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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-21103

Advanced Digital Information Corporation

Registrant’s telephone number, including area code:

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

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

Common Stock

     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 þ          No o

      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 III of this Form 10-K or any amendment to this Form 10-K.     o

      The aggregate market value of voting stock held by nonaffiliates of the registrant is $950,775,106 as of December 31, 2001, based on the closing sale price of such stock on the Nasdaq National Market on that date.

      There were 62,142,816 shares of common stock outstanding as of December 31, 2001.

      The Index to Exhibits appears on page 54.

      Part III is incorporated by reference from the proxy statement to be filed in connection with the 2002 Annual Meeting of Shareholders.

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PART I

Item 1.     Business

      This report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include, among others, those statements including the words “expect,” “anticipate,” “intend,” “believe” and similar expressions. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences include but are not limited to the risks discussed in the “Risk Factors” section. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Overview

      ADIC provides hardware and software-based data storage solutions to the open systems marketplace. We offer a broad range of products designed to enable organizations to effectively capture, protect, manage and archive the increasing amount of complex mission-critical data. We incorporate our proprietary hardware, software and connectivity products, as well as our service and support expertise, with third-party hardware and software products to deliver flexible, reliable and scalable storage solutions for large-scale data applications. Our storage solutions are market-driven, and we do not rely on any one technology or device to deliver them. We continue to increase our investments in developing innovative storage solutions that offer higher levels of added value by including significant intelligent management content and by offering technology enabling more effective operation in contemporary network environments. In order to broaden our access to complementary products, we make direct equity investments in and establish licensing and co-development arrangements with companies developing innovative technologies for the data storage market. Our sales channels include a global network of resellers developed over the last 15 years and original equipment manufacturers, or OEMs, including Dell Computer, Fujitsu Siemens Computers and IBM.

Industry Background

      In an increasingly information-based economy, information and databases are central to a company’s value, and managing the increase in data is one of the most important challenges that a company must address. The volume of mission-critical data generated, processed, stored and manipulated in the business environment has grown dramatically over the last decade. Studies conducted by the University of California at Berkeley’s School of Information Management in 2000 estimating the total amount of data stored on hard disks, which reflects the overall growth rate for electronic data, show that our information-based world economy is still sustaining compounded annual data growth rates of approximately 75%. See (www.sims.berkeley.edu/ research/ projects/ how-much-info). Several factors are driving the increased volume and value of data:

	•	Growth in Business Critical Data. Stored data is growing in size and complexity from the proliferation of different types of stored data, including graphics, video, text and audio, as well as the implementation of enterprise-wide databases containing both traditional and nontraditional business management information. Organizations in all industries, including technology, telecommunications, manufacturing, financial services, entertainment and broadcast, are increasingly dependent on their ability to collect, access, use and transfer these new types of stored data.
	•	Rise of Network Server Computing. Within organizations, there has been a fundamental shift from mainframe computers to networked, server-based computing. This development has shifted critical information from the mainframe to network servers, allowing more people to gain access to stored data as well as create new data, which in turn needs to be stored and backed up. The demand for storage is changing corporate networks as well, as IT departments perform an increasing percentage of data access and protection tasks on specialized networks optimized for data storage functions.
	•	Rise of the Internet and E-Commerce Based Businesses. The growth in the Internet as a means of commerce has created a class of companies whose businesses depend on the access, creation and archiving of stored data. In addition, the growth in the use of the Internet and the decreasing cost of

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		global communications has created wide access to vast amounts of data. The need for high-volume, high-speed access to large databases will continue to experience rapid growth as individuals and businesses increase their reliance on the Internet for transactions and data retrieval.

      These and other factors have intensified the demand placed on data centers. As a result, organizations face heightened requirements for large-scale data storage solutions that enable improved access to, and management of, shared data, including solutions that offer increased connectivity capabilities, greater capacity, higher performance, greater reliability and greater protection.

