UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the Fiscal Year Ended October 31, ~~2004~~2005

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

For the Transition Period From to

Commission file number 0-21103

Advanced Digital Information Corporation

(Exact name of registrant as specified in its charter)


Washington		91-1618616
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

P.O. Box 97057		98073-9757
11431 Willows Road N.E.		(Zip Code)
Redmond, Washington
(Address of principal executive offices)

Registrant’s telephone number, including area code:

(425) 881-8004

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange

on which registered

(None)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

Preferred Stock Purchase Rights

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in ~~Part~~ Part III of this Form 10-K or any amendment to this Form 10-K. x¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, ~~(as~~or ~~defined~~a ~~in Exchange~~non-accelerated ~~Act~~filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2~~) Yes x No ¨~~ of the Exchange Act

~~The~~Large ~~aggregate~~accelerated ~~market value~~filer of¨ ~~voting~~Accelerated ~~stock~~filer ~~held~~x byNon-accelerated ~~nonaffiliates~~filer ~~of the registrant is $644,898,640 as of April 30, 2004, based on the closing sale price of such stock on the Nasdaq National Market on that date.~~ ¨

~~There~~Indicate ~~were~~by ~~63,780,563~~check ~~shares~~mark ofwhether the ~~common~~Registrant ~~stock~~is ~~outstanding~~a shell company (as defined in Rule 12b-2 of ~~December~~the ~~15,~~Exchange ~~2004.~~ Act) Yes ¨ No x

The ~~information~~aggregate ~~requested~~market value byof ~~Items~~voting ~~10,~~stock ~~11,~~held ~~12,~~by 13nonaffiliates ~~and 14~~ of ~~Part III, to~~ the ~~extent~~registrant ~~not~~is ~~set forth herein~~$406,131,145 isas ~~incorporated~~of byApril 30, ~~reference~~2005, tobased on the ~~proxy~~closing ~~statement~~sale toprice beof ~~filed~~such instock ~~connection~~on ~~with~~ the ~~Annual~~Nasdaq ~~Meeting~~National ofMarket ~~Shareholders to be held~~ on ~~March~~that ~~10, 2005~~date.

There were 61,475,863 shares of common stock outstanding as of December 15, 2005.

The information requested by Items 10, 11, 12, 13 and 14 of Part III, to the extent not set forth herein, is incorporated by reference to the proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held on March 15, 2006.

PART I

Item 1.

Business

This ~~report~~Form ~~contains forward~~10-~~looking~~K, ~~statements~~including ~~that~~the ~~involve~~following ~~risks~~discussion and ~~uncertainties.~~analysis, ~~Such~~contains “forward-looking statements” ~~include,~~within ~~among~~the ~~others,~~meaning ~~those~~of ~~statements including~~ the ~~words~~Private ~~“expect,”~~Securities Litigation ~~“anticipate,”~~Reform ~~“intend,”~~Act ~~“believe”~~of ~~and~~1995. ~~similar~~These ~~expressions.~~statements ~~Our~~can ~~actual~~be ~~results~~identified ~~could~~by ~~differ~~references ~~materially~~to ~~from~~future ~~those~~events, ~~discussed~~circumstances, inresults ~~this~~or ~~report~~actions. ~~Factors~~They ~~that~~often ~~could~~contain ~~cause~~words ~~or contribute to~~ such ~~differences~~as ~~include~~“expect,” ~~but~~“anticipate,” ~~are~~“intend,” “believe,” ~~not~~“may,” ~~limited~~“will,” to“could” ~~the~~or ~~risks~~“should” ~~discussed~~or insimilar ~~the~~expressions ~~section~~and ~~entitled~~variations ~~“Risk~~of ~~Factors”~~these ~~as well as elsewhere herein~~words. Readers are cautioned not to place undue reliance on these forward-looking statements, ~~which~~because ~~speak~~all ~~only~~forward-looking asstatements ofare ~~the~~inherently ~~date~~uncertain ~~hereof.~~and Weoutside ~~undertake~~our nocontrol ~~obligation~~as tothey ~~publicly~~relate ~~release~~to ~~the~~future ~~result~~events. ofWe ~~any~~undertake ~~revisions~~no obligation to update these forward-looking statements ~~that may be required~~ to reflect events or circumstances ~~after~~that ~~the~~may ~~date~~subsequently ~~hereof or to reflect the occurrence of unanticipated events~~arise.

A number of factors could cause our actual results to differ materially from those contained in the forward-looking statements. They include changes in global economic and political conditions; seasonal trends; our lack of backlog; increased competition and pricing pressures; our need to continually develop successful new products; uncertain results of research and development spending; reliance on tape technology for a substantial portion of our revenue; our strategy to extend products and services beyond the tape library market; our dependence on a limited number of global suppliers and contract manufacturers; our concentration of manufacturing in one location; our reliance on indirect sales channels and OEM sales; product liability risks; claims of infringement or other risks relating to development and use of intellectual property; the performance of our investments in other entities; our ability to retain key personnel; ongoing service obligations; our expectation that the adoption of SFAS 123R will have a material impact on our results of operations; international operations; regulatory compliance and foreign currency fluctuations. The foregoing list of factors is not exhaustive. You should carefully consider these factors and other uncertainties and potential events described in the Risk Factors section of this Annual Report on Form 10-K and other documents filed from time to time with the SEC.

Company Overview

ADIC® is a leading provider of Intelligent Storage™ solutions for the open systems marketplace. We design, market, sell and support specialized hardware and software products that help a broad range of business and governmental organizations store, manage, access and protect their large-scale data more effectively. IT departments face increasingly complex data storage problems that can no longer be solved efficiently by purchasing more low-cost commodity products or adding raw capacity. Recognizing this fact, we apply innovative technologies to provide management and automation leverage so that our customers can solve their data storage problems more easily and make more effective use of their digital assets and human resources. ADIC is a Washington corporation and was incorporated in 1984.

Industry Background

Information technology departments in businesses and government offices face an expanding set of problems with storing their data. Digitization has become nearly universal, with a variety of information now relying on digital format as its primary form. This phenomenon applies to business-critical records of all kinds, including documents, images and communications, as well as to the actual products of entire industries—, including ~~television~~rich ~~broadcasting~~media production services and ~~Internet~~television ~~services~~broadcasting. Intensifying the impact of this data wave is the rise of broadband communications and the ease of copying and moving records among users and sites. With a single mouse click, multiple copies of the same file—a picture, a presentation, a video clip, a spreadsheet—are sent to servers around the world, and copied over and over again.

The net effect is a rapid increase in the total amount of data being stored and managed, an increase that may outpace any change in fundamental business activity. The data storage requirements of virtually every company increase year after year, whether or not the business is growing.

Adding to the complexity of the data-management task are regulatory and economic issues. Virtually every company ishas ~~now dealing with~~ regulatory requirements from different organizations that recognize the critical value of this data and that mandate both its long-term preservation and rapid access. Different industries are affected by different regulations, and the interpretation of requirements is not always straightforward; however, organizations of all types recognize the significance of storing and protecting their data over time. At the same time, IT organizations find themselves under pressure to increase operational efficiencies by doing more with the same—, or reduced—, staff levels. IT departments have come to expect that every year they will face the problem of how to manage more data, in more places.

This situation makes it very difficult for many companies to continue to operate in the ways they had in the past, and it drives a rapidly increasing need for value-add solutions aimed to solve storage problems.

Part of the solution can be found in new technologies associated with storage and with information management:

• Flexible, lower cost, open system, client -server platforms using UNIX, Linux and Windows operating systems are replacing mainframe environments.

• Storage media, both fixed and removable, have been developed to provide more capacity and ~~more~~ different kinds of capacity at lower cost.

•

Data transmission transports, including Fibre Channel and Internet Protocol, have been applied to storage solutions.

•

New networking techniques designed specifically for storage have developed, including Storage Area Networks (SANs) and Network Attached Storage (NAS).

Each of these technologies, however, can also have the effect of creating additional adoption and integration tasks for ~~overworked~~ IT departments ~~struggling~~under pressure to keep up with the growth of data and the requirements to manage it. Technologies alone, especially in their early phases, cannot provide the operating leverage that is achieved with a comprehensive data management solution.

Strategy

Our strategy is to design and develop ~~innovative~~increasingly sophisticated and innovative hardware and software solutions that help organizations ~~deal~~handle ~~with~~ the widespread surge in digital data—enabling them to store, manage, access and protect their data more effectively and efficiently. To do this, we develop and acquire core intellectual property and use the resulting technology to provide organizations with the ability to surmount their data management challenges more intelligently and control their digital assets ~~easily~~with more ease and ~~transparently~~transparency.

Maintaining independence from any one tape, disk or other storage format continues to be a key strategic tenet, allowing us to take advantage of innovative storage format developments. Because we focus on providing complete solutions, our products may include a variety of storage types, including various tape formats, magnetic disk, optical or emerging technologies—, combined with our proprietary connectivity and management features. Heterogeneous support of open- systems platforms is also an important differentiating feature, and we remain committed to creating software and hardware solutions designed to work in these open systems (UNIX, Linux and Windows) environments.

We2 deliver integrated data management and storage through multiple sales channels. Selection of these sales channels is dependent on their ability to access end user customers and help us meet customer needs. We typically sell our newest, most innovative products through our ADIC branded channels—and utilize OEM channels to deliver more established higher volume products to broader markets.

We deliver integrated data management and storage through multiple sales channels to customers that range from mid-size businesses to Fortune 500 companies. Selection and development of these sales channels is based on their ability to access end user customers and help us meet customer needs. We typically sell our newest, most innovative products through our ADIC branded channels and utilize OEM channels to deliver more established, higher volume products to broader markets.

Products

Our principal products fall broadly into three categories: automated tape libraries, ~~data~~disk-based ~~management~~backup ~~software~~solutions and ~~disk-based~~ data ~~protection~~management ~~solutions~~software. These three product categories, in combination with related offerings from ~~our~~ our global services group, define the vast majority of our business. Our software expertise, in addition to providing ADIC with a strong independent business aimed primarily at vertical markets with very large scale data requirements, also serves to provide management technology that helps to differentiate our hardware-based solutions from competitors.

Automated Tape Libraries

Our tape libraries are high capacity innovative storage solutions. Our libraries substantially increase the value associated with commodity tape drives by integrating them into a full system using a combination of automation technology, advanced connectivity and effective management tools. These library solutions are primarily used to back up networked data in open systems environments that deploy UNIX, Linux or Windows servers, and they integrate several tape drive technologies from different suppliers. Today, the preferred tape drive choices are linear tape open, or LTO, and digital linear tape, or DLT/SDLT, technologies. In each of 2001 through 2004 Gartner Dataquest named ADIC the world’s largest supplier of automated tape systems using the drive technologies noted above.

Our automated tape libraries range in size from easy-to-use desk-top units suitable for a small office to storage networking solutions that can protect the largest data center. A typical entry-level unit contains one or two tape drives and up to 24 cartridges, whereas our large enterprise-class libraries can contain up to hundreds of drives and thousands of cartridges.

For mid-range and enterprise customers, we offer two families of iPlatform™ libraries, the Scalar^® i2000™ and Scalar i500™, both of which are supported by a common, integrated software management approach called the iLayer™. Together, these libraries offer intelligent backup for systems as small as a terabyte and as large as multiple petabytes. They are designed to deploy managed connectivity technology to help the libraries improve the performance and reliability of backup in SANs. Their innovative monitoring, alerting and diagnostic technology has been shown to reduce service calls, shorten issue resolution time and reduce the time users spend managing backup. Their scalability technologies allow users to expand the capacity of their libraries as their data grows. The iPlatform libraries were the first in the industry to support an important new standard for managing storage resources (the Storage Management Initiative Specification, SMI-S), and they were designed to integrate easily with disk backup products, including our Pathlight^® VX solutions.

Disk-Based Backup Solutions

In the first quarter of fiscal 2004, we introduced the first in a series of integrated hardware solutions—the Pathlight series—that expanded our list of supported storage media by leveraging the recent availability of low-cost ATA commodity disk products. This disk technology has the potential to make data protection more effective, but that effectiveness cannot be accomplished by commodity-level products alone. All of our Pathlight series products use integrated disk storage resources as part of high value-added data protection solutions. The products are designed to combine the disk

~~deploy~~resources ~~UNIX,~~with ~~Linux~~management orsoftware, ~~Windows~~advanced ~~servers,~~connectivity technology and ~~they~~other ~~integrate~~hardware ~~several~~systems including tape ~~drive~~storage ~~technologies~~systems ~~from~~in ~~different~~a ~~suppliers~~single, integrated data protection solution. ~~Today,~~The ~~the~~Pathlight ~~preferred~~series ~~tape~~is ~~drive~~designed ~~choices~~to ~~are~~significantly ~~LTO, DLT/SDLT~~expand ~~and~~the ~~AIT~~range of integrated technologies. Inin ~~each~~a ofway ~~2001,~~that ~~2002~~leverages ~~and~~our ~~2003,~~core ~~Gartner~~intellectual ~~Dataquest~~property ~~named~~and ~~ADIC~~that ~~the~~can ~~world’s~~be ~~largest~~delivered ~~supplier~~and ofserviced ~~automated~~by ~~tape~~our ~~systems~~existing ~~using~~channel ~~the~~partners, ~~drive~~sales ~~technologies~~and marketing ~~noted~~and ~~above~~technical support structure.

~~Our~~The ~~automated~~inaugural ~~tape~~product ~~libraries range~~ in ~~size~~this series, ~~from~~Pathlight ~~easy-to-use~~VX, ~~desk-top~~is ~~units suitable for~~ a ~~small~~backup ~~office~~and torestore ~~storage~~solution ~~networking solutions~~ that ~~can~~integrates ~~protect~~disk into the ~~largest~~backup ~~data~~process ~~center.~~while Aallowing ~~typical~~users ~~entry-level unit contains one or two tape drives and up~~ to 24retain ~~cartridges,~~their ~~whereas~~investments ~~our~~in ~~large~~existing ~~enterprise~~tape-~~class~~based ~~libraries~~data ~~can~~protection ~~contain~~products ~~up to hundreds of drives~~ and ~~thousands of cartridges~~procedures. ~~Many~~Pathlight ofVX ~~our~~integrates ~~models~~disk ~~designed~~and tape ~~for~~into ~~enterprise applications are characterized by~~ a ~~high~~combined ~~level~~solution. ofIt ~~automation~~leverages ~~and~~ATA ~~intelligence.~~disk ~~Our~~technology ~~managed~~to ~~connectivity~~enhance ~~technology~~backup ~~helps~~performance ~~the~~and ~~libraries~~give ~~improve~~it ~~the~~RAID ~~performance~~(Redundant ~~and reliability~~Array of ~~backup~~Independent inDisk) ~~SANs~~fault tolerance, and ~~our~~it ~~innovative~~uses ~~monitoring~~tape technology, ~~alerting~~using ~~and~~tape ~~diagnostic~~libraries ~~technology~~from ~~has~~us ~~been~~or ~~shown~~other suppliers, to provide ~~reduce~~enterprise ~~service calls~~scalability, ~~shorten~~secure ~~issue~~long-term ~~resolution~~data ~~time~~retention and ~~reduce~~reduced ~~the time that end users spend managing their backup~~costs. WePathlight ~~offer~~VX’s ~~several different~~embedded ~~scalability~~management ~~technologies,~~allows ~~allowing~~ users to ~~expand~~apply ~~the~~lifecycle ~~capacity~~management oftechnology ~~their~~to ~~libraries as~~ their backup data ~~grows. Our advanced design~~ for ~~reliability~~lower ~~increases~~administrative ~~users’~~costs ~~level~~and ofenhanced data ~~protection by building in component redundancy, automated~~ ~~failover and active monitoring and alerting functions~~protection.

Data Management Software

Our data management software ~~provides automated,~~helps ~~integrated~~businesses ~~management~~with oflarge-scale data onneeds ~~different~~to ~~platforms,~~benefit from ~~operating~~workflow ~~systems~~efficiencies, ~~and~~ storage ~~media~~consolidation ~~types~~and ~~for~~archive ~~IT departments managing a broad range of enterprise-scale digital assets~~management. Designed for open system computing environments, our ~~software solutions~~data ~~help~~management ~~customers~~software ~~get their~~ products toallow ~~market~~multiple ~~faster~~applications byto ~~providing~~rapidly ~~shared, transparent~~ access ~~to data for~~ a ~~wide~~single ~~variety~~data ~~of high-performance applications. End users include international leaders in science and engineering applications~~set, ~~workflow~~ ~~management~~increasing productivity and ~~rich~~maximizing ~~media~~storage ~~distribution via the Internet and digital broadcast channels~~utilization. ~~Our~~They ~~data~~also ~~management~~transparently ~~software~~migrate ~~products~~information ~~provide~~based aon ~~fully~~business ~~integrated~~value, ~~management~~reducing ~~system~~storage ~~for~~costs anwhile ~~organization’s~~providing ~~digital~~embedded ~~assets throughout the life cycle of the~~ data protection. ~~ADIC~~For ~~software~~more isthan ~~developed~~five toyears, ~~help~~more ITthan ~~departments~~1,000 ~~get~~organizations ~~the~~within ~~maximum~~rich ~~performance~~media production and ~~utilization~~broadcast, ~~from~~Federal ~~their~~government ~~storage~~and ~~resource~~science ~~investment~~and ~~regardless~~engineering ofhave ~~the~~utilized ~~storage environment or media types that they use. Currently,~~ our data management software isto ~~used~~derive in more ~~than~~value ~~1,000~~from ~~organizations~~their ~~worldwide~~data towhile ~~manage~~controlling ~~some~~costs. Many of ~~the~~these ~~industry’s~~customers ~~largest~~now ~~and~~rely ~~most~~on ~~challenging~~our ~~data~~software ~~storage~~as ~~environments~~their cornerstone technology.

~~Disk~~Designed for data-intensive SAN environments, our flagship software solution is StorNext®, data management software that reduces the time and total cost of managing data for end users with large data sets and challenging distribution environments. It provides shared access to data across different operating systems and storage platforms. Based ~~Data~~on ~~Protection~~user-defined ~~Solutions~~policies, StorNext provides automated movement of data between different tiers of storage. The result is a scalable, high-performance data management solution that is designed to optimize the use of SAN storage while ensuring the long-term safety and recoverability of data.

InGlobal ~~late~~Services 2003, we introduced the first in a series of integrated hardware solutions—the Pathlight® series—that expanded our list of supported storage media by leveraging the recent availability of low-cost ATA commodity disk products. The new disk technology has the potential to make data protection more effective, but that effectiveness cannot be accomplished by commodity-level products alone. All of our Pathlight series products use integrated disk storage resources as part of high value-added data protection solutions. The products are designed to combine the disk resources with management software, advanced connectivity technology and other hardware systems including tape storage systems in a single, integrated data protection solution. The Pathlight series is designed to significantly expand the range of integrated technologies in a way that leverages our core intellectual property and that can be delivered and serviced by our existing channel partners, sales and marketing and technical support structure.

~~Selected~~Our ~~Products~~global services strategy is an integral component of our total customer solution. Service is typically a significant purchase factor for customers considering data management and storage solutions, and our ability to provide comprehensive service and support can provide us with a noteworthy competitive advantage. In addition, we believe that our ability to retain long-term customer relationships and secure repeat business is frequently tied directly to our service capabilities and performance.

~~The~~Through ~~following~~the ~~products demonstrate~~combined ~~innovative~~use ~~integration~~of new technology and traditional service components, we believe we can most effectively meet the dynamic support needs of ~~several~~our customers. iSurety™ is our comprehensive suite of services designed to best meet our ~~core~~customers’ ~~technologies~~requirements for product support. iSurety services include iLink™, our new remote service feature; Customer Service Center, our expanded web support capability; and Online Service Request, an enhanced online service request tool that includes access to an extensive knowledge base, allowing customers to perform basic troubleshooting themselves. We continue to provide conventional support capabilities such as technical support and on-site services. However, our extensive use of technology and innovative,

Scalar® i2000™ Automated Tape Library

The Scalar i2000, with its iPlatform™ architecture, represents the next generation of enterprise tape library functionality and sets new industry standards. It uses ADIC connectivity, management and

~~I/O controller technology to integrate and simplify key backup management functions, offering~~ built-in ~~support~~product ~~for~~intelligence aallows ~~broad~~us range of data center requirements while reducing the need for external library control servers, software and management activities. Functions integrated within the library include native partitioning of a single library into multiple logical libraries, native Fibre Channel connectivity, advanced performance monitoring, proactive system readiness checks, self-guided diagnostics and policy-based user alerts using standard email and pager networks. The iPlatform’s server-class embedded controller displays real-time backup performance data and gathers information to bescale ~~used~~our ~~for~~global ~~future~~services ~~predictive~~operations ~~analysis.~~more ~~The~~efficiently ~~Scalar~~than ~~i2000~~purely ~~also~~traditional ~~incorporates a unique capacity-on-demand capability~~models, ~~allowing~~where ~~users~~adding tohuman ~~expand~~resources ~~capacity from 100 to over 2,200 cartridges, and only pay for~~is ~~added~~typically ~~capacity~~the ~~when~~primary ~~they use it~~option.

~~StorNext®~~We ~~Data~~continue ~~Management~~to ~~Software™~~emphasize our global services infrastructure and technology investment as we scale to meet the needs of our expanding installed base. We are currently able to provide service to customers in 180 countries, supported by 24-hour, multi-language technical support centers located in North America, Europe and Asia. We provide our customers with warranty coverage ranging from three months to three years on our products. Customers with high availability requirements may also purchase additional service to extend the warranty period, obtain faster response times, or both. We offer this additional support coverage at a variety of response levels, up to 24-hours a day, seven-days-a-week, 365-day-a-year, for customers with stringent high-availability needs.

Designed for data-intensive SAN environments, StorNext is policy-based data management software that provides organizations with a foundation for Information Lifecycle Management (ILM). StorNext reduces the time and total cost of managing data for a broad class of end users faced with the problem of large data sets and challenging distribution environments. It provides a comprehensive storage solution by integrating two powerful components: StorNext File System™ (SNFS) and StorNext Storage Manager™ (SNSM). SNFS provides shared access to data across different operating systems and storage platforms, while SNSM provides automated movement of data between different tiers of storage-based user-defined policies. The result is a scalable, high-performance data management solution that is designed to optimize the use of SAN storage while ensuring the long-term safety and recoverability of data.

Pathlight VX™ Disk-to-Tape Backup Solution

Pathlight VX is a backup and restore solution that integrates disk into the backup process while allowing users to retain their investments in existing data protection products and procedures. Pathlight VX integrates disk and tape into a combined solution. It leverages ATA disk technology to enhance backup performance and give it RAID (Redundant Array of Independent Disk) fault tolerance, and it uses the characteristics of tape technology to provide enterprise scalability, secure long-term data retention and reduced costs. Pathlight VX’s embedded policy-based management lets users apply lifecycle management technology to their backup data for lower administrative costs and enhanced data protection. Pathlight VX combines four of ADIC’s core technologies to deliver a complete solution. ADIC’s virtualization software presents disk to hosts as logical tape drives and media. ADIC’s I/O controller technology provides high performance data flow to boost the speed of backup and recovery operations. ADIC’s policy-based data management software technology automates the management of data across disk and tape. ADIC’s intelligent tape library technology provides advanced, scalable tape storage elements to provide a fully integrated solution.

Sales and Marketing

We deploy a comprehensive sales, marketing and support infrastructure to address our domestic and international target markets. We rely on multiple channels to reach end- user customers, ranging in size from small businesses to government agencies and large, multinational corporations. We ~~remain~~emphasize ~~committed to upgrading our sales force to include team members with more~~ technical expertise asand ~~well as more~~ experience selling higher-value solutions to enterprise-level hardware and software customers within our sales force. Our products are sold under both the ADIC brand name and under the names of various OEM customers.

ADIC Branded Sales Channels

For our ADIC branded products we utilize value-added resellers (VARs), direct marketing resellers and distributors,. ~~and~~We wealso sell directly to certain large entities and governmental agencies. We maintain and operate a sales force from our headquarters in Redmond, Washington, regional offices in Paris, London and Munich, as well as numerous smaller field sales offices throughout North America, Europe and Asia. Additionally, we have a reseller agreement with EMC Corporation pursuant to which EMC sells ADIC-branded tape libraries.

5A large portion of ADIC-branded products are sold in conjunction with VARs who work closely with our sales force to sell our products to corporate and governmental customers. These enterprise-focused VARs generally provide some level of pre- and post-sales support for the end user customer. Typically, the VARs specialize in providing data storage and networking solutions for end users with larger data centers that require higher levels of system architecture services. We primarily partner with VARs for the sale of our larger, enterprise-class libraries including the Scalar i2000 and Scalar 10K™ and our ATA disk and standalone software solutions that leverage our proprietary technology.

~~and~~We ~~operate~~have arelationships ~~sales~~with ~~force~~a ~~from~~number ~~our~~of ~~headquarters~~distributors inwho ~~Redmond,~~offer ~~Washington,~~our ~~regional~~products ~~offices~~to inlocal ~~Paris~~VARs or, ~~London~~in ~~and~~some ~~Munich~~countries, asdirectly ~~well~~to asend ~~numerous~~users. ~~smaller~~We ~~field~~believe ~~sales offices~~international ~~throughout~~markets ~~North~~represent ~~America,~~an ~~Europe~~attractive ~~and~~growth ~~Asia.~~opportunity ~~Additionally,~~and incontinue ~~June~~to ~~2004~~expand wethe ~~entered~~scope ~~into~~of aour ~~reseller~~international ~~agreement~~sales ~~with~~efforts ~~EMC~~by ~~Corporation~~actively ~~pursuant~~engaging toadditional ~~which~~international ~~EMC~~distributors ~~sells~~and ~~ADIC-branded tape libraries~~resellers.

A large portion of ADIC-branded products are sold in conjunction with VARs who work closely with our sales force to sell our products to corporate and governmental customers. These enterprise-focused VARs generally provide some level of pre- and post-sales support for the end-user customer. Typically, the VARs specialize in providing data storage and networking solutions for end users with large data centers that require higher levels of system architecture services. We primarily partner with VARs for the sale of our larger, enterprise-class libraries including the Scalar i2000 and Scalar 10K, and our ATA disk and standalone software solutions that leverage our proprietary technology.

We have relationships with a number of distributors who offer our products to local VARs or, in some countries, directly to end users. We believe international markets represent an attractive growth opportunity and intend to expand the scope of our international sales efforts by continuing to actively pursue additional international distributors and resellers.

OEM Relationships

We sell our products to several ~~companies under~~ OEM ~~relationships.~~customers ~~OEMs~~who generally resell our products under their own brand name and typically assume responsibility for product sales, end user service and support. These OEM relationships enable us to reach end users not served by our direct sales force or our other distribution channels. They also allow us to sell to select geographic or vertical markets where specific OEMs have exceptional strength. We maintain ongoing discussions with numerous OEMs, including leading systems suppliers, regarding opportunities for our products. Our OEM relationships for hardware include Dell, Inc., Fujitsu-Siemens Computers, IBM Corporation and Sun Microsystems, Inc. We primarily ~~sell our entry-level, lower-margin products through our hardware OEMs. Software OEMs include Cray, Hewlett-Packard Company and Grass Valley Group. For fiscal 2004, OEM sales~~ represented 47% of our net sales. Total sales to Dell and IBM, which include OEM sales as well as sales of ADIC branded product to these customers, totaled 24% and 21%, respectively, of sales in fiscal 2004.

sell our entry-level, lower-margin products through our hardware OEMs. Software OEMs include Cray, Hewlett-Packard Company and Grass Valley Group. For fiscal 2005, OEM sales represented 39% of our revenue. Total sales to Dell and IBM, which include OEM sales as well as sales of ADIC branded product to these customers, totaled 22% and 16%, respectively, of sales in fiscal 2005.

Our OEM relationships require a highly customized approach in terms of product identification, logistics and service models. During the product development stage, each OEM typically requires modifications to the look and feel of the products they receive from us. This may be as simple as requiring the OEM’s unique industrial design on the exterior of the product, or as extensive as customized firmware specific to an OEM’s product feature requirements. In certain cases, the OEM does not require any change to the ADIC-branded product but we categorize the sale as an OEM sale because the product is embedded in the OEM’s system sale and has the sales, service and support characteristics typical of OEM business.

Fulfillment models vary, but generally require usmaintaining ~~to maintain~~ an inventory of OEM product in third party logistics centers near the OEM’s manufacturing or distribution facility. In these relationships, we generally maintain title to products until those products leave the third party logistics location. Service support differs widely from one OEM to another. ~~ADIC~~We ~~provides~~provide support ranging from repair and replacement to 24-hour fast exchange to on site service support for our mid-range and enterprise-class products.

End Users

End users of our products represent a wide variety of industries, including the technology, financial/services, commercial/industrial and telecommunications/entertainment industries, and range from mid-size businesses to Fortune 500 companies. The table below lists representative end users of our products:

Technology	Financial/Services	Commercial/Industrial	Telecommunications/ Entertainment
Cray	Abbey National	3M Health ~~InformationSystems~~Information Systems	~~Cingular Wireless(AT&T Wireless)~~Alltel
Dell	Bank of China	Albany International Corp.	BTBBC ~~Group~~(British ~~PLC~~Broadcasting Co)
Fujitsu Siemens	CIT Group, Inc.	BPBritish Petroleum	~~Deutsche~~BT ~~Telekom~~Group PLC
Hewlett-Packard	Citibank	~~CGG~~ChevronTexaco Corp.	~~The~~Cingular ~~Walt DisneyCompany~~Wireless
IBM	Clifford Chance	~~ChevronTexaco~~Corporate ~~Corp.~~Express	~~MCI~~Deutsche Telekom
Microsoft	Corio, Inc.	~~Corporate Express~~DHL	~~Nokia~~France Télécom
SAP	Deutsche Bank	DHL	Sprint PCS
Oracle Corporation	Deutsche Bank	Ford Motor Company	MCI
Siemens	Ernst & Young	Ford Motor Company	T-Mobile
SAP	Ernst & Young	Harley-Davidson	Nokia
Sony	Fidelity Investments	Harley-Davidson	Time Warner Inc.
Siemens	Fidelity Investments	Johnson & Johnson	Sprint PCS
Sun Microsystems	JPMorgan Chase & Co.	Johnson & Johnson	Turner BroadcastingSystem
Sony	JPMorgan Chase & Co.	MapInfo Corp.	T-Mobile
Yahoo!	Knights of Columbus	MapInfo Corp.	VerizonCommunications
Sun Microsystems	Knights of Columbus	Shell	The Walt Disney Company
	North American Health Plans	Shell	Western Wireless
Yahoo!	North American Health Plans	Sony	Time Warner Inc.
	PricewaterhouseCoopers	Sony
			Turner Broadcasting System
			Verizon Communications

End users of our products also include many government agencies. Our government sales teams work primarily with four major categories of government including intelligence, defense, civilian and state and local agencies. Specific government end users include the National Geospatial-Intelligence Agency (NGA), Internal Revenue Service (IRS), National Aeronautics and Space Administration (NASA) and all armed services (Army, Navy, Air Force, Marines).

Global Services

Our comprehensive service strategy is an integral component of our total customer solution, providing us with a competitive advantage through our support offerings and a predictable flow of revenue and cash. In order to meet customer needs, the offerings of our global services group not only include the standard activities needed to ensure successful selection and on-going support of products, but are also directly coupled with meeting dynamic customer requirements and innovative product design that can help minimize the need for conventional service. Additionally, we see the offerings of our global services group as a significant purchase factor for customers considering data management and storage solutions, which is why our ability to add value to the overall customer experience through our support offerings is a significant competitive advantage. We also believe our ability to retain long-term customer relationships and secure repeat business is frequently tied directly to our service performance.

Our global services infrastructure and technology investment continues to be a major priority, as we scale to meet our expanding installed base. We are currently able to provide service in 180 countries, supported by 24-hour, multi-language technical support centers located in North America and Europe. We provide our customers with warranty coverage ranging from three months to three years on our products. Customers with tapes, drives and disk used in our products, but manufactured by an outside party, are provided with a warranty that is equivalent to the warranty of the original equipment manufacturer. Our customers may also purchase additional service to extend the warranty period, obtain faster response times, or both. We offer this additional support coverage at a variety of levels, up to 24-hour, seven-day-a-week, 365-day-a-year response for customers with stringent high-availability needs.

Information Technology and Infrastructure

We ~~continue~~emphasize tocontinuous ~~focus~~improvement onof ~~further improving~~ our internal business systems and global information technology infrastructure. We have collaborated with several key business partners to integrate business to business communication platforms into our technology infrastructure designed to increase the efficiency of critical transactional processes. We have also developed additional on-line service request help functionality to support our growing customer installed base. All of our key business systems are integrated on a single platform designed ~~to provide scalable processes and support of our global functions. Recent~~ initiatives include implementing an automated remote diagnostic service platform to enhance customer service and a further synchronization of our global Enterprise Resource Planning and Customer Relationship Management systems.

to provide scalable processes and support of our global functions. We collaborate with several key business partners to integrate business-to-business communication platforms into our technology infrastructure that are designed to increase the efficiency of critical transactional processes. Recent initiatives include developing a centralized order management and logistics system for our European subsidiaries designed to streamline internal processes and enhance customer service. Other recent initiatives include developing additional on-line service request help functionality to support our growing customer installed base, implementing an automated remote diagnostic service platform to enhance customer service and additional synchronization of our global Enterprise Resource Planning and Customer Relationship Management systems.

Manufacturing and Suppliers

We have a manufacturing ~~facilities~~facility in Colorado ~~and Germany,~~ operating under ISO 9001 certification. Our Scalar ~~1000™, Scalar~~ i2000 and Scalar 10K™ tape libraries and our Pathlight VX disk-based products are manufactured at ~~our~~this ~~Colorado~~ facility. Our ~~highest-capacity large libraries are built in our Germany facility. Our~~ manufacturing strategy for these product lines is to perform product assembly, integration and testing, leaving component and piece-part manufacturing to our strategic suppliers. As a result of this ~~manufacturing~~ manufacturing strategy, the cost of our compliance with environmental laws ~~does~~has not ~~entail~~required material capital expenditures.

