capital structure for the periods presented. However, pro forma net
loss per share, reflecting the HDDG stock to be issued under the tracking stock
proposal, is presented for fiscal year 1998 and the first nine months of fiscal
year 1999.

<TABLE>
<CAPTION>
At or For the
At or For the Years Ended March 31, Nine Months Ended
---------------------------------------------------------- -------------------------
December 28, December 27,
Statement of Operations 1994 1995 1996 1997 1998 1997 1998
Data ---------- ---------- ---------- ---------- ---------- ------------ ------------
Business unit: (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Desktop
Revenue................ $1,951,685 $2,737,585 $3,349,735 $4,004,828 $3,981,614 $3,098,487 $2,294,274
Gross profit........... 213,273 499,133 511,390 565,681 453,278 390,643 150,435
Unit operating profit
(loss)................ 34,982 266,936 290,767 300,287 184,331 183,995 (54,166)
High-end
Revenue................ $ 179,369 $ 542,394 $ 737,426 $ 586,616 $ 633,821 $ 487,222 $ 386,386
Gross profit (loss).... 25,570 47,468 (73,974) (10,721) (80,790) (73,390) 40,267
Unit operating loss.... (24,654) (56,106) (416,620) (154,184) (250,136) (205,218) (62,147)
Recording heads
Unit operating loss.... -- (66,555) (69,967) (109,632) (8,592) (8,592) --
Loss from investee..... -- -- -- -- (66,060) (42,222) (142,050)
Combined group
Revenue................ $2,131,054 $3,279,979 $4,087,161 $4,591,444 $4,615,435 $3,585,709 $2,680,660
Income (loss) from
operations............ 10,328 144,275 (195,820) 36,471 (74,397) (29,815) (116,313)
Net income (loss)...... $ 2,674 $ 81,684 $ (125,429) $ 41,055 $ (52,858) $ (12,346) $ (151,400)
Pro forma net loss per
share
Basic................. $ (0.78) $ (1.91)
Diluted............... $ (0.78) $ (1.91)
Balance Sheet Data
Property, plant and
equipment, net......... $ 85,874 $ 255,051 $ 333,976 $ 368,092 $ 227,760 $ 194,061
Total assets............ 997,438 1,540,404 1,740,949 1,721,402 1,646,340 1,456,373
Total long-term debt,
convertible debt and
redeemable preferred
stock.................. 212,500 250,833 288,008 140,969 109,161 117,241
</TABLE>

10
<PAGE>

RISK FACTORS

The risk factors included through page 11 discuss risks arising from a
capital structure with two separate classes of common stock. Beginning on page
16, we discuss risks which are specific to a particular group.

Special Note Regarding Forward-Looking Statements

Many of the statements included in this proxy statement, including those
under the captions "Proxy Statement Summary--The Tracking Stock Proposal,"
"Risk Factors," "Quantum Corporation-- Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business of DSSG," "DSSG--
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business of HDDG" and "HDDG--Management's Discussion and Analysis
of Financial Condition and Results of Operations" are 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 can be identified by the use of forward-looking
terminology, such as "may," "will," "project," "estimate," "anticipate,"
"believe," "expect," "continue," "potential," "opportunity," or the negative of
such terms or other variations of such terms or comparable terminology or
expressions.

All forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for such
forward-looking statements.

In order to comply with the terms of the safe harbor, we note that a variety
of the risks and uncertainties that we discuss in detail below could cause our
actual results and experience to differ materially from those expected. Readers
are cautioned not to place undue reliance on forward-looking statements in this
proxy statement, which speak only as of the date hereof.

You will remain stockholders of one company and, therefore, financial effects
on one group could adversely affect the other

Holders of DSSG stock and HDDG stock will be stockholders of a single
company. DSSG and HDDG are not separate legal entities. As a result,
stockholders will continue to be subject to all of the risks of an investment
in Quantum and all of our businesses, assets and liabilities. The issuance of
the DSSG stock and the HDDG stock and the allocation of assets and liabilities
and stockholders' equity between DSSG and HDDG will not result in a
distribution or spin-off to stockholders of any of our assets or liabilities
and will not affect ownership of our assets or responsibility for our
liabilities or those of our subsidiaries. The assets we attribute to one group
could be subject to the liabilities of the other group, whether such
liabilities arise from lawsuits, contracts or indebtedness that we attribute to
the other group. If we are unable to satisfy one group's liabilities out of the
assets we attribute to it, we may be required to satisfy those liabilities with
assets we have attributed to the other group.

Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the common stock relating to the other group. In addition, net losses of either
group and dividends and distributions on, or repurchases of, either class of
common stock or repurchases of certain preferred stock will reduce the funds we
can pay on each class of common stock under Delaware law. For these reasons,
you should read our consolidated financial information with the financial
information we provide for each group.

Holders of group common stock will have limited rights related to their group

Holders of DSSG stock and HDDG stock will have only the rights customarily
held by common stockholders. In addition, they will have only the following
rights related to their corresponding group:

. certain rights with regard to dividends and liquidation;

. requirements for a mandatory dividend, redemption or conversion upon the
disposition of all or substantially all of the assets of their
corresponding group; and

11
<PAGE>

. a right to vote on matters as a separate voting class in the limited
circumstances provided under Delaware law, by Nasdaq rules or as
determined by our board of directors.

We will not hold separate meetings for holders of DSSG stock and HDDG stock.

Limits exist on voting power of group common stock

HDDG stock may not initially have any influence on the outcome of stockholder
voting

We expect that initially the DSSG stock will have a substantial majority of
the voting power of the common stock. Except in limited circumstances requiring
separate class voting, either class of common stock that is entitled to more
than the number of votes required to approve any stockholder action could
control the outcome of such vote--even if the matter involves a divergence or
conflict of the interests of the holders of the DSSG stock and the HDDG stock.
These matters may include mergers and other extraordinary transactions.

Group common stock with less than majority voting power can block action if a
class vote is required

If Delaware law, Nasdaq rules or our board of directors requires a separate
vote on a matter by the holders of either the DSSG stock or the HDDG stock,
those holders could prevent approval of the matter--even if the holders of a
majority of the total number of votes cast or entitled to be cast, voting
together as a class, were to vote in favor of it.

Holders of only one class of common stock can not ensure that their voting
power will be sufficient to protect their interests

Since the relative voting power per share of DSSG stock and HDDG stock will
fluctuate based on the relative market values of the two classes of common
stock, the relative voting power of a class of common stock could decrease. As
a result, holders of shares of only one of the two classes of common stock
cannot ensure that their voting power will be sufficient to protect their
interests.

Stockholders may not have any remedies for breach of fiduciary duties if any
action by directors and officers has a disadvantageous effect on either class
of common stock

Stockholders may not have any remedies if any action or decision of our
directors or officers has a disadvantageous effect on the DSSG stock or the
HDDG stock compared to the other class of common stock. We are not aware of any
legal precedent under Delaware law involving the fiduciary duties of directors
and officers of corporations having two classes of common stock, or separate
classes or series of capital stock, the rights of which, like the DSSG stock
and HDDG stock, are defined by reference to separate businesses of the
corporation.

Principles of Delaware law established in cases involving differing
treatment of two classes of capital stock or two groups of holders of the same
class of capital stock provide that a board of directors owes an equal duty to
all stockholders regardless of class or series. Under these principles of
Delaware law and the related principle known as the "business judgment rule,"
absent abuse of discretion, a good faith business decision made by a
disinterested and adequately informed board of directors, board of directors'
committee or officer with respect to any matter having different effects on
holders of DSSG stock and holders of HDDG stock would be a defense to any
challenge to such determination made by or on behalf of the holders of either
class of common stock.

Stock ownership could cause directors and officers to favor one group over the
other

As a policy, our board of directors will periodically monitor the ownership
of shares of DSSG stock and shares of HDDG stock by our directors and officers
and our option grants to them so that their interests are generally aligned
with the two classes of common stock and with their duty to act in the best
interests of Quantum and our stockholders as a whole. However, because the
actual value of their interests in the DSSG stock and HDDG stock is anticipated
to vary significantly, it is possible that they could have an incentive to
favor one group over the other due to their stock and option holdings. See
"Proposal 1--The Tracking Stock Proposal--Management and Allocation Policies--
Common Stock Ownership of Directors and Officers."

12
<PAGE>

Numerous potential conflicts of interest exist between the classes of common
stock which may be difficult to resolve by our board or which may be resolved
adversely to one of the classes

Our board of directors may pay more or less dividends on group common stock
than if that group was a separate company

Subject to the limitations referred to below, our board of directors has the
authority to declare and pay dividends on the DSSG stock and the HDDG stock in
any amount and could, in its sole discretion, declare and pay dividends
exclusively on the DSSG stock, exclusively on the HDDG stock, or on both, in
equal or unequal amounts. The performance of one group may cause our board of
directors to pay more or less dividends on the common stock relating to the
other group than if that other group was a stand-alone corporation. Our board
of directors will not be required to consider the amount of dividends
previously declared on each class, the respective voting or liquidation rights
of each class or any other factor. In addition, Delaware law and the restated
certificate of incorporation impose limitations on the amount of dividends
which may be paid on each class of common stock. See "Proposal 1--The Tracking
Stock Proposal--Dividend Policy" and "--Description of DSSG Stock and HDDG
Stock--Dividends."

Proceeds of mergers or consolidations may be allocated unfavorably

The tracking stock proposal does not contain any provisions governing how
consideration to be received by holders of common stock in connection with a
merger or consolidation involving Quantum is to be allocated among holders of
each class of common stock. Our board of directors will determine the
percentage of the consideration to be allocated to holders of each class of
common stock in any such transaction. Such percentage may be materially more or
less than that which might have been allocated to such holders had our board of
directors chosen a different method of allocation.

Holders of either class of common stock may be adversely affected by a
conversion of group common stock

Our board of directors could, in its sole discretion and without stockholder
approval, determine to convert shares of DSSG stock into shares of HDDG stock,
or vice versa at any time including when either or both classes of common stock
may be considered to be overvalued or undervalued. Any conversion at a premium
would dilute the interests in Quantum of the holders of the class of common
stock being issued in the conversion. Any such conversion would also preclude
holders of both classes of common stock from retaining their investment in a
security that is intended to reflect separately the performance of the relevant
group. It would also give holders of shares of the class of common stock
converted a greater or lesser premium than any premium that might be paid by a
third-party buyer of all or substantially all of the assets of the group whose
stock is converted. See "Proposal 1--The Tracking Stock Proposal--Description
of DSSG Stock and HDDG Stock--Conversion and Redemption."

Allocation of corporate opportunities could favor one group over the other

Our board of directors may be required to allocate corporate opportunities
between the groups. In some cases, our directors could determine that a
corporate opportunity, such as a business that we are acquiring, should be
shared by the groups. Any such decisions could favor one group at the expense
of the other. Our board of directors will make these decisions in its good
faith business judgment that such allocation is in the best interests of our
company and all of our stockholders as a whole. See "Proposal 1--The Tracking
Stock Proposal--Management and Allocation Policies--Review of Corporate
Opportunities."

Groups may compete with each other to the detriment of their businesses

The creation of two separate classes of common stock will not prevent the
groups from competing with each other. Any competition between the groups could
be detrimental to the businesses of either or both of the groups. As a matter
of policy, neither DSSG nor HDDG will engage in the principal businesses of the
other, except for certain joint transactions with each other and third parties.
However, our Chief Executive Officer or our board of directors will permit
indirect competition between
the groups based on his or its good faith business judgment that such
competition is in the best

13
<PAGE>

interests of our company and all of our stockholders as a whole. In addition,
the groups may compete in a business that is not a principal business of the
other group. See "Proposal 1--The Tracking Stock Proposal--Management and
Allocation Policies--Competition Between Groups."

Our board of directors may change our management and allocation policies
without stockholder approval to the detriment of the other group

Our board of directors may modify or rescind our policies with respect to
the allocation of corporate overhead, taxes, debt, interest and other matters,
or may adopt additional policies in its sole discretion without stockholder
approval. A decision to modify or rescind these policies, or adopt additional
policies, could have different effects on holders of DSSG stock and holders of
HDDG stock or could result in a benefit or detriment to one class of
stockholders compared to the other class. Our board of directors would make any
such decision in accordance with its good faith business judgment that such
decision is in the best interests of Quantum and all of our stockholders as a
whole.

Either group may finance the other group on terms unfavorable to one of the
groups

We anticipate that we will transfer cash and other property between groups
to finance their business activities. The group providing the financing will be
subject to the risks relating to the group receiving the financing. We will
account for those transfers in one of the following ways:

. as a reallocation of "pooled" debt or preferred stock;

. as a short-term or long-term loan between groups or as a repayment of a
previous borrowing; or

. as a sale of assets between groups.

Our board of directors has not adopted specific criteria to determine which
of the foregoing will be applied to a particular transfer of cash or property
from one group to the other. These determinations, including the terms of any
transactions accounted for as a loan, could be unfavorable to either the group
transferring or receiving the cash or other property. Our board of directors
expects to make these determinations, either in specific instances or by
setting generally applicable policies, after considering the financing needs
and objectives of the receiving group, the investment objectives of the
transferring group and the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions. See "Proposal 1--The Tracking Stock Proposal--Management and
Allocation Policies--Financing Activities."

We cannot assure you that any terms that we fix for debt will approximate
those that could have been obtained by the borrowing group if it were a stand-
alone corporation.

Holders of group common stock may receive less consideration upon a sale of
assets than if the group were a separate company

The restated certificate of incorporation provides that if we dispose of all
or substantially all of the assets of either group, we must, subject to certain
exceptions,

. distribute to holders of the class of common stock relating to that group
an amount equal to the net proceeds of such disposition; or

. convert the outstanding shares of such group's common stock into shares
of the class of common stock relating to the other group at a 10% premium
for the first five years following the implementation of the tracking
stock proposal and without any premium thereafter.

If the group subject to the disposition were a separate, independent company
and its shares were acquired by another person, certain costs of that
disposition, including corporate level taxes, might not be payable in
connection with that acquisition. As a result, stockholders of the separate,
independent company might receive a greater amount than the net proceeds that
would be received by holders of the class of common stock relating to that
group if the assets of such group were sold. In addition, we can not assure you
that the net proceeds per share of the common stock relating to that group will
be equal to or more than the market value per share of such common stock prior
to or after announcement of a disposition. See "Proposal 1--The Tracking Stock
Proposal--Description of DSSG

14
<PAGE>

Stock and HDDG Stock--Conversion and Redemption--Mandatory Dividend, Redemption
or Conversion of Common Stock If Disposition of Group Assets Occurs."

Our capital structure and variable vote per share may discourage acquisitions
of a group or a class of common stock

A potential acquiror could acquire control of Quantum by acquiring shares of
common stock having a majority of the voting power of all shares of common
stock outstanding. Such a majority could be obtained by acquiring a sufficient
number of shares of both classes of common stock or, if one class of common
stock has a majority of such voting power, only shares of that class. We expect
that initially the DSSG stock will have a substantial majority of the voting
power. As a result, initially, it might be possible for an acquiror to obtain
control of Quantum by purchasing only shares of DSSG stock. See "Proposal 1--
The Tracking Stock Proposal--Description of DSSG Stock and HDDG Stock--Voting
Rights."

Decisions by directors and officers that affect market values could adversely
affect voting and conversion rights

The relative voting power per share of each class of common stock and the
number of shares of one class of common stock issuable upon the conversion of
the other class of common stock will vary depending upon the relative market
values of the DSSG stock and the HDDG stock. The market value of either or both
classes of common stock could be adversely affected by market reaction to
decisions by our board of directors or our management that investors perceive
to affect differently one class of common stock compared to the other. These
decisions could involve changes to our management and allocation policies,
transfers of assets between groups, allocations of corporate opportunities and
financing resources between groups and changes in dividend policies.

Market value of the stock received under the tracking stock proposal may be
less than the market value of existing common stock

We can not assure you that the combined market values of a share of DSSG
stock and of 0.5 of a share of HDDG stock received under the tracking stock
proposal will equal or exceed the market value of a share of our existing
common stock.

The market price of the DSSG stock or the HDDG stock may be affected by the
number of market makers supporting the DSSG stock or the HDDG stock.

Investors may not value common stock based on group financial information and
policies

We can not assure you that investors will value the DSSG stock and the HDDG
stock based on the reported financial results and prospects of the separate
groups or the dividend policies established by our board of directors with
respect to such groups.

Market price of common stock not included in stock market indices could decline

We can not assure you that the DSSG stock or the HDDG stock will be included
in any particular index. As a result, holders of our existing common stock that
are required to own only stocks included in a particular index would be
required to sell immediately any class of common stock not included in that
index. Not being included in a particular index could adversely affect the
market price of that class of common stock.

Provisions governing common stock could discourage a change of control and the
payment of a premium for shares

Our restated stockholder rights plan could prevent stockholders from
profiting from an increase in the market value of their shares as a result of a
change in control of our company by delaying or preventing such change in
control. The existence of two classes of common stock could also present
complexities and could, in certain circumstances, pose obstacles, financial and
otherwise, to an acquiring person. In addition, certain provisions of Delaware
law, the restated certificate of incorporation and the by-laws may also deter
hostile takeover attempts. See "Proposal 1--The Tracking Stock Proposal--
Restated Rights Agreement" and "--Certain Anti-Takeover Provisions of Delaware
Law and the Restated Certificate of Incorporation, the By-laws and the Restated
Rights Agreement."

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IRS could assert that the receipt of group common stock is taxable

We have been advised by our counsel that no income, gain or loss will be
recognized by you for federal income tax purposes as a result of the tracking
stock proposal, except for any cash received instead of fractional shares of
HDDG stock. However, the Internal Revenue Service could disagree. There are no
court decisions or other authorities bearing directly on the effect of the
features of the DSSG stock and the HDDG stock. In addition, the Internal
Revenue Service has announced that it will not issue rulings on the
characterization of stock with characteristics similar to the DSSG stock and
the HDDG stock. It is possible, therefore, that the Internal Revenue Service
could successfully assert that the receipt of the DSSG stock or the HDDG stock
as well as the subsequent exchange of such common stock could be taxable to you
and to us as ordinary income.

Recent Clinton Administration proposal could result in taxation of issuances of
common stock

Under the restated certificate of incorporation, we may convert the DSSG
stock or the HDDG stock into shares of the other class without any premium if
there are adverse U.S. federal income tax law developments. The proposal of the
Clinton Administration would be such an adverse development if it is
implemented or receives certain legislative action. See "Proposal 1--The
Tracking Stock Proposal--Description of DSSG Stock and HDDG Stock--Conversion
and Redemption--Conversion of Common Stock at Option of Quantum at any Time"
and "--United States Federal Income Tax Consequences."

Risk Factors Relating to DSSG

Competition may increase in the tape drive market

DSSG competes with companies that develop, manufacture, market and sell tape
drive products. DSSG's principal competitors include Exabyte Corporation,
Hewlett-Packard Company, Seagate Technology, Inc., Sony Corporation and
StorageTek. These competitors are aggressively trying to develop new tape drive
technologies that compete more successfully with DLTtape technology. Hewlett-
Packard, IBM and Seagate have formed a consortium to develop new tape drive
products using linear tape open (LTO) technology. DSSG expects products based
on LTO technology to target the high-capacity data storage market and compete
with DSSG's products based on Super DLTtape(TM) technology. Such competition
could have a material adverse impact on DSSG's operating results.

DSSG depends on successful new product introductions

To compete effectively, DSSG must improve existing products and introduce
new products, such as products based on Super DLTtape technology and network
attached storage appliances. DSSG cannot assure you that:

. it will introduce any of these new products in the time frame DSSG
currently forecasts;

. it will not experience technical or other difficulties that could prevent
or delay the introduction of these new products;

. its products will achieve market acceptance;

. its new products will be successfully qualified with DSSG's customers;

. it will achieve volume production of these new products in a timely
manner, if at all; or

. competitors will not introduce products that are more technologically
advanced, more favorably priced or that otherwise compete more favorably.

This risk is magnified because DSSG expects technological changes, customer
requirements and increasing competition could result in declining sales and
gross margins on its existing products.

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Reliance on qualified third-party suppliers could result in increased costs
and delays

DSSG depends on qualified suppliers for components and sub-assemblies,
including recording heads, tape media and integrated circuits, all of which are
essential to the manufacture of DLTtape drives and tape libraries. DSSG
currently purchases the DLTtape media it sells primarily from Fuji Photo Film
Co., Ltd. and Hitachi Maxell, Ltd. DSSG cannot assure you that Fuji or Maxell
will continue to supply adequate high quality tape media in the future. If
component shortages occur, or if DSSG experiences quality problems with
component suppliers, shipments of products could be significantly delayed
and/or costs significantly increased. In addition, DSSG qualifies only a single
source for certain components and sub-assemblies, which could magnify the risk
of future shortages.

Competition may increase in the tape library market

Advanced Digital Information Corporation, Breece Hill Technologies, Inc.,
Exabyte, Hewlett-Packard, Overland Data, Inc. and StorageTek offer tape
libraries that compete with DSSG's tape libraries. If DLTtape technology
continues to maintain broad market acceptance in the mid-range tape market,
DSSG expects increased competition from these competitors and other companies
who may develop and introduce tape libraries using DLTtape technology. DSSG
also expects increased competition from large integrated computer equipment
companies, many of whom have historically incorporated their own tape storage
products into their mainframe server systems and are broadening their product
lines to focus on the enterprise server market.

DSSG's quarterly operating results could fluctuate significantly

DSSG's quarterly operating results have fluctuated significantly in the past
and could fluctuate significantly in the future. As a result, you should not
use DSSG's past quarterly operating results to predict future performance.
Quarterly operating results could be adversely affected by:

. the introduction of competing products that offer higher performance,
higher reliability and/or lower cost than DSSG's product offerings;

. an inadequate supply of DLTtape media;

. customers canceling, deferring or rescheduling significant orders as a
result of inventory levels or other factors;

. delays in qualification of new products with customers, which can be a
difficult, lengthy and complex process;

. declines in network server demand;

. unexpected warranty costs;

. significant increases in research and development expenditures required
to develop new products; or

. failure to complete shipments in the last month of a quarter resulting
from a decline in customer demand, manufacturing problems or other
factors.

A majority of sales come from a few customers; no minimum purchase commitments

Sales to DSSG's top five customers for the first nine months of fiscal year
1999 represented 54% of revenue, compared to 64% of revenue in the
corresponding period of fiscal year 1998. These amounts reflected a retroactive
combination of the sales to Compaq Computer, Inc. and Digital Equipment as a
result of their merger in June 1998. Sales to Compaq were 26% of revenue for
the first nine months of fiscal year 1999, compared to 39% of revenue in the
corresponding period of fiscal year 1998, including sales made to Digital
Equipment. Sales to Hewlett-Packard were 13% of revenue for the first nine
months of fiscal year 1999, compared to 10% of revenue in the corresponding
period of fiscal year 1998.

Customers are not obligated to purchase any minimum product volume and
DSSG's relationships with its customers are terminable at will. The loss of, or
a significant change in demand from, one or more key customers could materially
adversely impact DSSG's operating results.

Unpredictable end-user demand may cause excess or insufficient inventories

Unpredictable end-user demand, combined with the OEM trend toward carrying
minimal inventory

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levels, increases the risk that DSSG will manufacture and custom configure too
much or too little inventory for particular OEM customers. Significant excess
inventory could result in inventory write-downs and losses while inventory
shortages could adversely impact DSSG's relationship with its customers, either
of which could adversely impact DSSG's operating results.

DSSG/Tandberg relationship is subject to a number of risks

In September 1998, DSSG and Tandberg Data ASA entered into a manufacturing
license and marketing agreement through which Tandberg can independently
manufacture and sell DLTtape drives, including tape drives based on Super
DLTtape technology. This relationship is important for OEM customers who desire
an alternative source of DLTtape drives. Risks associated with this agreement
include:

. the failure by Tandberg to timely achieve volume production of DLTtape
drives because of technical, operational, cost or other factors;

. the potential for more competitive products to gain market share if
Tandberg is unsuccessful; and

. the possible oversupply of DLTtape drives and the resulting price
declines.

DSSG does not control licensee pricing or licensee sales of DLTtape media

DSSG receives a royalty fee based on sales of DLTtape media by Fuji and
Maxell. Under DSSG's license agreements with Fuji and Maxell, each of the
licensees determine the pricing and number of units of DLTtape media sold by
it. As a result, DSSG's royalty revenue will vary depending upon the level of
sales and prices set by Fuji and Maxell.

DSSG faces risk of third party infringement claims

From time to time, third parties allege DSSG's infringement of and need for
a license under their patented or other proprietary technology. Adverse
resolution of any third party infringement claim could subject DSSG to
substantial liabilities and require it to refrain from manufacturing and
selling certain products. In addition, the costs incurred in intellectual
property litigation can be substantial, regardless of the outcome.

Manufacturing and sales are subject to the risks of conducting business in
foreign countries

Certain of DSSG's product components are currently manufactured outside the
United States. In addition, international sales, including sales to the
overseas operations of United States companies, represented approximately 28%
of DSSG's total revenue for the first nine months of fiscal year 1999. As a
result, DSSG is subject to certain risks associated with conducting business in
foreign countries, including obtaining requisite United States and foreign
governmental permits and approvals, currency restrictions, political
instability, labor problems, trade restrictions, reduced intellectual property
protection and changes in tariff and freight rates.

Fluctuating currency exchange rates could adversely impact operating results

DSSG cannot assure you that it will manage successfully all foreign currency
risks, or that DSSG will not incur material charges as a result of fluctuating
foreign currency exchange rates which could have an adverse impact on DSSG's
operating results. Several Asian countries have experienced significant
economic downturns and significant declines in the value of their currencies
relative to the U.S. dollar. The result of this decline is that DSSG's products
are more expensive in these countries' local currencies.

Risk Factors Relating to HDDG

HDDG depends on successful new product introductions

To compete effectively, HDDG must frequently introduce new hard disk drives.
HDDG cannot assure you that:

. it will successfully or timely develop or market any new hard disk drives
in response to technological changes or evolving industry standards;

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<PAGE>

. it will not experience technical or other difficulties that could delay
or prevent the successful development, introduction or marketing of new
hard disk drives;

. it will successfully qualify new hard disk drives, particularly high-end
disk drives, with its customers;

. it will quickly achieve volume production of new hard disk drives; or

. its new products will achieve market acceptance.

These risks are magnified because HDDG expects technological changes, short
product life cycles and intense competitive pressures to result in declining
sales and gross margins on its existing products.

HDDG's ability to successfully incorporate GMR recording heads into its
products is expected to impact technology leadership and competitiveness

In calendar year 1999, HDDG expects increasing industry-wide competition for
hard disk drives that incorporate Giant Magneto-Resistive ("GMR") recording
heads, the next generation of Magneto-Resistive ("MR") recording heads. IBM has
already commenced shipment of hard disk drives which incorporate GMR recording
heads. HDDG cannot assure you that it will be able to incorporate GMR recording
heads into its hard disk drives in a timely manner. If HDDG is successful in
incorporating GMR recording heads into its hard disk drives, HDDG cannot assure
you that such drives will achieve market acceptance.

HDDG's quarterly operating results could fluctuate significantly

HDDG's quarterly operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. As a result, you should not use
HDDG's past quarterly operating results to predict future performance.
Quarterly operating results could be adversely affected by:

. MKE's ability to quickly achieve volume production of HDDG's hard disk
drives;

. the introduction of competitive hard disk drive products with higher
performance, higher reliability and/or lower cost than HDDG's hard disk
drives;

. customers canceling, deferring or rescheduling significant orders;

. returns by customers of unsold hard disk drives for credit;

. significant increases in research and development expenditures to develop
new products;

. decline in PC demand; or

. failure to complete shipments in the last month of a quarter resulting
from a decline in customer demand, manufacturing problems or other
factors.

HDDG's prices and margins are subject to declines

End-user demand for the computer systems which contain HDDG's hard disk
drives has historically been subject to rapid and unpredictable fluctuations.
As a result, the hard disk drive market tends to experience periods of excess
capacity which typically leads to intense price competition. If intense price
competition occurs, HDDG may be forced to lower prices sooner and more than
expected and transition to new products sooner than expected. For example, in
the first nine months of fiscal year 1999 and the second half of fiscal year
1998, as a result of excess inventory in the desktop hard disk drive market,
aggressive pricing and corresponding margin reductions materially adversely
impacted HDDG's operating results. HDDG experienced similar conditions in the
high-end hard disk drive market during most of fiscal year 1998 and in the
first nine months of fiscal year 1999. In addition, the recent growth of the
sub-$1,000 PC market has led to a shift toward lower priced desktop hard disk
drives, and to significantly reduced gross margins. HDDG expects the trend
toward lower prices and margins on hard disk drives continue. If HDDG is unable
to lower the cost of its desktop hard disk drives accordingly, gross margins
will continue to decrease.

Intense competition in the desktop and high-end hard disk drive market could
adversely impact HDDG's operating results

In the desktop hard disk drive market, HDDG's primary competitors are
Fujitsu Limited, IBM,

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<PAGE>

Maxtor Corporation, Samsung Electronics Co., Ltd, Seagate and Western Digital
Corporation. The desktop hard disk drive market is characterized by more
competitiveness and shorter product life cycles than the information storage
industry in general.

In the high-end hard disk drive market, HDDG's primary competitors are
Fujitsu, Hitachi, IBM, Seagate and Western Digital. Currently, Seagate and IBM
have the largest market share for high-end hard disk drives. The same
competitive factors applicable to the desktop hard disk drive market apply to
high-end hard disk drives. For example, intense competition has led to losses
on HDDG's high-end hard disk drive products over the past seven quarters. HDDG
does not anticipate that its high-end hard disk drive products will return to
profitability prior to shipping its next generation products.

A majority of sales come from a few customers; no minimum purchase
commitments; customer competition

Sales to HDDG's top five customers for the first nine months of fiscal year
1999 represented 41% of revenue, compared to 44% of revenue for the
corresponding period in fiscal year 1998. These amounts reflected a retroactive
combination of the sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Hewlett-Packard were 14% of revenue for the first
nine months of fiscal year 1999, compared to 12% of revenue in the
corresponding period of fiscal year 1998. Sales to Compaq were under 10% of
revenue for the first nine months of fiscal year 1999, compared to 12% of
revenue in the corresponding period of fiscal year 1998, including sales to
Digital Equipment.

Customers are not obligated to purchase any minimum product volume and
HDDG's customer relationships are terminable at will. Another risk is that a
key HDDG customer could commence the manufacture of hard disk drives for their
own use or for sale to others. The loss of, or a significant change in demand
from, one or more key HDDG customers could have a material adverse impact on
HDDG's operating results.

HDDG depends on MKE for the manufacture of all hard disk drives

HDDG's relationship with MKE is critical to HDDG's operating results and
overall business performance. HDDG's dependence on MKE includes the following
principal risks:

. Quality and Delivery. HDDG relies on MKE to quickly achieve volume
production of new hard disk drives at a competitive cost, to meet HDDG's
stringent quality requirements and to respond quickly to changing product
delivery schedules. Failure of MKE to satisfy these requirements could
have a material adverse impact on HDDG's operating results.

. Purchase Forecasts. MKE's production schedule is based on HDDG's
forecasts of its purchase requirements, and HDDG has limited rights to
modify short-term purchase orders. The failure of HDDG to accurately
forecast its requirements or successfully adjust MKE's production
schedule could lead to inventory shortages or surpluses.

. Pricing. HDDG negotiates pricing arrangements with MKE on a quarterly
basis. Any failure to reach competitive pricing arrangements would have a
material adverse impact on HDDG's operating results.

. Capital Commitment. HDDG's future growth will require that MKE continue
to devote substantial financial resources to property, plant and
equipment to support the manufacture of HDDG's products.

. Manufacturing Capacity. If MKE is unable or unwilling to meet HDDG's
manufacturing requirements, an alternative manufacturing source may not
be available in the near-term.

MKE depends on a limited number of component and sub-assembly suppliers

MKE depends on a limited number of qualified suppliers for components and
sub-assemblies, including recording heads, media and integrated circuits, all
of which are essential to the manufacture of HDDG's hard disk drives. MKE may
qualify only a single source for certain components and sub-assemblies, which
can magnify the risk of component shortages. Component shortages have
constrained HDDG's sales growth in the past, and HDDG believes that the
industry will periodically experience component shortages. If MKE experiences
quality problems with its component

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<PAGE>

suppliers, HDDG's hard disk drive shipments could be significantly delayed or
costs could be significantly increased.

Unexpected warranty costs could have a material adverse impact on operating
results

HDDG warrants its products against defects for a period of one to five
years. Actual warranty costs could have a material adverse impact on HDDG's
operating results if the actual unit failure rate or unit repair costs are
greater than those for which HDDG established a warranty accrual.

HDDG faces risk of third party infringement claims

From time to time, third parties allege HDDG's infringement of and need for
a license under their patented or other proprietary technology. For example, in
August 1998 Quantum was named as one of several defendants in a patent
infringement lawsuit. The plaintiff, Papst Licensing GmbH, owns at least 24
U.S. patents, which it asserts that HDDG has infringed. Adverse resolution of
the Papst litigation or any other third party infringement claim could subject
HDDG to substantial liabilities and require it to refrain from manufacturing
and selling certain products. If HDDG is unsuccessful, HDDG cannot assure you
that licenses to any technology owned by Papst or any other third party
alleging infringement could be obtained on commercially reasonable terms, or at
all. In addition, the costs of litigation could be substantial, regardless of
the outcome.

Manufacturing and sales are subject to the risks of conducting business in
foreign countries

HDDG's products and product components are currently manufactured outside
the United States. In addition, international sales, including sales to the
overseas operations of United States companies, represent approximately 55% of
HDDG's revenue in the first nine months of fiscal year 1999. As a result, HDDG
is subject to certain risks associated with conducting business in foreign
countries, including obtaining requisite United States and foreign governmental
permits and approvals, currency restrictions, political instability, labor
problems, trade restrictions, reduced intellectual property protection and
changes in tariff and freight rates.

Fluctuating currency exchange rates could impact operating results

HDDG cannot assure you that all foreign currency risks will be adequately
managed, or that HDDG will not incur material charges as a result of
fluctuating foreign currency exchange rates. Several Asian countries have been
experiencing significant economic downturns and significant declines in the
value of their currencies relative to the United States dollar. The result of
this decline is that HDDG's products are more expensive in these countries'
local currencies. In the four quarters ending with the first quarter of fiscal
year 1999, HDDG experienced a year-over-year reduction in sales to certain
Asian countries due, in part, to the effects of these adverse economic
conditions.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W. Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference room.

The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this proxy statement, and information that we file later with
the SEC will automatically update and supersede this information.

We incorporate by reference our documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until the special meeting:

. Annual Report on Form 10-K for the fiscal year ended March 31, 1998;

. Quarterly Reports on Form 10-Q for the quarterly periods ended June 28,
1998, September 27, 1998 and December 27, 1998; and

. Current Reports on Form 8-K, filed September 28, 1998 and March 26, 1999.

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<PAGE>

You should rely only on the information incorporated by reference or
provided in this proxy statement. We have not authorized anyone else to provide
you with different information. You should not assume that the information in
this proxy statement is accurate as of any date other than the date on the
front of this document.

INFORMATION ABOUT THE SPECIAL
MEETING AND VOTING

Date, Time and Place of Meeting

We are providing this proxy statement to you in connection with the
solicitation of proxies by our board of directors for use at the special
meeting. The special meeting will be held on [ ], 1999, at 10:00 a.m.,
local time, at our headquarters at 500 McCarthy Boulevard, Milpitas,
California. This proxy statement is first being mailed to our stockholders on
or about [ ], 1999.

Record Date

We have established [ ], 1999 as the record date for the special
meeting. Only holders of record of shares of our existing common stock at the
close of business on this date will be eligible to vote at the special meeting.

Proposals to be Considered at the Meeting

You will be asked to consider and vote on the two proposals described in
this proxy statement.

If either proposal is approved, we will implement it whether or not the
other proposal is approved.

We do not expect that any other matter will be brought before the special
meeting. If, however, other matters are properly presented, the individuals
named on your proxy card will vote in accordance with their judgment with
respect to those matters.

Vote Required to Approve the Proposals

The tracking stock proposal will require the favorable vote of the holders
of a majority of the outstanding shares of existing common stock. As a result,
abstentions and broker non-votes on the tracking stock proposal will have the
same effect as negative votes. Broker non-votes occur when a broker returns a
proxy but does not have authority to vote on a particular proposal.

The proposal to amend our employee stock purchase plan will be decided by
the favorable vote of a majority of the outstanding shares of our existing
common stock represented in person or by proxy at the special meeting. Under
Delaware law, abstentions will have the same effect as negative votes on this
proposal, while broker non-votes will not affect the outcome of this proposal.

Each outstanding share of existing common stock has one vote on each
proposal. As of [ ], 1999, the most recent practicable date prior to the
date of this proxy statement, we had issued and outstanding [ ] shares of
existing common stock. The shares of existing common stock held in our treasury
will not be entitled to vote or counted in determining the number of
outstanding shares.

Our directors and executive officers beneficially owned approximately [ ]%
of the outstanding shares of our existing common stock on [ ], 1999.

Quorum

In order to carry on the business of the special meeting, we must have a
quorum. This means a majority of the votes eligible to be cast by holders of
shares of our existing common stock outstanding on the record date must be
represented in person or by proxy at the special meeting. Abstentions and
broker non-votes will count for quorum purposes.

Procedure for Voting by Proxy

If you properly fill in your proxy card and send it to us in time to vote,
your shares will be voted as you have directed. If you sign the proxy card but
do not make specific choices, the individuals named on your proxy card will
vote your shares in favor of approval and adoption of each proposal. If you
mark "abstain" on your proxy card, your shares will be counted as present for
purposes of determining the presence of a quorum. If necessary, unless you have
indicated on your proxy card that you wish to vote against either or both the
proposals, the individuals named on your proxy card may vote in favor of a
proposal to adjourn the special meeting to a later

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<PAGE>

date in order to solicit and obtain sufficient votes for either of the
proposals.

A proxy card is enclosed for your use. To vote without attending the special
meeting in person, you should complete, sign, date and return the proxy card in
the accompanying envelope, which is postage-paid if mailed in the United
States. In addition, you may vote by telephone or via the Internet by following
the instructions on the enclosed proxy card.

If you have completed and returned a proxy card, you can still vote in
person at the special meeting. You may revoke your proxy before it is voted by
submitting a new proxy card with a later date; by voting in person at the
special meeting; or by filing with our company or with our transfer agent a
written revocation of proxy. Attendance at the special meeting will not of
itself constitute revocation of a proxy.

PROPOSAL 1--THE TRACKING STOCK PROPOSAL

Description of the Tracking Stock Proposal

You are being asked to consider and approve the tracking stock proposal
which, if approved, will allow Quantum to adopt a restated certificate of
incorporation containing amendments to its certificate of incorporation under
which each outstanding share of our existing common stock will be changed into
one share of DSSG stock and 0.5 of a share of HDDG stock.

Quantum will not issue any fractional shares of HDDG stock. Any stockholder
entitled to receive a fractional share of HDDG stock will instead receive an
amount of cash based on the closing price of HDDG stock on the date the
tracking stock proposal is implemented.

If the tracking stock proposal is implemented, your rights as stockholders
will be governed by Delaware law, the restated certificate of incorporation and
our amended by-laws which have been filed with the SEC. The restated
certificate of incorporation contains the terms of the DSSG stock and the HDDG
stock. Accordingly, you should carefully read the restated certificate of
incorporation attached as Annex I.

If the tracking stock proposal is not approved, our existing common stock
will not be changed into DSSG stock and HDDG stock.

If the tracking stock proposal is approved, we plan to implement the
proposal by filing the restated certificate of incorporation with the Secretary
of State of the State of Delaware. We presently anticipate that this filing
will be made as soon as possible after the special meeting. No state or federal
regulatory approvals are required for the consummation of the tracking stock
proposal.

Our board of directors may decide not to implement the tracking stock
proposal for any reason at any time prior to the filing of the restated
certificate of incorporation with the Secretary of State of the State of
Delaware, either before or after stockholder approval.

Background of and Reasons for the Tracking Stock Proposal

Our board of directors approved the tracking stock proposal following its
review of various alternatives for enhancing the overall return to our
stockholders and for supporting our strategic objectives. Our board of
directors believes that the historical price performance of our existing common
stock has been more closely linked to HDDG and fails to reflect adequately the
value of DSSG. As a result, our stockholders have been unable to realize the
full value of their shares.

At the same time, our board of directors recognized that our current capital
structure impedes our ability to execute our strategic objectives and to
further enhance shareholder value. Our management has adopted a broad strategy
focused on accelerating the growth of DSSG's DLTtape and storage systems
business and strengthening HDDG's position in the hard disk drive market. This
strategy focuses primarily on:

. extending DSSG's leading positions in the tape drive and tape library
markets;

. leveraging our strength and expertise in storage device sub-system and
system technology to offer total storage solutions with increased
functionality and performance; and

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<PAGE>

. maintaining HDDG's leading position in the desktop hard disk drive market
and establishing leadership in the Intel-based server and workstation
market.

To be successful in the execution of this strategy, we need to:

. raise funds more cost effectively in the capital markets;

. facilitate strategic acquisitions through the issuance of equity
securities; and

. attract and retain key personnel to advance the growth of Quantum as a
whole.

The failure of the financial markets to value accurately the businesses of each
group represents a significant impediment to the execution of this strategy.

We expect that the tracking stock proposal should encourage proper valuation
of the businesses of each of the groups. The proposal is designed to highlight
the separate performance of each of DSSG and HDDG. The value of each class of
common stock is intended to be based on the performance of the business to
which it relates and influenced by the factors that affect the value of common
stock generally (i.e., earnings, growth prospects and comparable valuations).
The tracking stock proposal will also encourage proper valuation of the groups
by providing stockholders, analysts and other market participants with separate
financial and other information to evaluate the respective businesses.

At a meeting held on October 20, 1998, our board of directors discussed with
our management a variety of structural alternatives designed to enhance the
value of the existing common stock to our stockholders and address our core
strategy of building a more diversified storage business. In this discussion,
our management evaluated the effect that each alternative would have on our
ability to:

. raise funds in the capital markets;

. create a more valuable currency for strategic acquisitions; and

. attract and retain key personnel to advance the growth of Quantum.

Following this discussion, our board of directors authorized management to
continue its review of such alternatives. On January 29, 1999, our board of
directors again met with management in order to formally evaluate the various
strategies for enhancing shareholder value and advancing our strategic goals.
Among the alternatives considered by our board of directors were:

. the preservation of our current equity and operating structure;

. the tracking stock proposal; and

. the creation of separate equity securities of subsidiaries.

Because the preservation of the current equity and operating structure would
not allow proper valuation of DSSG's business, our board concluded that the
tracking stock proposal would be most likely to enhance shareholder value and
address our strategic objectives. In reaching its conclusion, our board of
directors consulted with Quantum's financial advisors, legal counsel and
independent accountants.

On March 24, 1999, our board of directors confirmed its prior conclusions
concerning alternatives available to Quantum and identified the following as
the advantages of the tracking stock proposal:

. The creation of two classes of common stock intended to reflect
separately the performance of DSSG and HDDG should increase shareholder
value by more specifically tracking the earnings, cash flows, growth
prospects and investment results of each group. The issuance of DSSG
stock should result in broader and more in-depth equity coverage of DSSG
by financial analysts. As a result, investors should better understand
DSSG and Quantum as a whole;

. We expect that holders of HDDG stock and DSSG stock could be separate and
distinct investor groups;

. The creation of two classes of common stock should enhance the ability of
each group and its management to focus on that group's business strategy
and financial model. At the same time, we will maintain a cohesive
corporate identity and culture through incentive-based compensation which
permits us to provide employees with participation in

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<PAGE>

the long-term growth and financial success of Quantum as a whole;

. The tracking stock proposal, in contrast to other alternatives, will
retain for us the advantages of doing business as a single company and
allow each group to capitalize on relationships with the other group. As
part of one company, each group will be in a position to benefit from
cost savings and synergies with the other compared to the costs each
group would incur if it operated separately. As part of a single
organization, we expect to incur savings in corporate overhead expenses
while preserving the benefits of credit availability and, more
importantly, a shared strategy;

. The availability of two different equity securities will enhance our
financial and strategic flexibility to raise capital for DSSG and HDDG
and to engage in mergers, acquisitions, strategic investments, capital
restructurings and other transactions affecting either group. In the
ordinary course of business, our board of directors may consider such
transactions from time to time but it has no current plans or intentions
with respect to any specific transaction; and

. The tracking stock proposal retains future restructuring flexibility by
preserving our ability to undertake future capital restructuring and
asset segmentation as well as to modify our capital structure.

Our board of directors also considered the following potential disadvantages
of the tracking stock proposal:

. The tracking stock proposal results in a complex capital structure that
may not be well-understood by investors and thus could inhibit the
efficient valuation of either or both classes of common stock;

. The potential diverging or conflicting interests of the two groups and
the issues that could arise in resolving any conflicts;

. Investors in DSSG stock and HDDG stock will be exposed to the risks of
our consolidated businesses and liabilities because both groups remain
legally a part of Quantum;

. The market values of the DSSG stock and the HDDG stock could be affected
by market reaction to decisions by our board of directors and management
that investors perceive to affect differently one class of common stock
compared to the other, such as decisions regarding the allocation of
assets, expenses, liabilities and corporate opportunities and financing
resources between the groups;

. The possible inability to use the pooling method of accounting in
connection with future acquisitions using HDDG stock, and the possible
inability or increased difficulty of receiving a ruling from the Internal
Revenue Service in connection with a proposed acquisition to be effected
using either DSSG stock or HDDG stock; and

. The uncertain tax treatment of tracking stock under current law as well
as the recent proposal by the Clinton Administration to impose a
corporate level tax on the issuance of stock similar to the DSSG stock
and the HDDG stock could require us to change our capital structure after
their issuance to avoid adverse tax consequences.

Our board of directors determined that on balance the potential advantages
of the tracking stock proposal outweigh the potential disadvantages and
concluded that the tracking stock proposal is advisable and in the best
interests of our company and our stockholders.

Recommendation of the Board of Directors

Our board of directors has carefully considered the tracking stock proposal
and believes that the approval of the tracking stock proposal by the
stockholders is advisable and in the best interests of our company and our
stockholders. Our board of directors unanimously recommends that you approve
the tracking stock proposal.

Management and Allocation Policies

Because DSSG and HDDG will each be a part of a single company, we have
carefully considered a number of issues with respect to the financing of DSSG
and HDDG, competition between groups, inter-group business transactions, access
to

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<PAGE>

technology and know-how, corporate opportunities and the allocation of debt,
corporate overhead, interest, taxes and other support activities between the
two groups. Our board of directors and management have established policies
designed to accomplish the fundamental objective of the tracking stock
proposal, which is to highlight the separate performance of each of DSSG and
HDDG and to allow each group to focus on its own business strategy and
financial model. These policies establish guidelines to help us to allocate
costs and charges between the two groups on an objective basis and to ensure
that transactions between DSSG and HDDG are made on terms that approximate the
terms that could be obtained from unaffiliated third parties.

Policies Subject to Change Without Stockholder Approval

We have summarized our management and allocation policies below. We are not
requesting stockholder approval of these policies.

Our board of directors may modify or rescind these policies, or may adopt
additional policies, in its sole discretion without stockholder approval.
However, our board of directors has no present intention to do so. A decision
to modify or rescind these policies, or adopt additional policies, could have
different effects upon holders of DSSG stock and holders of HDDG stock or could
result in a benefit or detriment to one class of stockholders compared to the
other class. Our board of directors would make any such decision in accordance
with its good faith business judgment that such decision is in the best
interests of our company and all of our stockholders as a whole.

Fiduciary and Management Responsibilities

Because DSSG and HDDG will continue to be a part of a single company, our
directors and officers will have the same fiduciary duties to holders of DSSG
stock and the HDDG stock that they currently have to the holders of our
existing common stock. Under Delaware law, absent an abuse of discretion, a
director or officer will be deemed to have satisfied his or her fiduciary
duties to our company and our stockholders if that person is disinterested and
acts in accordance with his or her good faith business judgment in the
interests of our company and all of our stockholders as a whole. Our board of
directors and our Chief Executive Officer, in establishing policies with regard
to intracompany matters such as business transactions between groups and
allocations of assets, liabilities, debt, corporate overhead, taxes, interest,
corporate opportunities and other matters, will consider various factors and
information which could benefit or cause detriment to the stockholders of the
respective groups and will make determinations in the best interests of our
company and all of our stockholders as a whole.

Because the tracking stock proposal will result in no change in our
corporate structure, Michael A. Brown, the Chairman of the Board of Directors
and Chief Executive Officer, will have the same duties and responsibilities for
the management of our assets and businesses which comprise DSSG and HDDG
following the implementation of the tracking stock proposal as he has now. The
individuals named below will hold the positions listed next to their names and
will continue to have the same general responsibilities following the
implementation of the tracking stock proposal as they have now. The costs
attributable to their responsibilities will be allocated as discussed below
under "--Financial Statements; Allocation Matters--Corporate Overhead and
Administrative Shared Services."

<TABLE>
<CAPTION>
Officer Position
------- --------
<C> <S>
Michael A. Brown.... Chairman of the Board and Chief Executive Officer
Richard L. Clemmer.. Executive Vice President, Finance, Chief Financial
Officer and Secretary
Curt Francis........ Vice President, Corporate Development
Jerald L. Maurer.... Executive Vice President, Human Resources, Real Estate,
Corporate Services
Peter van
Cuylenburg......... President, DSSG
John J. Gannon...... President, HDDG
</TABLE>

Our Chief Executive Officer, with the approval of our board of directors,
has designated separate management teams for each of DSSG and HDDG to ensure
that the efforts of each team of managers are focused on the business and
operations for which they have responsibility. These individuals are

26
<PAGE>

named in "Business of DSSG--Management" and "Business of HDDG--Management."

Common Stock Ownership of Directors and Officers

As a policy, our board of directors will periodically monitor the ownership
of shares of DSSG stock and shares of HDDG stock by our directors and officers
and our option grants to them so that their interests are generally aligned
with the two classes of common stock and with their duty to act in the best
interests of our company and our stockholders as a whole. However, because of
the anticipated differences in trading values between the DSSG stock and the
HDDG stock, the actual value of their interests in the DSSG stock and HDDG
stock will vary significantly. Accordingly, it is possible that directors or
officers could have an incentive to favor one group over the other due to their
stock and option holdings.

Financing Activities

We will continue to manage most financial activities on a centralized basis.
These activities include the investment of surplus cash, the issuance and
repayment of short-term and long-term debt, the issuance and repurchase of
common stock and the issuance and repurchase of any preferred stock. If we
transfer cash or other property allocated to one group to the other group, we
will account for such transfer in one of the following ways:

. As a reallocation of "pooled" debt or preferred stock, as described under
"Company Debt and Preferred Stock" below;

. As a short-term or long-term loan between groups, or as a repayment of a
previous borrowing, as described under "Inter-group Loans" below; or

. As a sale of assets between groups.

Our board of directors has not adopted specific criteria to determine which
of the foregoing will be applied to a particular transfer of cash or property
from one group to the other. Our board of directors will make these
determinations, either in specific instances or by setting generally applicable
policies, in the exercise of its business judgment based on all relevant
circumstances, including the financing needs and objectives of the receiving
group, the investment objectives of the transferring group, the availability,
cost and time associated with alternative financing sources, prevailing
interest rates and general economic conditions. We will make all transfers of
assets from one group to the other on a fair value basis for the foregoing
purposes, as determined by our board of directors. See "--Transfers of Assets
Between Groups."

Although we may allocate our debt and preferred stock between groups, the
debt and preferred stock will remain our obligations and all of our
stockholders will be subject to the risks associated with those obligations.
See "Risk Factors--You will remain stockholders of one company; and, therefore,
financial effects on one group could adversely affect the other."

Company Debt and Preferred Stock. We will allocate our debt between the
groups or, if we so determine, in its entirety to a particular group. We will
allocate preferred stock, if issued, in a similar manner. We refer to debt and
preferred stock allocated between groups as being "pooled."

Cash allocated to one group that is used to repay pooled debt or redeem
pooled preferred stock will decrease such group's allocated portion of the
pooled debt or preferred stock. Cash or other property allocated to one group
that is transferred to the other group will, if so determined by our board of
directors, decrease the transferring group's allocated portion of the pooled
debt or preferred stock and, correspondingly, increase the recipient group's
allocated portion of the pooled debt or preferred stock.

Pooled debt will bear interest for group financial statement purposes at a
rate equal to the weighted average interest rate of the debt calculated on a
quarterly basis and applied to the average pooled debt balance during the
period. Preferred stock, if issued and if pooled in a manner similar to the
pooled debt, will bear dividends for group financial statement purposes at a
rate based on the weighted average dividend rate of the preferred stock
similarly calculated and applied. Any expense related to increases in pooled
debt or preferred stock will be reflected in the weighted average interest or
dividend rate of such pooled debt or preferred stock as a whole.

27
<PAGE>

If we allocate debt for a particular financing in its entirety to one group,
that debt will bear interest for group financial statement purposes at the rate
that we determine. If we allocate preferred stock in its entirety to one group,
we will charge the dividend cost to that group in a similar manner. If the
interest or dividend cost is higher than our actual cost, the other group will
receive a credit for an amount equal to the difference as compensation for the
use of our credit capacity. Any expense related to debt or preferred stock that
is allocated in its entirety to a group will be allocated in whole to that
group.

Inter-group Loans. Cash or other property that we allocate to one group that
is transferred to the other group, could, if so determined by our board of
directors, be accounted for either as a short-term loan or as a long-term loan.
Short-term loans and, unless our board of directors determines otherwise, long-
term loans will bear interest at a rate equal to the weighted average interest
rate of our pooled debt. If we do not have any pooled debt, our board of
directors will determine the rate of interest for such loan. Our board of
directors will establish the terms on which long-term loans between the groups
will be made, including interest rate if not based on our weighted average
interest rate, amortization schedule, maturity and redemption terms.

Equity Issuances and Repurchases and Dividends. We will reflect all
financial effects of issuances and repurchases of shares of DSSG stock or
shares of HDDG stock entirely in the financial statements of that group. We
will reflect financial effects of dividends or other distributions on, and
purchases of, shares of DSSG stock or HDDG stock entirely in the respective
financial statements of DSSG or HDDG.

Competition Between Groups

Neither DSSG nor HDDG will engage in the principal business of the other,
except for certain joint transactions with each other. DSSG's principal
business is the design, manufacture and sale of DLTtape drives and media and
storage systems and subsystems, including tape libraries and network attached
storage appliances. HDDG's principal business is the design, manufacture and
sale of devices that store digital content on rigid rotating media by magnetic
means and are incorporated as a component in a system, subsystem or appliance.
Our board of directors may designate one or more additional businesses as
principal businesses of either DSSG or HDDG in the future.

Joint transactions may include joint ventures or other collaborative
arrangements to develop, market, manufacture, sell and support new products and
services. Third parties may also participate in such joint transactions. See
"--Transfers of Assets Between Groups--Joint Transactions." The terms of any
joint transactions will be determined by our Chief Executive Officer or, in
appropriate circumstances, our board of directors.

With the approval of our Chief Executive Officer or, in appropriate
circumstances, our board of directors, the groups may engage in indirect
competition in their principal businesses from time to time. This competition
could involve, for example:

. HDDG selling its products to a third party for use in the third party's
products which compete with DSSG's products;

. DSSG's inclusion of a third party's products rather than HDDG's products,
in DSSG's products; or

. Quantum licensing technology to a third party that is a competitor of the
other group.

Our Chief Executive Officer or our board of directors will permit indirect
competition between the groups based on his or its good faith business judgment
that such competition is in the best interests of our company and all of our
stockholders as a whole. In addition, the groups may compete in a business
which is not a principal business of the other group.

Transfers of Assets Between Groups

The restated certificate of incorporation permits the transfer of assets
between groups without stockholder approval. Our board of directors has
determined that all such transfers will be made at fair value, as determined by
our board of directors. The consideration for such transfers may be paid by one
group to the other in cash or other consideration, as determined by our board
of directors.

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<PAGE>

Our board of directors has adopted specific policies for the sale of
products and services between groups and joint transactions with each other and
third parties as set forth below.

Sales of Products and Services Between Groups. One group will sell products
or services to the other group on terms that would be available from
unaffiliated third parties in commercial transactions. If the terms for such
transactions are not available from a third party, the purchasing group will
pay for such products and services at fair value, in accordance with policies
set by our board of directors.

Joint Transactions. The groups may from time to time engage in transactions
jointly, including with third parties, as described under "--Competition
Between Groups." Research and development and other services performed by one
group for a joint venture or other collaborative arrangement will be charged at
fair value, in accordance with policies set by our board of directors.

Access to Technology and Know-How

Each group will have access to all of our technology and know-how, excluding
products and services of the other group, that may be useful in that group's
business, subject to obligations and limitations applicable to Quantum and to
such exceptions that our board of directors may determine. The groups will
consult with each other on a regular basis concerning technology issues that
affect both groups.

Review of Corporate Opportunities

Our board of directors will review any significant matter which involves the
allocation of a corporate opportunity to either DSSG or HDDG or in part to DSSG
and in part to HDDG. In accordance with Delaware law, our board of directors
will make its determination with regard to the allocation of any such
opportunity and the benefit of such opportunity in accordance with their good
faith business judgment of the best interests of our company and all of our
stockholders as a whole. Among the factors that our board of directors may
consider in making this allocation is whether a particular corporate
opportunity is principally related to the business of DSSG or HDDG, as
described under "--Competition Between Groups"; whether one group, because of
its managerial or operational expertise, will be better positioned to undertake
the corporate opportunity; and existing contractual agreements and
restrictions.

Financial Statements; Allocation Matters

We will prepare financial statements in accordance with generally accepted
accounting principles, consistently applied, for DSSG and HDDG, and these
financial statements, taken together, will comprise all of the accounts
included in our consolidated financial statements. The financial statements of
each of DSSG and HDDG will reflect the financial condition, results of
operations and cash flows of the businesses included therein.

Group financial statements will also include allocated portions of our debt,
interest, corporate overhead and costs of administrative shared services and
taxes. We will make these allocations for the purpose of preparing each group's
financial statements; however, holders of DSSG Stock and HDDG stock will
continue to be subject to all of the risks associated with an investment in our
company and all of our businesses, assets and liabilities. See "Risk Factors--
You will remain stockholders of one company and, therefore, financial effects
on one group could adversely affect the other" and the financial statements for
DSSG and HDDG included in this proxy statement.

In addition to allocating debt and interest as described above under "--
Financing Activities" and assets as described above under "--Transfers of
Assets Between Groups," our board of directors has adopted the following
allocation policies, each of which is reflected in the financial statements of
the respective groups included in this proxy statement:

. Support Activities. We will directly charge specifically identified costs
for certain support activities to DSSG and HDDG based upon the use of
such activities. Where determinations based on use alone are not
practical, we will use other methods and criteria to provide a reasonable
allocation of the cost of certain other support activities attributable
to the groups. Such allocated

29
<PAGE>

support activities include certain selling and marketing, executive
management, human resources, corporate finance, legal and corporate
planning activities.

. Taxes. We will determine the income tax provisions of Quantum and its
subsidiaries which own assets allocated between the groups on a
consolidated basis. We will allocate consolidated income tax provisions
and related tax payments or refunds between the groups based principally
on the taxable income and tax credits directly attributable to each
group. Such allocations will reflect each group's contribution, whether
positive or negative, to Quantum's consolidated taxable income and the
consolidated tax liability and tax credit position. We will credit tax
benefits that can not be used by the group generating those benefits but
can be used on a consolidated basis to the group that generated such
benefits. Inter-group transactions will be treated and taxed as if each
group was a stand-alone company.

Current and deferred taxes and taxes payable or refundable allocated to
each group in these historical financial statements differ from those
that would have been allocated to each group had they filed separate
income tax returns.

Dividend Policy

Historically, we have not paid dividends on our existing common stock. We
presently intend to retain all earnings for use in our business and do not
anticipate paying dividends on either the DSSG stock or the HDDG stock in the
foreseeable future.

Our board of directors does not currently intend to change the above-
described dividend policy but reserves the right to do so at any time based
primarily on the financial condition, results of operations and business
requirements of the respective groups and of Quantum as a whole. Future
dividends on the DSSG stock and HDDG stock will be payable when, as and if
declared by our board of directors out of the lesser of (1) all funds of
Quantum legally available therefor and (2) the amount calculated under the
definition of that group's Available Dividend Amount contained in the restated
certificate of incorporation in Annex I. We encourage you to carefully read
these definitions. Each group's Available Dividend Amount is intended to be
similar to the amount that would be legally available for the payment of
dividends on the stock for that group under Delaware law if that group were a
separate company. See "--Description of DSSG Stock and HDDG Stock--Dividends."

In making its dividend decisions regarding the DSSG stock and the HDDG
stock, our board of directors will rely on the respective financial statements
of DSSG and HDDG. See the financial statements of DSSG and HDDG included in
this proxy statement. The method of calculating net income (loss) for the DSSG
stock and the HDDG stock is set forth in the restated certificate of
incorporation in Annex I under the definitions of DSSG Net Income (Loss) and
HDDG Net Income (Loss). We encourage you to carefully read these definitions.

Description of DSSG Stock and HDDG Stock

We have summarized below the material terms of the DSSG stock and the HDDG
stock. The summary is not complete. We encourage you to read the restated
certificate of incorporation which is attached as Annex I.