      Traditionally, one of the key applications driving accelerating demands for storage has been backup data protection focused on limiting the high costs associated with lost data that primarily stemmed from human error, viruses, equipment failure, data corruption and man-made and natural disasters. As a result, tape storage systems, which because of their relatively low cost and removable media offer an attractive solution for storing and protecting large quantities of data, historically had comprised a central piece of a business’s storage solution.

      With the rapid escalation of the volume and value of stored data, organizations are increasingly looking for storage system solutions that enable them to not only back up business-critical data, but also effectively capture, protect, manage and archive stored information across a variety of storage platforms and applications. Efficiently storing, managing and protecting this data is considered mission-critical. This data is frequently integral to the business, and in many companies, the data is a key strategic asset of the company. Corporate databases contain useful information about customer records, order patterns and other data that can be analyzed and transformed into a competitive advantage. The ability to turn this data into useful information enables a company to react and adapt more quickly to the market. As a result, companies require solutions that will provide increased accessibility to data without sacrificing performance requirements or introducing greater risk of data loss.

      In response to the limitations of traditional storage architectures, open standard technology protocols have emerged that are designed to provide high-speed connectivity for data-intensive applications across multiple operating systems, including UNIX and Windows. These methods of storage and data management technologies include the following:

	•	Fibre Channel and Emerging Transport Technologies. Fibre Channel is a data transport technology that allows users to connect multiple storage devices with very high bandwidth throughput over long distances up to two gigabits per second. Fibre Channel is the leading technology today to provide the bandwidth, reliability, scalability and transmission distances that allow companies to create Storage Area Networks, or SANs. In addition, emerging Internet Protocol (IP) transport systems in work today, such as iSCSI, are expected to become a major contributor to this market beginning late in 2002.
	•	Storage Area Networks. A SAN-based architecture applies the inherent benefits of a networked approach to data storage applications, allowing large blocks of data to move efficiently and reliably between multiple storage devices and servers without interrupting normal network traffic. The benefits of SAN architecture also include increasing the scalability of existing storage solutions and providing a higher level of connectivity than is achievable with traditional technologies. With file sharing software, SANs can also allow multiple hosts to share data, dramatically reducing the need to duplicate, move and manage multiple files in a wide variety of data-intensive applications.
	•	Network Attach Storage Appliances. Network Attach Storage, or NAS, appliances are highly specialized devices that usually include integrated disk storage, microprocessors and operating systems to allow users to add storage capacity easily to networks without having to disable or increase demands on network servers.
	•	Multiple Storage Formats. As data increases in volume, value and complexity, data centers are demanding multiple forms of storage media. New tape drive formats and disk system architectures are proliferating rapidly and multiple recording technologies, including optical disks, hard disk drives and

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		specialized tape technologies are important tools for a wide range of storage applications. Software and hardware products have been developed that allow users to optimize these multiple storage formats.

      With the increased volume of, dependence on and use of their stored data, organizations need efficient and reliable storage system solutions that offer real-time accessibility to shared data, higher performance and storage capabilities for mission-critical applications and greater functionality to manage and back up stored content. Furthermore, the limitations of existing enterprise computing and storage solutions are compounded by the use of multiple incompatible server operating systems, such as the proliferation of Windows and UNIX environments. As a result, organizations are being forced to dedicate substantial financial and personnel resources to manage and maintain the distributed storage capabilities of their networks. This heightened need for increased capacity and number of storage devices has created significant opportunities for total storage system solutions that include devices such as tape drives and other storage formats, tape libraries and storage management software, as well as storage services such as data backup, disaster recovery, near-line storage, archiving and media management.

ADIC Solution

      We provide hardware and software-based data storage solutions optimized for large-scale data sets and designed for the open systems marketplace, including storage area network environments. We offer a broad range of products designed to enable organizations to effectively capture, protect, manage and archive the increasing amount of complex mission-critical data. Our storage solutions are market-driven, and we do not rely on any one technology or device to deliver them. We, along with our value-added resellers, or VARs, OEM partners and customers, incorporate our proprietary hardware, software and connectivity products, as well as our service and support expertise, with third-party hardware and software products to deliver reliable, flexible and scalable storage solutions.