In addition to our own manufacturing ~~facilities~~facility, we also rely on third-party contract manufacturers to build our entry-level to mid-range libraries, including our FastStor®, Scalar 24™, ~~and~~ Scalar 100™ and Scalar i500 product lines, as well as some of our management and connectivity appliances. In ~~2004~~2005, we continued to expand our manufacturing relationship with Benchmark Electronics, Inc, who manufactures some of our entry-level and mid-range product lines. We developed the Scalar i500 leveraging Benchmark’s new product introduction process and experience. We believe our strategy to outsource the manufacture of our entry-level and mid-range products and our expanding relationship with Benchmark provides our customers the highest product quality at the lowest possible price ~~to them~~ and results in ongoing operational improvements. We also depend on third-party manufacturers to supply us with magnetic tape drives, optical disk drives and other storage devices that we incorporate into our products. We do not have long-term purchase commitments with any of our significant suppliers.

In August 2005, we entered into an agreement with Tandberg Data ASA, a Norwegian manufacturer and distributor of entry-level tape automation data storage products, to design, develop and manufacture certain entry-level products that we expect will complement our product line through our own sales channels. We entered into this agreement to remain active in the market for entry-level products, but in a way that permitted us to dedicate our own resources to focus on developing technologically sophisticated products.

We work closely with a group of regional, national and international suppliers to obtain parts and components meeting our specifications. In some cases, specific versions of these components and devices are customized and available only from a single source.

We carefully coordinate our inventory planning and management with our suppliers and customers to match our production to market demand. Product orders are confirmed and, in most cases, shipped to customers within one week. Larger libraries often have longer lead times and may include on-site integration and customer acceptance. Since we fill the majority of our orders as they are received, we do not believe our backlog levels are indicative of future sales.

Research and Development

Our research and development teams have developed multiple generations of ADIC’s storage ~~management~~ products, platforms and ~~platforms~~software. It is our strategy to continue significant investment in research and ~~development to expand our product offerings and to continue innovating in existing product areas. Our efforts depend on the integration of multiple engineering disciplines to generate products that~~ competitively meet or exceed market needs in a timely fashion. Our new product development is frequently stimulated by the availability of an enhanced or more cost-effective storage capacity device, the emergence of new storage protocols and evolving end-user requirements. We are constantly looking for alternative technologies that can be incorporated into our products and give us a competitive advantage. We identify and define new products based on their ability to meet a perceived

development both to expand our product offerings and to continue innovating in existing product areas. We are focusing these investments on differentiating technology with increasingly greater software content. Our efforts depend on the integration of multiple engineering disciplines to generate products that competitively meet or exceed market needs in a timely fashion. Our new product development is frequently stimulated by the availability of an enhanced or more cost-effective storage capacity device, the emergence of new storage protocols and evolving end user requirements. We are constantly evaluating alternative technologies that can be incorporated into our products and provide us a competitive advantage. We identify and define new products based on their ability to meet a perceived market need in a rapidly evolving field. Our sales, marketing, product development, engineering, supply chain and global services organizations all contribute to the process of identifying and implementing advances in technology.

Time and investment requirements for new product development tend to be significant, in terms of hardware engineering, firmware engineering and the development of tooling for manufacturing. Wherever feasible, we work toward developing software and hardware components that can be used across multiple platforms. Examples of this in our product groups are the use of portions of our StorNext software code in the Pathlight family of disk products and the leveraging of the storage networking controller (SNC®) connectivity products across ~~the~~much ~~entire~~of our library product line.

Our research and development expenses totaled $3742.95 million, $4037.69 million and $3240.26 million for fiscal ~~2004~~2005, ~~2003~~2004 and ~~2002~~2003, respectively. In connection with certain business combinations, we have recorded, and may in the future record, charges for acquired in-process research and development. These charges represent acquired technology that has not reached technological feasibility and has no alternative future use. The fiscal 2005 numbers also include costs for consolidation of our Ithaca, New York and Santa Clara, California research and development facilities into our Colorado facility. While we remain generally committed to a distributed research and development model, we anticipate that this consolidation will yield both innovation and efficiency benefits in certain product development areas.

Competition

Our products compete in the market for open- systems data storage solutions. The market is characterized by rapidly changing technology, short product lifecycles, evolving standards and aggressive pricing. Barriers to entry in the market are relatively low. Key competitive factors are technology, performance, reliability, breadth of product line, distribution strength, product availability and price, as well as customer service, including technical and sales support. Our ability to compete more effectively in customer service and other areas of scale has increased.

With respect to our tape automation products, we primarily compete for reseller and end user business with IBM, ~~Storage~~Sun ~~Technology Corporation~~Microsystems, Hewlett-Packard and Quantum Corporation as well as indirectly with companies such as BDT Products Inc., Overland Storage, Inc., NEC ~~Corporation~~ Corporation and several others who supply or manufacture similar products under OEM or outsourcing relationships. ~~Our~~During ~~tape~~2005, ~~automation~~Sun ~~products~~Microsystems ~~and~~purchased ~~disk-based~~a ~~solutions~~former ~~also~~competitor, ~~compete~~Storage ~~with~~Technology ~~disk-based~~Corporation. ~~storage~~Consolidation ~~and~~in ~~management~~the ~~solutions~~industry ~~sold~~is bychanging market ~~Hewlett-Packard,~~dynamics ~~IBM,~~and ~~Sun~~may ~~Microsystems,~~impact ~~EMC~~the ~~and~~competitive ~~Network Appliance, Inc~~landscape.

~~Several~~Our ofvirtual ~~our~~tape disk-based ~~competitors~~protection ~~have~~solutions ~~greater~~compete ~~financial,~~with ~~technical,~~disk-based ~~manufacturing,~~storage ~~marketing~~ and ~~other~~management ~~resources~~products ~~than~~sold weby ~~have~~Hewlett-Packard, ~~and~~IBM, ~~some~~Sun ofMicrosystems, ~~our~~EMC ~~competitors are also our customers~~ and ~~suppliers~~Network ofAppliance, ~~component~~Inc. ~~tape~~Our ~~and~~StorNext ~~disk~~software ~~drive~~products ~~technologies incorporated~~compete ~~into~~with ~~competing~~ products. ~~Competitors~~from ~~who~~IBM, ~~manufacture~~Sun ~~the~~Microsystems, Cray ~~drives may be able to leverage their access to~~ and ~~pricing of drives to improve the competitive position of their products~~others.

Several of our competitors have greater financial, technical, manufacturing, marketing and other resources than we have, and some of our competitors are also our customers and suppliers of

component tape and disk drive technologies incorporated into competing products. Competitors who manufacture the drives may be able to leverage their access to and pricing of drives to improve the competitive position of their products.

Aggressive competition in the market has resulted in price erosion in the past, and we expect our products, as they mature, to face increasing pricing pressure.

Intellectual Property

We rely predominantly on our full product line, strong channel structure, library and software development experience and global services offerings to compete in our marketplace. However, our success also depends on our proprietary technology. We attempt to protect our technology through the application of a combination of patent, copyright, trade secret and confidentiality means. We hold patents on various elements of our products and we are pursuing numerous additional patent applications. There can be no assurance that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology, and these measures may not preclude competitors from independently developing products or technologies that are substantially equivalent or superior to our products and technology. Our failure to protect our proprietary information could have a material adverse effect on our business, financial condition and operating results.

In connection with our acquisition of EMASS, Inc. in August 1998 from Raytheon E-Systems, Inc., we were granted a worldwide, royalty-free license under three patents owned by Raytheon relating to mass data storage systems. We are aware that Raytheon commenced a lawsuit against a number of companies in 2003 based on alleged infringement of one of these patents and that the cases have settled.

InWe ~~May~~have ~~2004, we signed~~ an agreement with IBM to license part of IBM’s tape automation technology., Weand we also ~~executed~~have a worldwide patent cross-licensing agreement with IBM covering our respective patent portfolios in the area of storage.

Environmental Compliance

We are subject to federal, state, local and international environmental laws and regulations. Compliance with these laws and regulations has not had a material effect on our capital expenditures, earnings or competitive position.

~~Recently,~~During ~~however~~2004, the European Union finalized the Waste Electrical and Electronic Equipment (WEEE) directive, which regulates the collection, recovery and recycling of waste from electrical and electronic products, and the Restrictions on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) directive, which bans the use of certain hazardous materials including lead, mercury, cadmium, chromium and halogenated flame-retardants. During 2005, member nations undertook legislation for the application of WEEE and RoHS within their borders. Not all member countries have finalized their laws as of the end of 2005, and many countries that have finalized laws are just beginning to implement their processes. To comply with the WEEE directive, we will be responsible for financing operations for the collection, treatment, disposal and recycling of past and future covered products within those countries in which we operate. To comply with the RoHS directive, we ~~may~~have ~~need~~identified toalternatives ~~substantially alter product designs and/or find alternate suppliers~~ for ~~critical~~certain components used in ~~those~~our products. ~~Because~~and ~~the~~are ~~specific~~in ~~legal~~the ~~requirements~~process ~~have~~of ~~not~~altering ~~been~~certain ~~finalized~~aspects ~~and~~of weour product ~~have~~designs. ~~yet~~Future toyears ~~fully~~may ~~assess the~~bring ~~ramifications~~additional toimplementation ~~our products~~requirements, wesuch ~~are~~as ~~presently~~the ~~unable~~expiration toof ~~reasonably~~current ~~estimate~~exemptions, ~~the~~and ~~amount~~we ofmay ~~any~~need ~~costs~~to orsubstantially ~~capital~~alter ~~expenditures~~product ~~that~~designs ~~may~~and belocate ~~necessary~~alternate tosuppliers ~~comply~~for ~~with~~critical ~~WEEE~~components ~~and~~used ~~RoHS~~in those products. We ~~cannot~~continue ~~provide~~to ~~any~~evaluate ~~assurance~~the potential impact that compliance with WEEE and RoHS ~~will~~ ~~not~~may have aon ~~material~~our ~~adverse~~results ~~effect~~of onoperations ~~our~~and ~~earnings~~financial orand competitive position.

Team Members

As of October 31, ~~2004~~2005, we had 1,~~147~~109 full-time team members, including ~~262~~275 in sales and marketing, ~~255~~211 in engineering and research and development, ~~340~~308 in global services (which includes professional services, service operations, systems engineering and technical support), ~~180~~200 in manufacturing and operations and ~~110~~115 in finance, general administration and management. In ~~November~~addition ~~2003,~~to weour ~~transferred~~full-time ~~approximately 150~~ team members, ~~associated~~we ~~with~~also ~~manufacturing~~utilize ~~and~~temporary ~~operations~~labor ~~to Benchmark~~ in ~~connection with~~ the ~~expansion~~United ofStates ~~an outsourced manufacturing relationship with Benchmark. In June 2004, we further expanded this outsource relationship~~ and ~~transferred~~other 42locations ~~team~~around ~~members~~the ~~associated with customer service and repair operations to Benchmark~~world. None of our North American team members is covered by collective bargaining agreements. We consider our relations with our team members to be good.

Our future success depends on our ability to attract and retain key team members. Competition for highly skilled technical, sales and management personnel is can be intense. We have a large number of open positions for which we are actively recruiting. In the future we may not be successful in retaining our existing team members or in attracting additional qualified team members.

Available Information

Our Internet address is www.adic.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the Investors section of our web site. Our Code of Conduct and Code of Ethics, which applies to our team members, including our Chief Executive Officer and Chief Financial Officer, is also available on our web site. The information found on our web site is not part of this or any other report we file with or furnish to the SEC.

RISK FACTORS

This report contains forward-looking statements. There are many factors that could cause actual results to differ materially from those projected by the forward-looking statements made in this report. Factors that might cause such a difference include, but are not limited to, the risk factors described below. We do not undertake any obligation to publicly release the result of any revisions to the forward-looking statements contained in this report that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

WeOur Financial Results May Be Materially Affected By ~~Global~~Our ~~Economic~~Strategy ~~and~~to ~~Political~~Grow ~~Conditions. In~~from ~~recent~~a ~~periods,~~Company ~~adverse~~Primarily Focused on Tape Library ~~economic~~Technologies ~~conditions~~to inOne ~~the~~Able ~~United~~to ~~States~~Sell and ~~throughout~~Support ~~the~~Software, ~~world~~Disk ~~economy~~and ~~adversely~~Advanced ~~affected~~Tape-Based ~~our~~Solutions. The ~~sales~~market ~~levels.~~for ~~Again~~data instorage ~~2004~~solutions, weincluding ~~experienced~~automated ~~lower~~tape ~~than~~libraries, ~~anticipated~~disk-based ~~sales~~data ~~volumes~~protection solutions and storage management software, ~~which~~is weintensely ~~attribute~~competitive inand ~~part~~characterized toby ~~general~~rapidly ~~economic~~changing ~~uncertainties~~technology and ~~resource~~ ~~constraints~~evolving ofstandards. ~~our~~To ~~customers~~succeed ~~due~~in tothis ~~the~~market, ~~implementation~~we ofbelieve ~~many~~that ~~new~~we ~~regulatory~~must ~~requirements,~~continue ~~including~~our ~~the~~strategy ~~internal~~of ~~financial~~developing ~~controls~~storage ~~requirements~~solutions ~~under~~and ~~Section~~products ~~404~~ of increasing ~~the~~technical ~~Sarbanes-Oxley~~sophistication, ~~Act.~~including Ifsoftware ~~general~~and ~~economic~~disk-based ~~conditions~~products, ~~fail~~and toenhance ~~improve or~~our ~~continue~~capacity to ~~worsen,~~support weand ~~may~~market ~~experience~~more aadvanced ~~material~~solutions. ~~adverse~~As ~~impact~~part onof ~~our~~this ~~revenues~~strategy, ~~operating~~we ~~results~~dramatically ~~and~~ramped ~~financial~~up ~~condition.~~our Aresearch ~~prolonged~~and ~~continuation~~development orduring ~~worsening~~the ofpast several ~~adverse~~years, ~~economic~~although ~~conditions~~in ~~may~~fiscal ~~require~~2004, usresearch toand ~~re-evaluate~~development ~~our~~decreased ~~strategy~~moderately ~~of investing~~primarily indue ~~research~~to ~~and~~the ~~development~~timing ~~and~~of ~~sales~~new product introductions and ~~marketing,~~lower orincentive tocompensation ~~take~~expense. ~~other~~In ~~actions~~fiscal to2005 ~~reduce~~we ~~the~~continued ~~cost~~to ofincrease sales and ~~operating~~ marketing expenses inas ~~future~~we ~~periods.~~increased ~~Any~~the ~~such~~skill ~~future~~of ~~actions~~our ~~could~~internal ~~result~~sales inforce ~~special~~and ~~charges~~reach orof ~~adversely affect~~ our ~~long-term competitive~~branded ~~position~~sales channels. ~~Further,~~We weexperienced ~~may~~an beexpected ~~unable~~reduction toin ~~reduce~~sales ~~the cost~~ of ~~sales~~low-margin, ~~and~~entry-level ~~operating~~OEM ~~expenses~~products. atWe aare ~~rate~~focusing ~~and~~our ~~level~~efforts ~~consistent~~on ~~with~~replacing such ~~future~~entry-level sales ~~adverse~~with sales ~~environment~~of higher-margin, ~~which~~enterprise ~~would~~class ~~have~~branded anand ~~adverse~~OEM ~~effect~~products. onWe ~~our~~have ~~results~~seen signs of ~~operations~~success ~~and financial~~of ~~condition.~~this ~~Unstable~~strategy; ~~global~~however, ~~political~~we ~~conditions~~cannot ~~may~~predict ~~also~~how ~~materially~~long ~~affect~~it ~~our~~will ~~financial~~take ~~condition~~to completely implement our strategy, and ~~results~~we ofcannot ~~operations.~~provide ~~Terrorist~~assurance ~~attacks~~that we orwill ~~acts~~ultimately ofexecute ~~war~~our ~~could~~strategy ~~disrupt~~successfully or that our ~~operations~~strategy ~~significantly~~will asprovide ~~well~~us aswith ~~the~~a ~~operations~~sustainable ofcompetitive ~~our customers,~~advantage ~~suppliers~~in ~~and~~the ~~sales~~market ~~channels~~for data storage solutions.

Our Financial Results May Be Materially Affected By Our Strategy to Grow from a Company Primarily Focused on Tape Library Technologies to One Able to Sell and Support Software, Disk and Advanced Tape-Based Solutions. The market for data storage solutions, including automated tape libraries, disk-based data protection solutions and storage management software, is intensely competitive and characterized by rapidly changing technology and evolving standards. To succeed in this market, we believe that we must continue our strategy of developing storage solutions and products of increasing technical sophistication, including software and disk-based products, and enhance our capacity to support and market more advanced solutions. As part of this strategy, we dramatically ramped up our research and development during the past several years, although in fiscal 2004, research and development decreased moderately primarily due to the timing of new product introductions and lower incentive compensation expense. In fiscal 2004 we continued a steep increase in sales and marketing expenses to increase the skill of our internal sales force and reach of our branded sales channels. In addition, we have allowed for a reduction in sales of low-margin, entry-level OEM products. We expect to focus our efforts to replace such entry-level sales with sales of higher-margin, enterprise class branded and OEM products that yield a higher gross margin percentage. We are beginning to see signs of success of this strategy; however, we cannot predict how long it will take to implement our strategy, and we cannot provide assurance that we will execute our strategy successfully or that our strategy will provide us with a competitive advantage in the market for data storage solutions.

Our Quarterly Revenues and Operating Results May Fluctuate for a Number of Reasons. Our quarterly operating results have varied in the past and are likely to vary significantly in the future due to several factors, including:

•

general economic conditions affecting enterprise spending for information technology;

•

increased number and diversity of available data back-up and archive storage alternatives resulting in delays to customer decision-making cycles;

•

size and timing of significant customer orders;

•

shifts in product or distribution channel mix;

•

increased competition and pricing pressure, timing of new product announcements and releases by us or our competitors;

•

new product developments by storage device manufacturers, including cost and performance of ATA disk drive products;

•

recognition of losses or gains from our strategic and other equity investments;

• changes in the rate of growth in the data storage market;

•

market acceptance of new and enhanced versions of our products;

•

performance of key suppliers and availability of key components;

•

timing and levels of our operating expenses;

• gain or loss of significant customers; ~~and~~

•11 ~~currency fluctuations and variations in effective tax rates.~~

~~Operating~~• ~~results~~currency influctuations ~~any~~and ~~period~~variations should not be considered indicative of the results investors can expect for any future period. We cannot assure you that past quarterly results will be indicative of future results or that we will be profitable in ~~any~~effective ~~future~~tax ~~period. Any unfavorable change in the factors described above or any other factors could adversely affect our operating results for a particular quarter.~~ rates;

•

changes in accounting rules, such as recording expenses for employee stock option grants and changes in tax accounting principles.

The other risk factors identified in this section in more detail, such as seasonality, may also cause our quarterly operating results to fluctuate. Operating results in any period should not be considered indicative of the results investors can expect for any future period. We cannot assure you that past quarterly results will be indicative of future results or that we will be profitable in any future period. Any unfavorable change in the factors described above or any other factors could adversely affect our operating results for a particular quarter.

Our Quarterly Revenue and Operating Results May Be Affected By Seasonal Trends. We may experience seasonal trends in our branded sales and OEM sales. Our seasonal trends can result in lower branded revenue in the first quarter of each fiscal year compared to the fourth quarter of the previous fiscal year due to customer purchasing and budgetary practices and our sales commission and budgetary structure. By contrast, OEM sales can be quite strong during the first quarter of our fiscal year, as several of our OEM partners complete their fiscal year during our first quarter, and then may decline in the second quarter of our fiscal year. These seasonal trends in branded and OEM sales have not been very predictable in recent years.

Because We Operate with Little Backlog, Our Operating Results Could Be Adversely Affected If We Do Not Accurately Anticipate Future Sales Levels. Historically, we have operated with little order backlog and, due to the nature of our business, we do not anticipate having significant backlog in the future. Consequently, a large portion of our revenue in each quarter results from orders placed during that quarter. Because of the relatively large dollar size of orders from our OEMs and our concentrated customer base for ADIC-branded products, delay in the placing of a small number of orders by a small number of purchasers could negatively affect our operating results for a particular period. Our operating expense levels are, in the short term, largely fixed and are based, in part, on expectations regarding future revenue. Thus, our operating results could be disproportionately and adversely affected if we do not receive the expected number of orders in a given quarter and our revenue falls below our expectations.

Competition in the Open Systems Storage Solutions Market May Lead to Reduced Market Share and Adversely Affect Our Revenues. The market for open- systems data storage solutions is intensely competitive and characterized by rapidly changing technology, short product cycles, evolving standards and aggressive pricing. These conditions could render our products less competitive or obsolete and could harm our business, financial condition and ability to market our products as currently contemplated. Because we offer and are developing a broad range of open- systems storage solutions, including automated tape libraries, disk-based data protection solutions and software, our competitors differ depending on the product format and performance level (e.g., entry-level, mid-range or enterprise class). Several of our competitors have greater financial, technical, manufacturing, marketing and other resources than we have. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may develop products and technologies that are less expensive or technologically superior to our products. In addition, our competitors may manufacture and market their products more successfully than we do our products.

Our Products, Especially Our Smaller Automated Libraries, and Our Services Face Pricing Pressure That Could Result in Declining Prices and Reduced Profits. There is significant price competition in the markets in which we compete, especially in the market for our entry-level automated libraries and for product-related service, and we believe that pricing pressures are likely to continue. Some competitors may reduce prices of entry-level library products in order to preserve or gain market

orshare, ~~enterprise~~and ~~class).~~certain ~~Several~~competitors ofwho ~~our~~are ~~competitors~~also ~~have~~manufacturers ~~greater~~of ~~financial,~~tape ~~technical~~drives, ~~manufacturing,~~may ~~marketing~~leverage ~~and~~their ~~other~~access ~~resources~~to ~~than~~and wepricing ~~have.~~of Asdrives ato ~~result,~~improve ~~our~~their competitive position. ~~competitors~~Service ~~may~~contract berevenues ~~able~~are toalso ~~respond~~under ~~more~~pressure ~~quickly~~for ~~than~~competitive wereasons, ~~can~~and margins are likely to ~~new~~be orcompressed. ~~changing~~To ~~opportunities,~~successfully ~~technologies~~compete, ~~standards~~we ormust ~~customer~~be ~~requirements.~~able ~~Competitors~~to ~~may~~manage ~~develop~~our ~~products~~product component and ~~technologies~~design ~~that~~costs ~~are~~and ~~less~~maintain ~~expensive~~a orhigh ~~technologically~~level ~~superior~~of toefficiency in our ~~products~~service organization. InPricing ~~addition~~pressures, and our ~~competitors~~potential ~~may~~inability ~~manufacture~~to manage related costs, could result in significant erosion in revenues, reduced gross profit margins and ~~market~~loss ~~their~~of ~~products~~market ~~more~~share, ~~successfully~~which ~~than~~could wenegatively doaffect our ~~products~~business, financial condition and operating results.

~~Our~~The ~~Products,~~Storage ~~Especially~~Device ~~Our~~Market is ~~Smaller~~Characterized ~~Automated~~By ~~Libraries~~Rapid Technological Evolution, ~~Face~~and ~~Pricing~~Our ~~Pressure~~Success ~~That~~Depends ~~Could~~on ~~Result~~Our inAbility ~~Declining~~to ~~Prices~~Develop ~~and~~Successful ~~Reduced Profits~~New Products. ~~There~~The ismarket ~~significant~~for ~~price~~our ~~competition~~products inis ~~the~~characterized ~~markets~~by inrapidly ~~which~~changing wetechnology ~~compete,~~and ~~especially~~evolving industry instandards ~~the~~and ~~market~~is ~~for~~highly ~~our~~competitive ~~entry-level~~with ~~automated~~respect ~~libraries,~~to ~~and~~timely weinnovation. ~~believe~~The ~~that~~data ~~pricing~~storage ~~pressures~~market ~~are~~is ~~likely~~particularly subject to ~~continue.~~change ~~Some competitors~~with ~~may~~the ~~reduce~~emergence ~~prices~~of innew ~~order~~communication toprotocols ~~preserve~~and orother ~~gain~~new ~~market~~storage ~~share.~~technologies Inand ~~addition~~solutions, ~~certain~~as ~~competitors~~well ~~are~~as the ~~also~~introduction ~~manufacturers~~ of ~~tape~~products ~~drives~~ and ~~may~~technologies bethat ~~able~~provide tosimilar ~~leverage~~functionality ~~their~~to ~~access~~existing toproducts and ~~pricing~~technologies ofbut ~~drives~~at todramatically ~~improve~~reduced ~~their~~price ~~competitive position~~points. To ~~successfully~~The ~~compete~~introduction inof ~~this~~new ~~market,~~products weembodying ~~must~~new beor ~~able~~alternative totechnology ~~manage~~or the emergence of new industry standards could render our ~~component~~existing ~~and~~products ~~product~~obsolete ~~design~~or ~~costs~~unmarketable. ~~This~~Our ~~pricing~~future ~~pressure,~~success ~~and~~will ~~our~~depend ~~potential~~in ~~inability~~part toon ~~manage~~ our ~~component~~ability ~~and~~to ~~product~~anticipate ~~design~~changes ~~costs~~in technology, ~~could~~to ~~result~~gain inaccess ~~significant~~to ~~price~~such ~~erosion,~~technology for incorporation into our ~~reduced~~products ~~gross~~and ~~profit~~to ~~margins~~develop new and ~~loss~~enhanced ofproducts ~~market~~on ~~share,~~a ~~which~~timely ~~could~~and ~~negatively~~cost-effective ~~affect~~basis. ~~our~~Risks ~~business,~~inherent ~~financial~~in ~~condition~~the development and ~~operating~~introduction ~~results.~~of new products include:

The Storage Device Market is Characterized By Rapid Technological Evolution, and Our Success Depends on Our Ability to Develop New Products. The market for our products is characterized by rapidly changing technology and evolving industry standards and is highly competitive with respect to timely innovation. At this time, the data storage market is particularly subject to change with the emergence of new communication protocols and other new storage technologies and solutions, as well as the introduction of products and technologies that provide similar functionality to existing products and technologies but at dramatically reduced cost points. The introduction of new products embodying new or alternative technology or the emergence of new industry standards could render our existing products obsolete or unmarketable. Our future success will depend in part on our ability to anticipate changes in technology, to gain access to such technology for incorporation into our products and to develop new and enhanced products on a timely and cost-effective basis. For example, our recently introduced Pathlight family of disk-based data protection solutions utilizes ATA disk technology, which itself has only recently become generally available. Risks inherent in the development and introduction of new products include:

•

delay in our development and initial shipments of new products;

•

the difficulty in forecasting customer demand accurately;

•

our inability to expand production capacity fast enough to meet customer demand;

•

the possibility that our key suppliers will be unable to deliver new technologies in production volumes;

•

the possibility that new products may cannibalize our current products;

•

competitors’ responses to our introduction of new products; and

•

the desire by customers to evaluate new products for longer periods of time before making a purchase decision.

In addition, we must be able to maintain the compatibility of our products with significant future device technologies, and we must rely on producers of new device technologies to achieve and sustain market acceptance of those technologies. Development schedules for high-technology products are subject to uncertainty, and we may not meet our product development schedules. If we are unable, for technological or other reasons, to develop products in a timely manner or if the products or product enhancements that we develop do not achieve market acceptance, our business will be harmed.

Our Increased Research and Development Spending May Not Yield Results That Justify the Costs Incurred. In 2005 we substantially increased our research and development spending over 2004. We expect to continue significant investment in research and development for the development of new, more technologically advanced products and enhancements of our current product lines. The market for data storage solutions and products is rapidly evolving, and we cannot be assured that our research and development efforts and investments will succeed in providing us with new or upgraded products that are competitive. If these programs are not successful, our increased investment in research and development will not yield corresponding benefits to us.

We Rely on Tape Technology for a Substantial Portion of Our Revenue. We derive a significant majority of our revenue from products that incorporate some form of tape technology, including LTO and DLT/SDLT, and we expect to continue to derive a substantial amount of revenue from these

~~Our~~ products ~~Increased~~for ~~Research~~the ~~and~~foreseeable ~~Development~~future. ~~Spending~~As ~~May~~a ~~Not~~result, ~~Yield~~our ~~Results~~future ~~That~~operating ~~Justify~~results ~~the~~significantly ~~Costs Incurred. In~~depend ~~recent~~on ~~fiscal~~the ~~years~~continued weavailability ~~have substantially increased our research~~ and ~~development~~market ~~spending~~acceptance ~~over~~of ~~that~~products employing oftape ~~prior~~drive ~~periods~~technology. WeTape ~~expect~~products tohave ~~continue~~a ~~significant~~competitive ~~investment~~advantage inover ~~research~~disk-based ~~and~~storage ~~development~~on ~~for~~ the ~~development~~ basis of ~~new,~~price. ~~more~~The ~~technologically~~price ~~advanced~~of ~~products~~disk ~~and~~storage ~~enhancements~~continues ofto ~~our~~decrease ~~current~~rapidly, ~~product~~however, ~~lines.~~due ~~The~~to ~~market~~increased ~~for~~competition ~~data~~and ~~storage~~lower ~~solutions~~costs ~~and~~resulting ~~products~~from new isdisk ~~rapidly~~drive ~~evolving,~~technologies ~~and~~such weas ~~cannot~~ATA bedisk. ~~assured~~If ~~that~~products ~~these~~incorporating ~~efforts~~disk ~~and~~or ~~investments~~other ~~will successfully~~technologies ~~provide~~gain uscomparable ~~with~~or ~~new~~superior ormarket ~~upgraded~~acceptance ~~products~~and ~~that~~competitive ~~will~~price beadvantage, ~~competitive.~~our Ifbusiness, ~~these~~financial ~~programs~~condition ~~are~~and ~~not~~operating ~~successful,~~results ~~our~~would ~~increased~~be adversely ~~investment~~affected inunless ~~research~~we ~~and~~successfully ~~development~~develop ~~will~~and ~~not~~market ~~yield~~products ~~corresponding~~incorporating ~~benefits~~the tonew ustechnology.

We ~~Rely~~Depend on ~~Tape~~a ~~Technology~~Limited Number of Increasingly Global Suppliers for aKey ~~Substantial~~Parts, ~~Portion~~Components and Storage Capacity Technologies; Some of Our Suppliers Are Also Our ~~Revenue~~Competitors. We ~~derive~~rely on a ~~significant~~limited ~~majority~~number of ~~our~~third-party ~~revenue~~manufactures ~~from~~to ~~products~~supply ~~that~~us ~~incorporate~~with ~~some~~parts ~~form~~and ofcomponents ~~tape~~used ~~technology~~in our products, ~~including~~and ~~linear~~our ~~tape~~supply ~~open~~chain extends around the world. In addition to the usual business risks associated with a concentrated supply chain, we have increased exposure to natural or ~~LTO,~~weather disruptions and ~~digital~~political ~~linear~~or ~~tape,~~economic disturbances occurring in countries or ~~DLT/SDLT,~~regions ~~and~~outside wethe ~~expect~~United toStates ~~continue~~based toon our worldwide supply chain. We do ~~derive~~not apossess ~~substantial~~proprietary ~~amount~~magnetic oftape ~~revenue~~drive, ~~from~~optical ~~these~~disk, high-density disk or other storage capacity technologies incorporated into our products, ~~for~~so ~~the~~we ~~foreseeable~~rely ~~future~~on a limited number of third-party suppliers for those devices. AsIn amany ~~result~~cases, ~~our~~specific versions ~~future~~of ~~operating~~storage ~~results~~capacity ~~significantly~~devices ~~depend~~are onavailable ~~the~~only ~~continued~~from ~~availability~~a ~~and~~single ~~market~~manufacturer, ~~acceptance~~who ofsometimes markets its own data storage products ~~employing~~to ~~tape~~compete ~~drive~~with ~~technology~~ours. ~~Tape~~ ~~products~~They ~~have~~may abe ~~competitive~~able ~~advantage~~to ~~over~~leverage ~~disk~~their low-~~based~~cost ~~storage~~access onto the ~~basis~~components ofto price their products more competitively than we can. ~~The~~At ~~price~~times, manufacturers of ~~disk~~ storage ~~continues~~capacity technologies have been unable to ~~decrease~~meet ~~rapidly,~~demand ~~however,~~for ~~due~~their products and have had to ~~increased~~allocate ~~competition~~quantities ~~and~~of ~~lower~~devices ~~costs~~among ~~resulting~~their ~~from~~customers. ~~new~~It ~~disk~~is ~~drive~~possible ~~technologies~~that, ~~such~~in the asfuture, ~~ATA~~a ~~disk.~~drive Ifor other device technology we incorporate into our products ~~incorporating~~will ~~disk~~be subject to allocation or ~~other~~that ~~technologies~~we ~~gain~~will ~~comparable~~otherwise orbe ~~superior~~unable ~~market~~to ~~acceptance~~obtain ~~and~~it ~~competitive~~in ~~price~~the ~~advantage~~quantities we desire, which would adversely affect our ~~business,~~ability ~~financial~~to ~~condition~~manufacture and ~~operating~~sell products ~~results~~incorporating ~~would~~that bedrive ~~adversely~~or ~~affected~~technology. ~~unless~~We ~~we successfully~~do ~~develop~~not have long-term contracts with any of our significant suppliers. The partial or complete loss of any of our suppliers could result in significant lost revenue, added costs and ~~market~~production delays ~~products~~or ~~incorporating~~may ~~the~~otherwise ~~new~~harm ~~technology~~our business, financial condition, operating results and customer relationships.