Authorized and Outstanding Shares

Our existing certificate of incorporation authorizes us to issue 504 million
shares of stock, consisting of 500 million shares of common stock, par value
$0.01 per share, and 4 million shares of preferred stock, par value $0.01 per
share. Of the 4 million shares of preferred stock, our board of directors has
designated a total of 1 million shares of Series A Junior Participating
Preferred Stock in connection with our existing stockholder rights plan. Our
board of directors may issue shares of preferred stock in series, without
stockholder approval. As of [ ], 1999, [ ] shares of existing common stock
and no shares of preferred stock were issued and outstanding.

The restated certificate of incorporation will authorize us to issue 1.62
billion shares of stock as follows: 1 billion shares of a class of common
stock, designated as Quantum Corporation--DSSG Common Stock, .6 billion shares
of a class of common stock, designated as Quantum Corporation

30
<PAGE>

- --HDDG Common Stock, and 20 million shares of preferred stock. Shares of each
class of stock will have a par value of $0.01 per share. We will be able to
issue shares of preferred stock in series, without stockholder approval. Of the
20 million authorized shares of preferred stock, our board of directors has
designated a total of [ ] shares of two series of junior participating
preferred stock in connection with our restated stockholder rights plan. See
"--Restated Rights Agreement."

As a result of the tracking stock proposal, assuming the number of shares of
existing common stock then outstanding is the same as the number outstanding on
[ ], 1999, [ ] shares of DSSG stock and [ ] shares of the
HDDG stock will be issued and outstanding.

Reasons for Increase in Authorized Common Stock

Our board of directors believes that an increase in the number of authorized
shares of common stock at this time is in the best interests of our company so
that we can implement the tracking stock proposal and have available the number
of shares needed for a possible future conversion, dividends, acquisitions,
capital raising, our restated stockholder rights plan and employee benefit
plans.

The authorization of at least [ ] shares of DSSG stock and at least
[ ] shares of HDDG stock is needed for the tracking stock proposal to
be implemented. In addition, Quantum has outstanding $288 million principal
amount of 7% convertible subordinated notes due 2004, which are convertible at
the option of the holder at any time prior to maturity into shares of our
existing common stock at a conversion price of $46.325. Following the
implementation of the tracking stock proposal, each of those notes will be
convertible into a number of shares of DSSG stock and a number of shares of
HDDG stock equal to the numbers of such shares which the holder of such note
would receive under the tracking stock proposal had such note been converted
immediately prior to the implementation of the tracking stock proposal. We have
also reserved 25,940,985 shares of our existing common stock for issuance under
our employee benefit plans. See "--Effect on Existing Options and Convertible
Notes."

Further, as described under "--Conversion and Redemption," our board of
directors has the right to convert one class of common stock into the other at
a 10% premium for the first five years following the implementation of the
tracking stock proposal and without premium thereafter and in certain other
circumstances. The number of shares issuable in a conversion will vary based on
the relative market values of the two classes of common stock and the number of
outstanding shares of common stock being converted.

Our board of directors may also pay a stock dividend in one class of common
stock on that class of common stock. If our board of directors determines that
a conversion or a stock dividend is in the best interests of Quantum, but at
that time sufficient authorized shares of common stock are not available, our
stockholders would be required to approve an amendment to the restated
certificate of incorporation.

Other than the issuance of shares under our outstanding convertible
subordinated notes and our employee benefit plans, we have no present
understanding or agreement for the issuance of any additional shares of DSSG
stock or HDDG stock. Although our board of directors has no present intention
of doing so, the additional shares that would be authorized for issuance if the
tracking stock proposal is implemented could be issued in one or more
transactions that would make a takeover of Quantum more difficult and,
therefore, less likely, even though a takeover might be financially beneficial
to our company and our stockholders. See "--Certain Anti-Takeover Provisions of
Delaware Law and the Restated Certificate of Incorporation, the By-laws and the
Restated Rights Agreement." We have no knowledge of any person or entity that
intends to seek a controlling interest in our company or to make a takeover
proposal.

We may issue the authorized but unissued shares of DSSG stock and HDDG stock
for any proper corporate purpose, which could include any of the purposes set
forth above. We will not solicit the approval of our stockholders for the
issuance of additional authorized shares of DSSG stock or HDDG stock unless our
board of directors believes that approval is advisable or is required by Nasdaq
regulations or Delaware law.

Dividends

Dividends on our existing common stock are limited to our legally available
funds under

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<PAGE>

Delaware law and subject to the prior payment of dividends on any preferred
stock. Dividends on the DSSG stock and the HDDG stock will be subject to the
same limitations as dividends on our existing common stock. Dividends on the
DSSG stock and dividends on the HDDG stock will also be limited to an amount
not greater than the Available Dividend Amount for the relevant group.

Under Delaware law, the amount of legally available funds for dividends is
determined on the basis of our entire company, and not only the respective
groups. As a result, the amount of legally available funds will reflect the
amount of any net losses of each group, any distributions on DSSG stock, HDDG
stock or any preferred stock and any repurchases of DSSG stock, HDDG stock or
certain preferred stock. Dividend payments on the DSSG stock and on the HDDG
stock could be precluded because legally available funds are not available
under Delaware law, even though the Available Dividend Amount test for the
particular relevant group was met. We can not assure you that there will be an
Available Dividend Amount for either group.

Subject to the prior payment of dividends on any outstanding shares of
preferred stock and the limitations described above, our board of directors
will be able, in its sole discretion, to declare and pay dividends exclusively
on the DSSG stock, exclusively on the HDDG stock or on both, in equal or
unequal amounts. In making its dividend decisions, our board of directors will
not be required to take into account the relative Available Dividend Amounts
for the two groups, the amount of prior dividends declared on either class, the
respective voting or liquidation rights of either class or any other factor.

Conversion and Redemption

Our existing certificate of incorporation currently does not provide for
either mandatory or optional conversion or redemption of our existing common
stock. The tracking stock proposal will permit the conversion or redemption of
the DSSG stock and the HDDG stock as described below.

Mandatory Dividend, Redemption or Conversion of Common Stock If Disposition
of Group Assets Occurs. If we sell, transfer, assign or otherwise dispose of,
in one transaction or a series of related transactions, all or substantially
all of the properties and assets attributed to either group (a "disposition"),
we are required, except as described below, to:

. pay a dividend in cash and/or securities or other property to the holders
of shares of the class of common stock relating to the group subject to
the disposition having a fair value equal to the net proceeds of the
disposition; or

. (1) if the disposition involves all of such properties and assets, redeem
all outstanding shares of common stock relating to that group in exchange
for cash and/or securities or other property having a fair value equal to
the net proceeds of the disposition; or

(2) if the disposition involves substantially all, but not all, of such
properties and assets, redeem that number of whole shares of the class of
common stock relating to that group as have in the aggregate an average
market value, during the period of ten consecutive trading days beginning
on the 26th trading day following the disposition date, closest to the
net proceeds of the disposition; and the redemption price will be cash
and/or securities or other property having a fair value equal to such net
proceeds; or

. convert each outstanding share of such class of common stock into a
number of shares of common stock relating to the other group equal to:

(A) 110%, if the disposition is consummated during the five years
following the implementation of the tracking stock proposal, or

(B) 100%, if the disposition is consummated after such five-year period,

of the ratio of the average market value of one share of common stock
relating to the group subject to the disposition to the average market
value of one share of common stock relating to the other group during the
10-trading day period beginning on the 26th trading day following the
disposition date.

We may only pay a dividend or redeem shares of common stock as set forth
above if we have

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<PAGE>

legally available funds under Delaware law and the amount to be paid to holders
is less than or equal to the Available Dividend Amount for the group. We are
required to pay such dividend or complete such redemption or conversion on or
prior to the 95th trading day following the disposition date.

For purposes of determining whether a disposition has occurred,
"substantially all of the properties and assets" attributed to either group
means a portion of such properties and assets:

. that represents at least 80% of the then fair value of the properties and
assets attributed to that group; or

. from which were derived at least 80% of the aggregate revenues of that
group for the immediately preceding twelve fiscal quarterly periods.

The "net proceeds" of a disposition means an amount equal to what remains of
the gross proceeds of the disposition after any payment of, or reasonable
provision is made as determined by our board of directors for:

. any taxes payable by us, or which would have been payable but for the
utilization of tax benefits attributable to the group not subject to the
disposition, in respect of the disposition or in respect of any resulting
dividend or redemption;

. any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and

. any liabilities of or attributed to the group subject to the disposition,
including, without limitation, any liabilities for deferred taxes, any
indemnity or guarantee obligations incurred in connection with the
disposition or otherwise, any liabilities for future purchase price
adjustments and any preferential amounts plus any accumulated and unpaid
dividends in respect of the preferred stock attributed to that group.

We may elect to pay the dividend or redemption price in connection with a
disposition either in the same form as the proceeds of the disposition were
received or in any other combination of cash, securities or other property that
our board of directors or, in the case of securities that have not been
publicly traded for a period of at least 15 months, an independent investment
banking firm, determines will have an aggregate market value of not less than
the fair value of the net proceeds.

The following illustration demonstrates the provisions requiring a mandatory
dividend, redemption or conversion if a disposition occurs prior to the fifth
anniversary of the implementation of the tracking stock proposal.

. If 160 million shares of DSSG stock and 80 million shares of HDDG stock
were outstanding,

. the net proceeds of the disposition of substantially all, but not all, of
the assets of HDDG equals $1.5 billion,

. the average market value of the HDDG stock during the 10-trading day
valuation period was $20 per share and

. the average market value of the DSSG stock during the same valuation
period was $40 per share,

then we could do any of the following:

(1) pay a dividend to the holders of shares of HDDG stock equal to:

<TABLE>
<S> <C> <C>
net proceeds = $1.5 billion
- ------------------------------------------ -----------------
number of outstanding shares of HDDG stock 80 million shares
= $18.75 per share
</TABLE>

(2) redeem for $20 per share a number of shares of HDDG stock equal to:

<TABLE>
<S> <C> <C>
net proceeds = $1.5 billion
- ---------------------------------- -----------------
average market value of HDDG stock $20 per share
= 75,000,000 shares
</TABLE>

(3) convert each outstanding share of HDDG Stock into a number of shares of
DSSG stock equal to:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
average market
value of
1.1 x HDDG stock = 1.1 x $20 per share
-------------- -------------
average market $40 per share
value of
DSSG stock
= .55 shares
</TABLE>

33
<PAGE>

Exceptions to the Dividend, Redemption or Conversion Requirement if a
Disposition Occurs. We are not required to take any of the above actions for
any disposition of all or substantially all of the properties and assets
attributed to either group in a transaction or series of related transactions
that results in our receiving for such properties and assets primarily equity
securities of any entity which:

. acquires such properties or assets or succeeds to the business conducted
with such properties or assets or controls such acquiror or successor;
and

. is primarily engaged or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by that
group prior to the disposition, as determined by our board of directors.

The purpose of this exception is to enable us technically to "dispose" of
properties or assets of a group to other entities engaged or proposing to
engage in businesses similar or complementary to those of that group without
requiring a dividend on, or a conversion or redemption of, the class of common
stock of that group, so long as we hold an equity interest in that entity. A
joint venture in which we own a direct or indirect equity interest is an
example of such an acquiror. We are not required to control that entity,
whether by ownership or contract provisions.

We are also not required to effect a dividend, redemption or conversion if
the disposition is:

. of all or substantially all of our properties and assets in one
transaction or a series of related transactions in connection with our
dissolution, liquidation or winding up and the distribution of our assets
to stockholders;

. on a pro rata basis, such as in a spin-off, to the holders of all
outstanding shares of the class of common stock relating to the group
subject to the disposition; or

. made to any person or entity controlled by us, as determined by our board
of directors.

Notices If Disposition of Group Assets Occurs. Not later than the 20th
trading day after the consummation of a disposition, we will announce publicly
by press release:

. the estimated net proceeds of the disposition;

. the number of shares outstanding of the class of common stock relating to
the group subject to the disposition; and

. the number of shares of such class of common stock into or for which
convertible securities are then convertible, exchangeable or exercisable
and the conversion, exchange or exercise price thereof.

Not earlier than the 36th trading day and not later than the 40th trading
day after the consummation of the disposition, we will announce publicly by
press release whether we will pay a dividend or redeem shares of common stock
with the net proceeds of the disposition or convert the shares of common stock
of the group subject to the disposition into the other class of common stock.

We are required to cause to be mailed to each holder of shares of the class
of common stock relating to the group subject to the disposition the additional
notices and other information required by the restated certificate of
incorporation.

Conversion of Common Stock at Option of Quantum at Any Time. During the five
years following the implementation of the tracking stock proposal, our board of
directors may at any time convert each share of DSSG stock into a number of
shares of HDDG stock equal to 110% of the ratio of the average market values of
the DSSG stock to the HDDG stock over a 20-trading day period. Conversely,
during such period our board of directors may also at any time convert each
share of HDDG stock into a number of shares of DSSG stock equal to 110% of the
ratio of the average market values of the HDDG stock to the DSSG stock over a
20-trading day period. Following the fifth anniversary of the implementation of
the tracking stock proposal, the number of shares to be received as a result of
such conversion will equal 100% of the applicable ratio. This means that the
holders of the class of stock being converted will not receive any premium in
such conversion. We will calculate the ratio of average market values as of the
fifth trading day prior to the date we mail the conversion notice to holders.

However, if a Tax Event occurs at any time, a factor of 100% rather than
110% will be applied to the ratio of the average market values. This means that
the holders of the class of common stock being converted will not receive any
premium in such conversion.

34
<PAGE>

"Tax Event" means the receipt by our company of an opinion of tax counsel
that, as a result of:

. any amendment to, or change in, the laws or regulations interpreting such
laws of the United States or any political subdivision or taxing
authority, including any announced proposed change by an applicable
legislative committee or its chair in such laws or by an administrative
agency in such regulations; or

. any official or administrative pronouncement, action or judicial decision
interpreting or applying such laws or regulations,

it is more likely than not that for United States federal income tax purposes:

. Quantum or our stockholders are, or at any time in the future will be,
subject to tax upon the issuance of shares of either DSSG stock or HDDG
stock, or

. either DSSG stock or HDDG stock is not or at any time in the future will
not be treated solely as stock of Quantum.

For purposes of rendering such an opinion, tax counsel will assume that any
legislative or administrative proposals will be adopted or enacted as proposed.

These provisions allow us the flexibility to recapitalize the two classes of
common stock into one class of common stock that would, after such
recapitalization, represent an equity interest in all of our businesses. The
optional conversion or redemption could be exercised at any future time if our
board of directors determines that, under the facts and circumstances then
existing, an equity structure consisting of two classes of common stock was no
longer in the best interests of all of our stockholders. Such exchange could be
exercised, however, at a time that is disadvantageous to the holders of one of
the classes of common stock. See "Risk Factors--Stockholders may not have any
remedies for breach of fiduciary duties if any action by directors and officers
has a disadvantageous effect on either class of common stock" and "--Numerous
potential conflicts of interest exist between classes of common stock which may
be difficult to resolve by our board of directors or which may be resolved
adversely to one of the classes."

Conversion would be based upon the relative market values of the DSSG stock
and the HDDG stock. Many factors could affect the market values of the DSSG
stock or the HDDG stock, including our results of operations and those of each
of the groups, trading volume and general economic and market conditions.
Market values could also be affected by decisions by our board of directors or
our management that investors perceive to affect differently one class of
common stock compared to the other. These decisions could include changes to
our management and allocation policies, transfers of assets between groups,
allocations of corporate opportunities and financing resources between the
groups and changes in dividend policies.

The following illustration demonstrates the calculation of the number of
shares issuable upon conversion of one class of common stock into shares of the
other class at our option if:

. a Tax Event has not occurred,

. five years have not elapsed since the implementation of the tracking
stock proposal,

. 160 million shares of DSSG stock and 80 million shares of HDDG stock were
outstanding immediately prior to a conversion,

. the average market value of one share of the HDDG stock over the 20-
trading day valuation period was $20, and

. the average market value of one share of the DSSG stock over the same
valuation period was $40,

then each share of HDDG stock could be converted into .55 shares of DSSG stock
based on the following calculation:

<TABLE>
<S> <C> <C> <C> <C>
1.1 x $20 = .55 shares
---
$40
</TABLE>

Redemption in Exchange for Stock of Subsidiary. Although we currently have
no intention to do so, our board of directors may redeem on a pro rata basis
all of the outstanding shares of DSSG stock or HDDG stock for shares of the
common stock of one or more of our wholly-owned subsidiaries which own all of
the assets and liabilities attributed to the relevant group. We may

35
<PAGE>

redeem shares of common stock for subsidiary stock only if we have legally
available funds under Delaware law.

As a result of any such redemption, holders of each class of common stock
would hold securities of separate legal entities operating in distinct lines of
business. Such a redemption could be authorized by our board of directors at
any time in the future if it determines that, under the facts and circumstances
then existing, an equity structure comprised of the DSSG stock and the HDDG
stock is no longer in the best interests of all of our stockholders as a whole.

Selection of Shares for Redemption. If less than all of the outstanding
shares of a class of common stock are to be redeemed, we will redeem such
shares proportionately from among the holders of outstanding shares of such
common stock or by such method as may be determined by our board of directors
to be equitable.

Fractional Interests; Transfer Taxes. We will not be required to issue
fractional shares of any capital stock or any fractional securities to any
holder of either class of common stock upon any conversion, redemption,
dividend or other distribution described above. If a fraction is not issued to
a holder, we will pay cash instead of such fraction.

We will pay all documentary, stamp or similar issue or transfer taxes that
may be payable in respect of the issue or delivery of any shares of capital
stock and/or other securities on conversion or redemption of shares.

Voting Rights

Variable Voting. Currently, holders of our existing common stock have one
vote per share on all matters submitted to stockholders.

Under the restated certificate of incorporation the entire voting power of
our stockholders will be vested in the holders of common stock, who will be
entitled to vote on any matter on which our stockholders are, by law or by the
provisions of the restated certificate of incorporation or our by-laws,
entitled to vote, except as otherwise provided by law, by the terms of any
outstanding preferred stock or by any provision of the restated certificate of
incorporation restricting the power to vote on a specified matter to other
stockholders.

Holders of common stock will vote as a single class on each matter on which
holders of common stock are generally entitled to vote.

On all matters as to which both classes of common stock will vote together
as a single class:

. each share of DSSG stock will have one vote; and

. each share of HDDG stock will have a number of votes equal to the
quotient of the average market value of a share of HDDG stock over the
20-trading day period ending on the 10th trading day prior to the record
date for determining the holders of common stock entitled to vote,
divided by the average market value of a share of DSSG stock over the
same period.

Accordingly, the relative per share voting rights of the DSSG stock and the
HDDG stock will fluctuate depending on changes in the relative market values of
shares of such classes of common stock.

We expect that, upon implementation of the tracking stock proposal, the DSSG
stock will have a substantial majority of the voting power because we expect
that the aggregate market value of the outstanding shares of DSSG stock will be
substantially greater than the aggregate market value of the outstanding shares
of HDDG stock.

We will set forth the number of outstanding shares of DSSG stock and HDDG
stock in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q
filed under the Securities Exchange Act of 1934. We will disclose in any proxy
statement for a stockholders' meeting the number of outstanding shares and per
share voting rights of the DSSG stock and the HDDG stock.

If shares of only one class of common stock are outstanding, each share of
that class will have one vote. If either class of common stock is entitled to
vote as a separate class with respect to any matter, each share of that class
will, for purpose of such vote, have one vote on such matter.

Fluctuations in the relative voting rights of the DSSG stock and the HDDG
stock could influence an investor interested in acquiring and maintaining a
fixed percentage of the voting power of our stock to

36
<PAGE>

acquire such percentage of both classes of common stock, and would limit the
ability of investors in one class to acquire for the same consideration
relatively more or less votes per share than investors in the other class.

The holders of DSSG stock and HDDG stock will not have any rights to vote
separately as a class on any matter coming before our stockholders, except for
certain limited class voting rights provided under Delaware law, by Nasdaq
rules or as determined by our board of directors. In addition to the approval
of the holders of a majority of the voting power of all shares of common stock
voting together as a single class, the approval of a majority of the
outstanding shares of the DSSG stock or the HDDG stock, voting as a separate
class, would be required under Delaware law to approve any amendment to the
restated certificate of incorporation that would change the par value of the
shares of the class or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely. As permitted
by Delaware law, the restated certificate of incorporation will provide that an
amendment to the restated certificate of incorporation that increases or
decreases the number of authorized shares of DSSG stock or HDDG stock will only
require the approval of the holders of a majority of the voting power of all
shares of common stock, voting together as a single class, and will not require
the approval of the holders of the class of common stock affected by such
amendment, voting as a separate class.

The following illustration demonstrates the calculation of the number of
votes each share of HDDG stock would be entitled on all matters on which
holders of DSSG stock and HDDG stock vote as a single class. If the average
market value for the 20-trading day valuation period was $20 for the HDDG stock
and $40 for the DSSG stock, each share of DSSG stock would have one vote and
each share of HDDG stock would have 0.5 votes based on the following
calculation:

<TABLE>
<S> <C> <C>
$20 = 0.5 votes
---
$40
</TABLE>

Assuming 160 million shares of DSSG stock and 80 million shares of HDDG stock
were outstanding, the shares of DSSG stock would represent 80% of our total
voting power and the shares of HDDG stock would represent 20% of our total
voting power.

Cumulative Voting. Currently, a holder of our existing common stock may, in
the election of directors, cumulate his or her votes in order to give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such holder's shares are entitled.
We currently have six directors. Alternatively, a holder may distribute such
number of votes among up to the number of directors to be elected. Under the
restated certificate of incorporation, a holder will continue to be able to
cumulate his or her votes in the election of directors following the
implementation of the tracking stock proposal. The total number of votes that a
holder may cumulate will be equal to the number of directors to be elected
multiplied by the total number of votes to which such holder's shares of DSSG
stock and shares of HDDG stock are entitled.

Liquidation

Currently, in the event of our liquidation, dissolution or termination after
payment, or provision for payment, of our debts and other liabilities and the
payment of full preferential amounts to which the holders of any preferred
stock are entitled, holders of existing common stock are entitled to share
equally in our remaining net assets.

Under the restated certificate of incorporation, in the event of our
dissolution, liquidation or winding up, the holders of DSSG stock and HDDG
stock will be entitled to receive our assets remaining for distribution to
holders of common stock on a per share basis in proportion to the liquidation
units per share of such class, after payment or provision for payment of the
debts and other liabilities and full preferential amounts to which holders of
any preferred stock are entitled.

Each share of DSSG stock will have one liquidation unit. Each share of HDDG
stock will have a number of liquidation units equal to the quotient of the
average market value of a share of HDDG stock over the 20-trading day period
ending on the 40th trading day after the initial issuance of the DSSG stock and
the HDDG stock under the tracking stock proposal, divided by the average market
value of a share of DSSG stock over the same period.

After the number of liquidation units to which each share of HDDG stock is
entitled has been

37
<PAGE>

calculated in accordance with this formula, that number will not be changed
without the approval of holders of the class of common stock adversely affected
except as described below. As a result, after the date of the calculation of
the number of liquidation units to which the HDDG stock is entitled the
liquidation rights of the holders of the respective classes of common stock may
not bear any relationship to the relative market values or the relative voting
rights of the two classes. We consider that liquidation is a remote
contingency, and our financial advisors believe that, in general, these
liquidation provisions will be immaterial to trading in the DSSG stock and the
HDDG stock.

No holder of DSSG stock will have any special right to receive specific
assets of DSSG and no holder of HDDG stock will have any special right to
receive specific assets of HDDG in the case of our dissolution, liquidation or
winding up.

If we subdivide or combine the outstanding shares of either class of common
stock or declare a dividend or other distribution of shares of either class of
common stock to holders of such class of common stock, the number of
liquidation units of either class of common stock will be appropriately
adjusted, as determined by our board of directors, to avoid any dilution in the
aggregate, relative liquidation rights of any class of common stock.

Neither a merger nor consolidation of Quantum into or with any other
corporation, nor any sale, transfer or lease of all or any part of our assets,
will, alone, be deemed a liquidation or winding up of Quantum, or cause the
dissolution of Quantum, for purposes of these liquidation provisions.

Determinations by the Board of Directors

Any determinations made in good faith by our board of directors under any
provision described under "Description of DSSG Stock and HDDG Stock," and any
determinations with respect to any group or the rights of holders of shares of
either class of common stock, will be final and binding on all of our
stockholders, subject to the rights of stockholders under applicable Delaware
law and under the federal and state securities laws.

Preemptive Rights

Neither the holders of the DSSG stock nor the holders of the HDDG stock will
have any preemptive rights or any rights to convert their shares into any other
securities of Quantum.

Restated Rights Agreement

We have issued preferred share purchase rights (the "existing rights") to
all holders of our existing common stock under a rights agreement dated as of
July 28, 1998 between our company and Harris Trust and Savings Bank, as rights
agent. Each existing right entitles the holder to purchase shares of Series A
Junior Participating Preferred Stock under conditions described in the existing
rights agreement. The existing rights expire on August 4, 2008.

Pursuant to the tracking stock proposal, our board of directors has
determined to amend and restate the existing rights agreement and to exchange
for all existing rights:

. one right for each share of DSSG stock (a "DSSG Right"), which will allow
holders to purchase shares of a newly designated Series B Junior
Participating Preferred Stock of Quantum if a "distribution date" occurs;
and

. one right for each share of HDDG Stock (an "HDDG Right"), which will
allow holders to purchase shares of a newly designated Series C Junior
Participating Preferred Stock of Quantum if a "distribution date" occurs.

We refer to the DSSG Rights and the HDDG Rights as the "Rights." The
restated rights agreement contains provisions designed to, among other things:

. reflect our new equity structure; and

. reset the prices at which rights issued under the restated rights
agreement may be exercised for shares of participating preferred stock.

A "distribution date" will occur upon the earlier of:

. the tenth day after a public announcement that a person or group of
affiliated or associated persons other than us or our employee benefit
plans (an "acquiring person") has acquired beneficial ownership of
(1) 20% or more of the shares of DSSG stock then outstanding or (2) 20%
or more of the shares of HDDG stock then outstanding; or

38
<PAGE>

. the tenth business day or a later day determined by our board of
directors following the commencement of a tender or exchange offer that
would result in such person or group beneficially owning such number of
shares.

Until the distribution date, the Rights will be transferred only with the
common stock.

Following the distribution date, holders of Rights will be entitled to
purchase from us:

. in the case of a DSSG Right, one one- thousandth of a share of Series B
Junior Participating Preferred Stock at a purchase price to be determined
by our board of directors, subject to adjustment (the "Series B Purchase
Price"); and

. in the case of an HDDG Right, one one-thousandth of a share of Series C
Participating Junior Preferred Stock at a purchase price to be determined
by our board of directors, subject to adjustment (the "Series C Purchase
Price").

An existing right entitles the holder to purchase one one-thousandth of a share
of participating preferred stock at a purchase price of $115 upon the
occurrence of a distribution date under the existing rights agreement. In
adopting the restated rights agreement, our board of directors determined that
$115 would not represent the long term value of a share of DSSG stock or HDDG
stock.

If any person or group becomes an acquiring person:

. a DSSG Right will entitle its holder to purchase, at the Series B
Purchase Price, a number of shares of DSSG stock with a market value
equal to twice the Series B Purchase Price; and

. an HDDG Right will entitle its holder to purchase, at the Series C
Purchase Price, a number of shares of HDDG stock with a market value
equal to twice the Series C Purchase Price.

In certain circumstances after the Rights have been triggered, we may
exchange the Rights, other than Rights owned by an acquiring person, at an
exchange ratio of one share of DSSG stock per DSSG Right and one share of HDDG
stock per HDDG Right.

If, following the time a person becomes an acquiring person:

. Quantum is acquired in a merger or other business combination transaction
and Quantum is not the surviving corporation;

. any person consolidates or merges with Quantum and all or part of the
common stock is converted or exchanged for securities, cash or property
of any other person; or

. 50% or more of Quantum's assets or earning power is sold or transferred,

each DSSG Right and each HDDG Right will entitle its holder to purchase, for
the Series B Purchase Price or Series C Purchase Price, a number of shares of
common stock of the surviving entity in any such merger, consolidation or other
business combination or the purchaser in any such sale or transfer with a
market value equal to twice the Series B Purchase Price or Series C Purchase
Price.

The Rights will expire on August 4, 2008, unless we extend or terminate them
as described below.

At any time until a public announcement that an acquiring person has become
such, our board of directors may redeem all of the Rights at a price of $0.01
per Right. On the redemption date, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive this
price.

A holder of a Right will not have any rights as a stockholder of Quantum,
including the right to vote or to receive dividends, until a Right is
exercised.

At any time prior to the occurrence of a distribution date, we may, without
the approval of any holders of Rights, supplement or amend any provision of the
restated rights agreement in any manner, whether or not such supplement or
amendment is adverse to any holders of the Rights. From and after the
occurrence of a distribution date, we may, without the approval of any holders
of Rights, supplement or amend the restated rights agreement:

. to cure any ambiguity,

. to correct or supplement any provision that may be defective or
inconsistent,

39
<PAGE>

. subject to certain exceptions, to shorten or lengthen any time period
thereunder, or

. in any manner that we may deem necessary or desirable and which does not
adversely affect the interests of the holders of Rights, other than an
acquiring person.

The restated rights agreement contains provisions designed to prevent the
inadvertent triggering of the Rights. For example, it gives a person who has
inadvertently acquired (1) 20% or more of the outstanding shares of a class of
common stock and does not have any intention of changing or influencing the
control of Quantum the opportunity to sell a sufficient number of shares so
that such acquisition would not trigger the Rights. In addition, the Rights
will not be triggered and a divestiture of shares will not be required by our
repurchase of shares of common stock outstanding which could raise the
proportion of shares held by a person to over the applicable 20% threshold.
However, any person who exceeds such threshold as a result of our stock
repurchases will trigger the Rights if such person subsequently acquires any
additional shares of common stock.

We have filed a copy of the form of the restated rights agreement with the
SEC as an exhibit to the registration statement of which this proxy statement
is a part. Upon request, we will provide you with a copy of the restated rights
agreement free of charge.

Certain Anti-Takeover Provisions of Delaware Law and the Restated Certificate
of Incorporation, the By-laws and the Restated Rights Agreement

The following discussion concerns certain provisions of Delaware law, the
restated certificate of incorporation, our by-laws, and the restated rights
agreement that could be viewed as having the effect of discouraging an attempt
to obtain control of Quantum. These provisions are similar in many respects to
those currently applicable to us.

Delaware Law

Section 203 of the Delaware General Corporation Law. Under certain
circumstances, Section 203 of the Delaware General Corporation Law limits the
ability of an "interested stockholder" to effect various business combinations
with Quantum for a three-year period following the time that such stockholder
became an interested stockholder. An "interested stockholder" is defined as a
holder of 15% or more of the outstanding voting stock.

An interested stockholder may engage in a business combination transaction
with Quantum within such three-year period only if:

. our board of directors approved the transaction before such stockholder
became an interested stockholder or approved the transaction in which
such stockholder became an interested stockholder;

. the interested stockholder acquired at least 85% of the voting stock in
the transaction in which it became an interested stockholder; or

. our board of directors and the holders of shares entitled to cast two-
thirds of the voted entitled to be cast by all of the outstanding voting
shares held by all disinterested stockholders approve the transaction.

Restated Certificate of Incorporation and By-laws

Authorized Shares. The restated certificate of incorporation will provide
that we may from time to time issue shares of preferred stock in one or more
series, the terms of which will be determined by our board of directors, and
common stock of either class. We will not solicit approval of our stockholders
unless our board of directors believes that approval is advisable or is
required by Nasdaq regulations or Delaware law. This could enable our board of
directors to issue shares to persons friendly to current management which could
render more difficult or discourage an attempt to obtain control of Quantum by
means of a merger, tender offer, proxy contest or otherwise, and thereby
protect the continuity of our management. Such additional shares also could be
used to dilute the stock ownership of persons seeking to obtain control of our
company.

Stockholder Proposals and Nominations The by-laws provide that any
stockholder may present a nomination for a directorship at an annual meeting of
stockholders only if advance notice of such nomination has been delivered to
Quantum not
40
<PAGE>

less than 20 days or more than 60 days prior to the meeting. If less than
30 days notice or public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder must be received not later than 10
days after such notice was mailed or such disclosure made. Similarly, any
stockholder may present a proposal at an annual meeting only if advance notice
of such proposal has been delivered to Quantum not less than 60 days or more
than 90 days prior to the meeting. If less than 70 days notice or public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder must be received not later than 10 days after such notice
was mailed or such disclosure made. The foregoing notices must contain certain
information regarding the proposal or nomination as well as certain specified
information regarding the stockholder giving the notice, his or her interest in
such proposal and, with respect to nominations for directorships, whether such
stockholder intends to request cumulative voting in the election of directors
at the meeting. See "--Description of DSSG Stock and HDDG Stock--Voting
Rights--Cumulative Voting." These procedural requirements could have the effect
of delaying or preventing the submission of certain matters proposed by any
stockholder to a vote of the stockholders.

Restated Rights Agreement

As described under "--Restated Rights Agreement," the restated rights
agreement will permit disinterested stockholders to acquire additional shares
of Quantum or of an acquiring company at a substantial discount in the event of
certain described changes in control. The restated rights agreement is intended
to discourage anyone from buying shares of common stock having more than 20% of
the voting power of either class of common stock shares without board of
directors' approval.

United States Federal Income Tax Considerations

The following discussion is a summary of the principal United States federal
income tax consequences of the implementation of the tracking stock proposal.
The discussion is based on the Internal Revenue Code of 1986, Treasury
Department regulations, published positions of the Internal Revenue Service,
and court decisions now in effect, all of which are subject to change. In
particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to the DSSG stock and the HDDG stock, or the
Treasury Department could issue regulations or other guidance that change
current law. Any future legislation or regulations (or other guidance) could
apply retroactively to the implementation of the tracking stock proposal. See
"--Clinton Administration Proposal" below.

This discussion addresses only those of you who hold your existing common
stock and would hold your DSSG stock and HDDG stock as a capital asset and did
not acquire your shares in a compensatory transaction, including the exercise
of employee stock options. We have included this discussion for general
information only; it does not discuss all aspects of United States federal
income taxation that may be relevant to you in light of your particular tax
circumstances. This discussion does not apply to you if you are a tax-exempt
organization, S corporation or other pass-through entity, mutual fund, small
business investment company, regulated investment company, insurance company or
other financial institution, broker-dealer or are otherwise subject to special
treatment under the federal income tax laws. This discussion also does not
apply to those of you who hold your existing common stock as part of a
straddle, hedging or conversion transaction. You should consult your own tax
advisor with regard to the application of the federal income tax laws, as well
as to the applicability and effect of any state, local, or foreign tax laws to
which you may be subject.

Tax Implications of the Tracking Stock Proposal to Stockholders

In the opinion of Wilson Sonsini Goodrich & Rosati, P.C., the tracking stock
proposal will constitute a tax-free reorganization for federal income tax
purposes. This means that:

. You will not recognize any income, gain or loss on the exchange of your
existing common stock for shares of DSSG stock and HDDG stock;

. You will recognize capital gain or loss on any cash received in lieu of
fractional shares of HDDG stock equal to the difference

41
<PAGE>

between the amount of cash received and the basis allocated to such
fractional shares;

. Your basis in the existing common stock held immediately before the
implementation of the tracking stock proposal will be allocated between
the DSSG stock and HDDG stock received, including any fractional shares
deemed received, in proportion to the fair market value of such DSSG
stock and HDDG stock on the date the tracking stock proposal is
implemented;

. Your holding period of the DSSG stock and HDDG stock will include the
holding period of the existing common stock; and

. Any gain or loss recognized upon a subsequent sale or exchange of either
the DSSG stock or HDDG stock will be capital gain or loss.

Tax Implications of a Conversion of DSSG Stock or HDDG Stock

Wilson Sonsini Goodrich & Rosati, P.C. has advised that if we exercise our
option to convert one class of common stock into the other class of common
stock, that conversion will be tax-free to you. You will have a carry-over
adjusted tax basis in your newly received common stock and generally a holding
period that includes the holding period of the common stock you surrendered in
the exchange.

No Internal Revenue Service Ruling

No ruling has been sought from the Internal Revenue Service. The Internal
Revenue Service has announced that it will not issue any advance rulings on the
classification of an instrument that has certain voting and liquidation rights
in an issuing corporation but whose dividend rights are determined by reference
to the earnings of a segregated portion of the issuing corporation's assets,
including assets held by a subsidiary. The opinion of Wilson Sonsini Goodrich &
Rosati, P.C. is not binding on the Internal Revenue Service and merely
represents counsel's best judgment based upon existing authorities and certain
assumptions and customary representations made to counsel. In addition, there
are no court decisions or other authorities that bear directly on the effect of
the features of the DSSG Stock and HDDG Stock.

It is possible, therefore, that the Internal Revenue Service could assert
successfully that the receipt of the DSSG stock and HDDG stock as well as the
subsequent exchange of the DSSG stock and HDDG stock could be taxable to you
and to us. The Internal Revenue Service could also successfully assert that
gain from a subsequent sale of the HDDG stock or the DSSG stock is taxable as
ordinary income rather than capital gain. Once again, you should consult your
own tax advisor.

Clinton Administration Proposal

A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to the DSSG stock or the HDDG stock.
If this proposal is enacted, we could be subject to tax on an issuance of DSSG
stock or HDDG stock after the date of enactment. We can not predict, however,
whether the proposal will be enacted by Congress and, if enacted, whether it
will be in the form proposed by the Clinton Administration. If our stockholders
approve the tracking stock proposal, our board of directors currently intends
to implement the proposal, subject to further developments relating to the
Clinton Administration tax proposal.

Under the restated certificate of incorporation, we may convert the DSSG
stock or the HDDG stock into shares of the other class without any premium if
there are adverse federal income tax law developments. See "Description of DSSG
Stock and HDDG Stock--Conversion and Redemption-- Conversion of Common Stock at
Option of Quantum at Any Time." The proposal of the Clinton Administration
would be such an adverse development if it is implemented or receives certain
legislative action.

Nasdaq Listings

We will seek the listing of both the DSSG stock and the HDDG stock on Nasdaq
under the symbols "QDSS" and "QHDD," respectively.

Exchange Procedures

Shortly after the implementation of the tracking stock proposal, you will
receive instructions on how you may, at your option, exchange your existing
stock certificates for new certificates representing your DSSG stock and your
HDDG stock.

Stock Transfer Agent and Registrar

Our existing transfer agent, Harris Trust and Savings Bank will act as the
registrar and transfer agent for both the DSSG stock and the HDDG stock.

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Financial Advisors

Lehman Brothers Inc. and Salomon Smith Barney Inc. are acting as financial
advisors in connection with the tracking stock proposal. We have paid $1
million in fees to each of them. We will pay each of them an additional fee
equal to 0.15% (the "advisory fee") of the increase in our market
capitalization comparing the market capitalization of the DSSG stock and HDDG
stock during the ten-trading day period beginning 90 days after implementation
of the tracking stock proposal to the market capitalization of our existing
common stock during the ten-trading period prior to public announcement of the
tracking stock proposal. The market capitalization of our existing common stock
during that ten-trading day period was $3.2 billion. We will receive a credit
against the advisory fee for the $1 million we have previously paid to them. If
the increase in market capitalization of the DSSG stock and HDDG stock using
average closing prices during the ten-trading day period beginning 180 days
after the implementation of the tracking stock proposal is at least 90% of the
increase in the market capitalization of the DSSG stock and the HDDG stock
determined above, we will pay each of the financial advisors an additional fee
equal to 15% of the advisory fee.

We have also agreed to reimburse these advisors for their reasonable out-of-
pocket expenses, including the fees and expenses of their lawyers, and to
indemnify them against liabilities under the Securities Act of 1933 and certain
other liabilities.

Effect on Existing Options and Convertible Notes

If the tracking system proposal is implemented, each outstanding stock
option under our existing stock option plans will be converted into separately
exercisable options to acquire one share of DSSG stock and 0.5 of a tracking
stock proposal share of HDDG stock. The exercise price for the resulting DSSG
stock options and HDDG stock options will be calculated by multiplying the
exercise price under such existing stock option by a fraction, the numerator of
which is the opening price of the applicable class of common stock underlying
such option on the first date such stock is traded after the implementation of
the tracking stock proposal and the denominator of which is the sum of such
prices for the DSSG stock and the HDDG stock.

If the tracking stock proposal is implemented, each of our 7% convertible
subordinated notes, which currently are convertible into shares of existing
common stock, will become convertible into a number of shares of DSSG stock and
a number of shares of HDDG stock equal to the numbers of such shares which the
holder of such note would receive under the tracking stock proposal had such
note been converted immediately prior to the implementation of the tracking
stock proposal. The notes will not be separately convertible into solely DSSG
stock or solely HDDG stock. The exercise price and maturity date of each
convertible note will not be affected by the implementation of the tracking
stock proposal.

No Dissenters' Rights

Under Delaware law, stockholders who dissent from the tracking stock
proposal will not have appraisal rights.

QUANTUM CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
OPERATIONS

You should read this discussion with our consolidated financial statements.
Historical results and percentage relationships may not necessarily be
indicative of operating results for any future periods.

Results of Operations

First Nine Months of Fiscal Year 1999 Compared with the First Nine Months of
Fiscal Year 1998

Revenue. Revenue for the first nine months of fiscal year 1999 was $3.6
billion, compared to $4.5 billion in the corresponding period of fiscal year
1998, a decrease of 20%. The decrease in revenue reflected lower revenue from
sales of desktop and high-end hard disk drives, partially offset by an increase
in total DLTtape media revenue and consolidation of ATL's revenue effective
September 28, 1998. We continued to experience favorable market conditions for
DLTtape products, despite the decline in overall revenue. The decline in
desktop hard disk drive revenue reflected a decline in average unit prices and,
to a lesser extent, shipments. However, strong demand in the desktop PC market
in the third quarter of fiscal year

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1999 resulted in some easing of the intense competitive pricing pressures of
prior quarters. Although high-end hard disk drive shipments increased in the
first nine months of fiscal year 1999, increased competitive pricing pressures,
especially in the third quarter of fiscal year 1999, resulted in reduced
average unit prices and lower high-end hard disk drive revenue.

Sales to our top five customers for the first nine months of fiscal year
1999 represented 43% of revenue, compared to 45% of revenue in the
corresponding period of fiscal year 1998. These amounts reflected a retroactive
combination of the sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Compaq were 15% of revenue for the first nine
months of fiscal year 1999, compared to 18% of revenue in the corresponding
period of fiscal year 1998, including sales made to Digital Equipment. Sales to
Hewlett-Packard were 14% of revenue for the first nine months of fiscal year
1999, compared to 12% of revenue in the corresponding period of fiscal year
1998.

For the first nine months of fiscal year 1999, sales to OEM and distribution
channel customers were 64% and 34% of revenue, respectively, compared to 62%
and 38% of revenue in the corresponding period of fiscal year 1998. The
remaining revenue in fiscal year 1999 represented DLTtape media royalty revenue
and sales to value added resellers.

Gross Margin Rate. Our gross margin rate for the first nine months of fiscal
year 1999 was 16.6%, compared to 15.7% in the corresponding period of fiscal
year 1998. The gross margin rate for the first nine months of fiscal year 1998
reflected the impact of a $103 million special charge taken in the third
quarter related to the transition to a new generation of high-end disk drive
products, and consisted primarily of inventory write-offs and adjustments, and
losses related to firm inventory purchase commitments. Excluding the special
charge, the gross margin rate was 18.0% for the first nine months of fiscal
year 1998. This 1.4 percentage point decline between the corresponding periods
of fiscal year 1998 and 1999 reflected the decline in gross margins earned on
desktop hard disk drives. The price decline reflected intense competition,
especially in the first two quarters of fiscal year 1999 and the growth of the
sub-$1,000 PC market, which has become a higher proportion of the overall
desktop PC market. An increase in the percentage of revenue represented by
sales of higher margin DLTtape drives and media partially offset the decline in
desktop hard disk drive margins.

Research and Development Expenses. Research and development expenses for the
first nine months of fiscal year 1999 were $255 million, or 7.1% of revenue,
compared to $237 million, or 5.2% of revenue, in the corresponding period of
fiscal year 1998. This increase reflected higher expenses related to new tape
drive products and new information storage products and technologies, including
Super DLTtape technology and, to a significantly lesser extent, optical storage
technology and the consolidation of ATL's expenses.

Sales and Marketing Expenses. Sales and marketing expenses for the first
nine months of fiscal year 1999 were $135 million, or 3.8% of revenue, compared
to $129 million, or 2.9% of revenue, in the corresponding period of fiscal year
1998. This increase reflected the consolidation of ATL's expenses and an
increase in marketing and advertising costs associated with DLTtape products.

General and Administrative Expenses. General and administrative expenses for
the first nine months of fiscal year 1999 were $61 million, or 1.7% of revenue,
compared to $75 million, or 1.7% of revenue, in the corresponding period of
fiscal year 1998. The decrease in general and administrative expenses reflected
the impact of cost control efforts and reduced bonus expenses in response to
the lower level of revenue and earnings in fiscal year 1999. The expansion of
DSSG's infrastructure to support increased revenue and earnings growth
partially offset this decline.

Purchased In-process Research and Development Expense. We expensed purchased
in-process research and development costs as a result of the ATL acquisition in
the third quarter of fiscal year 1999. Based on a preliminary valuation, we
have estimated these costs at $89 million. For additional information regarding
the ATL acquisition and the costs associated with in-process research and
development, see Note 5 of the Notes to Consolidated Financial Statements.

Interest and Other Income/Expense. Net interest and other income and expense
for the first

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nine months of fiscal year 1999 was $0.2 million expense, compared to $0.5
million income in the corresponding period of fiscal year 1998.

Loss from Investee. Our investment and operating results related to our
recording heads business have resulted in significant losses. We acquired a
recording heads business from Digital Equipment in October 1994. In May 1997,
we sold a 51% majority interest in our recording heads operations to MKE,
thereby forming a recording head joint venture with MKE. On October 28, 1998,
we and MKE agreed to dissolve MKQC. In connection with the dissolution, we
recorded a $101 million loss in the third quarter of fiscal year 1999. This
loss included a write-off of our investment in MKQC, a write-down of our
interest in facilities in Louisville, Colorado, and Shrewsbury, Massachusetts
that were occupied by MKQC, warranty costs resulting from MR recording heads
manufactured by MKQC, and our 49% pro rata share in funding MKQC's repayment
of its obligations, primarily bank debt, accounts payable and other
liabilities. See Note 6 of the Notes to Consolidated Financial Statements for
additional discussion of the dissolution of MKQC.

Income Taxes. Our effective tax rate for the first nine months of fiscal
year 1999, excluding the write-off of the purchased in-process research and
development, would have been 34%, compared to 26% in the corresponding period
of fiscal year 1998. The higher effective tax rate was primarily attributable
to a decrease in the percentage of our total earnings being represented by
foreign earnings, taxed at less than the U.S. rate, and an increase in
nondeductible goodwill amortization. In addition, no tax benefit was
recognizable for the charge for purchased in-process research and development.

Net Income (Loss). We reported a net loss of $86 million for the first nine
months of fiscal year 1999, compared to net income of $168 million in the
corresponding period of fiscal year 1998. The decrease resulted from the
charge for purchased in-process research and development of $89 million.
Excluding the charge, net income was $3 million, a decrease of $165 million.
This decrease resulted from the $101 million loss related to the MKQC
dissolution, the decrease in revenue and gross profit and the increase in
research and development expenses.

Fiscal Year 1998 Compared With Fiscal Year 1997

Revenue. Revenue in fiscal year 1998 was $5.8 billion, compared to $5.3
billion in fiscal year 1997, an increase of 9%. The increase in revenue
reflected an increase in DLTtape drive and media product shipments, as well as
an increase in shipments across our other key product lines, including desktop
and high-end hard disk drives. The increase in DLTtape drive revenue reflected
growth in market acceptance of DLTtape technology and a shift in sales mix to
higher storage capacity products which carry a higher per unit price. However,
the average price at each storage capacity level of DLTtape drives and media
declined when compared with fiscal year 1997.

The increase in DLTtape drive shipments reflected an increase in tape drive
production volume, which was at a level high enough to meet product demand
beginning in the third quarter of fiscal year 1998. However, the general
availability of DLTtape drives resulted in sequentially lower DLTtape drive
sales in the fourth quarter of fiscal year 1998 as certain OEM customers
reduced purchases in order to adjust their inventory levels.

Declines in average unit prices for both desktop and high-end hard disk
drive products substantially offset the increase in disk drive shipments.
Oversupply and intensely competitive pricing, particularly in the second half
of fiscal year 1998 and more significantly for the high-end disk drive
products, caused such declines.

Sales to our top five customers were 45% of revenue in fiscal year 1998,
compared to 43% in fiscal year 1997. These amounts reflect a retroactive
combination of sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Compaq were 18% of revenue in fiscal year 1998,
compared to 16% of revenue in fiscal year 1997, including sales to Digital
Equipment. Sales to Hewlett-Packard were 13% of revenue in fiscal year 1998,
compared to 11% of revenue in fiscal year 1997.

Sales to OEM and distribution channel customers were 63% and 37% of
revenue, respectively, for fiscal years 1998 and 1997.

Gross Margin Rate. Our gross margin rate increased 0.6 percentage points to
15.1% in fiscal year 1998, from 14.5% in fiscal year 1997. The

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increase in gross margin rate reflected an increase in the gross margin rate
earned on DLTtape drives and media. In addition, DLTtape drive and media
products, which achieved a significantly higher gross margin rate than our
other products, represented a higher proportion of our overall revenue in
fiscal year 1998. The erosion of gross margins earned on hard disk drives,
particularly in the second half of fiscal year 1998, and the $103 million
special charge in the third quarter of fiscal year 1998 largely offset these
increases. The special charge related to the transition to a new generation of
high-end disk drive products, and consisted primarily of inventory write-offs
and adjustments, and losses related to firm inventory purchase commitments.
Excluding the special charge, the gross margin rate was 16.9% in fiscal year
1998. The erosion of gross margins earned on hard disk drives and the special
charge both reflected the oversupply and intensely competitive pricing in the
desktop and high-end disk drive markets, particularly in the second half of
fiscal year 1998.

Research and Development Expenses. Research and development expenses in
fiscal 1998 were $322 million, or 5.5% of revenue, compared with $291 million,
or 5.5% of revenue, in fiscal year 1997. The $31 million increase in research
and development expenses reflected higher expenses related to pre-production
activity on new products, as well as expenses related to new information
storage products and technologies, including Super DLTtape technology and, to
a significantly lesser extent, optical storage technology.

Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1998 were $169 million, or 2.9% of revenue, compared with $149 million, or
2.8% of revenue, in fiscal year 1997. This increase primarily reflected the
increased costs associated with supporting our higher sales volume.

General and Administrative Expenses. General and administrative expenses in
fiscal year 1998 were $89 million, or 1.5% of revenue, compared with $87
million, or 1.6% of revenue, in fiscal year 1997.

Interest and Other Income/Expense. Net interest and other income and
expense in fiscal year 1998 was income of $1 million, compared with expense of
$41 million in fiscal year 1997. A decrease in interest expense, reflecting an
approximately $172 million year-over-year decrease in the average level of
debt used to finance operations, and an increase in the year-over-year average
level of cash, combined to cause this change.

Loss from Investee. The loss from investee reflected our equity share in
the operating losses of MKQC since May 16, 1997, when this joint venture was
formed. Prior to May 16, 1997, we fully consolidated our recording heads
operations. Our total losses from recording heads operations for fiscal year
1998 was $75 million, compared to $110 million for fiscal year 1997. The loss
from investee for fiscal year 1998 included a charge of approximately $5
million, which represented our share of a third quarter charge in MKQC's
operating results for severance, equipment write-offs, lease termination and
other costs associated with MKQC's strategic actions. A combination of reduced
unit prices, operating costs, manufacturing yields, product transitions and
soft demand for certain recording heads programs, primarily those related to
high-end disk drive products, resulted in losses by MKQC.

Income Taxes. Our effective tax rate for fiscal years 1998 and 1997 was
26%. The state valuation allowance was reversed in fiscal year 1998 as a
result of the realization of the state deferred tax assets through tax
planning.

Net Income. We reported after-tax earnings of $171 million in fiscal year
1998, compared to $149 million in fiscal year 1997. The increase reflected
increased sales and margins on DLTtape products, increased interest income,
decreased interest expense, and lower net losses related to our involvement in
recording heads operations due to our reduced ownership of these operations.
Higher margins on DLTtape products, as compared with the eroded gross margins
on hard disk drives, resulted in tape drive and related media products
becoming a more significant source of our operating income in fiscal year
1998, particularly during the second half of the fiscal year. Lower margins on
sales of desktop and high-end hard disk drives and the $103 million special
charge related to high-end hard disk drives partially offset these increases.

Fiscal Year 1997 Compared With Fiscal Year 1996

Revenue. Revenue in fiscal year 1997 was $5.3 billion, compared to $4.4
billion in fiscal year
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1996, an increase of 20%. This increase resulted from an increase in shipments
of desktop hard disk drives, DLTtape drives and media and an increase in the
average drive price. The increase in the average drive price reflected a change
in sales mix to more advanced, larger-capacity drives, market demand and the
limited market availability of DLTtape drives and higher-capacity hard disk
drives. A decline in high-end hard disk drive revenue, particularly in the
first three quarters of fiscal year 1997, partially offset the increase in
total revenue. The closure of our manufacturing operations during our
transition of high-end disk drive manufacturing to MKE during fiscal year 1996
was a primary factor behind this decline in revenue.

Sales to our top five customers were 43% of revenue in fiscal year 1997,
compared to 48% of revenue in fiscal year 1996. These amounts reflect a
retroactive combination of the sale to Compaq and Digital Equipment as a result
of their merger in June 1998. Sales to Compaq were 16% of revenue in fiscal
year 1997, compared with 20% of revenue in fiscal year 1996, including sales to
Digital Equipment. Sales to Hewlett-Packard were 11% of revenue in fiscal year
1997, and were less than 10% of revenue in fiscal year 1996. Sales to Apple
Computer, Inc. were less than 10% of revenue in fiscal year 1997, compared to
11% of revenue in fiscal year 1996.

Sales to OEM and distribution channel customers were 63% and 37% of revenue,
respectively, for fiscal year 1997, compared to 71% and 29% of revenue,
respectively, in fiscal year 1996. Product availability and demand influenced
sales to OEM and distribution channel customers.

Gross Margin Rate. Our gross margin rate increased 2.2 percentage points to
14.5% in fiscal year 1997, from 12.3% in fiscal year 1996, as DLTtape drive and
media products, which achieved a higher gross margin rate than our other
products, represented a higher proportion of our overall revenue in fiscal year
1997. The 2.2 percentage point gross margin rate increase also reflected the
impact of a resizing charge in fiscal year 1996 of $38 million, of which $36
million impacted the gross margin. Excluding the charge, the fiscal year 1996
gross margin rate was 13.1%.

Research and Development Expenses. Research and development expenses in
fiscal year 1997 were $291 million, or 5.5% of revenue, in fiscal year 1997,
compared with $239 million, or 5.4% of revenue, in fiscal year 1996. The $52
million increase in research and development spending reflected higher expenses
related to pre-production activity for a number of new products for both the
desktop and high-end hard disk drive markets, as well as the introduction of
new tape storage and storage systems.

Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1997 were $149 million, or 2.8% of revenue, compared with $142 million, or 3.2%
of revenue in fiscal year 1996.

General and Administrative Expenses. General and administrative expenses in
fiscal year 1997 were $87 million, or 1.6% of revenue, compared with $65
million, or 1.5% of revenue, in fiscal year 1996. The increase reflected the
expansion of our infrastructure.

Interest and Other Income/Expense. Net interest and other income and expense
in fiscal year 1997 was $41 million expense, compared with $28 million expense
in fiscal year 1996. An increase in interest expense, reflecting an
approximately $153 million year-over-year increase in the average level of debt
used to finance operations, caused this change.

Income Taxes. Our effective tax rate in fiscal year 1997 was 26%, compared
with 36% in fiscal year 1996. The decrease was attributable primarily to the
benefit of foreign earnings taxed at less than the U.S. rate and a reversal of
the federal valuation allowance previously provided for certain state-deferred
tax assets. The federal valuation allowance was reversed in fiscal year 1997 as
a result of the realization of the federal deferred tax assets through tax
planning.

Net Income (Loss). We reported after-tax earnings of $149 million in fiscal
year 1997, compared to a net loss of $90 million in fiscal year 1996. This
reflected the impact of the $209 million fiscal year 1996 charge related to our
transition of high-capacity product manufacturing to MKE.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of

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Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which we implemented in fiscal year 1999. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains, and losses) in a full set of general-purpose
financial statements. The adoption of SFAS No. 130 changed our financial
statement presentation but does not have an impact on our financial position or
results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires certain financial and
description information about a company's reportable operating segments. We
adopted SFAS No. 131 in fiscal year 1999. The adoption of SFAS No. 131 applies
solely to disclosure and does not have an impact on our financial position or
results of operations.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $707 million at
December 27, 1998, compared to $714 million at March 31, 1998. We used cash in
the nine months ended December 27, 1998 primarily to purchase $305 million of
treasury stock, as discussed below and to invest in property and equipment.
Cash was provided by operating activities, primarily sales, the collection of
accounts receivable, and the reduction in inventories.

In September 1998, we issued 16.9 million shares, including the reissuance
of treasury shares, to the shareholders of ATL to complete the acquisition of
ATL. The difference between the cost of the treasury stock and the value at
which we reissued the shares resulted in a $63 million reduction to retained
earnings in the third quarter of fiscal year 1999. For additional information
regarding the ATL acquisition, see Note 5 of the Notes to Consolidated
Financial Statements.

During the first nine months of fiscal year 1999, we completed the share
repurchase authorized by our board of directors of a total of 15.5 million
shares. The total cost of such repurchases was $305 million. Our intent in
effecting the repurchase was to minimize the dilutive impact of the shares
issued to complete the acquisition of ATL.

In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is co-
terminous with our $500 million revolving credit line, expiring in June 2000.
At the option of ATL, borrowings under the revolving credit line bear interest
at either LIBOR plus a margin determined by our total funded debt ratio, or at
a base rate, with option periods of one to six months. At December 27, 1998,
$25 million was outstanding on ATL's revolving credit line.

We filed a registration statement which became effective on July 24, 1997,
pursuant to which we may issue debt or equity securities, in one or more series
or issuances, limited to $450 million aggregate public offering price. Under
the registration statement, in July 1997, we issued $288 million of 7%
convertible subordinated notes. The notes mature on August 1, 2004, and are
convertible at the option of the holder at any time prior to maturity, unless
previously redeemed, into shares of our common stock at a conversion price of
$46.325 per share. We have the option to redeem the notes on or after August 1,
1999 and prior to August 1, 2001, under certain conditions related to the price
of our common stock. Subsequent to August 1, 2001, we may redeem the notes at
any time. In the event of certain changes involving all or substantially all of
our common stock, the holder would have the option to redeem the notes.
Redemption prices range from 107% of the principal to 100% at maturity. The
notes are unsecured obligations subordinated in right of payment to all of our
existing and future senior indebtedness.

In June 1997, we entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At our
option, borrowings under the revolving credit line bear interest at either
LIBOR plus a margin determined by our total funded debt ratio, or at a base
rate, with option periods of one to six months. At December 27, 1998, there was
no outstanding balance drawn on this line.

In September 1996, we entered into a $42 million mortgage financing related
to certain domestic facilities at an effective interest rate of approximately
10.1%. The term of the mortgage is 10 years. We are required to make monthly
payments based on a 20-year amortization period, and a balloon payment at the
end of the 10-year term.

Based on the adverse conditions in the hard disk drive market in fiscal year
1999, we have

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reduced capital spending and expect to spend less than $130 million for capital
equipment, expansion of our facilities, and leasehold improvements. These
capital expenditures will support the disk drive and tape drive businesses,
research and development, and general corporate operations.

We believe that our existing capital resources, including the credit
facility and any cash generated from operations, will be sufficient to meet all
currently planned expenditures and sustain operations for the next 12 months.
However, this belief assumes that operating results and cash flow from
operations will meet our expectations.

See Note 7 of the Notes to Consolidated Financial Statements for additional
information regarding long-term debt.

Year 2000

The year 2000 computer issue refers to the possibility that computer systems
may not be able to distinguish the year 2000 from the year 1900. Two other
date-related issues may contribute to the year 2000 problem: (1) certain
systems have associated special values with date fields (for example, 9/9/99),
and (2) these same systems may fail to recognize that year 2000 is a leap year.
Because of the pervasive use and dependency on computer technology in all
facets of modern commerce, year 2000 issues present a potentially vast risk to
companies, including us. For example, there are potential disruptions or
failures of our products and operations and of the products and operations of
our suppliers, customers and service providers. Because the year 2000 issue can
impact us indirectly through our suppliers, service providers and customers, an
assessment and prediction of the impact of the year 2000 issue on our company
is difficult.

We are in the process of implementing plans to address year 2000 issues both
within and outside Quantum. In addressing the year 2000 issues and risks, we
have focused our efforts on our enterprise-wide and departmental operations,
products, critical suppliers (including service providers) and key customers.
Within Quantum, these efforts are intended to encompass all major categories of
computer systems and operating equipment used by us, including those utilized
in manufacturing, research and development, sales, finance and human resources.
To ensure year 2000 compliance for all of our systems, we have adopted an
approach based on the U.S. General Accounting Office Year 2000 Assessment
Guide. The approach utilizes a multi-phased model, with major phases consisting
of inventory, assessment, resolution, testing and certification. In the
inventory phase we are listing and reviewing for criticality and risk all
hardware, software, equipment, infrastructure, and desktop tools and
applications. Thereafter, we are determining in the assessment phase whether we
are converting, replacing or eliminating the impacted system or application. In
the resolution phase, we are developing and carrying out a formal plan. Under
stringent procedures in the testing phase, we are validating the system and
application on its functionality to perform seamlessly in the year 2000. We are
documenting and verifying all test results in the certification phase.