      In addition to our current products, we continue to increase our investment in research and development and to make strategic acquisitions that allow us to control the technology that will continue to produce innovative and effective storage products with high levels of differentiation and added value. In order to access complementary products, we also make direct equity investments in and establish licensing and co-development arrangements with companies developing innovative and effective storage technologies.

      We offer end users technical service and support on a multilingual, 24-hour-a-day, seven-day-a-week basis. Such technical support includes warranty, service contract, trouble shooting and integration services.

      We believe that our open-systems approach, focus on new technologies, multiple channel distribution model and customer service and support allow us to be well positioned and sufficiently agile to provide storage solutions to a rapidly growing and evolving data storage marketplace.

ADIC Strategy

      Our objective is to capture an increasing portion of the open systems storage solutions market. To achieve this objective we intend to:

      Provide a Broad Array of Device-Independent Storage Solutions. We believe that our independence from any one tape, disk or other storage format technology is a key advantage. We provide end users with effective storage solutions comprised of competitive data recording device technology, automation hardware, connectivity products, state-of-the-art software and technical service and support. Our strategy employs a device-independent and open systems approach that allows us or our OEM or VAR partners to provide storage solutions incorporating the optimal combination of our proprietary products and available third-party hardware and software products. Depending on the specific requirements of a particular application, such as cost, transfer rate or access time, our products may include a variety of tape formats, optical, disk or emerging technologies.

      Aggressively Develop Technology That Offers Higher Level Solutions. We believe that focused expenditures on differentiated technologies are critical to our success and are accelerating our expenditures on technology development in order to offer more complete storage solutions. We have built multiple generations

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      Capitalize on Worldwide Branded Reseller and OEM Channels. Over the past 15 years, we believe we have established a strong branded worldwide distribution channel. Long-standing relationships with national and international distributors, integrators and individual resellers provide an experienced broad-based channel that allows us to cost-effectively offer our branded products to multiple market segments. In recent years, we have increased our focus on OEM relationships, resulting in a significant increase in our OEM business. We have numerous OEM customers, including significant, multi-product relationships with Dell Computer, Fujitsu Siemens Computers and IBM. Through these OEM supply arrangements, we are able to benefit from our OEMs’ extensive direct and indirect distribution networks.

      Build and Expand Relationships with Strategic Partners. It is our strategy to capitalize on products, technologies and channels that may be available through partners. We believe that continued growth of the open systems storage solutions market will create opportunities beyond those we can meet alone. Our relationships take the form of supplier, customer, licensor, co-developer or equity partner. For example, we have signed a development agreement to integrate technology being created by Adaptec Corporation into ADIC hardware platforms to allow them to operate more effectively in storage networks that use the emerging Internet Protocol transport standards. We sometimes partner with key suppliers, including Quantum, Sony AIT and Benchmark Tape Systems to address developing markets. We intend to continue to seek out related markets that leverage our strengths and to continue partnerships with VERITAS Software, Computer Associates and Legato Systems. Our close ties with these and other software vendors can be critical in reseller sales situations where an effective solution requires pairing compatible hardware and software products.

Products

      ADIC products are used to store, protect, manage and access data in computer networks based on open systems standards. Our hardware and software solutions combine the elements of capacity, connectivity and management to meet specific market needs. The strength of our solutions is enhanced through our world wide professional services and customer support organizations and strategic partnerships. Our products are based on our own proprietary technology, and may incorporate third-party storage devices, hardware or software. We are continually creating new products by extending our expertise, by making new alliances, and by combining existing elements in new ways that help solve data storage problems for our customers. The ADIC product families fall broadly into three categories: automated storage library systems, storage networking appliances, and storage management software.