We Depend on ~~Certain~~Contract ~~Key~~Manufacturers ~~Suppliers~~For ~~for~~Certain ~~Parts,~~Products ~~Components~~ and ~~Storage~~Components. We ~~Capacity~~are ~~Technologies;~~increasing ~~Some~~our ofreliance ~~Our~~on ~~Suppliers~~third ~~Are~~party ~~Also Our Competitors~~contract manufacturers. We ~~rely~~currently onutilize acontract ~~limited~~manufacturers ~~number of third-party manufactures~~ to ~~supply~~ usmanufacture ~~with~~our ~~parts~~entry-level and ~~components~~mid-range ~~used~~workgroup intape ~~our~~automation library products. Weand dosome ~~not~~of ~~possess~~our ~~proprietary~~management ~~magnetic~~and ~~tape~~connectivity ~~drive~~products, ~~optical~~as ~~disk,~~well ~~high-density~~as ~~disk~~various orcomponents ~~other~~and ~~storage~~sub-assemblies of ~~capacity~~virtually ~~technologies~~all ~~incorporated~~of ~~into~~ our products. ~~and~~From ~~also~~time ~~must~~to ~~rely~~time, aour ~~limited~~contract ~~number~~manufacturers ~~of third-party~~and component suppliers ~~for~~have ~~those~~in ~~devices.~~the Inpast ~~many cases~~been, ~~specific~~and ~~versions~~may ofin ~~storage~~the ~~capacity~~future ~~devices~~be, ~~are~~unable ~~available~~to ~~only~~meet ~~from~~our asupply ~~single~~needs, ~~manufacturer.~~including ~~Some of~~ our ~~sole-source~~needs ~~suppliers~~for oftimely ~~storage~~delivery, ~~capacity~~high ~~devices~~quality ~~market~~and adequate ~~their~~quantity. ~~own~~As ~~data~~a ~~storage~~result ~~products that~~of ~~compete~~our ~~with~~increased ~~ours~~reliance ~~and~~on ~~are,~~contract ~~thus~~manufacturers, ~~also~~we ~~our competitors. They~~ may not be able to ~~leverage~~be ~~their~~as ~~low-cost~~flexible ~~access~~as towe ~~the~~have ~~components~~been toin ~~price~~the ~~their~~past ~~products~~in ~~more~~responding ~~competitively~~to ~~than~~specific ~~ours. At certain times~~quantity, ~~manufacturers~~feature ofand ~~storage~~other ~~capacity~~requests ~~technologies have~~from ~~been~~our ~~unable~~OEM topartners ~~meet demand for their products~~ and ~~have~~other customers. ~~had~~Further, tosome ~~allocate~~of ~~quantities~~our ofsuppliers ~~devices~~have ~~among~~experienced ~~their~~financial ~~customers~~difficulties. ItIf iscomponent ~~possible~~shortages ~~that~~occur, inor ~~the~~if ~~future,~~we aexperience ~~drive~~quality orproblems ~~other~~with ~~device~~contract ~~technology~~manufacturers weor ~~incorporate~~component ~~into~~suppliers, ~~our~~shipments of products ~~will~~could be ~~subject to~~significantly ~~allocation~~delayed or ~~that~~costs wesignificantly ~~will~~increased, ~~otherwise~~and beas ~~unable~~a toresult, ~~obtain~~our itrevenues inand ~~the~~operating ~~quantities~~results wecould ~~desire,~~be ~~which~~materially ~~would~~and adversely ~~affect~~affected. ~~our~~In ~~ability~~addition, towe ~~manufacture~~utilize ~~and~~only ~~sell~~a ~~products~~single ~~incorporating~~source ~~that~~for ~~drive~~many orcomponents ~~technology.~~and Wesub-assemblies, dowhich ~~not~~magnifies ~~have~~the ~~long-term~~risk of ~~contracts~~future ~~with~~shortages. ~~any~~Although of our ~~significant~~agreements ~~suppliers.~~with ~~The~~our ~~partial~~contract ormanufacturers ~~complete~~do ~~loss~~not oftypically ~~any~~include ofminimum ~~our~~volume ~~suppliers~~commitments ~~could~~or ~~result~~exclusivity inprovisions, ~~significant~~as ~~lost~~a ~~revenue,~~practical ~~added~~matter ~~costs~~it is frequently very disruptive and ~~production~~time ~~delays~~consuming orto ~~may~~change suppliers, ~~otherwise~~and ~~harm~~therefore our business, financial condition, operating results and customer relationships could be materially adversely affected if any of our significant suppliers failed to meet our supply requirements.

We ~~Depend~~recently onentered ~~Contract~~into ~~Manufacturers~~an ~~For~~agreement ~~Certain Products~~with ~~and~~Tandberg ~~Components. We~~Data ~~are~~ASA ~~increasing~~that ~~our~~requires ~~reliance~~Tandberg onto design, ~~third~~develop ~~party~~and ~~contract manufacturers. We currently utilize contract manufacturers to~~ manufacture ~~our~~certain entry-level ~~and~~automated ~~workgroup tape automation~~ library products ~~and some~~that of our management and connectivity products, as well as various components and sub-assemblies of virtually all of our products. Our contract manufacturers and component suppliers have in the past been, and may in the future be, unable to meet our supply needs, including our needs for timely delivery, high quality and adequate quantity. As a result of our increased reliance on contract manufacturers, we ~~may~~plan ~~not be able~~ to bedistribute ~~as flexible as we have been in the past in responding to~~ specific quantity, feature and other requests from our OEM partners and other customers. Further, some of our suppliers have experienced financial difficulties. If component shortages occur, or if we experience quality problems with contract manufacturers or component suppliers, shipments of products could be significantly delayed or costs significantly increased, and as a result, our revenues and operating results could be materially and adversely affected. In addition, we utilize only a single source for many components and sub-assemblies, which magnifies the risk of future shortages.

~~Although~~through our ~~agreements~~sales ~~with~~channels. ~~our~~Our ~~contract~~success ~~manufacturers~~with dorespect ~~not~~to ~~typically~~the ~~include~~entry-level ~~minimum~~automated ~~volume~~library ~~commitments~~market orwill ~~exclusivity~~depend ~~provisions,~~significantly ason aTandberg’s ~~practical~~ability ~~matter~~to ~~it is~~design, ~~frequently~~develop ~~very disruptive~~ and ~~time~~manufacture ~~consuming~~quality toproducts ~~change~~that ~~suppliers,~~we ~~and~~can ~~therefore~~offer through our ~~business,~~channels ~~financial~~at ~~condition,~~competitive ~~operating~~prices. ~~results~~A ~~and~~failure ~~customer~~by ~~relationships~~Tandberg ~~could~~to beprovide ~~materially~~us ~~adversely~~with ~~affected~~such ifproducts ~~any~~could ofadversely affect our ~~significant~~ability ~~suppliers~~to ~~failed~~compete ~~to meet~~effectively ~~our~~in ~~supply~~this ~~requirements~~market segment.

We Rely Heavily on our Manufacturing Facility in Englewood, Colorado; ~~Therefore,~~An an Interruption of Business at the Facility Could Have Material Adverse Consequences on our Financial Results. All of our Scalar ~~1000, Scalar~~ i2000 and Scalar 10K tape libraries and our Pathlight VX disk-based products are manufactured at our leased facility in Englewood, Colorado. If this facility ~~becomes~~were to become incapable of manufacturing products for any reason, we may be unable to fulfill orders, and we may lose revenue and customers. We carry business interruption insurance on the facility to cover lost revenue and profits for up to three months of downtime. This insurance, however, would not cover all possible situations affecting operation of the facility nor would it cover all out-of-pocket expenses for repairs necessary to resume operations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing customers resulting from our inability to produce products for them in a timely manner.

We Rely Heavily on Indirect Sales Channels to Market and Sell Our Branded Products; Therefore, the Loss of or Deterioration in our Relationship with One or More of our Resellers or Distributors Could Negatively Affect Our ~~Operating~~ Operating Results. We sell the majority of our branded products to value-added resellers, or VARs, and to direct marketing resellers such as CDW Corporation, who in turn sell our products to end users., ~~For the small~~ and ~~mid-range~~ ~~libraries,~~to ~~VARs may purchase our products from large~~ distributors such as Ingram Micro, Tech Data and others. InWe ~~June~~also ~~2004,~~have ~~we announced~~ a ~~new~~growing ~~reseller~~relationship ~~agreement~~ with EMC, ~~under~~through which EMC ~~resells~~and ~~our~~ADIC ~~branded~~work ~~tape~~together ~~automation~~to make available ADIC branded products that complement EMC’s product offerings. The ~~incremental~~ success of ~~new~~these sales channels is hard to predict, ~~and~~particularly ~~may~~over ~~cannibalize~~time, ~~current~~and ~~sales~~we ~~channels.~~have ~~There are~~ no purchase commitments or long-term orders ~~with~~from ~~any~~them ofthat ~~our~~assure ~~significant~~us ~~resellers.~~of ~~Generally,~~any webaseline ~~sell~~sales ~~products~~through ~~pursuant~~these ~~to purchase orders~~channels. Several of our resellers carry competing product lines that they may promote over our products. A reseller might not continue to purchase our products or market them effectively, and each reseller determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end~~-user~~ user customers. Certain of our contracts with our distributors contain “most favored nation” pricing provisions mandating that we offer our products to these customers at the lowest price offered to other similarly situated customers. In addition, sales of our enterprise-class libraries, and the revenue associated with the on-site service of those libraries, are somewhat concentrated in specific customers, including government agencies and government-related companies. Our operating results could be adversely affected ifby any number of ~~the following~~ factors ~~were to occur relating to one or more of our significant resellers~~including:

•

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

•

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

•

the loss of one or more of such resellers; or

•

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

We Expect to Continue ~~Significant~~to Focus on OEM Sales and Could Be Adversely Affected if Our OEM Sales Efforts Are Not Successful. We rely on OEMs such as Cray, Dell, Fujitsu-Siemens, Hewlett-Packard, IBM and Sun Microsystems to sell our products under the OEM’s brand. For fiscal ~~2004~~2005, OEM sales represented 4739% of our ~~net sales~~revenue. Total sales to Dell and IBM, which include OEM sales as well as sale of ADIC branded product to these customers, were 2422% and 2116%, respectively, of our sales in fiscal ~~2004~~2005. OEMs typically conduct substantial and lengthy evaluation programs before certifying a new product for inclusion in their product line. We may be required to devote significant amounts of financial and human resources to these evaluation programs with no assurance that our products will ever be selected. In addition, even if selected by the OEM, there generally is no ~~requirement that the OEM will purchase any particular amount of product or that it will refrain from~~

requirement that the OEM will purchase any particular amount of product or that it will refrain from purchasing competing products. We do not have purchase commitments from our OEMs, and a reduction in the level of sales from this channel could significantly impact revenue. Further, OEM sales typically feature lower profit margins than we have obtained in the past through our other distribution channels. If any of the OEMs decide not to continue to purchase our products, our business, financial condition and operating results may be harmed.

We May Not Realize Returns on Our Investments in Sales and Marketing. In ~~recent~~each ~~periods~~of the last three years, we have increased our spending on sales and marketing in both the U.S. and in our European and other international markets as part of our strategy to expand our sales and service channels to support new product offerings and improve market penetration with our more complex enterprise-level hardware products and with our software products. Our focus on increasing sales of these more complex hardware and software products has required us to upgrade our sales force to include team members with more technical expertise as well as more experience selling to this level of customer. Further, the sales of these more complex hardware and software products to large enterprises tend to have a longer sales cycle than sales of our mid-range and entry-level products. If our strategy of investing in this sales channel does not yield results through greater penetration of this large enterprise target market and through increased software sales, our business and results of operations will be adversely affected.

Our Operating Results Would Be Adversely Affected by a Significant Amount of Product Returns. Our customers have rights in certain instances to return products to us, and we may otherwise allow product returns if we think that doing so is in the interest of maximizing the effectiveness of our sales channels. We estimate and reserve for potential returns in our reported financial results. Actual returns could exceed the level of our estimates due to new product introductions or other changes affecting the market for our products. If returns are made at levels that exceed our estimates, our financial results could be adversely affected in the periods of these returns.

We May Make Acquisitions That Are Not Successful. We have in the past acquired businesses, and we may do so in the future. Acquisitions present a number of risks, including:

•

our ability to successfully integrate the acquired entity’s operations, technologies and products with our own;

•

our ability to retain key customers and personnel;

•

our ability to manage a larger and more diverse business, a portion of which may be in markets where we have no or limited prior experience;

•

unanticipated costs associated with the integration of the acquired entity into our business;

•

diversion of management’s attention from our core business during the acquisition and integration process;

•

potential adverse effects on existing business relationships with suppliers and customers; and

•

charges and write-offs incurred in connection with acquisitions.

Additionally, we expect that the consideration paid for future acquisitions, if any, could be in the form of cash, stock, assumption of indebtedness and/or rights to purchase stock. Dilution to existing shareholders and to earnings per share may result to the extent that shares of stock or other rights to purchase stock are issued in connection with any such future acquisitions. Dilution may occur if the earnings from such acquisitions do not exceed associated interest and other charges. We may also incur charges from the completion of acquisitions, such as the expense of in-process research and development or severance or other charges arising from the integration of the businesses. Any such charges could materially and adversely affect our results of operations, and dilution from such acquisitions could materially and adversely affect the price of our stock.

We May Not Be Able to Effectively Manage Any Future Growth. We have experienced rapid growth in the past and anticipate continued growth in the future. This growth has resulted in, and may

We May Not Be Able to Effectively Manage Any Future Growth and We May Not Fully Realize Expected Benefits of Reorganizations. We have experienced rapid growth in the past and anticipate continued growth in the future. This growth has resulted in, and may possibly create in the future, additional capacity requirements, new and increased responsibilities for management personnel, the need to hire additional personnel, the need to open new offices in other international locations, ~~and~~ added pressures on our operating and financial systems and, on occasion, the need to reorganize our operations to realize operating efficiencies and cost savings. Our facilities, personnel and operating and global information systems may not be sufficient to manage and sustain our future growth, and additional growth may detract from our ability to respond to new opportunities and challenges quickly. We may not be able to fully realize the benefits of operating reorganizations. If we are unable to manage growth effectively and realize the benefits of operating reorganizations, our business, financial condition and operating results could be materially negatively affected. In addition, to the extent expected revenue growth does not materialize, increases in our operating expenditures that are based on anticipated revenue growth could harm our financial results.

Risks Associated with International Operations May Adversely Affect Our Business. We have significant sales to customers outside the United States and believe that international sales will continue to represent a large portion of our ~~net sales~~revenue. In addition, we have used in the past and expect to continue to use in the future, contractors outside the U.S. for certain product development and manufacturing work. Our international operations, product development, manufacturing and our sales to customers outside the United States subject us to a number of risks, including:

•

the need to comply with a wide variety of foreign laws and regulations, as well as U.S. export and import laws;

•

political and economic instability in certain international markets;

•

longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable;

•

changes in tariffs and tax laws;

•

greater difficulty of administering business overseas;

•

the need to support multiple languages;

•

difficulty recruiting sales and technical support personnel with the skills to support our products;

•

unpredictability of foreign regulations;

•

difficulty of obtaining export licenses; and

•

potential severance exposure related to employment agreements with our European personnel.

Furthermore, although we endeavor to meet standards established by foreign regulatory bodies, we may not be able to comply with changes in foreign standards in the future. Our inability to design products to comply with foreign standards could harm our business, financial condition and operating results.

We May Be Sued By Our Customers for Product Liability Claims as a Result of Failures in Our Data Storage Products. We face potential liability for performance problems of our products because our end users employ our storage technologies for the storage and backup of important data and to satisfy regulatory requirements. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could harm our business.

We May Face Liability Associated with the Use of Products and Processes on Which Patent Ownership or Other Intellectual Property Rights Are Claimed. While ADIC is not currently directly involved in any intellectual property litigation or proceedings, we may become involved in intellectual property litigation or proceedings in the future. We are now, and we may in the future be, subject to claims or inquiries regarding our alleged unauthorized use of a third party’s intellectual property. For example, in 2001 we settled litigation that Crossroads Systems, Inc. had filed against Pathlight prior to

We May Face Liability Associated with the Use of Products and Processes on Which Patent Ownership or Other ~~our~~Intellectual ~~acquisition~~Property Rights Are Claimed. Although we are not currently directly involved in any intellectual property litigation or proceedings, ~~relating~~we may become involved in intellectual property litigation or proceedings in the future. We are now subject to ~~infringement~~claims or inquiries regarding our alleged unauthorized use of ~~Crossroads~~a third party’s ~~patent~~intellectual byproperty ~~certain~~and ~~products~~we ~~sold~~may bybecome ~~Pathlight~~subject to similar claims in the future. Patent holders in particular have become increasingly active, both directly and through licensing agents, in asserting patents against companies like ours that develop and distribute technologically sophisticated products. An adverse outcome in any intellectual property litigation ~~could~~ could subject us to significant liabilities to third parties, require us to license technology from or to others or require us to cease marketing or using certain products, any of which could negatively affect our business, financial condition and operating results. If we are required to seek licenses under patents or proprietary rights of others, we may not be able to acquire these licenses on acceptable terms, if at all. In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could harm our business, financial condition and operating results.

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

•

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

•

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

•

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

Fluctuating Foreign Currency Valuations May Adversely Impact Our Profitability. Currently, approximately 5458% of our total international sales are denominated in U.S. dollars, and fluctuations in the value of foreign currencies relative to the U.S. dollar could therefore make our products less price competitive. The remaining portion of our international sales are denominated in foreign currencies, primarily the euro and the British pound sterling. A decrease in the value of a relevant foreign currency in relation to the U.S. dollar after establishing prices and before our receipt of payment and conversion of such payment to U.S. dollars would have an adverse effect on our operating results. Furthermore, the expenses of our international subsidiaries are denominated in their local currencies. Because we currently engage in only limited foreign currency hedging transactions, our operating results could be adversely affected by movement in foreign currency exchange rates.

A Number of Key Personnel Are Critical to the Success of Our Business. Our future success depends in large part on our ability to retain certain key executives and other personnel, some of whom have been instrumental in establishing and maintaining strategic relationships with key suppliers and customers. We do not have any employment agreements with our U.S. ~~employees~~team members, except for change of control agreements with our officers and certain key team members and agreements with a few other personnel related to expatriate assignments. Our future growth and success will depend in large part on our ability to hire, motivate and retain highly qualified management, technical, operations and sales and marketing personnel. We may not be able to retain our existing personnel or attract additional qualified personnel in the future. In addition, companies in our industry whose employees accept positions with competitors frequently claim that the competitors have engaged in unfair hiring practices. We may receive such claims in the future as we seek to hire qualified personnel, and such claims could result in litigation. We also periodically have other employment-related claims asserted against us. Regardless of the merits of any of these claims, we could incur substantial costs in defending ourselves against these claims.

A Failure to Develop and Maintain Proprietary Technology Will Negatively Affect Our Business. Because our business depends on technology, our ability to compete effectively depends

inlarge part on our ability to ~~develop~~hire, motivate and ~~maintain~~retain ~~proprietary~~highly ~~aspects~~qualified ofmanagement, ~~our~~technical, ~~technology.~~operations Weand ~~hold~~sales ~~patents~~and onmarketing ~~various~~personnel. ~~elements~~We ofmay ~~our~~not ~~storage~~be ~~solution~~able ~~products in the~~to ~~United~~retain ~~States~~our ~~and~~existing apersonnel ~~few~~or ~~international~~attract ~~jurisdictions,~~additional ~~and~~qualified wepersonnel ~~are~~in ~~pursuing~~the ~~additional patent applications~~future. WeIn ~~cannot be certain~~addition, ~~however,~~companies ~~that~~in weour ~~will~~industry ~~receive~~whose ~~any~~employees ~~future~~accept ~~patents~~positions orwith ~~that~~competitors ~~any~~frequently ~~patents~~claim wethat dothe ~~receive~~competitors ~~will~~have beengaged ~~valid~~in orunfair ~~provide meaningful~~hiring ~~protection for our product innovations~~practices. We ~~also~~may ~~rely~~receive onsuch aclaims ~~combination~~in ofthe ~~copyright,~~future ~~trademark,~~as ~~trade~~we ~~secret~~seek ~~and~~to ~~other~~hire ~~intellectual~~qualified ~~property~~personnel, ~~laws~~ and ~~various~~such ~~contract~~claims ~~rights~~could toresult ~~protect~~in ~~our proprietary rights~~litigation. ~~Such~~We ~~rights,~~also ~~however,~~periodically ~~may~~have ~~not~~other ~~preclude competitors~~employment-related ~~from~~claims ~~developing~~asserted ~~products~~against ~~that are substantially equivalent or superior to our products~~us. InRegardless ~~addition,~~of ~~many~~the ~~aspects~~merits of ~~our~~any ~~products~~of these ~~are~~claims, ~~not~~we ~~subject~~could toincur ~~intellectual~~substantial ~~property~~costs ~~protection~~in ~~and~~defending ~~can~~ourselves ~~therefore~~against bethese ~~reproduced by our competitors~~claims.

We have historically granted employee stock options as a way of attracting and retaining key personnel. Beginning in fiscal 2006, we will adopt Statement of Financial Accounting Standards No. 123R, “Share-Based Payment (Revised 2004)” which requires, among other things, that compensation expense be recorded for new and existing partially-vested grants of stock options. The amount of the expense depends on the fair market value of the option at the time of grant. The adoption of SFAS 123R will reduce operating income or increase operating losses, and to the extent we continue to grant stock options to key personnel, may significantly impact operating income. The requirement to expense stock options could also affect our ability to grant stock options in the future which may, in turn, negatively affect our ability to attract and retain key personnel.

A Failure to Develop and Maintain Proprietary Technology Will Negatively Affect Our Business. Because our business depends on technology, our ability to compete effectively depends in part on our ability to develop and maintain proprietary aspects of our technology. We hold patents on various elements of our storage solution products in the United States and a few international jurisdictions, and we are pursuing additional patent applications. We cannot be certain, however, that we will receive any future patents or that any patents we do receive will be valid or provide meaningful protection for our product innovations. We also rely on a combination of copyright, trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights. Such rights, however, may not preclude competitors from developing products that are substantially equivalent or superior to our products. In addition, many aspects of our products are not subject to intellectual property protection and can therefore be reproduced by our competitors.

Undetected Software or Hardware Errors Could Increase Our Costs and Reduce Our Revenue. Many of our products are technologically complex and incorporate rapidly developing technologies, and we may not be able to adequately control and eliminate design and manufacturing flaws. Our products operate near the limits of electronic and physical performance and are designed and manufactured with relatively small tolerances. If flaws in design, production, assembly or testing were to occur in our products or those of our vendors, we could experience a rate of failure in our products that would result in substantial repair or replacement costs and potential damage to our reputation. Continued improvement in manufacturing capabilities and control of material and manufacturing quality and costs are critical factors in our future growth. We frequently revise and update manufacturing and test processes to address engineering and component changes to our products and evaluate the reallocation of manufacturing resources among our facilities. We can make no assurance that our efforts to monitor, develop and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial shipment delays, significant repair or replacement costs and damage to our reputation.

Because Our Products are Utilized in Complex Network Environments, it May be Difficult to Identify and Resolve Problems. Our products are often combined with products from other vendors and are frequently installed in complex network environments. As a result, when problems occur, it is difficult to identify the source of the problem. Problems caused by other network components may appear to be a malfunction of one of our products. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems.

We Face Substantial Warranty Exposure. We generally provide product warranties for varying lengths of time. In the past, we have incurred higher warranty expenses relating to new products than we typically incur with established products. In anticipation of such expenses, we establish allowances for the estimated liability associated with product warranties. However, these warranty allowances may be inadequate, and we may incur substantial warranty expenses in the future with respect to new or established products.

We Face Exposure Under Service Level Agreements. We are entering into an increasing number of service contracts with our customers that define specific periods of time during which we must respond to a service call, which sometimes are as short as two or four hours. We may incur more costs than anticipated as a result of these service level commitments. Further, any failure to meet our service level commitments may negatively affect our relationships with key customers and could result in liabilities that materially adversely affect our operating results.

Investments in Equity Securities May be Subject to Write-Downs in the Future or to Market Risk. We hold equity interests in private companies ~~having operations or technology in areas within our strategic focus~~ and limited partnership interests in private technology venture limited partnerships. Our equity interests in private companies are accounted for on a cost basis and are adjusted for other than temporary impairments. These investments are speculative in nature and can become valueless if the companies we invest in are not able to profitably achieve their business plans or if they are not able to obtain adequate funding to do so. We have in the past and may in the future incur impairment losses on our current investments or investments that we may make in the future, which would have an adverse effect on our profitability and financial condition. For our interests in private technology venture limited partnerships, we record equity investment gains or losses equal to our pro rata share of the limited partnership’s income or loss. To date, we have recorded approximately $1.6 million in net losses on these partnership interests, and we may record further losses in the future on these interests or others that we obtain, which would have an adverse effect on our profitability and financial condition. Additionally, these losses are primarily based on the general partner’s estimates of the fair value of non-marketable securities held by the partnership and are subject to the inherent uncertainty associated with the valuation of securities for which there is no public market.

19In addition, we may make investments from time to time in public companies. We did so in 2005 when we made an investment of 1.3 million shares of Overland Storage, Inc. Valuations of investments in publicly traded companies are subject to fluctuation based on the market prices. Declines in valuations of our investments in public companies could negatively affect our profitability and financial condition.

~~adequate funding to do so.~~ We ~~have~~Have inAntitakeover ~~the~~Provisions ~~past and may~~ in ~~the~~Place ~~future~~That ~~incur~~Make ~~impairment~~It ~~losses~~More onDifficult ~~our~~for ~~current~~a ~~investments~~Third orParty ~~investments~~to ~~that~~Acquire weUs. We ~~may~~have ~~make~~provisions in ~~the future,~~our ~~which~~articles ~~would~~of ~~have~~incorporation ~~an adverse effect on our profitability~~ and ~~financial condition. For our interests in private technology venture limited partnerships~~bylaws, ~~which we initially accounted for under the cost method~~ and ~~now~~are ~~account~~subject ~~for~~to ~~under~~certain ~~the~~provisions ~~equity method (see Note 2~~ of ~~our~~Washington ~~Consolidated Financial Statements for additional information)~~law, weeach ~~record equity investment gains or losses equal to our pro rata share~~ of ~~the~~which ~~limited~~could ~~partnership’s income or loss. To date, we~~ have ~~recorded approximately $1.6 million in net losses on these partnership interests, and we may in~~ the ~~future~~effect ~~record~~of ~~further~~rendering ~~losses~~more ondifficult ~~these interests~~ or ~~others~~discouraging ~~that we obtain in the future, which would have~~ an ~~adverse~~acquisition ~~effect on our profitability and financial condition. Additionally, these losses are primarily based on the general partner’s estimates~~ of ~~the~~ADIC ~~fair~~that ~~value~~is ofdeemed ~~non-marketable~~to ~~securities~~be ~~held~~undesirable by ~~the~~our ~~partnership~~board ~~and are subject to the inherent uncertainty associated with the valuation~~ of ~~securities for~~ ~~which~~directors. ~~there~~These isinclude noprovisions: ~~public market.~~

We• ~~Have~~authorizing ~~Antitakeover~~our ~~Provisions in Place That Make It More Difficult for a Third Party to Acquire Us. Our~~ board of directors ~~has the authority~~, without any action by the shareholders, to issue up to 4~~,000,000~~ ~~shares~~million ~~of preferred stock and to fix the rights and preferences of such~~ shares. ~~In addition, we have adopted a shareholder rights plan involving the issuance~~ of preferred stock ~~purchase~~with rights designed to protect our shareholders from abusive takeover tactics by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our board. Certain provisions in our articles of incorporationvoting, ~~bylaws~~liquidation, ~~certain~~dividend ~~third-party contracts~~ and ~~shareholder~~other rights ~~plan, as well as Washington law,~~ and ~~the~~preferences ~~ability~~superior ~~of our board~~ to ~~issue~~those ~~preferred stock, may have the effect~~ of ~~delaying, deferring or preventing a change in control, may discourage bids for~~ our common stock ~~at a premium over its market price and may adversely affect the market price and the voting and other rights of the holders of common stock.~~ ;

•

establishing that directors are elected for three-year terms; and

•

limiting the liability of, and providing indemnification to, our directors and officers.

We have also adopted a shareholder rights plan involving the issuance of preferred stock purchase rights designed to protect our shareholders from abusive takeover tactics by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our board and are subject to certain provisions in the Washington business combination statute, which prevents some shareholders from engaging in certain business combinations with us without approval

of our board of directors, and a Washington law provision that permits shareholders to act by written consent only if such consent is unanimous. These provisions, alone or together, may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price and the voting and other rights of the holders of common stock.

Our Stock Price May Be Extremely Volatile. The market price of our common stock has been volatile in the past, and it is likely to continue to fluctuate significantly in the future. Our stock price can fluctuate for a number of reasons, including:

•

quarterly variations in operating results, especially if they differ from our previously announced forecasts or forecasts made by analysts;

•

our announcements of anticipated future revenues or operating results;

•

announcements about us or our competitors;

•

the introduction of new technology or products by us or our competitors;

•

comments regarding us and the data storage market made by industry analysts or on Internet bulletin boards; and

•

changes in earnings estimates by analysts or changes in accounting policies.

We May be Materially Affected by the WEEE and RoHS Directives. The European Union has finalized the Waste Electrical and ~~Electronic~~ Electronic Equipment (WEEE) directive, which regulates the collection, recovery and recycling of waste from electrical and electronic products, and the Restrictions on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) directive, which bans the use of certain hazardous materials including lead, mercury, cadmium, chromium and halogenated flame-retardants. In order to comply with the WEEE directive, we will be responsible for financing operations for the collection, treatment, disposal and recycling of past and future covered products. In order to comply with the RoHS directive, we may need to substantially alter product designs and/or find alternate suppliers for critical components used in those products. Because the specific legal requirements have not been finalized in most EU countries and because we have yet to fully assess the ramifications to our products, we are presently unable to reasonably estimate the amount of any costs that we may ~~be necessary~~ incur in order to comply with WEEE and RoHS. We cannot provide any assurance that compliance with WEEE and RoHS will not have a material adverse effect on our financial condition or results of operations.

20We May Be Materially Affected By Global Economic and Political Conditions. In recent periods, adverse economic conditions in the United States and throughout the world economy adversely affected our sales levels. Through 2004 and into 2005, we experienced lower than anticipated sales volumes, which we attribute in part to general economic uncertainties and resource constraints of our customers due to the implementation of many new regulatory requirements, including the internal financial controls requirements under Section 404 of the Sarbanes-Oxley Act. If general economic conditions fail to improve or continue to worsen, we may experience a material adverse impact on our revenues, operating results and financial condition. A prolonged continuation or worsening of adverse economic conditions may require us to re-evaluate our strategy of investing in research and development and sales and marketing, or to take other actions to reduce the cost of sales and operating expenses in future periods. Any such future actions could result in special charges or adversely affect our long-term competitive position. Further, we may be unable to reduce the cost of sales and operating expenses at a rate and level consistent with such future adverse sales environment, which would have an adverse effect on our results of operations and financial condition. Unstable global political conditions may also materially affect our financial condition and results of operations. Terrorist attacks or acts of war could disrupt our operations significantly as well as the operations of our customers, suppliers and sales channels.

We21 May be Unable to Timely Comply with the Requirements of the Sarbanes-Oxley Act Relating to the Assessment by Us and Our Independent Registered Public Accounting Firm of the Effectiveness of Our Internal Controls Over Financial Reporting, Which Could Adversely Affect Our Business. The SEC, as directed by Section 404 of The Sarbanes-Oxley Act, adopted rules generally requiring each public company to include a report of an assessment by management of the effectiveness of the company’s internal control over financial reporting. In addition, the company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. This requirement will first apply to our annual report on Form 10-K for the fiscal year ending October 31, 2005. We are evaluating our internal control systems to allow our management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting, as required by Section 404. As a result, we have incurred additional expenses and a diversion of our management’s time, and we expect this to continue into fiscal year 2005.

~~While~~We weMay ~~have~~Identify ~~dedicated~~Material aWeaknesses ~~significant~~in ~~amount~~our ofInternal ~~time~~Controls in the Future and ~~resources~~Continue to ~~ensuring~~Incur Substantial ~~compliance~~Expenditures in Connection with the Sarbanes-Oxley Act of 2002. Beginning fiscal 2005, ~~there~~pursuant ~~can~~to beSection 404 noof ~~assurance~~the ~~that~~Sarbanes-Oxley Act of 2002 and rules adopted thereunder by the Securities and Exchange Commission, we orare required to include in our annual report a report of management on the company’s internal control over financial reporting. The independent registered public accounting firm ~~will~~auditing ~~complete~~our ~~the~~financial ~~necessary~~statements ~~work~~is also required to ~~comply~~attest ~~with~~to and ~~all~~report ~~aspects~~on management’s assessment of ~~Section~~the ~~404~~effectiveness inof aour ~~timely~~internal ~~manner.~~controls Ifover wefinancial orreporting. In January 2005, our independent registered public accounting firm ~~determine~~reported ~~that~~to weour ~~have~~Audit Committee a ~~material~~matter ~~weakness~~involving ininternal controls which our ~~internal~~independent ~~control~~registered ~~over~~public accounting firm considered to be a material weakness in our financial reporting process, weas ~~may~~defined beby ~~unable~~the toPublic ~~prevent~~Company orAccounting ~~detect~~Oversight ~~material~~Board ~~misstatements~~ in aAuditing ~~timely~~Standard ~~manner~~No. 2. ~~For~~We ~~example,~~addressed inthis weakness ~~connection~~and ~~with~~our ~~the~~evaluation ~~audit~~ of internal controls did not identify any material weaknesses in our internal controls over financial ~~statements as~~reporting ofat ~~and~~October 31, ~~for~~2005. ~~the~~Although ~~year~~no ~~ended~~material ~~October~~weaknesses were reported at October 31, ~~2004~~2005, we ~~identified~~are required ato ~~deficiency~~continually inevaluate our internal controls ~~that~~and, in the future, we may identify material weaknesses in our ~~independent~~internal ~~registered~~controls ~~public~~over ~~accounting~~financial ~~firm~~reporting. ~~considered~~If we fail to bemaintain aadequate ~~material~~internal ~~weakness.~~controls, ~~This~~our ~~matter~~business and ~~the~~results ~~measures~~of operations could be harmed and we ~~have~~might ~~commenced~~not be able to ~~remediate~~ ~~the~~provide ~~deficiency~~reasonable ~~are~~assurance ~~discussed~~as into ~~detail~~our infinancial ~~this~~results ~~report~~or ~~under~~meet ~~Item~~our 9Areporting obligations. In addition, ~~“Controls~~we ~~and~~expended ~~Procedures.”~~significant ~~Any~~resources ~~failure~~in tofiscal ~~implement~~2005 ~~required~~in ~~new~~order orto ~~improved~~comply ~~controls,~~with orthe ~~difficulties~~requirements of ~~encountered~~Section 404 in ~~their implementation~~particular, ~~could~~and ~~harm~~Sarbanes-Oxley ~~our operating~~in ~~results~~general, orand ~~cause~~we uswill tolikely ~~fail~~continue to ~~meet~~expend ~~our~~substantial ~~reporting~~amounts ~~obligations~~in the future. These ~~Disclosure~~expenditures ofmay amake ~~material~~it ~~weakness~~difficult ~~could~~for us to control or reduce the ~~market’s~~growth ~~confidence~~of in our ~~financial~~operating expenses, ~~statements~~which ~~and~~could adversely affect our ~~stock~~financial ~~price~~results.

Item 2.