Within each of the major categories of computer systems and operating
equipment, we prioritize our year 2000 issues and risks on three levels:
critical, key or active. The critical level reflects short-term failure which
would have a severe impact on our business operations and result in significant
downtime or a manual effort to perform the required functions. Without this
system or application, our business could not function. Key level applications
or systems, although required by us, are not mandatory for business survival.
We do not expect the failure of key level applications to cause significant
disruption to our operations. We can defer the work or devise manual back-up
procedures to handle the interim needs. We do not require active level
applications, although currently in use, for our normal operations. We do not
expect their failure to result in any disruption to our business.

We have made significant progress in our preparedness for year 2000. We
anticipate assessing and remedying all critical areas of our own operations,
and will be prepared to internally certify readiness of these critical areas,
by the end of March 1999. We also expect to complete assessment, resolution,
testing, and certification of critical third parties by the end of April 1999.
We plan to develop contingency plans based, in part, on the assessment results.

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<PAGE>

The following table summarizes our estimated timetable for assessment,
resolution, testing, and certification of critical level-year 2000 issues:

<TABLE>
<CAPTION>
Assessment Resolution Testing Certification
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Information Complete Complete Complete Complete
Technology

Operating Complete Complete 95% complete 95% complete
Equipment with
Embedded Chips Expected Expected
or Software completion completion
date, March 31, date, March 31,
1999 1999

Products Complete Complete Complete Complete

Third Party Complete for Complete for 95% complete 95% complete
system system for system for system
interface; 95% interface interface interface
complete for
all other Expected Expected
material completion date completion date
exposures for system for system
interface work, interface work,
Expected March 31, 1999 March 31, 1999
completion date
for surveying Implement
all third contingency
parties, plans or other
April 30, 1999 alternatives as
necessary,
April 30, 1999
</TABLE>

Our failure to complete critical readiness assessments, critical corrective
actions or implement viable contingency plans in a timely matter could have a
material adverse effect on our business, financial condition and operating
results.

As indicated above, our risk assessment includes understanding the year 2000
readiness of our suppliers. Our risk assessment process associated with
suppliers includes soliciting and analyzing responses to questionnaires
distributed to these suppliers, as well as onsite interviews with certain
critical suppliers. Critical suppliers include a number of suppliers with
operations in China, India and Mexico that are our sole source of certain
components for tape drives. We have received 100% of responses from an initial
survey sent to suppliers and have received 100% of responses from a second
follow-up survey sent to those identified as critical suppliers. To further
assess year 2000 readiness, we are conducting on-site visits of certain
critical suppliers.

The year 2000 readiness of MKE, our hard disk drive manufacturing partner,
is of particular importance. MKE implemented a year 2000 compliance project
plan in April 1998, similar in content and structure to that employed by us. We
expect MKE to have all of its critical processes, applications and hardware
tested and year 2000 compliant and certified by the end of March 1999. We
expect that all key and active processes, applications and hardware will be
year 2000 compliant and certified by the end of June 1999. We hold regular
meetings to verify that MKE is, and will remain, on schedule. Additionally, we
have performed limited on-site evaluations of MKE operations in Japan,
Singapore and Ireland, and expect completion by the end of March 1999. Our
reliance on MKE and other critical suppliers, and therefore, on the proper
functioning of their information systems and software, means that any failure
by these critical suppliers to address year 2000 issues could have a material
adverse impact on our business, financial condition and results of

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<PAGE>

operations. Based on the level of risk assessed of critical suppliers, we may
develop contingency plans, including the possibility of a planned increase in
inventory or other measures.

We are also working closely with key customers to evaluate their readiness
for year 2000 and expect to perform on-site visits if necessary. The ability of
customers to deal with year 2000 issues may affect their operations and their
ability to order and pay for products. Based on the level of risk assessed, we
may develop contingency plans to address possible changes in customer order
patterns.

We believe that third party factors, rather than our internal systems and
applications, would be the cause of our most reasonably likely worst case
scenario. For example, since we deal heavily with third parties to manufacture
and transport products and services, a failure of third party systems could
result in a disruption of service, which could result in delays in shipments of
our products. For internal systems, we are developing workarounds, which may
involve providing manual or other automated systems in lieu of normal
procedures.

Our products are inherently year 2000 compliant; the family of disk drives,
whether for desktop, workstation and systems, or solid state disks has no
internal date clocks, and therefore is not impacted by the year 2000 problem.
Our DLT tape drives use a four-character string to describe the year and will
not be affected by the year 2000 problem. Additionally, we do not need to make
any modifications to any disk or tape drive's internal firmware to accommodate
the transition to the year 2000. We consider a disk drive or tape product to be
year 2000 compliant when used in accordance with our product information. Such
product will not generate an error in data related to the year change from
December 31, 1999 to January 1, 2000. Furthermore, year 2000 compliant products
will correctly handle leap years, including leap years beginning January 1,
2000 and thereafter. However, the assessment of whether a complete computer
system operates correctly depends on factors such as the operating system,
BIOS, software and components, which companies other than Quantum provide.

Costs incurred to date in addressing the year 2000 issue have been
approximately $7.9 million, with $5.3 million and $2.6 million of this cost in
HDDG and DSSG, respectively. Based on assessment and resolution projects
underway, we currently expect that the total cost of addressing the year 2000
issue, including both incremental spending and redeployed resources, will not
exceed $15 million, with $10.3 million and $4.7 million of this cost in HDDG
and DSSG, respectively. We expect a majority of the cost to relate to the
redeployed resources. However, as the year 2000 efforts continue, we may use
third-party vendors, auditors, and/or service providers as necessary to assure
that we successfully meet program milestones. The expected costs related to the
year 2000 effort in fiscal year 1999 represent approximately 10% of our total
information technology budget for the fiscal year. We have not deferred any
significant system projects due to the year 2000 program. As our risk
assessment and correction activities continue, these costs may change. In
addition, our total cost estimate does not include potential costs related to
any customer or other claims resulting from our failure to adequately correct
year 2000 issues.

Based on assessment and remediation completed to date, we do not expect any
significant disruption to our operations or operating results as a result of
year 2000 issues. We are taking all steps we believe are appropriate to
identify and resolve any year 2000 issues; however, the extent such issues may
affect us is uncertain. We cannot assure you that we will be able to assess,
identify and correct year 2000 issues in a timely or successful manner. We also
cannot assure you that our suppliers, service providers, customers or other
third parties will be year 2000 compliant.

The foregoing statements regarding our year 2000 plans and our expectations
for resolving these issues and the costs associated therewith are forward-
looking statements and actual results could vary. The severity of the problems
to be resolved within Quantum, the year 2000 issues affecting our suppliers and
service providers, and the costs associated with third party consultants and
software necessary to address these issues could affect our success in
addressing year 2000 issues.

Euro Impact

We believe that the adoption of a single currency, the Euro, by eleven
European countries will not materially affect our business, information systems
or consolidated financial position, operating results or cash flows.

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<PAGE>

BUSINESS OF DSSG

DSSG designs, develops, manufactures, licenses and markets DLTtape drives
and media, tape libraries and solid state storage systems. DLTtape is DSSG's
half-inch tape technology that is the de facto industry standard for data back-
up in the mid-range server market. According to International Data Corporation,
DSSG was the worldwide revenue leader for all classes of tape drives in
calendar year 1997 and is projected to have been the leader in calendar year
1998. According to Dataquest, DLTtape drives are projected to have accounted
for 24% of total tape drive market revenue in calendar year 1998, up from 2% in
calendar year 1994. DSSG is also a leader in the tape library market for mid-
range servers. DSSG's acquisition of ATL in October 1998 allowed it to become
the first provider of tape libraries that serve the entire tape library market
from desktop to data center.

DLTtape drives require compatible DLTtape media. Historical use of DLTtape
drives has shown that each drive uses approximately 15-20 media cartridges per
year. Growth in the installed base of DLTtape drives will result in increasing
demand for DLTtape cartridges.

The installed base of DLTtape drives at the beginning of fiscal year 1999
was approximately 600,000, and grew to over 1 million during the fiscal year.
The larger installed base resulted in shipments of approximately 14 million
DLTtape cartridges in fiscal year 1999. DSSG expects the installed base to grow
at least by the same amount in fiscal year 2000. The foregoing expectation is a
forward-looking statement and actual results may be affected by the factors
discussed in "--Risk Factors Relating to DSSG." In September 1998, in an effort
to continue to expand the installed base of DLTtape drives, DSSG also began
licensing a third party supplier to manufacture and sell DLTtape drives. DSSG
will receive a royalty fee on all sales of DLTtape drives by this licensee.

Historically, DSSG derived revenue from the direct sale of both DLTtape
drives and media. Beginning in 1998, DSSG's licensed third party DLTtape media
manufacturers began selling DLTtape media. DSSG receives a royalty fee on all
DLTtape media sold by its licensees which, while resulting in lower revenue
than DLTtape media sold directly by DSSG, generates comparable income from
operations. DSSG prefers DLTtape media sales to occur through its license model
because this minimizes DSSG's operational risks and expenses and provides a
more efficient distribution channel. DSSG believes that the large installed
base of DLTtape drives and its licensing of DLTtape drives and media give DSSG
a unique competitive advantage.

INDUSTRY BACKGROUND

The importance of stored digital content has moved from a peripheral concern
to the central issue in computing. This is a result of several factors
including:

. GROWTH IN DIGITAL CONTENT. Digital content--data, graphics, video and
audio--is growing at an exponential rate. This growth has been made
possible by new technologies that make it easy and cost-effective to
transform, move, access and store mass amounts of digital content. When
one gets cash from an ATM machine, starts a personal computer, buys gas
with a charge card, goes to the doctor or dentist, makes a hotel or
airline reservation or checks a book out of the library--one is either
tapping into stored digital content, creating new digital content that
has to be stored somewhere, or both.

. SHIFT FROM MAINFRAME TO NETWORKED SERVER COMPUTING. Within enterprises,
there has been a fundamental shift from mainframe to networked server
computing. This shift has resulted in the distribution of mission
critical information from the mainframe to network servers. It has also
contributed significantly to the volume growth of digital content, and
has significantly increased the complexity of managing such content.

52
<PAGE>

. Dramatic Growth of Internet. The Internet has grown dramatically from a
relatively small research-based network to a worldwide network of
networks. The Internet has created greater volumes of stored digital
content, given further momentum to the growth of networked servers within
businesses, and created the entirely new medium of exchange known as
electronic commerce.

As businesses increasingly depend on stored digital content, it must be
secure from human or technical errors, available 24 hours a day, seven days a
week, and recoverable after a disaster. Storage system solutions must reliably
and efficiently capture, protect, manage, back up and archive stored content.

Because digital content is growing so rapidly in volume and importance, the
demand for storage and back-up capacity is also growing rapidly. International
Data Corporation estimates that worldwide storage needs are growing by up to
100% per year. This rapid growth is providing many opportunities for products
and services that are integral to total storage solutions, including devices
such as tape drives; systems and subsystems such as tape libraries and RAID;
storage management software; and storage services such as data back-up,
disaster recovery, media management and data warehousing.

Overview of the Tape Storage Market. The rapid growth in mission-critical
digital content has created a demand for high reliability, high capacity, high
performance data back-up systems. Tape storage is the lowest cost means of
storing large quantities of digital content when compared with fixed or
removable digital storage devices, because tape allows for larger storage
surface areas. Tape storage also offers the lowest price/capacity ratio of any
removable storage technology. As a result, tape storage has been used for many
years to back up and archive mission critical digital content stored on hard
disk drives and digital content that is not frequently accessed but is retained
for long periods of time.

Historically, the tape storage market has tracked the evolution of the
computer systems market. Tape storage initially served the mainframe back-up
and archival market. As the workstation computing market began to grow at the
end of the 1980s and into the 1990s, new tape drives were designed to meet the
back-up and archival needs of the workstation market. These tape drives
included the 4mm and 8mm helical scan tape technologies, which offered the
capacities and lower price points required for this market. As the Unix and
Windows NT server markets grew rapidly, the tape market for mid-range servers
(servers priced between $10,000 and $500,000) emerged. The mid-range tape
market requires tape storage solutions with high capacity, high performance,
high reliability and greater scalability. The mid-range tape market is expected
to continue to grow as a result of the continued expansion of the Unix and
Windows NT server markets.

Emerging Storage Industry Trends. During the past ten years, the computer
industry has been transformed by the emergence of dominant platforms, networked
computing and plug-and-play ease of use. The storage industry is now beginning
to experience similar changes as a result of the following:

. Storage architectures. Enterprise-level storage architectures attempt to
solve a very complex problem for an entire enterprise--integrating
storage management across diverse, distributed computers, networks and
operating systems. These architectures are high-end solutions, designed
to meet enterprise-wide transaction processing needs, and may require the
installation of an entire proprietary system.

. Storage Area Networks. Storage Area Networks, or SANs, are intended to
function at the high-end server level where most enterprise storage is
based. SANs are dedicated high-speed networks that expedite the movement
of digital content from one part of the system to another without tying
up servers or clogging local area networks.

. Network Attached Storage appliances. Network Attached Storage, or NAS,
appliances help overcome difficulties in sharing and protecting digital
content at the workgroup level. They allow users to easily add plug-and-
play storage capacity to networks without having to disable the server,
an inconvenient and expensive task. The NAS appliances and SANs
approaches

53
<PAGE>

are complementary because they focus on different segments of an
organization's total digital content storage need (workgroup vs.
enterprise). DSSG expects both approaches to co-exist for the foreseeable
future.

. NEW STORAGE INTELLIGENCE. SANs and NAS appliances require intelligence at
the system level, and the performance of both can be substantially
improved with intelligence at the device and sub-system levels. System
level intelligence allows for self-registration of storage devices and
capabilities, peer-to-peer communication and digital content transfer
(for example, disk to tape) and enables hybrid storage systems that use
disks to function as if they were tapes--in other words, "virtual tape."
This makes it possible for disks to be used by tape-based back-up systems
to enhance their performance. DSSG expects device level intelligence will
permit more efficient local processing, with the computer being brought
to the content, rather than the content to the computer.

DSSG SOLUTION

DSSG designs and manufactures DLTtape drives and media, tape libraries and
solid state systems that address many of the diverse storage needs of
workgroups and enterprises. DSSG plans to enter the rapidly emerging market for
NAS appliances with products targeted at workgroup-level applications and
designed to provide easy to use, flexible storage solutions.

DSSG's DLTtape technology has emerged as the de facto industry standard for
data back-up in the mid-range server market primarily for the following
reasons:

. HIGHER CAPACITY/COST-EFFECTIVENESS. More digital information can be
stored on DLTtape than 4mm or 8mm tape as a result of the greater media
recording area of half-inch tape, patented linear recording pattern and
single reel design. As a result, DLTtape technology compares favorably on
a price-to-capacity basis.

. HIGHER PERFORMANCE. The time periods allocated for servers to back up and
archive digital content are becoming shorter. DLTtape drive's faster data
transfer rates address this issue.

. HIGHER RELIABILITY. DSSG believes that DLTtape technology has proven more
reliable than 4mm or 8mm tape technology. This high reliability is due in
part to the DLTtape drive's patented head guide assembly that reduces
tape wear and ensures data tracking accuracy. Specifically, when compared
to 4mm and 8mm tape drives, DLTtape drives have much lower tape-to-head
friction and no contact between the rollers and magnetic coating.

. GREATER SCALABILITY. DLTtape products have higher capacity and backward
compatibility to previous generations, providing a scalable data back-up
solution that can cost-effectively grow with an organization's data back-
up needs.

DSSG's current storage solutions have the following core strengths:

. BROAD INDUSTRY ACCEPTANCE OF DLTTAPE TECHNOLOGY. The broad acceptance of
DLTtape technology in the mid-range server market has resulted in DLTtape
becoming an industry platform for data protection. DSSG maintains close
relationships with leading server OEMs. DSSG believes these OEMs will set
the industry standards, drive volume and continue to advance the market
position of DLTtape technology. In addition, many companies, including
DSSG's customers and competitors, design products based on DLTtape
technology including storage sub-systems, servers and storage management
software. The emergence of DLTtape also has enabled the development of an
entirely new market segment of mid-range tape libraries. DLTtape products
are incorporated into DSSG's tape libraries as well as many of DSSG's
competitor's products. As a result, many companies base significant
portions of their business on DLTtape technology.

. A BROAD TAPE LIBRARY FAMILY. DSSG's ATL acquisition allowed it to become
the first company in the industry to provide tape libraries that serve
the entire tape library market from desktop to data center. DSSG's

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tape library family includes tape autoloaders and tape libraries. DSSG's
broad line of tape libraries is particularly attractive to DSSG's OEM
customers who often prefer to deal with a limited number of suppliers.

. A UNIQUE SYSTEMS ARCHITECTURE. DSSG's Prism Library Architecture(TM), on
which many of DSSG's tape libraries are built, enables hybrid storage
systems to incorporate both tape drives and hard disk drives within the
same tape library. This enables tape libraries to take advantage of both
the speed of hard disk drives and the cost-effectiveness of tape storage.

. EFFICIENT STORAGE MANAGEMENT CAPABILITIES. DSSG's WebAdmin(TM), the
industry's first browser-based tape library management system, allows
system administrators to monitor widely distributed storage systems at
remote locations with point-and-click ease.

As DSSG designs more intelligence into its storage devices and sub-systems,
more functionality and capabilities will be added to DSSG's system level
products. DSSG's acquisition of ATL has increased DSSG's systems expertise. In
the future, DSSG expects that the knowledge it gains from designing both
storage systems and device and sub-system level products will further enhance
its ability to provide intelligent storage solutions with increased
functionality and performance.

DSSG STRATEGY

DSSG's strategy is to leverage its strength and expertise in storage device
technology and storage systems into broader industry leadership in storage
systems and services. DSSG's goal is to develop not only the devices that store
digital content, but also the intelligence that adds performance and
functionality to storage devices and the systems that support network digital
content storage.

The primary components of DSSG's business strategy are:

. EXTEND DSSG'S NUMBER ONE POSITION IN THE TAPE DRIVE AND MEDIA
MARKET. DSSG plans to execute this strategy by:

1) introducing new products such as those based on Super DLTtape
technology, which has the potential to expand DSSG's technology
leadership in the mid-range tape market. Super DLTtape technology will
feature native data transfer rates of 10-40 gigabytes (GB) per second
and native capacities of 100-500GB. DSSG plans to introduce its first
product based on Super DLTtape technology in calendar year 1999.

2) leveraging its relationships with licensees of its DLTtape drives and
media in order to expand the market for these products. DSSG's
strategy is to expand the market for DLTtape drives, particularly the
international market, further increasing demand for compatible DLTtape
media cartridges.

3) increasing the awareness of the need for data back-up. A research
study commissioned by DSSG found that an estimated 88% of companies
participating in the study did not have an effective disaster recovery
plan in place. DSSG and 20 other companies have jointly launched the
"Prove It" campaign to help companies evaluate, improve and implement
effective disaster recovery plans.

. EXPAND INTO THE NAS APPLIANCE MARKET. DSSG plans to introduce NAS
appliances designed to meet workgroup-level requirements. DSSG is
developing a tape-based appliance featuring a fully integrated
controller; pre-loaded back-up software; a tape library incorporating
standard DLTtape drives and media; automatic connectivity for remote
website management; and plug-and- play installation capability. DSSG is
also developing a hard disk drive-based appliance featuring a fully
integrated controller, file system and hard disk drive(s), and plug-and-
play installation capability.

. FURTHER EXPAND INTO THE ENTERPRISE STORAGE MARKET. DSSG believes that the
planned introduction of new products based on Super DLTtape technology,
with higher storage capacity, faster data transfer rates, and the added
benefits derived from the Prism Library Architecture and WebAdmin, will

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enable DSSG to further expand into the enterprise storage market. DSSG
believes that the introduction of its enterprise-level P3000 series tape
library in the fall of 1998 is the first step towards this expansion.

. Expand storage services business. Through its acquisition of ATL, DSSG
believes that it is now in a position to capitalize on the growing market
opportunity to provide services for both the management of data and
storage systems and the protection of data. DSSG believes that customers
will increasingly rely on third parties to provide storage management
services such as remote monitoring, trouble-shooting and maintenance of
storage systems.

Products

DSSG's products include:

. DLTtape drives. DSSG offers two tape drive products--the DLT7000 and the
DLT4000. The DLT7000 provides a combination of 35GB of native capacity
(70GB compressed) and a sustained data transfer rate of 5 megabytes (MB)
per second (10MB compressed). The DLT4000 provides a combination of 20GB
of native capacity (40GB compressed) and a sustained data transfer rate
of 1.5MB per second (3MB compressed). DSSG expects to introduce a next
generation DLTtape drive in calendar year 1999.

. DLTtape media. The DLTtape family of half-inch tape cartridges are
designed and formulated specifically for use with DLTtape drives. The
capacity of a DLTtape media cartridge is up to 35GB (70GB compressed).
DSSG's half-inch tape cartridges take advantage of shorter wavelength
recording schemes to enable read compatibility with future generations of
DLTtape drives such as those based on Super DLTtape technology.

. Tape libraries. DSSG offers a broad line of automated DLTtape libraries
that support a wide range of back-up and archival needs from workgroup
servers to enterprise-class servers. DSSG's tape libraries range from its
tape autoloaders which accommodate a single DLTtape drive and up to 280GB
of storage capacity to the P3000 series library which features Prism
Library Architecture and can be configured in multiple units to scale up
to 11.4 Terabytes of storage capacity.

. Solid state storage systems. DSSG offers two families of solid state
storage systems that are available in capacities ranging from 134MB to
1.66GB and have data access times that are up to 15 times faster than
magnetic hard disk drives.

Customers

DSSG's DLTtape drives have achieved broad market acceptance in the mid-range
server market with leading OEMs such as Compaq, Dell Computer Corporation,
Hewlett-Packard, IBM, StorageTek and Sun Microsystems, Inc. Customers for
DSSG's tape libraries include Compaq, Sun Microsystems, Hewlett-Packard, IBM
and EMC Corporation. To protect the competitive position of its tape library
customers, DSSG operates the tape library portion of its business through its
wholly owned ATL subsidiary which maintains an arms-length relationship with
DSSG's DLTtape drive business.

Because the leading OEMs have a dominant market share for the computer
systems into which DSSG's products are incorporated, DSSG's sales are
concentrated with several key customers. Sales to DSSG's top five customers for
the first nine months of fiscal year 1999 represented 54% of revenue, compared
to 64% of revenue in the corresponding period of fiscal year 1998. These
amounts reflected a retroactive combination of the sales to Compaq and Digital
Equipment as a result of their merger in June 1998. Sales to Compaq were 26% of
revenue for the first nine months of fiscal year 1999, compared to 39% of
revenue in the corresponding period of fiscal year 1998, including sales made
to Digital Equipment. Sales to Hewlett-Packard were 13% of revenue for the
first nine months of fiscal year 1999, compared to 10% of revenue in the
corresponding period of fiscal year 1998.

Sales and Marketing

DSSG markets its products directly to manufacturers of computer systems and
workstations and to distributors, resellers and systems integrators

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through its worldwide sales force. DSSG also sells DLTtape media through its
web site.

DSSG supports international sales and operations by maintaining a European
headquarters in Neuchatel, Switzerland; a Japanese headquarters in Tokyo; and
additional sales offices in Singapore and throughout the world. DSSG's
international sales, including sales to foreign subsidiaries of United States
companies, were 28% of DSSG's total revenue in the first nine months of fiscal
year 1999, and 3%, 24% and 22% of total revenue in fiscal years 1996, 1997 and
1998, respectively.

Strategic Licensing Partners

Fuji and Maxell have historically been the primary manufacturers of DLTtape
media for DSSG. DSSG's license agreements with Fuji and Maxell allow those
companies to independently sell DLTtape media for which DSSG receives royalty
fees. DSSG believes these strategic license agreements can expand the market
for DLTape technology and provide customers with multiple sources for DLTtape
media.

In September 1998, DSSG entered into a manufacturing license and marketing
agreement with Tandberg, a European-based data storage company, through which
Tandberg can become an independent manufacturer of DLTtape drives, as well as
products currently under development based on Super DLTtape technology. Under
the terms of the agreement, DSSG will receive royalties on all DLTtape drives
that Tandberg sells. Tandberg has indicated that it expects to begin
manufacturing DLTtape drives in the second half of calendar year 1999. Tandberg
has also agreed to market a full spectrum of DLTtape drives and media and tape
libraries. With Tandberg's strong name recognition and established distribution
channels in the European market, DSSG expects Tandberg to strengthen
international sales of DLTtape drives and tape libraries.

Manufacturing

DSSG manufactures DLTtape drives, autoloaders and solid state storage
systems in its Colorado Springs, Colorado facility and tape libraries in its
Irvine, California facility. DSSG also has a logistics site in Dundalk,
Ireland. All of DSSG's DLTtape media is manufactured by third parties--
primarily Fuji and Maxell.

Research and Development

DSSG invested approximately $72 million in research and development in the
first nine months of fiscal year 1999, and $25 million, $30 million, and $63
million in fiscal years 1996, 1997 and 1998, respectively. DSSG is focusing its
research and development efforts on the development of new DLTtape drives,
autoloaders and libraries, solid state storage systems, NAS appliances and
software storage architectures. In particular, DSSG is currently developing a
tape drive based on Super DLTtape technology. DSSG maintains research and
development facilities in Shrewsbury, Massachusetts; Irvine, California;
Boulder, Colorado; and Milpitas, California.

Competition

In the mid-range server market for tape drives, DSSG competes primarily with
Exabyte, Hewlett-Packard, Sony and StorageTek. In particular, Hewlett-Packard,
IBM and Seagate have formed a consortium to develop new tape drive products
using LTO technology. Such products will target the high-capacity data storage
market and are expected to compete with Super DLTtape technology. Key
competitive factors in the tape storage market include capacity, reliability,
durability, scalability, compatibility and cost.

ADIC, Breece Hill, Exabyte, Hewlett-Packard, Overland Data and StorageTek
also offer tape libraries incorporating DLTtape technology. If DLTtape
continues to maintain broad market acceptance in the mid-range server market,
DSSG believes many of these companies will continue to improve the
functionality and performance of their tape libraries designed for DLTtape
technology. DSSG also expects increased competition from large integrated
computer equipment companies, many of whom have historically incorporated their
own tape storage products into their mainframe systems, and are broadening
their focus on the enterprise-wide computing market.

DSSG believes that, although there are several start-up companies focusing
on the development of workgroup-level NAS appliances, it will be the first
established storage company to enter this market. In

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addition, several established competitors provide department-level NAS
appliances at higher price points including Network Appliance, Inc. and Auspex
Systems, Inc. Large traditional suppliers of general purpose file servers also
offer specialized file server storage solutions. Any one of these companies, or
any other company, could introduce NAS appliances or another similar storage
solution targeted at workgroup-level applications that could result in
increased competition with DSSG's NAS appliances.

WARRANTY AND SERVICE

DSSG generally warrants its products against defects for a period of one to
three years from the date of sale. DSSG generally provides warranty service on
DLTtape drives on a return to factory basis. DSSG's tape libraries generally
have a warranty period of one year, with service agreements available to
customers for additional years of warranty service. DSSG maintains in-house
product repair facilities in Colorado Springs, Colorado, and Dundalk, Ireland
to support warranty and service obligations for tape drives, libraries and
solid state systems. DSSG also performs tape library warranty service in its
facility in Irvine, California. In addition, third party service providers
throughout the world perform tape library warranty service.

EMPLOYEES

At December 27, 1998, DSSG had approximately 2,100 regular employees. In
addition, approximately 970 employees perform services for both DSSG and HDDG.
In the advanced electronics industry, competition for highly skilled employees
is intense. DSSG believes that a great part of its future success will depend
on DSSG's ability to attract and retain highly skilled employees. None of
DSSG's employees are represented by a union, and DSSG has experienced no work
stoppages. DSSG believes that its employee relations are favorable.

MANAGEMENT

The following table sets forth certain information with respect to the
executive officers of DSSG:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Peter van Cuylenburg.. 51 President
Kevin Daly, Ph.D...... 54 Chief Executive Officer of ATL
Ed Gardner............ 48 Vice President, Human Resources
Brodie Keast.......... 43 Vice President and General Manager, DLT
George Saliba......... 47 Chief Technology Officer and Vice President,
Advanced Storage Products
Tex Schenkkan......... 42 Vice President and General Manager, New Businesses
</TABLE>

Mr. van Cuylenburg has been President of DSSG since joining Quantum in 1996.
From 1993 to 1995, Mr. van Cuylenburg served as Executive Vice President,
responsible for the systems sector, at Xerox Corporation. From 1992 to 1993,
Mr. van Cuylenburg was President and Chief Operating Officer at NeXT Computer
Inc.

Dr. Daly has been Chief Executive Officer and Chairman of ATL since ATL's
formation in 1991. Since 1985, Dr. Daly was with ATL's former parent, Odetics,
Inc., most recently as Chief Technical Officer and a member of the Board of
Directors. From 1974 to 1985, he was Director of the Control and Dynamics
Division of the Charles Stark Draper Laboratory in Cambridge, Massachusetts.
During this time he was also Adjunct Professor at MIT. Dr. Daly is currently
chairman of the Industrial Advisory Board of the Center for Research on
Information Technology and Organizations at the University of California,
Irvine.

Mr. Gardner has been Vice President, Human Resources since 1997. Mr. Gardner
joined Quantum in 1996 as Director of Human Resources for the High-End Storage
Division and technology and engineering. Prior to joining Quantum, Mr. Gardner
served as Vice President of Human Resources and Facilities at Spectro Physics
Lasers Inc. for eight years.

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<PAGE>

Mr. Keast has been Vice President and General Manager of the DLT division
since 1997. Mr. Keast joined Quantum in 1996 as Vice President of Marketing for
the DLT division. Prior to joining Quantum, Mr. Keast spent 11 years at Apple
in a variety of marketing management positions.

Mr. Saliba has been Chief Technology Officer and Vice President of the
Advanced Storage Products division since 1998. From 1995 to 1998 Mr. Saliba
served as Vice President of Engineering for the DLT division. Following the
acquisition of certain businesses from Digital Equipment, Mr. Saliba joined the
Company in 1994 as Director of Engineering. Previously, he spent eight years as
Group Engineering Manager for Digital Equipment's tape products group.

Mr. Schenkkan has been Vice President and General Manager, New Businesses
since 1998. Before joining Quantum in 1996 as Vice President of Corporate
Development, Mr. Schenkkan spent 12 years at Hewlett-Packard where he held a
variety of marketing management and business development positions.

TECHNOLOGY

Both DSSG and HDDG will have access to all of Quantum's technology and know-
how, excluding products and services of the other group, that may be useful in
that group's business. DSSG and HDDG will consult each other on a regular basis
concerning technology issues that affect both groups.

Quantum has been granted and/or owns by assignment 477 United States
patents. In general, these patents have 17-year terms from the date of
issuance. Quantum also has certain foreign patents and applications relative to
certain of the products and technologies. Although DSSG believes that its
patents and applications have significant value, the rapidly changing computer
industry technology makes DSSG's future success dependent primarily upon the
technical competence and creative skills of our personnel rather than on patent
protection.

Several companies and individuals have approached DSSG concerning the need
for a license under patented technology that DSSG assertedly used, or is
assertedly using, in the manufacture and sale of one or more of its products.
DSSG conducts ongoing investigations into these assertions and presently
believes that any licenses ultimately determined to be required could be
obtained on commercially reasonable terms. However, DSSG cannot assure you that
such licenses are presently obtainable, or if later determined to be required,
could be obtained on commercially reasonable terms or at all.

Quantum has signed cross-licensing agreements with Hewlett-Packard, IBM,
Seagate and others. These agreements enable DSSG to use certain patents owned
by these companies, and enables these companies to use certain patents owned by
Quantum.

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DSSG

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

You should read this discussion along with DSSG's combined financial
statements contained in this proxy statement. Historical results and percentage
relationships may not necessarily be indicative of operating results for any
future periods.
Overview

DSSG derives its revenue from the following sources:

. DLTtape Drives. DSSG has generally experienced increasing sales and
attractive gross margins for its DLTtape drives due to increasing
acceptance of DLTtape drives as the de facto industry standard in the
mid-range server market. During fiscal years 1996 through 1998 and the
first nine months of fiscal year 1999, the number of mid-range servers
with tape storage back-up capability increased significantly with the
growth of mission critical server-based computing, and DSSG expects this
trend to continue.

. DLTtape Media and Royalty. DSSG derives a substantial portion of its
revenue from direct sales of DLTtape media and royalties received from
licensed DLTtape media providers. As the installed base of DLTtape drives
increases, additional DLTtape media is consumed resulting in continuing
purchases during the productive life of the DLTtape drive. DLTtape media
is manufactured for DSSG primarily by Fuji and Maxell (the "media
manufacturers"). The media manufacturers are first required to satisfy
all of DSSG's direct sale requirements, after which time they are
permitted to sell to third parties in exchange for a royalty fee payable
to DSSG.

Prior to fiscal year 1999, almost all DLTtape media was sold directly by
DSSG. However, during fiscal year 1999, increased DLTtape media
availability allowed the media manufacturers to sell DLTtape media, for
which DSSG receives royalties. DSSG estimates that in fiscal year 1999,
sales by the media manufacturers will account for approximately two-
thirds of total DLTtape media sales, and DSSG will account for the
balance. This compares to fiscal year 1998 sales by the media
manufacturers of approximately one-quarter of total DLTtape media sales.
Royalty receipts by DSSG are reported as royalty revenue, which is
significantly lower than the equivalent DLTtape media product revenue for
DSSG. However, this royalty model has generated income from operations
comparable to that generated by DLTtape media sales made directly by
DSSG.

. Storage Systems. Storage systems revenue includes both tape libraries and
services and solid state storage systems. The acquisition of ATL in
September 1998 combined ATL's mid-range to high-end tape library product
line and services with DSSG's autoloader products, thereby increasing
sales in the storage systems category. Sales of solid state storage
systems have been declining in large part due to falling DRAM prices,
which have translated into lower unit prices for these products, and a
slight decline in unit volume.

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The table below summarizes the components of DSSG's revenue:

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
---------------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
-------- -------- ---------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
DLTtape Drives and Media
Tape drives............ $194,370 $392,387 $ 783,831 $636,052 $604,313
Media product.......... 70,400 220,404 283,480 205,968 154,350
Media royalty.......... -- 8,088 27,075 12,495 84,717
Storage Systems
Tape libraries and
service............... 58,398 95,981 87,197 72,666 84,619
Solid state storage
systems............... 12,397 11,153 8,217 6,626 3,912
Intra-group
elimination*........... -- -- -- -- (19,256)
-------- -------- ---------- -------- --------
Total revenue......... $335,565 $728,013 $1,189,800 $933,807** $912,655**
</TABLE>
- --------
* Represents intra-group sales of DLTtape drives for incorporation into DSSG's
tape libraries.
** Based on reports received from the media manufacturers, DSSG estimates that
if it had sold directly all DLTtape media sold by the media manufacturers
and, accordingly, not collected any royalty revenue, its total revenue would
have increased by $40 million and $206 million for the first nine months of
fiscal year 1998 and 1999, respectively. This shift in revenue did not have
any significant effect on DSSG's income from operations.

Fluctuating Quarterly Revenue

The discussion below describes the principal factors resulting in
fluctuation of DSSG's quarterly revenue for fiscal years 1997 and 1998 and the
first nine months of fiscal year 1999.

. DLTtape Drive Inventory Correction. During fiscal year 1997 and the first
quarter of fiscal year 1998, DSSG's supply of DLTtape drives was not
sufficient to meet demand. As a result, in the first half of fiscal year
1998 certain OEM customers began building up larger inventories of
DLTtape drives than were required for their normal operations. As DSSG's
manufacturing capacity increased and DSSG was able to meet customer
demand for DLTtape drives, certain customers reduced their orders to
lower inventories to more typical levels. These actions resulted in
reduced sales of DLTtape drives beginning in the third quarter of fiscal
year 1998 and more significantly in the fourth quarter of fiscal year
1998 and the first quarter of fiscal year 1999.

. Shift in DLTtape Media Revenue to Royalty Revenue. From the third quarter
of fiscal year 1998 to the third quarter of fiscal year 1999, DLTtape
media revenue decreased from $65 million to $41 million as an increasing
percentage of DLTtape media sales were made by the media manufacturers.
During this same period, DSSG's royalty revenue from sales of DLTtape
media grew from under $10 million to over $30 million. The royalty
revenue approximates the income from operations that DSSG would have
earned had the DLTtape media been directly sold by DSSG.

. ATL Acquisition. DSSG completed the ATL acquisition at the beginning of
the third quarter of fiscal year 1999. This increased DLTtape library and
service revenue in this quarter as the acquisition combined ATL's mid-
range to high-end DLTtape library revenue with DSSG's autoloader revenue.

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<PAGE>

The table below summarizes DSSG's total revenue by quarter for fiscal years
1997 and 1998 and the first nine months of fiscal year 1999.

<TABLE>
<CAPTION>
Total Revenue
-----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Fiscal Year (In thousands)
<S> <C> <C> <C> <C>
1999....................................... $255,702 $290,458 $366,495
1998....................................... 265,005 338,523 330,279 $255,993
1997....................................... 128,451 152,917 203,338 243,307
</TABLE>

Results of Operations

First Nine Months of Fiscal Year 1999 Compared with the First Nine Months of
Fiscal Year 1998

Revenue. Total DSSG revenue for the first nine months of fiscal year 1999
was $913 million, compared to $934 million in the corresponding period of
fiscal year 1998, a decrease of 2%. The decrease in revenue reflects the shift
in a substantial portion of DLTtape media revenue from DSSG to the media
manufacturers and the inventory correction associated with sales to certain OEM
customers that began in the third quarter of fiscal year 1998 and continued
through the first quarter of fiscal year 1999. The decrease in total revenue
was partially offset by the ATL acquisition and combining ATL's revenue
effective September 28, 1998.

Sales to DSSG's top five customers for the first nine months of fiscal year
1999 represented 54% of revenue, compared to 64% of revenue in the
corresponding period of fiscal year 1998. These amounts reflected a retroactive
combination of the sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Compaq were 26% of revenue for the first nine
months of fiscal year 1999, compared to 39% of revenue in the corresponding
period of fiscal year 1998 including sales made to Digital Equipment. Sales to
Hewlett-Packard were 13% of revenue for the first nine months of fiscal year
1999, compared to 10% of revenue in the corresponding period of fiscal year
1998.

For the first nine months of fiscal year 1999, sales to OEM and distribution
channel customers were 74% and 17% of revenue, respectively, compared to 78%
and 22% of revenue, respectively, in the corresponding period of fiscal year
1998. The remaining revenue in fiscal year 1999 represented media royalty
revenue and sales to value-added resellers.

Gross Margin Rate. The gross margin rate for the first nine months of fiscal
year 1999 was 44.6%, compared to 41.9% in the corresponding period of fiscal
year 1998. The 2.7 percentage point increase reflected an increase in the
proportion of overall revenue represented by royalty revenue. Declines in the
gross margin rate earned on DLTtape drives resulting from price reductions
aimed at expanding the overall market for DLTtape drives partially offset the
increase from royalty revenue.

Research and Development Expenses. Research and development expenses for
the first nine months of fiscal year 1999 were $72 million, or 7.9% of revenue,
compared to $44 million, or 4.7% of revenue, in the corresponding period of
fiscal year 1998. The increase in research and development expenses reflected
higher research and development expenses related to new tape drive products and
to other new information storage products and technologies, including Super
DLTtape technology and, to a significantly lesser extent, optical storage
technology and combining ATL's expenses.

Sales and Marketing Expenses. Sales and marketing expenses for the first
nine months of fiscal year 1999 were $49 million, or 5.4% of revenue, compared
to $33 million, or 3.5% of revenue in the corresponding period of fiscal year
1998. This reflected the combining of ATL's expenses and an increase in
marketing and advertising costs associated with DLTtape products.

General and Administrative Expenses. General and administrative expenses
for the first nine months of fiscal year 1999 were $23 million, or

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<PAGE>

2.5% of revenue, compared to $17 million, or 1.8% of revenue, in the
corresponding period of fiscal year 1998. The increase in general and
administrative expenses reflected expansion of DSSG's infrastructure to support
increased revenue and earnings growth and the combining of ATL's expenses.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE. DSSG expensed
purchased in-process research and development costs as a result of the ATL
acquisition in the quarter ended December 27, 1998. Based on a preliminary
valuation, these costs are estimated at $89 million. For additional information
regarding the ATL acquisition and the costs associated with in-process research
and development, see Note 5 of the Notes to Combined Financial Statements.

INTEREST AND OTHER INCOME/EXPENSE. Net interest and other income and expense
for the first nine months of fiscal year 1999 was $6 million expense, compared
to $3 million expense in the corresponding period of fiscal year 1998. The
increase reflected a reduction in interest income as cash was used to purchase
treasury stock prior to the ATL acquisition. A reduction in interest expense
partially offset this increase.

INCOME TAXES. DSSG's tax rate for the first nine months of fiscal year 1999,
excluding the write-off of the purchased in-process research and development,
would have been 40%, compared to 39% for the corresponding period in fiscal
year 1998. DSSG recorded a provision for income taxes at an effective rate of
61% of pretax earnings for the first nine months of fiscal year 1999. This
higher effective tax rate was primarily attributable to the impact of the
purchased in-process research and development write-off and goodwill
amortization, which are nondeductible.

NET INCOME. DSSG reported net income for the first nine months of fiscal
year 1999 of $65 million, compared to $180 million in the corresponding period
of fiscal year 1998. The decrease primarily resulted from the charge for
purchased in-process research and development of $89 million. Excluding the
charge, net income was $154 million, a decrease of $26 million. This decrease
reflected lower DLTtape drive revenue because of the DLTtape inventory
correction at certain OEM customers, increased amortization of goodwill and
other intangible assets resulting from the ATL acquisition, increased operating
expenses and decreased interest income. This decrease was partially offset by
an increase in gross profit.

FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997

REVENUE. Total revenue in fiscal year 1998 was $1.2 billion, compared to
$728 million in fiscal year 1997, an increase of 63%. The increase in total
revenue resulted from an increase in DLTtape drive and media product shipments.
The increase in total revenue reflected growth in market acceptance of DLTtape
technology and a shift in sales mix to higher storage capacity products which
carry a higher per unit price. However, the average price at each storage
capacity level of DLTtape drives and media products declined when compared with
fiscal year 1997.

The increase in DLTtape drive shipments reflected, in part, an increase in
tape drive production volume, which was at a level high enough to meet product
demand beginning in the third quarter of fiscal year 1998. However, the general
availability of DLTtape drives resulted in sequentially lower DLTtape drive
sales in the fourth quarter of fiscal year 1998 as certain OEM customers
reduced purchases in order to adjust their inventory levels.

Sales to DSSG's top five customers were 63% of revenue in fiscal years 1998
and 1997. This amount reflects a retroactive combination of the sales to Compaq
and Digital Equipment. Sales to Compaq were 36% of revenue in fiscal year 1998,
compared to 35% of revenue in fiscal year 1997, including sales to Digital
Equipment. Sales to Hewlett Packard were 11% of revenue in fiscal year 1998,
compared to 14% of revenue in fiscal year 1997.

Sales to OEM and distribution channel customers were 79% and 21% of revenue,
respectively, in fiscal year 1998, compared to 77% and 23% of revenue,
respectively, in fiscal year 1997.

GROSS MARGIN RATE. The gross margin rate was 42.2% in fiscal year 1998,
compared to 37.1% in fiscal year 1997. The 5.1 percentage point increase
reflected an increase in the gross margin

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<PAGE>

rate earned on DLTtape drives and media as sales shifted to the higher margin
DLT7000.

Research and Development Expenses. Research and development expenses in
fiscal year 1998 were $63 million, or 5.3% of revenue, compared with $30
million, or 4.1% of revenue, in fiscal year 1997. The $33 million increase in
research and development expenses reflected higher expenses related to new
information storage products and technologies, including Super DLTtape
technology and, to a significantly lesser extent, optical storage technology.

Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1998 were $47 million, or 4.0% of revenue, compared with $24 million, or 3.3%
of revenue, in fiscal year 1997. This increase primarily reflected the
increased costs associated with supporting DSSG's higher sales volume.

General and Administrative Expenses. General and administrative expenses in
fiscal year 1998 were $22 million, or 1.9% of revenue, compared with $11
million, or 1.6% of revenue, in fiscal year 1997. The increase in general and
administrative expenses reflected expansion of DSSG's infrastructure to support
increased shipments and revenue growth.

Interest and Other Income/Expense. Net interest and other income and expense
in fiscal year 1998 was $3 million expense, compared with $26 million expense
in fiscal year 1997. A decrease in interest expense reflecting a year-over-year
decrease in the average level of debt used to finance operations, and an
increase in year-over-year average level of cash, combined to cause this
change.

Income Taxes. DSSG's effective tax rate was 39% and 40% for fiscal years
1998 and 1997, respectively. The decrease in the tax rate for fiscal year 1998
was primarily attributable to a research and development credit.

Net Income. DSSG reported net income in fiscal year 1998 of $224 million,
compared to $108 million in fiscal year 1997. The increase reflected increased
total revenue and gross profit, partially offset by an increase in operating
expenses and a reduction in interest income.

Fiscal Year 1997 Compared With Fiscal Year 1996

Revenue. Total revenue in fiscal year 1997 increased 117%, to $728 million,
compared to total revenue of $336 million in fiscal year 1996. This increase
resulted from an increase in shipments of DLTtape drives and media, and an
increase in the average DLTtape tape drive price. The increase in the average
tape drive price reflected a change in sales mix to more advanced, higher-
capacity tape drives, market demand and the limited market availability of
DLTtape drives.

Sales to DSSG's top five customers were 63% of revenue in fiscal year 1997,
compared to 72% in fiscal year 1996. These amounts reflect a retroactive
combination of the sales to Compaq and Digital Equipment. Sales to Compaq were
35% of revenue in fiscal year 1997, compared to 56% of revenue in fiscal year
1996, including sales to Digital Equipment. Sales to Hewlett Packard were 14%
of revenue in fiscal year 1997, and were less than 10% of revenue in fiscal
year 1996.

Sales to OEM and distribution channel customers were 77% and 23% of revenue,
respectively, for fiscal year 1997, compared to 87% and 13% of revenue,
respectively, in fiscal year 1996. Product availability and demand influenced
sales to OEM and distribution channel customers.

Gross Margin Rate. The gross margin rate was 37.1% for fiscal year 1997,
compared to 37.7% for fiscal year 1996. The decrease resulted from increased
spending on DSSG's manufacturing infrastructure, which grew at a slightly
faster rate than revenue.

Research and Development Expenses. Research and development expenses were
$30 million, or 4.1% of revenue, in fiscal year 1997, compared with $25
million, or 7.4% of revenue, in fiscal year 1996. The $5 million increase in
research and development spending reflected higher expenses related to the
introduction of new DLTtape drive products.

Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1997 were $24

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<PAGE>

million, or 3.3% of revenue, compared with $15 million, or 4.4% of revenue, in
fiscal year 1996. The $9 million increase in sales and marketing expenses
reflected increased expenses to support the increase in sales.

General and Administrative Expenses. General and administrative expenses in
fiscal year 1997 were $11 million, or 1.6% of revenue, compared with $4
million, or 1.3% of revenue, in fiscal year 1996. The increase reflected the
expansion of DSSG's infrastructure to support increased sales and revenue
growth.

Interest and Other Income/Expense. Net interest and other income and expense
in fiscal year 1997 was $26 million expense, compared with $24 million expense
in fiscal year 1996. An increase in interest income was offset by an increase
in interest expense.

Income Taxes. DSSG's effective tax rate was 40% for fiscal years 1997 and
1996.

Net Income. DSSG reported net income in fiscal year 1997 of $107 million,
compared to $35 million in fiscal year 1996. The increase reflected increased
total revenue and gross profit dollars, partially offset by increased operating
expenses.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which DSSG implemented in fiscal year 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of general-
purpose financial statements. The adoption of SFAS No. 130 changed financial
statement presentation but did not have an impact on DSSG's financial position
or results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," requires certain financial and descriptive
information about a company's reportable operating segments. DSSG adopted SFAS
No. 131 in fiscal year 1999. The adoption of SFAS No. 131 applies solely to
disclosure and will not have an impact on the DSSG's financial position or
results of operations.

Liquidity and Capital Resources

Operating Activities. DSSG generated cash from operations of $203 million
during fiscal year 1998. DSSG's cash provided by operations in fiscal year 1997
was $93 million. The increase primarily reflects an increase in net income.
Cash provided by operations was $142 million in the first nine months of fiscal
year 1999, compared with $164 million in the first nine months of fiscal year
1998.

Investing Activities. Investments during fiscal year 1998 were $62 million,
which included the acquistion of property, equipment and technology.
Investments in fiscal year 1997 totaled $14 million. Investments in the first
nine months of fiscal year 1999 were $25 million, compared with $56 million in
the first nine months of fiscal year 1998.

Financing Activities. At December 27, 1998, and March 31, 1998, Quantum's
debt allocated to DSSG was $235 million and $219 million, respectively. Debt
allocated to DSSG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At
December 27, 1998, Quantum had total debt of $353 million with an average
interest rate of 7.4%. In the future, each group's debt will increase or
decrease by the amount of any cash provided by or used for the group's
operating activities, investing activities, share repurchases or issuances and
other (non-debt-related) financing activities. See Note 1 to Combined Financial
Statements for further discussion of financing activities.

In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is co-
terminous with Quantum's $500 million revolving credit line, expiring in June
2000. At the option of ATL, borrowings under the revolving credit line bear
interest at either LIBOR plus a margin determined by Quantum's total funded
debt ratio, or at a base rate, with option periods of one to six months. At
December 27, 1998, $25 million was outstanding on this revolving credit line.

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<PAGE>

Quantum filed a registration statement which became effective on July 24,
1997, pursuant to which Quantum may issue debt or equity securities, in one or
more series or issuances, limited to $450 million aggregate public offering
price. Under the registration statement, in July 1997, Quantum issued $288
million of 7% convertible subordinated notes. The notes mature on August 1,
2004, and are convertible at the option of the holder at any time prior to
maturity, unless previously redeemed, into shares of Quantum's common stock at
a conversion price of $46.325 per share. Quantum has the option to redeem the
notes on or after August 1, 1999 and prior to August 1, 2001, under certain
conditions related to the price of Quantum's common stock. Subsequent to August
1, 2001, Quantum may redeem the notes at any time. In the event of certain
changes involving all or substantially all of Quantum's common stock, the
holder would have the option to redeem the notes. Redemption prices range from
107% of the principal to 100% at maturity. The notes are unsecured obligations
subordinated in right of payment to all of Quantum's existing and future senior
indebtedness.

If the tracking stock proposal is implemented, each of the 7% convertible
subordinated notes, which currently are convertible into shares of existing
common stock, will become convertible into a number of shares of DSSG Stock and
a number of shares of HDDG Stock equal to the numbers of such shares which the
holder of such note would receive under the tracking stock proposal had such
note been converted immediately prior to the implementation of the tracking
stock proposal. The notes will not be separately convertible into solely DSSG
Stock or solely HDDG Stock. The exercise price and maturity date of each
convertible note will not be affected by the implementation of the tracking
stock proposal.

In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either LIBOR plus a margin determined by our total funded debt ratio, or at a
base rate, with option periods of one to six months. At December 27, 1998,
there was no outstanding balance drawn on this line.

In September 1996, Quantum entered into a $42 million mortgage financing
related to certain domestic facilities at an effective interest rate of
approximately 10.1%. The term of the mortgage is 10 years. Quantum is required
to make monthly payments based on a 20-year amortization period, and a balloon
payment at the end of the 10-year term.

DSSG expects to spend approximately $70 million in fiscal year 2000 for
capital equipment and leasehold improvements. These capital expenditures will
support the expansion of the DLTtape product line, production of Super DLTtape
products and DSSG's general infrastructure.

DSSG expects its cash flow from operations, together with available
financing sources, will be sufficient to meet all currently planned
expenditures and sustain operations for the next 12 months. However, this
belief assumes that operating results and cash flow from operations will meet
our expectations.

BUSINESS OF HDDG

HDDG designs desktop hard disk drives to meet the storage requirements of
entry-level to high-performance desktop PCs in home and business environments.
HDDG also designs high-end hard disk drives for the demanding storage needs of
network servers, workstations and storage subsystems. These high-end hard disk
drives are used for data-intensive environments and applications, such as data
warehousing, digital content creation, digital video, file servers, financial
services, Internet and intranet services, mechanical computer aided design,
multimedia, online transaction processing, RAID systems, software development
and workgroup computing.

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HDDG recently introduced two new hard disk drives designed for the
developing consumer electronics market. These hard disk drives utilize Quantum
QuickView(TM)--HDDG's hard disk drive technology designed for consumer
electronics. The use of hard disk drive technology makes it possible to
simultaneously record and playback video content and to rapidly and
inexpensively access large amounts of video content--capabilities that are not
as well suited to competing technologies such as video tape and digital video
disk (DVD).

Industry Background

Market for Hard Disk Drives. The demand for hard disk drives continues to
grow due to:

. increasing demand for desktop computers, driven in part by continued
improvements in desktop computing price-to-performance ratios;

. the substantial growth of the sub-$1,000 PC market, particularly in the
home;

. the rapid accumulation of data resulting from the growth in digital
content--audio, video and data;

. the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing;

. the growth of the Intel based-server and workstation market due in large
part to the migration of workstation and server applications to more
cost-effective Intel-based platforms; and

. the trend of consumer electronic content moving from analog to digital
form and the creation of a wide variety of new applications for consumer
electronic devices and information appliances.

In December 1998, Dataquest forecasted that annual demand for the worldwide
desktop computer market would grow from approximately 78 million units in 1998
to 133 million units in 2002, reflecting a compound annual growth rate of
approximately 14%. International Data Corporation forecasts the annual demand
for both the desktop and high-end hard disk drive markets to grow at 15% over
the same period with the desktop disk drive market growing from approximately
111 million units to 194 million units and the high-end disk drive market
growing from approximately 15 million units to 27 million units.

Hard Disk Drive Market Challenges. The growing demand for hard disk drives
has led to intensified competition. The hard disk drive market is characterized
by rapid technological change, increasing capacity and performance, rapid
product obsolescence, changing customer requirements, dramatic shifts in market
share and significant erosion of average selling prices.

HDDG, IBM, Seagate and Western Digital have traditionally had the highest
market share with leading OEMs. Over the last two years, hard disk drive
suppliers such as Fujitsu, Maxtor and Samsung have introduced new hard disk
drive products and gained market share with leading OEMs. The competitive
environment, together with the growth of the sub-$1,000 PC market, has placed
continuous downward pressure on hard disk drive prices. This pressure, in turn,
has reduced average gross margins for hard disk drive suppliers.

In addition to increasing competition, the leading PC OEMs have been gaining
market share which has increased their influence. In calendar year 1997 and
1998, the top ten PC OEMs accounted for more than 50% of all PC shipments and
most of the growth in the PC market. In addition, the top four server and
workstation OEMs accounted for almost 50% of server and workstation units
shipped in calendar 1998. As a result, maintaining customer satisfaction with
these leading OEMs has become even more critical.

OEMs face substantial market pressures to lower costs and improve customer
satisfaction. Historically, hard disk drive failure has been the leading cause
for PC returns and end-user dissatisfaction. As a result, OEMs place a high
value on consistently receiving reliable hard disk drives from their suppliers.

Hard disk drive suppliers have had to manage their businesses to meet these
challenges. OEMs typically seek to qualify up to three or four providers for
each generation of hard disk drives. To achieve consistent success with OEM
qualifications, a hard disk drive supplier must be an early provider of next
generation hard disk drives featuring leading technology and high capacity per
disk. Suppliers

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must quickly achieve volume production of high quality and reliable hard disk
drives. To quickly achieve volume production, a disk drive supplier must have
access to flexible, high-capacity, high-quality and dedicated manufacturing
capabilities. Factors on which OEMs evaluate their hard disk drive suppliers
include ease of doing business, overall quality, storage capacities,
performance characteristics, price and the supplier's long-term financial
stability.

HDDG Solution

HDDG offers one of the industry's most diversified hard disk drive product
portfolios featuring leading-edge technology and reliable hard disk drives.
HDDG focuses on providing consistent, high-quality products, quickly achieving
volume production and maintaining excellent customer satisfaction. HDDG
continues to develop new and improved hard disk drive technology for the
desktop and high-end markets and the emerging consumer electronics market.

The core strengths of HDDG include:

. Strong OEM Relationships. HDDG sells its hard disk drives to each of the
top ten leading PC OEMs including Acer America Corporation, Apple
Computer, Compaq, Dell, Fujitsu, Gateway, Inc., Hewlett-Packard, IBM,
Packard Bell/NEC, Inc. and Siemens AG. According to International Data
Corporation, HDDG had the highest desktop hard disk drive market share
with leading OEMs for each of the calendar years 1993-1998.

. Manufacturing Partnership with MKE. MKE is the exclusive manufacturer of
HDDG's hard disk drives. HDDG believes that it has been able to maintain
a leadership position in the hard disk drive market by integrating its
engineering and design expertise with MKE's high-volume, highly automated
manufacturing capabilities. This partnership gives HDDG the ability to
quickly achieve volume production of high-quality and reliable hard disk
drives without a significant ongoing investment in manufacturing assets.
As a result, HDDG has achieved higher inventory turnover and has the
potential for higher returns on invested capital than the industry
average.

. Leading Customer Satisfaction. HDDG ranked among the best hard disk drive
suppliers in customer satisfaction according to quarterly business
reviews summarizing the status of supplier performance. HDDG believes the
following four factors contribute to its high customer satisfaction
ratings:

1) Quality and Reliability. HDDG's focus on providing high quality,
reliable hard disk drives begins at the design and development phase
and continues through extensive pre-production reliability testing,
strategic use of MKE's automated manufacturing, long-term
relationships with high-performing suppliers and solid, consistent
execution. In addition, HDDG has added two unique features to its hard
disk drives: the Shock Protection System(TM) (SPS), which reduces
potential damage to the hard disk drive in the case of poor handling,
and the Data Protection System(TM) (DPS), which is a diagnostic
software application that reduces the product return rate. HDDG's
consistent execution and stringent quality standards, along with the
introduction of SPS and DPS, have resulted in HDDG having the lowest
rate of defects per million at three leading PC OEMs and two leading
server and workstation OEMs.

2) Time-to-Market/Time-to-Volume. HDDG achieves a leading position in
time-to-market with each generation of hard disk drives through
internal technology development, relationships with key component
suppliers and an integrated design and development process with MKE.
Demonstrating HDDG's time-to-market leadership, in March 1999, HDDG
announced the introduction of Fireball CX which features industry
leading areal density with capacity of 6.8GB per disk and is the first
HDDG hard disk drive to incorporate GMR heads. In addition, HDDG's
technology advances in channels, interface and cache architecture have
led to consistently high benchmark performances for its

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<PAGE>

Fireball and Fireball Plus product lines. HDDG quickly achieves volume
production by capitalizing on MKE's highly automated manufacturing
facilities and manufacturing expertise. For example, with MKE, HDDG
completed one of the fastest conversions from inductive to MR heads in
the industry and quickly achieved volume production. HDDG expects to
complete a similar transition to GMR heads.

3) Competitive Cost. HDDG focuses on providing the lowest total cost of
ownership through high quality, time-to-volume products; high
inventory turnover; and minimal infrastructure. MKE provides low cost
and superior quality manufacturing through a high- yielding automated
process.

4) Ease of doing business. HDDG focuses development resources on features
that provide tangible, practical benefits for its customers--
technology that enables its customers to provide superior computer
systems to their customers at the lowest total cost of ownership. HDDG
provides worldwide logistics capabilities, which include regional
service delivery to support build-to-order and configure-to-order
production strategies and e-commerce capability with major customers.
In addition, HDDG offers dedicated supply chain initiatives and
dedicated support teams for all its major OEM customers. According to
quarterly business reviews received from its customers, HDDG has been
consistently ranked among the best hard disk drive suppliers in
delivery responsiveness.

HDDG Strategy

HDDG's objective is to be the number one supplier of hard disk drives to
each of the desktop, high-end and emerging markets in which it competes. Key
elements of HDDG's strategy include:

. Maintaining Leadership Position in Desktop Market. HDDG has been the
leading volume supplier of hard disk drives to the desktop market over
the past six years. HDDG has maintained this leadership position while
several different competitors have advanced and then declined in the
desktop market. The foundation of HDDG's future success will be
maintaining its strong OEM and distribution relationships to help
position HDDG for long-term growth. HDDG is committed to maintaining its
leadership position in the desktop hard disk drive market by executing
its strategy of maintaining customer satisfaction by focusing on quality,
reliability, time-to-market, time-to-volume, competitive cost and ease of
doing business. Demonstrating HDDG's time-to-market leadership position,
in March 1999 HDDG announced the introduction of Fireball CX which
features industry leading areal density with capacity of 6.8GB per disk
and is the first HDDG hard disk drive to incorporate GMR heads.