      ADIC’s automated tape libraries combine the storage capacity associated with digital tapes and drives, or other removable media, with network connectivity and integrated management services. An automated library, working in conjunction with separate storage management software, can perform sophisticated backup of a network’s data without human intervention, automatically copying specific network data to specific media at specific times.

      We integrate third-party storage devices, such as tape drives or other storage formats, into our automated libraries to provide capacity. While a large majority of our libraries currently use tape drives, we also offer libraries using optical and other storage technologies, and some of our libraries also allow for the incorporation of more than one type of tape or optical media, as well as mixed media capability. For libraries that utilize tape drives, tape cartridges or other removable media are housed within the library, typically organized in magazines. In some cases, these tape magazines are removable, easing storage and offsite transfer of the tapes.

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      Connectivity for the libraries, to enable them to transfer data using several different networking protocols, is provided by proprietary internal controller technology that we obtained through our acquisition of Pathlight Technology and which we continue to further develop internally. We believe we currently are the only provider of automated storage libraries that utilizes its own connectivity technology. Management of the library itself, and management of many of the library and data transmission functions within the network, is accomplished through software that we also develop. When operated in combination with third-party or our own storage management software, our libraries provide a complete solution for systematically and cost-effectively automating data storage backup and archiving in open systems network computing environments.

      Our storage library products vary by device technology, network connectivity, number of drives and number of cartridges, with suggested retail prices typically ranging from approximately $1,800 to $2.0 million. The following table summarizes our automated library products:

(1)	Capacity of our storage library products vary by type of drives, quantity of drives and unit configuration. Stated capacity assumes 2:1 compression. One terabyte is equivalent to 1,000 gigabytes.
(2)	Prices represent typical installations.

      Using technology acquired from our mid-2001 merger with Pathlight Technology, ADIC has recently begun to produce libraries specifically designed to provide advanced support for storage network environments. These storage networking libraries build in several features that help users obtain more effective data protection from this important network topology, including built-in support for multiple protocols and data path conditioning (path verification, error recovery, and performance optimization), as well as integrated security utilities and data moving agents.

      ADIC designs, markets, and sells a range of storage network connectivity and management appliances, which are used in a wide variety of storage networking applications to support multi-protocol installations, and to provide management of storage components located in the SAN. ADIC storage network appliances are used in conjunction with disk resources to allow Fibre Channel and SCSI elements to use the same storage and to provide an efficient way for users to reallocate storage resources rapidly. They are also used in conjunction with non-ADIC tape libraries or other storage formats such as disk to help them operate more efficiently in a storage network environment. Sales channels for ADIC storage networking appliances include resellers who carry ADIC’s larger tape libraries, independent resellers and integrators, and OEM partners, which have included IBM and Hitachi Data Systems.

      Advanced software is a key component of a sophisticated data storage system. The majority of our research and development efforts are directed to development of our embedded software, or firmware, and our other software products. As described above, firmware we develop is incorporated into our libraries to provide

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      A key objective of our strategy is to continue to develop a storage software business. Through our acquisition of EMASS, Inc. in 1998, we acquired proprietary software designed to intelligently organize and manage data in open systems environments. This was enhanced by the addition of CentraVision software from our acquisition of MountainGate Imaging Systems Corporation in 1999. In 2001, the acquisition of Pathlight Technology added additional storage management software and utilities specifically designed for use within storage network environments. Currently, sales of our non-embedded software represent a small percentage of our total revenue. However, we believe that software offers a number of opportunities for us to increase sales to existing and new customers and to create innovative storage products, and are devoting a significant portion of our research and development expenditures to further software development.