Properties

We lease a facility in Redmond, Washington of approximately 65,000 square feet to house our corporate headquarters and our primary marketing, sales, research and development and global services organizations. Additionally, we lease two facilities located in Englewood, Colorado. The larger facility, of 148,000 square feet, is used for research and development, manufacturing operations and additional service operations. In early fiscal 2002, as a result of our move to the larger facility, we vacated a portion of the other 86,000 square foot Englewood facility. The lease on the vacated Englewood facility expires in December 2006. We ~~also~~are ~~own~~leasing approximately a77,000 ~~facility~~square infeet ~~Germany~~of ~~where~~a facility we ~~manufacture~~previously ~~some~~owned ofin ~~our~~Böehmenkirch, ~~large~~Germany ~~libraries~~where ~~and~~we primarily perform service operations. We lease facilities for research and development in ~~the~~Richardson, ~~following~~Texas ~~locations:~~and Burnsville, Minnesota. We vacated a research and development facility located in Ithaca, New York; ~~Santa~~in ~~Clara,~~September ~~California;~~2005 ~~Richardson,~~which ~~Texas;~~we ~~and~~will ~~Burnsville,~~continue ~~Minnesota~~to lease until the lease expires in August 2011. We lease additional facilities throughout the United States, Asia and Europe for our regional sales offices and customer service and support personnel. Our operating leases have terms ranging from fiscal 2006 through 2014.

Item 3.

Legal Proceedings

We are from time to time involved in various lawsuits and legal proceedings that arise in the ordinary course of business. At this time, we are not aware of any pending or threatened litigation against us that we expect will have a material adverse effect on our business, financial condition, liquidity or operating results. Legal claims are inherently uncertain, however. We cannot assure you that we will not be adversely affected in the future by legal proceedings.

Item 4.

Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the fourth quarter of fiscal ~~2004~~2005.

2122

PART II

Item 5.

Market for Registrant’s Common Equity and Related Shareholder Matters

Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol “ADIC.” As of ~~December 15~~January 9, ~~2004~~2006, there were approximately ~~414~~492 shareholders of record. The following table shows the high and low sales prices for our common stock for the periods indicated, as reported by the Nasdaq National Market.

	High		Low
Fiscal Year 2005:
1st Quarter	$	10.980	$	8.650
2nd Quarter	$	11.250	$	6.760
3rd Quarter	$	8.440	$	6.450
4th Quarter	$	9.630	$	7.710
Fiscal Year 2004:
1st Quarter	$	19.790	$	12.150
2nd Quarter	$	18.390	$	10.370
3rd Quarter	$	10.880	$	7.500
4th Quarter	$	10.100	$	8.280
Fiscal Year 2003:
1st Quarter	$	9.100	$	5.660
2nd Quarter	$	8.150	$	5.700
3rd Quarter	$	11.760	$	7.930
4th Quarter	$	17.990	$	9.850

We have not paid any cash dividends on our common stock during the past two fiscal years, and itwe isdo not ~~anticipated~~anticipate that ~~cash~~we ~~dividends~~ will bepay ~~paid~~cash dividends on shares of our common stock in the foreseeable future.

InDuring ~~May~~the ~~2002,~~quarterly ~~our~~period ~~board~~ended ~~of directors announced a stock repurchase program~~October 31, ~~and in May 2004~~2005, ~~the~~we ~~number~~repurchased ~~of total~~ shares ~~available~~of ~~for repurchase~~our ~~was~~common ~~increased~~stock toon ~~an additional 5,000,000 shares above~~ the ~~1,406,900 that had previously been repurchased under the program. The repurchase program permits~~ open market ~~purchases~~as ~~from~~set ~~time~~forth ~~to time and remains~~ in ~~effect until the total~~ ~~authorized number of shares have been repurchased or until earlier termination by~~ the ~~board~~following oftable: ~~directors. As of October 31, 2004, a total of 3,989,607 shares remained available for repurchase.~~

22ISSUER PURCHASES OF EQUITY SECURITIES

Item 6. Selected Consolidated Financial Data


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 (August 1 to August 31, 2005)	12,300	$	7.98	12,300	3,123,635
Month #2 (September 1 to September 30, 2005)	—	$	—	—	3,123,635
Month #3 (October 1 to October 31, 2005)	—	$	—	—	3,123,635

Total	12,300	$	7.98	12,300	3,123,635

In ~~the~~May ~~table below~~2002, ~~we provide~~ our ~~selected~~board ~~historical consolidated financial data. We~~of ~~have~~directors ~~prepared~~announced ~~this~~a ~~information~~stock ~~using~~repurchase ~~our~~program, ~~consolidated~~and ~~financial~~in ~~statements~~May ~~for~~2004, the ~~five~~number ~~years~~of ~~ended~~total ~~October~~shares ~~31,~~available ~~2004.~~for ~~The~~repurchase ~~information~~was ~~below~~increased ~~for~~to ~~the~~5 million ~~years~~shares. ~~ended~~In ~~October 31~~May 2005, ~~2001~~after ~~and~~approximately ~~2000~~2 million ~~includes~~shares ~~the~~had ~~results~~been ofrepurchased ~~Pathlight~~under ~~Technology, Inc., which was~~this ~~acquired May 11~~authorization, ~~2001, for~~ the ~~entire~~board ~~period~~of ~~because~~directors itauthorized ~~was~~increasing athe ~~business~~repurchase ~~combination~~authorization ~~accounted~~back ~~for~~up asto a5 million ~~pooling-of-interests~~shares. ItThe isauthorization ~~important~~does tonot ~~read~~have ~~this~~an ~~selected~~expiration ~~historical~~date. ~~consolidated~~In ~~financial~~July ~~data along with our historical annual financial statements and related notes included in this report~~2005, aswe ~~well~~entered asinto ~~“Management’s~~a ~~Discussion~~Rule ~~and~~10b5-1 ~~Analysis~~repurchase ofplan ~~Financial~~that ~~Condition~~allowed open-market ~~and~~repurchases ~~Results~~ of ~~Operations.”~~common ~~Amounts~~stock ~~presented~~during ~~for~~a ~~the~~period ~~years~~when ~~ended~~we ~~October~~normally ~~31,~~would ~~2003,~~not ~~2002~~be ~~and~~active ~~2001~~in ~~have~~the ~~been restated~~market. ~~See~~Our ~~Note~~shares 2repurchased toduring ~~our~~the ~~Consolidated~~fourth ~~Financial~~quarter ~~Statements~~of ~~for~~fiscal ~~additional~~2005 ~~information~~were ~~(in~~repurchased ~~thousands,~~pursuant ~~except~~to ~~for~~the ~~per~~Rule ~~share~~10b5-1 ~~data)~~plan.

	Fiscal Years Ended October 31,
	2004			2003		2002			2001			2000
									(Restated)(1)
Consolidated Statements of Operations:
Net sales	$	454,819		$	423,998	$	337,599		$	364,681		$	290,296
Cost of sales		325,588			292,121		245,832			258,893			183,717
Pathlight acquisition costs		—			—		—			4,109			—
Gross profit		129,231			131,877		91,767			101,679			106,579
Operating expenses:
Sales and marketing		64,836			57,777		48,307			43,704			39,204
General and administrative		24,242			24,015		23,172			19,960			15,411
Research and development		37,925			40,609		32,230			27,763			19,959
Crossroads settlement costs		—			—		—			16,974			434
Acquisition expenses		—			—		1,475			8,837			—
Operating profit (loss)		2,228			9,476		(13,417	)		(15,559	)		31,571
Other income(2)		3,365			6,035		11,864			38			108,491
Income (loss) before income taxes		5,593			15,511		(1,553	)		(15,521	)		140,062
Provision (benefit) for income taxes		(2,142	)		3,020		(3,113	)		(4,181	)		44,599
Minority interest		—			—		—			—			19
Net income (loss)	$	7,735		$	12,491	$	1,560		$	(11,340	)	$	95,444
Basic net income (loss) per share	$	0.12		$	0.20	$	0.03		$	(0.19	)	$	1.62
Diluted net income (loss) per share	$	0.12		$	0.20	$	0.02		$	(0.19	)	$	1.50
	As of October 31,
	2004			2003		2002			2001			2000
				(Restated)		(Restated)			(Restated)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	226,890		$	180,401	$	150,741		$	155,274		$	194,268
Working capital		281,361			279,545		231,679			257,415			262,021
Total assets		475,030			450,157		398,629			398,862			399,245
Long-term debt, excluding current portion		—			967		984			1,170			1,279
Shareholders’ equity		363,898			354,338		328,226			329,968			326,486

(1) The following table summarizes the impact on our consolidated statement of operations for fiscal 2001 of the restatement relating to our accounting for our investment in a private technology

~~venture~~Item ~~limited~~6. ~~partnership~~Selected ~~discussed in Note 2 to the~~ Consolidated Financial ~~Statements (in thousands, except for per share data):~~Data

	As Reported			As Restated
Loss on securities and investment transactions	$	(6,508	)	$	(7,289	)
Other income		819			38
Benefit for income taxes		(3,908	)		(4,181	)
Net loss		(10,832	)		(11,340	)
Basic net loss per share	$	(0.18	)	$	(0.19	)
Diluted net loss per share	$	(0.18	)	$	(0.19	)

In the table below, we provide our selected historical consolidated financial data. We have prepared this information using our consolidated financial statements for the five years ended October 31, 2005. The information below for the year ended October 31, 2001 includes the results of Pathlight Technology, Inc., which was acquired May 11, 2001, for the entire period because it was a business combination accounted for as a pooling-of-interests. It is important to read this selected historical consolidated financial data along with our historical annual financial statements and related notes included in this report, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Amounts are presented in thousands, except for per share data.

(2) In fiscal 2000, other income primarily comprises a net gain on equity securities transactions of $97.3 million.


	Fiscal Years Ended October 31,
	2005			2004			2003		2002			2001
Consolidated Statements of Operations:
Revenue	$	454,178		$	454,819		$	423,998	$	337,599		$	364,681
Cost of revenue		315,115			325,588			292,121		245,832			258,893
Pathlight acquisition costs		—			—			—		—			4,109

Gross profit		139,063			129,231			131,877		91,767			101,679
Operating expenses:
Sales and marketing		66,597			64,836			57,777		48,307			43,704
General and administrative		25,886			24,242			24,015		23,172			19,960
Research and development		42,493			37,925			40,609		32,230			27,763
Crossroads settlement costs		—			—			—		—			16,974
Acquisition expenses		—			—			—		1,475			8,837

Operating profit (loss)		4,087			2,228			9,476		(13,417	)		(15,559	)
Other income		6,030			3,365			6,035		11,864			38

Income (loss) before income taxes		10,117			5,593			15,511		(1,553	)		(15,521	)
Provision (benefit) for income taxes		(4,156	)		(2,142	)		3,020		(3,113	)		(4,181	)

Net income (loss)	$	14,273		$	7,735		$	12,491	$	1,560		$	(11,340	)

Basic net income (loss) per share	$	0.23		$	0.12		$	0.20	$	0.03		$	(0.19	)

Diluted net income (loss) per share	$	0.23		$	0.12		$	0.20	$	0.02		$	(0.19	)


	As of October 31,
	2005			2004			2003		2002			2001
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	131,554		$	94,695		$	91,451	$	96,191		$	128,774
Marketable securities		121,025			138,238			109,738		86,649			51,402
Working capital		283,024			281,361			279,545		231,679			257,415
Total assets		496,087			475,030			450,157		398,629			398,862
Long-term debt, excluding current portion		—			—			967		984			1,170
Shareholders’ equity		359,898			363,898			354,338		328,226			329,968

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the sections entitled “Selected Consolidated Financial Data,” “Critical Accounting Estimates” and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed here. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all forward-looking statements wherever they appear. Factors that could cause or contribute to such differences include those discussed in the section entitled “Risk Factors,” as well as those discussed elsewhere herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

ADIC is a leading provider of Intelligent Storage solutions for the open- systems marketplace. We design, market, sell and support hardware and software products that help a broad range of business and governmental organizations manage, access and protect their large-scale data more effectively. Currently, we derive substantially all of our revenue from the sale of tape and disk-based storage solutions, storage software, connectivity solutions and related services and support. We distribute our products primarily through OEMs, value-added resellers (VARs) and distributors, and also sell directly to certain end users.

WeOur ~~have~~operating ~~achieved~~performance aimproved ~~compounded~~in ~~annual sales growth rate of approximately 15% since~~ fiscal ~~1999~~2005, ~~despite~~as aevidenced ~~challenging~~by ~~market~~increases ~~during~~in ~~the~~net ~~past~~income ~~few~~and ~~years.~~operating Inincome ~~fiscal~~of ~~2004,~~85% weand ~~experienced~~83%, ~~lower than anticipated sales volumes~~respectively, ~~which~~on weessentially ~~attribute in part to general economic uncertainties and resource constraints of our~~flat ~~customers~~revenues ~~due~~compared to ~~the~~fiscal ~~implementation~~2004. ~~of many new regulatory requirements~~Additionally, ~~including~~we ~~the~~generated ~~internal~~$48.6 ~~financial~~million ~~controls~~in ~~requirements~~cash ~~under~~from ~~Section~~operations ~~404~~during offiscal ~~the Sarbanes-Oxley Act~~2005. ~~Sales~~During in the fourth quarter of fiscal ~~2004~~2005, ~~however,~~we ~~were~~reported upboth ~~approximately 5%~~record ~~from~~total ~~the~~revenue ~~$110.0~~and ~~million~~revenue ~~reported~~from inbranded ~~the third quarter~~customers. Sales to branded customers, ~~which~~were ~~tend~~strong tothroughout ~~generate~~the ayear, ~~higher~~increasing ~~gross~~16% ~~margin~~for ~~percentage~~the ~~than~~full ~~our~~year ~~OEM~~and ~~sales,~~26% ~~reached a record $65.3 million~~ during the fourth quarter of fiscal ~~2004~~2005 ascompared weto ~~enjoyed~~ the ~~benefits~~same ofperiods ~~new~~in fiscal 2004. This growth in revenue from branded ~~channels~~customers ~~like~~is ~~EMC~~primarily ~~and~~attributable to increased sales of our ~~newest,~~ technologically sophisticated enterprise products, ~~like~~particularly the ~~disk-based~~Scalar ~~Pathlight~~i2000, VXand ~~solution.~~increased ~~Gross~~service ~~profit~~revenue. ~~decreased~~The tostrong ~~28%~~branded inrevenues ~~fiscal~~were ~~2004~~offset ~~from~~by ~~31%~~a inreduction ~~fiscal 2003, primarily due to increased investment~~ in ~~global~~OEM ~~services and support, which outpaced~~ revenue resulting from ~~lower~~an ~~than~~anticipated ~~expected~~decline in the sales ~~volumes~~ of ~~our~~certain ~~branded~~lower-margin ~~enterprise~~entry-level products. ~~Gross~~We ~~profit~~believe ~~during~~our ~~the~~current ~~fourth~~OEM ~~quarter~~relationships ofare ~~fiscal~~stable ~~2004,~~as ~~however,~~evidenced ~~was~~by ata ~~its~~relatively ~~highest~~consistent level ~~since~~of ~~the end~~OEM ofsales ~~fiscal~~over ~~2003~~the aspast athree ~~result~~quarters. ofIn ~~improved~~November ~~sales~~2005, ~~mix~~we ~~toward~~announced ~~branded~~the ~~sales~~first ~~channels~~customer shipments ~~and~~of ~~advanced~~our ~~products.~~new InScalar ~~fiscal~~i500 ~~2004~~mid-range library, ~~our~~which ~~investment~~will inbe ~~sales~~sold ~~and~~to ~~marketing~~both ~~increased~~branded toand OEM customers.

24Gross profit increased to 31% in fiscal 2005 from 28% in fiscal 2004, primarily due to an increase in the proportion of product sales to branded customers and improved service margins. Gross profit during the fourth quarter of fiscal 2005 was at its highest level since the second quarter of fiscal 2003. Our investment in sales and marketing increased in fiscal 2005 to expand our sales team and further develop sales channels and skills to support our technologically evolving product lines. Research and development expenses also increased in fiscal 2005 due largely to new product development and charges associated with closing our Ithaca, New York and Santa Clara, California facilities. Our general and administrative expenses increased during fiscal 2005 due in large part to professional services fees related to our first year of Sarbanes-Oxley Section 404 compliance and to support ongoing tax and business strategy planning. We generated an income tax benefit in fiscal 2005 as a result of tax planning strategies and the resolution of tax contingencies related to achieving successful tax audit results. We expect that our long-term tax rate will be closer to, but lower than, statutory rates due to expected research and development tax credits, tax-exempt interest and net foreign tax benefits.

further develop sales channels and skills sufficient to support our technologically evolving product lines. After experiencing significant increases over the past several years, research and development expenses moderately decreased during fiscal 2004 due largely to the timing of product development and lower incentive compensation expenses. Our general and administrative expenses remained flat year over year despite the growth in sales. We generated an income tax benefit in fiscal 2004 as a result of tax planning strategies and the release of a tax contingency related to achieving successful tax audit results. We expect that our long-term tax rate will be closer to statutory rates, although there may be some additional one-time benefits available in the near term.

We expect to continue to make significant investments in research and development and sales and marketing in order to remain competitive and to solidify our market position in intelligent storage solutions. We are in the process of transforming our business from one that has historically been primarily focused on tape libraries to one with a broad portfolio of technologies and channels necessary to support software, disk and tape-based solutions in the rapidly evolving backup and archive storage markets. We believe our ability to serve broader markets with enterprise-level products and software and to continually develop technologically sophisticated, higher-margin branded products to replace entry-level products that become commoditized and subject to increasing price pressure at the OEM level will be key to our future success. In addition, we view a comprehensive global service and support offering as an integral component of our strategy and our total customer solution. In order to meet customer needs, the offerings of our global services group not only include the standard activities needed to ensure successful selection and on-going support of products, but are also directly coupled with meeting dynamic customer requirements and innovative product design that can help minimize the need for conventional service. Service infrastructure and technology investment have been—and are expected to continue to be—major priorities, as we scale to meet our organizational growth and the needs of our expanding installed base.

We believe continued investment in sales and marketing and research and development is required in order to successfully penetrate new markets, reach new customers and expand our offerings. The competition in our industry is strong and we must constantly work to reduce the cost of our existing products while retaining high quality standards and reliability. We have outsourced the production of our entry-level products and a portion of the repair of these products to third party manufacturers to allow us to take advantage of our suppliers’ economies of scale in component purchasing, manufacturing test and other areas associated with production of our higher volume, lower margin products.

Since 1998, in addition to our increased investment in internal research and development, we have made four acquisitions that enabled us to acquire new technologies. These technologies include Storage Area Network (SAN) software, other proprietary hardware and software technology that allow users to deploy SANs, and disk-based data protection products for the open systems market. In addition to acquiring new technologies, the acquisitions allowed us to expand our operations in Europe, gain a global services organization and add large libraries and proprietary software to our product offerings.

In November 2003, we expanded an existing outsource manufacturing relationship with Benchmark to include final assembly and test of a significant portion of our entry-level and workgroup tape automation product line. In connection with this expansion, we transferred to Benchmark approximately 150 team members associated with manufacturing, test and supply chain management. Benchmark assumed the lease on our Redmond, Washington manufacturing facility and purchased inventory associated with the product line and property, plant and equipment related to the operation for $15.1 million in cash. In June 2004, we further expanded our existing outsource relationship to incorporate screening and repair of certain entry-level and workgroup tape automation products. In connection with this expansion, we transferred to Benchmark certain team members from our customer service and repair operations in Redmond. Additionally, Benchmark purchased certain inventory and property, plant and equipment associated with these operations for $1.6 million in cash. There was no gain or loss recorded on any of these transactions.

InWe ~~June~~expect ~~2004,~~to wecontinue ~~announced~~to ~~the~~make ~~execution~~investments ofin aresearch ~~reseller~~and ~~agreement~~development ~~with~~and ~~EMC~~sales ~~pursuant~~and marketing in order to ~~which~~remain competitive ~~EMC~~and ~~sells~~to ~~ADIC~~solidify our market position as a provider of intelligent storage solutions. We have made advances in transforming our business from one that has historically been primarily focused on tape libraries. ~~All~~to ~~products~~one ~~sold~~with ~~through~~a ~~EMC~~broad ~~bear~~portfolio of technologies and channels necessary to support software, disk and tape-based solutions in the ~~ADIC~~rapidly ~~brand~~evolving backup and ~~all~~archive ~~service~~storage ~~associated~~markets. We believe our ability to serve broader markets with ~~the~~enterprise-level products isand software and to develop technologically sophisticated, higher-margin branded products to replace entry-level products that become commoditized and subject to increasing price pressure at the ~~responsibility~~OEM oflevel ~~ADIC~~will be key to our future success. WeIn ~~expect~~addition, ~~this~~we ~~expansion~~view a comprehensive global service and support offering as an integral component of our ~~branded~~strategy ~~sales~~and ~~channel~~our tototal ~~gradually~~customer ~~improve~~solution. ~~overall~~In ~~sales~~order ~~growth;~~to ~~however~~meet customer needs, ~~there are~~the noofferings ~~minimum~~of ~~purchase~~our ~~commitments~~global ~~under~~services ~~the~~group ~~arrangement,~~not only include the ~~quantity~~standard activities needed to ensure successful selection and on-going support of products, ~~purchased~~but byare ~~EMC~~also isdirectly ~~based~~coupled ~~upon~~with ~~market~~meeting ~~demand~~dynamic customer requirements and innovative product design that can help minimize the ~~agreement~~need ~~may~~for conventional service. Service infrastructure and technology investment have been, and are expected to continue to be, ~~disruptive~~major priorities, as we scale to meet our ~~current~~organizational ~~business~~growth and the needs of our expanding installed base. We believe continued investment in sales ~~channels~~and marketing and research and development is required in order to successfully penetrate new markets, reach new customers and expand our offerings.

~~During~~In ~~the~~addition ~~fourth~~to ~~quarter~~reinvesting ofour ~~fiscal~~available ~~2005,~~cash wein ~~will~~our ~~begin~~business, ~~recording~~we ~~the~~expect ~~fair~~to ~~value~~continue ofmaking ~~our share-based~~targeted ~~compensation~~investments in ~~our~~promising, ~~financial~~innovative ~~statements~~enterprises, ineither directly ~~accordance~~or ~~with~~indirectly ~~Statement~~such ofas ~~Financial~~through ~~Accounting~~private ~~Standards~~technology ~~No.~~venture ~~123R~~limited partnerships. Historically, ~~“Share-Based~~we ~~Payment~~have ~~(Revised~~concentrated ~~2004).”~~our ~~The~~investments ~~full~~in ~~impact~~technologies that ~~the~~are ~~adoption~~closely ofrelated ~~this~~to ~~statement~~our ~~will~~strategic ~~have~~focus. Going onforward, ~~our~~we expect to explore ~~financial~~broadening ~~position~~our ~~and~~investment ~~results~~parameters ofto ~~operations~~include isalternative ~~not~~investments. Such ~~yet~~investments ~~known,~~may ~~but~~encompass a wider range of businesses and technologies than we dohave ~~not~~concentrated ~~expect~~on in the ~~impact~~past, ~~will~~but beoffer ~~material~~an attractive opportunity to enhance the returns ~~fiscal~~we ~~2005~~earn ~~income~~on ~~statement~~our investable cash.

~~Foreign~~The ~~currency~~competition ~~gains~~in orour ~~losses~~industry is ~~arise~~strong asand awe ~~result~~must ofwork ~~our~~to ~~operation~~reduce the cost of ~~European~~our ~~subsidiaries,~~existing ~~the~~products ~~functional~~and ~~currencies~~integrate ofnew ~~which~~technologies ~~are~~while ~~the~~retaining ~~euro~~high ~~and~~quality ~~British~~standards ~~pound sterling~~and reliability. ~~All~~We ~~assets~~have ~~are~~outsourced ~~recorded~~the inproduction ~~the~~of ~~functional~~our ~~currencies~~entry-level onproducts, ~~the~~our ~~financial~~new ~~statements~~mid-level ofproduct and ~~these~~a ~~subsidiaries.~~portion ~~Some~~of ~~U.S.~~the ~~dollar-denominated~~repair ~~receivables~~of ~~and~~these ~~payables~~products into ~~these~~third ~~subsidiaries~~parties ~~offset~~to ~~each~~allow ~~other~~us to ~~reduce~~take advantage of our ~~exposure~~suppliers’ toeconomies ~~transaction gains~~of ~~and~~scale ~~losses.~~in Tocomponent ~~the~~purchasing, ~~extent~~manufacturing ~~that~~test ~~these~~and ~~monetary~~other ~~assets~~areas ~~and~~associated ~~liabilities~~with doproduction ~~not~~and ~~fully~~service ~~offset~~of ~~each~~our ~~other~~higher volume, ~~and~~lower ~~the~~margin Uproducts.S. ~~dollar~~Our ~~exchange~~cost ~~rate~~reduction ~~changes~~efforts ~~with~~also ~~respect~~include toreorganization ~~these~~of ~~currencies,~~our ~~transaction~~research ~~gains~~and ordevelopment ~~losses~~and ~~may~~European ~~result~~operations as further described below.

~~Our~~In ~~financial~~February ~~statements for the years ended October 31~~2005, ~~2003,~~we ~~2002~~announced ~~and~~plans ~~2001 have been restated~~ to ~~correct~~close our ~~accounting~~research ~~for~~and ~~our~~development ~~investment~~facilities in ~~a limited partnership. During fiscal 2004~~Ithaca, weNew ~~determined~~York ~~that~~and ~~our~~Santa ~~investment in Frazier Technology Venture Fund I (FTVI)~~Clara, aCalifornia. The ~~limited~~purpose ~~partnership,~~of ~~has~~these ~~been~~closures ~~improperly~~was ~~accounted~~to ~~for~~optimize ~~since~~efficiency ~~fiscal 2000.~~and Welower ~~initially accounted for~~ our ~~investment under the~~ cost ~~method~~structure ~~since~~by ~~our~~streamlining ~~ownership interest in FTVI is less than 20%~~ and weintegrating dooverhead ~~not~~from ~~have~~several ~~significant influence over the partnership’s operating and financial policies~~acquisitions. ~~Subsequently~~The itclosures ~~was determined~~were ~~that~~completed during the ~~equity~~fourth ~~method~~quarter isof ~~appropriate~~fiscal ~~under EITF Topic D-46~~2005, ~~“Accounting~~and ~~for~~during ~~Limited~~fiscal ~~Partnership~~2005 ~~Investments,”~~we recorded ~~because our limited partnership ownership interest is greater than 5%~~$1.8 ~~See~~million ~~Note 2~~ of ~~the~~charges ~~Notes~~related to ~~Consolidated Financial~~these ~~Statements~~closures ~~for~~in ~~additional~~research ~~information. The following discussion~~ and ~~analysis~~development ~~gives effect to the restatement~~expense.

~~Fiscal~~Also ~~Year~~in ~~2004~~February ~~Compared~~2005, we began a reorganization of our European operations to ~~2003~~create a shared services center in Switzerland. The purpose of this reorganization was to improve our ability to meet our customers’ needs; centralize our administrative support functions and operating and financial controls; streamline our reporting; and improve our operating cost model by streamlining and integrating overhead from several acquisitions. The reorganization will impact administrative team members, some of whom will be relocating within our European operations. The reorganization is expected to be complete by the second quarter of fiscal 2006. During fiscal 2005, we recorded $454,000 of charges related to the reorganization in general and administrative expense.

~~Net~~In ~~Sales. Net~~May sales increased 7% during fiscal 2004 to $454.8 million from $424.0 million in fiscal 2003. The increase is due to higher sales to both branded and OEM customers. Annual growth rates of branded and OEM sales during fiscal 2004 were 9% and 5%2005, ~~respectively.~~we ~~ADIC~~completed ~~branded~~a ~~revenues~~sale-leaseback ~~represented~~transaction ~~53%~~for ofour ~~sales~~facility in fiscal 2004 compared to 52% in fiscal 2003. Revenue from OEM customers comprised 47% of sales in fiscal 2004 compared to 48% in fiscal 2003. Branded sales have increased in all major geographical markets in fiscal 2004 compared to fiscal 2003. The primary source of this growth was revenues from hardware service contracts and software maintenance contractsBöehmenkirch, which increased due to both new product sales and renewals of existing contracts. The absolute dollar growth in OEM sales is primarily due to increased sales of products introduced within the past two years. During fiscal 2005Germany, wewhere ~~expect branded revenues to increase as a percentage of net sales as~~ we ~~continue~~perform toservice ~~devote~~operations ~~more~~for ~~focus~~several ~~on enterprise-level~~ products. ~~and~~We sold ~~software and less focus on~~ the ~~entry-level~~facility ~~tape~~for ~~libraries that comprise the bulk of our OEM revenues~~$4.5

Dell and IBM accounted for fiscal 2004 revenues of $109.9 million (24%) and $96.4 million (21%) and fiscal 2003 revenues of $103.3 million (24%) and $96.1 million (23%). Net sales outside the United States accounted for 35% of our net sales in both fiscal 2004 and 2003.

Gross Profit. Gross profit was $129.2 million or 28% of net sales for fiscal 2004 compared to $131.9 million or 31% of net sales for fiscal 2003. Gross profit margins depend on a number of factors,

~~including~~million, ~~channel~~ and ~~product~~the ~~mix,~~total ~~fixed~~gain ~~infrastructure~~on ~~costs,~~this ~~price~~sale ~~competition~~was ~~and~~approximately ~~tape drive costs~~$3.2 ~~The~~million, decrease in gross profit as a percentage of sales in fiscal 2004 compared to fiscal 2003 is primarily a result of increased investment in our global services infrastructure to support our growing global customer base$2.5 ~~Lower-than-expected~~million ~~sales volumes~~ of ~~branded~~which ~~enterprise~~was ~~products~~recorded ~~have~~during ~~caused~~ the ~~growth~~2005 ~~in our~~fiscal ~~global services costs to outpace our revenue growth~~year. WeThe ~~expect~~remaining ~~gross~~gain ~~margin~~has ~~will~~been deferred ~~improve for fiscal 2005 as we execute on our strategy of shifting customer mix toward our branded channels~~ and ~~product~~will ~~mix~~be ~~toward~~recognized ~~newer,~~over ~~more~~the ~~technologically sophisticated~~term ~~products that include elements~~ of our ~~proprietary~~lease ~~storage~~with ~~management~~the ~~software and connectivity technology~~purchaser.

~~Sales~~In ~~and~~August ~~Marketing~~2005, ~~Expenses. Sales~~we ~~and~~entered ~~marketing~~into ~~expenses~~an ~~were~~agreement ~~$64.8~~with ~~million~~Tandberg orData ~~14%~~ASA, ofa ~~net~~Norwegian ~~sales~~manufacturer ~~for~~and ~~fiscal~~distributor ~~2004 compared to $57.8 million or 14%~~ of ~~net~~entry-level ~~sales~~tape ~~for~~automation ~~fiscal~~data ~~2003.~~storage ~~The~~products, ~~absolute~~to ~~dollar~~design, ~~increase~~develop isand ~~primarily~~manufacture ~~the~~certain ~~result~~entry-level ofproducts ~~increased~~that ~~labor costs as~~ we~~’ve~~ expect ~~added~~will ~~headcount~~complement ~~as part of~~ our ~~continued~~product ~~efforts~~line tothrough ~~expand~~ our own sales channels. inWe ~~order~~entered tointo ~~penetrate~~this ~~new~~agreement ~~markets, reach new customers and~~ to ~~support~~remain ~~new~~active ~~product~~in ~~offerings.~~the ~~During~~market ~~fiscal~~for ~~2005~~entry-level products, webut ~~expect~~in ~~sales~~a ~~and~~way ~~marketing~~that ~~expenses~~permitted us to ~~remain~~dedicate ~~relatively~~our ~~flat~~own asresources weto ~~leverage~~ the ~~investment~~strategy wedescribed above ~~have~~focusing ~~made~~on indeveloping ~~sales~~technologically ~~and~~sophisticated ~~marketing over the past few years~~products.

~~General~~During ~~and~~the ~~Administrative~~first ~~Expenses. General~~quarter ~~and administrative~~of ~~expenses~~fiscal ~~were~~2006, ~~$24.2~~we ~~million~~will orbegin 5%recording the fair value of ~~net~~our ~~sales~~share-based ~~for~~compensation ~~fiscal~~in ~~2004~~our ~~compared~~financial tostatements ~~$24.0~~in ~~million~~accordance orwith 6%Statement of ~~net~~Financial ~~sales~~Accounting ~~for~~Standards ~~fiscal 2003~~No. 123R, We“Share-Based Payment ~~expect~~(Revised ~~growth~~2004).” inFor ~~absolute~~stock ~~dollars~~awards outstanding as of ~~general~~October 31, ~~and~~2005, ~~administrative~~we ~~expenses~~anticipate recording stock compensation expense of $4.0 million during fiscal ~~2005~~2006, ~~primarily related~~ranging from $662,000 to ~~our~~$1.4 ~~Sarbanes-Oxley~~million ~~Section~~per ~~404~~quarter. ~~compliance~~Option ~~requirements~~grants ~~and~~in subsequent ~~professional~~periods ~~services~~may ~~fees~~increase tonon-cash ~~support~~compensation ~~ongoing~~expense ~~tax~~recorded ~~and~~in ~~business~~cost ~~strategy~~of ~~planning~~revenue and operating expenses.

~~Research~~Foreign ~~and~~currency ~~Development~~gains ~~Expenses. Research~~or ~~and~~losses ~~development~~arise ~~expenses~~as ~~were~~a ~~$37.9~~result ~~million~~of orour 8%operation of ~~net~~European ~~sales~~subsidiaries, ~~for~~the ~~fiscal~~functional ~~2004~~currencies ~~compared to $40.6 million or 10%~~ of ~~net~~which ~~sales~~are ~~for fiscal 2003. Two primary factors contributed equally to~~ the ~~decrease~~euro ~~in fiscal 2004 research~~ and ~~development~~British ~~expenses~~pound sterling. ~~The~~All ~~first~~assets ~~was~~are ~~lower~~recorded ~~material costs~~ in ~~fiscal~~the ~~2004~~functional ~~associated~~currencies ~~with~~on ~~product development efforts due to~~ the ~~timing~~financial statements of ~~product~~these ~~introductions~~subsidiaries. ~~The~~Some ~~second~~U.S. ~~was~~dollar-denominated areceivables ~~reduction~~and payables in ~~recorded~~these ~~incentive~~subsidiaries ~~compensation~~offset ~~expenses~~each ~~recorded~~other into ~~fiscal~~reduce ~~2004~~our asexposure ~~compared~~ to ~~fiscal 2003 when the Company met certain incentive compensation targets. An increase in~~transaction ~~depreciation~~gains and ~~other~~losses. ~~facilities~~To ~~costs~~the ~~offset~~extent ~~approximately~~that ~~one-half of~~ these ~~decreases.~~monetary Weassets ~~anticipate research~~ and ~~development~~liabilities ~~spending~~do tonot ~~increase~~fully inoffset ~~absolute~~each ~~dollars~~other ~~during fiscal 2005 as we continue to invest in new product development~~ and ~~enhancements~~ tothe ~~our current product lines~~U.S. ~~Further,~~dollar weexchange ~~believe~~rate ~~the~~changes ~~potential~~with ~~for~~respect ~~growth in the market for storage solutions is sufficient~~ to ~~justify~~these ~~growth~~currencies, intransaction ~~our~~gains ~~investment~~or inlosses ~~research~~may ~~and development~~result.