. Establishing Leadership in the Intel-Based Server and Workstation
Market. In the fall of 1997, HDDG began to focus its high-end business on
the fast growing Intel-based server and workstation market. To execute on
this strategy, HDDG leverages its capabilities to produce high quality,
reliable hard disk drives and quickly achieve volume manufacturing in
partnership with MKE. In addition, during the past year HDDG has
simplified its high-end product development process by adopting a common
architecture for all its high-end hard disk drives to improve time-to-
market and time-to-volume. HDDG has continued its SCSI interface
leadership with the introduction of its Ultra 160/m interface technology
in its Atlas IV drive and was the first to market with this SCSI
interface technology. During the past year, HDDG has also expanded its
customer base to include each of the top four Intel based-server and
workstation OEMs and has achieved high customer satisfaction ratings as
measured by customer field returns. In calendar year 1999, HDDG will, for
the first time, have a complete high-end product offering, and 7200 RPM
and 10,000 RPM hard disk drives with SCSI and fiber channel interfaces.

. Offering Products That Meet Developing Consumer Electronic Storage
Needs.

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Consumer electronics represents a developing market opportunity for HDDG's
hard disk drive technologies. HDDG offers customized design capabilities
and unique hard disk drive technologies for consumer applications. HDDG is
currently developing hard disk drive storage applications in consumer
electronics with Sony, Panasonic Technologies, Inc. and TiVo, Inc., among
others. In December 1998, HDDG announced a strategic alliance with TiVo to
incorporate Quantum QuickView hard disk drives into a TiVo receiver and
began shipping Quantum QuickView in March 1999. This receiver will give
customers an in-home personalized television service with time-shifting
capabilities and instant access to media content. HDDG also intends to
increase consumer awareness of the Quantum brand name in the consumer
electronics market.

Products

Desktop products. HDDG offers three families of desktop hard disk drives--
the Quantum Bigfoot(TM), Quantum Fireball and Quantum Fireball Plus. The
Quantum Bigfoot family offers 5.25-inch hard disk drives for PC users. The
Quantum Fireball family offers 3.5-inch hard disk drives for consumer and
commercial PCs, as well as entry-level workstations and network servers.
Fireball Plus offers superior performance for power users. HDDG began offering
its Shock Protection System (SPS) and Data Protection System (DPS) with its
recently released desktop products. These features substantially reduce failure
rates with customers and provide increased reliability and performance.

High-end products. HDDG also offers a broad line of high-end 3.5-inch hard
disk drives--the Quantum Viking(TM), Quantum Atlas(TM) and Quantum Atlas 10K
families. The Quantum Viking II 3.5-inch hard disk drive is designed for low-
profile applications such as workgroup servers and desktop workstations, while
the Quantum Atlas family offers high-capacity hard disk drives for high
performance storage-intensive applications such as enterprise servers and
storage subsystems. HDDG began offering SPS with its recently released high-end
products.

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The table below sets forth key performance characteristics for HDDG's
current products:

<TABLE>
<CAPTION>
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
-------- -------- ----------- ---------- --------
<C> <C> <C> <C> <S>
Bigfoot TS 6.4 6.4 to 19.2 4000 Desktop PCs--Value, with
Ultra ATA interface, 5.25-
inch media

Fireball EX 3.4 3.2 to 12.9 5400 Desktop PCs--Performance,
with Ultra ATA interface, SPS

Fireball CR 4.3 4.3 to 13.0 5400 Desktop PCs--Value, with
Ultra ATA/66 interface, SPS
and DPS

Fireball Plus KA 4.5 6.4 to 18.2 7200 Desktop PCs--Performance,
with Ultra ATA/66 interface,
SPS and DPS

Fireball CX 6.8 6.4 to 20.4 5400 Desktop PCs--Value, with
Ultra ATA/66 interface, SPS
and DPS

Viking II 1.8 4.5 to 9.1 7200 PC Servers and Workstations,
with Ultra2 SCSI Low Voltage
Differential (LVD) or Ultra
SCSI interface

Atlas III 1.8 4.5 to 18.2 7200 Servers and Storage
Subsystems, Ultra2 SCSI
LVD/Ultra SCSI interface

Atlas IV 4.5 9.1 to 36.4 7200 Servers, Workstations and
Storage Subsystems, with
Ultra 160/m SCSI interface,
SPS

Atlas 10K 3.0 9.1 to 36.4 10,000 Enterprise Servers and
Storage Subsystems, with
Ultra 160/m SCSI interface or
Fiber Channel optional
interface, 3-inch media, SPS
</TABLE>

Customers

HDDG markets its products to leading OEMs, including Acer, Apple, Compaq,
Dell, Fujitsu, Gateway, Hewlett-Packard, IBM, Packard Bell/NEC and Siemens.
Because the leading OEMs have a dominant market share for the computer systems
into which HDDG's products are incorporated, HDDG's sales are concentrated with
several key customers.

Sales to HDDG's top five customers for the first nine months of fiscal year
1999 represented 41% of revenue, compared to 44% of revenue in the
corresponding period of fiscal year 1998. These amounts reflected a retroactive
combination of the sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Hewlett-Packard were 14% of revenue for the first
nine months of fiscal year 1999, compared to 12% of revenue in the
corresponding period of fiscal year 1998. Sales to Compaq were under 10% of
revenue for the first nine months of fiscal year 1999, compared to 12% of
revenue in the corresponding period of fiscal year 1998, including sales to
Digital Equipment.

Sales and Marketing

HDDG markets its products directly to manufacturers of desktop PCs, servers
and workstations. Key domestic and international OEM customers include Acer,
Apple, Apricot Computers Limited, Compaq, Dell, Fujitsu, Gateway, Hewlett-
Packard, IBM, LG Electronics Inc., Packard Bell/NEC, Samsung and Siemens.

In addition to its strong base of OEM customers, HDDG markets its products
through a domestic and international network of commercial and industrial
distributors located in more than 25 countries worldwide. This network includes
Bell Microproducts, Inc., Computer 2000 AG, Ingram Micro Inc. and Wyle
Electronics. Through this network, HDDG's hard disk drive products reach
smaller OEMs, systems integrators, value-added resellers, dealers and
retailers.

HDDG supports international sales and operations by maintaining regional
European headquarters in Neuchatel, Switzerland; a Japanese headquarters in
Tokyo; and additional sales offices

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in Singapore and throughout the world. HDDG's international sales, including
sales to foreign subsidiaries of United States companies, were 55% of HDDG's
revenue for the first nine months of fiscal year 1999, and 55%, 57% and 54% of
HDDG's revenue for fiscal years 1996, 1997 and 1998, respectively.

Manufacturing

MKE manufactures all of HDDG's hard disk drives at facilities located in
Japan, Singapore and Ireland. MKE's state-of-the-art manufacturing process is
highly automated, employing integrated computer networks and advanced control
systems. MKE's manufacturing expertise helps HDDG produce hard disk drives of
exceptional quality and quickly achieve volume production.

HDDG's relationship with MKE, which has been continuous since 1984, is
governed by a master agreement which continues through 2007, unless terminated
sooner as a result of certain specified events including a change-in-control of
either Quantum or MKE. This agreement gives MKE the exclusive worldwide right
to manufacture and HDDG the exclusive worldwide right to design and market hard
disk drives. HDDG provides MKE with a forecast of its requirements and places
purchase orders approximately three months prior to scheduled delivery. HDDG
works closely with MKE to regularly adjust its purchase orders as market
requirements change.

HDDG and MKE work together to develop strategic relationships with leading
suppliers of many of the key hard disk drive components. These relationships
enable HDDG to gain early access to leading-edge hard disk drive technology and
to actively manage its supply chain to improve flexibility in choosing state-
of-the-art components and to reduce component, inventory and overall product
costs.

In October 1998, HDDG agreed with MKE to dissolve their recording heads
joint venture. As a result, HDDG no longer develops or manufactures recording
heads.

Research and Development

HDDG's research and development expenses were $183 million for the first
nine months of fiscal year 1999, and $214 million, $261 million, and $259 for
fiscal years 1996, 1997, and 1998, respectively. HDDG is currently
concentrating its research and development efforts on broadening its existing
hard disk drive product lines through the development and introduction of new
products. These development efforts focus on developing desktop and high-end
hard disk drives, hard disk drives for consumer electronics and other hard disk
drive applications.

Competition

In the desktop product market, HDDG competes primarily with Fujitsu, IBM,
Maxtor, Samsung, Seagate and Western Digital. In the high-end market, HDDG
competes primarily with Fujitsu, Hitachi, IBM, Seagate and Western Digital.

HDDG believes that important competitive factors in the hard disk drive
market are quality, reliability, storage capacity, performance, price, time-to-
market introduction, time-to-volume production, OEM product qualifications,
breadth of product lines and technical service and support. HDDG believes that
it competes favorably with respect to these factors.

Warranty and Service

HDDG generally warrants its products against defects for a period of one to
five years from the date of sale. HDDG generally provides warranty service on a
return to factory basis. HDDG maintains in-house service facilities for
refurbishment or repair of its products in Milpitas, California; Dundalk,
Ireland; and Penang, Malaysia. HDDG also utilizes third party providers for
warranty repairs.

Employees

At December 27, 1998, HDDG had approximately 4,300 regular employees. In
addition, approximately 970 employees perform services for both HDDG and DSSG.
In the advanced electronics industry, competition for highly skilled employees
is intense. HDDG believes that a great part of its future success will depend
on its ability to attract and retain highly skilled employees. None of HDDG's
employees are represented by a union, and HDDG has experienced no work
stoppages. HDDG believes that its employee relations are favorable.

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MANAGEMENT

The following table sets forth certain information with respect to the
executive officers of HDDG:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
John J. Gannon...... 51 President
Shyam C. Parikh..... 54 Chief Technology Officer
Debora C. Shoquist.. 44 Executive Vice President, Hard Disk Drive Operations
Barbara J. Baill.... 47 Vice President, Human Resources
John M. Cobb........ 42 Vice President, Finance
Anthony Francesca... 42 Vice President and General Manager, New Businesses
Barbara H. Nelson... 44 Vice President and General Manager, Desktop Storage
Division
John S. Squire...... 45 Chief Quality Officer
</TABLE>

Mr. Gannon has been President of HDDG since February 1999. From May 1998 to
February 1999, Mr. Gannon was Executive Vice President of Worldwide Sales.
Prior to joining Quantum, Mr. Gannon spent seventeen years with Hewlett-Packard
from 1981 to 1998, last serving as General Manager of Commercial Desktop
Personal Computer Business from 1996 to 1998 and as General Manager of Digital
Audio Tape Business from 1993 to 1996.

Mr. Parikh has been Chief Technology Officer since August 1998. Mr. Parikh
joined Quantum in 1994, and served as Vice President of Technology and
Engineering from 1994 to August 1998. Prior to joining Quantum, Mr. Parikh was
employed by Digital Equipment for 18 years where he held positions in Advanced
Development, Product Development and Support Engineering.

Ms. Shoquist has been Executive Vice President of Hard Disk Drive Operations
since December 1996. Ms. Shoquist has served in a variety of manufacturing
management positions, most recently as Vice President of Product and Test
engineering for the High-End Storage Division. Prior to that, Ms. Shoquist was
Vice President of Worldwide Operations for the High-End Storage Division. Prior
to joining Quantum in 1991, Ms. Shoquist held a variety of operations
management positions at Hewlett-Packard.

Ms. Baill has been Vice President of Human Resources since 1997. From 1994
to 1997, Ms. Baill was Director of Human Resources. Prior to joining Quantum,
Ms. Baill spent 15 years with Hewlett-Packard where she held various positions
including human resource management in a regional sales organization and as the
Manager for Executive and Management Development.

Mr. Cobb has been the Vice President of Finance since 1998. Mr. Cobb joined
Quantum in 1990 as a Controller. From 1993 to 1995 Mr. Cobb was Director of
Finance for the High-End Storage Division. From 1995 to 1998 Mr. Cobb was Vice
President of Finance for the High-End Storage Division. Prior to joining
Quantum, Mr. Cobb was a Senior Manager from 1982 to 1990 at Ernst & Young LLP.

Mr. Francesca has been Vice President and General Manager, New Businesses
since 1998. From 1997 to 1998, Mr. Francesca was Vice President of Marketing of
the Desktop Storage Division and joined Quantum in 1997 as Vice President of
Mobile Business Unit. Prior to joining Quantum, Mr. Francesca was Vice
President of the OEM business unit for desktop and mobile communications at US
Robotics.

Ms. Nelson has been the Vice President and General Manager of the Desktop
Storage Division since November 1997. Ms. Nelson joined Quantum in January 1997
as Vice President of Marketing of the Desktop Storage Division. Prior to
joining Quantum, Ms. Nelson was at Lumina Office Products, Inc. where she was
responsible for sales and worldwide marketing. Ms. Nelson also spent four years
at Maxtor Corporation where she held a variety of positions, including Vice
President of Marketing and Sales and Director of Sales Management.

Mr. Squire has been the Chief Quality Officer since 1998. Mr. Squire has
held a variety of positions at Quantum since 1988, including most recently,
General Manager of the Desktop Storage Division from 1997 to 1998 and Vice
President of Development Engineering for Desktop Storage Division from 1995 to
1997.

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<PAGE>

Technology

Both HDDG and DSSG will have access to all of Quantum's technology and know-
how, excluding products and services of the other group, that may be useful in
that group's business. HDDG and DSSG will consult each other on a regular basis
concerning technology issues that affect both groups.

Quantum has been granted and/or owns by assignment 477 United States
patents. In general, these patents have 17-year terms from the date of
issuance. Quantum also has certain foreign patents and applications relative to
certain of the products and technologies. Although HDDG believes that its
patents and applications have significant value, the rapidly changing computer
industry technology makes HDDG's future success dependent primarily upon the
technical competence and creative skills of our personnel rather than on patent
protection.

Several companies and individuals have approached HDDG concerning the need
for a license under patented technology that HDDG assertedly used, or is
assertedly using, in the manufacture and sale of one or more of its products.
HDDG conducts ongoing investigations into these assertions and presently
believes that any licenses ultimately determined to be required could be
obtained on commercially reasonable terms. However, HDDG cannot assure you that
such licenses are presently obtainable, or if later determined to be required,
could be obtained on commercially reasonable terms or at all.

Quantum has signed cross-licensing agreements with Hewlett-Packard, IBM,
Seagate and others. These agreements enable HDDG to use certain patents owned
by these companies, and enables these companies to use certain patents owned by
Quantum.

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<PAGE>

HDDG

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

You should read this discussion along with HDDG's Combined Financial
Statements contained in this proxy statement. Historical results and percentage
relationships may not necessarily be indicative of operating results for any
future periods.

Overview

The following summarizes HDDG's desktop and high-end revenue and operating
profit (loss), excluding the effect of the discontinued recording heads
operations:

. Desktop Hard Disk Drives. Because desktop hard disk drives are the key
storage device within PCs, the PC market generates demand for desktop
hard disk drives. The growth and pervasive use of PCs in both the
business and home have generally resulted in increasing sales of HDDG's
desktop hard disk drives. However, a market demand slowdown, coupled with
inventory curtailment by leading OEMs, negatively affected revenue during
the four most recent quarters. In addition, intense competition in the
market for both PCs and desktop hard disk drives has resulted in
generally declining hard disk drive prices despite increases in the
capacity and performance of hard disk drives.

. High-end Hard Disk Drives. High-end hard disk drives are predominately
used in servers, workstations and storage sub-systems. Although the
market for high-end hard disk drives has continued to expand, IBM and
Seagate have held the largest market share in these markets. HDDG has
experienced difficulty in gaining market share and has experienced
continuing losses in this business. HDDG, however, recognizes the long
term potential of this market, and has continued its strategy of focusing
on the fast growing Intel-based server and workstation market and has
taken several important steps in an effort to improve its performance.
HDDG transitioned all of its high-end manufacturing to MKE beginning in
the fourth quarter of fiscal year 1996, which was substantially completed
by the second quarter of fiscal year 1997. This transition has
contributed to a recent improvement in the reliability of HDDG's new
high-end products. HDDG has also recently improved its time-to-market
performance and now has a complete high-end product offering with both
7200 RPM and 10,000 RPM products. HDDG also plans to introduce fibre
channel interface products.

Results of Operations

First Nine Months of Fiscal Year 1999 Compared with the First Nine Months of
Fiscal Year 1998

Revenue. Revenue for the first nine months of fiscal 1999 was $2.7 billion,
compared to $3.6

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<PAGE>

billion in the corresponding period of fiscal year 1998, a decrease of 25%. The
decrease in revenue reflected lower revenue from sales of both desktop and
high-end hard disk drives.

. Desktop hard disk drive revenue for the first nine months of fiscal year
1999 was $2.3 billion, compared to $3.1 billion in the corresponding
period of fiscal year 1998. The decline in desktop hard disk drive
revenue reflected a decline in average unit prices and, to a lesser
extent, shipments. However, a strong desktop PC market in the third
quarter of fiscal year 1999 resulted in some easing of the intense
competitive pricing pressures of prior quarters.

. High-end hard disk drive revenue for the first nine months of fiscal year
1999 was $386 million, compared to $487 million in the corresponding
period of fiscal year 1998. Although high-end hard disk drive shipments
increased in the first nine months of fiscal year 1999, increased
competitive pricing pressures, especially in the third quarter of fiscal
year 1999, resulted in reduced average unit prices and lower high-end
hard disk drive revenue.

Sales to the top five customers for the first nine months of fiscal year
1999 represented 41% of revenue, compared to 44% of revenue in the
corresponding period of fiscal year 1998. These amounts reflected a retroactive
combination of the sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Hewlett-Packard were 14% of revenue for the first
nine months of fiscal year 1999, compared to 12% of revenue, in the
corresponding period of fiscal year 1998. Sales to Compaq were under 10% of
revenue for the first nine months of fiscal year 1999, compared to 12% of
revenue in the corresponding period of fiscal year 1998, including sales to
Digital Equipment.

For the first nine months of fiscal year 1999, sales to OEM and distribution
channel customers were 61% and 39% of revenue, respectively, compared to 58%
and 42% of revenue, respectively, in the corresponding period of fiscal year
1998.

Gross Margin Rate. The gross margin rate for the first nine months of fiscal
year 1999 was 7.1%, compared to 8.9% in the corresponding period of fiscal year
1998.

. The desktop gross margin rate for the first nine months of fiscal year
1999 was 6.6%, compared to 12.6% in the corresponding period of fiscal
year 1998.

. The high-end gross margin rate for the first nine months of fiscal year
1999 was 10.4%, compared to 15.1% in the corresponding period of fiscal
year 1998.

The gross margin rate for the first nine months of fiscal year 1998 reflected
the impact of a $103 million special charge taken in the third quarter related
to the transition to a new generation of high-end disk drive products, and
consisted primarily of inventory write-offs and adjustments, and losses related
to firm inventory purchase commitments. Excluding the special charge, the gross
margin rate was 11.7% for the first nine months of fiscal year 1998. This 4.6
percentage point decline between the corresponding periods of fiscal year 1998
and 1999 reflected the decline in gross margins earned on desktop hard disk
drives. The price decline reflected intense competition, especially in the
first two quarters of fiscal year 1999, and the growth of the sub-$1,000 PC
market, which has become a higher proportion of the overall desktop PC market.

Research and Development Expenses. Research and development expenses in the
first nine months of fiscal year 1999, were $183 million, or 6.8% of revenue,
compared to $193 million, or 5.4% of revenue, in the corresponding period of
fiscal year 1998. The decrease in research and development expense reflected
reduced spending, including reduced bonus expense as a result of lower overall
Quantum performance.

Sales and Marketing Expenses. Sales and marketing expenses for the first
nine months of fiscal year 1999, were $86 million, or 3.2% of revenue, compared
to $96 million, or 2.7% of revenue in the corresponding period of fiscal year
1998. The decrease in sales and marketing expenses reflected reduced spending
including lower commissions as a result of the lower level of revenue.

General and Administrative Expenses. General and administrative expenses in
the first nine months of fiscal year 1999, were $39 million, or 1.4% of
revenue, compared to $58 million, or 1.6%

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<PAGE>

of revenue, in the corresponding period of fiscal year 1998. The decrease in
general and administrative expenses reflected the impact of cost control
efforts, including reduced bonus expenses as a result of lower overall Quantum
performance.

Interest and Other Income/Expense. Net interest and other income and expense
for the first nine months of fiscal year 1999 was $6 million income, compared
to $3 million income in the corresponding period of fiscal year 1998.

Loss from Investee. HDDG's investment and operating results related to its
recording heads business have resulted in significant losses. HDDG acquired a
recording heads business from Digital Equipment in October 1994. In May 1997,
HDDG sold a 51% majority interest in its recording heads operations to MKE,
thereby forming a recording head joint venture with MKE. On October 28, 1998,
HDDG and MKE agreed to dissolve MKQC. In connection with the dissolution, HDDG
recorded a $101 million loss in the third quarter of fiscal year 1999. This
loss included a write-off of HDDG's investment in MKQC; a write-down of HDDG's
interest in facilities in Louisville, Colorado, and Shrewsbury, Massachusetts
that were occupied by MKQC; warranty costs resulting from MR recording heads
manufactured by MKQC; and HDDG's 49% pro rata share in funding MKQC's repayment
of its obligations, primarily bank debt, accounts payable and other
liabilities. See Note 5 of the Notes to Combined Financial Statements for
additional discussion of the dissolution of MKQC.

Income Taxes. HDDG recorded a tax benefit of $101 million and $56 million
for an effective tax rate of 40% and 82% for the first nine months of fiscal
year 1999 and 1998, respectively. The 1999 effective tax rate reflects a lower
benefit from a foreign earnings taxed at less than the U.S. rate.

Net Loss. HDDG reported a net loss for the first nine months of fiscal year
1999 of $151 million, compared to $12 million in the corresponding period of
fiscal year 1998. The increased loss resulted from the $101 million charge
related to the MKQC dissolution and the decrease in revenue and gross profit,
partially offset by a decrease in operating costs.

Fiscal Year 1998 Compared With Fiscal Year 1997

Revenue. Revenue in fiscal year 1998 was $4.62 billion, compared to $4.59
billion in fiscal year 1997, an increase of 1%.

. Desktop hard disk drive revenue for each of fiscal year 1998 and fiscal
year 1997 was $4.0 billion.

. High-end hard disk drive revenue for fiscal year 1998 was $634 million,
compared to $587 million in fiscal year 1997.

Declines in average unit prices for both desktop and high-end disk drives
substantially offset an increase in disk drive unit shipments. Oversupply and
intensely competitive pricing in these markets, particularly in the second half
of fiscal year 1998 and more significantly for the high-end disk drive
products, caused such declines.

Sales to HDDG's top five customers were 44% of revenue in fiscal year 1998,
compared to 40% of revenue in fiscal year 1997. These amounts reflect a
retroactive combination of the sales to Compaq and Digital Equipment as a
result of their merger in June 1998. Sales to Hewlett Packard were 14% of
revenue in fiscal year 1998, compared with less than 10% of revenue in fiscal
year 1997. Sales to Compaq were 12% of revenue in both fiscal years 1998 and
1997, including sales to Digital Equipment.

Sales to OEM and distribution channel customers were 59% and 41% of revenue,
respectively, for fiscal year 1998 compared with 61% and 39% of revenue,
respectively, in fiscal year 1997.

Gross Margin Rate. The gross margin rate decreased 2.8 percentage points to
8.1% in fiscal year 1998, from 10.9% in fiscal year 1997.

. The desktop gross margin rate for fiscal year 1998 was 11.4%, compared to
14.1% for fiscal year 1997.

. The high-end gross margin rate for fiscal year 1998 was -12.7%, compared
to -1.8% for fiscal year 1997.

The overall gross margin decrease reflected the price declines earned on
desktop and high-end hard disk drives, particularly in the second half of
fiscal year 1998, and the $103 million special charge in the third quarter of
fiscal year 1998. The special charge

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<PAGE>

related to the transition to a new generation of high-end disk drive products,
and consisted primarily of inventory write-offs and adjustments, and losses
related to firm inventory purchase commitments. Excluding the special charge,
the gross margin rate was 10.3% in fiscal year 1998. The erosion of gross
margins earned on hard disk drives and the special charge both reflected the
oversupply and intensely competitive pricing in the desktop and high-end disk
drive markets, particularly in the second half of fiscal year 1998.

RESEARCH AND DEVELOPMENT EXPENSES. In fiscal year 1998, research and
development expenses were $259 million, or 5.6% of revenue, compared with $261
million, or 5.7% of revenue, in fiscal year 1997.

SALES AND MARKETING EXPENSES. Sales and marketing expenses in fiscal year
1998 were $122 million, or 2.6% of revenue, compared with $126 million, or 2.7%
of revenue, in fiscal year 1997.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
fiscal year 1998 were $67 million, or 1.5% of revenue, compared with $75
million, or 1.6% of revenue, in fiscal year 1997.

INTEREST AND OTHER INCOME/EXPENSE. Net interest and other income and expense
in fiscal year 1998 was $5 million income, compared with $15 million expense in
fiscal year 1997. A decrease in interest expense, reflecting a year-over-year
decrease in the average level of debt used to finance operations, and an
increase in the year-over-year average level of cash, combined to cause this
change.

LOSS FROM INVESTEE. The loss from investee reflected HDDG's equity share in
the operating losses of MKQC since May 16, 1997, when this joint venture was
formed. Prior to May 16, 1997, HDDG fully combined its recording heads
operations. HDDG's total losses from recording heads operations for fiscal year
1998 was $75 million, compared with $110 million for fiscal year 1997. The loss
from investee for fiscal year 1998 included a charge of approximately $5
million, which represented HDDG's share of a third quarter charge in MKQC's
operating results for severance, equipment write-offs, lease termination and
other costs associated with MKQC's strategic actions. A combination of reduced
unit prices, operating costs, manufacturing yields, product transitions and
soft demand for certain recording heads products, primarily those related to
high-end disk drive products, resulted in losses by MKQC.

INCOME TAXES. HDDG recorded a benefit provision of $83 million and $19
million for an effective tax rate of 61% and -90% for fiscal years 1998 and
1997, respectively. The 1997 effective tax rate reflects increased benefits
from foreign earnings taxed at less than the U.S. tax rate and valuation
allowance reversal. The remaining state valuation allowance was reversed in
fiscal year 1998 as a result of the realization of the state deferred tax
assets through tax planning.

NET INCOME (LOSS). HDDG reported a net loss in fiscal year 1998 of $53
million, compared to net income of $41 million in fiscal year 1997. The change
to a net loss resulted from the special charge related to high-end disk drives
and the erosion of margins on desktop hard disk drives. A decrease in operating
costs partially offset the decrease.

FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996

REVENUE. Revenue in fiscal year 1997 was $4.6 billion, compared to $4.1
billion in fiscal year 1996, an increase of 12%. The increase was the result of
an increase in shipments of desktop hard disk drives and an increase in the
average drive price. The increase in average drive price reflected a change in
sales mix to higher capacity and performance desktop hard disk drives. A
decline in high-end disk drive sales, particularly in the first three quarters
of fiscal year 1998, partially offset the increase in desktop revenue. HDDG's
transition of high-end disk drive manufacturing to MKE during fiscal year 1997
was a primary factor behind this decline in revenue.

Sales to HDDG's top five customers were 40% of revenue in fiscal year 1997,
compared to 47% of revenue in fiscal year 1996. These amounts reflect a
retroactive combination of the sales to Compaq and Digital Equipment as a
result of their merger in June 1998. Sales to Compaq were 12% of revenue in
fiscal year 1997, compared with 17% of revenue in fiscal year 1996, including
sales to Digital Equipment. Sales to Apple Computer were less than 10% of
revenue in fiscal year 1997, compared with 12% of revenue in fiscal year 1996.

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<PAGE>

Sales to OEM and distribution channel customers were 61% and 39% of revenue,
respectively, for fiscal year 1997, compared with 69% and 31% of revenue,
respectively, in fiscal year 1996. Product availability and demand dictated
sales to OEM and distribution channel customers.

Gross Margin Rate. The gross margin rate increased 0.7 percentage points to
10.9% for fiscal year 1997, from 10.2% in fiscal year 1996. The increase
reflected the impact of a resizing charge in fiscal year 1996 of $38 million,
of which $36 million affected the gross margin. Excluding the charge, the
fiscal year 1996 gross margin rate was 11.1%.

Research and Development Expenses. In fiscal year 1997, research and
development expenses were $261 million, or 5.7% of revenue, compared with $214
million, or 5.2% of revenue, in fiscal year 1996. The $47 million increase in
research and development spending reflected higher expenses related to pre-
production activity for new desktop and high-end hard disk drive products.

Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1997 were $126 million, or 2.7% of revenue, compared with $128 million, or 3.1%
of revenue in fiscal year 1996. The decline in sales and marketing expenses as
a percentage of sales reflected the increase in HDDG's sales and decreased
investment in certain marketing programs.

General and Administrative Expenses. General and administrative expenses in
fiscal year 1997 were $75 million, or 1.6% of revenue, compared with $61
million, or 1.5% of revenue, in fiscal year 1996. The increase in expenses in
fiscal year 1997 reflected the expansion of HDDG's infrastructure.

Interest and Other Income/Expense. Net interest and other income and expense
in fiscal year 1997 was $15 million expense, compared with $4 million expense
in fiscal year 1996. An increase in interest expense, reflecting a year-over-
year increase in the average amount of debt used to finance operations, caused
this change.

Income Taxes. HDDG recorded a benefit provision of $19 million and $74
million for an effective tax rate of -90% and 37% for fiscal years 1997 and
1996, respectively. The 1997 effective tax rate reflects increased benefits
from a valuation allowance reversal of foreign earnings taxed at less than the
U.S. rate. The remaining federal valuation allowance was reversed in fiscal
year 1997 as a result of the realization of the federal deferred tax assets
through tax planning.

Net Income (Loss). HDDG reported net income in fiscal year 1997 of $41
million, compared to a net loss of $125 million in fiscal year 1996. The change
to a net income resulted from the increase in sales and gross profit, as well
as the income tax benefit in fiscal year 1997; and the resizing and
restructuring charges in fiscal year 1996. The change was partially offset by
an increase in operating expenses.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which HDDG implemented in fiscal year 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of general-
purpose financial statements. The adoption of SFAS No. 130, changed financial
statement presentation but did not have an impact on HDDG's financial position
or results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," requires certain financial and descriptive
information about a company's reportable operating segments. HDDG adopted SFAS
No. 131 in fiscal year 1999. The adoption of SFAS No. 131 applies solely to
disclosure and will not have an impact on HDDG's financial position or results
of operations.

Liquidity and Capital Resources

Operatings Activities. HDDG generated cash from operations of $82 million
during fiscal year 1998. HDDG's cash provided by operations in fiscal year 1997
was $220 million. The decrease reflected reduced net income in fiscal year 1998
and a reduction in inventory in fiscal year 1997. This decrease was partially
offset by a reduction in accounts receivable. Cash provided by operations was
$214 million in the first nine months of fiscal

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<PAGE>

year 1999, compared with $107 million in the first nine months of fiscal year
1998. The increase reflected a reduction in accounts receivable and inventory,
partially offset by a decrease in accounts payable in the first nine months of
fiscal year 1999.

Investing Activities. Investments during fiscal year 1998 were $83 million,
which included investment in property and equipment and proceeds from the sale
of a 51% interest in HDDG's recording heads operations to MKE. Investments in
fiscal year 1997 totaled $157 million. Investments in the first nine months of
fiscal year 1999 were $16 million of cash used, compared with $18 million of
cash provided in the first nine months of fiscal year 1998.

Financing Activities. At December 27, 1998, and March 31, 1998, Quantum's
debt allocated to HDDG was $118 million and $109 million, respectively. Debt
allocated to HDDG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At
December 27, 1998, Quantum had a total debt of $353 million with an average
interest rate of 7.4%. In the future, each group's debt will increase or
decrease by the amount of any cash provided by or used for the group's
operating activities, investing activities, share repurchases or issuances and
other (non-debt-related) financing activities. See Note 1 to Combined Financial
Statements for further discussion of financing activities.

In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is
co-terminous with Quantum's $500 million revolving credit line, expiring in
June 2000. At the option of ATL, borrowings under the revolving credit line
bear interest at either LIBOR plus a margin determined by Quantum's total
funded debt ratio, or at a base rate, with option periods of one to six months.
At December 27, 1998, $25 million was outstanding on this revolving credit
line.

Quantum filed a registration statement which became effective on July 24,
1997, pursuant to which Quantum may issue debt or equity securities, in one or
more series or issuances, limited to $450 million aggregate public offering
price. Under the registration statement, in July 1997, Quantum issued $288
million of 7% convertible subordinated notes. The notes mature on August 1,
2004, and are convertible at the option of the holder at any time prior to
maturity, unless previously redeemed, into shares of the Quantum's common stock
at a conversion price of $46.325 per share. Quantum has the option to redeem
the notes on or after August 1, 1999 and prior to August 1, 2001, under certain
conditions related to the price of Quantum's common stock. Subsequent to August
1, 2001, Quantum may redeem the notes at any time. In the event of certain
changes involving all or substantially all of Quantum's common stock, the
holder would have the option to redeem the notes. Redemption prices range from
107% of the principal to 100% at maturity. The notes are unsecured obligations
subordinated in right of payment to all of Quantum's existing and future senior
indebtedness.

If the tracking stock proposal is implemented, each of the 7% convertible
subordinated notes, which currently are convertible into shares of existing
common stock, will become convertible into a number of shares of DSSG Stock and
a number of shares of HDDG Stock equal to the number of such shares which the
holder of such note would receive under the tracking stock proposal had such
note been converted immediately prior to the implementation of the tracking
stock proposal. The notes will not be separately convertible into solely DSSG
Stock or solely HDDG Stock. The exercise price and maturity date of each
convertible note will not be affected by the implementation of the tracking
stock proposal.

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<PAGE>

HDDG expects to spend approximately $85 million in fiscal year 2000 for
capital equipment and leasehold improvements. These capital expenditures will
support the expansion of the desktop and high-end hard disk drive product lines
and the introduction of hard drives for consumer electronic applications.

HDDG expects its cash flow from operations, together with available
financing sources, will be sufficient to meet all currently planned
expenditures and sustain operations for the next 12 months. However, this
belief assumes that operating results and cash flow from operations will meet
HDDG's expectations.

PROPOSAL 2--ADOPTION OF AMENDMENTS TO THE QUANTUM CORPORATION EMPLOYEE STOCK
PURCHASE PLAN

BACKGROUND OF THE PROPOSAL

Proposal 2 relates to amendments to the Quantum Corporation Employee Stock
Purchase Plan (the "purchase plan") which would:

. increase the number of shares available for issuance under the purchase
plan from 1,366,401 to ; and

. add an automatic share replenishment provision to the purchase plan which
will increase the number of shares reserved under the purchase plan each
year on April 1 beginning in the year 2000 by the lesser of (1)
shares, (2) % of the outstanding common stock or (3)
an amount determined by our board of directors.

. our board of directors believes the purchase plan serves to incentivize
current employees and to align their interests with those of our
stockholders;

. our board of directors believes that the purchase plan is an important
element of our strategy to attract and retain qualified employees in a
competitive market;

. the automatic replenishment provision will provide the purchase plan with
additional shares and avoid any adverse accounting consequences from
running out of shares during an offering period; and

. without the proposed share increase, we will exhaust the shares available
for issuance under the purchase plan this year.

This summary highlights certain provisions of the purchase plan. To
understand the purchase plan more fully, you should read carefully the amended
purchase plan which is Annex II.

It the tracking stock proposal is approved by our stockholders, additional
features will be added to the purchase plan to reflect the special features of
the tracking stock, including:

. two pools of stock reserved under the purchase plan, each with automatic
replenishment features, if this amendment is approved.

. a special mechanism for the purchase of shares from each pool so that
each participant purchases a proportionate number of shares of the HDDG
stock and the DSSG stock; and

. a modified change of control provision to reflect the tracking stock
capital structure.

Under the purchase plan, our board of directors has the authority to adopt
these amendments related to the tracking stock proposal without stockholder
approval.

SUMMARY OF THE PURCHASE PLAN

GENERAL

The purchase plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Section 423 of the
Code.

PURPOSE

The purchase plan provides the employees of Quantum and our majority-owned
subsidiaries

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<PAGE>

designated by our board of directors with an opportunity to purchase our
common stock through accumulated payroll deductions.

Administration

Either our board of directors or a committee of our board administers the
purchase plan. Currently, our board of directors is administering the purchase
plan. The administration, interpretation or application of the purchase plan
by our board of directors or the committee is final, conclusive and binding
upon all participants. Members of our board of directors who are eligible
employees may participate in the purchase plan so long as they do no vote on
any matter affecting the administration of the purchase plan or grant any
option pursuant to the purchase plan. In addition, if our board of directors
establishes a committee to administer the purchase plan, no member of the
board who is eligible to participate in the purchase plan may be a member of
the committee.

Eligibility and Participation

Any person whom Quantum (or any of its designated subsidiaries) employs
regularly at least 20 hours per week on the first day of each offering period
(the "enrollment date") is eligible to participate in the purchase plan.
Eligible employees become participants in the purchase plan by completing a
subscription agreement authorizing a payroll deduction on the form which we
provide and by filing the form with our payroll office prior to the applicable
enrollment date or such later time as our board of directors decides. As of
[the record date], [ ] of [ ] employees eligible to
participate in the purchase plan were participating.

Offering Dates

Generally, we implement the purchase plan by means of overlapping two-year
offering periods, starting every six months. There are four six-month exercise
periods within each offering period. Our board of directors has the power to
change the duration of the offering periods and exercise periods within each
offering period without stockholder approval if it announces the change at
least 15 days prior to the scheduled beginning of the first affected offering
period.

Purchase Price

The purchase price per share of the shares of common stock in a given
offering period is the lower of:

. 85% of the fair market value of a share of our common stock at the
commencement of the offering period; or

. 85% of the fair market value of a share of our common stock on the last
day of the applicable six-month exercise period within the offering
period.

Payment of Purchase Price; Payroll Deductions

The purchase price of shares is accumulated by payroll deductions over the
offering period. The deductions may not exceed 10% of a participant's
compensation. A participant may discontinue participation in the purchase
plan, or may change the rate of payroll deductions, by giving notice to us.
The change becomes effective:

. in the case of a decrease in rate, with the first payroll following such
notice; and

. in the case of an increase in rate, at the beginning of the next six-
month exercise period within the two-year offering period following such
notice.

Payroll deductions commence on the first payroll date following the
offering date and end on the last payroll date to which authorization is
applicable, unless sooner terminated as provided in the purchase plan.

We credit all payroll deductions made for a participant to his or her
account under the purchase plan. A participant may not make any additional
payments into such account.

Purchase of Stock; Exercise of Option

By executing a subscription agreement to participate in the purchase plan,
the employee can have shares placed under option to him or her. The maximum
number of shares placed under the option to a participant in any exercise
period is the number determined by dividing the total amount of his or her
compensation which is to be withheld for the exercise period by 85% of the
fair market value of the common stock at the beginning of the offering period
or end of the exercise period, whichever is

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less. Unless the employee's participation is discontinued, his or her option
for the purchase of shares is exercised automatically at the end of each
exercise period at the applicable price.

Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Internal Revenue Code of 1986, as amended, we will not
grant an option to any employee under the purchase plan if, immediately after
the grant of the option, the employee would own shares and/or hold outstanding
options to purchase stock, possessing 5% or more of the total combined voting
power or value of all classes of our shares or of shares of any of our
designated subsidiaries. In addition, we will not grant an option to any
employee that would permit him or her to buy more than $25,000 worth of stock
(determined at the fair market value of the shares at the time the option is
granted) under the purchase plan in any calendar year.

Withdrawal

A participant may terminate his or her interest in a given offering in
whole, but not in part, by signing and delivering to us a notice of withdrawal.
The participant may elect to withdraw at any time prior to the end of the
applicable offering period. A participant's withdrawal from an offering does
not have any effect upon such participant's eligibility to participate in
subsequent offerings under the purchase plan.

Amendment and Termination of the Purchase Plan

Our board of directors may at any time amend or terminate the purchase plan.
Unless the termination or an amendment is necessary to avoid adverse financial
accounting consequences to Quantum, no such termination can affect options
previously granted and no amendment may make any changes in an option
previously granted which adversely affects the rights of any participant. We
may not amend the purchase plan without the approval of our stockholders if
that amendment would:

. increase the number of shares that may be issued under the purchase plan;

. permit payroll deductions at a rate in excess of 10% of a participant's
compensation;

. materially modify the requirements as to eligibility for participation in
the purchase plan; or

. materially increase the benefits which may accrue to participants under
the purchase plan.

Automatic Transfer to Lower Price Offering Period

If the fair market value of our common stock on the first day of an offering
period exceeds the fair market value of our common stock on the first day of
any subsequent offering period commencing immediately following an exercise
date within the offering period in progress, then each participant in the
offering period in progress is deemed to have withdrawn from such offering
period immediately following the exercise of his or her option on such exercise
date and to have enrolled in such subsequent offering period as of the first
day thereof.

Certain Federal Income Tax Consequences

The following brief summary of the effect of federal income taxation upon
the participant and Quantum with respect to the shares purchased under the
purchase plan does not purport to be complete, and does not discuss the tax
consequences of a participant's death or the income tax laws of any state or
foreign country in which the participant may reside.

The purchase plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be taxable to a participant
until the shares purchased under the purchase plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax in an amount that depends upon the holding period.

If the shares are sold or otherwise disposed of more than two years from the
first day of the applicable offering period and one year from the applicable
date of purchase, the participant will recognize ordinary income measured as
the lesser of (a) the excess of the fair market value of the shares at the time
of such sale or disposition over the purchase price or (b) an amount equal to
15% of the fair market value of the shares as of the first day of the
applicable offering period. Any additional gain will be treated as long-term
capital gain.

If the shares are sold or otherwise disposed of before the expiration of
these holding periods, the participant will recognize ordinary income generally
measured as the excess of the fair market value of

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the shares on the date the shares are purchased over the purchase price. Any
additional gain or loss on such sale or disposition will be long-term or short-
term capital gain or loss, depending on the holding period. We are generally
not entitled to a deduction for amounts taxed as ordinary income or capital
gain to a participant except to the extent of ordinary income recognized by
participants upon a sale or disposition of shares prior to the expiration of
the holding periods described above.

Participation in the Purchase Plan

Participation in the purchase plan is voluntary and is dependent on each
eligible employee's election to participate and his or her determination as to
the level of payroll deductions. Accordingly, future purchases under the
purchase plan are not determinable. Non-employee directors are not eligible to
participate in the purchase plan. No employee has made any purchases under the
purchase plan since the board of directors amended it. However, purchases were
made prior to such amendment. The following table sets forth certain
information regarding shares purchased under the purchase plan during the last
fiscal year for each of the named executive officers, for all current executive
officers as a group and for all other employees who participated in the
purchase plan as a group:

AMENDED PLAN BENEFITS
Employee Stock Purchase Plan

<TABLE>
<CAPTION>
Number Dollar
Name of Individual or Identity of of Shares Value
Group and Position Date Purchased (#) ($)(1)
- --------------------------------- ---------------- ------------- -----------
<S> <C> <C> <C>
Michael A. Brown................... July 24, 1998 0 $ 0
January 25, 1999 1,369 13,502

Richard L. Clemmer................. July 24, 1998 0 0
January 25, 1999 1,562 18,393

Young K. Sohn...................... July 24, 1998 698 9,431
January 25, 1999 1,369 13,502

Kenneth Lee........................ July 24, 1998 93 1,257
January 25, 1999 0 0

Peter van Cuylenburg............... July 24, 1998 0 0
January 25, 1999 0 0

All current executive officers as a
group............................. July 24, 1998 1,315 17,767
January 25, 1999 5,735 59,549

All other employees as a group..... July 24, 1998 1,789,535 21,823,350
January 25, 1999 758,977 7,599,001
</TABLE>
- --------
(1) Market value of shares on date of purchase, minus the purchase price under
the Plan.

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<PAGE>

Vote Required

Approval of the amendments to the purchase plan requires the favorable vote
of a majority of our existing common stock represented in person or by proxy at
the special meeting.

Recommendation of the Board of Directors

Our board of directors has carefully considered the proposal to amend the
purchase plan and believes that the approval of the proposal by the
stockholders is in the best interests of our company and our stockholders. Our
board of directors unanimously recommends that you approve the proposal.

PRICE RANGE AND DIVIDENDS ON
EXISTING COMMON STOCK

The following table shows the high and low sales prices of our existing
common stock on Nasdaq (adjusted to reflect a two-for-one stock split in May
1997) during the periods indicated:

<TABLE>
<CAPTION>
Fiscal Year High Low
- ----------- --------- ---------
1997
<S> <C> <C>
First Quarter............................................... $13 $ 7 1/32
Second Quarter.............................................. 9 3/16 5 1/2
Third Quarter............................................... 14 7/8 8 21/32
Fourth Quarter.............................................. 22 17/32 13 3/4

<CAPTION>
1998
<S> <C> <C>
First Quarter............................................... $24 9/16 $17 7/8
Second Quarter.............................................. 42 7/16 20 5/16
Third Quarter............................................... 42 7/16 18 15/16
Fourth Quarter.............................................. 26 1/2 18 7/16

<CAPTION>
1999
<S> <C> <C>
First Quarter............................................... $25 3/4 $18
Second Quarter.............................................. 22 1/8 11 7/16
Third Quarter............................................... 23 7/8 12 3/4
Fourth Quarter (through March 25, 1999)..................... 28 5/16 16 7/16
</TABLE>

Historically, we have not paid dividends on our existing common stock.

The closing sale price of our existing common stock on Nasdaq was $16 7/16
per share on February 26, 1999, the trading day prior to our announcement of
the tracking stock proposal, and $[ ] per share on [ ], 1999, the
trading day prior to the date of this proxy statement. As of [ ],
1999, there were [ ] shares of our existing common stock outstanding
and [ ] holders of record.

INFORMATION ABOUT
STOCKHOLDER PROPOSALS

If you wish to submit proposals to be included in the proxy statement for
our 2000 annual meeting, we must receive them on or before [ ], 2000.
Please address your proposals to: Quantum Corporation, 500 McCarthy Boulevard,
Milpitas, California 95035, Attention: Assistant Secretary. Your proposal, if
you choose to submit one, has to include specified information about the
proposed business and yourself.

Our by-laws provide that any stockholder who intends to present a nomination
for a directorship or a proposal for action at any annual meeting of
stockholders must give advance notice of such proposal together with certain
specified information. These requirements are separate and apart from and in
addition to the SEC requirement noted above that a stockholder must meet in
order to have a proposal included in our proxy materials. In general, advance
notice of director nominations must be given to Quantum not less than 20 days
or more than 60 days prior to the meeting, and advance notice of other
proposals must be given to Quantum not less than 60 days or more than 90 days
prior to the meeting. In the case of our 1999 annual meeting, advance notice of
director nominations must be received no earlier than [ ], 1999 or later
than [ ], 1999 and advance notice of other proposals must be received no
earlier than [ ], 1999 or later than [ ], 1999. If the tracking stock
proposal is implemented, we will have discretionary authority to vote on any
stockholder proposal presented at the 2000 annual meeting which does not comply
with these notice requirements. Further information regarding the submission of
stockholder proposals may be obtained by writing to the secretary of Quantum.

EXPENSES OF SOLICITATION

We will pay the cost of soliciting proxies for the special meeting. In
addition to soliciting by mail, our directors, officers and other employees may
solicit proxies in person, or by telephone, facsimile transmission or other
means of electronic communication. We will also pay brokers, nominees,
fiduciaries, custodians and other persons representing beneficial owners of the
existing common stock for their reasonable expenses for

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<PAGE>

sending proxy materials to such beneficial owners and obtaining their
instructions. We have retained Corporate Investor Communications, Inc. to
perform various solicitation services and Lehman Brothers Inc. and Salomon
Smith Barney Inc. to perform various advisory and solicitation services. We
have agreed to pay Corporate Investor Communications, Inc. a customary fee for
their services. For information about compensation that we will pay Lehman
Brothers Inc. and Salomon Smith Barney Inc. for their services, you should read
"Proposal --The Tracking Stock Proposal 1-- Financial Advisors."

LEGAL OPINIONS

Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California, has rendered
opinions concerning the validity of the common stock and concerning certain tax
matters described under "Proposal 1--The Tracking Stock Proposal--United States
Federal Income Tax Considerations."

EXPERTS

Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Quantum Corporation, the combined financial statements
of the DLT & Storage System group and the combined financial statements of the
Hard Disk Drive group at March 31, 1998 and 1997, and for each of the three
years in the period ended March 31, 1998, as set forth in their reports. Ernst
& Young LLP's reports related to the financial statements of Quantum
Corporation and the Hard Disk Drive Group, as to the year ended March 31, 1998,
are based in part on the report of KPMG Peat Marwick LLP, independent auditors.
We have included these financial statements in this proxy statement and
prospectus in reliance on these reports, given on the authority of such firms
as experts in accounting and auditing.

Representatives of Ernst & Young LLP will attend the special meeting and
will have an opportunity to make a statement and to respond to appropriate
questions that you pose.

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INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Quantum Corporation -- Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors....................... F-2

Independent Auditors' Report............................................ F-3

Consolidated Statements of Operations for the Years Ended March 31,
1996, 1997 and 1998, and the Nine Months Ended December 28, 1997 and
December 27, 1998...................................................... F-4

Consolidated Balance Sheets as of March 31, 1997 and 1998 and December
27, 1998............................................................... F-5

Consolidated Statements of Cash Flows for the Years Ended March 31,
1996, 1997 and 1998, and the Nine Months Ended December 28, 1997 and
December 27, 1998...................................................... F-6

Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1996, 1997 and 1998, and the Nine Months Ended December 27,
1998................................................................... F-7

Notes to Consolidated Financial Statements.............................. F-8

DLT & Storage Systems Group -- Combined Financial Statements

Report of Ernst & Young LLP, Independent Auditors....................... F-29

Combined Statements of Operations for the Years Ended March 31, 1996,
1997 and 1998, and the Nine Months Ended December 28, 1997 and December
27, 1998............................................................... F-31

Combined Balance Sheets as of March 31, 1997 and 1998 and December 27,
1998................................................................... F-32

Combined Statements of Cash Flows for the Years Ended March 31, 1996,
1997 and 1998, and the Nine Months Ended December 28, 1997 and December
27, 1998............................................................... F-32

Combined Statements of Group Equity for the Years Ended March 31, 1996,
1997 and 1998, and the Nine Months Ended December 27, 1998............. F-33

Notes to Combined Financial Statements.................................. F-34

Hard Disk Drive Group -- Combined Financial Statements

Report of Ernst & Young LLP, Independent Auditors....................... F-51

Combined Balance Sheets as of March 31, 1997 and 1998 and December 27,
1998................................................................... F-53

Combined Statements of Group Equity for the Years Ended March 31, 1996,
1997 and 1998, and the Nine Months Ended December 27, 1998............. F-55

Notes to Combined Financial Statements.................................. F-56
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Quantum Corporation

We have audited the accompanying consolidated balance sheets of Quantum
Corporation (the "Company") as of March 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of MKE-
Quantum Components LLC ("MKQC"), a forty-nine percent equity investee of the
Company, which statements reflect a net loss of $134.8 million for the period
from May 16, 1997 (inception) through March 31, 1998. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for MKQC, is based solely on
the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Quantum Corporation at March
31, 1997 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Palo Alto, California
April 21, 1998

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Members
MKE-Quantum Components LLC:

We have audited the consolidated balance sheet of MKE-Quantum Components LLC
and subsidiaries as of March 31, 1998 and the related consolidated statements
of operations, members' equity, and cash flows for the period from May 16, 1997
(Inception) through March 31, 1998 not included herein. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MKE-Quantum
Components LLC and subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the period from May 16, 1997 (Inception)
through March 31, 1998 in conformity with generally accepted accounting
principles.

/s/ KPMG Peat Marwick LLP

Boston, Massachusetts
April 14, 1998, except for notes 6(b) and 12
which are as of June 5, 1998

F-3
<PAGE>

QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
---------------------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
---------- ---------- ---------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $4,422,726 $5,319,457 $5,805,235 $4,519,516 $3,593,315
Cost of revenue......... 3,880,309 4,550,716 4,929,714 3,809,826 2,995,964
---------- ---------- ---------- ---------- ----------
Gross profit............ 542,417 768,741 875,521 709,690 597,351
Operating expenses:
Research and
development.......... 239,116 291,332 321,741 236,797 254,859
Sales and marketing... 142,413 149,371 169,031 128,907 134,866
General and
administrative....... 65,145 86,507 89,364 75,114 61,275
Restructuring and
other charges........ 209,122 -- -- -- --
Purchased in-process
research and
development.......... -- -- -- -- 89,000
---------- ---------- ---------- ---------- ----------
655,796 527,210 580,136 440,818 540,000
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (113,379) 241,531 295,385 268,872 57,351
Interest income and
other, net............. 8,462 7,047 34,243 24,658 19,962
Interest expense........ (36,421) (47,882) (32,753) (24,135) (20,136)
Loss from investee...... -- -- (66,060) (42,222) (142,050)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (141,338) 200,696 230,815 227,173 (84,873)
Income tax provision
(benefit).............. (50,882) 52,181 60,014 59,065 1,403
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (90,456) $ 148,515 $ 170,801 $ 168,108 $ (86,276)
========== ========== ========== ========== ==========
Net income (loss) per
share:
Basic................. $ (0.87) $ 1.27 $ 1.25 $ 1.26 $ (0.54)
========== ========== ========== ========== ==========
Diluted............... $ (0.87) $ 1.04 $ 1.07 $ 1.05 $ (0.54)
========== ========== ========== ========== ==========
Weighted-average common
shares:
Basic................. 103,416 117,218 136,407 133,669 158,687
========== ========== ========== ========== ==========
Diluted............... 103,416 153,287 166,016 165,642 158,687
========== ========== ========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

QUANTUM CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
March 31,
--------------------- December 27,
1997 1998 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 345,125 $ 642,150 $ 683,011
Marketable securities.................... -- 71,573 24,425
Accounts receivable, net of allowance for
doubtful accounts of $10,610, $12,928
and $11,823 respectively................ 887,477 737,928 664,238
Inventories.............................. 252,802 315,035 259,042
Deferred taxes........................... 122,899 133,981 136,020
Other current assets..................... 80,116 124,670 88,710
---------- ---------- ----------
Total current assets...................... 1,688,419 2,025,337 1,855,446

Property, plant and equipment, less
accumulated depreciation................. 407,206 285,159 266,785
Intangible assets, less accumulated
amortization............................. 42,131 24,490 231,750
Other assets.............................. 20,507 103,425 39,587
---------- ---------- ----------
$2,158,263 $2,438,411 $2,393,568
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................... $ 502,069 $ 446,243 $ 405,737
Accrued warranty......................... 94,989 74,017 73,611
Accrued compensation..................... 63,093 60,344 55,601
Income taxes payable..................... 31,153 39,777 27,659
Current portion of long-term debt........ 44,229 935 1,001
Other accrued liabilities................ 80,045 78,920 100,102
---------- ---------- ----------
Total current liabilities................. 815,578 700,236 663,711

Deferred taxes............................ 33,587 38,668 73,945
Long-term debt............................ 177,668 39,985 64,225
Convertible subordinated debt............. 241,350 287,500 287,500
Commitments and contingencies
Redeemable preferred stock, Series B, $.01
par value; 90,000 shares issued and
outstanding at March 31, 1997; none at
March 31, 1998 and December 27, 1998..... 3,888 -- --
Stockholders' equity:
Common stock, $.01 par value; authorized:
500,000,000 shares; issued and
outstanding: 130,864,454 at March 31,
1997, 160,879,171 at March 31, 1998, and
165,941,011 at December 27, 1998........ 1,308 1,609 1,660
Capital in excess of par value........... 458,492 774,682 854,286
Retained earnings........................ 426,392 597,193 447,465
Accumulated other comprehensive income
(loss).................................. -- (1,462) 776
---------- ---------- ----------
Total stockholders' equity................ 886,192 1,372,022 1,304,187
---------- ---------- ----------
$2,158,263 $2,438,411 $2,393,568
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
---------------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(90,456) $148,515 $170,801 $168,108 $(86,276)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operations:
Restructuring and other
charges............... 208,571 -- -- -- --
Loss from investee..... -- -- 66,060 42,222 124,809
Purchased in-process
research and
development........... -- -- -- -- 89,000
Gain on sale of equity
investment............ (3,844) -- -- -- --
Depreciation........... 68,381 96,477 78,067 57,802 69,107
Amortization........... 28,727 27,959 13,532 9,332 13,812
Deferred taxes......... (54,339) 9,081 (6,001) (346) 438
Compensation related to
stock incentive
plans................. 1,414 2,391 4,236 3,099 4,064
Changes in assets and
liabilities:
Accounts receivable... (216,499) (176,370) 149,549 64,451 73,690
Inventories........... (188,444) 206,736 (62,233) (170,643) 55,993
Accounts payable...... 144,547 3,240 (55,826) 41,395 (40,506)
Income taxes payable.. (26,430) (9,841) 8,624 16,697 (12,118)
Accrued warranty...... 5,463 32,700 (20,972) (23,718) (406)
Other assets and
liabilities.......... (41,198) (28,189) (61,485) 62,246 63,972
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. (164,107) 312,699 284,352 270,645 355,579
-------- -------- -------- -------- --------
Cash flows from
investing activities:
Purchases of marketable
securities............ -- -- (71,573) -- (68,360)
Proceeds from sales of
marketable
securities............ -- -- -- -- 115,508
Purchases of equity
securities/minority
interest.............. -- (6,132) (15,000) (15,000) --
Acquisition of
intangible assets..... -- -- (25,850) (16,000) --
Proceeds from sale of
interest in recording
heads operations...... -- -- 94,000 94,000 --
Investment in property
and equipment......... (211,602) (174,977) (149,749) (124,299) (88,572)
Proceeds from
disposition of
property and
equipment............. -- 9,665 5,962 23,932 139
Proceeds from sale of
equity
investment/subsidiary.. 11,151 -- -- -- --
Proceeds from repayment
of note receivable.... -- -- 18,000 -- --
-------- -------- -------- -------- --------
Net cash used in
investing activities... (200,451) (171,444) (144,210) (37,367) (41,285)
-------- -------- -------- -------- --------
Cash flows from
financing activities:
Proceeds from long-term
credit facilities..... 393,000 330,091 -- -- 33,545
Proceeds from mortgage
loan.................. -- 42,105 -- -- --
Purchase of treasury
stock................. -- -- -- -- (305,287)
Principal payments on
long-term credit
facilities............ (330,000) (378,339) (180,977) (180,757) (26,848)
Proceeds from issuance
of common stock....... 37,207 45,261 50,360 31,442 25,157
Proceeds from issuance
of convertible
subordinated notes.... 241,350 -- 287,500 287,500 --
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............. 341,557 39,118 156,883 138,185 (273,433)
-------- -------- -------- -------- --------
Increase (decrease) in
cash and cash
equivalents............ (23,001) 180,373 297,025 371,463 40,861
Cash and cash
equivalents at
beginning of period.... 187,753 164,752 345,125 345,125 642,150
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $164,752 $345,125 $642,150 $716,588 $683,011
======== ======== ======== ======== ========
Supplemental disclosure
of cash flow
information:
Conversion of
debentures to common
stock................. $ 79,567 $132,893 $241,350 -- --
======== ======== ======== ======== ========
Note received on
disposition of
property and
equipment............. -- $ 18,000 -- -- --
======== ======== ======== ======== ========
Issuance of redeemable
preferred stock as
part of minority
interest acquisition.. -- $ 3,888 -- -- --
======== ======== ======== ======== ========
Conversion of
redeemable preferred
stock to common
stock................. -- -- $ 3,888 -- --
======== ======== ======== ======== ========
Cash paid during the
year for:
Interest............... $ 32,768 $ 48,500 $ 29,030 $ 11,793 $ 14,489
======== ======== ======== ======== ========
Income taxes, net of
(refunds)............. $ 29,789 $ 9,171 $ 62,615 $ 49,844 $ (1,246)
======== ======== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other
----------------- Excess of Retained Comprehensive Treasury
Shares Amount Par Value Earnings Income (Loss) Stock Total
-------- ------- ---------- --------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1995................... 92,328 $ 922 $ 140,232 $ 368,333 $ -- $ -- $ 509,487
Net loss................ -- -- -- (90,456) -- -- (90,456)
Conversion of
subordinated
debentures............. 8,768 88 77,732 -- -- -- 77,820
Shares issued under
employee stock purchase
plan................... 2,676 26 15,952 -- -- -- 15,978
Shares issued under
employee stock option
plans, net............. 4,620 46 21,988 -- -- -- 22,034
Compensation expense.... -- -- 1,414 -- -- -- 1,414
Tax benefits related to
stock option plans..... -- -- 8,546 -- -- -- 8,546
-------- ------- --------- --------- ------ -------- -----------
Balances at March 31,
1996................... 108,392 1,082 265,864 277,877 -- -- 544,823
Net income.............. -- -- -- 148,515 -- -- 148,515
Conversion of
subordinated
debentures............. 14,644 146 131,118 -- -- -- 131,264
Shares issued under
employee stock purchase
plan................... 3,216 32 17,370 -- -- -- 17,402
Shares issued under
employee stock option
plans, net............. 4,612 48 27,811 -- -- -- 27,859
Compensation expense and
other.................. -- -- 5,299 -- -- -- 5,299
Tax benefits related to
stock option plans..... -- -- 11,030 -- -- -- 11,030
-------- ------- --------- --------- ------ -------- -----------
Balances at March 31,
1997................... 130,864 1,308 458,492 426,392 -- -- 886,192
Comprehensive income:
Net income............. -- -- -- 170,801 -- -- 170,801
Other comprehensive
loss--foreign currency
translation
adjustments........... -- -- -- -- (1,462) -- (1,462)
-----------
Comprehensive income.... -- -- -- -- -- -- 169,339
Conversion of
subordinated
debentures............. 21,626 216 236,506 -- -- -- 236,722
Conversion of Series B
preferred shares....... 180 2 3,886 -- -- -- 3,888
Shares issued under
employee stock purchase
plan................... 3,454 35 21,442 -- -- -- 21,477
Shares issued under
employee stock option
plans, net............. 4,755 48 28,835 -- -- -- 28,883
Compensation expense and
other.................. -- -- 4,236 -- -- -- 4,236
Tax benefits related to
stock option plans..... -- -- 21,285 -- -- -- 21,285
-------- ------- --------- --------- ------ -------- -----------
Balances at March 31,
1998................... 160,879 1,609 774,682 597,193 (1,462) -- 1,372,022
Unaudited stockholders'
equity activity for the
nine months ended
December 27, 1998:
Comprehensive loss:
Net loss............... -- -- -- (86,276) -- -- (86,276)
Other comprehensive
income--foreign
currency translation
adjustments........... -- -- -- -- 2,238 -- 2,238
-----------
Comprehensive loss...... -- -- -- -- -- -- (84,038)
Shares issued under
employee stock purchase
plan................... 1,791 18 12,279 -- -- -- 12,297
Shares issued under
employee stock option
plans, net............. 1,800 18 12,844 -- -- -- 12,862
Treasury shares
repurchased............ (15,477) -- -- -- -- (305,287) (305,287)
Treasury shares reissued
for ATL acquisition.... 15,477 -- -- (63,452) -- 305,287 241,835
New shares issued for
ATL acquisition........ 1,471 15 22,973 -- -- -- 22,988
Conversion of ATL stock
options................ -- -- 22,367 -- -- -- 22,367
Compensation expense and
other.................. -- -- 4,301 -- -- -- 4,301
Tax benefits related to
stock option plans..... -- -- 4,840 -- -- -- 4,840
-------- ------- --------- --------- ------ -------- -----------
Balances at December 27,
1998 (unaudited)....... 165,941 $1,660 $854,286 $447,465 $ 776 $ -- $1,304,187
======== ======= ========= ========= ====== ======== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the nine months ended December 28, 1997 and
December 27, 1998 is unaudited.)