      Our software products include:

	•	AMASS®. AMASS storage management software is an integrated family of products for data-intensive computing environments and is usable with removable media products. It is presently available and installed in open system network environments worldwide. AMASS software makes data stored in libraries accessible with the look and feel of a hard disk and helps optimize system capacity. Under AMASS, all of the storage capacity in the library appears as a single, large hard disk drive on the server. Users manage files from the library the same way they currently do with hard drives.
	•	FileServ® and Data ManagerTM. FileServ and Data Manager are hierarchical storage management products. These products manage data migration from disk to tape or optical storage devices by allocating high-use data to disk and low-use data to tape, which provides efficient use of higher-cost disk drive space.
	•	CentraVisionTM. CentraVision software enables high-speed simultaneous use of a single file by UNIX, Linux and Windows systems in Fibre Channel SANs. The CentraVision file sharing system provides value by improving workflow efficiency, enabling collaborative workgroups and delivering high-performance file sharing in network environments. It is also a key enabling technology for delivery of streaming media content in digital broadcast applications and over the Internet, allowing many simultaneous streams of data to be delivered easily from a single file copy.
	•	StorNext® SAN. StorNext SAN is a new product developed by ADIC using several of our existing connectivity and management technologies and designed to complement ADIC automated libraries. StorNext SAN is an integrated, end-to-end management system specifically designed for large data sets in SANs. It reduces disk space requirements and boosts data processing performance by allowing multiple users to access the same files at the same time, and it increases system capacity by automatically migrating files between disk and tape based on access requirements. StorNext SAN supports Windows, Unix, and Linux workstations simultaneously, and it increases the security of network data and reduces IT overhead by providing long-term data protection utilities. The overall effect is more efficient resource utilization and workflow management, better security, lower costs, and higher performance.

      Our in-house software development team is actively engaged in developing and enhancing our proprietary software products that, when used with our hardware products or other vendors’ hardware products, provide an integrated storage solution. All of our software products are certified to operate in conjunction with our hardware products and may also be certified to operate with hardware products provided by competitors.

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      All our hardware products are designed for use on open systems computer networks in conjunction with storage management software provided by a third party or by us. Currently, over 50 different storage management software packages support our products, including software offerings from Computer Associates, EMC, Hewlett-Packard, IBM, Legato Systems, VERITAS Software, CommVault and SUN.

      We work closely with storage management software companies in a number of ways. We periodically engage in discussions with developers at these companies regarding the marketplace, end-user needs and potential solutions to these needs combining our products and the developer’s storage management software. We partner with storage management software companies to offer promotional product bundles, offering customers a special price on the combination of one of our products and a storage management software product. In addition, our field sales force strives to maintain relationships with counterparts from each of the storage management software companies and frequently participates in joint sales calls and seminars. We also maintain technical relationships with developers at these companies, in most cases providing our products for their use in developing software for our products. In addition, our systems engineering lab performs ongoing compatibility testing with a variety of storage management software products.

Sales and Marketing

      Our sales and marketing strategy is to deploy a comprehensive sales, marketing and support infrastructure to address our target markets both domestically and internationally. We rely on multiple distribution channels to reach end-user customers ranging in size from small businesses to government agencies and large multinational corporations. Our channels include VARs, distributors and OEMs. We support these channels with a sales force operating out of our headquarters in Redmond, Washington. Our offices in Paris, France and Munich, Germany, serve as our sales headquarters for Europe, the Middle East and Africa. In addition, we have over 30 regional field sales offices throughout North America, Europe and Asia. The majority of our products are sold under the ADIC brand name, but we also sell a significant amount of our products under the names of various OEM customers.

      We sell our products to large regional and national distributors, which in turn resell our products to national, regional or local VARs with expertise in integrating network solutions for end users. We support these VARs through our authorized reseller programs. In the case of larger, more complex sales situations, our field sales force may work in conjunction with a VAR to support the sales process. We currently have relationships with several major North American distributors, including GE IT Distribution, Ingram Micro and Tech Data. Because our distributor/ VAR sales channel is most effective in selling our smaller automated libraries and other lower-end products, we believe our OEM sales may adversely affect the volume of sales of some of our branded products.