~~Other~~During ~~Income. Other~~fiscal ~~income primarily consists of interest income~~2005, ~~net~~we ~~foreign~~began ~~currency~~presenting ~~transaction~~revenue ~~gains~~ and ~~net~~cost ~~gain~~of onrevenue ~~securities~~separately ~~and investment transactions. Interest income~~ for products ~~fiscal~~and ~~2004~~services ~~was~~because ~~$2.5~~our ~~million~~annual ~~compared~~service torevenue ~~$2.2~~exceeded ~~million~~10% ~~for fiscal 2003. The increase in interest income in fiscal 2004 is primarily the result~~ of ~~higher~~our ~~average~~total ~~cash~~revenue ~~and~~for ~~investment balances during~~ the ~~year.~~first ~~Foreign currency transaction gains were $1~~time.1 ~~million~~We ~~and~~have ~~$1.6~~made ~~million~~a ~~during~~corresponding ~~fiscal~~reclassification ~~2004 and 2003, respectively. Our net foreign currency transaction gains are impacted by fluctuations~~ in the ~~currency~~Consolidated ~~markets,~~Statements ~~and there is no assurance that we will experience the same types~~ of ~~gains~~Operations onfor ~~these transactions as in~~ fiscal 2004 and 2003. ~~Other~~The ~~income includes a net gain on securities and investment transactions~~following ofdiscussion ~~$73,000~~ and ~~$2.7~~analysis ~~million~~gives ineffect ~~fiscal 2004 and 2003, respectively. In fiscal 2004, we recorded equity investment losses of $799,000 that reflected a reduction in the fair value of investments related~~ to ~~our $5 million fiscal 2000 commitment to participate in a private technology venture limited partnership. These losses represent our pro rata share of~~ the limited partnership’s net loss, which is primarily based on the general partner’s estimates of the fair value of non-marketable securities held by the partnership and, to a lesser extent, realized gains and losses from the partnership’s disposal of securitiesreclassification. In both years, securities gains primarily related to the conversion of one of our investments in a private company to cash and marketable equity securities, and the subsequent receipt of additional shares under earnout and escrow provisions and the sale of those securities. In fiscal 2005, we expect interest income to

~~remain~~Fiscal ~~flat.~~Year ~~Net~~2005 ~~foreign~~Compared ~~currency~~to ~~transaction~~2004 ~~gains (losses) and net gain (loss) on securities and investment transactions will be driven by prevailing market conditions.~~

~~Provision~~The ~~(Benefit)~~following ~~for~~table ~~Income Taxes. For~~presents ~~fiscal~~our ~~2004,~~results ~~income tax benefit was $2.1 million compared to income tax expense~~ of ~~$3.0~~operations ~~million~~for in fiscal ~~2003.~~2005 Inand ~~fiscal~~ 2004. wePercentage ~~had an effective tax benefit~~ of ~~38%~~revenue ~~and~~data inis ~~fiscal~~stated ~~2003~~as wea ~~had~~percentage ~~an effective tax expense~~ of ~~19%.~~total ~~The~~revenue, ~~tax benefit in fiscal 2004 reflects the tax benefits of our credit~~ except for ~~research~~product and ~~development~~service ~~spending,~~cost ~~our~~of ~~extraterritorial income exclusion~~revenue, ~~non-taxable~~which ~~interest income and release of a tax contingency related to the favorable outcome of tax audits that have been concluded. The effective tax benefit~~ is ~~not~~stated ~~expected to be sustainable~~ as ~~the~~a ~~tax~~percentage ~~benefits will not grow as rapidly as the statutory tax expense during years~~ of ~~higher profitability. It is reasonable to anticipate that our long-term tax rate will be closer to statutory rates, although there may be some additional one-time benefits available in~~ the ~~near~~applicable ~~term.~~revenue Astype ~~a result of our modest income~~ (in ~~2003~~thousands, ~~taxes~~except ~~paid~~for inpercentages): ~~various federal, state and international jurisdictions moderately exceeded the tax benefits related to the three items described above, reflecting a relatively low tax expense.~~

Fiscal Year 2003 Compared to 2002


	Fiscal Years Ended October 31,
	2005					2004
	Dollars			% of Revenue		Dollars			% of Revenue
Revenue:
Product	$	398,527		88	%	$	409,371		90	%
Service		55,651		12	%		45,448		10	%

		454,178		100	%		454,819		100	%


Cost of revenue:
Product		274,702		69	%		290,660		71	%
Service		40,413		73	%		34,928		77	%

		315,115		69	%		325,588		72	%

Gross profit		139,063		31	%		129,231		28	%


Operating expenses:
Sales and marketing		66,597		15	%		64,836		14	%
General and administrative		25,886		6	%		24,242		5	%
Research and development		42,493		9	%		37,925		8	%

		134,976		30	%		127,003		28	%

Operating profit		4,087		1	%		2,228		0	%


Other income (expense):
Interest income		5,465		1	%		2,503		1	%
Gain (loss) on securities and investment transactions, net		(59	)	0	%		73		0	%
Gain on assets held for sale		2,549		1	%		—		0	%
Foreign currency transaction gains (losses), net		(1,452	)	0	%		1,114		0	%
Other		(473	)	0	%		(325	)	0	%

		6,303		1	%		3,365		1	%

Income before benefit for income taxes		10,117		2	%		5,593		1	%
Benefit for income taxes		(4,156	)	(1	)%		(2,142	)	0	%

Net income	$	14,273		3	%	$	7,735		2	%

~~Net~~Percentage ~~Sales. Net~~columns ~~sales~~may ~~increased 26% during fiscal 2003 to $424.0 million from $337.6 million in fiscal 2002. The increase was due to~~not ~~higher~~add sales to both OEM and branded customers. Annual growth rates of OEM and branded sales during fiscal 2003 were 35% and 18%, respectively. Revenue from OEM customers comprised 48% of sales in fiscal 2003 compared to 45% in fiscal 2002. ADIC branded revenues represented 52% of sales in fiscal 2003 compared to 55% in fiscal 2002. The growth in OEM sales was due to ~~a combination of increasing penetration with existing products and the addition of new products~~rounding. Branded sales increased in all major geographical markets in fiscal 2003 compared to fiscal 2002. The majority of this growth came in sales of enterprise-level products and revenues from global services. Dell and IBM accounted for fiscal 2003 revenues of $103.3 million (24%) and $96.1 million (23%) and fiscal 2002 revenues of $63.5 million (19%) and $86.2 million (26%).

~~Net~~Revenue. Product revenue includes sales ~~outside~~of ~~the~~hardware ~~United~~and ~~States~~software ~~accounted~~data ~~for~~storage ~~35%~~solutions, ofas ~~our~~well ~~net~~as ~~sales~~installation inand ~~fiscal~~professional ~~2003~~services ~~and~~related ~~41%~~to ofthese ~~our~~products. ~~net~~Service ~~sales~~revenue inincludes ~~fiscal~~revenue ~~2002.~~derived Infrom ~~fiscal~~contracts ~~2002,~~for afield ~~portion~~support ofprovided to our ~~net~~branded ~~sales~~customers ~~outside~~and ~~the~~not ~~United~~otherwise ~~States~~included ~~was~~in ~~due~~the tobase anprice ~~OEM~~of ~~customer~~the ~~for~~product. ~~whom~~Product werevenue ~~maintained~~decreased a3% ~~revolver~~during ~~warehouse~~fiscal ~~outside~~2005 ~~the~~compared ~~United~~to ~~States~~fiscal 2004. ~~During~~This ~~fiscal~~decrease ~~2003,~~is ~~all~~the net result of ~~the~~lower sales to ~~this~~ OEM ~~customer~~customers, ~~shifted~~which todecreased a18% ~~revolver~~from ~~warehouse~~fiscal ~~within~~2004, offset ~~the~~in ~~United~~large ~~States, which~~part ~~caused~~by aan ~~decline~~increase in ~~the~~branded ~~reported~~product ~~percentage~~revenues. ofThe ~~non-U.S.~~reduction ~~sales.~~in ~~This~~OEM revenue resulted from an anticipated decline ~~was~~in ~~partially~~the ~~offset~~sale byof ancertain lower-margin entry-level products. The increase in branded product sales is primarily due to increased ~~European~~sales ~~and~~of ~~Asian~~our ~~customers.~~branded

Gross Profit. Gross profit was $131.9 million or 31% of net sales for fiscal 2003 compared to $91.8 million or 27% of net sales for fiscal 2002, an increase of 44% on a net sales increase of 26%. The increase in gross profit in fiscal 2003 compared to fiscal 2002 was primarily a result of the absolute dollar increase in branded sales, including revenue from higher margin enterprise-level products and software. This increase was partially offset by the increase in the proportion of OEM sales.

Sales and Marketing Expenses. Sales and marketing expenses were $57.8 million or 14% of net sales for fiscal 2003 compared to $48.3 million or 14% of net sales for fiscal 2002. The absolute dollar increase was due to continued efforts to expand our sales and services channels in order to enter new markets and new customers and to support new product offerings.

General and Administrative Expenses. General and administrative expenses were $24.0 million or 6% of net sales for fiscal 2003 compared to $23.2 million or 7% of net sales for fiscal 2002. The absolute dollar increase was attributable to an increase in overall compensation as a result of the Company meeting certain incentive compensation targets and continued investments in our infrastructure, partially offset by decreases in bad debt expense. In fiscal 2002, bad debt expense was $1.3 million, the majority of which was attributed to a single customer.

~~Research and Development Expenses. Research and development expenses were $40.6~~ ~~million~~Scalar ~~for~~i2000 ~~fiscal 2003 compared to $32~~libraries.2 ~~million~~Service ~~for~~is ~~fiscal 2002. This represented~~ a ~~26%~~growing ~~increase~~element inof our ~~investment in research and development over our prior fiscal year. In both years~~business, ~~research~~with ~~and~~service ~~development~~revenues ~~expenses~~increasing ~~were 10~~22% ofduring ~~net sales. The increase in absolute dollars in~~ fiscal ~~2003~~2005 ~~reflected~~primarily ~~our~~due ~~strategy~~ to ~~maintain~~growth ~~heavy investments~~ in ~~software~~our ~~and~~installed base ~~connectivity~~of ~~product development and related to added personnel resources and additional spending related to new~~ products. ~~Additionally, in~~at ~~fiscal~~branded ~~2003 we recorded an increase in overall compensation as a result of incentive compensation~~customers.

~~Acquisition~~Total ~~Expenses~~revenue was relatively flat between fiscal 2005 and fiscal 2004. ~~Expenses~~ ~~related~~Fiscal 2005 revenue was the net result of lower sales to ~~our~~OEM ~~acquisition~~customers largely offset by growth of ~~V-Stor~~branded ~~were~~product $1sales and service revenues as described above.5 ~~million~~Total branded product and service revenue increased 16% during fiscal ~~2002~~2005. ~~These~~ADIC ~~one-time~~branded ~~acquisition charges~~revenues ~~related~~represented 61% of sales in fiscal 2005 compared to ~~acquired~~53% in fiscal 2004. Revenue from OEM customers comprised 39% of sales in fiscal 2005 compared to 47% in fiscal 2004. During fiscal 2006, we expect branded revenues as a percentage of sales to continue to increase as we maintain greater focus on enterprise-~~process~~level ~~research~~products and ~~development~~software. ~~and~~We ~~compensation~~anticipate tosales Vof our new Scalar i500 mid-~~Stor~~range ~~personnel~~product, with its enterprise-class, differentiated technologies, will contribute to both branded and OEM revenues in fiscal 2006.

~~Other~~Dell ~~Income. Other income primarily consisted of net gain on securities~~ and ~~investment transactions~~IBM, ~~interest~~our ~~income~~two ~~and~~largest ~~net~~customers, ~~foreign currency~~accounted ~~transaction gains. Other income was $6.0 million~~ for fiscal ~~2003~~2005 ~~compared~~revenues toof $1199.97 million ~~for fiscal 2002. Other income in fiscal 2003 included a gain on securities~~ (22%) and ~~investment transactions of~~ $271.76 million (16%), ~~which primarily related to conversion of one of our investments in a private company to cash and marketable equity securities~~respectively, and ~~the~~comprised ~~subsequent~~fiscal ~~sale~~2004 ofrevenues ~~the majority~~ of ~~those securities~~$109.9 Inmillion ~~fiscal~~(24%) and ~~2002, other income included a gain on marketable securities transactions of~~ $896.24 million, ~~which was offset by a $750~~(21%),~~000 charge for impairment of an investment we held in a private technology company~~ respectively. ~~The~~Sales ~~gains~~outside ~~realized in fiscal 2002 consisted of gains from~~ the ~~sale~~United ofStates ~~derivative~~accounted ~~financial instruments on securities we held~~ for ~~investment~~35% ~~as well as the sale~~ of ~~marketable~~our ~~securities.~~revenue ~~Interest income for fiscal 2003 was $2.2 million compared to $3.6 million for fiscal 2002. The decrease~~ in ~~interest~~both ~~income in~~ fiscal ~~2003~~2005 ~~was the result of lower returns on cash~~ and ~~investment~~ ~~balances during the year~~2004. ~~This decrease in interest income was partially offset by an increase in foreign currency transaction gains resulting from stronger European currencies.~~

~~Provision~~Gross ~~(Benefit)~~Profit. Gross profit was 31% of revenue for ~~Income~~fiscal ~~Taxes~~2005 compared to 28% of revenue for fiscal 2004. We ~~had~~Gross ~~income~~profit ~~tax~~margins depend ~~expense~~on a number of $3factors, including channel and product mix, fixed infrastructure costs, price competition and tape drive costs.0 ~~million~~The increase in gross profit as a percentage of revenue in fiscal ~~2003~~2005 compared to ~~income~~fiscal ~~tax~~2004 ~~benefit~~is ofprimarily ~~$3.1~~a ~~million~~result of an increase in ~~fiscal~~the ~~2002~~proportion of product sales to our branded customers with lower sales to OEM customers and improved service margins. InBranded ~~fiscal~~customers ~~2003~~typically wepurchase ~~had~~higher anmargin ~~effective~~products. ~~tax~~Product ~~expense~~margin ofincreased 19to 31% ~~and~~for infiscal 2005 from 29% for fiscal ~~2002~~2004. weService ~~had~~margin anwas ~~effective~~27% ~~tax~~for ~~benefit~~fiscal of2005 ~~200~~as compared to 23% for the prior year. ~~The~~Service margin has been volatile quarter to quarter as the costs are relatively ~~low~~small ~~tax~~and ~~rate~~service revenues and costs do not always move in concert as ~~fiscal~~the ~~2003~~business ~~reflected~~grows. ~~the~~However, ~~tax~~we ~~benefits~~have experienced an overall trend of improving service margins on an annual basis resulting from increasing utilization rates of our ~~credit~~global ~~for~~services ~~research~~personnel and ~~development~~parts ~~spending~~infrastructure. In fiscal 2006, ~~our~~we ~~extraterritorial~~expect ~~income~~gross margin ~~exclusion~~will ~~and~~be ~~non-taxable~~positively ~~interest~~impacted ~~income~~by our product and channel mix. AsWe acontinue ~~result~~to execute our strategy of changing our ~~near~~product ~~breakeven~~mix ~~taxable~~by ~~income~~focusing inon ~~2002~~higher margin sales and increasing sales of our newer, ~~taxes~~more ~~paid~~technologically insophisticated ~~various~~products that ~~federal,~~include ~~state~~elements of our proprietary storage management software and ~~international~~connectivity ~~jurisdictions~~technology. ~~were~~We ~~exceeded~~anticipate byservice ~~the~~margin ~~tax~~will ~~benefits~~continue ~~related~~to be somewhat volatile quarter to quarter as the ~~three~~business ~~items~~continues ~~described~~to ~~above~~grow.

~~Liquidity~~Sales and ~~Capital~~Marketing ~~Resources~~Expenses. Sales and marketing expenses increased in absolute dollars and as a percentage of revenue during fiscal 2005 compared to fiscal 2004. The increase is primarily the result of increased labor costs as we have added headcount as part of our continued efforts to expand our sales channels in order to penetrate new markets, reach new customers and to support new product offerings. During fiscal 2006, we expect sales and marketing expenses to increase as we continue to grow the ADIC branded business by expanding our sales force to acquire customers and expand channels for sales of branded products.

~~Cash~~General ~~flows~~and ~~provided~~Administrative ~~by operating activities were $31~~Expenses.7 General ~~million, $16.0 million~~ and ~~$40.0~~administrative ~~million~~expenses ~~during~~increased ~~fiscal~~in ~~2004,~~absolute ~~2003~~dollars and ~~2002,~~as ~~respectively.~~a ~~During~~percentage ~~fiscal~~of ~~2004, the~~revenue ~~difference~~during ~~between~~fiscal ~~reported~~2005 ~~net~~compared ~~income and cash provided by operating activities was primarily due~~ to ~~depreciation~~fiscal ~~and~~2004. ~~amortization,~~The an increase in ~~deferred revenue and a decrease in accounts receivable, which were offset by increases in service~~ ~~parts~~general ~~for maintenance~~ and ~~inventories.~~administrative ~~Deferred~~expenses ~~revenue~~is ~~increased~~largely due to ~~increased~~higher ~~sales~~professional ofservices ~~hardware~~fees ~~service~~related ~~contracts~~to ~~and~~our ~~software~~first ~~maintenance~~year ~~contracts,~~of ~~which~~Sarbanes-Oxley ~~are~~Section 404 ~~typically~~compliance ~~billed~~in atfiscal ~~the~~2005 ~~beginning of the contract term~~ and ~~recognized~~to assupport ~~revenue over~~ongoing ~~the~~tax ~~contract period,~~ and ~~certain~~business ~~software~~strategy ~~licenses that require deferral under generally accepted accounting principles~~planning. ~~Accounts~~During ~~receivable~~fiscal 2005, ~~decreased~~we ~~primarily~~recorded ~~due~~$454,000 ~~to the timing of collections from customers. The increase~~ in ~~service~~expenses ~~parts~~related ~~for maintenance relates~~ to ~~the~~a ~~support~~reorganization of our ~~growing~~European ~~installed~~operations. ~~base~~We ofexpect ~~products.~~general ~~Inventories~~and ~~increased~~administrative ~~primarily~~expenses ~~due~~ to an increase inmodestly ~~raw~~during ~~materials to support new products and customers. In~~ fiscal ~~2003~~2006, ~~the difference between reported net income and cash provided by operating activities was~~ primarily due to depreciation and amortization and increases in accounts payable, accrued liabilities and deferred revenue, which were offset by increases in accounts receivable, inventories and service parts for maintenance. Accounts payable and accrued liabilities increased primarily due to the ~~timing~~recording of ~~payments.~~stock Ascompensation ~~in fiscal 2004, deferred revenue increased due to~~ expense.

~~increased~~Research ~~sales of service~~ and ~~maintenance~~Development ~~contracts~~Expenses. Research and ~~certain~~development ~~software~~expenses ~~licenses. Accounts receivable~~ increased ~~primarily~~in absolute ~~due~~dollars ~~to increased sales~~ and ~~the~~as ~~timing~~a percentage of ~~such~~ ~~sales,~~revenue ~~and~~during ~~inventories~~fiscal ~~and~~2005 ~~service~~compared ~~parts~~to ~~for~~fiscal ~~maintenance~~2004. ~~increased~~The asincrease wein ~~launched~~research ~~both new products~~ and ~~existing~~development ~~products~~expenses ~~into~~during ~~new channels. During~~ fiscal ~~2002,~~2005 ~~the~~is ~~difference~~largely ~~between~~due ~~reported~~to ~~net~~higher ~~income~~material and ~~cash~~prototype ~~provided~~costs byassociated ~~operating~~with product ~~activities~~development ~~was~~efforts ~~primarily~~for ~~due~~products toreleased ~~depreciation~~in November 2005 and ~~amortization,~~$1.8 ~~decreases~~million in ~~accounts~~reorganization ~~receivable~~costs ~~and~~associated ~~inventories,~~with anthe ~~increase~~closure inof ~~deferred~~the ~~revenue~~Ithaca, ~~income~~New ~~tax~~York ~~refunds,~~ and ~~gains~~Santa onClara, ~~securities~~California research and ~~investment~~development ~~transactions,~~facilities. ~~which~~We ~~were~~anticipate ~~offset~~lower byresearch anand ~~increase~~development inspending ~~service~~during ~~parts~~fiscal ~~for~~2006, ~~maintenance.~~decreasing ~~Inventories~~expenditures ~~decreased~~on astraditional welibrary ~~entered~~products ~~into~~while ~~certain~~emphasizing ~~vendor-managed~~advanced ~~inventory~~solutions ~~programs,~~including ~~under~~our ~~which~~StorNext ~~ownership~~software ~~transfers~~and atPVX ~~the~~disk ~~time~~appliance weproducts. ~~take~~We ~~possession~~believe ~~of inventory in~~ the ~~manufacturing~~recent ~~process.~~consolidation ~~The~~within ~~increase in~~our ~~deferred~~research ~~revenue~~and ~~was~~development ~~due~~operations towill ~~increased~~yield ~~sales~~both ofinnovation ~~service~~ and ~~maintenance~~efficiency ~~contracts.~~benefits As in ~~fiscal~~certain ~~2003,~~product ~~the~~development ~~increases~~areas. inFurther, ~~service~~we ~~parts~~believe ~~for~~the ~~maintenance~~potential ~~related~~for togrowth ~~new~~in ~~product~~the ~~offerings~~market asfor ~~well~~storage assolutions ~~maintenance~~affirms of our ~~increasing~~investment ~~installed~~in ~~base~~research ~~of existing~~and ~~solutions~~development.

~~Cash~~Other ~~flows~~Income ~~provided by~~ (~~used in~~Expense) ~~investing activities~~. Other ~~included~~income ~~proceeds~~(expense) ~~from certain securities transactions,~~ primarily ~~the~~consists ~~maturities~~ of ~~marketable~~interest ~~debt securities~~income, ~~sale~~a ofgain ~~marketable equity securities and covered calls~~ on ~~shares~~assets ~~owned~~held byfor ~~us,~~sale ~~of $24.6 million, $38.6 million~~ and ~~$41.9~~net ~~million~~foreign ~~for fiscal~~currency ~~2004,~~transaction ~~2003~~gains and ~~2002, respectively~~losses. ~~These~~The ~~proceeds~~increase ~~were~~in ~~offset~~interest byincome ~~purchases~~in ~~of marketable securities of $9.1 million, $16.5 million and $52.8 million during~~ fiscal ~~2004,~~2005 ~~2003~~is ~~and~~primarily ~~2002,~~the ~~respectively,~~result ~~and~~of ~~$692,000,~~higher ~~$500,000~~average ~~and~~cash ~~$3.3 million of~~and ~~investments~~investment inbalances ~~non-marketable securities of non-public technology businesses~~ during the ~~same~~year ~~respective~~in ~~periods.~~addition ~~During~~to ~~fiscal~~higher ~~2004,~~interest werates received ~~proceeds~~on ofthose ~~$16~~balances.7 ~~million~~During ~~from~~ the ~~disposal~~second half of ~~assets held for sale~~2005, ~~which~~we ~~primarily~~recorded ~~comprised~~a ~~inventory and~~gain ~~leasehold~~of ~~improvements~~$2.5 million related to the ~~Benchmark~~sale ~~manufacturing~~and ~~outsourcing~~leaseback ~~agreement~~of ~~completed~~our ~~during~~facility ~~the~~in ~~year~~Böehmenkirch, Germany. The ~~Investments~~total ingain ~~property,~~on ~~plant~~this ~~and~~sale ~~equipment~~was ~~were~~approximately $143.62 million~~, $14~~.3 ~~million~~The ~~and~~remaining ~~$26.9~~gain ~~during~~has ~~fiscal~~been ~~2004,~~deferred ~~2003~~ and ~~2002, respectively.~~will ~~Capital~~be ~~expenditures~~recognized ~~during~~over ~~fiscal~~the ~~2004~~term ~~were~~of ~~comprised~~our ~~primarily~~lease ofwith ~~computer~~the ~~hardware~~purchaser. ~~and~~Our ~~software~~foreign tocurrency ~~support~~transaction ~~initiatives~~losses ~~within~~in ~~our~~fiscal ~~global~~2005 ~~services~~are ~~and~~primarily ~~research~~the ~~and~~result ~~development~~of the ~~organizations~~dollar ~~and~~strengthening ~~tooling~~against ~~and~~the ~~equipment~~euro ~~related~~during tothe ~~new product~~year ~~introductions.~~while ~~Capital~~our ~~expenditures~~foreign ~~during~~currency transaction gains in fiscal ~~2003~~2004 were ~~comprised~~due ~~primarily~~to ofa ~~computer~~generally ~~hardware~~weaker ~~and~~dollar ~~software~~against ~~for~~the ~~our~~euro. ~~global~~Our ~~information~~net ~~technology~~foreign ~~infrastructure~~currency ~~and~~transaction ~~tooling~~gains and ~~equipment~~losses ~~related~~are toimpacted ~~new~~by fluctuations ~~product~~in ~~introductions.~~the ~~Capital expenditures~~currency ~~during~~markets, ~~fiscal~~which ~~2002~~can ~~were~~cause ~~comprised~~this ~~primarily~~number ofto ~~computer~~vary ~~hardware~~significantly ~~and~~year ~~software~~over ~~associated~~year. ~~with~~In ~~the~~fiscal ~~global~~2006, ~~implementation~~we ofexpect ainterest ~~Customer~~income ~~Relationship~~to ~~Management~~increase ~~information~~due ~~system~~to ~~and~~ the ~~worldwide~~growth ~~rollout~~in of our ~~North~~cash ~~American~~and ~~Enterprise Resource~~marketable ~~Planning~~securities ~~information~~balances. ~~system,~~Net ~~leasehold~~foreign ~~improvements~~currency transaction ~~purchased~~gains ~~for our new Englewood, Colorado facility~~ and ~~tooling~~losses ~~and~~will ~~equipment~~be ~~related~~driven toby ~~new~~prevailing ~~product~~market ~~introductions~~conditions.

~~With~~Benefit ~~respect~~for toIncome ~~cash~~Taxes. In ~~flows~~fiscal ~~provided~~2005 byand ~~(used~~2004 ~~in)~~we ~~financing~~had ~~activities,~~an ~~during~~effective ~~fiscal~~tax ~~2004,~~benefit ~~2003~~of 41% and ~~2002~~38%, respectively, although we ~~received~~had ~~proceeds~~income ~~from the~~before ~~issuance~~benefit for income taxes of ~~common~~$10.1 ~~stock~~million ~~under~~and ~~our~~$5.6 ~~Stock~~million, respectively. ~~Purchase~~The ~~Plan~~tax ~~and~~benefit ~~the~~in ~~exercise~~fiscal of2005 ~~stock~~reflects ~~options~~a ~~and~~benefit ~~stock~~from ~~warrants~~income oftaxes ~~$8.1~~primarily ~~million,~~due ~~$8.4~~to ~~million~~resolution ~~and~~of ~~$6.5~~various ~~million,~~domestic ~~respectively~~tax audits. WeThe ~~repurchased~~remainder ~~$9.5~~of ~~million,~~the ~~$697,000~~tax ~~and~~benefit ~~$7.9~~in ~~million~~fiscal 2005 is comprised of our ~~common~~credit ~~stock during~~for ~~fiscal~~research ~~2004~~and development spending, ~~2003~~our extraterritorial income exclusion and ~~2002,~~non-taxable ~~respectively~~interest income. ~~During~~The tax benefit in fiscal ~~2003,~~2004 wereflects ~~borrowed~~the ~~$781,000~~tax onbenefits aof our credit ~~line~~for ~~from~~research aand ~~German~~development ~~bank~~spending, ~~which~~our weextraterritorial ~~repaid~~income inexclusion, ~~full~~non-taxable interest ~~during~~income and resolution of a tax contingency related to the ~~same~~favorable ~~year~~outcome of tax audits that have been concluded. ~~Offsetting~~The ~~cash~~effective ~~flows~~tax ~~provided~~benefit byis ~~financing~~not ~~activities~~expected into ~~all~~be ~~periods~~sustainable ~~were~~as future tax benefits will not grow as rapidly as the statutory ~~certain~~tax ~~payments~~expense ondue ~~short-term~~to ~~and~~resolution ~~long-term~~in ~~debt,~~fiscal ~~which~~2005 ~~were~~of $1cyclical audits.2 ~~million,~~It ~~$3.4~~is ~~million~~reasonable ~~and~~to ~~$2.2~~anticipate ~~million~~that ~~for~~our fiscal ~~2004,~~2006 ~~2003~~tax ~~and~~rate ~~2002~~will be closer to, ~~respectively.~~but ~~All~~lower ofthan, ~~our~~statutory ~~outstanding~~rates ~~debt~~due ~~was~~to ~~repaid~~expected inresearch ~~full~~and ~~during~~development ~~the~~tax ~~third~~credits, ~~quarter~~tax-exempt interest ofand ~~fiscal~~net ~~2004~~foreign tax benefits.

At October 31, 2004, our cash and cash equivalents totaled $226.9 million, up from $180.4 million at October 31, 2003. Our cash and cash equivalents and marketable securities totaled $232.9 million and $201.2 million at October 31, 2004 and 2003, respectively. Our working capital, the difference between current assets and current liabilities, was $281.4 million at October 31, 2004 compared to $279.5 million at October 31, 2003. The ratio of current assets to current liabilities was 3.9 to 1 and 4.2 to 1 at October 31, 2004 and 2003, respectively.

~~The~~Fiscal ~~following~~Year ~~table~~2004 ~~summarizes~~Compared ~~our~~to ~~contractual~~2003 ~~cash commitments as of October 31, 2004:~~

	Payments Due During Fiscal Years Ended October 31,
	Total		2005		2006-2007		2008-2009		Thereafter
	(In thousands)
Operating leases	$	22,003	$	4,871	$	7,696	$	4,777	$	4,659
Purchase obligations		48,591		47,991		400		200		—
Total contractual cash obligations	$	70,594	$	52,862	$	8,096	$	4,977	$	4,659

The following table presents our results of operations for fiscal 2004 and 2003. Percentage of revenue data is stated as a percentage of total revenue, except for product and service cost of revenue, which is stated as a percentage of the applicable revenue type (in thousands, except for percentages):

Included in the operating lease amounts above are the cash commitments related to a liability recorded in fiscal 2001 to reflect the anticipated costs to exit the facility in Englewood, Colorado that we partially abandoned in fiscal 2002. This liability represents our estimate of the net amount of lease payments related to unused capacity of the facility. During fiscal 2004, we made payments of $718,000, $511,000 of which related to unused capacity in the facility. This $511,000 reduced the liability from $1,008,000 at October 31, 2003 to $497,000 at October 31, 2004. During fiscal 2003, we made payments of $633,000, all of which related to unused capacity in the facility. This $633,000 reduced the liability from $1,641,000 at October 31, 2002 to $1,008,000 at October 31, 2003. We believe the remaining liability of $497,000 at October 31, 2004 is adequate to cover the cost of unused capacity in the facility through the end of the lease term in December 2006.


	Fiscal Years Ended October 31,
	2004					2003
	Dollars			% of Revenue		Dollars			% of Revenue
Revenue:
Product	$	409,371		90	%	$	390,727		92	%
Service		45,448		10	%		33,271		8	%

		454,819		100	%		423,998		100	%


Cost of revenue:
Product		290,660		71	%		264,934		68	%
Service		34,928		77	%		27,187		82	%

		325,588		72	%		292,121		69	%

Gross profit		129,231		28	%		131,877		31	%


Operating expenses:
Sales and marketing		64,836		14	%		57,777		14	%
General and administrative		24,242		5	%		24,015		6	%
Research and development		37,925		8	%		40,609		10	%

		127,003		28	%		122,401		29	%

Operating profit		2,228		0	%		9,476		2	%


Other income (expense):
Interest income		2,503		1	%		2,198		1	%
Gain on securities and investment transactions, net		73		0	%		2,722		1	%
Foreign currency transaction gains, net		1,114		0	%		1,569		0	%
Other		(325	)	0	%		(454	)	0	%

		3,365		1	%		6,035		2	%

Income before provision (benefit) for income taxes		5,593		1	%		15,511		4	%
Provision (benefit) for income taxes		(2,142	)	0	%		3,020		1	%

Net income	$	7,735		2	%	$	12,491		3	%

~~Purchase~~Percentage ~~obligations~~columns ~~include~~may ~~accounts~~not add ~~payable~~due to ~~our vendors and four remaining annual payments of $200,000 for a $1,000,000 patent license~~rounding.

~~Other commitments~~Revenue. Total ~~not~~revenue ~~included~~increased in7% ~~the~~during ~~contractual~~fiscal ~~cash~~2004 ~~commitments~~from ~~summary~~fiscal ~~above~~2003. ~~include~~The ~~$2,710,000~~increase inwas ~~funding~~primarily ofdue ~~investments~~to inhigher ~~two~~sales ~~limited~~to ~~partnership~~both ~~venture~~branded ~~capital~~and ~~funds,~~OEM ~~which~~customers. isBranded ~~discussed~~revenues increased in ~~Note~~all 18major togeographical ~~the~~markets ~~Consolidated~~in ~~Financial~~fiscal ~~Statements.~~2004 ~~Our~~compared ~~October~~to ~~31,~~fiscal 2003. ADIC ~~2004~~branded ~~balance~~revenues ~~sheet~~represented ~~includes~~53% ~~liabilities~~and ~~for~~52% ~~the~~of ~~purchase~~sales ~~obligations~~in fiscal 2004 and ~~the~~2003, ~~anticipated~~respectively. ~~exit~~Revenue ~~costs~~from ~~accrued~~OEM ~~during~~customers comprised 47% and 48% of sales in fiscal ~~2001~~2004 and 2003, respectively. ~~None~~OEM sales growth was primarily due to increased sales of products introduced within the ~~other~~prior ~~commitments~~two ~~mentioned~~years. ~~above~~Product ~~require~~revenue ~~accrual~~increased at5% ~~October~~during ~~31,~~fiscal 2004 compared to fiscal 2003, also due to higher sales to both branded and OEM customers. WeService ~~had~~revenue noincreased ~~other~~37% ~~material~~during orfiscal ~~unusual~~2004 from fiscal 2003 ~~commitments~~primarily asdue to growth in our installed base of ~~October~~products ~~31,~~at ~~2004~~branded customers.