Note 1 Summary of Significant Accounting Policies

Nature of Business. Quantum operates its business through two separate
groups: the DLT & Storage Systems group ("DSSG") and the Hard Disk Drive group
("HDDG") as described below.

HDDG designs desktop hard disk drives to meet the storage requirements of
entry-level to high-end desktop PCs in home and business environments. HDDG
also designs high-end hard disk drives for the storage needs of network
servers, workstations and storage sub-systems.

Financial Statement Presentation. The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated. Certain amounts in prior periods have been reclassified to conform
to current presentation.

Use of Estimates. The preparation of the consolidated financial statements
of the Company in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the period. Actual results
may differ from the estimates and assumptions used in preparing the
consolidated financial statements.

Revenue Recognition. Revenue from sales of products is recognized on
shipment to customers, with provision made for estimated returns. The Company
accrues royalty revenue based on licensees' sales that incorporate certain
licensed technology.

Foreign Currency Translation and Transactions. Assets, liabilities, and
operations of foreign offices and subsidiaries are recorded based on the
functional currency of the entity. For a majority of the Company's material
foreign operations, the functional currency is the U.S. Dollar. The assets and
liabilities of foreign offices with a local functional currency are
translated, for consolidation purposes, at current exchange rates from the
local currency to the reporting currency, the U.S. Dollar. The resulting gains
or losses are reported as a component of other comprehensive income (loss)
within stockholders' equity. Although close to half of the Company's sales are
made to customers in non-U.S. locations and all of the Company's hard disk
drive products are manufactured in Japan, Singapore and Ireland by Matsushita-
Kotobuki Electronics Industries, Ltd. ("MKE"), a majority of the Company's
material transactions are denominated in U.S. dollars. Accordingly,
transaction gains or losses have been immaterial to the Company's consolidated
financial statements for all years presented. The effect of foreign currency
exchange rate fluctuations on cash was also immaterial for the years
presented. Assets and liabilities denominated in other than the functional
currency are remeasured each month with the remeasurement gain or loss
recorded in other income.

Foreign Exchange Contracts. The effect of foreign currency rate changes on
the remeasurement of certain assets and liabilities denominated in a foreign
currency are managed using foreign currency forward exchange contracts.
Foreign currency forward exchange contracts represent agreements to exchange
the currency of one country for the currency of another country at an agreed-
upon price, on an agreed-upon settlement date. Foreign currency forward
exchange contracts are accounted for by the fair value method. Foreign
currency forward exchange contracts are carried on the balance sheet at fair
value, with changes in that value recognized in other income.

F-8
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Income (Loss) Per Share. The Company has adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No.
128 established new requirements for computing and presenting earnings per
share. Under the new requirements, the method previously used to compute
earnings per share is changed and all prior periods presented have been
restated to conform to the new requirements. The new requirements eliminate
primary and fully diluted earnings per share. As a result, under the new
requirements, basic net income (loss) per share excludes any dilutive effect of
stock options. Also, the dilutive effect of stock options used to compute
diluted net income (loss) per share is based on the average market price of the
Company's common stock for the period.

Cash Equivalents and Marketable Securities. The Company considers all highly
liquid debt instruments with a maturity of 90 days or less at the time of
purchase to be cash equivalents. Cash equivalents are carried at fair value,
which approximates cost. The Company's marketable securities have maturities of
more than 90 days at the time of purchase.

The Company has classified all cash equivalents and marketable securities as
available-for-sale. Securities classified as available-for-sale are carried at
fair value with material unrealized gains and losses reported in stockholders'
equity. The cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other-than-temporary are recorded in other income or expense. The cost of
securities sold is based on the specific identification method.

Concentration of Credit Risk. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses and such losses have historically been within management's
expectations.

The Company invests its excess cash in deposits with major banks and in
money market funds and short-term debt securities of companies with strong
credit ratings from a variety of industries. These securities generally mature
within 365 days and, therefore, bear minimal risk. The Company has not
experienced any material losses on its investments. The Company limits the
amount of credit exposure to any one issuer and to any one type of investment.

Investments in Joint Ventures and Other Entities. Investments in joint
ventures and other entities are recorded in other assets. Investments in joint
ventures are accounted for by the equity method. Dividends are recorded as a
reduction of the carrying value of the investment when received.

Investments in other entities (less-than-20-percent-owned companies) that
are not represented by marketable securities are carried at cost less write-
downs for declines in value that are judged to be other-than-temporary. These
valuation losses are recorded in other income when identified. Dividends are
recorded in other income when received.

Inventories. Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.

Property, Plant and Equipment. Property, plant and equipment are carried at
cost, less accumulated depreciation and amortization computed on a straight-
line basis over the lesser of the estimated useful lives of the assets
(generally three to ten years for machinery, equipment, furniture, and
leasehold improvements; and twenty-five years for buildings) or the lease term.

F-9
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and 1998, and December 27, 1998 was $61 million, $23 million, and $12 million,
respectively. Intangible assets are reviewed for impairment whenever events or
circumstances indicate impairment might exist, or at least annually.

Warranty Expense. The Company generally warrants its products against
defects for a period of one to five years. A provision for estimated future
costs relating to warranty expense is recorded when products are shipped and
revenue recognized.

Advertising Expense. The Company accrues for co-operative advertising as the
related revenue is earned, and other advertising expense is recorded as
incurred. Advertising expense for the years ended March 31, 1996, 1997 and
1998, was $25 million, $35 million, and $41 million, respectively.

Stock-Based Compensation. The Company accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB Opinion No. 25").

Risks and Uncertainties. As is typical in the information storage industry,
a significant portion of the Company's customer base is concentrated with a
small number of OEMs, and the Company is not able to predict whether there will
be any significant change in the demand for its customers' products. The loss
of any one of the Company's more significant customers could have a material
adverse effect on the Company's results of operations. A limited number of disk
and tape drive storage products make up a significant majority of the Company's
sales, and due to increasingly rapid technological change in the industry, the
Company's future depends on its ability to develop and successfully introduce
new products. Quantum utilizes a third party, MKE, to manufacture all of the
products it sells. The Company relies on MKE's ability to bring new products
rapidly to volume production and to meet stringent quality standards. MKE
manufactures Quantum's drives in Japan, Singapore, and Ireland. If MKE were
unable to satisfy Quantum's production requirements, the Company would not have
an alternative source to meet the demand for its products without substantial
delay and disruption to its operations. The actual results with regard to
warranty expenditures could have a material unfavorable impact on the Company
if the actual rate of unit failure or the cost to repair a unit is greater than
what the Company has used in estimating the warranty expense accrual.

Comprehensive Income. In June 1997, the FASB released Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements and has
been implemented by the Company.

Segment Information. In June 1997, The FASB released Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS 131 changes the way companies report selected
segment information in annual financial statements and also requires companies
to report selected segment information in interim financial reports to
stockholders. SFAS 131 has been implemented by the Company.

Unaudited Interim Financial Statements. The unaudited condensed consolidated
interim financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the Securities and Exchange Commission's rules and regulations
for interim reporting. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the unaudited
consolidated interim financial statements include all adjustments necessary to
present fairly such interim financial information.

F-10
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 2 Financial Instruments

Available-For-Sale Securities

The following is a summary of available-for-sale securities, all of which
are classified as cash equivalents and marketable securities:

<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Corporate commercial paper and bank
notes.............................. $25,338 $25,338 $103,346 $103,339
U.S. Treasury securities and
obligations of U.S. government
agencies........................... 25,455 25,455 165,364 165,360
Other............................... 83 83 4,613 4,613
------- ------- -------- --------
$50,876 $50,876 $273,323 $273,312
======= ======= ======== ========
</TABLE>

The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1997 and 1998, and therefore no
gross unrealized gains or losses were recorded in stockholders' equity. The
estimated fair value of available-for-sale securities is based on market
quotations. There were no sales of available-for-sale securities in fiscal
years 1997 or 1998. At March 31, 1998, the average available-for-sale portfolio
duration was approximately 23 days, and no security had a maturity longer than
one year.

Derivative Financial Instruments

Foreign Exchange--Asset and Liability Management. During the periods covered
by the financial statements, the Company utilized foreign currency forward
exchange contracts to manage the effects of foreign currency remeasurement
arising from certain assets and liabilities denominated in a foreign currency.
The gains and losses from market rate changes on these contracts, which are
intended to offset the losses and gains on certain foreign currency denominated
assets and liabilities, are recorded monthly in other income.

F-11
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following is a summary of foreign currency forward contracts held for
asset and liability management purposes:
<TABLE>
<CAPTION>
March 31,
--------------------------------
1997 1998
-------------- -----------------
(In millions, except for forward
rates)
<S> <C> <C>
Currency to be sold....................... Yen Yen
Maturity dates............................ April-May 1997 April-May 1998
Foreign currency notional amount.......... 3,300 yen 1,600 yen
Weighted average forward rate............. 122.22 132.23
U.S. dollar notional amount............... $27.0 $12.1
U.S. dollar equivalent.................... $26.5 $12.3
Fair value................................ $ 0.5 $(0.2)
<CAPTION>
March 31,
--------------------------------
1997 1998
-------------- -----------------
(In millions, except for forward
rates)
<S> <C> <C>
Currency to be purchased.................. -- Swiss Franc
Maturity dates............................ -- April 1998
Foreign currency notional amount.......... -- 26.5 Swiss Francs
Weighted average forward rate............. -- 1.51
U.S. dollar notional amount............... -- $17.5
U.S. dollar equivalent.................... -- $17.4
Fair value................................ -- $(0.1)
</TABLE>

The fair values for foreign currency forward contracts represent the
difference between the contracted forward rate and the quoted fair value of the
underlying Yen or Swiss Francs at the balance sheet dates. The Company
generally does not require collateral from the counterparties to foreign
currency forward contracts.

Carrying Amount and Fair Values of Financial Instruments

The estimated fair value of the Company's borrowings are summarized as
follows:

<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1997 1998
-------------------------- --------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Convertible subordinated
debt................... $241.4 $433.8 $287.5 $281.8
Revolving credit line... 110.0 110.0 -- --
Term loan............... 56.3 56.3 -- --
Mortgage loan........... 41.8 41.3 40.9 41.8
Equipment loan.......... 13.9 15.2 -- --
</TABLE>

The fair values for the convertible subordinated debt were based on the
quoted market price at the balance sheet dates. Fair values for the revolving
credit agreement and term loan approximated their carrying amounts, since
interest rates on these borrowings were adjusted periodically to reflect market
interest rates. The fair value of the mortgage and equipment loans were based
on the estimated present value of the remaining payments, utilizing risk-
adjusted market interest rates of similar instruments at the balance sheet
dates.

F-12
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 3 Inventories

Inventories consisted of:

<TABLE>
<CAPTION>
March 31,
----------------- December 27,
1997 1998 1998
-------- -------- ------------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Materials and purchased parts............... $ 28,663 $ 53,894 $ 72,911
Work in process............................. 48,005 44,303 25,300
Finished goods.............................. 176,134 216,838 160,831
-------- -------- --------
$252,802 $315,035 $259,042
======== ======== ========
</TABLE>

In the third quarter of fiscal year 1998, the Company recorded a $103
million charge to cost of revenue related to the transition to a new generation
of its high-end disk drive products, primarily for inventory write-offs and
adjustments and losses related to firm inventory purchase commitments.

Note 4 Property, Plant and Equipment

Property, plant and equipment consisted of:

<TABLE>
<CAPTION>
March 31,
------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Machinery and equipment................................ $446,677 $328,402
Furniture and fixtures................................. 27,453 31,307
Buildings and leasehold improvements................... 151,418 140,629
Land................................................... 8,349 5,302
-------- --------
633,897 505,640
Less accumulated depreciation and amortization......... (226,691) (220,481)
-------- --------
$407,206 $285,159
======== ========
</TABLE>

Note 5 Business Combination (unaudited)

On September 28, 1998, the Company completed the acquisition of ATL. ATL
designs, manufactures, markets and services automated tape libraries for the
networked computer market. ATL's products incorporate DLTtape drives as well as
ATL's proprietary IntelliGrip(TM) automation technology. The acquisition has
been accounted for as a purchase with a total cost of $335 million. The
acquisition was completed with the issuance of 16.9 million shares of Quantum
common stock valued at $265 million on the date of acquisition in exchange for
all outstanding shares of ATL, the conversion of outstanding ATL stock options
into options valued at $22 million to purchase 1.8 million shares of Quantum
common stock and the assumption of $45 million of ATL liabilities. The Company
also recognized deferred tax liabilities of $33 million. ATL's results of
operations are included in the financial statements from the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the date of acquisition.

F-13
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

use. Therefore, the Company has expensed the amount of the purchase price
allocated to in-process research and development, estimated at $89 million as
of the date of acquisition. This amount and the other components of the
purchase price allocation are preliminary. The remaining identifiable
intangible assets will be amortized on a straight-line basis over periods
ranging from two to fifteen years.

The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects,
and discounting the net cash flows back to their present value using a discount
rate of 20%, which represents a premium to the Company's cost of capital. The
expected revenue assumes an average compound annual revenue growth rate of 37%
during fiscal years 1999 to 2007. Expected total revenue from the purchased in-
process projects peak in fiscal year 2002 and then begin to decline as other
new products are expected to be introduced. These projections are based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions. If products are not
successfully developed, the Company may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.

The following unaudited pro forma information has been prepared assuming
that the acquisition had taken place at the beginning of fiscal year 1998. The
pro forma financial information is not necessarily indicative of the combined
results that would have occurred had the acquisition taken place at the
beginning of the periods, nor is it necessarily indicative of results that may
occur in the future.

<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
March 31, December 27,
1998 1998
---------- ------------
(In thousands)
<S> <C> <C>
Revenue........................................... $5,866,237 $3,633,626
Net income (loss)................................. $ 152,345 $ (7,986)
Net income (loss) per share:
Basic........................................... $ 1.10 $ (0.05)
Diluted......................................... $ 0.95 $ (0.05)
</TABLE>

Note 6 Loss from Investee

On May 16, 1997, the Company sold a controlling interest in its recording
heads operations to MKE, thereby forming a recording heads joint venture with
MKE, MKE-Quantum Components LLC ("MKQC"). The operations were involved in the
research, development, and manufacture of MR recording heads used in the
Company's hard disk drive products manufactured by MKE.

Quantum contributed recording heads assets and operations, and leased
certain premises to MKQC. The recording heads assets that Quantum contributed
to MKQC consisted of inventory, equipment, accounts receivable, and
intangibles, which aggregated $211 million. MKQC assumed $51 million of debt
payable to Quantum and assumed $24 million of third-party liabilities. MKE paid
Quantum $94 million and contributed $110 million to MKQC in exchange for a 51%
majority ownership interest in MKQC. Quantum retained a 49% minority ownership
interest in MKQC. Quantum employees who were involved in the recording heads
operations became employees of MKQC.

MKE and the Company shared pro rata in MKQC's results of operations and
agreed to share pro rata in any capital funding requirements.

F-14
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Subsequent to May 16, 1997, the Company accounted for its 49% interest in
MKQC using the equity method of accounting. The results of the Company's
involvement in recording heads through May 15, 1997, were consolidated.

The Company provided support services to MKQC. The support services were
mainly finance, human resources, legal, and computer support. MKQC reimbursed
the Company for the estimated cost of the services.

Summarized Financial Information

The following is summarized financial information for MKQC:

<TABLE>
<CAPTION>
Period from
May 16, 1997, to
March 31, 1998
----------------
(In thousands)
<S> <C>
Revenue................................................... $ 165,775
Gross profit (loss)....................................... (43,677)
Loss from continuing operations........................... (131,693)
Net loss.................................................. (134,816)
<CAPTION>
March 31, 1998
----------------
<S> <C>
Current assets............................................ $ 49,520
Noncurrent assets......................................... 213,230
Current liabilities....................................... 94,707
Note payable to Quantum................................... 50,823
Other noncurrent liabilities.............................. 14,964
</TABLE>

On October 28, 1998, the Company and MKE agreed to dissolve MKQC because
MKQC had not been able to produce MR recording heads on a cost-effective basis.
In connection with the dissolution, MKE has taken control and ownership of
MKQC's manufacturing operations in Batam, Indonesia; MKQC's domestic operations
have substantially ceased as of December 27, 1998; and its domestic assets are
in liquidation. In the third quarter of fiscal year 1999, the Company recorded
a $101 million loss from investee which includes a write-off of Quantum's
investment in MKQC; a write-down of Quantum's interest in facilities in
Louisville, Colorado, and Shrewsbury, Massachusetts that were occupied by MKQC;
warranty costs resulting from MR recording heads manufactured by MKQC; and
Quantum's 49% pro rata share in funding MKQC's repayment of its obligations,
bank debt, accounts payable, and other liabilities through June 1999 when the
liquidation of MKQC is expected to be completed.

MKQC's net loss for the six months ended September 27, 1998 was $84 million
on revenue of $62 million. The Company's 49% interest in this net loss was $41
million.

F-15
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt

Quantum's debt includes the following:

<TABLE>
<CAPTION>
March 31,
-----------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
7% convertible subordinated notes........................ $ -- $287,500
5% convertible subordinated debentures................... 241,350 --
Revolving credit line, 7.8% average rate, payable through
September 1998.......................................... 110,000 --
Term loan, 7.7% average rate, payable through September
1998.................................................... 56,250 --
Equipment loan, 7.6% average rate, payable through March
1999.................................................... 13,875 --
Mortgage................................................. 41,772 40,920
-------- --------
463,247 328,420
Less short-term portion of debt.......................... 44,229 935
-------- --------
Total long-term debt and convertible subordinated debt... $419,018 $327,485
======== ========
</TABLE>

In June 1997, the Company entered into an unsecured senior credit facility
that provides a $500 million revolving credit line and expires in June 2000. At
the option of the Company, borrowings under the revolving credit line bear
interest at either LIBOR plus a margin determined by a total funded debt ratio,
or a base rate, with option periods of one to six months. As of December 27,
1998 and March 31, 1998, there was no outstanding balance drawn on this line.

In July 1997, the Company issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option of
the holder at any time prior to maturity, unless previously redeemed, into
shares of the Company's common stock at a conversion price of $46.325 per
share. The notes are redeemable at the Company's option on or after August 1,
1999, and prior to August 1, 2001, under certain conditions related to the
price of the Company's common stock. Subsequent to August 1, 2001, the notes
are redeemable at the Company's option at any time. In the event of certain
changes involving all or substantially all of the Company's common stock, the
notes would become redeemable at the option of the holder. Redemption prices
range from 107% of the principal to 100% at maturity. The notes are unsecured
obligations subordinated in right of payment to all existing and future senior
indebtedness of the Company.

In March 1998, the Company called for redemption of all of the Company's
outstanding 5% convertible subordinated debentures due March 1, 2003, at a
redemption price of $1,035.71 per $1,000 principal amount of debenture. At the
time of the call for redemption, the entire original issue amount of the
debentures of approximately $241 million was outstanding. Holders of the
debentures exercised their option to convert debentures held into 21,626,327
shares of the Company's common stock at a conversion price of approximately
$11.16 per share. No debentures were redeemed for cash.

The previously outstanding revolving credit line, term loan, and equipment
loan, which had carrying amounts of $110 million, $56 million, and $14 million,
respectively, as of March 31, 1997, were repaid and terminated in the first
quarter of fiscal year 1998.

In September 1996, the Company entered into a $42 million mortgage related
to certain domestic facilities at an effective interest rate of approximately
10.1%. The term of the mortgage is 10 years, with monthly payments based on a
20-year amortization period, and a balloon payment at the end of the 10-year
term. The debt is secured by specified real estate.

F-16
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Payments required on long-term debt outstanding at March 31, 1998, are $0.9
million in fiscal year 1999, $1.0 million in fiscal year 2000, $1.1 million in
fiscal year 2001, $1.2 million in fiscal year 2002 and $1.3 million in fiscal
year 2003.

In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line. The revolving credit line is co-terminous
with the Company's $500 million revolving credit line, expiring in June 2000.
At the option of ATL, borrowings under the revolving credit line bear interest
at either LIBOR plus a margin determined by a total funded debt ratio of the
Company, or a base rate, with option periods of one to six months. At December
27, 1998, $25 million was outstanding on ATL's revolving credit line.

Note 8 Redeemable Preferred Stock

In fiscal year 1998, the holder of the 90,000 shares of Redeemable
Convertible Participating Series B Preferred Stock exercised its right to
convert the shares to Quantum common stock. The Company issued 180,000 shares
of its common stock pursuant to the conversion.

Note 9 Stock Incentive Plans

Long-Term Incentive Plan. The Company has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates of
the Company. The Plan has available and reserved for future issuance 14.6
million shares and allows for an annual increase in the number of shares
available for issuance, subject to a limitation. Available for grant as of
March 31, 1998, were 1,105,000 shares. Options under the Plan expire no later
than ten years from the grant date and generally vest over four years.
Restricted stock granted under the Plan generally vests over two to three
years. In fiscal years 1996, 1997 and 1998, the Company recorded compensation
expense of $899,000, $1,916,000 and $3,179,000, respectively, related to
restricted stock granted pursuant to stock purchase rights under the Plan. The
number of shares of restricted stock granted under the Plan were 65,500 shares,
354,290 shares, and 596,000 shares, in fiscal years 1998, 1997 and 1996,
respectively, at an exercise price of $.01.

Stock Option Plans. The Company has Stock Option Plans (the "Plans") under
which 600,000 shares of common stock was reserved for future issuance at March
31, 1998 to directors of the Company. Options under the Plans are granted at
prices determined by the Board of Directors, but at not less than the fair
market value, and accordingly no compensation accounting has been required at
the original date of grant. Options currently expire no later than ten years
from the grant date and generally vest ratably over one to four years. At
March 31, 1998, options with respect to 532,500 shares were available for
grant.

Stock Option Summary Information. A summary of activity relating to the
Long-Term Incentive Plan and the Stock Option Plans follows:

<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1996 1997 1998
---------------------- --------------------- ---------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
------- ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 16,104 $5.71 16,746 $6.75 16,354 $ 7.52
Granted................. 6,528 $7.90 5,850 $8.59 6,163 $19.80
Canceled................ (1,252) $6.85 (1,564) $7.94 (718) $14.11
Exercised............... (4,634) $4.76 (4,678) $5.97 (4,794) $ 6.10
------ ------ ------
Outstanding at end of
period................. 16,746 $6.75 16,354 $7.52 17,005 $12.09
====== ====== ======
Exercisable at end of
period................. 8,214 $5.92 8,514 $6.53 8,332 $ 8.84
====== ====== ======
</TABLE>

F-17
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The range of exercise prices for options outstanding at March 31, 1998 was
$1.11 to $40.38. Compensation expense of $525,000, $475,000 and $1,057,000 was
recorded in fiscal years 1996, 1997 and 1998, respectively, on accelerated
stock options under the Plans.

The following tables summarize information about options outstanding at
March 31, 1998:

<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------------
Shares Outstanding at Weighted-Average
March 31, 1998 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ --------------------- ----------------- ----------------
<C> <C> <S> <C>
$ 1.11 -- $ 7.22 5,546 6.38 $ 6.41
$ 7.32 -- $15.22 5,551 7.62 $ 9.49
$17.38 -- $40.38 5,908 9.15 $19.87
------
17,005 7.75 $12.09
======
</TABLE>

<TABLE>
<CAPTION>
Options Exercisable
-------------------------------------------
Shares
Exercisable at
March 31, 1998 Weighted-Average
Range of Exercise Prices (000s) Exercise Price
------------------------ -------------- ----------------
<C> <C> <S>
$ 1.11 -- $ 7.22 4,168 $ 6.16
$ 7.32 -- $15.22 3,084 $ 9.17
$17.38 -- $40.38 1,080 $18.25
-----
8,332 $ 8.84
=====
</TABLE>

Expiration dates ranged from July 25, 1998 to March 25, 2008 for options
outstanding at March 31, 1998. Prices for options exercised during the three-
year period ended March 31, 1998, ranged from $0.01 to $19.81. Proceeds
received by the Company from exercises are credited to common stock and capital
in excess of par value.

At December 27, 1998, options outstanding and exercisable were 22.5 million
and 11.2 million, respectively. Completing the acquisition of ATL included the
conversion of outstanding ATL stock options into options to purchase 1.8
million shares of Quantum common stock. These options relate to the Company's
assumption of ATL's 1996 Stock Incentive Plan and 1997 Stock Incentive Plan,
collectively referred to as the "ATL Plans." Under the terms of the ATL Plans,
eligible key employees, directors and consultants received options to purchase
shares of ATL's previously outstanding common stock at prices not less than
100% for incentive stock options and not less than 85% for nonqualified stock
options of the fair value on the date of grant as determined by ATL's Board of
Directors. Options under ATL Plans vest over a three year period and expire ten
years after date of grant or 90 days after termination of employment.
Subsequent to completing the acquisition of ATL, no additional grants may be
made from the ATL Plans. See Note 5 for more information on the acquisition of
ATL.

Stock Purchase Plan. The Company has an employee stock purchase plan (the
"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. The
Purchase Plan is qualified under Section 423 of the Internal Revenue Code. Of
the 22.8 million shares authorized to be issued under the plan, 3,922,000
shares were available for issuance at March 31, 1998. Employees purchased
2,676,000 shares, 3,216,000 shares, and 3,454,000 shares under the Purchase
Plan in fiscal years 1996, 1997, and 1998, respectively. The weighted average
exercise price of stock purchased under the Purchase Plan was $5.98, $5.41 and
$6.22 in fiscal years 1996, 1997, and 1998, respectively.

F-18
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Pro forma information. Pro forma information regarding net income and
earnings per share is required by SFAS No. 123. This information is required to
be determined as if the Company had accounted for its employee stock options
(including shares issued under the Long-Term Incentive Plan, Stock Option
Plans, and the Stock Purchase Plan, collectively called "options") granted
subsequent to March 31, 1995, under the fair value method of that statement.

The fair value of options granted in fiscal years 1996, 1997 and 1998
reported below have been estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
Long-Term Incentive Plan
and Stock Option Plans Stock Purchase Plan
----------------------------------- -----------------------------------
Fiscal 1996 Fiscal 1997 Fiscal 1998 Fiscal 1996 Fiscal 1997 Fiscal 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years).. 2.8 2.9 2.9 1.1 0.8 1.6
Risk-free interest
rate................... 6.7% 6.0% 6.25% 6.7% 6.0% 6.13%
Stock price volatility.. .50 .50 .56 .50 .50 .53
Dividend yield.......... -- -- -- -- -- --
</TABLE>

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of the options.

The following is a summary of weighted-average grant date fair values:

<TABLE>
<CAPTION>
Weighted-Average Grant Date Fair
Value
-----------------------------------
Fiscal 1996 Fiscal 1997 Fiscal 1998
----------- ----------- -----------
<S> <C> <C> <C>
Options granted under the Long-Term
Incentive
Plan and Stock Option Plans......... $ 3.30 $ 3.67 $ 8.39
Restricted stock granted under the
Long-Term
Incentive Plan...................... $10.70 $14.28 $23.68
Shares granted under the Stock
Purchase Plan....................... $ 2.66 $ 2.46 $ 3.56
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma net income and earnings per share follows:

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Net income (in thousands).................... $(101,600) $132,678 $139,907
========= ======== ========
Net income (loss) per share:
Basic...................................... $ (0.98) $ 1.13 $ 1.03
========= ======== ========
Diluted.................................... $ (0.98) $ 0.93 $ 0.88
========= ======== ========
</TABLE>

Since pro forma compensation cost relates to all periods over which the
options vest, the initial impact on pro forma net income may not be
representative of option expense in subsequent years, when the effect of the
amortization of multiple awards would be reflected.

F-19
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10 Common Stock and Stockholder Rights Plan

Effective April 28, 1997, the number of authorized shares of common stock
increased to 500,000,000 from 150,000,000. The number of authorized shares of
Preferred Stock is 4,000,000.

The Company has a stockholder rights plan (the "Rights Plan") that provides
existing stockholders with the right to purchase 1/1000 preferred share for
each common share held in the event of certain changes in Quantum's ownership.
Subject to certain exceptions, if any person or group becomes the beneficial
owner of 20% or more of the outstanding common stock each right will entitle
its holder to purchase 1/1000 preferred share or, under certain circumstances,
shares of common stock with a market value twice the exercise price of the
right. The Rights Plan may serve as a deterrent to takeover tactics that are
not in the best interests of stockholders. There are 1,000,000 preferred shares
reserved for issuance under the Rights Plan.

Note 11 Earnings Per Share

SFAS No. 128 replaced the previously reported primary and fully diluted net
income (loss) per share with basic and diluted net income (loss) per share.
Unlike primary net income (loss) per share, basic net income (loss) per share
excludes any dilutive effects of options and convertible securities. Diluted
net income (loss) per share is very similar to the previously reported fully
diluted net income (loss) per share.

The following table sets forth the computation of basic and diluted net
income (loss) per share:

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
--------------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Numerator:
Numerator for basic net
income (loss) per
share--income (loss)
available to common
stockholders........... $(90,456) $148,515 $170,801 $168,108 $(86,276)
Effect of dilutive
securities:
6 3/8% convertible
subordinated
debentures............. -- 3,135 -- -- --
5% convertible
subordinated
debentures............. -- 7,240 6,668 5,430 --
-------- -------- -------- -------- --------
Numerator for diluted
net income (loss) per
share--income (loss)
available to common
stockholders........... $(90,456) $158,890 $177,469 $173,538 $(86,276)
======== ======== ======== ======== ========
Denominator:
Denominator for basic
net income (loss) per
share--weighted average
shares................. 103,416 117,218 136,407 133,669 158,687
Effect of dilutive
securities:
Outstanding options..... -- 5,388 9,600 10,227 --
Series B preferred
stock.................. -- 23 90 120 --
6 3/8% convertible
subordinated
debentures............. -- 9,032 -- -- --
5% convertible
subordinated
debentures............. -- 21,626 19,919 21,626 --
-------- -------- -------- -------- --------
Denominator for diluted
net income (loss) per
share--adjusted weighted
average shares and
assumed conversions..... 103,416 153,287 166,016 165,642 158,687
======== ======== ======== ======== ========
Basic net income (loss)
per share.............. $ (0.87) $ 1.27 $ 1.25 $ 1.26 $ (0.54)
======== ======== ======== ======== ========
Diluted net income
(loss) per share....... $ (0.87) $ 1.04 $ 1.07 $ 1.05 $ (0.54)
======== ======== ======== ======== ========
</TABLE>

F-20
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The computation of diluted net income (loss) per share for the nine months
ended December 27, 1998 and December 28, 1997 and fiscal year 1998 excluded the
effect of the 7% convertible subordinated notes issued in July 1997, which are
convertible into 6,206,152 shares at a conversion price of $46.325 per share,
because the effect would have been anti-dilutive.

Options to purchase 22,540,250 shares of common stock were outstanding at
December 27, 1998. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
the nine months ended December 27, 1998, because the effect would have been
anti-dilutive.

The computation of diluted net loss per share for fiscal year 1996 excluded
the effect of the 6 3/8% convertible subordinated debentures issued in April
1992, which were called for redemption in December 1996, because the effect
would have been anti-dilutive. Options to purchase 16,708,062 shares of common
stock were outstanding at March 31, 1996. However, the corresponding weighted
average outstanding options were not included in the computation of diluted net
loss per share for the year ended March 31, 1996, because the effect would have
been anti-dilutive.

Note 12 Restructuring and Other Expenses

In the fourth quarter of fiscal year 1996, the Company recorded a
restructuring charge of $209 million, associated with the transition of its
high-end hard disk drive product manufacturing to MKE. As part of the
transition, the Company discontinued its manufacture of these products and
completed the shutdown of the related facilities in fiscal year 1997. The
related manufacturing work force was terminated in fiscal year 1997. The
Company closed, sold, or disposed of certain high-end hard disk drive
manufacturing facilities and equipment located in Penang, Malaysia, and
Milpitas, California, which as of March 31, 1996, were carried at a fair value
of approximately $30 million, net of estimated cost to dispose. Facilities sold
included the manufacturing building in Malaysia, which occurred in the second
quarter of fiscal year 1997.

The restructuring charge provided for costs associated with employee
termination benefits for over 2,200 employees that were associated with the
high-end hard disk drive product manufacturing process; the difference between
the carrying value and estimated fair value on disposal of high-end hard disk
drive manufacturing property and equipment; and incremental impairments in the
carrying value of certain high-end hard disk drive product inventories and
losses on supplier commitments arising directly from the decision to stop
manufacturing, as follows:

<TABLE>
<CAPTION>
(In millions)
<S> <C>
Employee termination benefits.............................. $ 10
Write-down of capital assets to fair value................. 45
Write-down of inventories to net realizable value and
losses on supplier commitments............................ 144
Other exit costs........................................... 10
----
$209
====
</TABLE>

The activities contemplated in the transition and related restructuring
reserve were substantially completed at March 31, 1997, and fully completed at
March 31, 1998 without a material change in the estimated cost of such
activities.

Note 13 Savings and Investment Plan

Substantially all of the regular domestic employees are eligible to make
contributions to the Company's 401(k) savings and investment plan. The Company
matches a percentage of the employees' contributions and may also make
additional discretionary contributions to the plan. Company contributions were
$4 million in fiscal year 1996, $5 million in fiscal year 1997, and $6 million
in fiscal year 1998.

F-21
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 14 Income Taxes

The income tax provision consists of the following:

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<C> <S> <C> <C> <C>
Federal: Current........................... $(31,160) $ 13,344 $ 19,343
Deferred.......................... (44,686) (10,289) 12,396
-------- -------- --------
(75,846) 3,055 31,739
-------- -------- --------
State: Current........................... 9,691 9,669 19,814
Deferred.......................... (9,691) 1,441 (17,803)
-------- -------- --------
-- 11,110 2,011
-------- -------- --------
Foreign: Current........................... 24,926 20,088 26,857
Deferred.......................... 38 17,928 (593)
-------- -------- --------
24,964 38,016 26,264
-------- -------- --------
Income tax provision (benefit).............. $(50,882) $ 52,181 $ 60,014
======== ======== ========
</TABLE>

The tax benefits associated with nonqualified stock options, disqualifying
dispositions of stock options, and employee stock purchase plan shares reduce
taxes currently payable as shown above by $8 million, $11 million, and $21
million in fiscal years 1996, 1997, and 1998, respectively. Such benefits are
credited to capital in excess of par value when realized.

The Company's income tax provision differs from the amount computed by
applying the federal statutory rate of 35% to income before income taxes as
follows:

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1996 1997 1998
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate................ $(49,468) $70,243 $80,788
State income tax, net of federal benefit..... -- 7,222 1,307
Research and development credit.............. -- -- (7,680)
Foreign earnings taxed at less than U.S.
rates....................................... (3,545) (17,169) (15,813)
Valuation allowance.......................... (4,855) (8,431) --
Other items.................................. 6,986 316 1,412
-------- ------- -------
$(50,882) $52,181 $60,014
======== ======= =======
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

F-22
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Significant components of deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
Year Ended March
31,
--------------------
1997 1998
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods...................... $ 42,236 $ 57,630
Accrued warranty expense......................... 53,995 33,824
Allowance for doubtful accounts.................. 3,625 4,563
Distribution reserves............................ 6,821 7,002
Restructuring charges............................ 26,230 20,422
Other accruals and reserves not currently
deductible for tax purposes..................... 16,873 27,927
Depreciation methods............................. 17,079 24,634
Amortization methods............................. 29,275 30,711
Valuation allowance.............................. (6,375) --
--------- ---------
189,759 206,713
--------- ---------
Deferred tax liabilities:
Foreign inventory valuation methods.............. (17,912) (17,322)
Tax on unremitted foreign earnings net of foreign
tax credits and foreign deferred taxes.......... (68,435) (77,180)
Other............................................ (14,100) (16,899)
--------- ---------
(100,447) (111,401)
--------- ---------
Net deferred tax asset............................. $ 89,312 $ 95,312
========= =========
</TABLE>

The valuation allowance for deferred tax assets decreased approximately $1
million, $9 million and $6 million during fiscal years 1996, 1997 and 1998.

Pretax income from foreign operations was $124 million, $241 million, and
$139 million for the fiscal years ended March 31, 1996, 1997, and 1998,
respectively. U.S. taxes have not been provided for unremitted foreign earnings
of $327 million. The residual U.S. tax liability if such amounts were remitted
would be approximately $81 million.

The Company's federal income tax returns have been examined by the Internal
Revenue Service (IRS) for all years through 1993. All issues have been resolved
with no material effect, and the IRS has closed those years. The Company's
federal tax returns for the years 1994-1996 are presently under examination by
the IRS. Management believes sufficient accruals have been provided in prior
years for any adjustments that may result for the years under examination.

Note 15 Litigation

The Company and certain of its current and former officers and directors
have been named as defendants in two class-action lawsuits, one filed on August
28, 1996, in the Superior Court of Santa Clara County, California, and one
filed on August 30, 1996, in the U.S. District Court of the Northern District
of California. The plaintiff in both class actions purports to represent a
class of all persons who purchased the Company's common stock between February
26, 1996, and June 13, 1996. The complaints allege that the defendants violated
various federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about the Company and that
individual defendants sold shares of the Company's stock based on material
nonpublic information.

F-23
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On February 25, 1997, in the Santa Clara County action, the Court sustained
defendants' demurrer to most of the causes of action in the complaint, with
leave to amend. At a June 12, 1997 demurrer hearing in state court, the judge
dismissed the action as to four of the individual defendants with prejudice and
as to three of the individual defendants without prejudice. The demurrer as to
the Company was overruled. The Court heard oral argument on plaintiffs' motion
for class certification on November 4, 1997. On March 4, 1998, the Court
entered an order denying plaintiffs' motion without prejudice. Limited
discovery is proceeding.

With respect to the federal action, defendants filed their motion to dismiss
on April 16, 1997. On August 14, 1997, the Court granted defendants' motion to
dismiss without prejudice. On September 11, 1997, plaintiff filed an amended
complaint. Defendants filed a motion to dismiss the amended complaint on
October 24, 1997. The hearing on defendants' motion took place on February 3,
1998. On April 16, 1998, the Court granted defendants' motion to dismiss with
prejudice. On May 19, 1998, plaintiff filed a notice of appeal of the District
Court's dismissal in the United States Court of Appeals for the Ninth Circuit.
On September 25, 1998, plaintiff filed his opening appellate brief. Defendants
filed their answering brief on November 30, 1998. Plaintiff's reply brief was
filed on January 14, 1999.

Certain of the Company's current and former officers and directors were also
named as defendants in a derivative lawsuit, which was filed on November 8,
1996, in the Superior Court of Santa Clara County. The derivative complaint was
based on factual allegations substantially similar to those alleged in the
class-action lawsuits. Defendants' demurrer to the derivative complaint was
sustained without prejudice on April 14, 1997. Plaintiffs did not file an
amended complaint. On August 7, 1997, the Court issued an order of dismissal
and entered final judgment dismissing the complaint.

On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. On Quantum's motion, the suit has been
moved to the Northern District of California. The plaintiff, Papst Licensing
GmbH, owns at least 24 U.S. patents which it asserts that the Company has
infringed. The Company has studied many of these patents before and, of the
patents it has studied, believes that defenses of patent invalidity and non-
infringement can be asserted. However, Quantum has not yet had time to make a
complete study of all the patents asserted by Papst and there can be no
assurance that the Company has not infringed on these or other patents owned by
Papst. The final results of this litigation, as with any litigation, are
uncertain. If required, there can be no assurance that licenses to any
technology owned by Papst or any other third party alleging infringement could
be obtained on commercially reasonable terms if at all. Adverse resolution of
the Papst litigation or any other intellectual property litigation could
subject the Company to substantial liabilities and require it to refrain from
manufacturing certain products which could have a material adverse effect on
the Company's business, financial condition or results of operations. In
addition, the costs of engaging in the Papst litigation or other intellectual
property litigation could be substantial, regardless of the outcome.

The Company is also subject to other legal proceedings and claims that arise
in the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity
of the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.

Note 16 Commitments

The Company leases its present facilities under non-cancelable operating
lease agreements for periods of up to 15 years. Some of the leases have renewal
options ranging from one to ten years and contain provisions for maintenance,
taxes, or insurance.

F-24
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Rent expense was $30 million, $26 million, and $27 million for the fiscal
years ended March 31, 1996, 1997, and 1997, respectively.

Future minimum lease payments under operating leases are as follows:

<TABLE>
<CAPTION>
Year ended March 31, (In thousands)
<S> <C>
1999...................................................... $ 28,657
2000...................................................... 28,026
2001...................................................... 26,524
2002...................................................... 25,338
2003...................................................... 22,335
Thereafter................................................ 100,928
--------
Total future minimum lease payments....................... $231,808
========
</TABLE>

Note 17 Business Segment and Geographic Information

Quantum Corporation's reportable segments are its two business groups, HDDG
and DSSG. HDDG consists of desktop and high-end hard disk drives. DSSG consists
of DLTtape drives and media, autoloaders and libraries, and solid state storage
systems. The Company directly markets its products to computer manufacturers
and through a broad range of distributors, resellers, and systems integrators.

The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates segment performance based on net profit or loss not including non-
recurring gains or losses. Segment assets include those items that can be
specifically identified with or reasonably allocated to a particular segment.

<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- ----------------------
HDDG DSSG Total HDDG DSSG Total HDDG DSSG Total
------ ---- ------ ------ ---- ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $4,087 $336 $4,423 $4,591 $728 $5,319 $4,615 $1,190 $5,805
Interest and other
income/(expense)....... (4) (24) (28) (15) (26) (41) 4 (3) 1
Depreciation and
amortization........... 85 12 97 109 15 124 68 24 92
Loss from investee...... -- -- -- -- -- -- (66) -- (66)
Income tax expense
(benefit).............. (74) 23 (51) (19) 72 52 (83) 143 60
Segment profit (loss)... (125) 35 (90) 41 107 149 (53) 224 171
Segment assets.......... 1,741 238 1,979 1,721 438 2,159 1,646 792 2,438
Expenditures for long-
lived assets........... 191 21 212 164 11 175 119 31 150
</TABLE>

F-25
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------
December 28, 1997 December 27, 1998
-------------------- --------------------
HDDG DSSG Total HDDG DSSG Total
------ ---- ------ ------ ---- ------
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $3,586 $934 $4,520 $2,681 $913 $3,593
Interest and other income
(expense).................... 3 (3) -- 6 (6) --
Depreciation and
amortization................. 50 17 67 54 29 83
Loss from investee............ 42 -- 42 142 -- 142
Income tax expense (benefit).. (56) 115 59 (101) 103 1
Segment profit (loss)......... (12) 180 168 (151) 65 (86)
Segment assets................ 1,857 772 2,629 1,456 937 2,394
Expenditures for long-lived
assets....................... 96 28 124 64 25 89
</TABLE>

Product Information

Revenue for reportable segments is composed of the following:

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
-------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
------ ------ ------ ------------ ------------
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C>
Hard Disk Drive Group:
Desktop hard disk
drives................. $3,350 $4,004 $3,981 $3,099 $2,295
High-end hard disk
drives................. 737 587 634 487 386
------ ------ ------ ------ ------
Total................... $4,087 $4,591 $4,615 $3,586 $2,681
====== ====== ====== ====== ======
DLTtape & Storage Systems
Group:
DLTtape drives.......... $ 194 $ 392 $ 784 $ 636 $ 604
DLTtape media product... 71 221 284 206 154
DLTtape media
royalties.............. -- 8 27 12 85
Tape libraries and
service................ 59 96 87 73 85
Solid state storage
systems................ 12 11 8 7 4
Intra-group
elimination............ -- -- -- -- (19)
------ ------ ------ ------ ------
Total................... $ 336 $ 728 $1,190 $ 934 $ 913
====== ====== ====== ====== ======
</TABLE>

Intra-group elimination represents intra-group sales of DLTtape drives
incorporated into DSSG's tape libraries.

F-26
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Geographic Information

Revenue and long-lived assets by region are as follows (revenue is
attributed to regions based on the location of customers):

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
Long-Lived Long-Lived Long-Lived
Revenue Assets Revenue Assets Revenue Assets
------- ---------- ------- ---------- ------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States.... $2,131 $385 $2,513 $374 $3,048 $271
Europe........... 1,281 15 1,620 13 1,689 13
Asia-Pacific..... 791 30 1,082 62 993 25
Latin America.... 220 -- 104 -- 75 --
------ ---- ------ ---- ------ ----
Total.......... $4,423 $430 $5,319 $449 $5,805 $309
====== ==== ====== ==== ====== ====
</TABLE>

<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
December 28, 1997 December 27, 1998
------------------ ------------------
Long-Lived Long-Lived
Revenue Assets Revenue Assets
------- ---------- ------- ----------
(in millions)
(unaudited)
<S> <C> <C> <C> <C>
United States........................ $2,350 $267 $1,870 $592
Europe............................... 1,312 13 978 14
Asia-Pacific......................... 802 20 657 29
Latin America........................ 56 -- 88 --
------ ---- ------ ----
Total.............................. $4,520 $300 $3,593 $635
====== ==== ====== ====
</TABLE>

One customer of both of the Company's reportable segments accounted for 10%
or more of the Company's consolidated revenue in fiscal years 1996, 1997 and
1998, and in the nine months ended December 28, 1997 and December 27, 1998.
Revenue from this customer represented $866 million, $856 million, $1,036
million, $831 million and $553 million of the Company's consolidated revenue in
the respective periods. Another customer of both of the Company's reportable
segments accounted for 10% or more of the Company's consolidated revenue in
fiscal years 1997 and 1998, and in the nine months ended December 28, 1997 and
December 27, 1998. Revenue from this customer represented $562 million, $759
million, $534 million and $500 million of the Company's consolidated revenue in
the respective periods. One customer of HDDG accounted for 10% or more of the
Company's consolidated revenue in fiscal year 1996, representing $473 million
of the Company's consolidated revenue in this period.

F-27
<PAGE>

QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 18 Unaudited Quarterly Consolidated Financial Data

<TABLE>
<CAPTION>
Year Ended March 31, 1999
-----------------------------------
1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- -----------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Revenue................. $1,103,023 $1,164,711 $1,325,581
Gross profit............ 166,373 191,889 239,089
Net income (loss)....... 3,010 17,264 (106,551)
Net income (loss) per
share:
Basic................. 0.02 0.11 (0.64)
Diluted............... 0.02 0.11 (0.64)
<CAPTION>
Year Ended March 31, 1998
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue................. $1,446,144 $1,553,491 $1,519,881 $1,285,719
Gross profit............ 275,934 298,084 135,673 165,831
Net income (loss)....... 96,514 103,778 (32,183) 2,692
Net income (loss) per
share:
Basic................. 0.74 0.77 (0.24) 0.02
Diluted............... 0.61 0.63 (0.24) 0.02
<CAPTION>
Year Ended March 31, 1997
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue................. $1,153,502 $1,124,144 $1,477,951 $1,563,860
Gross profit............ 141,279 135,478 215,457 276,527
Net income (loss)....... 3,843 4,573 52,435 87,664
Net income (loss) per
share:
Basic................. 0.03 0.04 0.45 0.69
Diluted............... 0.03 0.04 0.36 0.56
</TABLE>

The results of operations for the third quarter of fiscal year 1999 included
the effect of a $101 million charge related to the dissolution of MKQC, and
an $89 million charge related to purchased in-process research and
development related to the acquisition of ATL.
The results of operations for the third quarter of fiscal year 1998 included
the effect of a $103 million special charge related to the Company's high-
end hard disk drive products.

The results of operations for the fourth quarter of fiscal year 1998 were
impacted by the reduction in estimated bonus accrued earlier in the fiscal
year.

F-28
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Quantum Corporation

We have audited the accompanying combined balance sheets of the DLT &
Storage Systems group (as described in Note 1) ("DSSG") of Quantum Corporation
as of March 31, 1997 and 1998 and the related combined statements of
operations, group equity, and cash flows for each of the three years in the
period ended March 31, 1998. These financial statements are the responsibility
of Quantum Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DSSG at March 31, 1997 and
1998 and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles.

As more fully described in Note 1 to these financial statements, DSSG is a
business group of Quantum Corporation; accordingly, the combined financial
statements of DSSG should be read in conjunction with the audited consolidated
financial statements of Quantum Corporation.

/s/ Ernst & Young LLP

Palo Alto, California
April 21, 1998

F-29
<PAGE>

DLT & STORAGE SYSTEMS GROUP

COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
------------------------------ -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
-------- -------- ---------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Product revenue......... $335,565 $719,925 $1,162,725 $921,312 $827,938
Royalty revenue......... -- 8,088 27,075 12,495 84,717
-------- -------- ---------- -------- --------
Total revenue........... 335,565 728,013 1,189,800 933,807 912,655
Cost of revenue......... 208,955 457,674 687,586 542,202 506,005
-------- -------- ---------- -------- --------
Gross profit............ 126,610 270,339 502,214 391,605 406,650
Operating expenses:
Research and
development.......... 24,968 30,039 62,825 43,634 72,085
Sales and marketing... 14,776 23,770 47,244 32,549 49,348
General and
administrative....... 4,425 11,470 22,363 16,735 22,553
Purchased in-process
research and
development.......... -- -- -- -- 89,000
-------- -------- ---------- -------- --------
44,169 65,279 132,432 92,918 232,986
Income from operations.. 82,441 205,060 369,782 298,687 173,664
Interest income and
other, net............. (642) 2,387 18,707 13,230 7,633
Interest expense........ (23,511) (28,347) (21,835) (16,090) (13,424)
-------- -------- ---------- -------- --------
Income before income
taxes.................. 58,288 179,100 366,654 295,827 167,873
Income tax provision.... 23,315 71,640 142,995 115,373 102,749
-------- -------- ---------- -------- --------
Net income.............. $ 34,973 $107,460 $ 223,659 $180,454 $ 65,124
======== ======== ========== ======== ========
Pro forma net income per
share:
Basic................. $ 1.64 $ 0.41
========== ========
Diluted............... $ 1.37 $ 0.39
========== ========
Pro forma weighted-
average common shares:
Basic................. 136,407 158,687
========== ========
Diluted............... 170,125 171,487
========== ========
</TABLE>

See accompanying notes to combined financial statements.

F-30
<PAGE>

DLT & STORAGE SYSTEMS GROUP

COMBINED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
March 31,
------------------ December 27,
1997 1998 1998
--------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................... $ 143,346 $388,910 $200,394
Accounts receivable, net of allowance for
doubtful accounts of $1,698, $2,586 and
$3,311 respectively......................... 154,668 152,080 246,901
Inventories.................................. 47,197 103,028 113,497
Deferred taxes............................... 31,269 43,819 45,861
Other current assets......................... 4,523 6,582 8,342
--------- -------- --------
Total current assets.......................... 381,003 694,419 614,995
Property, plant and equipment, less
accumulated depreciation..................... 39,114 57,399 72,724
Intangible assets, less accumulated
amortization................................. 6,811 15,366 225,730
Deferred taxes................................ 1,065 -- --
Other assets.................................. 9,932 24,886 23,746
--------- -------- --------
$ 437,925 $792,070 $937,195
========= ======== ========
Liabilities and Group Equity
Current liabilities:
Accounts payable............................. $ 47,782 $ 44,919 $ 76,286
Accrued warranty............................. 29,102 33,778 32,320
Accrued compensation......................... 11,801 15,985 19,011
Current portion of long-term debt............ 29,486 623 667
Other accrued liabilities.................... 6,894 12,720 21,130
--------- -------- --------
Total current liabilities..................... 125,065 108,025 149,414
Deferred taxes................................ -- 145 32,945
Long-term debt................................ 118,445 26,657 42,817
Convertible subordinated debt................. 160,900 191,667 191,667
Commitments and contingencies
Redeemable preferred stock.................... 2,592 -- --
Group equity.................................. 30,923 465,576 520,352
--------- -------- --------
$ 437,925 $792,070 $937,195
========= ======== ========
</TABLE>

See accompanying notes to combined financial statements.

F-31
<PAGE>

DLT & STORAGE SYSTEMS GROUP

COMBINED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
---------------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 34,973 $107,460 $223,659 $180,454 $ 65,124
Adjustments to
reconcile net income
to net cash provided
by (used in)
operations:
Purchased in-process
research and
development........... -- -- -- -- 89,000
Depreciation........... 5,160 7,780 15,484 11,010 19,118
Amortization........... 7,300 7,649 8,160 5,601 10,302
Deferred taxes......... (11,550) (17,821) (11,340) -- (2,042)
Compensation related to
stock incentive
plans................. 943 1,594 2,824 2,066 2,709
Changes in assets and
liabilities:
Accounts receivable... (57,805) (75,341) 2,588 (31,846) (94,821)
Inventories........... (29,973) 2,905 (55,831) (51,254) (10,469)
Accounts payable...... 2,469 23,602 (2,863) 9,887 31,367
Accrued warranty...... 11,111 15,141 4,676 5,151 (9,458)
Other assets and
liabilities.......... 26,280 19,532 15,300 32,544 40,786
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. (11,092) 92,501 202,657 163,613 141,616
-------- -------- -------- -------- --------
Cash flows from
investing activities:
Purchases of equity
securities/minority
interest.............. -- (2,732) (15,000) (15,000) --
Acquisition of
intangible assets..... -- -- (16,000) (12,000) --
Investment in property
and equipment......... (20,571) (11,442) (30,682) (28,512) (25,093)
-------- -------- -------- -------- --------
Net cash used in
investing activities... (20,571) (14,174) (61,682) (55,512) (25,093)
-------- -------- -------- -------- --------
Cash flows from
financing activities:
Proceeds from long-term
credit facilities..... 262,000 220,061 -- -- 25,212
Repayment of inter-
group loan............ (165,815) -- -- -- --
Inter-group payment for
common stock issued... -- -- -- -- (15,118)
Proceeds from mortgage
loan.................. -- 28,070 -- -- --
Purchase of treasury
stock................. -- -- -- -- (305,287)
Principal payments on
long-term credit
facilities............ (220,000) (252,226) (120,651) (120,504) (26,617)
Proceeds from issuance
of common stock....... 24,805 30,174 33,573 20,961 16,771
Proceeds from issuance
of convertible
subordinated notes.... 160,900 -- 191,667 191,667 --
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............. 61,890 26,079 104,589 92,124 (305,039)
-------- -------- -------- -------- --------
Increase (decrease) in
cash and cash
equivalents............ 30,227 104,406 245,564 200,225 (188,516)
Cash and cash
equivalents at
beginning of period.... 8,713 38,940 143,346 143,346 388,910
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $ 38,940 $143,346 $388,910 $343,571 $200,394
======== ======== ======== ======== ========
Supplemental disclosure
of cash flow
information:
Conversion of
debentures to common
stock................. -- -- $160,900 -- --
======== ======== ======== ======== ========
Issuance of redeemable
preferred stock as
part of minority
interest acquisition.. -- $ 2,592 -- -- --
======== ======== ======== ======== ========
Conversion of
redeemable preferred
stock to common
stock................. -- -- $ 2,592 -- --
======== ======== ======== ======== ========
Cash paid during the
year for:
Interest.............. $ 14,505 $ 27,182 $ 19,353 $ 7,862 $ 9,659
======== ======== ======== ======== ========
Income taxes, net of
(refunds)............ $ 3,146 $ 1,550 $ 44,747 $ 44,227 $(21,289)
======== ======== ======== ======== ========
</TABLE>

See accompanying notes to combined financial statements.

F-32
<PAGE>

DLT & STORAGE SYSTEMS GROUP

COMBINED STATEMENTS OF GROUP EQUITY
(In thousands)

<TABLE>
<CAPTION>
Retained Group
Other Earnings Equity
--------- --------- ---------
<S> <C> <C> <C>
Balances at March 31, 1995................... $(184,458) $ (93) $(184,551)
Net income................................... -- 34,973 34,973
Shares issued under employee stock purchase
plan........................................ 10,652 -- 10,652
Shares issued under employee stock option
plans, net.................................. 14,689 -- 14,689
Compensation expense......................... 943 -- 943
Tax benefits related to stock option plans... 5,697 -- 5,697
--------- --------- ---------
Balances at March 31, 1996................... (152,477) 34,880 (117,597)
Net income................................... -- 107,460 107,460
Shares issued under employee stock purchase
plan........................................ 11,601 -- 11,601
Shares issued under employee stock option
plans, net.................................. 18,573 -- 18,573
Compensation expense and other............... 3,533 -- 3,533
Tax benefits related to stock option plans... 7,353 -- 7,353
--------- --------- ---------
Balances at March 31, 1997................... (111,417) 142,340 30,923
Net income................................... -- 223,659 223,659
Conversion of subordinated debentures........ 157,815 -- 157,815
Conversion of Series B preferred shares...... 2,592 -- 2,592
Shares issued under employee stock purchase
plan........................................ 14,318 -- 14,318
Shares issued under employee stock option
plans, net.................................. 19,255 -- 19,255
Compensation expense and other............... 2,824 -- 2,824
Tax benefits related to stock option plans... 14,190 -- 14,190
--------- --------- ---------
Balances at March 31, 1998................... 99,577 365,999 465,576
Unaudited group equity activity for the nine
months ended December 27, 1998:
Net income................................... -- 65,124 65,124
Shares issued under employee stock purchase
plan........................................ 8,198 -- 8,198
Shares issued under employee stock option
plans, net.................................. 8,575 -- 8,575
Treasury shares repurchased.................. (305,287) -- (305,287)
Treasury shares reissued for ATL
acquisition................................. 305,287 (63,452) 241,835
New shares issued for ATL acquisition........ 15,326 -- 15,326
Conversion of ATL stock options.............. 14,911 -- 14,911
Compensation expense and other............... 2,867 -- 2,867
Tax benefits related to stock option plans... 3,227 -- 3,227
--------- --------- ---------
Balances at December 27, 1998 (unaudited).... $ 152,681 $ 367,671 $ 520,352
========= ========= =========
</TABLE>

See accompanying notes to combined financial statements.

F-33
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS

(Information with respect to the nine months ended December 28, 1997 and
December 27, 1998 is unaudited.)

Note 1 Summary of Significant Accounting Policies

The accompanying combined financial statements should be read in conjunction
with the consolidated financial statements of Quantum Corporation ("Quantum").

Nature of Business. Quantum operates its business through two separate
groups: the DLT & Storage Systems group ("DSSG") and the Hard Disk Drive group
("HDDG"). DSSG and HDDG are referred to as the "groups."

HDDG designs desktop hard disk drives to meet the storage requirements of
entry-level to high-end desktop PCs in home and business environments. HDDG
also designs high-end hard disk drives for the demanding storage needs of
network servers, workstations and storage sub-systems.

The Board of Directors (the "Board") of Quantum has recommended stockholder
approval of a proposal (the "tracking stock proposal") that would create two
classes of common stock intended to reflect separately the performance of DSSG
and HDDG. Under the tracking stock proposal, Quantum's Certificate of
Incorporation would be amended and restated (the "Restated Certificate of
Incorporation") to (i) designate a new class of Quantum Corporation--DSSG
Common Stock, $.01 par value per share, (ii) designate a new class of Quantum
Corporation--HDDG common stock, $.01 par value per share , and (iii) reclassify
each authorized share of existing common stock, $.01 par value per share as one
share of DSSG stock and one-half share of HDDG stock.