      In addition to our standard VAR partners whose demands for our products are fulfilled through distributors, we have direct sales relationships with “Premier VARs” throughout North America and Europe. These Premier VARs are typically larger companies specializing in data storage and network solutions for client/ server networks. These VARs assume significant levels of responsibility for sales and support, although they still occasionally team with our own field sales force in certain large, complex sales situations.

      Similar to North America, we also have relationships with a number of large regional and national distributors internationally. 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. Because of the types of distribution channels we use, we are not able to accurately determine how much of our sales are derived from end-users located outside of the United States. Our reported international sales represented 51% of our net sales in fiscal 2001. The increase in international sales in fiscal 2001 is due to significant sales to an OEM customer for whom we maintain a revolver warehouse outside of the United States. While all shipments to this warehouse are reported as international sales, we

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      We sell our products to several companies under private label or OEM relationships. Private labelers and OEMs generally resell our products under their own brand name and typically assume responsibility for product sales, service and support. These relationships enable us to reach end users not served by our other reseller distribution channels and to serve select geographic or vertical markets where specific OEMs have exceptional strength. We maintain ongoing discussions with private labelers and OEMs, including leading systems suppliers, regarding opportunities for our products. Our existing OEM relationships include Dell Computer, Fujitsu Siemens Computers and IBM. Our shipments of automation products to IBM incorporating IBM’s StorageSmart Ultrium Linear Tape-Open drives began in late fiscal 2000. We are currently incorporating the Ultrium LTO drive into multiple products sold under the IBM and StorageSmart brand names. In addition, through Pathlight we provided connectivity appliances to IBM from 1999 to early 2001. Our relationship with Dell Computer, which began in 1999, expanded during 2001 to include multiple library product platforms and multiple technologies. For fiscal 2001, sales to Dell Computer represented 16% of our net sales and sales to IBM represented 24% of net sales, while sales to all OEMs represented 42% of our net sales.

      We maintain direct corporate sales relationships with a moderate number of large national and multinational companies in various industries, including technology, industrial, telecom, financial and service firms. We typically work with the company’s central information services organization to assess data storage backup and archival needs and then recommend a data storage solution. The successful culmination of this recommendation may be the creation of a corporate standard, including a selection of our products for the company’s ongoing storage needs. We also maintain direct sales relationships with a number of large government and private entities where the complexity or confidentiality of required storage solutions is such that the customer’s needs are best served by working directly with us. Even where we have established direct corporate or governmental sales relationships, product sales are frequently fulfilled through our VAR or distributor sales channels. In those relatively limited situations where we do sell direct to end users, we attempt to avoid conflict with existing reseller and OEM channels.

      We support our VAR, OEM and direct sales channels with a broad array of marketing programs designed to build our brand name, attract additional resellers and OEMs and generate end-user demand. Resellers are provided with a full range of marketing materials, including product specification literature and application notes. We advertise in key network systems publications and participate in national and regional tradeshows both domestically and internationally. Our field sales force conducts seminars targeting end users, often with a sales representative from one of the storage management software companies. We also conduct sales and technical training classes for our resellers. We periodically engage in various promotional activities for resellers and end users, including product-specific rebates, bundling our products with selected storage management software and certificates for free tape-drive cleaning cartridges.

      In late 2001 we introduced a new, expanded web site (www.adic.com). It provides a comprehensive collection of marketing information, including product specification sheets, product user manuals and application notes, and it provides a mechanism for easily communicating with our sales force, our resellers and our customers. The new site is designed to allow it to be linked to our corporate Oracle data base implementation, so it also provides a platform for increased levels of service that will be enabled as we combine more of our management information systems with our communications infrastructure.