Dell and IBM accounted for fiscal 2004 revenues of $109.9 million (24%) and $96.4 million (21%) and fiscal 2003 revenues of $103.3 million (24%) and $96.1 million (23%). Sales outside the United States accounted for 35% of revenue in both fiscal 2004 and 2003.

Gross Profit. Gross profit was 28% of revenue for fiscal 2004 compared to 31% of revenue for fiscal 2003. The decrease in gross profit as a percentage of revenue in fiscal 2004 compared to fiscal 2003 was primarily a result of decreased product margins, offset in part by increased service margins. Product margin was 29% for fiscal 2004 compared to 32% in fiscal 2003, primarily due to lower than expected sales volumes of branded enterprise products which caused growth in our fixed costs to outpace our product revenue growth. Service margin was 23% for fiscal 2004 compared to 18% for fiscal 2003 reflecting greater growth of service revenues relative to costs of expanding our service infrastructure.

Sales and Marketing Expenses. Sales and marketing expenses increased in absolute dollars during fiscal 2005 compared to fiscal 2004. The increase was primarily the result of increased labor costs as we added headcount as part of our continued efforts to expand our sales channels in order to penetrate new markets, reach new customers and to support new product offerings.

General and Administrative Expenses. General and administrative expenses were relatively flat, increasing 1% in fiscal 2004 compared to fiscal 2003.

Research and Development Expenses. Research and development expenses decreased in absolute dollars and as a percentage of revenue during fiscal 2004 compared to fiscal 2003. Two primary factors contributed equally to the decrease in fiscal 2004 research and development expenses. The first was lower material costs in fiscal 2004 associated with product development efforts due to the timing of product introductions. The second was a reduction in incentive compensation expenses recorded in fiscal 2004 compared to fiscal 2003 when the Company met certain incentive compensation targets. An increase in depreciation and other facilities costs offset approximately one-half of these decreases.

Other Income (Expense). Other income (expense) primarily consists of interest income, net foreign currency transaction gains and net gain on securities and investment transactions. The increase in interest income in fiscal 2004 was primarily the result of higher average cash and investment balances during the year. Our net foreign currency transaction gains are impacted by fluctuations in the currency markets. In fiscal 2004, we recorded equity investment losses of $799,000 that reflected a reduction in the fair value of investments related to our $5 million fiscal 2000 commitment to participate in a private technology venture limited partnership. These losses represent our pro rata share of the limited partnership’s net loss, which is primarily based on the general partner’s estimates of the fair value of non-marketable securities held by the partnership and, to a lesser extent, realized gains and losses from the partnership’s disposal of securities. In both years, securities gains primarily related to the conversion of one of our investments in a private company to cash and marketable equity securities, and the subsequent receipt of additional shares under earnout and escrow provisions and the sale of those securities.

Provision (Benefit) for Income Taxes. In fiscal 2004 we had an effective tax benefit of 38% and in fiscal 2003 we had an effective tax expense of 19%. The tax benefit in fiscal 2004 reflects the tax benefits of our credit for research and development spending, our extraterritorial income exclusion, non-taxable interest income and release of a tax contingency related to the favorable outcome of completed tax audits. As a result of our modest income in 2003, taxes paid in various federal, state and international jurisdictions moderately exceeded the tax benefits related to the three items described above, reflecting a relatively low tax expense.

Exit Costs

Research and Development Facility Closures. In February 2005, we announced plans to close our research and development facilities in Ithaca, New York and Santa Clara, California. The purpose of these closures was to optimize efficiency and reduce our cost structure by streamlining and integrating overhead from several acquisitions. Both facilities were abandoned and the closures were completed during the fourth quarter of fiscal 2005. The charges related to these closures are recorded in research and development expense. The activity for the year ended October 31, 2005 is as follows (in thousands):


	Workforce Reduction and Relocation Costs			Facility-Related Costs			Other Costs			Total
October 31, 2004	$	—		$	—		$	—		$	—
Charges		529			1,182			58			1,769
Cash payments		(529	)		(19	)		(58	)		(606	)
Noncash adjustments		—			(254	)		—			(254	)

October 31, 2005	$	—		$	909		$	—		$	909

The Santa Clara lease concluded in September 2005 and did not impact the facility-related exit costs. We accrued the net present value of the remaining lease payments for the Ithaca facility. Approximately 45% of the space in Ithaca has been subleased through the remaining lease term of August 2011, and approximately 7% of the space has been subleased through November 2008. The net present value of the subleases reduced the accrual for the remaining lease payments. Noncash adjustments include an asset impairment loss of $247,000 for the write-off of fixed assets in the Ithaca facility. The remaining equipment at these facilities was transferred to other ADIC locations.

Substantially all expected costs related to these facility closures were accrued during fiscal 2005. We do not expect any significant additional costs in fiscal 2006 or future years. The $1.8 million in exit costs is lower than our initial estimate primarily due to the inclusion of future income from subleasing approximately 52% of the Ithaca facility and lower actual workforce reduction and relocation costs. Our initial estimate, included on our Form 8-K filed with the SEC on February 4, 2005, ranged from $2.1 million to $4.0 million, excluding potential sublease income.

European Shared Services Reorganization. In February 2005, we began a reorganization of our European operations to create a shared services center in Switzerland. The purpose of this reorganization is to improve our ability to meet our customers’ needs; centralize our administrative support functions and operating and financial controls; streamline our reporting; and improve our operating cost model by streamlining and integrating overhead from several acquisitions. The reorganization will impact administrative team members, some of whom will be relocating elsewhere within our European operations. The reorganization is expected to be complete by the second quarter of fiscal 2006. The charges related to the reorganization are recorded in general and administrative expense. The activity for the year ended October 31, 2005 is as follows (in thousands):


	Workforce Reduction and Relocation costs		Other Costs		Total
October 31, 2004	$	—	$	—	$	—
Charges		454		—		454
Cash payments		—		—		—

October 31, 2005	$	454	$	—	$	454

We expect to record additional charges related to the reorganization during the first half of fiscal 2006. We currently anticipate total additional charges as follows (in thousands):


Workforce reduction and relocation costs	$	200
Other costs		25

	$	225

Other. During fiscal 2001, we recorded a $2.3 million liability to reflect anticipated costs to exit a manufacturing and development site in Englewood, Colorado which was replaced by a larger facility in Englewood in fiscal 2002. These accrued costs represent our estimate of the net amount of lease payments related to unused capacity of the old facility. The activity for the years ended October 31, 2005, 2004 and 2003, is as follows (in thousands):


	2005			2004			2003
Balance at beginning of period	$	497		$	1,008		$	1,641
Cash payments		(332	)		(511	)		(633	)

Balance at end of period	$	165		$	497		$	1,008

We believe the remaining accrual of $165,000 at October 31, 2005 is adequate to cover the cost of unused capacity in the facility through the end of the lease term in December 2006.

Liquidity and Capital Resources

The following table summarizes our statements of cash flows for fiscal 2005, 2004 and 2003 (in thousands):


	2005			2004			2003
Net cash flows provided by (used in):
Operating activities	$	48,644		$	31,679		$	16,019
Investing activities		8,178			(26,434	)		(27,044	)
Financing activities		(19,051	)		(2,658	)		5,067
Effect of exchange rate changes on cash and cash equivalents		(912	)		657			1,218

Net increase (decrease) in cash and cash equivalents	$	36,859		$	3,244		$	(4,740	)

In fiscal 2005, the difference between reported net income and cash provided by operating activities was primarily due to depreciation and amortization, an increase in deferred revenue and a reduction of inventories, partially offset by an increase in accounts receivable. Deferred revenue increased primarily due to increased sales of hardware service contracts and software maintenance contracts, which are typically billed at the beginning of the contract term and recognized as revenue over the contract period. Deferred revenue continues to be a significant contributor to our cash flow generation. The reduction in inventories was also due to strong sales during the fourth quarter, drawing down inventory levels. In particular, our finished goods inventories decreased 47% compared to the prior year. Accounts receivable increased primarily due to increased sales in the fourth quarter and the timing of collections from customers.

During fiscal 2004, the difference between reported net income and cash provided by operating activities was primarily due to depreciation and amortization, an increase in deferred revenue and a decrease in accounts receivable, which were offset by increases in service parts for maintenance and inventories. Deferred revenue increased due to increased sales of hardware service contracts and

software maintenance contracts and certain software licenses that require deferral under generally accepted accounting principles. Accounts receivable decreased primarily due to the timing of collections from customers. The increase in service parts for maintenance relates to the support of our growing installed base of products. Inventories increased primarily due to an increase in raw materials to support new products and customers.

In fiscal 2003, the difference between reported net income and cash provided by operating activities was primarily due to depreciation and amortization and increases in accounts payable, accrued liabilities and deferred revenue, which were offset by increases in accounts receivable, inventories and service parts for maintenance. Accounts payable and accrued liabilities increased primarily due to the timing of payments. As in fiscal 2004, deferred revenue increased due to increased sales of service and maintenance contracts and certain software licenses. Accounts receivable increased primarily due to increased sales and the timing of such sales, and inventories and service parts for maintenance increased as we launched both new products and existing products into new channels.

Cash flows provided by (used in) investing activities included proceeds from certain securities transactions, primarily the maturities of marketable debt securities and sale of marketable equity securities of $279.8 million, $86.0 million and $84.5 million for fiscal 2005, 2004 and 2003, respectively. These proceeds were offset by purchases of marketable securities of $261.5 million, $113.7 million and $96.8 million during fiscal 2005, 2004 and 2003, respectively, and $776,000, $692,000 and $500,000 of investments in non-marketable securities of non-public technology businesses during the same respective periods. During fiscal 2005, we received proceeds of $4.5 million from the sale of our Böehmenkirch, Germany facility. During fiscal 2004, we received proceeds of $16.7 million from the disposal of assets held for sale, which primarily comprised inventory and leasehold improvements related to the Benchmark manufacturing outsourcing agreement completed during the year. Investments in property, plant and equipment were $13.9 million, $14.6 million and $14.3 million during fiscal 2005, 2004 and 2003, respectively. Capital expenditures during fiscal 2005 consisted primarily of computer hardware and software to support initiatives within our global services organization and tooling and equipment related to new product introductions. During fiscal 2004 capital expenditures consisted primarily of computer hardware and software to support initiatives within our global services and research and development organizations and tooling and equipment related to new product introductions. Capital expenditures during fiscal 2003 consisted primarily of computer hardware and software for our global information technology infrastructure and tooling and equipment related to new product introductions.

With respect to cash flows provided by (used in) financing activities, during fiscal 2005, 2004 and 2003, we received proceeds from the issuance of common stock under our Stock Purchase Plan and the exercise of stock options and stock warrants of $3.8 million, $8.1 million and $8.4 million, respectively. We repurchased $22.9 million, $9.5 million and $697,000 of our common stock during fiscal 2005, 2004 and 2003, respectively. During fiscal 2003, we borrowed $781,000 on a credit line from a German bank, which we repaid in full during the same year. Offsetting cash flows provided by financing activities in fiscal 2004 and 2003 were certain payments on short-term and long-term debt, which were $1.2 million and $3.4 million, respectively. All of our outstanding debt was repaid in full during the third quarter of fiscal 2004.

At October 31, 2005, our cash and cash equivalents totaled $131.6 million, up from $94.7 million at October 31, 2004. Our cash and cash equivalents and marketable securities totaled $252.6 million and $232.9 million at October 31, 2005 and 2004, respectively. Our working capital, the difference between current assets and current liabilities, was $283.0 million at October 31, 2005 compared to $281.4 million at October 31, 2004. The ratio of current assets to current liabilities was 3.4 to 1 and 3.9 to 1 at October 31, 2005 and 2004, respectively.

Based on our strong cash position, anticipated profitable operations and planned expenditures, including further investment in our product development strategy, we believe that our existing cash and cash equivalents, marketable securities and anticipated cash flow from our operating activities will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. However, cash flows from operations could be negatively impacted by a decrease in demand for our products as a result of rapid technological changes and other risks described under “Risk Factors.” Over the longer term, we may choose to fund our operations through the issuance of additional equity or debt financing. The issuance of equity or convertible debt securities could result in dilution to our stockholders, and we cannot provide any assurance that such additional long-term financing, if required, could be completed on favorable terms.

We ~~will~~ continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash. In addition, in the past we have made and expect to continue to make investments in companies with whom we have identified potential synergies.

Off Balance Sheet Arrangements and Contractual Cash Commitments

The following table summarizes our contractual cash commitments as of October 31, 2005 (in thousands):


	Payments Due During Fiscal Years Ended October 31,
	Total		2006		2007-2008		2009-2010		Thereafter
Operating leases	$	19,649	$	5,383	$	7,159	$	4,445	$	2,662
Purchase obligations		57,391		56,991		400		—		—
Other obligations		454		454		—		—		—

Total contractual cash obligations	$	77,494	$	62,828	$	7,559	$	4,445	$	2,662

Operating lease amounts are presented before contractual subleases, which reduce our lease commitments. Also included in the operating lease amounts above are cash commitments related to a liability to reflect the anticipated costs of exiting facilities in Englewood, Colorado and Ithaca, New York. This liability represents our estimate of the net present value of lease payments, less any subleases, related to the abandoned facilities. We believe the remaining liability of $895,000 at October 31, 2005 is adequate to cover the net lease cost of each facility through the end of the lease terms in December 2006 and August 2011, respectively.

Purchase obligations include accounts payable to our vendors and three remaining annual payments of $200,000 for a $1.0 million patent license. Other obligations represent workforce reduction and relocation costs associated with our European reorganization.

Other commitments not included in the contractual cash commitments summary above include $2.2 million in funding of investments in two limited partnership venture capital funds. Additionally, we may have a potential payment that could be due in the event we terminate a contract with a certain supplier. Both of these commitments are described in Note 17 to the Consolidated Financial Statements. Our October 31, 2005 balance sheet includes liabilities for the purchase obligations and the exit costs under “Exit Costs” above. None of the other commitments mentioned above require accrual at October 31, 2005. We had no other material or unusual commitments as of October 31, 2005.

To improve the efficiencies of our European operations, during 2005 we outsourced our logistics to a third party in the Netherlands. In connection with this outsourcing arrangement, we provided a bank guarantee, with a restricted euro cash balance as collateral, to a third party agent in the Netherlands in

March 2005. This third party agent has taken responsibility for fiscal representation of ADIC in the Netherlands. The agreement with the agent includes this bank guarantee since the agent has liability for our international value-added tax with the Dutch taxing authorities. The bank guarantee may be increased or decreased based on assessments of the Dutch taxing authorities to the third party agent. The bank guarantee is an off balance sheet arrangement.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our ~~consolidated~~Consolidated ~~financial~~Financial ~~statements~~Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer agreements, sales returns, bad debts, cost of service revenue, inventory obsolescence, service parts for maintenance, warranty costs, investments, intangible assets, acquired in-process technology, deferred income taxes, potential tax exposures and legal proceedings. We base our estimates on a combination of specifically-identified items of which we are aware, historical trends, our expectations of the future and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer agreements, sales returns, bad debts, inventory obsolescence, service parts for maintenance, warranty costs, investments, intangible assets, acquired in-process technology, deferred income taxes, potential tax exposures and legal proceedings. We base our estimates on a combination of specifically identified items we are aware of, historical trends, our expectations of the future and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financial statements. See Note 1 to our Consolidated Financial Statements for a summary of all our significant accounting policies and recent accounting pronouncements that apply to us.

Customer Agreements and Sales Returns

We record estimated reductions to revenue for specifically-identified customer agreements, such as special pricing, price protection, stock rotation and volume-based incentives, at the time of shipment. These estimates are based upon the expected rate of occurrence taking into consideration both historical and current information. If market conditions were to decline, we may take actions to enter into more of these agreements, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. We also record an allowance for sales returns for our estimates of expected customer product returns based on current sales and historical return rates. Should actual return rates differ from our estimates, revisions to our sales return allowance may be necessary. Since we have historically been able to reliably estimate the amount of allowances required for future price adjustments and product returns, we recognize revenue, net of projected allowances, upon shipment to our customers. If we were unable to reliably estimate the amount of future price adjustments and product returns in any specific reporting period, then we would be required to defer recognition of the revenue until the right to future price adjustments and product returns were to lapse and we were no longer under any obligation to reduce the price or take back the product.

Bad Debts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate these losses based on specifically -identified at-risk receivables and the overall aging of our accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, and our ability to recognize sales to certain customers may be affected.

Cost of Service Revenue

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

Inventory Obsolescence

We evaluate our inventory and record a provision for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If technology rapidly changes or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Service Parts for Maintenance

We value our service parts for maintenance at the lower of amortized cost or market. Amortization of the aggregate service parts is computed on ~~the~~a straight-line ~~method~~ basis over the estimated useful life of three to seven years. Should the technology or our customers’ service needs change and cause a decrease in the estimated useful lives of such service parts, additional expense would be required.

Warranty Costs

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Investments

We hold equity interests in private ~~companies~~and ~~having~~publicly-traded ~~operations~~companies ~~or technology in areas within our strategic focus~~ and limited partnership interests in private technology venture limited partnerships. We also hold investment-grade marketable debt securities in government and commercial entities, frequently in the form of auction rate securities. We record an investment impairment charge when we obtain specific information that causes us to believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. For our interests in private technology venture limited partnerships, which are accounted for under the equity method, we record equity investment gains or losses equal to our pro rata share of the limited partnership’s income or loss. This income or loss is primarily based on the general partner’s estimates of the fair value of non-marketable securities held by the partnership and, to a lesser extent, realized gains and losses from the partnership’s disposal of securities. All estimates related to our non-marketable securities are subject to the inherent uncertainty associated with the valuation of securities for which there is no public market.

Intangible Assets

Upon our adoption of ~~SFAS~~Statement of Financial Accounting Standards No. 142 , “Goodwill and Other Intangible Assets” in the first quarter of fiscal 2003, we ceased amortizing goodwill and performed an initial review for impairment. Goodwill impairment has been reviewed annually thereafter, or more frequently when indicators of impairment are present. We did not record an impairment charge based on this initial review or our annual reviews performed during the third quarters of fiscal 2005, 2004 and 2003. Other intangible assets are carried and reported at acquisition cost, net of accumulated amortization ~~subsequent~~ subsequent to acquisition. The acquisition cost is amortized over the estimated useful lives of the assets, which range from 3051 months to seven years. Intangible assets are reviewed for impairment whenever events or circumstances indicate impairment ~~might~~ might exist, or at least annually. The determination of the net carrying value of goodwill and intangible assets and the extent to which, if any, there is impairment are dependent on material estimates and judgments on our part, including the useful ~~life~~ life over which the intangible assets are to be amortized, and the estimates of the value of future net cash flows, which are based upon further estimates of future revenues, expenses and operating margins.

Acquired In-Process Technology

When we enter into a business combination, we record an expense for the value of acquired in-process technology that has not reached technological feasibility and has no alternative future use as of the date of acquisition. Proposed new accounting literature may change in the future how we record acquired in-process technology that has not reached technological feasibility. The valuation of acquired in-process technology is typically based upon our estimates and valuations by a third-party appraiser.

Deferred Income Taxes

During fiscal ~~2004~~2005, we recorded a valuation allowance of $1.20 million to reduce our deferred tax assets relating to our foreign tax credits ~~and~~because we believe it is more likely than not that these assets will not be realized. We released $385,000 in valuation allowances in fiscal 2005 for selected state net operating losses because we believe it is more likely than not that these assets will be realized due to an increase in our pre-tax income. We do not have a valuation allowance on any other deferred tax assets because we believe that the assets are more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the appropriateness of a valuation allowance, in the event we were to determine that we would have a change in the realization of the net deferred tax asset in the future, an adjustment to the deferred tax asset or valuation allowance would be made.

is more likely than not that these assets will not be realized. We do not have a valuation allowance on any other deferred tax assets because we believe that the assets are more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the appropriateness of a valuation allowance, in the event we were to determine that we would have a change in the realization of the net deferred tax asset in the future, an adjustment to the deferred tax asset or valuation allowance would be made.

Potential Tax Exposures and Legal Proceedings

We record liabilities to address potential exposures related to business and income tax positions we have taken that have been or could be challenged by taxing authorities. Additionally, we record liabilities associated with legal proceedings and lawsuits. These liabilities are recorded when the likelihood of payment is probable and the amounts can be reasonably estimated. The determination for required liabilities is based upon analysis of each individual tax issue or legal proceeding, taking into consideration the likelihood of adverse judgments and the range of possible loss. Additionally, our analysis may include discussion with outside legal counsel. The ultimate resolution of these potential tax exposures and legal proceedings may be greater or less than the liabilities recorded.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Rate Risk

Currently, approximately 5458% of our total international sales are denominated in U.S. dollars; therefore we are exposed to foreign currency exchange rate risk. The assets and liabilities of our non-U.S. subsidiaries have functional currencies other than the U.S. dollar and are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. A 10% appreciation in the U.S. dollar would have resulted in an approximately $12.60 million and $1.86 million decrease in income before ~~provision (~~benefit) for income taxes during fiscal ~~2004~~2005 and ~~2003~~2004, respectively. Such a change in income would have resulted from applying a different exchange rate to translate and revalue the financial statements of our non-U.S. subsidiaries. To hedge this exposure, we may enter ~~into~~ into forward-currency exchange contracts from time to time. Such contracts provide for the exchange of one currency for another at an agreed-upon price at an agreed-upon settlement date. We had no such contracts outstanding as of October 31, ~~2004~~2005.

Interest Rate Risk

From time to time we invest in marketable debt securities as part of our cash management policy and not for trading purposes. ~~These~~We ~~investments~~also ~~are~~invest ~~subject~~in auction rate securities which have variable interest rates that typically reset every 7 to ~~risks~~49 ~~from~~days. ~~changes~~Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. All such investments held as of October 31, ~~2004~~2005 have effective maturity dates of less than one year. A hypothetical 10% adverse change in interest rates applied to our ~~current~~ marketable debt securities ~~would~~for ~~not~~each of fiscal 2005 and 2004 would have aresulted ~~material~~in ~~adverse~~a decrease ~~effect~~of onapproximately ~~our~~$449,000 ~~financial~~and ~~condition~~$223,000 ~~results~~in ofincome ~~operations~~before orbenefit ~~cash~~for ~~flows~~income taxes during these years, respectively.

34Market Risk

From time to time we invest in equity securities of public companies and have classified these securities as available for sale. These investments are subject to fluctuations in fair value due to the volatility of the stock market and the industries in which these companies operate. As of October 31, 2005, we had available for sale equity investments with a fair value of $10.6 million and a cost basis of approximately $9.5 million. Our objective in managing exposure to stock market fluctuations is to minimize the impact of stock market declines to earnings and cash flows. However, continued market volatility, as well as mergers and acquisitions, have the potential to have a non-cash impact on our financial position and operating results in future periods. A hypothetical 10% adverse change in the stock price of our marketable equity securities would not have a material adverse effect on our financial condition, results of operations or cash flows.

Item 8.

Index to Consolidated Financial Statements

		Page
Report of Independent Registered Public Accounting Firm		3642
Consolidated Balance Sheets at October 31, 2004 and 2003 (Restated)		37
Consolidated Balance Sheets at October 31, 2005 and 2004		44
Consolidated Statements of Operations for each of the threeyears in the period ended October 31, 2004		38
Consolidated Statements of Operations for each of the three years in the period ended October 31, 2005		45
Consolidated Statements of Changes in Shareholders’ Equityfor each of the three years in the period ended October 31, 2004 (Restated)		39
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended October 31, 2005		46
Consolidated Statements of Cash Flows for each of the threeyears in the period ended October 31, 2004		40
Consolidated Statements of Cash Flows for each of the three years in the period ended October 31, 2005		47
Notes to Consolidated Financial Statements		4148

3541

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Advanced Digital Information Corporation:

InWe ~~our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in~~have ~~shareholders’~~completed ~~equity~~an ~~and~~integrated ofaudit ~~cash flows present fairly, in all material respects, the financial position~~ of Advanced Digital Information Corporation’s ~~and~~2005 ~~its~~consolidated ~~subsidiaries~~financial atstatements ~~October 31, 2004~~ and ~~2003, and the results~~ of ~~their~~its ~~operations~~internal ~~and~~control ~~their cash~~over ~~flows~~financial ~~for~~reporting ~~each~~as of ~~the three years in the period ended~~ October 31, ~~2004,~~2005 inand ~~conformity~~audits ~~with accounting principles generally accepted in the United States~~ of ~~America.~~its ~~These~~2004 ~~financial~~and ~~statements~~2003 ~~are the responsibility of the Company’s~~consolidated ~~management; our responsibility is to express an opinion on these~~ financial statements ~~based on our audits. We conducted our audits of these statements~~ in accordance with the standards of the Public Company Accounting Oversight Board (United States). ~~Those~~ ~~standards~~Our ~~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~~opinions, based on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, ~~provide~~are apresented ~~reasonable basis for our opinion~~below.

AsConsolidated ~~discussed in Note 1 to the consolidated~~ financial statements, ~~effective November 1, 2002, the Company changed its method of accounting for goodwill as required by Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets.”~~

AsIn ~~discussed~~our inopinion, ~~Note 1 to~~ the consolidated financial statements listed in the accompanying index present fairly, ~~effective~~in ~~August~~all 1material respects, the ~~2003~~financial position of Advanced Digital Information Corporation and its subsidiaries at October 31, 2005 and 2004, and the ~~Company~~results ~~changed~~of ~~its~~their ~~method~~operations and their cash flows for each of the three years in the period ended October 31, 2005 in conformity with accounting ~~for~~principles ~~multiple~~generally ~~deliverable~~accepted ~~revenue~~in ~~arrangements~~the asUnited ~~required~~States byof ~~Emerging~~America. ~~Issues~~These ~~Task~~financial ~~Force~~statements ~~Issue~~are Nothe responsibility of the Company’s management. ~~00-21,~~Our ~~“Revenue~~responsibility ~~Arrangements~~is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with ~~Multiple~~the ~~Deliverables~~standards of the Public Company Accounting Oversight Board (United States).” 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

AsInternal ~~discussed~~control inover ~~Note 2, the consolidated~~ financial ~~statements~~reporting ~~for the years ended October 31, 2003 and 2002 have been restated.~~

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of October 31, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

January 13 17, ~~2005~~2006

3643

ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED BALANCE SHEETS

	October 31,
	2004			2003
				(Restated)
	(In thousands, except for share data)
ASSETS
Current assets:
Cash and cash equivalents	$	226,890		$	180,401
Accounts receivable, net of allowances of $1,319 in 2004 and $1,435 in 2003		93,025			100,391
Inventories, net		38,728			35,736
Short-term marketable securities		6,043			20,788
Assets held for sale		—			12,384
Prepaid expenses and other		2,845			2,356
Income taxes receivable		—			5,520
Deferred income taxes		10,757			8,303
Total current assets		378,288			365,879
Property, plant and equipment, net		45,913			45,505
Service parts for maintenance, net		29,993			28,427
Deferred income taxes		13,461			3,101
Investments		2,769			2,947
Goodwill		2,596			2,596
Intangible and other assets		2,010			1,702
	$	475,030		$	450,157
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	47,991		$	45,159
Accrued liabilities		17,035			19,653
Income taxes payable		174			—
Current portion of deferred revenue		31,727			21,330
Bank lines of credit and current portion of long-term debt		—			192
Total current liabilities		96,927			86,334
Long-term deferred revenue		13,605			8,518
Long-term debt		—			967
Other long-term liabilities		600			—
Commitments and contingencies (Note 18)
Shareholders’ equity:
Preferred stock, no par value; 4,000,000 shares authorized; none issued and outstanding		—			—
Common stock, no par value; 160,000,000 shares authorized, 63,758,716 issued and outstanding at October 31, 2004 (63,700,832 in 2003)		234,724			234,190
Retained earnings		127,877			120,142
Accumulated other comprehensive income (loss):
Cumulative translation adjustment		1,301			(42	)
Unrealized investment gains (losses)		(4	)		48
Total shareholders’ equity		363,898			354,338
	$	475,030		$	450,157

(in thousands, except for share data)


	October 31,
	2005		2004
ASSETS
Current assets:
Cash and cash equivalents	$	131,554	$	94,695
Accounts receivable, net of allowances of $1,929 in 2005 and $1,319 in 2004		105,879		93,025
Inventories, net		26,218		38,728
Short-term marketable securities		121,025		138,238
Prepaid expenses and other		4,577		2,845
Deferred income taxes		11,318		10,757

Total current assets		400,571		378,288
Property, plant and equipment, net		42,499		45,913
Service parts for maintenance, net		26,491		29,993
Deferred income taxes		19,227		13,461
Investments		3,485		2,769
Goodwill		2,596		2,596
Intangible and other assets		1,218		2,010

	$	496,087	$	475,030


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	56,991	$	47,991
Accrued liabilities		19,230		17,035
Income taxes payable		1,416		174
Current portion of deferred revenue		39,910		31,727

Total current liabilities		117,547		96,927
Long-term deferred revenue		18,242		13,605
Other long-term liabilities		400		600
Commitments and contingencies (Note 17)
Shareholders’ equity:
Preferred stock, no par value; 4,000,000 shares authorized; none issued and outstanding		—		—
Common stock, no par value; 160,000,000 shares authorized, 61,455,694 issued and outstanding at October 31, 2005 (63,758,716 in 2004)		216,268		234,724
Retained earnings		142,150		127,877
Accumulated other comprehensive income (loss):
Cumulative translation adjustment		770		1,301
Unrealized investment gains (losses)		710		(4	)

Total shareholders’ equity		359,898		363,898

	$	496,087	$	475,030

See the accompanying notes to these consolidated financial statements.

3744

ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended October 31,
	2004			2003			2002
	(In thousands, except for per sharedata)
Net sales	$	454,819		$	423,998		$	337,599
Cost of sales		325,588			292,121			245,832
Gross profit		129,231			131,877			91,767
Operating expenses:
Sales and marketing		64,836			57,777			48,307
General and administrative		24,242			24,015			23,172
Research and development		37,925			40,609			32,230
Acquisition expenses		—			—			1,475
		127,003			122,401			105,184
Operating profit (loss)		2,228			9,476			(13,417	)
Other income (expense):
Interest income		2,503			2,198			3,567
Gain on securities and investment transactions, net		73			2,722			7,482
Foreign currency transaction gains, net		1,114			1,569			1,094
Other		(325	)		(454	)		(279	)
		3,365			6,035			11,864
Income (loss) before provision (benefit) for income taxes		5,593			15,511			(1,553	)
Provision (benefit) for income taxes:
Current		3,190			(2,495	)		(7,202	)
Deferred		(5,332	)		5,515			4,089
		(2,142	)		3,020			(3,113	)
Net income	$	7,735		$	12,491		$	1,560
Basic net income per share	$	0.12		$	0.20		$	0.03
Diluted net income per share	$	0.12		$	0.20		$	0.02

(in thousands, except for per share data)


	Years Ended October 31,
	2005			2004			2003
Revenue:
Product	$	398,527		$	409,371		$	390,727
Service		55,651			45,448			33,271

		454,178			454,819			423,998

Cost of revenue:
Product		274,702			290,660			264,934
Service		40,413			34,928			27,187

		315,115			325,588			292,121

Gross profit		139,063			129,231			131,877


Operating expenses:
Sales and marketing		66,597			64,836			57,777
General and administrative		25,886			24,242			24,015
Research and development		42,493			37,925			40,609

		134,976			127,003			122,401

Operating profit		4,087			2,228			9,476


Other income (expense):
Interest income		5,465			2,503			2,198
Gain (loss) on securities and investment transactions, net		(59	)		73			2,722
Gain on assets held for sale		2,549			—			—
Foreign currency transaction gains (losses), net		(1,452	)		1,114			1,569
Other		(473	)		(325	)		(454	)

		6,030			3,365			6,035

Income before provision (benefit) for income taxes		10,117			5,593			15,511

Provision (benefit) for income taxes:
Current		1,327			3,190			(2,495	)
Deferred		(5,483	)		(5,332	)		5,515

		(4,156	)		(2,142	)		3,020

Net income	$	14,273		$	7,735		$	12,491

Basic net income per share	$	0.23		$	0.12		$	0.20

Diluted net income per share	$	0.23		$	0.12		$	0.20

See the accompanying notes to these consolidated financial statements.