The combined financial statements of the groups comprise all of the accounts
included in the corresponding consolidated financial statements of Quantum. The
separate group combined financial statements give effect to the accounting
policies that will be applicable upon implementation of the tracking stock
proposal. The separate DSSG and HDDG financial statements have been prepared on
a basis that management believes to be reasonable and appropriate and include
(i) the historical balance sheets, results of operations, and cash flows of
businesses that comprise each of the groups, with all significant intragroup
transactions and balances eliminated, (ii) in the case of DSSG's financial
statements, corporate assets and liabilities of Quantum and related
transactions identified with DSSG, including allocated portions of Quantum's
debt and selling, general and administrative costs, and (iii) in the case of
HDDG's financial statements, corporate assets and liabilities of Quantum and
related transactions identified with HDDG, including allocated portions of
Quantum's debt and selling, general and administrative costs.

Holders of DSSG stock and HDDG stock will be stockholders of a single
company. DSSG and HDDG are not separate legal entities. As a result,
stockholders will continue to be subject to all of the risks of an investment
in Quantum and all of Quantum's business, assets and liabilities. The issuance
of DSSG stock and HDDG stock and the allocation of assets or liabilities and
stockholders' equity between DSSG and HDDG will not result in a distribution or
spin-off to stockholders of any of Quantum's assets or liabilities and will not
affect ownership of any of Quantum's assets or responsibility for Quantum's
liabilities or those of Quantum's subsidiaries. The assets Quantum attributes
to one group could be subject to the liabilities of the other group. If Quantum
is unable to satisfy one group's liabilities out of the assets attributed to
it, Quantum may be required to satisfy those liabilities with assets Quantum
has attributed to the other group. Holders of DSSG stock and HDDG stock will
have only the rights customarily held by common stockholders of Quantum and

F-34
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

will not have any rights related to their corresponding group except as set
forth in provisions relating to dividend and liquidation rights and
requirements for a mandatory dividend, redemption or conversion upon the
disposition of all or substantially all of the assets of their corresponding
group, or have any right to vote on matters as a separate voting group other
than in limited circumstances as provided under Delaware law or by Nasdaq
rules. The relative voting power of DSSG stock and HDDG stock will fluctuate
from time to time, with each share of DSSG stock having one vote and each share
of HDDG stock having a number of votes, based upon the ratio, over a specified
period, of the average market values of one share of DSSG stock and of one
share of HDDG stock. This formula is intended to give each class of common
stock a number of votes proportionate to its aggregate market capitalization at
the time of any vote. Accordingly, changes in the market value of DSSG stock
and HDDG stock will affect the relative voting rights of a class of common
stock. It is expected that initially the holders of DSSG stock will have a
substantial majority of the voting power of Quantum.

Financial effects arising from one group that affect the Quantum's
consolidated results of operations or financial condition could, if
significant, affect the results of operations or financial condition of the
other group and the market price of the class of common stock relating to the
other group. Any net losses of DSSG or HDDG, and dividends or distributions on,
or repurchases of, DSSG stock or HDDG stock, or repurchases of certain
preferred stock, will reduce the funds of Quantum legally available for payment
of dividends on the DSSG stock.

The Board may at any time, in its sole discretion and without stockholder
approval, determine to convert the common stock related to one group into the
common stock related to the other group at a 10% premium during the first five
years following the implementation of the tracking stock proposal and without
any premium thereafter. The Board may also effect such a conversion at no
premium if, based on the legal opinion of Quantum's tax counsel, it is more
likely than not that for United States federal income tax purposes (i) Quantum
or its stockholders are, or at any time in the future will be, subject to tax
upon the issuance of shares of either DSSG stock or HDDG stock, or (ii) either
DSSG stock or HDDG stock is not, or at any time in the future will not be,
treated as stock of Quantum. In the case of certain dispositions of all or
substantially all of the assets of one group, the Board may determine to
convert the common stock of such group into the common stock of the other group
at a 10% premium during the first five years following the implementation of
the tracking stock proposal and without any premium thereafter. Any conversion
at a premium would dilute the interests in Quantum of the holders of the class
of common stock being issued in the conversion. In addition, any such
conversion of a class of common stock into another class of common stock would
preclude holders of both classes of common stock from retaining their
investment in a security that is intended to reflect separately the performance
of the relevant group.

The Board may modify or rescind our policies with respect to the allocation
of corporate overhead, taxes, debt, interest and other matters, or may adopt
additional policies in its sole discretion without stockholder approval.

DSSG's combined financial statements reflect the application of the
management and allocation policies adopted by the Board to various corporate
activities, as described below.

Financing Activities. Quantum manages most financial activities of DSSG and
HDDG on a centralized basis. Such financial activities include the investment
of surplus cash, the issuance and repayment of short-term and long-term debt,
the issuance and repurchase of common stock, and the issuance and repurchase of
any preferred stock.

At December 27, 1998, $235 million of Quantum's debt was allocated to DSSG
and $118 million was allocated to HDDG. The Board has adopted the following
financing policy that will affect the combined

F-35
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

statements of DSSG and HDDG: Quantum will allocate its debt between the groups
("pooled debt") or, if Quantum so determines, in its entirety to a particular
group. Quantum will allocate preferred stock, if issued, in a similar manner.

Cash allocated to one group that is used to repay pooled debt or redeem
pooled preferred stock decreases such group's allocated portion of the pooled
debt or preferred stock. Cash or other property allocated to one group that is
transferred to the other group, if so determined by the Board, decreases the
transferring group's allocated portion of the pooled debt or preferred stock
and, correspondingly, increases the recipient group's allocated portion of the
pooled debt or preferred stock.

Pooled debt bears interest for group financial statement purposes at a rate
equal to the weighted average interest rate of the debt calculated on a
quarterly basis and applied to the average pooled debt balance during the
period. Preferred stock, if issued and if pooled in a manner similar to the
pooled debt, may bear dividends for group financial statement purposes at a
rate based on the weighted average dividend rate of the preferred stock
similarly calculated and applied. Any expense related to increases in pooled
debt or preferred stock is reflected in the weighted average interest or
dividend rate of such pooled debt or preferred stock as a whole.

Debt for a particular financing allocated in its entirety to one group,
bears interest for group financial statement purposes at the rate determined by
the Board. For preferred stock allocated in its entirety to one group, the
dividend cost to that group is determined in a similar manner. If the interest
or dividend cost is higher than Quantum's actual cost, the other group receives
a credit for an amount equal to the difference as compensation for the use of
Quantum's credit capacity. Any expense related to debt or preferred stock that
is allocated in its entirety to a group is allocated in whole to that group.

Cash or other property that Quantum allocated to one group that is
transferred to the other group is, if so determined by the Board, accounted for
either as a short-term loan or as a long-term loan. Short-term loans and,
unless Quantum's board determines otherwise, long-term loans bear interest at a
rate equal to the weighted average interest rate of Quantum's pooled debt. If
Quantum does not have any pooled debt, the Board determines the rate of
interest for such loan. The Board establishes the terms on which long-term
loans between the groups is made, including interest rate if not based on
Quantum's weighted average interest rate, amortization schedule, maturity and
redemption terms.

Although Quantum may allocate its debt and preferred stock between groups,
the debt and preferred stock remain obligations of Quantum and all stockholders
of Quantum are subject to the risks associated with those obligations.

Allocation of Support Activities. DSSG is charged for specifically
identified costs of certain support activities based upon DSSG's use of such
activities. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of support activities attributable to DSSG. Such allocated support activities
included certain selling and marketing, executive management, human resources,
corporate finance, legal and corporate planning costs. The total of these
allocations were $8 million, $14 million, and $28 million in fiscal year 1996,
1997 and 1998, respectively. It is not practicable to provide a detailed
estimate of the expenses which would be recognized if DSSG were a separate
entity.

Allocation of Federal and State Income Taxes. The federal income taxes of
Quantum and the subsidiaries which own assets allocated between the groups are
determined on a consolidated basis. Consolidated federal income tax provisions
and related tax payments or refunds are allocated between the groups based
principally on the taxable income and tax credits directly attributable to each
group, as if each group were a stand-alone entity. Such allocations reflect
each group's contribution (whether positive or

F-36
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

negative) to Quantum's consolidated federal taxable income and the consolidated
federal tax liability and tax credit position. Tax benefits that cannot be used
by the group generating those benefits but can be used on a consolidated basis
are credited to the group that generated such benefits. Accordingly, the
amounts of taxes payable or refundable allocated to each group may not
necessarily be the same as that which would have been payable or refundable had
each group filed a separate income tax return.

Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a consolidated or combined basis or on a
separate corporation basis. State income tax provisions and related tax
payments or refunds determined on a consolidated or combined basis are
allocated between the groups based on their respective contributions to such
consolidated or combined state taxable incomes. State and local income tax
provisions and related tax payments which are determined on a separate
corporation basis are allocated between the groups in a manner designed to
reflect the respective contributions of the groups to the corporation's
separate state or local taxable income.

The discussion of DSSG's income tax provision (Note 11) should be read in
conjunction with Quantum's consolidated financial statements and notes thereto.

Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. Actual results may differ from the
estimates and assumptions used in preparing the combined financial statements.

Revenue Recognition. Revenue from sales of products is recognized on
shipment to customers, with provision made for estimated returns. DSSG accrues
royalty revenue based on licensees' sales that incorporate certain licensed
technology.

Foreign Currency Transactions. Assets, liabilities, and operations of
foreign offices and subsidiaries are recorded based on the functional currency
of the entity. For a majority of DSSG's material foreign operations, the
functional currency is the U.S. Dollar. In addition, a majority of DSSG's
material transactions are denominated in U.S. dollars. Accordingly, transaction
gains or losses have been immaterial to the financial statements for all years
presented. The effect of foreign currency exchange rate fluctuations on cash
was also immaterial for the years presented. Assets and liabilities denominated
in other than the functional currency are remeasured each month with the
remeasurement gain or loss recorded in other income.

Foreign Exchange Contracts. The effect of foreign currency rate changes on
the remeasurement of certain assets and liabilities denominated in a foreign
currency are managed using foreign currency forward exchange contracts. Foreign
currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method. Foreign currency forward
exchange contracts are carried on the balance sheet at fair value, with changes
in that value recognized in other income.

Net Income Per Share. Historical income per share is omitted from the
statements of operations because DSSG stock was not part of the capital
structure of Quantum for the periods presented. Following the implementation of
the tracking stock proposal, the method of calculating income per share for the
DSSG stock will reflect the terms of the Restated Certificate of Incorporation
and will be computed by dividing the net income of DSSG by the weighted average
number of shares of DSSG stock outstanding during the applicable period. The
effects of assuming issuance of DSSG stock on a pro forma basis under existing
long-term incentive, stock option, and stock purchase plans will be dilutive.
Pro forma income per share, reflecting the DSSG stock issued to be under the
tracking stock proposal, is presented in DSSG's statements of operations.

F-37
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Cash Equivalents. Highly liquid debt instruments with a maturity of 90 days
or less at the time of purchase are considered to be cash equivalents. Cash
equivalents are carried at fair value, which approximates cost. Marketable
securities have maturities of more than 90 days at the time of purchase. Cash
equivalents and marketable securities have been classified as available-for-
sale. Securities classified as available-for-sale are carried at fair value
with material unrealized gains and losses reported in group equity. The cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other-than-
temporary are recorded in other income or expense. The cost of securities sold
is based on the specific identification method.

Concentration of Credit Risk. Quantum performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral from
its customers. Reserves are maintained for potential credit losses and such
losses have historically been within management's expectations.

Quantum invests its excess cash in deposits with major banks and in money
market funds and short-term debt securities of companies with strong credit
ratings from a variety of industries. These securities generally mature within
365 days and, therefore, bear minimal risk. Quantum has not experienced any
material losses on its investments. Quantum, by corporate policy, limits the
amount of credit exposure to any one issuer and to any one type of investment.

Investments. Investments in entities (less-than-20-percent-owned companies)
that are not represented by marketable securities are carried at cost less
write-downs for declines in value that are judged to be other-than-temporary.
These valuation losses are recorded in other income when identified. Dividends
are recorded in other income when received.

Inventories. Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.

Acquired Intangibles. Goodwill and other acquired intangible assets are
being amortized over their estimated useful lives, which range from two to
fifteen years. The accumulated amortization at March 31, 1997 and 1998 and
December 27, 1998 was $12 million, $17 million, and $8 million, respectively.
Intangible assets are reviewed for impairment whenever events or circumstances
indicate impairment might exist, or at least annually.

Warranty Expense. DSSG generally warrants its products against defects for a
period of one to three years. A provision for estimated future costs relating
to warranty expense is recorded when products are shipped and revenue
recognized.

Advertising Expense. DSSG accrues for co-operative advertising as the
related revenue is earned, and other advertising expense is recorded as
incurred. Advertising expense for the years ended March 31, 1996, 1997 and
1998, was $2 million, $11 million, and $15 million, respectively.

Stock-Based Compensation. DSSG accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB Opinion No. 25").

F-38
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Risks and Uncertainties. As is typical in the information storage industry,
a significant portion of DSSG's customer base is concentrated with a small
number of OEMs, and DSSG is not able to predict whether there will be any
significant change in the demand for its customers' products. The loss of any
one of DSSG's more significant customers could have a material adverse effect
on DSSG's results of operations. A limited number of tape drive storage
products make up a significant majority of DSSG's sales, and due to
increasingly rapid technological change in the industry, DSSG's future depends
on its ability to develop and successfully introduce new products.

Unaudited Interim Financial Statements. The unaudited condensed interim
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the Securities and Exchange Commission's rules and regulations for interim
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of DSSG's management, the unaudited
combined interim financial statements include all adjustments necessary to
present fairly such interim financial information.

Note 2 Financial Instruments

Available-For-Sale Securities

Quantum's cash and cash equivalents, including certain available-for-sale
securities, are allocated between DSSG and HDDG. However, marketable securities
have been allocated to HDDG.

The following is a summary of Quantum's consolidated available-for-sale
securities, all of which are classified as cash equivalents and marketable
securities:

<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Corporate commercial paper and bank
notes.............................. $ 25,338 $25,338 $103,346 $103,339
U.S. Treasury securities and
obligations of U.S. government
agencies........................... 25,455 25,455 165,364 165,360
Other............................... 83 83 4,613 4,613
-------- ------- -------- --------
$ 50,876 $50,876 $273,323 $273,312
======== ======= ======== ========
</TABLE>

The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1997 and 1998, and therefore no
gross unrealized gains or losses were recorded in Quantum's stockholders'
equity. The estimated fair value of available-for-sale securities is based on
market quotations. There were no sales of available-for-sale securities in
fiscal years 1997 or 1998. At March 31, 1998, the average available-for-sale
portfolio duration was approximately 23 days, and no security had a maturity
longer than one year.

F-39
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Derivative Financial Instruments

Foreign Exchange--Asset and Liability Management. During the periods covered
by the financial statements, Quantum utilized foreign currency forward exchange
contracts to manage the effects of foreign currency remeasurement arising from
certain assets and liabilities denominated in a foreign currency. The gains and
losses from market rate changes on these contracts, which are intended to
offset the losses and gains on certain foreign currency denominated assets and
liabilities, are recorded monthly in other income. Such gains and losses have
been immaterial to DSSG.

Carrying Amount and Fair Values of Financial Instruments

The estimated fair value of Quantum's borrowings (pooled debt) are
summarized as follows:

<TABLE>
<CAPTION>
March 31,
-------------------------------
1997 1998
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(In millions)
<S> <C> <C> <C> <C>
Convertible subordinated debt............. $241.4 $433.8 $287.5 $281.8
Revolving credit line..................... 110.0 110.0 -- --
Term loan................................. 56.3 56.3 -- --
Mortgage loan............................. 41.8 41.3 40.9 41.8
Equipment loan............................ 13.9 15.2 -- --
</TABLE>

Note 3 Inventories

Inventories consisted of:

<TABLE>
<CAPTION>
March 31,
---------------- December 27,
1997 1998 1998
------- -------- ------------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Materials and purchased parts................ $21,853 $ 51,578 $ 70,086
Work in process.............................. 15,623 29,687 19,172
Finished goods............................... 9,721 21,763 24,239
------- -------- --------
$47,197 $103,028 $113,497
======= ======== ========
</TABLE>

F-40
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 4 Property, Plant, and Equipment

Property, plant, and equipment consisted of:

<TABLE>
<CAPTION>
March 31,
------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Machinery and equipment............................... $ 34,269 $ 57,084
Furniture and fixtures................................ 2,595 4,088
Buildings and leasehold improvements.................. 17,612 24,302
Land.................................................. 686 674
-------- --------
55,162 86,148
Less accumulated depreciation and amortization........ (16,048) (28,749)
-------- --------
$ 39,114 $ 57,399
======== ========
</TABLE>

Note 5 Business Combination (unaudited)

On September 28, 1998, Quantum completed the acquisition of ATL. ATL
designs, manufactures, markets and services automated tape libraries for the
networked computer market. ATL's products incorporate DLTtape drives as well as
ATL's proprietary IntelliGrip automation technology. The acquisition has been
accounted for as a purchase with a total cost of $335 million. The acquisition
was completed with the issuance of 16.9 million shares of Quantum common stock
valued at $265 million on the date of acquisition in exchange for all
outstanding shares of ATL, the conversion of outstanding ATL stock options into
options valued at $22 million to purchase 1.8 million shares of Quantum common
stock and the assumption of $45 million of ATL liabilities. DSSG also
recognized deferred tax liabilities of $33 million. ATL's results of operations
are included in the financial statements from the date of acquisition, and the
assets and liabilities acquired were recorded based on their fair values as of
the date of acquisition.

The excess of the purchase price over the fair value of the net tangible
assets acquired has been allocated to the following identifiable intangible
assets: goodwill, trademarks and trade names, original equipment manufacturer
and value added reseller customer relationships, non-compete agreements,
workforce in place, developed technology and in-process research and
development. As of the acquisition date, technological feasibility of the in-
process technology has not been established, and the technology has no
alternative future use. Therefore, DSSG has expensed the amount of the purchase
price allocated to in-process research and development, estimated at $89
million as of the date of acquisition. This amount and the other components of
the purchase price allocation are preliminary. The remaining identifiable
intangible assets will be amortized on a straight-line basis over periods
ranging from two to fifteen years.

The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects,
and discounting the net cash flows back to their present value using a discount
rate of 20%, which represents a premium to Quantum's cost of capital. The
expected revenue assumes an average compound annual revenue growth rate of 37%
during fiscal years 1999 to 2007. Expected total revenues from the purchased
in-process projects peak in fiscal year 2002 and then begin to decline as other
new products are expected to be introduced. These projections are based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions. If products are not
successfully developed, DSSG may not realize the value assigned to the in-
process research and development projects. In addition, the value of the other
acquired intangible assets may also become impaired.

F-41
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 31, 1998 December 27, 1998
-------------- -----------------
(In thousands)
<S> <C> <C>
Total revenue............................. $1,250,802 $952,966
Net income ............................... $ 208,443 $144,496
</TABLE>

Note 6 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt

Quantum's debt includes the following:

<TABLE>
<CAPTION>
March 31,
------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
7% convertible subordinated notes...................... $ -- $287,500
5% convertible subordinated debentures................. 241,350 --
Revolving credit line, 7.8% average rate, payable
through September 1998................................ 110,000 --
Term loan, 7.7% average rate, payable through September
1998.................................................. 56,250 --
Equipment loan, 7.6% average rate, payable through
March 1999............................................ 13,875 --
Mortgage............................................... 41,772 40,920
-------- --------
463,247 328,420
Less short-term portion of debt........................ 44,229 935
-------- --------
Total long-term debt and convertible subordinated
debt.................................................. $419,018 $327,485
======== ========
DSSG's portion of Quantum debt:
Short-term debt........................................ $ 29,486 $ 623
Long-term debt and convertible subordinated debt,
excluding current portion............................. 279,345 218,324
-------- --------
DSSG total debt...................................... $308,831 $218,947
======== ========
HDDG's portion of Quantum debt:
Short-term debt........................................ $14,743 $ 312
Long-term debt and convertible subordinated debt,
excluding current portion............................. 139,673 109,161
-------- --------
HDDG total debt...................................... $154,416 $109,473
======== ========
Weighted average interest rate on Quantum's debt at
period-end............................................ 6.53% 7.39%
</TABLE>

In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At the
option of Quantum, borrowings under the revolving credit line bear interest at
either LIBOR plus a margin determined by a total funded debt ratio, or a base
rate, with option periods of one to six months. As of December 27, 1998 and
March 31, 1998, there was no outstanding balance drawn on this line.

F-42
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

redeemed, into shares of Quantum common stock at a conversion price of $46.325
per share. The notes are redeemable at Quantum's option on or after August 1,
1999, and prior to August 1, 2001, under certain conditions related to the
price of Quantum common stock. Subsequent to August 1, 2001, the notes are
redeemable at Quantum's option at any time. In the event of certain changes
involving all or substantially all of Quantum common stock, the notes would
become redeemable at the option of the holder. Redemption prices range from
107% of the principal to 100% at maturity. The notes are unsecured obligations
subordinated in right of payment to all existing and future senior indebtedness
of Quantum.

If the tracking stock proposal is implemented, each of the 7% subordinated
notes, which currently are convertible into shares of Quantum common stock,
will become convertible into a number of shares of DSSG stock and a number of
shares of HDDG stock equal to the numbers of such shares which the holder of
such note would receive under the tracking stock proposal had such note been
converted immediately prior to the implementation of the tracking stock
proposal. The notes will not be separately convertible into solely DSSG stock
or solely HDDG stock. The exercise price and maturity date of each convertible
note will not be affected by the implementation of the tracking stock proposal.

In March 1998, Quantum called for redemption of all of its outstanding 5%
convertible subordinated debentures due March 1, 2003, at a redemption price of
$1,035.71 per $1,000 principal amount of debenture. At the time of the call for
redemption, the entire original issue amount of the debentures of approximately
$241 million was outstanding. Holders of the debentures exercised their option
to convert debentures held into 21,626,327 shares of Quantum common stock at a
conversion price of approximately $11.16 per share. No debentures were redeemed
for cash.

The previously outstanding revolving credit line, term loan, and equipment
loan, which had carrying amounts of $110 million, $56 million, and $14 million,
respectively, as of March 31, 1997, were repaid by Quantum and terminated in
the first quarter of fiscal year 1998.

In September 1996, Quantum entered into a $42 million mortgage related to
certain domestic facilities at an effective interest rate of approximately
10.1%. The term of the mortgage is 10 years, with monthly payments based on a
20-year amortization period, and a balloon payment at the end of the 10-year
term. The debt is secured by specified real estate.

Payments required on Quantum's long-term debt outstanding at March 31, 1998,
are $0.9 million in fiscal year 1999, $1.0 million in fiscal year 2000, $1.1
million in fiscal year 2001, $1.2 million in fiscal year 2002, $1.3 million in
fiscal year 2003.

In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is co-
terminous with Quantum's $500 million revolving credit line, expiring in June
2000. At the option of ATL, borrowings under the revolving credit line bear
interest at either LIBOR plus a margin determined by a total funded debt ratio
of Quantum, or a base rate, with option periods of one to six months. At
December 27, 1998, $25 million was outstanding on ATL's revolving credit line.

Note 7 Redeemable Preferred Stock

In fiscal year 1998, the holder of the 90,000 shares of Redeemable
Convertible Participating Series B Preferred Stock exercised its right to
convert the shares to Quantum common stock. Quantum issued 180,000 shares of
Quantum common stock pursuant to the conversion.

F-43
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 8 Stock Incentive Plans

Long-Term Incentive Plan. Quantum has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates of
Quantum. The Plan has available and reserved for future issuance 14.6 million
shares and allows for an annual increase in the number of shares available for
issuance, subject to a limitation. Available for grant as of March 31, 1998,
were 1,105,000 shares. Options under the Plan expire no later than ten years
from the grant date and generally vest over four years. Restricted stock
granted under the Plan generally vests over two to three years. In fiscal years
1996, 1997 and 1998, Quantum recorded compensation expense of $899,000,
$1,916,000 and $3,179,000, respectively, related to restricted stock granted
pursuant to stock purchase rights under the Plan, a portion of which was
allocated to DSSG. The number of shares of restricted stock granted under the
Plan were 596,000 shares, 354,290 shares, and 65,500 shares, in fiscal years
1996, 1997 and 1998, respectively, at an exercise price of $.01.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, each share of restricted stock currently held will be
changed into one share of DSSG stock and 0.5 of a share of HDDG stock.

Stock Option Plans. Quantum has Stock Option Plans (the "Plans") under which
600,000 shares of Quantum common stock was reserved for future issuance at
March 31, 1998 to directors of Quantum. Options under the Plans are granted at
prices determined by the Board, but at not less than the fair market value, and
accordingly no compensation accounting has been required at the original date
of grant. Options currently expire no later than ten years from the grant date
and generally vest ratably over one to four years. At March 31, 1998, options
with respect to 532,500 shares of Quantum common stock were available for
grant.

Stock Option Summary Information. A summary of activity relating to
Quantum's Long-Term Incentive Plan and the Stock Option Plans follows:

<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------
1996 1997 1998
----------------------- ---------------------- ----------------------
Options Weighted-Avg. Shares Weighted-Avg. Shares Weighted-Avg.
(000s) Exercise Price (000s) Exercise Price (000s) Exercise Price
------- -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 16,104 $5.71 16,746 $6.75 16,354 $ 7.52
Granted................. 6,528 $7.90 5,850 $8.59 6,163 $19.80
Canceled................ (1,252) $6.85 (1,564) $7.94 (718) $14.11
Exercised............... (4,634) $4.76 (4,678) $5.97 (4,794) $ 6.10
------ ------ ------
Outstanding at end of
period................. 16,746 $6.75 16,354 $7.52 17,005 $12.09
====== ====== ======
Exercisable at end of
period................. 8,214 $5.92 8,514 $6.53 8,332 $ 8.84
====== ====== ======
</TABLE>

The range of exercise prices for options outstanding at March 31, 1998 was
$1.11 to $40.38. Quantum recorded compensation expense of $525,000, $475,000
and $1,057,000 was recorded in fiscal years 1996, 1997 and 1998, respectively,
on accelerated stock options under the Plans, a portion of such expense was
allocated to DSSG.

F-44
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The following tables summarize information about Quantum's options
outstanding at March 31, 1998:

<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------------------
Shares Outstanding Weighted-Average
at March 31, 1998 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ ------------------ ---------------- ----------------
<C> <C> <S> <C>
$ 1.11 -- $ 7.22 5,546 6.38 $ 6.41
$ 7.32 -- $15.22 5,551 7.62 $ 9.49
$17.38 -- $40.38 5,908 9.15 $19.87
------
17,005 7.75 $12.09
======
</TABLE>

<TABLE>
<CAPTION>
Options Exercisable
---------------------------------------------
Shares
Exercisable at
March 31, 1998 Weighted-Average
Range of Exercise Prices (000s) Exercise Price
------------------------ -------------- ----------------
<C> <S> <C>
$ 1.11 -- $ 7.22 4,168 $ 6.16
$ 7.32 -- $15.22 3,084 $ 9.17
$17.38 -- $40.38 1,080 $18.25
-----
8,332 $ 8.84
=====
</TABLE>

At December 27, 1998, Quantum's options outstanding and exercisable were
22.5 million and 11.2 million, respectively. Completing the acquisition of ATL
included the conversion of outstanding ATL stock options into options to
purchase 1.8 million shares of Quantum common stock. These options relate to
Quantum's assumption of ATL's 1996 Stock Incentive Plan and 1997 Stock
Incentive Plan, collectively referred to as the "ATL Plans." Under the terms
of the ATL Plans, eligible key employees, directors and consultants received
options to purchase shares of ATL's previously outstanding common stock at
prices not less than 100% for incentive stock options and not less than 85%
for nonqualified stock options of the fair value on the date of grant as
determined by ATL's Board of Directors. Options under ATL Plans vest over a
three year period and expire ten years after date of grant or 90 days after
termination of employment. Subsequent to completing the acquisition of ATL, no
additional grants may be made from the ATL Plans. See Note 5 for more
information on the acquisition of ATL.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, each outstanding stock option under Quantum's stock
option plans will be converted into separately exercisable options to acquire
one share of DSSG stock and 0.5 of a share of HDDG stock. The exercise price
for the resulting DSSG stock options and HDDG stock options will be calculated
by multiplying the exercise price under the original option from which they
were converted by a fraction, the numerator of which is the opening price of
DSSG stock or HDDG stock, as the case may be, on the first date such stock are
traded on Nasdaq and the denominator of which is the sum of such DSSG stock
and HDDG stock prices. This is intended to ensure that the aggregate intrinsic
value of the options will be preserved, and the ratio of the exercise price
per option to the market value per share will not be reduced. In addition, the
vesting provision and option periods of the original grants will remain the
same when converted.

F-45
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

is less. The Purchase Plan is qualified under Section 423 of the Internal
Revenue Code. Of the 22.8 million shares authorized to be issued under the
plan, 3,922,000 shares were available for issuance at March 31, 1998. Quantum's
employees purchased 2,676,000 shares, 3,216,000 shares, and 3,454,000 shares
under the Purchase Plan in fiscal years 1996, 1997, and 1998, respectively. The
weighted average exercise price of stock purchased under the Purchase Plan was
$5.98, $5.41 and $6.22 in fiscal years 1996, 1997, and 1998, respectively.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, the terms of the Purchase Plan will be adjusted to
allow Quantum's employees to purchase one share of DSSG stock and 0.5 of a
share of HDDG stock for each share of Quantum common stock.

Other. DSSG adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
in fiscal year 1997. DSSG has elected to continue to account for its stock-
based compensation plans under Accounting Principles Board ("APB") Opinion No.
25 and disclose the pro forma effects of the plans on net income and earnings
per share as provided by SFAS No. 123. Accordingly, no compensation expense has
been recognized for the stock option plans and the employee stock purchase
plans as all options have been issued at fair market value. Since DSSG stock
was not part of the capital structure of Quantum for the periods presented,
there were no stock options outstanding. Therefore, the pro forma effect of
DSSG stock options on the accompanying combined financial statements is not
presented.

Note 9 Common Stock and Stockholder Rights Plan

The DSSG stock will represent a separate class of Quantum's common stock if
the tracking stock proposal is approved. Additional shares of DSSG stock may be
issued from time to time upon exercise of stock options or at the discretion of
Quantum's Board.

Quantum has a stockholder rights plan (the "Rights Plan") that provides
existing stockholders with the right to purchase 1/1000 preferred share for
each common share held in the event of certain changes in Quantum's ownership.
Subject to certain exceptions, if any person or group becomes the beneficial
owner of 20% or more of the outstanding common stock each right will entitle
its holder to purchase 1/1,000 preferred share or, under certain circumstances,
shares of common stock with a market value twice the exercise price of the
right. The Rights Plan may serve as a deterrent to takeover tactics that are
not in the best interests of stockholders. There are 1,000,000 preferred shares
reserved for issuance under the Rights Plan.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, the Rights Agreement will be amended and restated
(the "Restated Rights Agreement") to, among other things, (i) reflect the new
equity structure of Quantum and (ii) reset the prices at which rights issued
pursuant thereto may be exercised into units of Junior Preferred Stock.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, as of the date on which the DSSG stock and the HDDG
stock is issued under the tracking stock proposal, the Board will by resolution
(i) reduce the authorized number of shares of Series A Junior Preferred Stock
to zero, (ii) designate a new series of Junior Preferred Stock as the Series B
Junior Preferred Stock, (iii) designate another new series of Junior Preferred
Stock as the Series C Junior Preferred Stock, (iv) exchange for each existing
Right (A) one right with respect to each share of DSSG stock (a "DSSG right")
which will entitle the holders thereof to purchase shares of Series B Junior
Preferred Stock under the conditions specified in the Restated Rights
Agreement, and (B) one right with respect to each share of HDDG stock (a "HDDG
right"), which will entitle the holders thereof to purchase shares of Series C
Junior Preferred Stock under the conditions specified in the Restated Rights
Agreement. The DSSG rights and the HDDG rights are herein collectively referred
to as the "rights."

F-46
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The rights will expire on August 4, 2008, unless earlier redeemed by Quantum
or extended. The rights would be exercisable only if a person or group acquires
(i) 20% or more of the then outstanding shares of DSSG stock or (ii) 20% of the
then outstanding shares of HDDG stock, or commences a tender offer that would
result in such person or group beneficially owning such number of shares. In
such event and subject to certain exceptions, each right would entitle the
holder to purchase from Quantum (i) in the case of a DSSG right, 1/1000 of a
share of Series B Junior Preferred Stock (a "Series B Unit") at a purchase
price to be determined by the Board, subject to adjustment or, under certain
circumstances, shares of DSSG Stock with a market value twice the exercise
price of the DSSG right and (ii) in the case of a HDDG right, 1/1000 of a share
of Series C Junior Preferred Stock (a "Series C Unit") at a purchase price to
be determined by the Board, subject to adjustment or, under certain
circumstances, shares of HDDG stock with a market value twice the exercise
price of the HDDG right.

Note 10 Savings and Investment Plan

Substantially all of the regular domestic employees are eligible to make
contributions to Quantum's 401(k) savings and investment plan. Quantum matches
a percentage of the employees' contributions and may also make additional
discretionary contributions to the plan. Quantum contributions were $4 million
in fiscal year 1996, $5 million in fiscal year 1997, and $6 million in fiscal
year 1998.

Note 11 Income Taxes

The income tax provision consists of the following:

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1996 1997 1998
------- ------- --------
(In thousands)
<C> <S> <C> <C> <C>
Federal: Current............................. $28,395 $74,323 $125,930
Deferred............................ (9,169) (15,235) (8,634)
------- ------- --------
19,226 59,088 117,296
------- ------- --------
State: Current............................. 6,470 15,138 28,404
Deferred............................ (2,381) (2,586) (2,705)
------- ------- --------
4,089 12,552 25,699
------- ------- --------
Income tax provision.......................... $23,315 $71,640 $142,995
======= ======= ========
</TABLE>

The tax benefits associated with nonqualified stock options, disqualifying
dispositions of incentive stock options, and employee stock purchase plan
shares reduced taxes currently payable as shown above by $1 million, $1
million, and $5 million in fiscal years 1996, 1997 and 1998, respectively. Such
benefits are credited to group equity when realized.

DSSG's income tax provision differs from the amount computed by applying the
federal statutory rate or 35% to income before income taxes as follows:

<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1996 1997 1998
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate.................... $20,401 $62,685 $128,329
State income tax, net of federal benefit......... 2,658 8,159 16,705
Research and development credit.................. -- -- (1,690)
Other items...................................... 256 796 (349)
------- ------- --------
$23,315 $71,640 $142,995
======= ======= ========
</TABLE>

F-47
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Significant components of deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1997 1998
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods.................... $ 9,190 $ 17,796
Accrued warranty expense....................... 15,232 15,008
Allowance for doubtful accounts................ 724 1,165
Distribution reserves.......................... 814 615
Other accruals and reserves not currently
deductible for tax purposes................... 5,524 9,890
Depreciation methods........................... (273) 193
Amortization methods........................... 3,061 1,891
---------- ----------
34,272 46,588
Deferred tax liabilities......................... (1,938) (2,884)
---------- ----------
Net deferred tax asset........................... $ 32,334 $ 43,674
========== ==========
</TABLE>

Quantum's federal income tax returns have been examined by the Internal
Revenue Service (IRS) for all years through 1993. All issues have been resolved
with no material effect, and the IRS has closed those years. Quantum's federal
income tax returns for the years 1995-1996 are presently under examination by
the IRS. Management believes sufficient accruals have been provided in prior
years for any adjustments that may result for the years under examination.

Note 12 Commitments

Quantum leases certain facilities for DSSG's use under non-cancelable
operating lease agreements for periods of up to 15 years. Some of the leases
have renewal options ranging from one to ten years and contain provisions for
maintenance, taxes, or insurance.

DSSG's rent expense was $7 million, $5 million, and $6 million for the
fiscal years ended March 31, 1996, 1997, and 1998, respectively.

Future minimum lease payments under operating leases are as follows:

<TABLE>
<CAPTION>
Year ended March 31, (In thousands)
<S> <C>
1999...................................................... $ 5,714
2000...................................................... 5,834
2001...................................................... 5,510
2002...................................................... 6,398
2003...................................................... 4,985
Thereafter................................................ 20,352
-------
Total future minimum lease payments....................... $48,793
=======
</TABLE>

F-48
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 13 Business and Geographic Information

One customer accounted for 10% or more of combined revenue in fiscal years
1996, 1997 and 1998, and in the nine months ended December 28, 1997 and
December 27, 1998. Revenue from this customer represented $187 million, $253
million, $433 million, $368 million and $234 million of DSSG's combined revenue
in the respective periods. Another customer accounted for 10% or more of
combined revenue in fiscal years 1997 and 1998, and in the nine months ended
December 28, 1997 and December 27, 1998. Revenue from this customer represented
$100 million, $133 million, $93 million and $118 million of DSSG's combined
revenue in the respective periods.

Product Information

Revenue is composed of the following:

<TABLE>
<CAPTION>
Year Ended March
31, Nine Months Ended
---------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
---- ---- ------ ------------ ------------
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C>
DLTtape drives................. $194 $392 $ 784 $636 $604
DLTtape media products......... 71 221 284 206 154
DLTtape media royalties........ -- 8 27 12 85
Tape libraries and service..... 59 96 87 73 85
Solid state storage systems.... 12 11 8 7 4
Intra-group elimination........ -- -- -- -- (19)
---- ---- ------ ---- ----
Total.......................... $336 $728 $1,190 $934 $913
==== ==== ====== ==== ====
</TABLE>

Geographic Information

Revenue and long-lived assets by region are as follows (revenue is
attributed to regions based on the location of customers):

<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------------- -------------------------
Revenue Long-Lived Assets Revenue Long-Lived Assets Revenue Long-Lived Assets
------- ----------------- ------- ----------------- ------- -----------------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States........... $296 $43 $554 $ 45 $ 934 $71
United Kingdom.......... 12 -- 74 -- 149 --
Rest of Europe.......... 26 -- 87 -- 83 --
Asia Pacific............ 2 1 13 1 24 1
---- --- ---- ---- ------ ---
Total................. $336 $44 $728 $ 46 $1,190 $72
==== === ==== ==== ====== ===
<CAPTION>
Nine Months Ended
---------------------------------------------------
December 28, 1997 December 27, 1998
------------------------- -------------------------
Revenue Long-Lived Assets Revenue Long-Lived Assets
------- ----------------- ------- -----------------
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
United States........... $753 $70 $655 $432
United Kingdom.......... 100 -- 62 --
Rest of Europe.......... 63 1 62 1
Asia Pacific............ 18 2 33 1
---- --- ---- ----
Total................... $934 $73 $913 $434
==== === ==== ====
</TABLE>

F-49
<PAGE>

DLT & STORAGE SYSTEMS GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 14 Unaudited Quarterly Combined Financial Data

<TABLE>
<CAPTION>
Fiscal Year 1999
------------------------------------
1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue............. $255,702 $290,458 $366,495
Gross profit.............. 113,674 131,675 161,301
Net income (loss)......... 43,565 52,143 (30,584)
<CAPTION>
Fiscal Year 1998
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue............. $265,005 $338,523 $330,279 $255,993
Gross profit.............. 106,061 138,008 147,537 110,608
Net income................ 49,666 64,726 66,064 43,203
<CAPTION>
Fiscal Year 1997
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue............. $128,451 $152,917 $203,338 $243,307
Gross profit.............. 46,128 57,060 74,666 92,485
Net income................ 15,191 21,943 29,354 40,972
</TABLE>

The results of operations for the third quarter of fiscal year 1999 included
the effect of an $89 million charge related to purchased in-process research
and development related to the acquisition of ATL.

The results of operations for the fourth quarter of fiscal year 1998 were
impacted by the reduction in estimated bonus accrued earlier in the fiscal
year.

F-50
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Quantum Corporation

We have audited the accompanying combined balance sheets of the Hard Disk
Drive group (as described in Note 1) ("HDDG") of Quantum Corporation as of
March 31,1997 and 1998 and the related combined statements of operations, group
equity, and cash flows for each of the three years in the period ended
March 31, 1998. These financial statements are the responsibility of Quantum
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of MKE-Quantum Components LLC ("MKQC"), a forty-nine
percent equity investee of HDDG, which statements reflect a net loss of $134.8
million for the period from May 16, 1997 (inception) through March 31, 1998.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for MKQC, is
based solely on the report of the other auditors.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of HDDG at March 31, 1997 and 1998 and the
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles.

As more fully described in Note 1 to these financial statements, HDDG is a
business group of Quantum Corporation; accordingly, the combined financial
statements of HDDG should be read in conjunction with the audited consolidated
financial statements of Quantum Corporation.

Ernst & Young LLP

Palo Alto, California
April 21, 1998

F-51
<PAGE>

HARD DISK DRIVE GROUP

COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Gross profit............ 415,807 498,402 373,307 318,085 190,701

Operating expenses:
Research and
development.......... 214,148 261,293 258,916 193,163 182,774
Sales and marketing... 127,637 125,601 121,787 96,358 85,518
General and
administrative....... 60,720 75,037 67,001 58,379 38,722
Restructuring and
other charges........ 209,122 -- -- -- --
---------- ---------- ---------- ---------- ----------
611,627 461,931 447,704 347,900 307,014
---------- ---------- ---------- ---------- ----------

Income (loss) from
operations............. (195,820) 36,471 (74,397) (29,815) (116,313)
Interest income and
other, net............. 15,737 4,660 15,536 11,428 12,329
Interest expense........ (19,543) (19,535) (10,918) (8,045) (6,712)
Loss from investee...... -- -- (66,060) (42,222) (142,050)
---------- ---------- ---------- ---------- ----------

Income (loss) before
income taxes........... (199,626) 21,596 (135,839) (68,654) (252,746)
Income tax benefit...... (74,197) (19,459) (82,981) (56,308) (101,346)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (125,429) $ 41,055 $ (52,858) $ (12,346) $ (151,400)
========== ========== ========== ========== ==========

Pro forma net loss per
share:
Basic................. $ (0.78) $ (1.91)
========== ==========
Diluted............... $ (0.78) $ (1.91)
========== ==========

Pro forma weighted-
average common shares:
Basic................. 68,203 79,344
========== ==========
Diluted............... 68,203 79,344
========== ==========
</TABLE>

See accompanying notes to combined financial statements.

F-52
<PAGE>

HARD DISK DRIVE GROUP

COMBINED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
March 31,
--------------------- December 27,
1997 1998 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 201,779 $ 253,240 $ 482,617
Marketable securities..................... -- 71,573 24,425
Accounts receivable, net of allowance for
doubtful accounts of $8,912, $10,342 and
$8,513 respectively...................... 732,809 585,848 417,337
Inventories............................... 205,605 212,007 145,545
Deferred taxes............................ 91,629 90,162 90,159
Other current assets...................... 75,593 118,087 80,368
---------- ---------- ----------
Total current assets....................... 1,307,415 1,330,917 1,240,451

Property, plant, and equipment, less
accumulated depreciation.................. 368,092 227,760 194,061
Intangible assets, less accumulated
amortization.............................. 35,320 9,124 6,019
Other assets............................... 10,575 78,539 15,842
---------- ---------- ----------
$1,721,402 $1,646,340 $1,456,373
========== ========== ==========

Liabilities and Group Equity
Current liabilities:
Accounts payable.......................... $ 454,287 $ 401,324 $ 329,451
Accrued warranty.......................... 65,887 40,239 41,289
Accrued compensation...................... 51,292 44,359 36,590
Income taxes payable...................... 31,153 39,777 27,659
Current portion of long-term debt......... 14,743 312 334
Other accrued liabilities................. 73,150 66,199 78,974
---------- ---------- ----------
Total current liabilities.................. 690,512 592,210 514,297

Deferred taxes............................. 34,652 38,523 41,000
Long-term debt............................. 59,223 13,328 21,408
Convertible subordinated debt.............. 80,450 95,833 95,833
Commitments and contingencies
Redeemable preferred stock................. 1,296 -- --
Group equity............................... 855,269 906,446 783,835
---------- ---------- ----------
$1,721,402 $1,646,340 $1,456,373
========== ========== ==========
</TABLE>

See accompanying notes to combined financial statements.

F-53
<PAGE>

HARD DISK DRIVE GROUP

COMBINED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
----------------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
--------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(125,429) $ 41,055 $(52,858) $(12,346) $(151,400)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operations:
Restructuring and other
charges............... 208,571 -- -- -- --
Loss from investee..... -- -- 66,060 42,222 124,809
Gain on sale of equity
investment............ (3,844) -- -- -- --
Depreciation........... 63,221 88,697 62,583 46,792 49,989
Amortization........... 21,427 20,310 5,372 3,731 3,510
Deferred taxes......... (42,789) 26,902 5,338 (347) 2,480
Compensation related to
stock incentive
plans................. 471 797 1,412 1,033 1,355
Changes in assets and
liabilities:
Accounts receivable... (158,694) (101,029) 146,961 96,296 168,511
Inventories........... (158,471) 203,831 (6,402) (119,389) 66,462
Accounts payable...... 142,078 (20,361) (52,963) 31,509 (71,873)
Income taxes payable.. (26,430) (9,841) 8,624 16,697 (12,118)
Accrued warranty...... (5,648) 17,560 (25,648) (28,868) 9,050
Other assets and
liabilities.......... (67,478) (47,724) (76,785) 29,702 23,187
--------- -------- -------- -------- ---------
Net cash provided by
(used in) operating
activities............. (153,015) 220,197 81,694 107,032 213,962
--------- -------- -------- -------- ---------

Cash flows from
investing activities:
Purchases of marketable
securities............ -- -- (71,573) -- (68,360)
Proceeds from sale of
marketable
securities............ -- -- -- 115,508
Purchases of equity
securities/minority
interest.............. -- (3,400) -- -- --
Acquisition of
intangible assets..... -- -- (9,850) (4,000) --
Proceeds from sale of
interest in recording
heads operations...... -- -- 94,000 94,000 --
Investment in property
and equipment......... (191,031) (163,534) (119,066) (95,787) (63,478)
Proceeds from
disposition of
property and
equipment............. -- 9,665 5,962 23,932 139
Proceeds from sale of
equity
investment/subsidiary.. 11,151 -- -- -- --
Proceeds from repayment
of note receivable.... -- -- 18,000 -- --
--------- -------- -------- -------- ---------
Net cash provided by
(used in) investing
activities............. (179,880) (157,269) (82,527) 18,145 (16,191)
--------- -------- -------- -------- ---------
Cash flows from
financing activities:
Proceeds from long-term
credit facilities..... 131,000 110,030 -- -- 8,333
Receipt of repayment of
inter-group loan...... 165,815 -- -- -- --
Inter-group proceeds
for common stock
issued................ -- -- -- -- 15,118
Proceeds from mortgage
loan.................. -- 14,035 -- -- --
Principal payments on
long-term credit
facilities............ (110,000) (126,113) (60,326) (60,253) (231)
Proceeds from issuance
of common stock....... 12,402 15,087 16,787 10,481 8,386
Proceeds from issuance
of convertible
subordinated notes.... 80,450 -- 95,833 95,833 --
--------- -------- -------- -------- ---------
Net cash provided by
financing activities... 279,667 13,039 52,294 46,061 31,606
--------- -------- -------- -------- ---------
Increase (decrease) in
cash and cash
equivalents............ (53,228) 75,967 51,461 171,238 229,377
Cash and cash
equivalents at
beginning of period.... 179,040 125,812 201,779 201,779 253,240
--------- -------- -------- -------- ---------
Cash and cash
equivalents at end of
period................. $ 125,812 $201,779 $253,240 $373,017 $ 482,617
========= ======== ======== ======== =========
Supplemental disclosure
of cash flow
information:
Conversion of debentures
to common stock........ $ 79,567 $132,893 $ 80,450 -- --
========= ======== ======== ======== =========
Note received on
disposition of property
and equipment.......... -- $ 18,000 -- -- --
========= ======== ======== ======== =========
Issuance of redeemable
preferred stock as part
of minority
interest acquisition... -- $ 1,296 -- -- --
========= ======== ======== ======== =========
Conversion of redeemable
preferred stock to
common stock........... -- -- $ 1,296 -- --
========= ======== ======== ======== =========
Cash paid during the
year for:
Interest............... $ 18,263 $ 21,318 $ 9,677 $ 3,931 $ 4,830
========= ======== ======== ======== =========
Income taxes, net of
(refunds).............. $ 26,643 $ 7,621 $ 17,868 $ 5,617 $ 20,043
========= ======== ======== ======== =========
</TABLE>

See accompanying notes to combined financial statements.

F-54
<PAGE>

HARD DISK DRIVE GROUP

COMBINED STATEMENTS OF GROUP EQUITY
(In thousands)

<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Group
Other Earnings Income (Loss) Equity
-------- -------- ------------- --------
<S> <C> <C> <C> <C>
Balances at March 31, 1995......... $325,612 $368,426 $ -- $694,038
Net loss........................... -- (125,429) -- (125,429)
Conversion of subordinated
debentures........................ 77,820 -- -- 77,820
Shares issued under employee stock
purchase plan..................... 5,326 -- -- 5,326
Shares issued under employee stock
option plans, net................. 7,345 -- -- 7,345
Compensation expense............... 471 -- -- 471
Tax benefits related to stock
option plans...................... 2,849 -- -- 2,849
-------- -------- ------- --------
Balances at March 31, 1996......... 419,423 242,997 -- 662,420
Net income......................... -- 41,055 -- 41,055
Conversion of subordinated
debentures........................ 131,264 -- -- 131,264
Shares issued under employee stock
purchase plan..................... 5,801 -- -- 5,801
Shares issued under employee stock
option plans, net................. 9,286 -- -- 9,286
Compensation expense and other..... 1,766 -- -- 1,766
Tax benefits related to stock
option plans...................... 3,677 -- -- 3,677
-------- -------- ------- --------
Balances at March 31, 1997......... 571,217 284,052 -- 855,269
Comprehensive loss:
Net loss........................... -- (52,858) -- (52,858)
Other comprehensive loss--foreign
currency translation adjustments.. -- -- (1,462) (1,462)
--------
Comprehensive loss................. -- -- -- (54,320)
Conversion of subordinated
debentures........................ 78,907 -- -- 78,907
Conversion of Series B preferred
shares............................ 1,296 -- -- 1,296
Shares issued under employee stock
purchase plan..................... 7,159 -- -- 7,159
Shares issued under employee stock
option plans, net................. 9,628 -- -- 9,628
Compensation expense and other..... 1,412 -- -- 1,412
Tax benefits related to stock
option plans...................... 7,095 -- -- 7,095
-------- -------- ------- --------
Balances at March 31, 1998......... 676,714 231,194 (1,462) 906,446
Unaudited group equity activity for
the nine months ended December 27,
1998:
Comprehensive loss:
Net loss.......................... -- (151,400) -- (151,400)
Other comprehensive income--
foreign currency translation
adjustments...................... -- -- 2,238 2,238
--------
Comprehensive loss................. -- -- -- (149,162)
Shares issued under employee stock
purchase plan..................... 4,099 -- -- 4,099
Shares issued under employee stock
option plans, net................. 4,287 -- -- 4,287
New shares issued for ATL
acquisition....................... 7,662 -- -- 7,662
Conversion of ATL stock options.... 7,456 -- -- 7,456
Compensation expense and other..... 1,434 -- -- 1,434
Tax benefits related to stock
option plans...................... 1,613 -- -- 1,613
-------- -------- ------- --------
Balances at December 27, 1998
(unaudited)....................... $703,265 $ 79,794 $ 776 $783,835
======== ======== ======= ========
</TABLE>

See accompanying notes to combined financial statements.

F-55
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS

(Information with respect to the nine months ended December 28, 1997 and
December 27, 1998 is unaudited.)

The accompanying combined financial statements should be read in conjunction
with the consolidated financial statements of Quantum Corporation ("Quantum").

Note 1 Summary of Significant Accounting Policies

Nature of Business. Quantum operates its business through two separate
groups: the Hard Disk Drive group ("HDDG") and the DLT & Storage Systems group
("DSSG") as described below. HDDG and DSSG are referred to as the "groups."

HDDG designs desktop hard disk drives to meet the storage requirements of
entry-level to high-end desktop PCs in home and business environments. HDDG
also designs high-end hard disk drives for the demanding storage needs of
network servers, workstations and storage sub-systems.

The Board of Directors (the "Board") of Quantum has recommended stockholder
approval of a proposal (the "tracking stock proposal") that would create two
classes of common stock intended to reflect separately the performance of HDDG
and DSSG. Under the tracking stock proposal, Quantum's Certificate of
Incorporation would be amended and restated (the "Restated Certificate of
Incorporation") to (i) designate a new class of Quantum Corporation--HDDG
Common Stock, $.01 par value per share, (ii) designate a new class of Quantum
Corporation--DSSG Common Stock, $.01 par value per share, and (iii) reclassify
each authorized share of existing common stock, $.01 par value per share as
one-half share of HDDG stock and one share of DSSG stock.

The combined financial statements of the groups comprise all of the accounts
included in the corresponding consolidated financial statements of Quantum. The
separate group combined financial statements give effect to the accounting
policies that will be applicable upon implementation of the tracking stock
proposal. The separate HDDG and DSSG financial statements have been prepared on
a basis that management believes to be reasonable and appropriate and include
(i) the historical balance sheets, results of operations, and cash flows of
businesses that comprise each of the groups, with all significant intragroup
transactions and balances eliminated, (ii) in the case of HDDG's financial
statements, corporate assets and liabilities of Quantum and related
transactions identified with HDDG, including allocated portions of Quantum's
debt and selling, general and administrative costs, and (iii) in the case of
DSSG's financial statements, corporate assets and liabilities of Quantum and
related transactions identified with DSSG, including allocated portions of
Quantum's debt and selling, general and administrative costs.

Holders of HDDG stock and DSSG stock will be stockholders of a single
company. HDDG and DSSG are not separate legal entities. As a result,
stockholders will continue to be subject to all of the risks of an investment
in Quantum and all of Quantum's business, assets and liabilities. The issuance
of HDDG stock and DSSG stock and the allocation of assets or liabilities and
stockholders' equity between HDDG and DSSG will not result in a distribution or
spin-off to stockholders of any of Quantum's assets or liabilities and will not
affect ownership of any of Quantum's assets or responsibility for Quantum's
liabilities or those of Quantum's subsidiaries. The assets Quantum attributes
to one group could be subject to the liabilities of the other group. If Quantum
is unable to satisfy one group's liabilities out of the assets attributed to
it, Quantum may be required to satisfy those liabilities with assets Quantum
has attributed to the other group. Holders of HDDG stock and DSSG stock will
have only the rights customarily held by common stockholders of Quantum and
will not have any rights related

F-56
<PAGE>

QUANTUM CORPORATION--HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

to their corresponding group except as set forth in provisions relating to
dividend and liquidation rights and requirements for a mandatory dividend,
redemption or conversion upon the disposition of all or substantially all of
the assets of their corresponding group, or have any right to vote on matters
as a separate voting group other than in limited circumstances as provided
under Delaware law or by Nasdaq rules. The relative voting power of HDDG stock
and DSSG stock will fluctuate from time to time, with each share of DSSG stock
having one vote and each share of HDDG stock having a number of votes, based
upon the ratio, over a specified period, of the average market values of one
share of HDDG stock and of one share of DSSG stock. This formula is intended to
give each class of common stock a number of votes proportionate to its
aggregate market capitalization at the time of any vote. Accordingly, changes
in the market value of HDDG stock and DSSG stock will affect the relative
voting rights of a class of common stock. It is expected that initially the
holders of DSSG stock will have a substantial majority of the voting power of
Quantum.

Financial effects arising from one group that affect Quantum's consolidated
results of operations or financial condition could, if significant, affect the
results of operations or financial condition of the other group and the market
price of the class of common stock relating to the other group. Any net losses
of HDDG or DSSG and dividends or distributions on, or repurchases of, HDDG
stock or DSSG stock, or repurchases of certain preferred stock, will reduce the
funds of Quantum legally available for payment of dividends on the HDDG stock.

The Board may at any time, in its sole discretion and without stockholder
approval, determine to convert the common stock related to one group into the
common stock related to the other group at a 10% premium during the first five
years following the implementation of the tracking stock proposal and without
any premium thereafter. The Board may also effect such a conversion at no
premium if, based on the legal opinion of Quantum's tax counsel, it is more
likely than not that for United States federal income tax purposes (i) Quantum
or its stockholders are, or at any time in the future will be, subject to tax
upon the issuance of shares of either HDDG stock or DSSG stock, or (ii) either
HDDG stock or DSSG stock is not, or at any time in the future will not be,
treated as stock of Quantum. In the case of certain dispositions of all or
substantially all of the assets of one group, the Board may determine to
convert the common stock of such group into the common stock of the other group
at a 10% premium during the first five years following the implementation of
the tracking stock proposal and without any premium thereafter. Any conversion
at a premium would dilute the interests in Quantum of the holders of the class
of common stock being issued in the conversion. In addition, any such
conversion of a class of common stock into another class of common stock would
preclude holders of both classes of common stock from retaining their
investment in a security that is intended to reflect separately the performance
of the relevant group.

The HDDG's combined financial statements reflect the application of the
management and allocation policies adopted by the Board to various corporate
activities, as described below.

Financing Activities. Quantum manages most financial activities of HDDG and
DSSG on a centralized basis. Such financial activities include the investment
of surplus cash, the issuance and repayment of short-term and long-term debt,
the issuance and repurchase of common stock, and the issuance and repurchase of
any preferred stock.

At December 27, 1998, $118 million of Quantum's debt was allocated to HDDG
and $235 million was allocated to DSSG. The Board has adopted the following
financing policy that will affect the combined

F-57
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

statements of HDDG and DSSG: Quantum will allocate its debt between the groups
("pooled debt") or, if Quantum so determines, in its entirety to a particular
group. Quantum will allocate preferred stock, if issued, in a similar manner.

Debt for a particular financing allocated in its entirety to one group,
bears interest for group financial statement purposes at the rate determined by
the Board. For preferred stock allocated in its entirety to one group the
dividend cost to that group is determined in a similar manner. If the interest
or dividend cost is higher than Quantum's actual cost, the other group receives
a credit for an amount equal to the difference as compensation for the use of
Quantum's credit capacity. Any expense related to debt or preferred stock that
is allocated in its entirety to a group is allocated in whole to that group.

Allocation of Support Activities. HDDG is charged for specifically
identified costs of certain support activities based upon HDDG's use of such
activities. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of support activities attributable to HDDG. Such allocated support activities
included certain selling and marketing, executive management, human resources,
corporate finance, legal and corporate planning costs. The total of these
allocations were $83 million, $98 million, and $79 million in fiscal year 1996,
1997 and 1998, respectively. It is not practicable to provide a detailed
estimate of the expenses which would be recognized if HDDG were a separate
entity.

F-58
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

group were a stand-alone entity. Such allocations reflect each group's
contribution (whether positive or negative) to Quantum's consolidated federal
taxable income and the consolidated federal tax liability and tax credit
position. Tax benefits that cannot be used by the group generating those
benefits but can be used on a consolidated basis are credited to the group that
generated such benefits. Accordingly, the amounts of taxes payable or
refundable allocated to each group may not necessarily be the same as that
which would have been payable or refundable had each group filed a separate
income tax return.

Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a consolidated or combined basis or on a
separate corporation basis. State income tax provisions and related tax
payments or refunds are allocated between the groups based on their respective
contributions to such consolidated or combined state taxable incomes. State and
local income tax provisions and related tax payments which are determined on a
separate corporation basis are allocated between the groups in a manner
designed to reflect the respective contributions of the groups to the
corporation's separate state or local taxable income.

The discussion of the HDDG's income tax provision (Note 12) should be read
in conjunction with Quantum's consolidated financial statements and notes
thereto.

Revenue Recognition. Revenue from sales of products is recognized on
shipment to customers, with provision made for estimated returns.

Foreign Currency Translation and Transactions. Assets, liabilities, and
operations of foreign offices and subsidiaries are recorded based on the
functional currency of the entity. For a majority of HDDG's material foreign
operations, the functional currency is the U.S. Dollar. The assets and
liabilities of foreign offices with a local functional currency are translated
at current exchange rates from the local currency to the reporting currency,
the U.S. Dollar. The resulting gains or losses are reported as a component of
group equity. Although close to half of HDDG's sales are made to customers in
non-U.S. locations and all of HDDG's hard disk drive products are manufactured
in Japan, Singapore and Ireland by Matsushita-Kotobuki Electronics Industries,
Ltd. ("MKE"), a majority of HDDG's material transactions are denominated in
U.S. dollars, including the purchase by HDDG of hard disk drives manufactured
by MKE in U.S. dollars. Accordingly, transaction gains or losses have been
immaterial to the financial statements for all years presented. The effect of
foreign currency exchange rate fluctuations on cash was also immaterial for the
years presented. Assets and liabilities denominated in other than the
functional currency are remeasured each month with the remeasurement gain or
loss recorded in other income.

Foreign Exchange Contracts. The effect of foreign currency rate changes on
the remeasurement of certain assets and liabilities denominated in a foreign
currency are managed using foreign currency forward exchange contracts. Foreign
currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method. Foreign currency forward
exchange contracts are carried on the balance sheet at fair value, with changes
in that value recognized in other income.

F-59
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Net Income (Loss) Per Share. Historical income (loss) per share is omitted
from the statements of operations because the HDDG stock was not part of the
capital structure of Quantum for the periods presented. Following the
implementation of the tracking stock proposal, the method of calculating income
per share for the HDDG stock will reflect the terms of the Restated Certificate
of Incorporation and will be computed by dividing the net income of HDDG by the
weighted-average number of shares of HDDG stock outstanding during the
applicable period. The effects of assuming issuance of HDDG stock on a pro
forma basis under existing long-term incentive, stock option, and stock
purchase plans will be anti-dilutive. Pro forma loss per share, reflecting the
HDDG stock to be issued under the tracking stock proposal, is presented in
HDDG's statements of operations.