      In addition to these activities, our marketing organization’s product management team is responsible for initiating development of new products and product line extensions. In order to create a product development

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End Users

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

Customer Service and Support

      We view customer service and support as strategically important elements of our business. Our customer service and support effort consists of five components:

	•	Technical Support. Our ADIC Technical Assistance Center, or ATAC, provides 24-hour-a-day, seven-day-a-week technical support for our products. Our multilingual staff is trained not only with respect to our products, but is also experienced with storage management and network operating system software. Our staff is located principally in Washington, Colorado and France, with phone calls being routed to the location with the most timely available expertise. Smaller library products with problems not resolved via telephone support may be returned to us for repair or replacement during the warranty period. We make a number of service alternatives available for a nominal fee, including in-house repair, loaner units and advanced exchange service.
	•	Sales and Systems Engineering. Sales and systems engineers provide both pre- and post-sales technical support to resellers and end users. Systems engineers typically become involved in more complex problem-solving situations involving interactions among our products, third-party storage management software, the network server hardware and the network operating system. System engineers work with resellers and end users both over the telephone and on-site. We view this capability as an opportunity for growth as it allows us to provide and support storage solutions with the highest level of complexity and value to the customer.
	•	On-Site Service. Our field service team and third-party service providers offer on-site service for our branded products in over 180 countries worldwide. A wide variety of programs are available, including an on-site service response time of four hours, seven days a week. Most of the mid-range and larger automated libraries that we sell include at least a one-year service warranty. As our installed base of products has grown, post-warranty service has become an increasingly important source of customer loyalty and revenue.
	•	Training. We offer a comprehensive training program to resellers and end users. Training classes are conducted at locations worldwide.

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	•	Warranty. Parts and labor for our standard products are covered under warranty for periods ranging from three months to three years. We pass on to the customer the warranty provided by the manufacturer of tape drives, other recording devices and media used in our products.

Manufacturing and Suppliers

      We have manufacturing facilities in Washington, Colorado and Germany, all of which operate under ISO 9001 certification. Several existing and potential OEM customers, including Dell Computer, have audited the Washington facility.

      We have continued to expand our facilities based on increasing market demand for our products. In late 2001, we nearly doubled the size of our Colorado facility when we took occupancy of a new 148,000 square foot building near Denver. This plant is responsible for building the Scalar® 1000 and Scalar® 10K tape libraries. During 2000, we more than doubled the size of our Washington facilities, which are responsible for building all mid-range to lower-capacity libraries, including our FastStor® and Scalar® 100 product lines, by adding an approximately 78,000 square foot building to provide increased manufacturing capacity, additional office space and expanded test and systems engineering labs. Our highest-capacity large libraries are built in our Germany facility, and our storage network connectivity and management products are developed in an Ithaca, New York facility that we added this year as a result of our acquisition of Pathlight Technology. Our manufacturing strategy is to perform product assembly, integration and testing, leaving component and piece-part manufacturing to our supplier partners.

      In addition to our own manufacturing facilities, we also rely on third-party contract manufacturers to supply us with some of our management and connectivity appliances and smaller libraries. We also depend on third-party manufacturers to supply us with magnetic tape drives, optical disk drives or other storage devices that we incorporate into our products. We do not have long-term commitments to any of our significant suppliers.

      We work closely with a group of regional, national and international suppliers to obtain parts and components meeting our specifications. Though our designs are proprietary, the various components, other than data storage recording devices, are available off the shelf or are manufactured using standard, readily available techniques, which limit supplier base risk and facilitate volume increases.

      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 the customer 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 that our backlog levels are indicative of future sales.

Research and Development

      Our research and development teams have developed multiple product generations of automated tape libraries, storage management software products, and SAN connectivity and management platforms. The large majority of our research and development expenditures are focused on software and firmware development. Our research and development efforts rely on the integration of multiple engineering disciplines to generate products that competitively meet market needs in a timely fashion. Successful development of data storage products requires the melding of firmware design, electronic design, software, electro-mechanical design and engineering packaging into integrated products that can be effectively used in an overall storage solution. Product success also relies on the engineering team’s thorough knowledge of each of the different tape, optical and other recording devices, as well as the ability to manage multiple communication protocols. Software products and our SAN management and connectivity platforms rely on a comprehensive understanding of multiple operating system environments, programming techniques, file management structures, storage networking and file sharing protocols, and user applications and needs.