3845

ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended October 31, ~~2004~~2005, ~~2003~~2004 and ~~2002~~2003

	Common Stock					Retained Earnings		AccumulatedOtherComprehensiveIncome (Loss)			Total
	Shares		Amount
						(Restated)					(Restated)
	(In thousands)
Balance at October 31, 2001	61,934		$	221,399		$	106,091	$	2,478		$	329,968
Shares repurchased	(1,294	)		(7,863	)		—		—			(7,863	)
Purchases under Stock Purchase Plan	286			1,943			—		—			1,943
Exercise of stock options, including tax benefit of $2,607	898			7,065			—		—			7,065
Exercise of warrants	106			143			—		—			143
Cancellation of Pathlight escrow shares	(55	)		—			—		—			—
Comprehensive income (loss):
Net income	—			—			1,560		—			—
Unrealized investment gains (losses):
Unrealized investment losses, net of tax of $1,410	—			—			—		(2,618	)		—
Reclassification adjustment: gain included in net income, net of tax of $1,285	—			—			—		(2,387	)		—
Foreign currency translation adjustment, net of tax of $223	—			—			—		415			—
Total comprehensive loss	—			—			—		—			(3,030	)
Balance at October 31, 2002	61,875			222,687			107,651		(2,112	)		328,226
Shares repurchased	(113	)		(697	)		—		—			(697	)
Purchases under Stock Purchase Plan	422			2,329			—		—			2,329
Exercise of stock options, including tax benefit of $3,844	1,512			9,866			—		—			9,866
Exercise of warrants	5			5			—		—			5
Comprehensive income (loss):
Net income	—			—			12,491		—			—
Unrealized investment gains (losses):
Unrealized investment gains, net of tax of $60	—			—			—		111			—
Reclassification adjustment: loss included in net income, net of tax of $87	—			—			—		162			—
Foreign currency translation adjustment, net of tax of $993	—			—			—		1,845			—
Total comprehensive income	—			—			—		—			14,609
Balance at October 31, 2003	63,701			234,190			120,142		6			354,338
Shares repurchased	(1,010	)		(9,510	)		—		—			(9,510	)
Purchases under Stock Purchase Plan	282			2,612			—		—			2,612
Exercise of stock options, including tax benefit of $1,971	761			7,378			—		—			7,378
Exercise of warrants	25			54			—		—			54
Comprehensive income (loss):
Net income	—			—			7,735		—			—
Unrealized investment gains (losses):
Unrealized investment gains, net of tax of $29	—			—			—		(54	)		—
Reclassification adjustment: loss included in net income, net of tax of $1	—			—			—		2			—
Foreign currency translation adjustment, net of tax of $723	—			—			—		1,343			—
Total comprehensive income	—			—			—		—			9,026
Balance at October 31, 2004	63,759		$	234,724		$	127,877	$	1,297		$	363,898

(in thousands)


	Common Stock					Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance at October 31, 2002	61,875		$	222,687		$	107,651	$	(2,112	)	$	328,226
Shares repurchased	(113	)		(697	)		—		—			(697	)
Purchases under Stock Purchase Plan	422			2,329			—		—			2,329
Exercise of stock options, including tax benefit of $3,844	1,512			9,866			—		—			9,866
Exercise of warrants	5			5			—		—			5
Comprehensive income:
Net income	—			—			12,491		—			—
Unrealized investment gains (losses):
Unrealized investment gains, net of tax of $60	—			—			—		111			—
Reclassification adjustment: loss included in net income, net of tax of $87	—			—			—		162			—
Foreign currency translation adjustment	—			—			—		1,845			—
Total comprehensive income	—			—			—		—			14,609

Balance at October 31, 2003	63,701			234,190			120,142		6			354,338
Shares repurchased	(1,010	)		(9,510	)		—		—			(9,510	)
Purchases under Stock Purchase Plan	282			2,612			—		—			2,612
Exercise of stock options, including tax benefit of $1,971	761			7,378			—		—			7,378
Exercise of warrants	25			54			—		—			54
Comprehensive income (loss):
Net income	—			—			7,735		—			—
Unrealized investment gains (losses):
Unrealized investment losses, net of tax of $29	—			—			—		(54	)		—
Reclassification adjustment: loss included in net income, net of tax of $1	—			—			—		2			—
Foreign currency translation adjustment	—			—			—		1,343			—
Total comprehensive income	—			—			—		—			9,026

Balance at October 31, 2004	63,759			234,724			127,877		1,297			363,898
Shares repurchased	(2,892	)		(22,893	)		—		—			(22,893	)
Purchases under Stock Purchase Plan	325			2,342			—		—			2,342
Exercise of stock options, including tax benefit of $466	249			1,966			—		—			1,966
Stock grants	15			129			—		—			129
Comprehensive income (loss):
Net income	—			—			14,273		—			—
Unrealized investment gains:
Unrealized investment gains, net of tax of $384	—			—			—		714			—
Foreign currency translation adjustment	—			—			—		(531	)		—
Total comprehensive income	—			—			—		—			14,456

Balance at October 31, 2005	61,456		$	216,268		$	142,150	$	1,480		$	359,898

See the accompanying notes to these consolidated financial statements.

3946

ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended October 31,
	2004			2003			2002
	(In thousands)
Cash flows from operating activities:
Net income	$	7,735		$	12,491		$	1,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,538			21,014			16,815
Bad debt expense		211			14			1,258
Inventory obsolescence		3,335			4,334			4,173
Acquired in-process research and development		—			—			1,200
Gain on securities and investment transactions		(73	)		(2,722	)		(7,482	)
Deferred income taxes		(2,898	)		5,323			4,279
Tax benefit from exercise of stock options		1,971			3,844			2,607
Other		81			131			17
Change in assets and liabilities:
Accounts receivable		6,616			(29,041	)		9,807
Inventories		(8,465	)		(15,467	)		6,585
Prepaid expenses and other		(402	)		(51	)		(436	)
Service parts for maintenance		(11,032	)		(9,865	)		(10,210	)
Accounts payable		1,309			9,282			683
Accrued liabilities		(3,303	)		7,228			(1,369	)
Income taxes		(2,636	)		848			3,306
Deferred revenue		14,692			8,656			7,234
Net cash provided by operating activities		31,679			16,019			40,027
Cash flows from investing activities:
Purchase of property, plant and equipment		(14,644	)		(14,296	)		(26,932	)
Proceeds from assets held for sale		16,740			—			—
Purchase of marketable securities		(9,054	)		(16,478	)		(52,812	)
Proceeds from securities transactions		24,590			38,630			41,875
Purchase of other investments		(692	)		(500	)		(3,259	)
Purchase of intangible assets		(200	)		—			—
Return of investment on other investments		71			—			—
Net cash provided by (used in) investing activities		16,811			7,356			(41,128	)
Cash flows from financing activities:
Repayment of short-term and long-term debt		(1,221	)		(3,373	)		(2,227	)
Proceeds from short-term borrowings		—			781			—
Repurchase of common stock		(9,510	)		(697	)		(7,863	)
Proceeds from issuance of common stock for stock options, stock warrants and Stock Purchase Plan		8,073			8,356			6,544
Net cash provided by (used in) financing activities		(2,658	)		5,067			(3,546	)
Effect of exchange rate changes on cash		657			1,218			114
Net increase (decrease) in cash and cash equivalents		46,489			29,660			(4,533	)
Cash and cash equivalents at beginning of period		180,401			150,741			155,274
Cash and cash equivalents at end of period	$	226,890		$	180,401		$	150,741

(in thousands)


	Years Ended October 31,
	2005			2004			2003
Cash flows from operating activities:
Net income	$	14,273		$	7,735		$	12,491
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		26,624			24,538			21,014
Bad debt expense		899			211			14
Inventory obsolescence		2,300			3,335			4,334
Stock compensation		129			—			—
(Gain) loss on securities and investment transactions		59			(73	)		(2,722	)
Deferred income taxes		(6,840	)		(2,898	)		5,323
Tax benefit from exercise of stock options		466			1,971			3,844
Gain on assets held for sale		(2,549	)		—			—
Loss on asset impairment		247			—			—
Other		358			81			131
Change in assets and liabilities:
Accounts receivable		(13,132	)		6,616			(29,041	)
Inventories		9,928			(8,465	)		(15,467	)
Prepaid expenses and other		(1,881	)		(402	)		(51	)
Service parts for maintenance		(7,729	)		(11,032	)		(9,865	)
Accounts payable		8,688			1,309			9,282
Accrued liabilities		2,062			(3,303	)		7,228
Income taxes		1,292			(2,636	)		848
Deferred revenue		13,450			14,692			8,656

Net cash provided by operating activities		48,644			31,679			16,019

Cash flows from investing activities:
Purchase of property, plant and equipment		(13,855	)		(14,644	)		(14,296	)
Proceeds from assets held for sale		4,498			16,740			—
Purchase of marketable securities		(261,464	)		(113,744	)		(96,778	)
Proceeds from securities transactions		279,775			86,035			84,530
Purchase of other investments		(776	)		(692	)		(500	)
Purchase of intangible assets		—			(200	)		—
Return of investment on other investments		—			71			—

Net cash provided by (used in) investing activities		8,178			(26,434	)		(27,044	)

Cash flows from financing activities:
Repayment of short-term and long-term debt		—			(1,221	)		(3,373	)
Proceeds from short-term borrowings		—			—			781
Repurchase of common stock		(22,893	)		(9,510	)		(697	)
Proceeds from issuance of common stock for stock options, stock warrants and Stock Purchase Plan		3,842			8,073			8,356

Net cash provided by (used in) financing activities		(19,051	)		(2,658	)		5,067

Effect of exchange rate changes on cash		(912	)		657			1,218

Net increase (decrease) in cash and cash equivalents		36,859			3,244			(4,740	)
Cash and cash equivalents at beginning of period		94,695			91,451			96,191

Cash and cash equivalents at end of period	$	131,554		$	94,695		$	91,451

Supplemental Disclosure of Cash Flow Information

	Years Ended October 31,
	2004		2003		2002
	2005		2004		2003
	(In thousands)
Cash paid during the period for:
Interest	$	~~123~~2	$	~~211~~123	$	~~292~~211
Income taxes	$	12,~~826~~541	$	~~734~~1,826	$	~~675~~734
Non-cash investing activity:
Patent license acquired with long-term payable	$	800	$	—	$	—
Gain deferred on sale-leaseback transaction		721		—		—
Conversion of cost basis investment into marketable securities	$	—	$	6,350	$	—
Patent license acquired with long-term payable		—		800		—
Conversion of cost basis investment into marketable securities		—		—		6,350

See the accompanying notes to these consolidated financial statements.

4047

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements consolidate the accounts of Advanced Digital Information Corporation (ADIC) and our wholly owned subsidiaries, including the subsidiaries representing our major international operations: ADIC Europe SARL (ADE), ADIC Germany ~~GmbH~~ GmbH & Co. KG (ADIC Germany), ADIC AG (ADIC Switzerland) and ADIC Limited (ADIC UK). The companies are collectively hereinafter referred to as “ADIC,” “we,” “our” and “us.” All intercompany transactions have been eliminated.

Nature of Operations

ADIC provides Intelligent Storage solutions for the open- systems marketplace. Along with our value-added resellers (VARs), distributors, OEM partners and end- user customers, we incorporate our proprietary hardware, software and connectivity solutions, as well as our service and support expertise, with third-party hardware and software products to deliver reliable, flexible and scalable storage solutions. Our storage solutions are designed to enable a broad range of business and governmental organizations to manage, access and protect their large-scale data more effectively. We sell our products on a global basis.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Estimates that are particularly susceptible to significant change in the near term are those related to customer agreements, sales returns, bad debts, ~~inventory~~cost of service revenue, inventory obsolescence, service parts for maintenance, warranty costs, investments, intangible assets, acquired in-process technology, deferred income taxes, potential tax exposures and legal proceedings.

Revenue Recognition

We rely on multiple distribution channels; our customers may be VARs, distributors, OEMs or end users. Revenue from hardware product sales is recognized in accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” which was adopted in fiscal 2003, and Staff Accounting Bulletin No. 104, “Revenue Recognition,” which was adopted in fiscal 2004. Under these pronouncements, we recognize revenue from hardware sales upon shipment provided that there is no customer acceptance clause in the purchase order or contract, there are no significant post-delivery obligations remaining, the price is fixed and collection of the resulting receivable is reasonably assured. When significant post-delivery obligations exist, the related revenue is deferred until such obligations are fulfilled. If there are customer acceptance criteria in the contract, we recognize revenue upon end- user acceptance, which typically occurs after delivery and installation are completed. Revenue ~~from~~equal to the separately stated price of extended and enhanced service contracts is deferred and recognized ratably over the ~~life~~number of ~~the~~months ~~contract. We define service revenue to include these service contracts, and we view all other types~~ of ~~revenue~~the ~~as part of our product sales~~contract. We consign inventory at third-party warehouses for certain OEM partners. We recognize revenue when ~~our~~the ~~OEM~~warehouse ~~partner~~ships ~~takes~~inventory ~~title~~ to the ~~inventory, which can occur one of two ways~~OEM partner. InLibraries, ~~some instances~~software, ~~the~~service ~~warehouse~~contracts ~~ships~~and ~~inventory~~maintenance toservices ~~the~~may ~~OEM~~be ~~partner,~~sold ~~and~~separately inor ~~other~~together. If

4148

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~instances~~sold together, ~~the~~total ~~warehouse~~revenue ~~ships~~is ~~inventory~~allocated ~~directly~~ to ~~a customer of~~ the ~~OEM.~~various Inelements ~~both~~based ~~instances, title transfers to our OEM partner~~ upon ~~shipment.~~the ~~Libraries,~~relative ~~software, service~~fair ~~contracts~~value ~~and~~of ~~maintenance~~each ~~services may be sold separately or together. If sold together~~element, ~~total~~which ~~revenue~~ is ~~allocated~~generally ~~to the various elements~~ based ~~upon~~on the price of that item sold on a separate basis.

Certain distributors and direct marketing resellers have the right, on a quarterly basis, to return products according to a stock rotation policy. Typically, the value of the products returned cannot exceed 10% of the previous quarter’s purchases, and the products returned must be new and in sealed cartons. Some of our agreements with distributors require that these returns be accompanied by offsetting orders of commensurate value. We record reductions to revenue for these rights when the sale is made. We also record an allowance for sales returns for our estimates of expected customer product returns based on current sales and historical return rates. Since we have historically been able to reliably estimate the amount of allowances required for future price adjustments and product returns, we recognize revenue, net of projected allowances, upon shipment to our customers. We also record estimated reductions to revenue for specifically-identified customer pricing agreements, such as special pricing, price protection and volume-based incentives, at the time of shipment. These estimates are based upon the expected rate of occurrence taking into consideration both historical and current information.

Revenue from software sales is recognized when the criteria of Statement of Position No. 97-2, “Software Revenue Recognition” have been met. These criteria include persuasive evidence of an arrangement, delivery of the software, a fixed and determinable fee, probable collection and vendor- specific objective evidence of fair value for undelivered elements. Vendor-specific objective evidence is typically based on the price charged when an element is sold separately or, if an element is not sold separately, on the price established by authorized management, if it is probable that the price, ~~once~~ once established, will not change before market introduction. We recognize revenue from software sales upon delivery provided that there is no customer acceptance clause in the purchase order or contract, there are no significant post-delivery obligations remaining, the price is fixed and collection of the resulting receivable is reasonably assured. When significant post-delivery obligations exist, the related revenue is deferred until such obligations are fulfilled. If there are customer acceptance criteria in the contract, we recognize revenue upon end- user acceptance, which typically occurs after delivery and installation are completed. Revenue from postcontract customer support agreements, which entitle customers to both support and upgrades during the term of the agreement, when-and-if available, is recognized ratably over the life of the agreement. EITF Issue No. 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an ~~Arrangement~~ Arrangement Containing More-Than-Incidental Software” affirms that the revenue recognition guidance in SOP 97-2 also applies to non-software deliverables, such as computer hardware, in an arrangement if the software is essential to the functionality of the non-software deliverables. We do not currently have any non-software deliverables that are subject to the guidance of EITF 03-5.

Revenue from installations, professional services, repair and training is recognized when the work is completed. ~~Generally, product installation is considered perfunctory and is treated as a separate element from the product under EITF 00-21.~~

Deferred Revenue

Deferred revenue primarily consists of unearned revenue from hardware service contracts and software maintenance contracts, both of which are typically billed at the beginning of the contract term and recognized as revenue over the contract period. The remainder of the deferred revenue balance comprises certain software licenses and hardware sales that require deferral under generally accepted accounting principles if the criteria described in the Revenue Recognition policy above are not met at the time the sale is made.

4249

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~comprises~~Product ~~certain~~and ~~software~~Service ~~licenses~~Revenue and ~~hardware~~Cost ~~purchases~~of ~~that require deferral under generally accepted accounting principles if the criteria described in the~~ Revenue ~~Recognition policy above are not met at the time the sale is made.~~

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

Indemnifications and Warranties

In the normal course of business, we are party to a variety of agreements under which we may be obligated to indemnify the other party for certain matters. These obligations typically arise in contracts where we customarily agree to hold the other party harmless against losses arising from a breach of representations or covenants for certain matters such as title to assets and intellectual property rights associated with the sale of products. The duration of these indemnifications varies, and in certain cases, is indefinite. In each of these circumstances, payment by us depends upon the other party making an adverse claim according to the procedures outlined in the particular agreement, which procedures generally allow us to challenge the other party’s claims. In certain instances, we may have recourse against third parties for payments made by us.

Based on historical experience, we do not believe any significant payments will result from these indemnification obligations; accordingly, no amounts have been accrued for these provisions. However, we do accrue losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.

For our products, parts and labor are covered under warranty for periods between three months and three years. A provision for internal labor costs and third party service costs related to warranty expense is recorded when revenue is recognized. We hold service parts for maintenance that are used to service our warranties and extended service contracts. The aggregate cost of these parts is amortized over the estimated useful life of three to seven years. With respect to drives, tapes and disk used in our products but manufactured by a third party, we provide to the customer a warranty on such drives, tapes and disk that is substantially equivalent to the warranty provided by the manufacturer.

Changes in our accrued warranty balance for the year ended October 31, ~~2004~~2005 are as follows (in thousands):

Balance at October 31, 2003	$	5,481
Accruals for warranties issued		9,960
Settlements during the period		(8,509	)
Balance at October 31, 2004	$	6,932
Accruals for warranties issued		11,146
Settlements during the period		(11,686	)
Balance at October 31, 2005	$	6,392

~~Shipping~~50 ~~Costs~~

The cost of shipping product to customers is included in cost of sales. Freight charged to customers is included in net sales.

Advertising Expense

Advertising expense includes costs associated with direct marketing, telemarketing, trade shows, promotions and public relations. These costs are expensed as incurred. Advertising expense for the years ended October 31, 2004, 2003 and 2002 was $7,214,000, $7,360,000 and $7,168,000, respectively.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shipping Costs

The cost of shipping products to customers is included in cost of revenue. Freight charged to customers is included in revenue.

Advertising Expense

Advertising expense includes costs associated with direct marketing, telemarketing, trade shows, promotions and public relations. These costs are expensed as incurred. Advertising expense for the years ended October 31, 2005, 2004 and 2003 was $6.0 million, $7.2 million and $7.4 million, respectively.

Research and Development Costs

Expenditures relating to the development of new products and processes are expensed as incurred. These costs include expenditures for team member compensation, materials used in the development effort, facilities and other internal costs, as well as expenditures for third party professional services.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments. Marketable securities are carried at fair value, which is based on quoted market prices. The fair value of our investments in marketable securities iswas ~~less~~greater than cost at October 31, ~~2004~~ 2005 and ~~greater~~less than cost at October 31, ~~2003~~2004.

Concentrations

Our products are concentrated in the data storage solutions industry, which is highly competitive and rapidly changing. Significant technological changes in the industry could affect operating results adversely. Our inventories include devices and components that may be subject to rapid technological obsolescence. While we have programs to minimize the required inventories on hand and consider technological obsolescence in estimating required allowances, such estimates could change in the future. Additionally, we depend on a limited number of third-party manufacturers to supply us with our devices, components and entry-level and mid-range libraries. In many cases, specific versions of these components, devices and libraries are customized and are available only from a single supplier. Therefore, loss of certain suppliers could disrupt operations. We attempt to mitigate these risks by working closely with and performing financial reviews of key and strategic suppliers and purchasing business interruption insurance where appropriate.

We sell products to customers in a wide variety of industries on a worldwide basis. In countries or industries where we are exposed to material credit risk, we require collateral, including cash deposits, letters of credit and/or credit insurance, prior to the completion of a transaction. We do not believe there is a credit risk beyond that provided for in the financial statements in the ordinary course of business.

We51 sell our products primarily through third-party resellers and OEMs. Total sales to Dell and IBM, our two largest customers, include OEM sales as well as sales of ADIC branded product. Dell and IBM accounted for fiscal 2004 revenues of $109,935,000 (24%) and $96,448,000 (21%), respectively. These two customers accounted for fiscal 2003 revenues of $103,317,000 (24%) and $96,118,000 (23%), respectively, and fiscal 2002 revenues of $63,518,000 (19%) and $86,211,000 (26%), respectively. These two customers represented 44% and 49% of accounts receivable at October 31, 2004 and 2003, respectively.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We ~~maintain~~sell anour ~~allowance~~products ~~for~~primarily ~~doubtful~~through ~~accounts~~third-party ~~receivable~~resellers ~~based upon our historical experience~~ and ~~the~~OEMs. ~~expected collectibility~~Total ofsales ~~all~~to ~~outstanding~~Dell ~~accounts~~and ~~receivable.~~IBM, ~~Allowance~~our ~~for~~two largest ~~doubtful~~customers, ~~accounts~~include ~~receivable~~OEM ~~for~~sales ~~the~~as ~~years~~well ~~ended~~as ~~October~~sales ~~31,~~of ~~2004,~~ADIC ~~2003~~branded ~~and~~product ~~2002 is~~ as follows (in thousands):

	Balance at Beginning of Year		Additions Charged to Income*		Deductions*				Balance at End of Year
	Years Ended October 31,
	(In thousands)
	2005				2004						2003
Allowance for doubtful accounts receivable:
	Revenue		Percent ofRevenue		Revenue			Percent ofRevenue			Revenue		Percent ofRevenue
2004	$	1,435	$	211	$	327			$	1,319
Dell	$	99,692	22	%	$	109,935		24	%		$	103,317	24	%
2003		1,379		14		(42	)			1,435
IBM		71,600	16	%		96,448		21	%			96,118	23	%
2002		1,752		1,258		1,631				1,379

*These ~~Deductions~~two ~~represent~~customers ~~amounts~~represented 40% ~~written off against the allowance, net of recoveries. During fiscal 2003, due to strong collection activity, our accounts receivable customer balances were very current~~ and ~~contributed~~44% ~~to a lower allowance as a percentage~~ of accounts receivable ~~than~~at ~~we have historically recorded. During fiscal 2002~~October 31, ~~the~~2005 ~~write~~and ~~off of a single customer balance accounted for $1~~2004,~~239,000~~ ~~of the deduction~~respectively.

We maintain an allowance for doubtful accounts receivable based upon our historical experience and the expected collectibility of all outstanding accounts receivable. Allowance for doubtful accounts receivable for the years ended October 31, 2005, 2004 and 2003 is as follows (in thousands):


	Balance at Beginning of Year		Additions Charged to Income*		Deductions*			Balance at End of Year
Allowance for doubtful accounts receivable:
2005	$	1,319	$	899	$	289		$	1,929
2004		1,435		211		327			1,319
2003		1,379		14		(42	)		1,435

Deductions represent amounts written off against the allowance, net of recoveries. During fiscal 2003, due to strong collection activity, our accounts receivable customer balances were very current and contributed to a lower allowance as a percentage of accounts receivable than we had historically recorded.

Cash and Cash Equivalents

We consider any highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of investments in money market funds, and commercial paper ~~and marketable debt securities that are readily convertible to cash without penalty and subject to insignificant risk of changes~~ in ~~value in~~ accordance with our cash management policy. The objectives of our cash management policy are safety and preservation of funds, liquidity sufficient to meet cash flow requirements and attainment of a market rate of return. Our cash and cash equivalents balance consists of the following (in thousands):

	October 31, 2004		October 31, 2003
	October 31, 2005		October 31, 2004
	(In thousands)
Unrestricted cash and cash equivalents	$	131,357	$	94,695
Cash	$	94,695	$	95,447
Restricted cash		197		—
Marketable debt securities		132,195		84,954
	$	131,554	$	94,695
	$	226,890	$	180,401

Restricted cash is held per an agreement regarding international value-added tax obligations that is described more fully in Note 9. Cash equivalents exclude marketable debt securities with maturities of greater than three months at the date of purchase. ~~These securities are classified as marketable securities and are described in Note 5.~~

~~Marketable~~52 ~~Securities and Other Investments~~

At times we invest in certain marketable debt and equity securities. Equity securities consist of stock in U.S. companies that operate in areas within our strategic focus. Debt securities consist of investment-grade government and commercial securities purchased in accordance with our cash management policy to generate a higher yield than cash equivalents. In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” such investments are classified as available-for-sale. Under SFAS 115, unrealized investment gains and losses, net of taxes, are reflected as a net amount in a separate component of shareholders’ equity until realized. For the purpose of computing realized gains and losses, costs are

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~identified~~Marketable onSecurities ~~a specific identification basis. We write down an investment~~ and ~~recognize~~Other aInvestments loss when events indicate there has been an impairment of value which is other than temporary. We also hold investments in privately held early-stage technology companies and private technology venture limited partnerships. These investments individually represent voting ownership interests of less than 20%. Ownership interests in private technology limited partnerships are accounted for under the equity method unless our interest is so minor (typically less than 5%) that we have virtually no influence over the partnership operating and financial policies, in which case the cost method is used. Currently, our investments in private technology limited partnerships are accounted for using the equity method.

At times we invest in certain marketable debt and equity securities. Equity securities at October 31, 2005 consisted of stock in U.S. companies that operate in areas within our strategic focus. Debt securities consist of investment-grade government and commercial securities, including auction rate securities, purchased in accordance with our cash management policy to generate a higher yield than cash equivalents. In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” such investments are classified as available-for-sale. Under SFAS 115, unrealized investment gains and losses, net of taxes, are reflected as a net amount in a separate component of shareholders’ equity until realized. For the purpose of computing realized gains and losses, securities are identified on a specific- identification basis. We write down an investment and recognize a loss when events indicate there has been an impairment of value which is other-than-temporary.

Our investments in auction rate securities are recorded at fair value, which approximates cost due to the variable interest rates of these securities that typically reset every 7 to 49 days. As a result, we have no unrealized or realized investment gains or losses from these securities. Additionally, despite the long-term nature of their stated contractual maturities, we have the ability to quickly liquidate these securities within the current operating cycle and therefore have classified them as short-term marketable securities in the Consolidated Balance Sheet. All income generated from these auction rate securities is recorded as interest income.

We also hold investments in privately held early-stage technology companies and private technology venture limited partnerships. These investments individually represent voting ownership interests of less than 20%. Ownership interests in private technology limited partnerships are accounted for under the equity method unless our interest is so minor (typically less than 5%) that we have virtually no influence over the partnership operating and financial policies, in which case the cost method is used. Currently, our investments in private technology limited partnerships are accounted for using the equity method.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We evaluate the need for inventory allowances associated with obsolete, slow-moving and nonsalable inventory by reviewing current transactions and forecasted product demand. Allowance for excess and obsolete inventory for the years ended October 31, ~~2004~~2005, ~~2003~~2004 and ~~2002~~2003 is as follows (in thousands):

	Balance at Beginning of Year		Additions Charged to Income		Deductions*		Balance at End of Year
	(In thousands)
Allowance for inventory obsolescence:
2004	$	14,019	$	3,335	$	4,063	$	13,291
2005	$	13,291	$	2,300	$	5,419	$	10,172
2004		14,019		3,335		4,063		13,291
2003		10,713		4,334		1,028		14,019
2002		7,388		4,173		848		10,713

*	Deductions represent dispositions of inventory written off against the allowance.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating Leases

We recognize lease expense on a straight-line basis over the initial lease term. We have operating leases on real property and equipment expiring at various dates through 2014. For leases that contain rent holidays or escalation clauses, we recognize rent expense on a straight-line basis and record the difference between the rent expense and rental amount payable as deferred rent. The deferred rent is amortized over the terms of the leases as an addition to, or reduction of, rent expense. Subleases are recorded as a reduction to rent expense and are recognized on a straight-line basis over the initial sublease term.

Property, Plant and Equipment

Property, plant and equipment isare recorded at cost, except for property, plant and equipment of acquired entities which has been reduced for certain negative goodwill associated with their acquisition in fiscal 1998. Depreciation and amortization are computed on ~~the~~a straight-line ~~method~~basis over the estimated useful lives of the assets as follows:


Buildings		25 to 40 years
Machinery and equipment		3 to 10 years
Computer equipment		3 to 5 years
Software		3 to 10 years
Office furniture		3 to 10 years
Leasehold improvements		Life of lease

Expenditures for maintenance and repairs are expensed as incurred. Gains and losses from disposal in the amount of the difference between any proceeds received from the sale of property, plant and equipment and net book value of the asset disposed are recorded in other income.

Long-Lived Assets

We evaluate the recoverability of long-lived assets, including property, ~~and~~plant ~~equipment~~and equipment and certain identifiable intangible assets, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When we determine that the carrying amount of long-lived assets may not be recoverable, we assess the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by management to be commensurate with the risk inherent in the business. During the year ended October 31, 2005, we recorded an asset impairment loss of $247,000 for the write-off of fixed assets in the Ithaca, New York facility we exited in September 2005. This transaction is described in Note 16. We have not recorded any other material impairment losses.

4654

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the carrying amount of an asset may not be recoverable. When we determine that the carrying amount of long-lived assets may not be recoverable, we assess the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by management to be commensurate with the risk inherent in the business. We have not recorded any material impairment losses.

Service Parts for Maintenance

Service parts for maintenance are valued at the lower of amortized cost or market. Amortization of the aggregate service parts is computed on ~~the~~a straight-line ~~method~~basis over the estimated useful life of three to seven years.

Goodwill and Intangible Assets

Intangible assets resulting from past acquisitions include core technology, ~~non-compete agreements~~ and goodwill, which were recorded at their fair value. In fiscal 2004 we acquired licensed technology from an existing supplier. On November 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which required us to discontinue amortization of goodwill. As required by SFAS 142, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. In applying these criteria, we transferred net assembled workforce from intangible assets to goodwill in the first quarter of fiscal 2003. During the first quarter of fiscal 2003, we completed the initial assessment for impairment of goodwill required upon implementation of SFAS 142 and concluded that goodwill was not impaired. We are required to perform goodwill impairment tests on an annual basis or when indicators of impairment exist. We performed our annual goodwill impairment test in the third quarter of fiscal 2005, 2004 and 2003 and concluded that goodwill was not impaired. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. Intangible assets other than goodwill are amortized over the periods estimated to be benefited as follows: core technology, seven years; and licensed technology, 51 months~~; non-compete agreements, 30 months~~.

The following table presents net income and net income per share for the years ended October 31, 2004, 2003 and 2002 on a pro forma basis as if SFAS 142 had been adopted on November 1, 2001:

	Years Ended October 31,
	2004		2003		2002
	(In thousands, except for per share data)
Net income, as reported	$	7,735	$	12,491	$	1,560
Add back: amortization of goodwill (including assembled workforce), net of tax		—		—		282
Pro forma net income	$	7,735	$	12,491	$	1,842
Basic net income per share:
As reported	$	0.12	$	0.20	$	0.03
Pro forma	$	0.12	$	0.20	$	0.03
Diluted net income per share:
As reported	$	0.12	$	0.20	$	0.02
Pro forma	$	0.12	$	0.20	$	0.03

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

Provision for income taxes has been recorded in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the liability method of SFAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.

Deferred taxes result from the ~~difference~~timing ~~between~~of ~~the~~ tax ~~basis~~deductions ~~and~~for ~~fair~~depreciation, ~~value of~~allowances ~~assets~~and ofaccrued ~~acquired entities~~expenses, the unrealized gain or loss associated with investments in equity securities and ~~from~~ the ~~timing~~difference ofbetween the tax ~~deductions~~basis ~~for~~and ~~depreciation,~~fair ~~allowances~~value ~~and~~of ~~accrued~~assets ~~expenses~~of acquired entities. In addition, we have deferred taxes resulting from net operating loss and general business credit carryforwards.

Foreign Currency Translations

The financial statements of ADE, ADIC Germany, ADIC Switzerland and ADIC UK have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” Under the provisions of this statement, all assets and liabilities in the balance sheets of these subsidiaries, whose functional currency is the euro for ADE, ADIC Germany and ADIC ~~Germany~~Switzerland and British pound sterling for ADIC UK, are translated at year-end exchange rates,. ~~and~~Translation ~~translation~~ gains and losses are accumulated in a separate component of shareholders’ equity.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Transactions and Forward Contracts

Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. Gains and losses on those foreign currency transactions are included in determining net income or loss for the period in which exchange rates change. In addition, we may enter into foreign currency forward contracts to hedge transactions which are not otherwise offset. 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, and are typically three months or less in length. There were no outstanding contracts at October 31, ~~2004~~2005 or ~~2003~~2004.

During the third quarter of fiscal 2005 we entered into a forward extra option contract with an underlying put of 3.5 million euros that is a derivative as defined by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activity.” The forward contract was purchased by one of our European subsidiaries to offset the currency risk of an intercompany loan valued in U.S. dollars of the same amount. We elected not to designate this derivative instrument as a formal hedge and perform hedge accounting. The loan was repaid in October 2005 upon the expiration of the forward contract. Fair value changes of the contract are recorded in foreign currency transaction gains (losses) on the Consolidated Statement of Operations, resulting in a minimal gain in fiscal 2005.

Derivative Financial Instruments

In accordance with ~~Statement~~SFAS ~~of Financial Accounting Standards No.~~ 133, ~~“Accounting for Derivative Instruments and Hedging Activities,”~~ all derivatives, whether designated in hedging relationships or not, are recognized on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Derivatives not designated or qualifying as a hedging instrument are adjusted to fair value through earnings. We may, from time to time, enter into derivative instruments to hedge against known or forecasted market exposures.