Cash Equivalents and Marketable Securities. Highly liquid debt instruments
with a maturity of 90 days or less at the time of purchase are considered to be
cash equivalents. Cash equivalents are carried at fair value, which
approximates cost. Marketable securities have maturities of more than 90 days
at the time of purchase. Cash equivalents and marketable securities have been
classified as available-for-sale. Securities classified as available-for-sale
are carried at fair value with material unrealized gains and losses reported in
Group equity. The cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to
be other-than-temporary are recorded in other income or expense. The cost of
securities sold is based on the specific identification method.

Inventories. Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.

Property, Plant, and Equipment. Property, plant, and equipment are carried
at cost, less accumulated depreciation and amortization computed on a straight-
line basis over the lesser of the estimated useful lives of the assets
(generally three to ten years for machinery, equipment, furniture, and
leasehold improvements; and twenty-five years for buildings) or the lease term.

Acquired Intangibles. Acquired intangible assets are being amortized over
their estimated useful lives, which range from three to five years. The
accumulated amortization at March 31, 1997 and 1998, and

F-60
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

December 27, 1998 was $49 million, $6 million, and $4 million, respectively.
Intangible assets are reviewed for impairment whenever events or circumstances
indicate impairment might exist, or at least annually.

Warranty Expense. HDDG generally warrants its products against defects for a
period of one to five years. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped and revenue recognized.

Advertising Expense. HDDG accrues for co-operative advertising as the
related revenue is earned, and other advertising expense is recorded as
incurred. Advertising expense for the years ended March 31, 1996, 1997 and
1998, was $23 million, $24 million, and $26 million, respectively.

Stock-Based Compensation. HDDG accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB Opinion No. 25").

Risks and Uncertainties. HDDG's business entails a number of risks. As is
typical in the information storage industry, a significant portion of HDDG's
customer base is concentrated with a small number of OEMs, and HDDG is not able
to predict whether there will be any significant change in the demand for its
customers' products. The loss of any one of HDDG's more significant customers
could have a material adverse effect on the HDDG's results of operations. A
limited number of hard disk drive storage products make up a significant
majority of HDDG's sales, and due to increasingly rapid technological change in
the industry, HDDG's future depends on its ability to develop and successfully
introduce new products. HDDG utilizes a third party, MKE, to manufacture all of
the products it sells. HDDG relies on MKE's ability to bring new products
rapidly to volume production and to meet stringent quality standards. MKE
manufactures HDDG's drives in Japan, Singapore, and Ireland. If MKE were unable
to satisfy the HDDG's production requirements, the HDDG would not have an
alternative source to meet the demand for its products without substantial
delay and disruption to its operations.

Unaudited Interim Financial Statements. The unaudited condensed interim
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the Securities and Exchange Commission's rules and regulations for interim
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of HDDG's management, the unaudited
combined interim financial statements include all adjustments necessary to
present fairly such interim financial information.

F-61
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 2 Financial Instruments

Quantum's cash and cash equivalents, including certain available-for-sale
securities, are allocated between HDDG and DSSG. However, marketable securities
have been allocated to HDDG.

Available-For-Sale Securities

The following is a summary of Quantum's consolidated available-for-sale
securities, all of which are classified as cash equivalents and marketable
securities:

<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
------------------------- -------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Corporate commercial
paper and bank notes... $25,338 $25,338 $103,346 $103,339
U.S. Treasury securities
and obligations of U.S.
government agencies.... 25,455 25,455 165,364 165,360
Other................... 83 83 4,613 4,613
------- ------- -------- --------
$50,876 $50,876 $273,323 $273,312
======= ======= ======== ========
</TABLE>

The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1997 and 1998, and therefore no
gross unrealized gains or losses were recorded in Quantum's stockholders'
equity. The estimated fair value of available-for-sale securities is based on
market quotations. There were no sales of available-for-sale securities in
fiscal years 1997 or 1998. At March 31, 1998, the average available-for-sale
portfolio duration was approximately 23 days, and no security had a maturity
longer than one year.

Derivative Financial Instruments

F-62
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The following is a summary of foreign currency forward contracts held for
asset and liability management purposes:

<TABLE>
<CAPTION>
March 31,
--------------------------------
1997 1998
-------------- -----------------
(In millions, except for forward
rates)
<S> <C> <C>
Currency to be sold....................... Yen Yen
Maturity dates............................ April-May 1997 April-May 1998
Foreign currency notional amount.......... 3,300 yen 1,600 yen
Weighted average forward rate............. 122.22 132.23
U.S. dollar notional amount............... $27.0 $12.1
U.S. dollar equivalent.................... $26.5 $12.3
Fair value................................ $ 0.5 $(0.2)
<CAPTION>
March 31,
--------------------------------
1997 1998
-------------- -----------------
(In millions, except for forward
rates)
<S> <C> <C>
Currency to be purchased.................. -- Swiss Franc
Maturity dates............................ -- April 1998
Foreign currency notional amount.......... -- 26.5 Swiss Francs
Weighted average forward rate............. -- 1.51
U.S. dollar notional amount............... -- $17.5
U.S. dollar equivalent.................... -- $17.4
Fair value................................ -- $(0.1)
</TABLE>

The fair values for foreign currency forward contracts represent the
difference between the contracted forward rate and the quoted fair value of the
underlying Yen or Swiss Francs at the balance sheet dates. Quantum generally
does not require collateral from the counterparties to foreign currency forward
contracts.

Carrying Amount and Fair Values of Financial Instruments

The estimated fair value of Quantum's borrowings (pooled debt) are
summarized as follows:

F-63
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 3 Inventories

Inventories consisted of:

<TABLE>
<CAPTION>
March 31,
----------------- December 27,
1997 1998 1998
-------- -------- ------------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Materials and purchased parts............... $ 6,810 $ 2,316 $ 2,825
Work in process............................. 32,382 14,616 6,128
Finished goods.............................. 166,413 195,075 136,592
-------- -------- --------
$205,605 $212,007 $145,545
======== ======== ========
</TABLE>

In the third quarter of fiscal year 1998, HDDG recorded a $103 million
charge to cost of revenue related to the transition to a new generation of its
high-end disk drive products, primarily for inventory write-offs and
adjustments and losses related to firm inventory purchase commitments.

Note 4 Property, Plant and Equipment

Property, plant, and equipment consisted of:

<TABLE>
<CAPTION>
March 31,
------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Machinery and equipment................................ $412,408 $271,318
Furniture and fixtures................................. 24,858 27,219
Buildings and leasehold improvements................... 133,806 116,327
Land................................................... 7,663 4,628
-------- --------
578,735 419,492
Less accumulated depreciation and amortization......... (210,643) (191,732)
-------- --------
$368,092 $227,760
======== ========
</TABLE>

Note 5 Loss from Investee

On May 16, 1997, HDDG sold a controlling interest in its recording heads
operations to MKE, thereby forming a recording heads joint venture with MKE,
MKE-Quantum Components LLC ("MKQC"). The operations were involved in the
research, development, and manufacture of MR recording heads used in HDDG's
hard disk drive products manufactured by MKE.

HDDG contributed recording heads assets and operations, and leased certain
premises to MKQC. The recording heads assets that Quantum contributed to MKQC
consisted of inventory, equipment, accounts receivable, and intangibles, which
aggregated $211 million. MKQC assumed $51 million of debt payable to Quantum
and assumed $24 million of third-party liabilities. MKE paid Quantum $94
million and contributed $110 million to MKQC in exchange for a 51% majority
ownership interest in MKQC. Quantum retained a 49% minority ownership interest
in MKQC. Quantum employees who were involved in the recording heads operations
became employees of MKQC.

MKE and Quantum shared pro rata in MKQC's results of operations and agreed
to share pro rata in any capital funding requirements.

F-64
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Subsequent to May 16, 1997, HDDG accounted for its 49% interest in MKQC
using the equity method of accounting. The results of HDDG's involvement in
recording heads through May 15, 1997, were combined.

Quantum provided support services to MKQC. The support services were mainly
finance, human resources, legal, and computer support. MKQC reimbursed Quantum
for the estimated cost of the services.

Summarized Financial Information

The following is summarized financial information for MKQC:

On October 28, 1998, Quantum and MKE agreed to dissolve MKQC because MKQC
had not been able to produce MR recording heads on a cost-effective basis. In
connection with the dissolution, MKE has taken control and ownership of MKQC's
manufacturing operations in Batam, Indonesia; MKQC's domestic operations have
substantially ceased as of December 27, 1998; and its domestic assets are in
liquidation. In the third quarter of fiscal year 1999, HDDG recorded a $101
million loss from investee which includes a write-off of HDDG's investment in
MKQC; a write-down of HDDG's interest in facilities in Louisville, Colorado,
and Shrewsbury, Massachusetts that were occupied by MKQC; warranty costs
resulting from MR recording heads manufactured by MKQC; and HDDG's 49% pro rata
share in funding MKQC's repayment of its obligations, primarily bank debt,
accounts payable, and other liabilities through June 1999 when the liquidation
of MKQC is expected to be completed.

MKQC's net loss for the six months ended September 27, 1998 was $84 million
on revenue of $62 million. HDDG's 49% interest in the net loss was $41 million.

F-65
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 6 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt

Quantum's debt includes the following:

Less short-term portion of debt........................ 44,229 935
-------- --------
Total long-term debt and convertible subordinated
debt.................................................. $419,018 $327,485
======== ========
HDDG's portion of Quantum debt:
Short-term debt........................................ $ 14,743 $ 312
Long-term debt and convertible subordinated debt,
excluding current portion............................. 139,673 109,161
-------- --------
HDDG total debt...................................... $154,416 $109,473
======== ========

DSSG's portion of Quantum debt:
Short-term debt........................................ $ 29,486 $ 623
Long-term debt and convertible subordinated debt,
excluding current portion............................. 279,345 218,324
-------- --------
DSSG total debt...................................... $308,831 $218,947
======== ========
Weighted average interest rate on Quantum's debt at
period-end............................................ 6.53% 7.39%
</TABLE>

In July 1997, Quantum issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option of
the holder at any time prior to maturity, unless previously redeemed, into
shares of Quantum's common stock at a conversion price of $46.325 per share.
The notes are redeemable at Quantum's option on or after August 1, 1999, and
prior to August 1, 2001, under certain conditions related to the price of
Quantum's common stock. Subsequent to August 1, 2001, the notes are redeemable
at Quantum's option at any time. In the event of certain changes involving all
or substantially all of Quantum's common stock, the notes would become
redeemable at the option of the holder. Redemption prices range from 107% of
the principal to 100% at maturity. The notes are unsecured obligations
subordinated in right of payment to all existing and future senior indebtedness
of Quantum.

If the Tracking Stock Proposal is implemented, each of the 7% subordinated
notes, which currently are convertible into shares of Quantum Common Stock,
will become convertible into a number of shares of HDDG

F-66
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Stock and a number of shares of DSSG stock equal to the numbers of such shares
which the holder of such note would receive under the tracking stock proposal
had such note been converted immediately prior to the implementation of the
tracking stock proposal. The notes will not be separately convertible into
solely DSSG stock or solely HDDG stock. The exercise price and maturity date of
each convertible note will not be affected by the implementation of the
tracking stock proposal.

In March 1998, Quantum called for redemption of all of Quantum's outstanding
5% convertible subordinated debentures due March 1, 2003, at a redemption price
of $1,035.71 per $1,000 principal amount of debenture. At the time of the call
for redemption, the entire original issue amount of the debentures of
approximately $241 million was outstanding. Holders of the debentures exercised
their option to convert debentures held into 21,626,327 shares of Quantum's
common stock at a conversion price of approximately $11.16 per share. No
debentures were redeemed for cash.

The previously outstanding revolving credit line, term loan, and equipment
loan, which had carrying amounts of $110 million, $56 million, and $14 million,
respectively, as of March 31, 1997, were repaid by Quantum and terminated in
the first quarter of fiscal year 1998.

Note 7 Redeemable Preferred Stock

In fiscal year 1998, the holder of the 90,000 shares of Redeemable
Convertible Participating Series B Preferred Stock exercised its right to
convert the shares to Quantum common stock. Quantum issued 180,000 shares of
Quantum common stock pursuant to the conversion.

Note 8 Stock Incentive Plans

Long-Term Incentive Plan. Quantum has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates of
Quantum. The Plan has available and reserved for future issuance 14.6 million
shares and allows for an annual increase in the number of shares available for
issuance, subject to a limitation. Available for grant as of March 31, 1998,
were 1,105,000 shares. Options under the Plan expire no later than ten years
from the grant date and generally vest over four years. Restricted stock
granted under the Plan generally vests over two to three years. In fiscal years
1996, 1997 and 1998, Quantum recorded compensation expense of $899,000,
$1,916,000 and $3,179,000, respectively, related to restricted stock granted
pursuant to stock purchase rights under the Plan, a portion of which was
allocated to HDDG. The number of shares of restricted stock granted under the
Plan were 596,000 shares, 354,290 shares, and 65,500 shares, in fiscal years
1996, 1997 and 1998, respectively, at an exercise price of $.01.

F-67
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Stock Option Plans. Quantum has Stock Option Plans (the "Plans") under
which 600,000 shares of Quantum common stock was reserved for future issuance
at March 31, 1998 to directors of Quantum. Options under the Plans are granted
at prices determined by the Board, but at not less than the fair market value,
and accordingly no compensation accounting has been required at the original
date of grant. Options currently expire no later than ten years from the grant
date and generally vest ratably over one to four years. At March 31, 1998,
options with respect to 532,500 shares of Quantum common stock were available
for grant.

Stock Option Summary Information. A summary of activity relating to
Quantum's Long-Term Incentive Plan and the Stock Option Plans follows:

The following tables summarize information about Quantum's options
outstanding at March 31, 1998:

<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------------------------------
Shares Outstanding at Weighted-Average Weighted-Average
Range of Exercise Prices March 31, 1998 (000s) Remaining Contractual Life Exercise Price
------------------------ --------------------- -------------------------- ----------------
<C> <S> <C> <C>
$ 1.11 -- $ 7.22 5,546 6.38 $ 6.41
$ 7.32 -- $15.22 5,551 7.62 $ 9.49
$17.38 -- $40.38 5,908 9.15 $19.87
------
17,005 7.75 $12.09
======
</TABLE>

<TABLE>
<CAPTION>
Options Exercisable
----------------------------------------------
Shares Exercisable at
March 31, 1998 Weighted-Average
Range of Exercise Prices (000s) Exercise Price
------------------------ --------------------- ----------------
<C> <S> <C>
$ 1.11 -- $ 7.22 4,168 $ 6.16
$ 7.32 -- $15.22 3,084 $ 9.17
$17.38 -- $40.38 1,080 $18.25
-----
8,332 $ 8.84
=====
</TABLE>

F-68
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

At December 27, 1998, Quantum's options outstanding and exercisable were
22.5 million and 11.2 million, respectively. Completing the acquisition of ATL
included the conversion of outstanding ATL stock options into options to
purchase 1.8 million shares of Quantum common stock. These options relate to
Quantum's assumption of ATL's 1996 Stock Incentive Plan and 1997 Stock
Incentive Plan, collectively referred to as the "ATL Plans." Under the terms of
the ATL Plans, eligible key employees, directors and consultants received
options to purchase shares of ATL's previously outstanding common stock at
prices not less than 100% for incentive stock options and not less than 85% for
nonqualified stock options of the fair value on the date of grant as determined
by ATL's Board of Directors. Options under ATL Plans vest over a three year
period and expire ten years after date of grant or 90 days after termination of
employment. Subsequent to completing the acquisition of ATL, no additional
grants may be made from the ATL Plans.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, each outstanding stock option under Quantum's stock
option plans will be converted into separately exercisable options to acquire
one share of DSSG stock and 0.5 of a share of HDDG stock. The exercise price
for the resulting DSSG stock options and HDDG stock options will be calculated
by multiplying the exercise price under the original option from which they
were converted by a fraction, the numerator of which is the opening price of
DSSG stock or HDDG stock, as the case may be, on the first date such stock are
traded on Nasdaq and the denominator of which is the sum of such DSSG stock and
HDDG stock prices. This is intended to ensure that the aggregate intrinsic
value of the options will be preserved, and the ratio of the exercise price per
option to the market value per share will not be reduced. In addition, the
vesting provision and option periods of the original grants will remain the
same when converted.

Stock Purchase Plan. Quantum has an employee stock purchase plan (the
"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. The
Purchase Plan is qualified under Section 423 of the Internal Revenue Code. Of
the 22.8 million shares authorized to be issued under the plan, 3,922,000
shares were available for issuance at March 31, 1998. Quantum's employees
purchased 2,676,000 shares, 3,216,000 shares, and 3,454,000 shares under the
Purchase Plan in fiscal years 1996, 1997, and 1998, respectively. The weighted
average exercise price of stock purchased under the Purchase Plan was $5.98,
$5.41 and $6.22 in fiscal years 1996, 1997, and 1998, respectively.

If the tracking stock proposal is approved by the stockholders and
implemented by the Board, the terms of the Purchase Plan will be adjusted to
allow Quantum's employees to purchase one share of DSSG Stock and 0.5 of a
share of HDDG stock for each share of Quantum common stock.

Other. HDDG adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
in fiscal year 1997. HDDG has elected to continue to account for its stock-
based compensation plans under Accounting Principles Board ("APB") Opinion No.
25 and disclose the pro forma effects of the plans on net income and earnings
per share as provided by SFAS No. 123. Accordingly, no compensation expense has
been recognized for the stock option plans and the employee stock purchase
plans as all options have been issued at fair market value. Since HDDG stock
was not part of the capital structure of Quantum for the periods presented,
there were no stock options outstanding. Therefore, the pro forma effect of
HDDG stock options on the accompanying combined financial statements is not
presented.

Note 9 Common Stock and Stockholder Rights Plan

The HDDG stock will represent a separate class of Quantum's common stock if
the tracking stock proposal is approved. Additional shares of HDDG stock may be
issued from time to time upon exercise of stock options or at the discretion of
Quantum's Board.

F-69
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Quantum has a stockholder rights plan (the "Rights Plan") that provides
existing stockholders with the right to purchase 1/1000 preferred share for
each common share held in the event of certain changes in Quantum's ownership.
Subject to certain exceptions, if any person or group becomes the beneficial
owner of 20% or more of the outstanding common stock each right will entitle
its holder to purchase 1/1000 preferred share or, under certain circumstances,
shares of common stock with a market value twice the exercise price of the
right. The Rights Plan may serve as a deterrent to takeover tactics that are
not in the best interests of stockholders.

The rights will expire on August 4, 2008, unless earlier redeemed by Quantum
or extended. The rights would be exercisable only if a person or group acquires
(i) 20% or more of the then outstanding shares of DSSG stock or (ii) 20% of the
then outstanding shares of HDDG stock, or commences a tender offer that would
result in such person or group beneficially owning such number of shares. In
such event, each Right would entitle the holder to purchase from Quantum (i) in
the case of a DSSG right, 1/1000 of a share of Series B Junior Preferred Stock
(a "Series B Unit") at a purchase price to be determined by the Board, subject
to adjustment or, under certain circumstances, shares of DSSG stock with a
market value twice the exercise price of the DSSG right and (ii) in the case of
a HDDG right, 1/1000 of a share of Series C Junior Preferred Stock (a "Series C
Unit") at a purchase to be determined by the Board, subject to adjustment or,
under certain circumstances, shares of HDDG stock with a market value twice the
exercise price of the HDDG right.

Note 10 Restructuring and Other Expenses

In the fourth quarter of fiscal year 1996, HDDG recorded a restructuring
charge of $209 million, associated with the transition of its high-end hard
disk drive product manufacturing to MKE. As part of the transition, HDDG
discontinued its manufacture of these products and completed the shutdown of
the related facilities in fiscal year 1997. The related manufacturing work
force was terminated in fiscal year 1997. HDDG closed, sold, or disposed of
certain high-end hard disk drive manufacturing facilities and equipment located
in Penang, Malaysia, and Milpitas, California, which as of March 31, 1996, were
carried at a fair value of approximately $30 million, net of estimated cost to
dispose. Facilities sold included the manufacturing building in Malaysia, which
occurred in the second quarter of fiscal year 1997.

F-70
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

between the carrying value and estimated fair value on disposal of high-end
hard disk drive manufacturing property and equipment; and incremental
impairments in the carrying value of certain high-end hard disk drive product
inventories and losses on supplier commitments arising directly from the
decision to stop manufacturing, as follows:

<TABLE>
<CAPTION>
(In millions)
<S> <C>
Employee termination benefits................................ $ 10
Write-down of capital assets to fair value................... 45
Write-down of inventories to net realizable value and losses
on supplier commitments..................................... 144
Other exit costs............................................. 10
----
$209
====
</TABLE>

Note 11 Savings and Investment Plan

Note 12 Income Taxes

The income tax benefit consists of the following:

<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
(In thousands)
<C> <S> <C> <C> <C>
Federal: Current.......................... $(59,555) $(60,979) $(106,585)
Deferred......................... (35,517) 4,946 21,029
-------- -------- ---------
(95,072) (56,033) (85,556)
-------- -------- ---------
State: Current.......................... 3,221 (5,470) (8,591)
Deferred......................... (7,310) 4,028 (15,098)
-------- -------- ---------
(4,089) (1,442) (23,689)
-------- -------- ---------
Foreign: Current.......................... 24,926 20,088 26,857
Deferred......................... 38 17,928 (593)
-------- -------- ---------
24,964 38,016 26,264
-------- -------- ---------
Income tax benefit......................... $(74,197) $(19,459) $ (82,981)
======== ======== =========
</TABLE>

The tax benefits associated with nonqualified stock options, disqualifying
dispositions of stock options, and employee stock purchase plan shares reduced
taxes currently payable as shown above by $8 million, $10 million, and $16
million in fiscal years 1996, 1997 and 1998, respectively. Such benefits are
credited to group equity when realized.

F-71
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

HDDG's income tax provision differs from the amount computed by applying the
federal statutory rate of 35% to income before income taxes as follows:

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate.............. $(69,869) $ 7,559 $(47,544)
State income tax, net of federal benefit... (2,658) (937) (15,398)
Research and development credit............ -- -- (5,990)
Foreign earnings taxed at less than U.S.
rates..................................... (1,098) (17,169) (15,813)
Valuation allowance........................ (4,855) (8,431) --
Other items................................ 4,283 (481) 1,764
-------- -------- --------
$(74,197) $(19,459) $(82,981)
======== ======== ========
</TABLE>

Significant components of deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
Year Ended March
31,
-----------------
1997 1998
------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods......................... $33,047 $ 39,834
Accrued warranty expense............................ 38,762 18,816
Allowance for doubtful accounts..................... 2,901 3,398
Distribution reserves............................... 6,007 6,387
Restructuring charges............................... 22,441 20,422
Other accruals and reserves not currently deductible
for tax purposes................................... 15,139 20,821
Depreciation methods................................ 17,351 24,441
Amortization methods................................ 26,215 26,037
Valuation allowance................................. (6,375) --
------- --------
155,488 160,156
------- --------
Deferred tax liabilities:
Foreign inventory valuation methods................. (17,912) (17,322)
Tax on unremitted foreign earnings net of foreign
tax credits and foreign deferred taxes............. (68,435) (77,180)
Other............................................... (12,164) (14,015)
------- --------
(98,511) (108,517)
------- --------
Net deferred tax asset................................ $56,977 $ 51,639
======= ========
</TABLE>

The valuation allowance for deferred tax assets decreased approximately $1
million, $9 million and $6 million during fiscal years 1996, 1997 and 1998.

Pretax income from foreign operations was $124 million, $241 million, and
$139 million for the fiscal years ended March 31, 1996, 1997, and 1998,
respectively. U.S. taxes have not been provided for unremitted foreign earnings
of $327 million. The residual U.S. tax liability, if such amounts were
remitted, would be approximately $81 million.

F-72
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Quantum's federal income tax returns have been examined by the Internal
Revenue Service (IRS) for all years through 1993. All issues have been resolved
with no material effect, and the IRS has closed those years. Quantum's federal
tax returns for the years 1994-1996 are presently under examination by the IRS.
Management believes sufficient accruals have been provided in prior years for
any adjustments that may result for the years under examination.

Note 13 Litigation

Quantum and certain of its current and former officers and directors have
been named as defendants in two class-action lawsuits, one filed on August 28,
1996, in the Superior Court of Santa Clara County, California, and one filed on
August 30, 1996, in the U.S. District Court of the Northern District of
California. The plaintiff in both class actions purports to represent a class
of all persons who purchased Quantum Common Stock between February 26, 1996,
and June 13, 1996. The complaints allege that the defendants violated various
federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about Quantum and that individual
defendants sold shares of Quantum Common Stock based on material nonpublic
information.

On February 25, 1997, in the Santa Clara County action, the Court sustained
defendants' demurrer to most of the causes of action in the complaint, with
leave to amend. At a June 12, 1997 demurrer hearing in state court, the judge
dismissed the action as to four of the individual defendants with prejudice and
as to three of the individual defendants without prejudice. The demurrer as to
Quantum was overruled. The Court heard oral argument on plaintiffs' motion for
class certification on November 4, 1997. On March 4, 1998, the Court entered an
order denying plaintiffs' motion without prejudice. Limited discovery is
proceeding.

Certain of Quantum's current and former officers and directors were also
named as defendants in a derivative lawsuit, which was filed on November 8,
1996, in the Superior Court of Santa Clara County. The derivative complaint was
based on factual allegations substantially similar to those alleged in the
class-action lawsuits. Defendants' demurrer to the derivative complaint was
sustained without prejudice on April 14, 1997. Plaintiffs did not file an
amended complaint. On August 7, 1997, the Court issued an order of dismissal
and entered final judgment dismissing the complaint.

On August 7, 1998, Quantum was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. On Quantum's motion, the suit has been
moved to the Northern District of California. The plaintiff, Papst Licensing
GmbH, owns at least 24 U.S. patents which it asserts that Quantum has
infringed. Quantum has studied many of these
patents before and, of the patents it has studied, believes that defenses of
patent invalidity and non-infringement can be asserted. However, Quantum has
not yet had time to make a complete study of all the patents asserted by Papst
and there can be no assurance that Quantum has not infringed on these or other
patents owned by Papst. The final results of this litigation, as with any
litigation, are uncertain. If required, there can be no assurance that licenses
to any technology owned by Papst or any other third party alleging infringement
could

F-73
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

be obtained on commercially reasonable terms if at all. Adverse resolution of
the Papst litigation or any other intellectual property litigation could
subject Quantum to substantial liabilities and require it to refrain from
manufacturing certain products which could have a material adverse effect on
Quantum's business, financial condition or results of operations. In addition,
the costs of engaging in the Papst litigation or other intellectual property
litigation could be substantial, regardless of the outcome.

Quantum is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity
of Quantum, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to Quantum.

Note 14 Commitments

Quantum leases certain facilities for HDDG's use under non-cancelable
operating lease agreements for periods of up to 15 years. Some of the leases
have renewal options ranging from one to ten years and contain provisions for
maintenance, taxes, or insurance.

HDDG's rent expense was $23 million, $22 million, and $21 million for the
fiscal years ended March 31, 1996, 1997, and 1998, respectively.

Future minimum lease payments under operating leases are as follows:

<TABLE>
<CAPTION>
Year ended March 31, (In thousands)
<S> <C>
1999.................................................... $ 22,943
2000.................................................... 22,192
2001.................................................... 21,014
2002.................................................... 18,940
2003.................................................... 17,350
Thereafter.............................................. 80,576
--------
Total future minimum lease payments..................... $183,015
========
</TABLE>

Note 15 Business Units and Geographic Information

HDDG currently has two primary product lines, desktop hard disk drives and
high-end hard disk drives. HDDG has two separate business units that support
these two product lines. All recording heads manufactured by HDDG are used in
HDDG hard disk drives and are not sold to external customers.

The desktop business unit designs, develops and markets desktop hard disk
drives designed to meet the storage requirements of entry-level to high-end
desktop personal computers in home and business environments. The high-end
business unit designs, develops and markets high-end hard disk drives designed
to meet the storage requirements of network servers, workstations and storage
subsystems. In the future, the two HDDG business units may become a single
business unit as their markets begin to merge and be reported on a combined
basis.

HDDG's recording heads business through May 15, 1997 was reported in HDDG's
combined operations. Effective May 16, 1997, MKE acquired a 51% interest in
HDDG's recording heads business which became part of a joint venture with MKE.
HDDG accounted for its 49% interest in the joint venture using the equity
method. On October 28, 1998, the joint venture was dissolved and a charge was
recorded to write-off assets and recognize obligations related to the
dissolution. For more information on the loss from investee see note 5 of the
notes to combined financial statements.

F-74
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
At or For the At or For the
Year Ended March 31, Nine Months Ended
---------------------- -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
------ ------ ------ ------------ ------------
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C>
Business unit:
Desktop
Revenue.................... $3,350 $4,005 $3,981 $3,099 $2,295
Gross profit............... 511 566 453 391 150
Unit operating profit
(loss).................... 291 300 184 184 (54)
Inventory and property,
plant and equipment, net
of accumulated
depreciation.............. 338 259 320 378 273
Expenditures for long-lived
assets.................... 97 65 79 73 52

High-end
Revenue.................... 737 587 634 487 386
Gross profit (loss)........ (74) (11) (81) (73) (40)
Unit operating loss........ (417) (154) (250) (205) (62)
Inventory and property
plant and equipment, net
of accumulated
depreciation.............. 357 167 120 170 67
Expenditures for long-lived
assets.................... 81 42 40 23 11

Recording heads
Unit operating loss........ (70) (110) (9) (9) --
Loss from investee......... -- -- (66) (42) (142)
Inventory and property,
plant and equipment, net
of accumulated
depreciation.............. 48 148 -- -- --
Expenditures for long-lived
assets.................... 13 57 -- -- --
</TABLE>

<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended
------------------------ -------------------------
December 28, December 27,
1996 1997 1998 1997 1998
------- ------ ------- ------------ ------------
(unaudited)
(In millions)
<S> <C> <C> <C> <C> <C>
Profit or (loss)
reconciliation:
Total unit operating
profit (loss)............ $(196) $ 36 $ (74) $(30) $(116)
Total loss from investee.. -- -- (66) (42) (142)
Unallocated amounts:
Interest and other
income/(expense)......... (4) (15) 4 3 5
------- ------ ------- ---- -----
Income before income
taxes.................. $(200) $ 21 $(136) $(69) $(253)
======= ====== ======= ==== =====
</TABLE>

<TABLE>
<CAPTION>
March 31,
------------- December 27,
1997 1998 1998
------ ------ ------------
(unaudited)
(In millions)
<S> <C> <C> <C>
Assets reconciliation:
Total unit inventory and property, plant and
equipment, net of accumulated depreciation........ $ 574 $ 440 $ 340
Cash and cash equivalents.......................... 202 253 483
Marketable securities.............................. -- 72 24
Accounts receivable, net of allowance for doubtful
accounts.......................................... 733 586 417
Deferred taxes..................................... 92 90 90
Other current assets............................... 75 118 80
Intangible assets, less accumulated amortization... 35 9 6
Other assets....................................... 10 78 16
------ ------ ------
Total combined assets............................ $1,721 $1,646 $1,456
====== ====== ======
</TABLE>

F-75
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Certain HDDG costs have not been allocated to the desktop, high-end and
recording heads business units. Recording heads produced by the recording heads
business were transferred to MKE and used in the manufacture of hard disk
drives for HDDG. The value at which the recording heads were transferred was
recorded as an offset to cost of sales by HDDG.

Property plant and equipment, net of accumulated depreciation, included
equipment related to research and development, testing and configuration of
hard disk drives, logistics, customer service, and administration. Cash and
cash equivalents, marketable securities, accounts receivable, deferred taxes,
other current assets, intangible assets and other assets were not allocated to
the business units.

Geographic Information

Revenue and long-lived assets by region are as follows (revenue is
attributed to regions based on the location of customers):

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
Long-Lived Long-Lived Long-Lived
Revenue Assets Revenue Assets Revenue Assets
------- ---------- ------- ---------- ------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States... $1,835 $342 $1,959 $329 $2,114 $200
Europe.......... 1,243 15 1,459 13 1,457 13
Asia Pacific.... 789 29 1,069 61 969 24
Latin America... 220 -- 104 -- 75 --
------ ---- ------ ---- ------ ----
Total........... $4,087 $386 $4,591 $403 $4,615 $237
====== ==== ====== ==== ====== ====
</TABLE>

<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
December 28, 1997 December 27, 1998
------------------ ------------------
Long-Lived Long-Lived
Revenue Assets Revenue Assets
------- ---------- ------- ----------
(In millions)
(unaudited)
<S> <C> <C> <C> <C>
United States........................ $1,597 $197 $1,215 $160
Europe............................... 1,149 12 754 13
Asia Pacific......................... 784 18 624 28
Latin America........................ 56 -- 88 --
------ ---- ------ ----
Total................................ $3,586 $227 $2,681 $201
====== ==== ====== ====
</TABLE>

One customer accounted for 10% or more of combined revenue in fiscal years
1996, 1997 and 1998, and in the nine months ended December 28, 1997. Revenue
from this customer represented $675 million, $552 million, $552 million and
$418 million of HDDG's combined revenue in the respective periods. Another
customer accounted for 10% or more of combined revenue in fiscal year 1996,
representing $473 million of HDDG's combined revenue in this period. Another
customer accounted for 10% or more of combined revenue in fiscal year 1998, and
in the nine months ended December 28, 1997 and December 27, 1998. Revenue from
this customer represented $626 million, $441 million and $382 million of HDDG's
combined revenue in the respective periods.

F-76
<PAGE>

HARD DISK DRIVE GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 16 Unaudited Quarterly Combined Financial Data

<TABLE>
<CAPTION>
Fiscal Year 1999
-----------------------------------
1st 2nd
Quarter Quarter 3rd Quarter
---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue............. $ 847,321 $ 874,253 $ 959,086
Gross profit.............. 52,699 60,214 77,788
Net loss.................. (40,554) (34,878) (75,968)
<CAPTION>
Fiscal Year 1998
------------------------------------------------
1st 2nd
Quarter Quarter 3rd Quarter 4th Quarter
---------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue............. $1,181,139 $1,214,968 $1,189,602 $1,029,726
Gross profit (loss)....... 169,872 160,076 (11,864) 55,223
Net income (loss)......... 46,847 39,053 (98,247) (40,511)
<CAPTION>
Fiscal Year 1997
------------------------------------------------
1st 2nd
Quarter Quarter 3rd Quarter 4th Quarter
---------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue............. $1,025,051 $ 971,227 $1,274,613 $1,320,553
Gross profit.............. 95,152 78,418 140,791 184,041
Net income (loss)......... (11,345) (17,372) 23,079 46,693
</TABLE>

The results of operations for the third quarter of fiscal year 1999 included
the effect of a $101 million charge related to the dissolution of MKQC.

The results of operations for the third quarter fiscal year 1998 included
the effect of a $103 million special charge related to the HDDG's high-end hard
disk drive products.

The results of operations for the fourth quarter of fiscal year 1998 were
impacted by the reduction in estimated bonus accrued earlier in the fiscal
year.

F-77
<PAGE>

ANNEX I

RESTATED CERTIFICATE OF INCORPORATION

QUANTUM CORPORATION

(Originally Incorporated January 28, 1987 Under the Same Name)

ARTICLE I.

NAME

The name of the corporation is Quantum Corporation (the "Corporation").

ARTICLE II.

ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT

The address of the Corporation's registered office in the State of Delaware
is Incorporating Services, Ltd., 410 South State Street, in the city of Dover,
County of Kent, 19901. The name of its registered agent at that address is
Incorporating Services, Ltd.

ARTICLE III.

PURPOSE

The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the Delaware General Corporation Law (the "DGCL").

ARTICLE IV.

CAPITAL STOCK

Section 1. Authorization. The total number of shares of all classes of stock
which the Corporation has authority to issue is ( ) shares,
consisting of ( ) shares of a class of common stock designated
as "Quantum Corporation--DSSG Common Stock," having a par value of $0.01 per
share (the "DSSG Stock"), ( ) shares of a class of common stock
designated as "Quantum Corporation--HDDG Common Stock," having a par value of
$0.01 per share (the "HDDG Stock"), and ( ) shares of preferred
stock having a par value of $0.01 per share (the "Preferred Stock"). The DSSG
Stock and the HDDG Stock shall hereinafter collectively be called "Common
Stock" and either shall sometimes be called a class of Common Stock. For
purposes of this Article IV, references to the "Board of Directors" shall refer
to the Board of Directors of the Corporation, as established in accordance with
Article VI of the Certificate of Incorporation of the Corporation, and
references to "the Certificate of Incorporation" shall refer to this Restated
Certificate of Incorporation as the same may be amended from time to time.
Certain capitalized terms used in this Article IV, shall have the meanings set
forth in Section 2.6 of this Article. For purposes of this Article IV, the DSSG
Stock, when issued, shall be considered issued in respect of DSSG and the HDDG
Stock, when issued, shall be considered issued in respect of HDDG. The number
of authorized shares of any class or classes of capital stock of the
Corporation may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the voting power of the stock of the Corporation entitled to vote generally
in the election of directors.
<PAGE>

Upon the date on which this Restated Certificate of Incorporation shall
become effective, and without any further action on the part of the Corporation
or its stockholders, each share of the Corporation's common stock, par value
$0.01 per share, that is issued and outstanding shall be changed into one share
of DSSG Stock and 0.5 of a share of HDDG Stock.

Section 2. Common Stock. The voting powers, preferences and relative,
participating, optional or other special rights of the Common Stock, and the
qualifications and restrictions thereon, shall be as follows in this Section 2.

Section 2.1 Dividends. Subject to any preferences and relative,
participating, optional or other special rights of any outstanding class or
series of preferred stock of the Corporation and any qualifications or
restrictions on either class of Common Stock created thereby, dividends may be
declared and paid upon either class of Common Stock, upon the terms with
respect to each such class, and subject to the limitations provided for below
in this Section 2.1, as the Board of Directors may determine.

(a) Dividends on DSSG Stock. Dividends on DSSG Stock may be declared and
paid only out of the lesser of (i) the funds of the Corporation legally
available therefor and (ii) the DSSG Available Dividend Amount.

(b) Dividends on HDDG Stock. Dividends on HDDG Stock may be declared and
paid only out of the lesser of (i) the funds of the Corporation legally
available therefor and (ii) the HDDG Available Dividend Amount.

(c) Discrimination in Dividends Between Classes of Common Stock. The Board
of Directors, subject to the provisions of Sections 2.1(a) and 2.1(b), may at
any time declare and pay dividends exclusively on DSSG Stock, exclusively on
HDDG Stock, or on both such classes, in equal or unequal amounts,
notwithstanding the relative amounts of the Available Dividend Amount with
respect to either Group, the amount of dividends previously declared on either
class, the respective voting or liquidation rights of either class or any other
factor.

(d) Shares Distributions. Except as permitted by Sections 2.4(a) and 2.4(b),
the Board of Directors may declare and pay dividends or distributions of shares
of DSSG Stock or HDDG Stock (or Convertible Securities convertible into or
exchangeable or exercisable for shares of DSSG Stock or HDDG Stock) on shares
of a class of Common Stock or shares of a class or series of preferred stock of
the Corporation only as follows:

(i) dividends or distributions of shares of DSSG Stock (or Convertible
Securities convertible into or exchangeable or exercisable for shares of
DSSG Stock) on shares of DSSG Stock or shares of preferred stock attributed
to DSSG; and

(ii) dividends or distributions of shares of HDDG Stock (or Convertible
Securities convertible into or exchangeable or exercisable for shares of
HDDG Stock) on shares of HDDG Stock or shares of preferred stock attributed
to HDDG.

Section 2.2 Voting Rights. (a) General. Except as otherwise provided by law,
by the terms of any outstanding class or series of preferred stock of the
Corporation or by any provision of the Certificate of Incorporation restricting
the power to vote on a specified matter to other stockholders, the entire
voting power of the stockholders of the Corporation shall be vested in the
holders of the Common Stock, who shall be entitled to vote on any matter on
which the holders of stock of the Corporation shall, by law or by the
provisions of the Certificate of Incorporation or Bylaws of the Corporation, be
entitled to vote, and both classes of Common Stock shall vote thereon together
as a single class.

(b) Number of Votes for each Class of Common Stock. On each matter to be
voted on by the holders of both classes of Common Stock voting together as a
single class, the number of votes per share of each class shall be as follows:

(i) each outstanding share of DSSG Stock shall have one vote; and

2
<PAGE>

(ii) each outstanding share of HDDG Stock shall have a number of votes
(including a fraction of one vote) equal to the quotient (rounded to the
nearest three decimal places) of the average Market Value of one share of
HDDG Stock during the 20-Trading Day Period ending on the tenth Trading Day
prior to the record date for determining the stockholders entitled to vote,
divided by the average Market Value of a share of DSSG Stock during such
20-Trading Day period.

Notwithstanding the foregoing, if shares of only one class of Common Stock are
outstanding on the record date for determining the holders of Common Stock
entitled to vote on any matter, then each share of that class shall be entitled
to one vote and, if either class of Common Stock is entitled to vote as a
separate class with respect to any matter, each share of that class shall, for
purpose of such vote, be entitled to one vote on such matter.

In addition to any provision of law or any provision of the Certificate of
Incorporation entitling the holders of outstanding shares of DSSG Stock or HDDG
Stock to vote as a separate class, the Board of Directors may condition the
approval of any matter submitted to stockholders on receipt of a separate vote
of the holders of outstanding shares of DSSG Stock or HDDG Stock.

Section 2.3 Liquidation Rights. In the event of any voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation and
the full preferential amounts (including any accumulated and unpaid dividends)
to which the holders of any outstanding shares of preferred stock of the
Corporation are entitled (regardless of the Group to which such shares of
preferred stock were attributed), the holders of the DSSG Stock and HDDG Stock
shall be entitled to receive the assets, if any, of the Corporation remaining
for distribution to holders of Common Stock on a per share basis in proportion
to the respective liquidation units per share of such class. Each share of DSSG
Stock shall have one liquidation unit and each share of HDDG Stock shall have a
number of liquidation units (including a fraction of one liquidation unit)
equal to the quotient (rounded to the nearest five decimal places) of the
average Market Value of one share of HDDG Stock during the 20-Trading Day
period ending on the 40th Trading Day after the effective date of this
certificate of incorporation, divided by the average Market Value of one share
of DSSG Stock during such 20-Trading Day period. Neither the merger nor
consolidation of the Corporation into or with any other corporation, nor a
sale, transfer or lease of all or any part of the assets of the Corporation,
shall, alone, be deemed a liquidation or winding up of the Corporation or cause
the dissolution of the Corporation, for purposes of this Section 2.3.

If the Corporation shall in any manner subdivide (by stock split,
reclassification or otherwise) or combine (by reverse stock split,
reclassification or otherwise) the outstanding shares of DSSG Stock or HDDG
Stock, or declare a dividend in shares of either class to holders of such
class, the per share liquidation units of either class of Common Stock
specified in the preceding paragraph of this Section 2.3, as adjusted from time
to time, shall be appropriately adjusted as determined by the Board of
Directors, so as to avoid dilution in the aggregate, relative liquidation
rights of the shares of any class of Common Stock.

Section 2.4 Conversion or Redemption of the Common Stock. DSSG Stock is
subject to conversion or redemption and HDDG Stock is subject to conversion or
redemption, in each case, upon the terms provided below in this Section 2.4;
provided, however, that neither class of Common Stock may be converted or
redeemed if the other class of Common Stock has been converted or redeemed in
its entirety or notice thereof shall have been given as required by this
Section 2.4.

(a) Mandatory and Optional Conversion and Redemption of DSSG Stock Other
Than for DSSG Subsidiary Stock. (i) In the event of the Disposition, in one
transaction or a series of related transactions, by the Corporation and/or its
subsidiaries of all or substantially all of the properties and assets
attributed to DSSG to one or more persons or entities (other than the
Disposition (w) by the Corporation of all or substantially all of its
properties and assets in one transaction or a series of related transactions in
connection with the dissolution, liquidation or winding up of the Corporation
and the distribution of assets to stockholders as referred to in Section 2.3,
(x) of the properties and assets attributed to DSSG as contemplated by Section
2.4(c) or otherwise to all holders of shares of DSSG Stock divided among such
holders on a pro rata basis in accordance with the

3
<PAGE>

number of shares of DSSG Stock outstanding, (y) to any person or entity
controlled (as determined by the Board of Directors) by the Corporation or (z)
in connection with a Related Business Transaction in respect of DSSG), the
Corporation shall, on or prior to the 95th Trading Day after the date of
consummation of such Disposition (the "Disposition Date"), pay a dividend on
DSSG Stock or redeem some or all of DSSG Stock or convert DSSG Stock into HDDG
Stock (or another class or series of common stock of the Corporation), all as
provided by the following Sections 2.4(a)(i)(1) and 2.4(a)(i)(2) and, to the
extent applicable, by Section 2.4(f), as the Board of Directors shall have
selected among such alternatives:

(1) provided that there are funds of the Corporation legally available
therefor:

(A) pay to the holders of the shares of DSSG Stock a dividend pro
rata in accordance with the number of shares of DSSG Stock held by each
such holder, as the Board of Directors shall have declared subject to
compliance with Section 2, in cash and/or in securities (other than a
dividend of shares of a class of Common Stock) or other property having
a Fair Value as of the Disposition Date in the aggregate equal to the
Fair Value as of the Disposition Date of the Net Proceeds of such
Disposition; or

(B) (I) subject to the last sentence of this Section 2.4(a)(i), if
such Disposition involves all (not merely substantially all) of the
properties and assets attributed to DSSG, redeem or exchange as of the
Redemption Date determined as provided by Section 2.4(f)(iii), all
outstanding shares of DSSG Stock in exchange for, on a pro rata basis,
cash and/or for securities (other than shares of a class of Common
Stock) or other property having a Fair Value as of the Disposition Date
in the aggregate equal to the Fair Value as of the Disposition Date of
the Net Proceeds of such Disposition; or

(II) subject to the last sentence of this Section 2.4(a)(i), if such
Disposition involves substantially all (but not all) of the properties
and assets attributed to DSSG, redeem or exchange as of the Redemption
Date determined as provided by Section 2.4(f)(iv) such number of whole
shares of DSSG Stock (which may be all, but not more than all, of such
shares outstanding) as have in the aggregate an average Market Value
during the period of ten consecutive Trading Days beginning on the 26th
Trading Day immediately succeeding the Disposition Date closest to the
Fair Value as of the Disposition Date of the Net Proceeds of such
Disposition in consideration for, on a pro rata basis, cash and/or
securities (other than shares of a class of Common Stock) or other
property having a Fair Value as of the Disposition Date in the
aggregate equal to such Fair Value of the Net Proceeds; or

(2) declare that each outstanding share of DSSG Stock shall be converted
as of the Conversion Date determined as provided by Section 2.4(f)(v) into
a number of fully paid and nonassessable shares of HDDG Stock (or, if HDDG
Stock is not Publicly Traded at such time and shares of another class or
series of common stock of the Corporation (other than DSSG Stock) are then
Publicly Traded, of such other class or series of the common stock of the
Corporation as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of
such conversion required by Section 2.4(f)(v)) equal to 110% of the ratio,
expressed as a decimal fraction rounded to the nearest five decimal places,
of the average Market Value of one share of DSSG Stock over the period of
ten consecutive Trading Days beginning on the 26th Trading Day immediately
succeeding the Disposition Date to the average Market Value of one share of
HDDG Stock (or such other class or series of common stock) over the same
ten Trading Day period; provided, that with respect to any Conversion Date
which is later than the fifth anniversary of the date on which this
Restated Certificate of Incorporation shall have become effective, then
such number of fully paid and nonassessable shares shall equal 100% of such
ratio.

Notwithstanding the foregoing provisions of this Section 2.4(a)(i), the
Corporation shall redeem shares of a class of Common Stock as provided by
Section 2.4(a)(i)(1)(B)(I) or (II) only if the amount to be paid in redemption
of such stock is less than or equal to the DSSG Available Dividend Amount as of
the Redemption Date.

(ii) For purposes of this Section 2.4(a): (1) as of any date, "substantially
all of the properties and assets" attributed to DSSG shall mean a portion of
such properties and assets (A) that represents at least 80% of the

4
<PAGE>

Fair Value of the properties and assets attributed to DSSG as of such date or
(B) from which were derived at least 80% of the aggregate revenues for the
immediately preceding twelve fiscal quarterly periods of the Corporation
(calculated on a pro forma basis to include revenues derived from any of such
properties and assets acquired during such period) derived from the properties
and assets attributed to DSSG as of such date; (2) in the case of a Disposition
of the properties and assets attributed to DSSG in a series of related
transactions, such Disposition shall not be deemed to have been consummated
until the consummation of the last of such transactions; and (3) the Board of
Directors may pay any dividend or redemption price referred to in Section
2.4(a)(i) in cash, securities (other than shares of a class of Common Stock) or
other property, regardless of the form or nature of the proceeds of the
Disposition.

(iii) The Board of Directors may at any time declare that each outstanding
share of DSSG Stock shall be converted, as of the Conversion Date provided by
Section 2.4(f)(v), into a number of fully paid and nonassessable shares of HDDG
Stock (or, if HDDG Stock is not Publicly Traded at such time and shares of any
other class or series of common stock of the Corporation (other than DSSG
Stock) are then Publicly Traded, of such other class or series of common stock
of the Corporation as has the largest Market Capitalization as of the close of
business on the fifth Trading Day immediately preceding the date of the notice
of conversion required by Section 2.4(f)(v)) equal to 110% of the Market Value
Ratio of the DSSG Stock to HDDG Stock as of the fifth Trading Day prior to the
date of the notice of such conversion required by Section 2.4(f)(v); provided,
that (x) with respect to any Conversion Date which is later than the fifth
anniversary of the date on which this Restated Certificate of Incorporation
shall have become effective, or (y) if a Tax Event has occurred, then such
number of fully paid and nonassessable shares shall equal 100% of such ratio.

(b) Mandatory and Optional Conversion and Redemption of HDDG Stock Other
Than for HDD Subsidiary Stock. (i) In the event of the Disposition, in one
transaction or a series of related transactions, by the Corporation and/or its
subsidiaries of all or substantially all of the properties and assets
attributed to HDDG to one or more persons or entities (other than (w) the
Disposition by the Corporation of all or substantially all of its properties
and assets in one transaction or a series of related transactions in connection
with the dissolution, liquidation or winding up of the Corporation and the
distribution of assets to stockholders as referred to in Section 2.3, (x) the
Disposition of the properties and assets attributed to HDDG as contemplated by
Section 2.4(d) or otherwise to all holders of shares of HDDG Stock divided
among such holders on a pro rata basis in accordance with the number of shares
of HDDG Stock outstanding, (y) to any person or entity controlled (as
determined by the Board of Directors) by the Corporation or (z) in connection
with a Related Business Transaction in respect of HDDG), the Corporation shall,
on or prior to the 95th Trading Day after the date of consummation of such
Disposition (the "Disposition Date"), pay a dividend on HDDG Stock or redeem
some or all of HDDG Stock or convert HDDG Stock into DSSG Stock (or another
class or series of common stock of the Corporation), all as provided by the
following Sections 2.4(b)(i)(1) and 2.4(b)(i)(2) and, to the extent applicable,
by Section 2.4(f), as the Board of Directors shall have selected among such
alternatives:

(1) provided that there are funds of the Corporation legally available
therefor:

(A) pay to the holders of the shares of HDDG Stock a dividend pro
rata in accordance with the number of shares of HDDG Stock held by each
such holder, as the Board of Directors shall have declared subject to
compliance with Section 2.1, in cash and/or in securities (other than a
dividend of shares of a class of Common Stock) or other property having
a Fair Value as of the Disposition Date in the aggregate equal to the
Fair Value as of the Disposition Date of the Net Proceeds of such
Disposition; or

(B) (I) subject to the last sentence of this Section 2.4(b)(i), if
such Disposition involves all (not merely substantially all) of the
properties and assets attributed to HDDG, redeem or exchange as of the
Redemption Date determined as provided by Section 2.4(f)(iii), all
outstanding shares of HDDG Stock in exchange for, on a pro rata basis,
cash and/or for securities (other than shares of a class of Common
Stock) or other property having a Fair Value as of the Disposition Date
in the aggregate equal to the Fair Value as of the Disposition Date of
the Net Proceeds of such Disposition; or

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<PAGE>

(II) subject to the last sentence of this Section 2.4(b)(i), if such
Disposition involves substantially all (but not all) of the properties
and assets attributed to HDDG, redeem or exchange as of the Redemption
Date determined as provided by Section 2.4(f)(iv) such number of whole
shares of HDDG Stock (which may be all, but not more than all, of such
shares outstanding) as have in the aggregate an average Market Value
during the period of ten consecutive Trading Days beginning on the 26th
Trading Day immediately succeeding the Disposition Date closest to the
Fair Value as of the Disposition Date of the Net Proceeds of such
Disposition in consideration for, on a pro rata basis, cash and/or
securities (other than shares of a class of Common Stock) or other
property having a Fair Value as of the Disposition Date in the
aggregate equal to such product; or

(2) declare that each outstanding share of HDDG Stock shall be converted
as of the Conversion Date determined as provided by Section 2.4(f)(v) into
a number of fully paid and nonassessable shares of DSSG Stock (or, if DSSG
Stock is not Publicly Traded at such time and shares of another class or
series of common stock of the Corporation (other than HDDG Stock) are then
Publicly Traded, of such other class or series of the common stock of the
Corporation as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of
such conversion required by Section 2.4(f)(v)) equal to 110% of the ratio,
expressed as a decimal fraction rounded to the nearest five decimal places,
of the average Market Value of one share of HDDG Stock over the period of
ten consecutive Trading Days beginning on the 26th Trading Day immediately
succeeding the Disposition Date to the average Market Value of one share of
DSSG Stock (or such other class or series of common stock) over the same
ten Trading Day period; provided, that with respect to any Conversion Date
which is later than the fifth anniversary of the date on which this
Restated Certificate of Incorporation shall have become effective, then
such number of fully paid and nonassessable shares shall equal 100% of such
ratio.

Notwithstanding the foregoing provisions of this Section 2.4(b)(i), the
Corporation shall redeem shares of a class of Common Stock as provided by
Section 2.4(b)(i)(1)(B)(I) or (II) only if the amount to be paid in redemption
of such stock is less than or equal to the HDDG Available Dividend Amount as of
the Redemption Date.

(ii) For purposes of this Section 2.4(b): (1) as of any date, "substantially
all of the properties and assets" attributed to HDDG shall mean a portion of
such properties and assets (A) that represents at least 80% of the Fair Value
of the properties and assets attributed to HDDG as of such date or (B) from
which were derived at least 80% of the aggregate revenues for the immediately
preceding twelve fiscal quarterly periods of the Corporation (calculated on a
pro forma basis to include revenues derived from any of such properties and
assets acquired during such period) derived from the properties and assets
attributed to HDDG as of such date; (2) in the case of a Disposition of the
properties and assets attributed to HDDG in a series of related transactions,
such Disposition shall not be deemed to have been consummated until the
consummation of the last of such transactions; and (3) the Board of Directors
may pay any dividend or redemption price referred to in Section 2.4(b)(i) in
cash, securities (other than shares of a class of Common Stock) or other
property, regardless of the form or nature of the proceeds of the Disposition.

(iii) The Board of Directors may at any time declare that each outstanding
share of HDDG Stock shall be converted, as of the Conversion Date provided by
Section 2.4(f)(v), into a number of fully paid and nonassessable shares of DSSG
Stock (or, if DSSG Stock is not Publicly Traded at such time and shares of any
other class or series of common stock of the Corporation (other than HDDG
Stock) are then Publicly Traded, of such other class or series of common stock
of the Corporation as has the largest Market Capitalization as of the close of
business on the fifth Trading Day immediately preceding the date of the notice
of conversion required by Section 2.4(f)(v)) equal to 110% of the Market Value
Ratio of the HDDG Stock to DSSG Stock as of the fifth Trading Day prior to the
date of the notice of such conversion required by Section 2.4(f)(v); provided,
that (x) with respect to any Conversion Date which is later than the fifth
anniversary of the date on which this Restated Certificate of Incorporation
shall have become effective, or (y) if a Tax Event has occurred, then such
number of fully paid and nonassessable shares shall equal 100% of such ratio.

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<PAGE>

(c) Redemption of DSSG Stock for DSSG Subsidiary Stock. At any time at which
all of the assets and liabilities attributed to DSSG (and no other assets or
liabilities of the Corporation or any subsidiary thereof) are held directly or
indirectly by one or more wholly-owned subsidiaries of the Corporation (each,
an "DSSG Subsidiary"), the Board of Directors may, provided that there are
funds of the Corporation legally available therefor, redeem all of the
outstanding shares of DSSG Stock, on a Redemption Date of which notice is
delivered in accordance with Section 2.4(f)(vi), in exchange for all of the
shares of common stock of each DSSG Subsidiary as will be outstanding
immediately following such exchange of shares, such shares of common stock of
each DSSG Subsidiary to be delivered to the holders of shares of DSSG Stock on
the Redemption Date either directly or indirectly through the delivery of
shares of another DSSG Subsidiary that owns directly or indirectly all such
shares, and to be divided among the holders of DSSG Stock pro rata in
accordance with the number of shares of DSSG Stock held by each such holder on
such Redemption Date, each of which shares of common stock of such DSSG
Subsidiary shall be, upon such delivery, fully paid and nonassessable.

(d) Redemption of HDDG Stock for HDD Subsidiary Stock. At any time at which
all of the assets and liabilities attributed to HDDG (and no other assets or
liabilities of the Corporation or any subsidiary thereof) are held directly or
indirectly by one or more wholly-owned subsidiaries of the Corporation (each, a
"HDD Subsidiary"), the Board of Directors may, provided that there are funds of
the Corporation legally available therefor, redeem all of the outstanding
shares of HDDG Stock, on a Redemption Date of which notice is delivered in
accordance with Section 2.4(f)(vi), in exchange for all of the shares of common
stock of each HDD Subsidiary as will be outstanding immediately following such
exchange of shares, such shares of common stock of each HDD Subsidiary to be
delivered to the holders of shares of HDDG Stock on the Redemption Date either
directly or indirectly through the delivery of shares of another HDD Subsidiary
that owns directly or indirectly all such shares, and to be divided among the
holders of HDDG Stock pro rata in accordance with the number of shares of HDDG
Stock held by each such holder on such Redemption Date, each of which shares of
common stock of such HDD Subsidiary shall be, upon such delivery, fully paid
and nonassessable.

(e) Treatment of Convertible Securities. After any Conversion Date or
Redemption Date on which all outstanding shares of either DSSG Stock or HDDG
Stock are converted or redeemed, any share of such class of Common Stock that
is to be issued on conversion, exchange or exercise of any Convertible
Securities shall, immediately upon such conversion, exchange or exercise and
without any notice from or to, or any other action on the part of, the
Corporation or its Board of Directors or the holder of such Convertible
Security:

(i) in the event the shares of such class of Common Stock outstanding on
such Conversion Date were converted into shares of the other class of
Common Stock (or another class or series of common stock of the
Corporation) pursuant to Section 2.4(a)(i)(2), 2.4(a)(iii), 2.4(b)(i)(2) or
2.4(a)(iii), be converted into the amount of cash and/or the number of
shares of the kind of capital stock and/or other securities or property of
the Corporation that number of shares of such class of Common Stock that
were to be issued upon such conversion, exchange or exercise would have
received had such shares been outstanding on such Conversion Date; or

(ii) in the event the shares of such class of Common Stock outstanding
on such Redemption Date were redeemed pursuant to Section
2.4(a)(i)(1)(B)(I), 2.4(b)(i)(1)(B)(I), 2.4(c) or 2.4(d), be redeemed, to
the extent of funds of the Corporation legally available therefor, for
$0.01 per share in cash for each share of such class of Common Stock that
otherwise would be issued upon such conversion, exchange or exercise.

The provisions of the preceding sentence of this Section 2.4(e) shall not apply
to the extent that other adjustments in respect of such conversion, exchange or
redemption of a class of Common Stock are otherwise made pursuant to the
provisions of such Convertible Securities.

(f) Notice and Other Provisions. (i) Not later than the 20th Trading Day
following the consummation of a Disposition referred to in Section 2.4(a)(i)
(in the case of DSSG Stock) or Section 2.4(b)(i) (in the case of

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<PAGE>

HDDG Stock), the Corporation shall announce publicly by press release (1) the
estimated Net Proceeds of such Disposition, (2) the number of shares
outstanding of the class of Common Stock relating to the Group subject to such
Disposition and (3) the number of shares of such class of Common Stock into or
for which Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof. Not earlier
than the 36th Trading Day and not later than the 40th Trading Day following the
consummation of such Disposition, the Corporation shall announce publicly by
press release which of the actions specified in Section 2.4(a)(i) or 2.4(b)(i),
as the case may be, it has irrevocably determined to take in respect of such
Disposition.

(ii) If the Corporation determines to pay a dividend pursuant to Section
2.4(a)(i)(1)(A) (in the case of DSSG Stock) or Section 2.4(b)(i)(1)(A) (in the
case of HDDG Stock), the Corporation shall, not later than the 40th Trading Day
following the consummation of the Disposition referred to in such Section,
cause notice to be given to the holders of shares of the class of Common Stock
relating to the Group subject to such Disposition and to each holder of
Convertible Securities that are convertible into or exchangeable or exercisable
for shares of such class of Common Stock (unless alternate provision for such
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), setting forth (1) the record date for
determining holders entitled to receive such dividend, which shall be not
earlier than the tenth Trading Day and not later than the 20th Trading Day
following the date of such notice, (2) the anticipated payment date of such
dividend (which shall not be more than 95 Trading Days following the
consummation of such Disposition), (3) the type of property to be paid as such
dividend in respect of the outstanding shares of such class of Common Stock,
(4) the Net Proceeds of such Disposition, (5) the number of outstanding shares
of such class of Common Stock and the number of shares of such class of Common
Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof and (6) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities shall be entitled to receive such dividend only if such
holder properly converts, exchanges or exercises such Convertible Securities on
or prior to the record date referred to in clause (1) of this sentence. Such
notice shall be sent by first-class mail, postage prepaid, to each such holder
at such holder's address as the same appears on the transfer books of the
Corporation on the record date fixed for such notice.

(iii) If the Corporation determines to undertake a redemption pursuant to
Section 2.4(a)(i)(1)(B)(I) (in the case of DSSG Stock) or Section
2.4(b)(i)(1)(B)(I) (in the case of HDDG Stock), the Corporation shall, not
earlier than the 45th Trading Day and not later than the 35th Trading Day prior
to the Redemption Date, cause notice to be given to the holders of shares of
the class of Common Stock relating to the Group subject to the Disposition
referred to in such Section and to each holder of Convertible Securities
convertible into or exchangeable or exercisable for shares of such class of
Common Stock (unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such Convertible
Securities), setting forth (1) a statement that all shares of such class of
Common Stock outstanding on the Redemption Date shall be redeemed, (2) the
Redemption Date (which shall not be more than 95 Trading Days following the
consummation of such Disposition), (3) the type of property in which the
redemption price for the shares of such class of Common Stock to be redeemed is
to be paid, (4) the Net Proceeds of such Disposition, (5) the place or places
where certificates for shares of such class of Common Stock, properly endorsed
or assigned for transfer (unless the Corporation waives such requirement), are
to be surrendered for delivery of cash and/or securities or other property, (6)
the number of outstanding shares of such class of Common Stock and the number
of shares of such class of Common Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and
the conversion, exchange or exercise price thereof, (7) in the case of notice
to be given to holders of Convertible Securities, a statement to the effect
that a holder of such Convertible Securities shall be entitled to participate
in such redemption only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the Redemption Date
referred to in clause (2) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, this Section 2.4 if such holder
thereafter converts, exchanges or exercises such Convertible Securities and (8)
a statement to the effect that, except as otherwise provided by Section
2.4(f)(ix), dividends on shares of such class of Common

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<PAGE>

Stock shall cease to be paid as of such Redemption Date. Such notice shall be
sent by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Corporation on the
record date fixed for such notice.

(iv) If the Corporation determines to undertake a redemption pursuant to
Section 2.4(a)(i)(1)(B)(II) (in the case of DSSG Stock) or Section
2.4(b)(i)(1)(B)(II) (in the case of HDDG Stock), the Corporation shall, not
later than the 40th Trading Day following the consummation of the Disposition
referred to in such Section, cause notice to be given to the holders of shares
of the class of Common Stock relating to the Group subject to such Disposition
and to each holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such class of Common Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible Securities)
setting forth (1) a date not earlier than the tenth Trading Day and not later
than the 20th Trading Day following the date of such notice on which shares of
such class of Common Stock shall be selected for redemption, (2) the
anticipated Redemption Date (which shall not be more than 95 Trading Days
following the consummation of such Disposition), (3) the type of property in
which the redemption price for the shares to be redeemed is to be paid, (4) the
Net Proceeds of such Disposition, (5) the number of shares of such class of
Common Stock outstanding and the number of shares of such class of Common Stock
into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (6) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities shall be eligible to participate in such selection for redemption
only if such holder properly converts, exchanges or exercises such Convertible
Securities on or prior to the record date referred to in clause (1) of this
sentence, and a statement as to what, if anything, such holder will be entitled
to receive pursuant to the terms of such Convertible Securities or, if
applicable, this Section 2.4 if such holder thereafter converts, exchanges or
exercises such Convertible Securities and (7) a statement that the Corporation
will not be required to register a transfer of any shares of such class of
Common Stock for a period of 15 Trading Days next preceding the date referred
to in clause (1) of this sentence. Promptly following the date referred to in
clause (1) of the preceding sentence, the Corporation shall cause a notice to
be given to each holder of record of shares of such class of Common Stock to be
redeemed setting forth (1) the number of shares of such class of Common Stock
held by such holder to be redeemed, (2) a statement that such shares of such
class of Common Stock shall be redeemed, (3) the Redemption Date, (4) the kind
and per share amount of cash and/or securities or other property to be received
by such holder with respect to each share of such class of Common Stock to be
redeemed, including details as to the calculation thereof, (5) the place or
places where certificates for shares of such class of Common Stock, properly
endorsed or assigned for transfer (unless the Corporation shall waive such
requirement), are to be surrendered for delivery of such cash and/or securities
or other property, (6) if applicable, a statement to the effect that the shares
being redeemed may no longer be transferred on the transfer books of the
Corporation after the Redemption Date and (7) a statement to the effect that,
subject to Section 2.4(f)(ix), dividends on such shares of such class of Common
Stock shall cease to be paid as of the Redemption Date. Such notices shall be
sent by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Corporation on the
record date fixed for such notice.

(v) If the Corporation determines to convert DSSG Stock into HDDG Stock or
HDDG Stock into DSSG Stock (or, in either case, another class or series of
common stock of the Corporation) pursuant to Section 2.4(a)(i)(2) or
2.4(a)(iii) (in the case of the conversion of DSSG Stock) or Section
2.4(b)(i)(2) or 2.4(b)(iii) (in the case of the conversion of HDDG Stock), the
Corporation shall, not earlier than the 45th Trading Day and not later than the
35th Trading Day prior to the Conversion Date, cause notice to be given to the
holders of shares of the class of Common Stock to be so converted and to each
holder of Convertible Securities that are convertible into or exchangeable or
exercisable for shares of such class of Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities) setting forth (1) a
statement that all outstanding shares of such class of Common Stock shall be
converted, (2) the Conversion Date (which, in the case of a conversion after a
Disposition, shall not be more than 95 Trading Days following the consummation
of such Disposition), (3) the per share number of shares of Common Stock (or
another class or series of common stock of the Corporation) to be received with
respect to each share of such class of Common Stock, including details as to
the calculation thereof, (4) the

9
<PAGE>

place or places where certificates for shares of such class of Common Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates for
shares of such class of Common Stock, (5) the number of outstanding shares of
such class of Common Stock and the number of shares of such class of Common
Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, (6) a statement to the effect that, subject to Section
2.4(f)(ix), dividends on shares of such class of Common Stock shall cease to be
paid as of such Conversion Date and/or Redemption Date and (7) in the case of
notice to holders of such Convertible Securities, a statement to the effect
that a holder of such Convertible Securities shall be entitled to receive
shares of such class of Common Stock upon such conversion if such holder
properly converts, exchanges or exercises such Convertible Securities on or
prior to such Conversion Date and a statement as to what, if anything, such
holder will be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, this Section 2.4 if such holder thereafter
converts, exchanges or exercises such Convertible Securities. Such notice shall
be sent by first-class mail, postage prepaid, to each such holder at such
holder's address as the same appears on the transfer books of the Corporation
on the record date fixed for such notice.

(vi) If the Corporation determines to redeem shares of DSSG Stock pursuant
to Section 2.4(c) or HDDG Stock pursuant to Section 2.4(d), the Corporation
shall cause notice to be given to each holder of shares of such class of Common
Stock to be redeemed and to the holders of Convertible Securities that are
convertible into or exchangeable or exercisable for shares of such class of
Common Stock (unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such Convertible
Securities), setting forth (1) a statement that all shares of such class of
Common Stock outstanding on the Redemption Date shall be redeemed in exchange
for shares of common stock of each DSSG Subsidiary or HDD Subsidiary, as
applicable, (2) the Redemption Date, (3) the place or places where certificates
for shares of the class of Common Stock to be redeemed, properly endorsed or
assigned for transfer (unless the Corporation shall waive such requirement),
are to be surrendered for delivery of certificates for shares of common stock
of each DSSG Subsidiary or HDD Subsidiary, as applicable, (4) a statement to
the effect that, subject to Section 2.4(f)(ix), dividends on shares of such
class of Common Stock being redeemed shall cease to be paid as of such
Redemption Date, (5) the number of shares of such class of Common Stock
outstanding and the number of shares of such class of Common Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (6) in
the case of notice to holders of Convertible Securities, a statement to the
effect that a holder of Convertible Securities shall be entitled to receive
shares of common stock of each DSSG Subsidiary or HDD Subsidiary, as
applicable, upon redemption only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the Redemption Date and a
statement as to what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable, this
Section 2.4(f), if such holder thereafter converts, exchanges or exercises such
Convertible Securities. Such notice shall be sent by first-class mail, postage
prepaid, not earlier than the 45th Trading Day and not later than the 35th
Trading Day prior to the Redemption Date, to each such holder at such holder's
address as the same appears on the transfer books of the Corporation on the
record date fixed for such notice.

(vii) If less than all of the outstanding shares of either class of Common
Stock are to be redeemed pursuant to Section 2.4(a)(i)(1) (in the case of DSSG
Stock) or Section 2.4(b)(i)(1) (in the case of HDDG Stock), the shares to be
redeemed by the Corporation shall be selected from among the holders of shares
of such class of Common Stock outstanding at the close of business on the
record date for such redemption on a pro rata basis among all such holders or
by lot or by such other method as may be determined by the Board of Directors
to be equitable.

(viii) The Corporation shall not be required to issue or deliver fractional
shares of any capital stock or of any other securities to any holder of either
class of Common Stock upon any conversion, redemption, dividend or other
distribution pursuant to this Section 2.4. If more than one share of either
class of Common Stock shall be held at the same time by the same holder, the
Corporation may aggregate the number of shares of any capital stock that shall
be issuable or any other securities or property that shall be distributable to
such

10
<PAGE>

holder upon any conversion, redemption, dividend or other distribution
(including any fractional shares). If fractional shares of any capital stock or
of any other securities would be required to be issued or distributed to the
holders of either class of Common Stock, the Corporation shall, if such
fractional shares are not issued or distributed to the holder, pay cash in
respect of such fractional shares in an amount equal to the Fair Value thereof
(without interest).

(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of either class of Common Stock;
provided, however, that if the Conversion Date or Redemption Date, as the case
may be, with respect to any shares of either class of Common Stock shall be
subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto, the holders of such class of
Common Stock at the close of business on such record date shall be entitled to
receive the dividend or other distribution payable on or with respect to such
shares on the date set for payment of such dividend or other distribution, in
each case without interest, notwithstanding the subsequent conversion or
redemption of such shares.

(x) Before any holder of shares of either class of Common Stock shall be
entitled to receive any cash payment and/or certificates or instruments
representing shares of any capital stock and/or other securities or property to
be distributed to such holder with respect to such class of Common Stock
pursuant to this Section 2.4, such holder shall surrender at such place as the
Corporation shall specify certificates for such shares of Common Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement). The Corporation shall as soon as practicable after receipt
of certificates representing such shares of Common Stock deliver to the person
for whose account such shares of Common Stock were so surrendered, or to such
person's nominee or nominees, the cash and/or the certificates or instruments
representing the number of whole shares of the kind of capital stock and/or
other securities or property to which such person shall be entitled as
aforesaid, together with any payment in respect of fractional shares
contemplated by Section 2.4(f)(viii), in each case without interest. If less
than all of the shares of either class of Common Stock represented by any one
certificate are to be redeemed, the Corporation shall issue and deliver a new
certificate for the shares of such class of Common Stock not redeemed.

(xi) From and after any applicable Conversion Date or Redemption Date, as
the case may be, all rights of a holder of shares of either class of Common
Stock that were converted or redeemed shall cease except for the right, upon
surrender of the certificates representing such shares of Common Stock as
required by Section 2.4(f)(x), to receive the cash and/or the certificates or
instruments representing shares of the kind and amount of capital stock and/or
other securities or property for which such shares were converted or redeemed,
together with any payment in respect of fractional shares contemplated by
Section 2.4(f)(viii) (which shall be held by the Corporation for the holder of
such shares of Common Stock that were redeemed until the receipt of
certificates representing such shares of Common Stock as provided in Section
2.4(f)(x)) and rights to dividends as provided in Section 2.4(f)(ix), in each
case without interest. No holder of a certificate that immediately prior to the
applicable Conversion Date or Redemption Date represented shares of a class of
Common Stock shall be entitled to receive any dividend or other distribution or
interest payment with respect to shares of any kind of capital stock or other
security or instrument for which such class of Common Stock was converted or
redeemed until the surrender as required by this Section 2.4 of such
certificate in exchange for a certificate or certificates or instrument or
instruments representing such capital stock or other security. Subject to
applicable escheat and similar laws, upon such surrender, there shall be paid
to the holder the amount of any dividends or other distributions (without
interest) which theretofore became payable on any class or series of capital
stock of the Corporation as of a record date after the Conversion Date or
Redemption Date, but that were not paid by reason of the foregoing, with
respect to the number of whole shares of the kind of capital stock represented
by the certificate or certificates issued upon such surrender. From and after a
Conversion Date or Redemption Date, the Corporation shall, however, be entitled
to treat the certificates for a class of Common Stock that have not yet been
surrendered for conversion or redemption as evidencing the ownership of the
number of whole shares of the kind or kinds of capital stock of the Corporation
for which the shares of such class of Common Stock represented by such
certificates shall have been converted or redeemed, notwithstanding the failure
to surrender such certificates.

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<PAGE>

(xii) The Corporation shall pay any and all documentary, stamp or similar
issue or transfer taxes that may be payable in respect of the issuance or
delivery of any shares of capital stock and/or other securities upon conversion
or redemption of shares of either class of Common Stock pursuant to this
Section 2.4. The Corporation shall not, however, be required to pay any tax
that may be payable in respect of any transfer involved in the issuance or
delivery of any shares of capital stock and/or other securities in a name other
than that in which the shares of such class of Common Stock so converted or
redeemed were registered, and no such issuance or delivery shall be made unless
and until the person requesting such issuance or delivery has paid to the
Corporation the amount of any such tax or has established to the satisfaction
of the Corporation that such tax has been paid.

(xiii) Neither the failure to mail any notice required by this Section 2.4
to any particular holder of a class of Common Stock or of Convertible
Securities nor any defect therein shall affect the sufficiency thereof with
respect to any other holder of outstanding shares of a class of Common Stock or
of Convertible Securities or the validity of any such conversion or redemption.

(xiv) The Board of Directors may establish such rules and requirements to
facilitate the effectuation of the transactions contemplated by this Section
2.4 as the Board of Directors shall determine to be appropriate.

Section 2.5 Application of the Provisions of Article IV. (a) Certain
Determinations by the Board of Directors. The Board of Directors shall make
such determinations with respect to the businesses, assets, properties and
liabilities to be attributed to the Groups, the application of the provisions
of the Certificate of Incorporation to transactions to be engaged in by the
Corporation and the voting powers, preferences and relative, participating,
optional and other special rights of the holders of either class of Common
Stock, and the qualifications and restrictions thereon, provided by the
Certificate of Incorporation as may be or become necessary or appropriate to
the exercise of such powers, preferences and relative, participating, optional
and other special rights, including, without limiting the foregoing, the
determinations referred to in this Section 2.5. A record of any such
determination shall be filed with the records of the actions of the Board of
Directors.

(i) Upon any acquisition by the Corporation or its subsidiaries of any
assets or business, or any assumption of liabilities, outside of the
ordinary course of business of DSSG or HDDG, as the case may be, the Board
of Directors shall determine whether such assets, business and liabilities
(or an interest therein) shall be for the benefit of DSSG or HDDG or that
an interest therein shall be partly for the benefit of DSSG and partly for
the benefit of HDDG and, accordingly, shall be attributed to DSSG or HDDG,
or partly to each, in accordance with Section 2.6(e) or 2.6(j), as the case
may be.

(ii) Upon any issuance of any shares of any class or series of preferred
stock of the Corporation, the Board of Directors shall attribute, based on
the use of proceeds of such issuance of shares of preferred stock in the
business of DSSG or HDDG and any other relevant factors, the shares so
issued entirely to DSSG or entirely to HDDG or partly to DSSG and partly to
HDDG in such proportion as the Board of Directors shall determine.

(iii) Upon any redemption or repurchase by the Corporation or any
subsidiary thereof of shares of preferred stock of any class or series or
of other securities or debt obligations of the Corporation, the Board of
Directors shall determine, based on the property used to redeem or purchase
such shares, other securities or debt obligations, which, if any, of such
shares, other securities or debt obligations redeemed or repurchased shall
be attributed to DSSG and which, if any, of such shares, other securities
or debt obligations shall be attributed to HDDG and, accordingly, how many
of the shares of such class or series of preferred stock or of such other
securities, or how much of such debt obligations, that remain outstanding,
if any, are thereafter attributed to DSSG or HDDG.

(b) Certain Determinations Not Required. Notwithstanding the foregoing
provisions of this Section 2.5, the provisions of Section 2.6(e) or 2.6(j) or
any other provision of the Certificate of Incorporation, at any time when there
are not outstanding both (i) one or more shares of DSSG Stock or Convertible
Securities convertible into or exchangeable or exercisable for DSSG Stock and
(ii) one or more shares of HDDG Stock or Convertible Securities convertible
into or exchangeable or exercisable for HDDG Stock, the Corporation need

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<PAGE>

not (A) attribute any of the assets or liabilities of the Corporation or any of
its subsidiaries to DSSG or HDDG or (B) make any determination required in
connection therewith, nor shall the Board of Directors be required to make any
of the determinations otherwise required by this Article, and in such
circumstances the holders of the shares of DSSG Stock and HDDG Stock
outstanding, as the case may be, shall (unless otherwise specifically provided
by the Certificate of Incorporation) be entitled to all the voting powers,
preferences and relative, participating, optional and other special rights of
both classes of Common Stock without differentiation between the DSSG Stock and
the HDDG Stock.

(c) Board Determinations Binding. Subject to applicable law, any
determinations made in good faith by the Board of Directors of the Corporation
under any provision of this Section 2.5 or otherwise in furtherance of the
application of this Section 2 shall be final and binding on all stockholders.

Section 2.6 Certain Definitions. As used in the Certificate of
Incorporation, the following terms shall have the following meanings (with
terms defined in the singular having comparable meaning when used in the plural
and vice versa), unless the context otherwise requires. As used in this Section
2.6, a "contribution" or "transfer" of assets or properties from one Group to
another shall refer to the reattribution of such assets or properties from the
contributing or transferring Group to the other Group and correlative phrases
shall have correlative meanings.

(a) Available Dividend Amount shall mean, as the context requires, a
reference to the DSSG Available Dividend Amount or the HDDG Available Dividend
Amount.

(b) Conversion Date shall mean the date fixed by the Board of Directors as
the effective date for the conversion of shares of DSSG Stock into shares of
HDDG Stock (or another class or series of common stock of the Corporation) or
of shares of HDDG Stock into shares of DSSG Stock (or another class or series
of common stock of the Corporation), as the case may be, as shall be set forth
in the notice to holders of shares of the class of Common Stock subject to such
conversion and to holders of any Convertible Securities that are convertible
into or exchangeable or exercisable for shares of the class of Common Stock
subject to such conversion required pursuant to Section 2.4(f)(v).

(c) Convertible Securities shall mean, as of any date, any securities of the
Corporation or of any subsidiary thereof (other than shares of a class of
Common Stock), including warrants and options, outstanding at such time that by
their terms are convertible into or exchangeable or exercisable for or evidence
the right to acquire any shares of either class of Common Stock, whether
convertible, exchangeable or exercisable at such time or a later time or only
upon the occurrence of certain events; provided that securities shall only be
Convertible Securities in respect of the number of shares of Common Stock into
or for which such securities are then convertible, exchangeable or exercisable.

(d) Disposition shall mean a sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or contribution of assets or stock or
otherwise) of properties or assets (including stock, other securities and
goodwill).

(e) DSSG shall mean, as of any date:

(i) all businesses, assets, properties and liabilities of the
Corporation and its subsidiaries attributed by the Board of Directors to
DSSG;

(ii) all businesses, assets, properties and liabilities transferred to
DSSG from HDDG pursuant to transactions in the ordinary course of business
of DSSG and HDDG or otherwise as the Board of Directors may have directed
as permitted by the Certificate of Incorporation; and

(iii) the interest of the Corporation or any of its subsidiaries in any
business or asset acquired and any liabilities assumed by the Corporation
or any of its subsidiaries outside of the ordinary course of business and
attributed to DSSG, as determined by the Board of Directors as contemplated
by Section 2.5(a)(i);

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<PAGE>

provided that from and after any transfer of any assets or properties from DSSG
to HDDG, DSSG shall no longer include such assets or properties so transferred.

(f) DSSG Available Dividend Amount shall mean, on any date, either:

(x) (i) the amount equal to the fair market value of the total assets
attributed to DSSG less the total liabilities attributed to DSSG (provided
that preferred stock shall not be treated as a liability), in each case, as
of such date and determined on a basis consistent with that applied in
determining the DSSG Net Income (Loss), minus (ii) the aggregate par value
of, or any greater amount determined in accordance with applicable law to
be capital in respect of, all outstanding shares of DSSG Stock and each
class or series of preferred stock attributed in accordance with the
Certificate of Incorporation to DSSG, or

(y) in case the total amount calculated pursuant to clause (i) above is
not a positive number, an amount equal to the DSSG Net Income (Loss) (if
positive) for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.

Notwithstanding the foregoing provisions of this Section 2.6(f), and consistent
with Section 2.5(c), at any time when there are not outstanding both (i) one or
more shares of DSSG Stock or Convertible Securities convertible into or
exchangeable or exercisable for DSSG Stock and (ii) one or more shares of HDDG
Stock or Convertible Securities convertible into or exchangeable or exercisable
for HDDG Stock, the "Available Dividend Amount," on any calculation date during
such time period, with respect to the DSSG Stock or the HDDG Stock, as the case
may be (depending on which of such classes of Common Stock or Convertible
Securities convertible into or exchangeable or exercisable for such class of
Common Stock is outstanding), shall mean the amount available for the payment
of dividends on such Common Stock in accordance with law.

(g) DSSG Net Income (Loss) shall mean, for any period through any date, (i)
the net income or loss of DSSG for such period determined in accordance with
generally accepted accounting principles in effect at such time, reflecting
income and expense of the Corporation attributed to DSSG on a basis
substantially consistent with attributions of income and expense made in the
calculation of the HDDG Net Income (Loss), including, without limitation,
corporate administrative costs, net interest and other financial costs and
income taxes.

(h) Fair Value shall mean, (i) in the case of equity securities or debt
securities of a class or series that has previously been Publicly Traded for a
period of at least 15 months, the Market Value thereof (if such Market Value,
as so defined, can be determined); (ii) in the case of an equity security or
debt security that has not been Publicly Traded for at least 15 months or the
Market Value of which cannot be determined, the fair value per share of stock
or per other unit of such security, on a fully distributed basis, as determined
by an independent investment banking firm experienced in the valuation of
securities selected in good faith by the Board of Directors, or, if no such
investment banking firm is, as determined in the good faith judgment of the
Board of Directors, available to make such determination, in good faith by the
Board of Directors; (iii) in the case of cash denominated in U.S. dollars, the
face amount thereof and in the case of cash denominated in other than U.S.
dollars, the face amount thereof converted into U.S. dollars at the rate
published in The Wall Street Journal on the date for the determination of Fair
Value or, if not so published, at such rate as shall be determined in good
faith by the Board of Directors based upon such information as the Board of
Directors shall in good faith determine to be appropriate; and (iv) in the case
of property other than securities or cash, the "Fair Value" thereof shall be
determined in good faith by the Board of Directors based upon such appraisals
or valuation reports of such independent experts as the Board of Directors
shall in good faith determine to be appropriate. Any such determination of Fair
Value shall be described in a statement filed with the records of the actions
of the Board of Directors.

(i) Group shall mean, as of any date, DSSG or HDDG, as the case may be.

(j) HDDG shall mean, as of any date:

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<PAGE>

(i) the interest of the Corporation or any of its subsidiaries on such
date in all of the businesses, assets, properties and liabilities of the
Corporation or any of its subsidiaries (and any successor companies), other
than any businesses, assets, properties and liabilities attributed in
accordance with this Article to DSSG;

(ii) all businesses, assets, properties and liabilities transferred to
HDDG from DSSG pursuant to transactions in the ordinary course of business
of HDDG and DSSG or otherwise as the Board of Directors may have directed
as permitted by the Certificate of Incorporation; and

(iii) the interest of the Corporation or any of its subsidiaries in any
business or asset acquired and any liabilities assumed by the Corporation
or any of its subsidiaries outside of the ordinary course of business and
attributed to HDDG, as determined by the Board of Directors as contemplated
by Section 2.5(a)(i);

provided that from and after any transfer of any assets or properties from HDDG
to DSSG, HDDG shall no longer include such assets or properties so transferred.

(k) HDDG Available Dividend Amount shall mean, on any date, either:

(x) (i) an amount equal to the fair market value of the total assets
attributed to HDDG less the total liabilities attributed to HDDG (provided
that preferred stock shall not be treated as a liability), in each case, as
of such date and determined on a basis consistent with that applied in
determining the HDDG Net Income (Loss), minus (ii) the aggregate par value
of, or any greater amount determined in accordance with applicable law to
be capital in respect of, all outstanding shares of HDDG Stock and each
class or series of preferred stock attributed in accordance with the
Certificate of Incorporation to HDDG, or

(y) in case the total amount calculated pursuant to clause (i) above is
not a positive number, an amount equal to the HDDG Net Income (Loss) (if
positive) for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.

Notwithstanding the foregoing provisions of this Section 2.6(k), and consistent
with Section 2.5(c), at any time when there are not outstanding both (i) one or
more shares of DSSG Stock or Convertible Securities convertible into or
exchangeable or exercisable for DSSG Stock and (ii) one or more shares of HDDG
Stock or Convertible Securities convertible into or exchangeable or exercisable
for HDDG Stock, the "Available Dividend Amount," on any calculation date during
such time period, with respect to the DSSG Stock or the HDDG Stock, as the case
may be (depending on which of such classes of Common Stock or Convertible
Securities convertible into or exchangeable or exercisable for such class of
Common Stock is outstanding), shall mean the amount available for the payment
of dividends on such Common Stock in accordance with law.

(l) HDDG Net Income (Loss) shall mean, for any period through any date, (i)
the net income or loss of HDDG for such period determined in accordance with
generally accepted accounting principles in effect at such time, reflecting
income and expense of the Corporation attributed to HDDG on a basis
substantially consistent with attributions of income and expense made in the
calculation of the DSSG Net Income (Loss), including, without limitation,
corporate administrative costs, net interest and other financial costs and
income taxes.

(m) Market Capitalization of any class or series of capital stock on any
date shall mean the product of (i) the Market Value of one share of such class
or series of capital stock on such date and (ii) the number of shares of such
class or series of capital stock outstanding on such date.

(n) Market Value of a share of any class or series of capital stock of the
Corporation on any day shall mean the average of the high and low reported
sales prices regular way of a share of such class or series on such Trading Day
or, in case no such reported sale takes place on such Trading Day, the average
of the reported closing bid and asked prices regular way of a share of such
class or series on such Trading Day, in either case as reported on the Nasdaq
National Market System or, if the shares of such class or series are not

15
<PAGE>

quoted on the Nasdaq National Market System on such Trading Day, on the
principal national securities exchange in the United States on which the shares
of such class or series are listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange on such Trading Day,
the average of the closing bid and asked prices of a share of such class or
series in the over-the-counter market on such Trading Day as furnished by any
New York Stock Exchange member firm selected from time to time by the
Corporation or, if such closing bid and asked prices are not made available by
any such New York Stock Exchange member firm on such Trading Day, the Fair
Value of a share of such class or series as set forth in clause (ii) of the
definition of Fair Value; provided that, for purposes of determining the
"Market Value" of a share of any class or series of capital stock for any
period, (i) the "Market Value" of a share of capital stock on any day prior to
any "ex-dividend" date or any similar date occurring during such period for any
dividend or distribution (other than any dividend or distribution contemplated
by clause (ii)(B) of this sentence) paid or to be paid with respect to such
capital stock shall be reduced by the Fair Value of the per share amount of
such dividend or distribution and (ii) the "Market Value" of any share of
capital stock on any day prior to (A) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or otherwise)
of outstanding shares of such class or series of capital stock occurring during
such period or (B) any "ex-dividend" date or any similar date occurring during
such period for any dividend or distribution with respect to such capital stock
to be made in shares of such class or series of capital stock or Convertible
Securities that are convertible, exchangeable or exercisable for such class or
series of capital stock shall be appropriately adjusted, as determined by the
Board of Directors, to reflect such subdivision, combination, dividend or
distribution.

(o) Market Value Ratio of HDDG Stock to DSSG Stock as of any date shall mean
the fraction (which may be greater or less than 1/1), expressed as a decimal
(rounded to the nearest five decimal places), of a share of DSSG Stock (or
another class or series of common stock of the Corporation, if so provided by
Section 2.4(b)(iii) because DSSG Stock is not then Publicly Traded) to be
issued in respect of a share of HDDG Stock upon a conversion of HDDG Stock into
DSSG Stock (or another class or series of common stock of the Corporation) in
accordance with Section 2.4(b)(iii) the numerator of which shall be the average
Market Value of one share of HDDG Stock during the 20-Trading Day period ending
on such date and the denominator of which shall be the average Market Value of
one share of DSSG Stock (or such other common stock) during the 20-Trading Day
period ending on such date.

(p) Market Value Ratio of DSSG Stock to HDDG Stock as of any date shall mean
the fraction (which may be greater or less than 1/1), expressed as a decimal
(rounded to the nearest five decimal places), of a share of HDDG Stock (or
another class or series of common stock of the Corporation, if so provided by
Section 2.4(a)(iii) because HDDG Stock is not then Publicly Traded) to be
issued in respect of a share of DSSG Stock upon a conversion of DSSG Stock into
HDDG Stock (or another class or series of common stock of the Corporation) in
accordance with Section 2.4(a)(iii), the numerator of which shall be the
average Market Value of one share of DSSG Stock during the 20-Trading Day
period ending on such date and the denominator of which shall be the average
Market Value of one share of HDDG Stock (or such other common stock) during the
20-Trading Day period ending on such date.

(q) Net Proceeds shall mean, as of any date with respect to any Disposition
of any of the properties and assets attributed to DSSG or HDDG, as the case may
be, an amount, if any, equal to what remains of the gross proceeds of such
Disposition after payment of, or reasonable provision is made as determined by
the Board of Directors for, (i) any taxes payable by the Corporation (or which
would have been payable but for the utilization of tax benefits attributable to
the other Group) in respect of such Disposition or in respect of any resulting
dividend or redemption pursuant to Section 2.4(a)(i)(1)(A), 2.4(a)(i)(1)(B),
2.4(b)(i)(1)(A) or 2.4(b)(i)(1)(B), (ii) any transaction costs, including,
without limitation, any legal, investment banking and accounting fees and
expenses and (iii) any liabilities (contingent or otherwise) of or attributed
to such Group, including, without limitation, any liabilities for deferred
taxes or any indemnity or guarantee obligations of the Corporation incurred in
connection with the Disposition or otherwise, and any liabilities for future
purchase price adjustments and any preferential amounts plus any accumulated
and unpaid dividends in respect of the

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<PAGE>

preferred stock attributed to such Group. For purposes of this definition, any
properties and assets attributed to the Group, the properties and assets of
which are subject to such Disposition, remaining after such Disposition shall
constitute Areasonable provision@ for such amount of taxes, costs and
liabilities (contingent or otherwise) as the Board of Directors determines can
be expected to be supported by such properties and assets.

(r) Publicly Traded with respect to any security shall mean that such
security is (i) registered under Section 12 of the Securities Exchange Act of
1934, as amended (or any successor provision of law), and (ii) listed for
trading on the New York Stock Exchange or the American Stock Exchange (or any
national securities exchange registered under Section 7 of the Securities
Exchange Act of 1934, as amended (or any successor provision of law), that is
the successor to either such exchange) or listed on The Nasdaq Stock Market (or
any successor market system).

(s) Redemption Date shall mean the date fixed by the Board of Directors as
the effective date for a redemption of shares of either class of Common Stock,
as set forth in a notice to holders thereof required pursuant to Section
2.4(f)(iii), (iv), (v) or (vi).

(t) Related Business Transaction means any Disposition of all or
substantially all the properties and assets attributed to DSSG or HDDG, as the
case may be, in a transaction or series of related transactions that result in
the Corporation receiving in consideration of such properties and assets
primarily equity securities (including, without limitation, capital stock, debt
securities convertible into or exchangeable for equity securities or interests
in a general or limited partnership or limited liability company, without
regard to the voting power or other management or governance rights associated
therewith) of any entity which (i) acquires such properties or assets or
succeeds (by merger, formation of a joint venture or otherwise) to the business
conducted with such properties or assets or controls such acquiror or successor
and (ii) is engaged primarily or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by such Group
prior to such Disposition, as determined by the Board of Directors.

(u) Tax Event shall mean the receipt by the Corporation of an opinion of tax
counsel to the Corporation experienced in such matters, who shall not be an
officer or employee of the Corporation or any of its affiliates, that, as a
result of any amendment to, or change in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein (including any announced proposed change by an
applicable legislative committee or the chair thereof in such laws or by an
administrative agency in such regulations), or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, it is more likely than not that for United
States federal income tax purposes (i) the Corporation or its stockholders is
or, at any time in the future, will be subject to tax upon the issuance of
shares of either DSSG Stock or HDDG Stock or (ii) either DSSG Stock or HDDG
Stock is not or, at any time in the future, will not be treated solely as stock
of the Corporation. For purposes of rendering such opinion, tax counsel shall
assume that any legislative or administrative proposals will be enacted or
adopted as proposed.

(v) Trading Day shall mean each weekday other than any day on which the
relevant class of common stock of the Corporation is not traded on any national
securities exchange or listed on The Nasdaq Stock Market or in the over-the-
counter market.

Section 3. Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series, each with such distinctive designation as may be
stated in the Certificate of Incorporation or in any amendment hereto, or in a
resolution or resolutions providing for the issue of such stock from time to
time adopted by the Board of Directors. The resolution or resolutions providing
for the issue of shares of a particular series shall fix, subject to applicable
laws and the provisions of the Certificate of Incorporation, for each such
series the number of shares constituting such series and the designation and
the voting powers, preferences and relative, participating, optional or other
special rights and the qualifications, limitations or restrictions thereof,
including, without limiting the generality of the foregoing, such provisions as
may be desired concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by the Board of Directors under the DGCL.

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<PAGE>

The Board of Directors is further authorized to increase or decrease the
number of shares of any series, the number of which was fixed by it, subsequent
to the issue of shares of such series then outstanding, subject to the
limitations and restrictions stated in the resolution or resolutions of the
Board of Directors originally fixing the number of shares of such series. If
the number of shares of any series is so decreased, then the shares
constituting such decreases shall resume the status which they had prior to the
adoption of the resolution fixing the number of shares of such series.

ARTICLE V.

DURATION

The Corporation is to have perpetual existence.

ARTICLE VI.

BOARD OF DIRECTORS

Section 1. Number of Directors. The number of directors which constitute the
whole Board of Directors shall be as specified in the By-laws of the
Corporation.

Section 2. Powers of the Board of Directors. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, alter, amend or repeal the By-laws of the
Corporation.

ARTICLE VII.

CUMULATIVE VOTING

Subject to Article X hereof, at all elections of directors of the
Corporation, each holder of stock or of any class or classes or of a series or
series thereof shall be entitled to as many votes as shall equal the number of
votes which (except for this provision as to cumulative voting) he would be
entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected, and he may cast all
of such votes for a single director or may distribute them among the number of
directors to be voted for, or for any two or more of them as he may see fit.

ARTICLE VIII.

MEETINGS OF STOCKHOLDERS

Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the Statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-laws of the Corporation.

ARTICLE IX.

LIMITATION ON LIABILITY OF DIRECTORS

To the fullest extent permitted by the DGCL as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director. Neither any amendment nor repeal of this
Article IX shall, nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article IX, shall

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<PAGE>

eliminate or reduce the effect of this Article IX in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article IX,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.

ARTICLE X.

ADVANCE NOTICE

Advance notice of new business and stockholder nominations for, and
cumulative voting in, the election of directors shall be given in the manner
and to the extent provided in the By-laws of the Corporation.

ARTICLE XI.

AMENDMENT OF CERTIFICATE OF INCORPORATION

The Corporation reserves the right to amend, alter, change or repeal any
provision contained in the Certificate of Incorporation in the manner now or
hereafter prescribed by statute and all rights conferred upon stockholders
herein are granted subject to this reservation.

IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates, integrates and amends the provisions of the certificate of
incorporation of the Corporation, and which has been duly adopted by in
accordance with the provisions of Sections 242 and 245 of the Delaware General
Corporation Law, has been executed by , its , this day
of , 1999.

Quantum Corporation

By: _________________________________
Name:
Title:

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<PAGE>

ANNEX II

QUANTUM CORPORATION

EMPLOYEE STOCK PURCHASE PLAN

As Amended , 1999

The following constitute the provisions of the Employee Stock Purchase Plan
(herein called the "Plan") of Quantum Corporation (herein called the
"Company").

1. Purpose. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan shall, accordingly, be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.

2. Definitions.

(a) "Board" shall mean the Board of Directors of the Company.

(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.

(d) "Company" shall mean Quantum Corporation, a Delaware corporation.

(e) "Compensation" shall mean all regular straight time earnings, payments
for overtime, shift premium, incentive compensation, incentive payments,
bonuses and commissions (except to the extent that the exclusion of any such
items for all participants is specifically directed by the Board or its
committee).

(f) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of: (i) a leave of
absence agreed to in writing by the Company, provided that such leave is for a
period of not more than 90 days or re-employment upon the expiration of such
leave is guaranteed by contract or statute; or (ii) notification by the Company
of termination under a reduction-in-force. Termination in the case of a
reduction-in-force shall be considered to have occurred at the end of the
employee's continuation period.

(g) "Designated Subsidiaries" shall mean the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.

(h) "Employee" means any person, including an officer, who is customarily
employed for at least twenty (20) hours per week by the Company or one of its
Designated Subsidiaries.

(i) "Enrollment Date" shall mean the first day of each Offering Period.

(j) "Exercise Date" shall mean the date one day prior to the date six
months, twelve months, eighteen months, or twenty-four months after the
Enrollment Date of an Offering Period; provided, however, that the exercise
date under the June 1991 and December 1991 offering periods shall mean the date
one day prior to the date seven and one-half (7 1/2) months, thirteen and one-
half (13 1/2) months, nineteen and one-half (19 1/2) months, or twenty-five and
one-half (25 1/2) months after the enrollment date of such offering periods.

(k) "Exercise Period" shall mean a period commencing on an Enrollment Date
or on the day after an Exercise Date and terminating one day prior to the date
six (6) months later; provided, however, that for the offering periods
beginning June 1991 and December 1991 , the initial exercise period under such
offering periods shall be the period commencing on the Enrollment Date and
terminating one day prior to the date seven and one-half (7 1/2) months later.

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(l) "Offering Period" shall mean a period of twenty-four (24) months
consisting of four six-month Exercise Periods, or as otherwise set forth in
Section 4 hereof; provided, however, that the offering periods commencing in
June 1991 and December 1991 shall be for a period of twenty-five and one-half
(25 1/2) months consisting of one seven and one-half (7 1/2) exercise period
and three six (6) month exercise periods during which options granted pursuant
to the Plan may be exercised or as otherwise set forth in Section 4 hereof.

(m) "Plan" shall mean this Employee Stock Purchase Plan.

(n) "Subsidiary" shall mean a corporation, domestic or foreign, of which not
less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or
acquired by the Company or a Subsidiary.

3. Eligibility.

(a) Any Employee (as defined in paragraph 2) who shall be employed by the
Company on the date his participation in the Plan is effective shall be
eligible to participate in the Plan, subject to limitations imposed by Section
423 (b) of the Code.

(b) Any provisions of the Plan to the contrary notwithstanding, no Employee
shall be granted an option under the Plan (i) if, immediately, after the grant,
such Employee (or any other person whose stock would be attributed to such
Employee pursuant to Section 425 (d) of the Code) would own shares and/or hold
outstanding options to purchase stock possessing five percent (5%) or more of
the total combined voting power or value of all classes of shares of the
Company or of any subsidiary of the Company, or (ii) which permits his rights
to purchase shares under all employee stock plans of the Company and its
subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the fair market value of the shares (determined at the time such
option is granted) for each calendar year in which such stock option is
outstanding at any time.

4. Offering Dates. The Plan shall be implemented by consecutive Offering
Periods with a new Offering Period commencing on or about January 25 and July
25 of each year, and shall continue thereafter until terminated in accordance
with paragraph 20 or 24 hereof; provided, however, that the Offering Period
which began in June 1991 and the Offering Period planned to begin in December
1991 shall continue in effect for twenty-five and one-half (25 1/2) months and
shall run concurrently with January and July Offering Periods until the
respective twenty-five and one-half month term for the June and December 1991
Offering Periods has expired. Thereafter, Offering Periods shall begin only in
January and July. The Board of Directors of the Company shall have the power to
change the duration of Offering Periods and Exercise Periods with respect to
future offerings without stockholder approval if such change is announced at
least fifteen (15) days prior to the scheduled beginning of the first Offering
Period to be affected. In no event shall the duration of an Offering Period
exceed twenty-seven (27) months. Notwithstanding the foregoing, no offers
hereunder shall be made until compliance with all applicable securities law has
been obtained.

5. Participation.

(a) An eligible Employee may become a participant in the Plan by completing
a subscription agreement authorizing payroll deduction on the form provided by
the Company and filing it with the Company's payroll office prior to the
applicable Enrollment Date, unless a later time for filing the subscription
agreement is set by the Board for all eligible Employees with respect to a
given Offering Period.

(b) Payroll deductions for a participant shall commence on the first payroll
following the Enrollment Date and shall end on the last payroll date in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in paragraph 11.

6. Payroll Deductions.

(a) At the time a participant files his subscription agreement, he shall
elect to have payroll deductions made on each payday during the Offering Period
at a rate not exceeding ten percent (10%) of the Compensation which he received
on such payday, and the aggregate of such payroll deductions pursuant to the

2
<PAGE>

Plan during the Offering Period shall not exceed ten percent (10%) of his
aggregate Compensation during said Offering Period.

(b) All payroll deductions made for a participant shall be credited to his
account under the Plan. A participant may not make any additional payments into
such account.

(c) A participant may discontinue participation in the Plan as provided in
paragraph 11, or may change the rate of payroll deductions by giving written
notice to the Company authorizing a change in the participant's payroll
deduction rate. The change rate shall be effective (i) in the case of a
decrease in rate, with the first payroll period following the Company's receipt
of the notice of rate change, and (ii) in the case of an increase in rate at
the beginning of the next Exercise Period following the Company's receipt of
the notice of rate exchange.

7. Grant of Option.

(a) On the Enrollment Date of each Offering Period, each eligible Employee
participating in such Offering Period shall be granted an option to purchase on
each Exercise Date during such Offering Period up to a number of shares of the
Company's Common Stock determined by dividing such Employee's payroll
deductions accumulated during the Exercise Period ending on such Exercise Date
by the lower of (i) eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Enrollment Date or (ii) eighty-five
(85%) of the fair market value of a share of the Company's Common Stock on the
Exercise Date; provided that in no event shall an Employee be permitted to
purchase during each 24-month Offering Period more than a number of shares
determined by dividing $50,000 by the fair market value of a share of the
Company's Common Stock on the Enrollment Date, and provided further that such
purchase shall be subject to the limitations set forth in paragraphs 3(b) and
13 hereof. The option shall be automatically exercised on the Exercise Dates
during the Offering Period, unless the participant has withdrawn pursuant to
paragraph 11, and shall expire on the last day of the Offering Period. Fair
market value of a share of the Company's Common Stock shall be determined as
provided in paragraph 7(b) herein.

(b) The option price per share of the shares offered in a given offering
Period shall be the lower of: (i) 85% of the fair market value of a share of
the Common Stock of the Company on the Enrollment Date; or (ii) 85% of the fair
market value of a share of the Common Stock of the Company on the Exercise
Date. The fair market value of the Company's Common Stock on a given date shall
be determined by the Board in its discretion; provided, however, that where
there is a public market for the Common Stock, the fair market value per share
shall be the closing price of the Common Stock for such date, as reported by
the NASDAQ National Market System, or, in the event the Common Stock is listed
on a stock exchange, the fair market value per share shall be the closing price
on such exchange on such date, as reported in The Wall Street Journal.

(c) Notwithstanding the foregoing, to the extent necessary to comply with
Section 423 (b) (8) of the Code and paragraph 3 (b) herein, a participant's
payroll deductions may be decreased to 0% at such time during any Exercise
Period which is scheduled to end during the current calendar year that the
aggregate of all payroll deductions accumulated with respect to such Exercise
Period and any other Exercise Period ending within the same calendar year equal
$21,250. Payroll deductions shall recommence at the rate provided in such
participant's subscription scheduled to end in the following calendar year,
unless terminated by the participant as provided in paragraph 11.

8. Exercise of Option. The participant's option for the purchase of shares
will be exercised automatically on each Exercise Date of each Offering Period
and the maximum number of full shares subject to option will be purchased for
such participant at the applicable option price with the accumulated payroll
deductions in his account unless prior to such Exercise Date the participant
has withdrawn from the Offering Period as provided in paragraph 11. During a
participant's lifetime, a participant's option to purchase shares hereunder is
exercisable only by the participant. Any amount remaining in the participant's
account after an Exercise Date shall be held in the account until the next
Exercise Date in such Offering Period, unless the Offering Period has been
over-subscribed or has terminated with such Exercise Date, in which case such
amount shall be refunded to the participant.

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<PAGE>

9. Delivery. As promptly as practicable after each Exercise Date, the
Company shall arrange the delivery to each participant, as appropriate, of a
certificate representing the shares purchased upon exercise of the option.

10. Automatic Transfer to Low Price Offering Period. If the fair market
value of the Company's Common Stock on the first day of an Offering Period then
in progress exceeds the fair market value of the Company's Common Stock on the
first day of any subsequent Offering Period commencing immediately following an
Exercise Date within the Offering Period in progress, then each participant in
the Offering Period in progress shall be deemed to have withdrawn from the
Offering Period in progress shall be deemed to have withdrawn from the Offering
Period in progress immediately following the exercise of his option on such
Exercise Date and to have enrolled in such subsequent Offering Period as of the
first day thereof.

11. Withdrawal; Termination of Employment.

(a) A participant may withdraw all but not less than all the payroll
deductions credited to his account under the Plan at any time prior to the end
of the Offering Period by giving written notice to the Company. All of the
participant's payroll deductions credited to his account will be paid to him
promptly after receipt of his notice of withdrawal and his option for the
current Offering Period will be automatically terminated, and no further
payroll deductions for the purchase of shares will be made during the Offering
Period. If a participant withdraws from an Offering Period, payroll deductions
will not resume at the beginning of the succeeding Offering Period unless the
participant delivers to the Company a new subscription agreement.

(b) Upon termination of the participant's employment prior to the end of the
Offering Period for any reason, including retirement or death, the payroll
deductions credited to his account will be returned to him or, in the case of
his death, to the person or persons entitled thereto under paragraph 15, and
his option will be automatically terminated.

(c) In the event a participant fails to remain in continuous Status as an
Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, the participant will be
deemed to have elected to withdraw from the Plan and the payroll deductions
credited to his account will be returned to such participant and such
participant's option terminated; provided that

(i) if an Employee shall take a leave of absence approved by the Company
in accordance with paragraph 2(f) of this Plan during an Offering Period in
which the Employee is a participant, the participant will be deemed to have
his or her payroll deductions reduced to 0% during such leave of absence,
but he shall continue to be a participant in the applicable Offering Period
and upon his return to full-time employment with the Company shall be
eligible to participate fully in any remaining portion of the applicable
Offering Period. If the participant fails to return to full-time employment
with the Company at the end of such authorized leave of absence, or if his
employment is otherwise terminated earlier, he shall be deemed to have
withdrawn from participation in the Plan; and

(ii) if an Employee begins working part-time (fewer than twenty (20)
hours per week) with the intent of returning to full-time employment before
the end of the Offering Period in which he is currently participating, the
participant will be deemed to have withdrawn from the applicable Exercise
Period, the payroll deductions credited to his account will be returned to
him, and the rate of his payroll deductions shall be reduced to 0% during
such part-time employment, but he shall continue to be a participant in the
applicable Offering Period, and upon his return to full-time employment
with the Company he shall be eligible to participate fully in any remaining
portion of the applicable Offering Period. If the participant fails to
return to full-time employment with the Company before the end of the
applicable Offering Period, or if his employment with the Company is
otherwise terminated earlier, he shall be deemed to have withdrawn from
participation in the Plan.

(d) A participant's withdrawal from an Offering Period will not have any
effect upon his eligibility to participate in any similar plan which may
hereafter be adopted by the Company or in succeeding Offering Periods.

4
<PAGE>

12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.

13. Stock.

(a) The maximum number of shares of the Company's Common Stock which shall
be made available for sale under the Plan shall be made available for sale
under the Plan shall be shares, plus an annual increase to be added on
each anniversary date of the Plan equal to the lesser of (i) [ ] shares,
(ii) [ ]% of the outstanding shares on such date or (iii) a lesser amount
determined by the Board], subject to adjustment upon changes in capitalization
of the Company as provided in paragraph 19. If the total number of shares which
would otherwise be subject to options granted pursuant to paragraph 7 (a)
hereof at the beginning of an Offering Period exceeds the number of shares then
available under the Plan (after deduction of all shares for which options have
been exercised or are then outstanding), the Company shall make a pro rata
allocation of the shares remaining available for option grant in as uniform a
manner as shall be practicable and as it shall determine to be equitable. In
such event, the Company shall give written notice of such reduction of the
number of shares subject to the option to each Employee affected thereby and
shall similarly reduce the rate of payroll deductions, if necessary.

(b) The participant will have no interest or voting right in shares covered
by his option until such option has been exercised.

(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his spouse, or as otherwise directed by the participant.

14. Administration. The Plan shall be administered by the Board of Directors
of the Company or a committee appointed by the Board. The administration,
interpretation or application of the Plan by the Board or its committee shall
be final, conclusive and binding upon all participants. Members of the Board
who are eligible Employees are permitted to participate in the Plan, provided
that:

(a) Members of the Board who are eligible to participate in the Plan may not
vote on any matter affecting the administration of the Plan or the grant of any
option pursuant to the Plan.

(b) If a Committee is established to administer the Plan, no member of the
Board who is eligible to participate in the Plan may be a member of the
Committee.

15. Designation of Beneficiary.

(a) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of the
Offering Period but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the end of the Offering Period.

(b) Such designation of beneficiary may be changed by the participant at any
time by written notice. In the event of the death of a participant and in the
absence of a beneficiary validly designated under the Plan who is living at the
time of such participant's death, the Company shall deliver such shares and/or
cash to the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion , may deliver such shares and/or cash
to the spouse or to any one or more dependents or relatives of the participant,
or if no spouse, dependent or relative is known to the Company, then to such
other person as the Company may designate.

16. Transferability. Neither payroll deductions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution or as provided in paragraph 15 hereof) by the participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with paragraph 11.

5
<PAGE>

17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.

18. Reports. Individual accounts will be maintained for each participant in
the Plan. Statements of account will be given to participating Employees at
least annually promptly following the Exercise Date, which statements will set
forth the amounts of payroll deductions, the per share purchase price, the
number of shares purchased and the remaining cash balance, if any.

19. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but have not yet been placed under option (collectively, the
"Reserves"), as well as the price per share of Common Stock covered by each
option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split or the payment of a stock
dividend (but only on the Common Stock) or any other increase or decrease in
the number of shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected without
receipt of consideration." Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to the
number or price of shares of Common Stock subject to an Option.

The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.

20. Amendment or Termination.

(a) The Board of Directors of the Company may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 19 hereof, no such
termination can affect options previously granted, provided that an Offering
Period may be terminated by the Board of Directors on any Exercise Date if the
Board determines that the termination of the Offering Period or the Plan is in
the best interests of the Company and its shareholders. Except as provided in
Section 19 and this Section 20 hereof, no amendment may make any change in any
option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or
stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.

(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods,
limit the frequency and/or number of changes in the amount withheld during an
Offering Period, establish the exchange ratio applicable to amounts withheld in
a currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.

6
<PAGE>

(c) In the event the Board determines that the ongoing operation of the
Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:

(i) altering the Purchase Price for any Offering Period including an
Offering Period underway at the time of the change in Purchase Price;

(ii) shortening any Offering Period so that Offering Period ends on a
new Exercise Date, including an Offering Period underway at the time of the
Board action; and (iii) allocating shares.

Such modifications or amendments shall not require stockholder approval or the
consent of any Plan participants.

21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or
by the person, designated by the Company for the receipt thereof.

22. Stockholder Approval. Continuance of the Plan and, if required by
paragraph 20, any amendment thereto shall be subject to approval by the
stockholders of the Company within twelve months before or after the date the
Plan or such amendment is adopted. If such stockholder approval is obtained at
a duly held stockholders' meeting, it may be obtained by the affirmative vote
of the holders of a majority of the outstanding shares of the Company present
or represented and entitled to vote thereon, which approval shall be:

(a) (1) solicited substantially in accordance with Section 14 (a) of the
Securities Act of 1934 as amended (the "Act") and the rules and regulations
promulgated thereunder, or (2) solicited after the Company has furnished in
writing to the holders entitled to vote substantially the same information
concerning the Plan as that which would be required by the rules and
regulations in effect under Section 14 (a) of the Act at the time such
information is furnished; and

(b) obtained at or prior to the first annual meeting of stockholders
held subsequent to the later of (i) the first registration of Common Stock
under Section 12 of the Act, or (ii) the acquisition of an equity security
for which exemption is claimed.

In the case of approval by written consent, it must be obtained in
accordance with applicable state law.

23. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without
any present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.

24. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the stockholders
of the Company as described in paragraph 22. It shall continue in effect for a
term of twenty (20) years unless sooner terminated under paragraph 20.

7
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law (the "DGCL") permits the
company's board of directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with any
threatened, pending or completed action (except settlements or judgments in
derivative suits), suit or proceeding in which such person is made a party by
reason of his or her being or having been a director, officer, employee or
agent of the company, in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The statute provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.

The company's by-laws provide for the mandatory indemnification of its
directors, officers, employees and other agents to the maximum extent permitted
by the DGCL, and the company has entered into agreements with its officers,
directors and certain key employees implementing such indemnification.

As permitted by sections 102 and 145 of the DGCL the company's certificate
of incorporation eliminates a director's personal liability for monetary
damages to the company and its stockholders arising from a breach or alleged
breach of a director's fiduciary duty except for liability under section 174 of
the DGCL, for liability for any breach of the director's duty of loyalty to the
company or its stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law or for any
transaction which the director derived an improper personal benefit.

The directors and officers of the company are covered by insurance policies
indemnifying against certain liabilities, including certain liabilities arising
under the Securities Act which might be incurred by them in such capabilities
and against which they cannot be indemnified by the company.

Item 21. Exhibits and Financial Statement Schedules.

(a) Exhibits

<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation (included as Annex I to the
Proxy Statement and Prospectus).
3.2* By-laws.
3.3 Certificate of Designations for the Series B Participating Junior
Preferred Stock and Series C Participating Junior Preferred Stock
(included as Exhibits A and B of the Restated Preferred Shares Rights
Agreement).
4.1* Restated Preferred Shares Rights Agreement, dated as of 1999, between
Quantum Corporation and Harris Trust and Savings Bank.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C., as to the legality
of the securities.
8.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C., as to tax matters.
10.1 Quantum Corporation Employee Stock Purchase Plan, as amended (included
as Annex II to the Proxy Statement and Prospectus).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Independent Accountant's Consent.
23.3 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (contained in
Exhibit 5.1 and Exhibit 8.1).
24.1 Powers of Attorney (included on page II-4 hereof).
27.1* Financial Data Schedule.
99.1 Form of Proxy.
</TABLE>

- --------
* To be filed by amendment

II-1
<PAGE>

Item 22. Undertakings.

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" Table in the effective registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.

(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an

II-2
<PAGE>

amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date corresponding to the request.

(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milpitas, State of
California, on March 26, 1999.

Quantum Corporation

By /s/ Michael A. Brown
-----------------------------------
Name: Michael A. Brown
Title: Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard L. Clemmer and Andrew Kryder and
each of them, jointly and severally, as his attorneys-in-fact, each with full
power of substitution for him in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorney-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Michael A. Brown Chairman of the Board and March 26, 1999
____________________________________ Chief Executive Officer
(Michael A. Brown)

/s/ Richard L. Clemmer Vice President, Finance and March 26, 1999
____________________________________ Chief Financial Officer
(Richard L. Clemmer)

/s/ Steven C. Wheelwright Director March 26, 1999
____________________________________
(Steven C. Wheelwright)

/s/ Stephen M. Berkeley Director March 26, 1999
____________________________________
(Stephen M. Berkeley)

/s/ David A. Brown Director March 26, 1999
____________________________________
(David A. Brown)

/s/ Robert J. Casale Director March 26, 1999
____________________________________
(Robert J. Casale)

/s/ Edward M. Esber, Jr. Director March 26, 1999
____________________________________
(Edward M. Esber, Jr.)
</TABLE>

II-4
<PAGE>

EXHIBIT INDEX

- --------
* To be filed by amendment

<PAGE>

Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 21, 1998, included in the Proxy Statement of
Quantum Corporation that are made a part of the Registration Statement (Form S-
4) and Prospectus of Quantum Corporation for the registration shares of its
DSSG and HDDG common stock.

/s/ Ernst & Young LLP

Palo Alto, California
March 24, 1999

<PAGE>

Exhibit 23.2

INDEPENDENT ACCOUNTANTS' CONSENT

The Board of Directors
MKE-Quantum Components LLC

We consent to the incorporation by reference in the registration statement
on Form S-4 of Quantum Corporation of our report dated April 14, 1998, except
for notes 6(b) and 12, which are as of June 5, 1998, with respect to the
consolidated balance sheet of MKE-Quantum Components LLC and subsidiaries as of
March 31, 1998, and the related consolidated statements of operations, members'
equity, and cash flows for the period from May 16, 1997 (Inception) through
March 31, 1998, which report appears in Form 8-K of Quantum Corporation dated
March 26, 1999, and to the reference to our firm under the heading "Experts".

/s/ KPMG Peat Marwick LLP

Boston, Massachusetts
March 26, 1999

<PAGE>

Exhibit 99.1

This Proxy is solicited on behalf of the Board of Directors

[QUANTUM'S LOGO]

SPECIAL MEETING OF STOCKHOLDERS
[ ], 1999

The undersigned stockholder(s) of Quantum Corporation, a
Delaware corporation, hereby acknowledge(s) receipt of the
Notice of Special Meeting of Stockholders and Proxy Statement,
each dated , 1999, and hereby appoints Michael A. Brown
and Richard L. Clemmer, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the
undersigned at the Special Meeting of Stockholders of Quantum
Corporation, to be held , 1999 at 10:00 a.m., Pacific
Standard Time, at Quantum Corporation, 500 McCarthy Boulevard,
Milpitas, California 95035, and at any adjournment or
adjournments thereof, and to vote (including cumulatively, if
required) all shares of Common Stock which the undersigned
would be entitles to vote if then and there personally
present, on the matters set forth on the reverse side:

(continued, and to be signed and dated on reverse side)
<PAGE>

COMPANY #
CONTROL #

THERE ARE THREE WAYS TO VOTE YOUR PROXY

Vote By Phone Vote Via Internet
[1-800- ] http://www. Vote by Mail
Use any touch- Use the Internet Mark, sign and
tone telephone to to vote your date your proxy
vote your proxy proxy 24 hours a card and return
24 hours a day, 7 day, 7 days a it in the
days a week. Have week. Have your postage-paid
your proxy card proxy card proxy envelope we have
in hand when you card in hand when provided.
call. You will be you access the
prompted to enter web site. You
your 3-digit will be prompted
company number to enter your 3-
and a 7-digit digit company
control number, number and a 7-
which are located digit control
above, and then number, Which are
follow the simple located above, to
instructions. create and
electronic
ballot.

Please detach here

Your THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1 AND 2
telephone 1. Proposal to adopt the amended and restated Certificate of
or Incorporation
Internet
vote [_] FOR [_] AGAINST [_] ABSTAIN
authorizes
the named 2. Proposal to adopt amendments to the Quantum Corporation
proxies to Employee Stock Purchase Plan.
vote your
shares in [_] FOR [_] AGAINST [_] ABSTAIN
the same
manner as and in their discretion, upon such other matters which may
if you properly come before the meeting or any adjournment or
marked, adjournments thereof.
signed and
returned The shares represented by this proxy when properly executed will
the proxy be voted in the manner directed herein by the undersigned
card. The Stockholder(s). If no direction is made, this proxy will be voted
deadline FOR items 1 and 2. If any other matters properly come before the
for meeting, or if cumulative voting is required, the persons named in
telephone this proxy will vote, in their discretion.
or
Internet Dated
voting is
PST, Signature(s) of Stockholder(s) in Box
on PLEASE SIGN exactly as name appears at
, left. Joint owners should each sign.
1999. Executors, administrators, trustees,
etc. should so indicate when signing.
If signer is a corporation, please
sign full name by duly authorized
officer.
Address change? Mark box [_] Indicate
change at left