~~Stock-based~~56 ~~Compensation~~

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Interpretation of APB Opinion No. 25.” No stock~~Stock-based compensation cost is reflected in net income, as all stock options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” ~~our net income and basic and diluted net income per share would have been reduced to the pro forma amounts indicated below:~~

	Years Ended October 31,
	2004			2003			2002
	(In thousands, except for per share data)
Net income, as reported	$	7,735		$	12,491		$	1,560
Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax		(6,963	)		(6,663	)		(8,990	)
Pro forma net income (loss)	$	772		$	5,828		$	(7,430	)
Basic net income (loss) per share:
As reported	$	0.12		$	0.20		$	0.03
Pro forma	$	0.01		$	0.09		$	(0.12	)
Diluted net income (loss) per share:
As reported	$	0.12		$	0.20		$	0.02
Pro forma	$	0.01		$	0.09		$	(0.12	)

Stock-based compensation plans are accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25.” In August 2005, our board of directors approved a grant of unrestricted shares of common stock to certain team members. The shares were valued at fair market value on the grant date. We recorded $129,000 in compensation expense for these grants. No other share-based or stock compensation cost is reflected in net income, as all stock options granted under our stock-based compensation plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” our net income and basic and diluted net income per share would have been reduced to the pro forma amounts indicated below (in thousands, except for per share data):

The options granted during fiscal 2004, 2003 and 2002 expire between sixteen months and ten years after the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results for options granted during the fiscal years presented:


	Years Ended October 31,
	2005			2004			2003
Net income, as reported	$	14,273		$	7,735		$	12,491
Add: stock-based compensation expense under APB No. 25 included in reported net income, net of tax		84			—			—
Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax		(5,999	)		(6,963	)		(6,663	)

Pro forma net income	$	8,358		$	772		$	5,828

Basic net income per share:
As reported	$	0.23		$	0.12		$	0.20
Pro forma	$	0.13		$	0.01		$	0.09
Diluted net income per share:
As reported	$	0.23		$	0.12		$	0.20
Pro forma	$	0.13		$	0.01		$	0.09

	Years Ended October 31,
	2004			2003			2002
Weighted average risk free interest rates		3.51	%		3.45	%		3.93	%
Expected dividend yield		0	%		0	%		0	%
Expected volatility		78	%		80	%		82	%
Expected lives (in years)		5.2			6.0			4.7
Weighted average fair value, grants equal to fair market value	$	6.62		$	6.24		$	5.71
Weighted average fair value, grants greater than fair market value	$	2.74		$	—		$	—

The options granted during fiscal 2005, 2004 and 2003 expire between sixteen months and ten years after the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results for options granted during the fiscal years presented:

The fair value of each share purchased under our stock purchase plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results for options granted during the fiscal years presented:


	Years Ended October 31,
	2005			2004			2003
Weighted average risk free interest rates		4.06	%		3.51	%		3.45	%
Expected dividend yield		0	%		0	%		0	%
Expected volatility		56	%		78	%		80	%
Expected lives (in years)		3.4			5.2			6.0
Weighted average fair value, grants equal to fair market value	$	3.73		$	6.62		$	6.24
Weighted average fair value, grants greater than fair market value	$	—		$	2.74		$	—

	Years Ended October 31,
	2004			2003			2002
Weighted average risk free interest rates		1.45	%		1.11	%		1.82	%
Expected dividend yield		0	%		0	%		0	%
Expected volatility		65	%		70	%		68	%
Expected lives (in years)		0.5			0.5			0.5
Weighted average fair value	$	3.40		$	3.27		$	2.64

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of each share purchased under our stock purchase plan is estimated on the date of grant using the Black-Scholes option pricing model ~~requires~~with the ~~input~~following ofweighted ~~highly~~average ~~subjective~~ assumptions and ~~does~~results ~~not necessarily~~for ~~provide~~options agranted ~~reliable~~during ~~measure~~the offiscal ~~fair~~years ~~value.~~presented:


	Years Ended October 31,
	2005			2004			2003
Weighted average risk free interest rates		3.43	%		1.45	%		1.11	%
Expected dividend yield		0	%		0	%		0	%
Expected volatility		37	%		65	%		70	%
Expected lives (in years)		0.5			0.5			0.5
Weighted average fair value	$	2.15		$	3.40		$	3.27

The Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

Earnings Per Share

Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period increased by the weighted average number of common stock equivalents outstanding during the period, using the treasury stock method.

Business Segments

We maintain single sales, marketing, research and development and administrative functions for all of our sales and geographic regions. Management uses one measurement of profitability and does not disaggregate its business for internal reporting. Based on the criteria of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we have determined that our company operates in one segment providing hardware and software data storage solutions to the open systems marketplace.

~~Reclassification~~Reclassifications

~~Certain~~During ~~prior~~fiscal ~~year~~2005, ~~information~~we ~~has~~concluded ~~been~~it ~~reclassified~~was appropriate to ~~conform~~classify toour auction rate marketable securities as current investments. Previously, we classified these securities as cash equivalents because of an interest rate reset feature that provides short-term liquidity. Accordingly, we have revised the classification to report these securities as current ~~year~~investments ~~presentation~~in the line item short-term marketable securities in the Consolidated Balance Sheets. Further, we have also made corresponding reclassifications in our Consolidated Statements of Cash Flows for the years ended October 31, 2004 and October 31, 2003 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect cash flows from operations or from financing activities in our previously reported Consolidated Statements of Cash Flows or our previously reported Consolidated Statements of Operations for any period.

~~Recent~~As ~~Accounting~~of ~~Pronouncements~~October 31, 2005 and 2004, $110.4 million and $132.2 million, respectively, of these current investments were classified as short-term marketable securities on our Consolidated Balance Sheets. For the year ended October 31, 2005, net cash provided by investing activities related to these current

In58 May 2003, the EITF reached a consensus on Issue No. 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.” EITF 03-5 affirms that the revenue recognition guidance in SOP 97-2 applies to non-software deliverables, such as computer hardware, in an arrangement if the software is essential to the functionality of the non-software deliverables. We adopted EITF 03-5 during the first quarter of fiscal 2004. Under this pronouncement we will apply SOP 97-2 to any hardware that is software-related and will recognize revenue accordingly. We do not currently have any non-software deliverables that meet the EITF 03-5 definition of “software-related;” therefore, to date, the adoption of this accounting principle has not had a significant impact on our financial position or results of operations.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition,” which supercedes Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Although SAB 104 incorporates guidance prescribed by EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Given this, the issuance of SAB 104 has not had a significant impact on our financial position or results of operations.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~developed~~investments ~~a basic three-step model to evaluate whether an investment~~ is ~~other-than-temporarily impaired~~$21.8 Inmillion ~~September~~in ~~2004,~~our ~~the~~Consolidated ~~FASB~~Statements ~~approved the issuance~~ of ~~FASB Staff~~Cash ~~Position~~Flows. ~~EITF~~For ~~03-1-1, which delays~~ the ~~effective~~years ~~date~~ended ~~until~~October 31, ~~additional~~2004 ~~guidance~~and is2003, ~~issued~~net ~~for~~cash ~~the~~used ~~application~~in ofinvesting ~~the~~activities related ~~recognition~~to ~~and~~these ~~measurement~~current ~~provisions of EITF 03-1 to~~ investments inwas ~~securities~~$43.2 ~~that~~million ~~are~~and ~~impaired~~$34.4 ~~The~~million, ~~adoption~~respectively, ofin ~~this accounting principle is not expected to have a significant impact on~~ our ~~financial~~Consolidated ~~position~~Statements ~~or results~~ of ~~operations~~Cash Flows.

During fiscal 2005, we began presenting revenue and cost of revenue separately for products and services because our annual service revenue exceeded 10% of our total revenue for the first time. We have made a corresponding reclassification in the Consolidated Statements of Operations for the years ended October 31, 2004 and October 31, 2003. Our accounting policy for product and service revenue and cost of revenue is described above.

Recent Accounting Pronouncements

In March 2004, the EITF reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The FSP addresses when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 with earlier application permitted. For ADIC, the effective date will be the second quarter of fiscal 2006. The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of operations.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs—an Amendment of ARB No. 43, Chapter 4.” This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage, requiring these items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and will become effective for ADIC beginning in fiscal 2006. The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment (Revised 2004).” This statement addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for the company’s equity instruments or liabilities that are based on the fair value of the company’s equity securities or may be settled by the issuance of these securities. SFAS 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such transactions be accounted for using a fair value method. The provisions of this statement are effective for financial statements issued for fiscal ~~periods~~years beginning after June 15, 2005 and will become effective for ADIC beginning ~~with the fourth~~in ~~quarter of our 2005~~ fiscal ~~year~~2006. We ~~have not yet determined which transition method we~~ will ~~use to~~ adopt SFAS 123R. ~~Assuming~~using the modified prospective method with no restatement isand ~~used, we~~ will record stock compensation expense of approximately $67.5 8 million between the ~~fourth~~first quarter of fiscal ~~2005~~2006 through fiscal ~~2008~~2009 for stock awards outstanding as of October 31, ~~2004~~2005. ~~The~~Any ~~full~~additional impact ~~that the adoption of this statement will have on our financial position and results of operations will be~~ ~~determined by share-based payments granted in future periods.~~

~~2. Restatement~~59 ~~of Previously Issued Financial Statements~~

Our financial statements for the years ended October 31, 2003, 2002 and 2001 have been restated to correct our accounting for our investment in a private technology venture limited partnership. During fiscal 2004, we determined that our investment in Frazier Technology Venture Fund I (FTVI), a limited partnership, has been improperly accounted for since fiscal 2000. We initially accounted for our investment under the cost method since our ownership interest in FTVI is less than 20% and we do not have significant influence over the partnership’s operating and financial policies. Subsequently it was determined that the equity method is appropriate under EITF Topic D-46, “Accounting for Limited Partnership Investments,” because our limited partnership ownership interest is greater than 5%. In addition, we reclassified $5,335,000 from current deferred income taxes to noncurrent deferred income taxes unrelated to the FTVI adjustment.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The~~ that ~~following table summarizes~~ the ~~impact~~adoption of this ~~restatement~~statement will have on our financial ~~statements~~position ~~for~~and ~~the~~results ~~fiscal~~of ~~years ended~~operations ~~October,~~will ~~31,~~be ~~2003,~~determined ~~2002~~by share-based payments granted in future periods and ~~2001:~~the assumptions on which the value of those share-based payments is based.

	As Reported			As Restated
	(In thousands)
At October 31, 2001:
Deferred income taxes, noncurrent	$	7,766		$	8,039
Investments		9,953			9,172
Retained earnings		106,599			106,091
At October 31, 2002:
Deferred income taxes, noncurrent		3,347			3,620
Investments		10,928			10,147
Retained earnings		108,159			107,651
At October 31, 2003:
Deferred income taxes, current		13,638			8,303
Deferred income tax asset (liability), noncurrent		(2,507	)		3,101
Investments		3,728			2,947
Retained earnings		120,650			120,142

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets – an Amendment of APB Opinion No. 29.” This statement amends APB 29 to eliminate an exception to the fair value measurement principle for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and were effective for ADIC beginning in the fourth quarter of fiscal 2005. The adoption of this accounting principle did not have a significant impact on our financial position or results of operations.

3In May 2005, the FASB issued Statement of Financial Accounting Standards No. ~~Business~~ 154, “Accounting Changes and Error Corrections.” This statement replaces APB 20 cumulative effect accounting with retroactive restatement of comparative financial ~~Combinations~~statements. It applies to all voluntary changes in accounting principle and defines “retrospective application” to differentiate it from restatements due to incorrect accounting. The provisions of this statement are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and will become effective for ADIC in fiscal 2007. The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of operations.

In ~~March~~June ~~2002~~2005, wethe ~~paid~~FASB issued ~~$1.8~~final ~~million~~FASB inStaff ~~cash~~Position toFAS ~~acquire the~~No. 143-1, ~~intellectual~~“Accounting ~~property~~for ~~and~~Electronic ~~assets~~Equipment ~~and~~Waste ~~hire~~Obligations.” ~~the~~The ~~engineering~~statement ~~and~~addresses ~~product~~obligations ~~management~~associated ~~personnel~~with ofthe ~~V-Stor~~European ~~LLC,~~Union’s aDirective ~~privately~~on ~~held~~Waste ~~company~~Electrical ~~based~~and inElectronic Equipment ~~California~~(the Directive). ~~V-Stor~~The ~~developed~~Directive ~~disk~~requires EU-~~based~~member ~~data~~countries ~~protection~~to ~~products~~adopt ~~for~~legislation ~~the~~to ~~open~~regulate ~~systems~~the ~~market.~~collection, ~~Our V-Stor-based~~treatment, ~~development~~recovery ~~effort~~and ~~includes~~environmentally ~~software~~sound ~~that~~disposal ~~allows~~of ~~disk-based~~electrical ~~storage~~and toelectronic ~~look~~waste ~~and~~equipment. ~~act~~It ~~like~~distinguishes ~~tape~~between products ~~systems~~put toon ~~traditional~~the ~~backup~~market ~~applications~~after inAugust 15, ~~order~~2005 to(new ~~allow~~waste) ~~disk~~and toproducts beput ~~utilized~~on ~~easily~~the inmarket ~~existing~~before ~~data~~that ~~protection~~date ~~systems~~(historical waste). The ~~V-Stor technology~~FSP ~~has~~addresses ~~been~~historical ~~integrated~~waste ~~into~~and ~~new~~directs ~~products,~~companies ~~including~~to ~~products~~apply ~~that~~the ~~combine~~provisions ~~disk~~of ~~and~~SFAS ~~tape~~143, “Accounting for Asset ~~backup~~Retirement Obligations,” to the obligation associated with historical waste. ~~This~~The ~~acquisition~~FSP ~~was~~is ~~accounted~~effective for asthe afirst ~~purchase~~reporting ~~business~~period ~~combination.~~ending Weafter ~~expensed~~June 8, ~~$1.5~~2005, ~~million~~or of the ~~total~~date ~~purchase~~of ~~consideration.~~adoption ~~These acquisition~~of ~~charges~~the ~~relate~~law toby ~~acquired~~the inapplicable EU-~~process~~member ~~research~~country, and became ~~development~~effective ~~and~~for ~~compensation~~ADIC toin ~~V-Stor~~the ~~personnel~~third quarter of fiscal 2005. ~~The~~This ~~acquired~~accounting ~~technology~~principle ~~had~~did not ~~reached~~have ~~technological~~a ~~feasibility~~significant ~~and~~impact ~~has~~on noour ~~alternative~~financial ~~future~~position ~~use~~or results of operations. ~~The~~New ~~valuation~~waste ofwill ~~the~~also ~~acquired in-process~~be ~~research~~accounted for under SFAS 143, and ~~development~~the ~~was~~accounting for ~~based~~new onwaste ~~our~~is ~~estimates~~not ~~and~~expected to have a ~~valuation~~significant byimpact aon ~~third-party~~our ~~appraiser~~financial position or results of operations.

4In September 2005, the EITF reached a consensus on Issue No. ~~Benchmark~~ 04-13, ~~Outsourcing~~“Accounting ~~Agreement~~for Purchases and Sales of Inventory with the Same Counterparty.” Under EITF 04-13, purchases and sales of inventory with the same counterparty should be considered a single nonmonetary transaction when transacted in contemplation of each other. Nonmonetary exchanges of inventory within the same line of business should be recognized at fair value when finished goods inventory is exchanged for the same or a different type of inventory within the same line of business. The EITF is effective for any transactions completed after March 15, 2006, or the second fiscal quarter of 2006 for ADIC. Adoption of EITF 04-13 is not expected to have a significant impact on our financial position or results of operations.

In November ~~2003~~2005, wethe ~~expanded~~FASB anissued ~~existing outsource manufacturing relationship with Benchmark Electronics, Inc. to include~~ final ~~assembly~~FASB ~~and~~Staff ~~test~~Position ofFAS ~~a significant portion of our entry-level and workgroup tape automation product line~~No. ~~In connection with this expansion~~ 123R-3, we“Transition ~~transferred~~Election Related to ~~Benchmark~~Accounting ~~approximately~~for ~~150 team members associated with manufacturing, test and supply chain management. Benchmark assumed~~ the ~~lease~~Tax onEffects ~~our Redmond, Washington manufacturing~~of ~~facility~~Share-Based ~~and~~Payment ~~purchased inventory associated with the product line and property, plant and equipment related to the operation for $15~~Awards.1” ~~million~~The inFSP ~~cash. Assets held for sale at October 31, 2003 related to this transaction and were comprised of the~~ ~~following:~~

	Amount
	(In thousands)
Inventories	$	8,454
Property, plant and equipment		4,052
Less: accrued liabilities		(122	)
	$	12,384

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The~~ provides ~~$15.1~~an ~~million~~alternative ~~purchase~~method ~~price~~of ~~exceeded~~calculating excess tax benefits (the ~~$12.4~~APIC ~~million~~pool) offrom ~~assets~~the ~~held~~method ~~for~~defined ~~sale~~in asFAS123R offor ~~October~~share-based ~~31,~~payments. ~~2003 primarily~~A ~~due~~one-time election to adopt the ~~fact~~transition ~~that~~method ~~certain~~in ~~inventory~~this ~~purchased~~FSP ~~during~~is ~~November~~available ~~2003~~to ~~was~~those ~~sold~~entities toadopting ~~Benchmark.~~FAS In123R ~~June~~using ~~2004,~~either wethe ~~further~~modified ~~expanded~~retrospective ~~our~~or ~~existing~~modified ~~outsource~~prospective ~~relationship~~method. Up to ~~incorporate~~one ~~screening~~year ~~and~~from ~~repair~~the initial adoption of ~~certain~~FAS ~~entry-level~~123R ~~and~~or ~~workgroup~~effective date of the FSP is ~~tape~~provided ~~automation~~to ~~products~~make this one-time election. InHowever, ~~connection~~until ~~with~~an ~~this~~entity ~~expansion~~makes its election, weit ~~transferred~~must tofollow ~~Benchmark~~the ~~certain~~guidance ~~team~~in ~~members~~FAS ~~from~~123R. ~~our~~FSP ~~customer~~123R-3 ~~service~~is effective upon initial adoption of FAS 123R and ~~repair~~will ~~operations~~become ineffective ~~Redmond~~for ADIC the first quarter of fiscal 2006. ~~Additionally,~~We ~~Benchmark~~are ~~purchased~~currently ~~certain~~evaluating ~~inventory~~the ~~and~~potential ~~property,~~impact ~~plant~~of ~~and equipment~~calculating ~~associated~~the APIC pool with ~~these~~this ~~operations~~alternative ~~for~~method ~~$1.6~~and ~~million~~have innot ~~cash.~~determined ~~There~~which ~~was~~method nowe ~~gain~~will oradopt, ~~loss~~nor ~~recorded~~the expected impact on ~~any~~our offinancial ~~these~~position ~~transactions.~~or results of operations.

52. ~~Investments~~Benchmark ~~in Marketable Securities and Other Investments~~ Outsourcing Agreement

WeIn ~~classify~~November ~~all~~2003, we expanded an existing outsource manufacturing relationship with Benchmark Electronics, Inc. to include final assembly and test of ~~our~~a ~~marketable~~significant ~~securities~~portion asof ~~available~~our entry-~~for-sale~~level ~~because~~and workgroup tape automation product line. In connection with this expansion, we ~~intend~~transferred to ~~maintain~~Benchmark approximately a150 ~~liquid~~team ~~portfolio~~members toassociated ~~take~~with ~~advantage~~manufacturing, test and supply chain management. Benchmark assumed the lease on our Redmond, Washington manufacturing facility and purchased inventory associated with the product line and property, plant and equipment related to the operation for $15.1 million in cash. In June 2004, we further expanded our existing outsource relationship to incorporate screening and repair of ~~investment~~certain ~~opportunities~~entry-level and workgroup tape automation products. ~~The~~In connection ~~cost~~with this expansion, ~~fair~~we ~~value~~transferred to Benchmark certain team members from our customer service and ~~unrealized~~repair ~~gains~~operations in Redmond. Additionally, Benchmark purchased certain inventory and ~~losses~~property, ofplant ~~marketable~~and ~~securities~~equipment ~~are~~associated ~~summarized~~with asthese operations ~~follows:~~for $1.6 million in cash. There was no gain or loss recorded on any of these transactions.

	Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(In thousands)
October 31, 2004:
Municipal obligations	$	6,049	$	—	$	(6	)	$	6,043
October 31, 2003:
U.S. government and agency obligations	$	4,007	$	44	$	—		$	4,051
Municipal obligations		13,332		13		—			13,345
Corporate obligations		3,214		15		—			3,229
Equity securities		161		2		—			163
	$	20,714	$	74	$	—		$	20,788

3. Investments in Marketable Securities and Other Investments

~~Consistent~~We ~~with~~classify all of our ~~investment policy,~~marketable ~~investment~~securities ~~maturities~~as doavailable-for-sale ~~not~~because ~~exceed~~we 24intend ~~months~~to atmaintain ~~the~~a ~~date~~liquid portfolio to take advantage of ~~purchase~~investment opportunities. The ~~All~~cost, ~~marketable~~fair ~~debt~~value ~~securities~~and ~~have~~unrealized ~~maturities~~gains and losses of ~~less~~marketable ~~than~~securities ~~one~~are ~~year~~summarized as offollows ~~October~~(in ~~31,~~thousands): ~~2004.~~

During fiscal 2004, 2003 and 2002, we sold certain current marketable securities and realized gains and losses as follows:


	Cost		Unrealized Gains		Unrealized Losses			Fair Value
October 31, 2005:
Auction rate securities	$	110,425		—		—		$	110,425
Equity securities		9,508		1,092		—			10,600

	$	119,933	$	1,092	$	—		$	121,025

October 31, 2004:
Auction rate securities	$	132,195	$	—	$	—		$	132,195
Municipal obligations		6,049		—		(6	)		6,043

	$	138,244	$	—	$	(6	)	$	138,238

	Realized Gains		Realized Losses			Net Gains
	(In thousands)
2004	$	52	$	(4	)	$	48
2003		1,738		(249	)		1,489
2002		3,675		(3	)		3,672

Auction rate securities are securities that are structured with short-term reset dates of generally less than 90 days but with maturities in excess of 90 days. At the end of the reset period, investors can sell or continue to hold the securities at par. We have the ability to quickly liquidate auction rate securities within the current operating cycle despite the long-term nature of their stated contractual maturities and therefore have classified them as short-term marketable securities. These securities are classified in the table below based on their legal stated maturity dates. Our securities with multiple

~~From~~61 time to time, we make other strategic investments that are accounted for under the cost method. We review these non-marketable investments on a regular basis to determine if there has been any impairment of value which is other than temporary by reviewing their financial information, gaining knowledge of any new financing or other business agreements and assessing their operating viability. In fiscal 2002, we wrote down our strategic investment portfolio by $750,000 to reflect such impairment and recorded this write-down as a component of our net gain on securities transactions. We did not record any write downs during fiscal 2004 or 2003. In November 2002, one of our strategic

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~investments~~maturities ~~was~~are ~~converted~~mutual tofunds ~~cash~~ and ~~marketable~~similar ~~equity securities with a combined value of $8,351,000, and we recorded a gain on securities transactions of $651,000~~instruments. ~~During~~ ~~the~~The ~~remainder~~maturities of ~~fiscal~~our ~~2003~~debt ~~and fiscal 2004, we received additional shares of marketable equity~~ securities ~~under~~as ~~earnout and escrow provisions~~ of ~~the November 2002 investment transaction noted above and recorded additional gains on securities transactions of $582~~October 31,~~000~~ ~~and~~2005 ~~$823,000,~~are ~~respectively,~~summarized ~~upon~~as ~~the~~follows ~~receipt~~(in ~~of these shares.~~ thousands):

We also hold strategic investments in private technology venture limited partnerships that are accounted for under the equity method. During fiscal 2004, we recorded a $799,000 loss on equity investment reflecting a reduction in the value of investments related to our $5,000,000 fiscal 2000 commitment to participate in a limited partnership. No gains or losses were recorded in fiscal 2003 or 2002.


1 to 10 years	$	4,550
Greater than 10 years to 20 years		25,325
Greater than 20 years to 30 years		47,050
Greater than 30 years		18,500
Multiple maturities		15,000

	$	110,425

AtDuring ~~October~~fiscal 312005, ~~2001~~2004 ~~we recorded a liability of $4~~and 2003,~~272,000~~ ~~for~~we ~~cash received~~sold ~~related to the sale of derivative financial instruments on~~ certain marketable ~~equity~~ securities ~~held~~and byrealized ~~us.~~gains Asand ~~the~~losses ~~derivatives matured during the first half of fiscal 2002, the recorded liability of $4,272,000 was recorded~~ as afollows ~~gain on securities transactions. In addition, we received $288,000~~ (in ~~cash~~thousands): ~~related to the sale of derivatives in fiscal 2002 and recognized that as a gain on securities transactions during the year.~~

6. Inventories


	Realized Gains		Realized Losses			Net Gains
2005	$	—	$	—		$	—
2004		52		(4	)		48
2003		1,738		(249	)		1,489

~~Inventories~~We also hold strategic investments in private technology venture limited partnerships that are ~~comprised~~accounted for under the equity method. During fiscal 2005 and 2004, we recorded losses of $59,000 and $799,000, respectively, reflecting our pro rata share of the ~~following:~~limited partnerships’ net losses. These loss amounts are primarily based on the general partners’ estimates of the fair value of non-marketable securities held by the partnerships and, to a lesser extent, realized gains and losses from the partnerships’ disposal of securities. No gains or losses were recorded in fiscal 2003.

	October 31, 2004			October 31, 2003
	(In thousands)
Finished goods	$	27,976		$	30,858
Work-in-process		173			622
Raw materials		23,870			18,275
		52,019			49,755
Allowance for inventory obsolescence		(13,291	)		(14,019	)
	$	38,728		$	35,736

From time to time, we make other strategic investments that are accounted for under the cost method. We review these non-marketable investments on a regular basis to determine if there has been any impairment of value which is other than temporary by reviewing their financial information, gaining knowledge of any new financing or other business agreements and assessing their operating viability. We did not record any write downs during fiscal 2005, 2004 or 2003. In November 2002, one of our strategic investments was converted to cash and marketable equity securities with a combined value of $8.4 million, and we recorded a gain on securities transactions of $651,000. During the remainder of fiscal 2003 and fiscal 2004, we received additional shares of marketable equity securities under earnout and escrow provisions of the November 2002 investment transaction noted above and recorded additional gains on securities transactions of $582,000 and $823,000, respectively, upon the receipt of these shares. There were no additional shares received nor any gains or losses on this investment during fiscal 2005.

~~7. Property,~~62 ~~Plant and Equipment~~

Property, plant and equipment consists of the following:

	October 31, 2004			October 31, 2003
	(In thousands)
Land and building	$	1,010		$	1,141
Machinery and equipment		31,071			31,593
Office equipment, including purchased software		38,307			33,146
Leasehold improvements		6,726			5,766
		77,114			71,646
Accumulated depreciation and amortization		(31,201	)		(26,141	)
	$	45,913		$	45,505

Depreciation and amortization expense was $14,929,000, $14,675,000 and $10,627,000 in fiscal 2004, 2003 and 2002, respectively.

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

84. ~~Service~~Inventories ~~Parts for Maintenance~~

~~Service~~Inventories ~~parts~~are ~~for~~comprised ~~maintenance consists~~ of the following (in thousands):

	October 31, 2004			October 31, 2003
	October 31, 2005			October 31, 2004
	(In thousands)
Finished goods	$	14,818		$	27,976
Service parts for maintenance	$	60,035		$	49,351
Work-in-process		74			173
Accumulated amortization		(30,042	)		(20,924	)
Raw materials		21,498			23,870
	$	29,993		$	28,427
		36,390			52,019
Allowance for inventory obsolescence		(10,172	)		(13,291	)
	$	26,218		$	38,728

~~Amortization expense was $8,930,000, $~~5. Property,~~721,000~~ ~~and~~Plant ~~$4,874,000 in fiscal 2004, 2003~~ and Equipment ~~2002, respectively.~~

~~9. Intangible~~Property, plant and ~~Other~~equipment ~~Assets~~consist of the following (in thousands):

Intangible and other assets consists of the following:


	October 31, 2005			October 31, 2004
Land and building	$	—		$	1,010
Machinery and equipment		36,775			31,071
Office equipment, including purchased software		43,979			38,307
Leasehold improvements		6,526			6,726

		87,280			77,114
Accumulated depreciation and amortization		(44,781	)		(31,201	)

	$	42,499		$	45,913

	October 31, 2004							October 31, 2003
	Gross Amount		AccumulatedAmortization			Net Amount		Gross Amount		AccumulatedAmortization			Net Amount
			(In thousands)							(In thousands)
Core technology	$	3,804	$	(2,762	)	$	1,042	$	3,804	$	(2,218	)	$	1,586
Licensed technology		1,000		(117	)		883		—		—			—
Non-compete agreements		—		—			—		50		(32	)		18
Other assets		85		—			85		98		—			98
	$	4,889	$	(2,879	)	$	2,010	$	3,952	$	(2,250	)	$	1,702

Depreciation and amortization expense was $15.2 million, $14.9 million and $14.7 million in fiscal 2005, 2004 and 2003, respectively.

~~Non-compete~~In ~~agreements~~May ~~became fully~~2005, ~~amortized~~we ~~during~~completed ~~fiscal~~a ~~2004.~~sale-leaseback Wetransaction ~~recorded~~for ~~intangible~~our ~~amortization~~facility ~~expense~~in ofBöehmenkirch, ~~$679~~Germany,~~000,~~ where we perform service operations for several products. We sold the facility for $~~618~~4.5 million,~~000~~ and the total gain on this asset held for sale was approximately $13.2 million,~~314,000~~ in$2.5 million of which was recorded during the current fiscal ~~2004,~~year ~~2003~~in ~~and~~gain ~~2002,~~on ~~respectively~~assets held for sale in the Consolidated Statements of Operations. ~~Total~~The ~~expected~~remaining ~~future~~gain ~~amortization~~has ~~related~~been todeferred ~~intangible~~and ~~assets~~will isbe ~~provided~~recognized over the term of our lease with the purchaser. Our lease ends in December 2007, though we have the option to extend the lease one year. The future minimum lease payments are ~~following~~included ~~table:~~in Note 17.

Year Ended October 31,	Amortization
	(In thousands)
2005	$	779
2006		733
2007		235
2008		178

6. Service Parts for Maintenance

~~10. Accrued~~Service parts for maintenance consist of the following (in ~~Liabilities~~thousands):

Accrued liabilities are comprised of the following:


	October 31, 2005			October 31, 2004
Service parts for maintenance	$	64,179		$	60,035
Accumulated amortization		(37,688	)		(30,042	)

	$	26,491		$	29,993

	October 31, 2004		October 31, 2003
	(In thousands)
Accrued payroll and related liabilities	$	7,071	$	12,157
Warranties		6,932		5,481
Taxes, other than income		586		920
Other		2,446		1,095
	$	17,035	$	19,653

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11Amortization expense, which is recorded in cost of revenue, was $10. ~~Credit~~7 ~~Agreements~~million, $8.9 million and ~~Long-term~~$5.7 ~~Debt~~million in fiscal 2005, 2004 and 2003, respectively.

7. Intangible and Other Assets

Intangible and other assets consist of the following (in thousands):


	October 31, 2005							October 31, 2004
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Core technology	$	3,804	$	(3,305	)	$	499	$	3,804	$	(2,762	)	$	1,042
Licensed technology		1,000		(353	)		647		1,000		(117	)		883
Other assets		72		—			72		85		—			85

	$	4,876	$	(3,658	)	$	1,218	$	4,889	$	(2,879	)	$	2,010

We recorded intangible amortization expense of $779,000, $679,000 and $618,000 in fiscal 2005, 2004 and 2003, respectively. Intangibles held at October 31, 2005 are expected to become fully amortized during fiscal 2008. Total expected future amortization related to intangible assets is provided in the following table (in thousands):


Year Ended October 31,	Amortization
2006	$	733
2007		235
2008		178

8. Accrued Liabilities

Accrued liabilities are comprised of the following (in thousands):


	October 31, 2005		October 31, 2004
Accrued payroll and related liabilities	$	7,960	$	7,071
Warranties		6,392		6,932
Taxes, other than income		2,149		586
Other		2,729		2,446

	$	19,230	$	17,035

9. Credit Agreements and Long-term Debt

Credit Agreements

We had borrowings under two operating lines provided by German banks that were repaid in full during fiscal 2003.

~~Long-term~~To ~~Debt~~improve the efficiencies of our European operations, during 2005 we outsourced our logistics to a third party in the Netherlands. In connection with this outsourcing arrangement, we provided a bank guarantee, with a restricted euro cash balance as collateral, to a third party agent in the Netherlands in March 2005. This third party agent has taken responsibility for fiscal representation of ADIC in the Netherlands. The agreement with the agent includes this bank guarantee since the agent has liability

~~Long-term~~64 debt at October 31, 2003 primarily represented a loan payable to a German bank, which was collateralized by the German manufacturing facility with a net book value of $3,247,000 at October 31, 2003. This loan was repaid in full during fiscal 2004.

12. Income Taxes

The provision (benefit) for income taxes consists of the following:

	Years Ended October 31,
	2004			2003			2002
	(In thousands)
Current income tax:
U.S. Federal	$	1,969		$	(4,190	)	$	(7,100	)
Foreign		996			1,457			(332	)
State and local		225			238			230
Total current		3,190			(2,495	)		(7,202	)
Deferred income tax:
U.S. Federal		(1,579	)		4,635			4,096
Foreign		(897	)		880			(7	)
State and local		(150	)		—			—
Tax contingency release		(2,706	)		—			—
Total deferred		(5,332	)		5,515			4,089
Total provision (benefit) for income taxes	$	(2,142	)	$	3,020		$	(3,113	)

The provision (benefit) for federal income tax differs from the amount computed by applying the applicable statutory income tax rate to income (loss) before provision (benefit) for income taxes for the following reasons:

	Years Ended October 31,
	2004			2003			2002
	(In thousands)
Federal income tax at statutory rate	$	1,958		$	5,429		$	(491	)
Impact of foreign operations		(6	)		115			53
Foreign tax credit		(802	)		—			—
Tax exempt interest income		(458	)		(261	)		(298	)
Research and development tax credits		(1,011	)		(1,961	)		(1,547	)
Activity of foreign subsidiaries		(112	)		(572	)		(1,169	)
State income taxes		(389	)		155			150
Change in valuation allowance		1,187			—			—
Tax contingency release		(2,706	)		—			—
Other		197			115			189
	$	(2,142	)	$	3,020		$	(3,113	)

ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The~~ for our international value-added tax ~~effect~~with ofthe ~~temporary~~Dutch ~~differences~~taxing ~~that~~authorities. ~~give~~The ~~rise~~bank toguarantee ~~significant~~may ~~portions~~be increased or decreased based on assessments of the ~~deferred~~Dutch ~~tax~~taxing authorities ~~assets~~to ~~at October~~the third party agent. The bank guarantee is an off balance sheet arrangement. As of October 31, ~~2004~~2005 ~~and~~the ~~2003~~restricted ~~are:~~cash balance for the bank guarantee was $197,000.

	October 31, 2004			October 31, 2003
				(Restated)
	(In thousands)
Deferred tax assets:
Allowance for inventory and spare parts	$	11,264		$	9,107
Team member compensated absences		342			301
Warranties		1,765			1,142
Allowances for bad debt and sales returns		1,276			1,255
Net operating loss and credit carryforwards		13,817			5,905
Lease termination accrual		176			353
Asset acquisition		338			365
Deferred revenue		1,900			—
Gain from partnership interest(1)		370			108
Unrealized investment losses		1,572			—
Foreign tax credit related to partnership interest		681			—
Other		173			—
Gross deferred tax assets		33,674			18,536
Deferred tax assets valuation allowance		(1,187	)		—
Net deferred tax assets		32,487			18,536
Deferred tax liabilities:
Plant and equipment		(7,452	)		(5,629	)

Filing Compare · ADVANCED DIGITAL INFORMATION CORP