      Our new product development is frequently stimulated by the availability of an enhanced tape or other storage capacity device or the emergence of new storage protocols. As device manufacturers compete in the

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      With these product development efforts, time and investment requirements tend to be significant, both in terms of engineering and tooling for manufacturing. However, we have found that, in many instances, we have been able to leverage our previous engineering investments into new products. For example, the firmware, or operating system, of the Scalar® library product is based on successive generations of the operating system developed for our first library. Our engineers also have been able to leverage electro-mechanical and electronic hardware designs from previous products into next-generation designs. In some cases, entire subassemblies are transferable, leveraging not only engineering time but also tooling investments, materials purchasing, inventory stocking, manufacturing and after-sale service. The Scalar® 100, introduced in late fiscal 1999, was designed to accommodate versions utilizing AIT, DLT and LTO storage devices by switching only four components. This type of design leveraging helps control inventory and cost while still offering our customers a very broad range of storage products. Our StorNext SAN family, a new product, uses file sharing technology from our CentraVision software, automatic file migration, disk caching, and library operation technology from our Data Manager and FileServe software products, and it stores data in ADIC automated tape libraries equipped with our own storage networking connectivity and management technology.

      Our research and development expenses were $27.8 million, $20.0 million and $15.3 million for fiscal 2001, 2000, and 1999, respectively. We intend to maintain the higher level of research and development spending we experienced in fiscal 2001 as we continue investing in software, management, and connectivity technology that can be leveraged into several different hardware and software products.

Competition

      The markets for data storage solutions in general, and automated tape libraries and storage management and connectivity technologies in particular, are intensely competitive, fragmented and characterized by rapidly changing technology and evolving standards. Competitors vary in size and in the scope and breadth of the products they offer. As we offer a broad range of automated storage libraries, software and complementary products, we tend to have a large number of competitors that differ depending on the particular product format and performance level. In the automated tape library market, we compete with a number of companies, most significantly IBM Corporation, Hewlett Packard, Storage Technology Corporation and ATL Products, a subsidiary of Quantum Corporation. Some of these competitors are also significant customers of ours, as well as suppliers of drive technologies. Those competitors who manufacture their own drives may be able to leverage their access to and pricing of drives to improve their competitive position. Since there are relatively low barriers to entry into the automated tape library market, we anticipate increased competition from other sources, ranging from emerging to established companies, including large system OEMs. Many of our competitors have substantially greater financial and other resources, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products than we do. Our competitors may develop new technologies and products that are more effective than our products. In addition, competitive products may be manufactured and marketed more successfully than our products. We believe the primary competitive factors in the market for data storage products are performance, reliability, breadth of product line, distribution strength, product availability and price, as well as customer service, including technical and sales support.

Intellectual Property

      We rely predominantly on our full product line, strong channel structure, and over a decade of library and software development experience to compete in our marketplace. However, our success also depends on our proprietary technology. We attempt to protect our technology through a combination of patents, copyrights,

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Team Members (Employees)

      As of October 31, 2001, we had 966 full-time team members, including 206 in sales and marketing, 173 in engineering and research and development, 167 in systems engineering, customer service and technical support, 325 in manufacturing and operations, and 95 in finance, general administration and management. 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 in large part on our ability to attract and retain key team members. Competition for highly skilled technical, sales and management personnel is intense. In the future we may not be successful in retaining our existing team members or in attracting additional qualified team members.

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.

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

	•	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;
	•	recognition of losses or gains from our strategic investments;
	•	the rate of growth in the data storage market;
	•	market acceptance of new and enhanced versions of our products;
	•	timing and levels of our operating expenses;
	•	gain or loss of significant customers or distributors;
	•	currency fluctuations; and
	•	personnel changes.

      Our Quarterly Revenue and Operating Results May Be Affected By Seasonal Trends and Are Inherently Uncertain. Our seasonal trends may result in lower 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

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      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 distributors and original equipment manufacturers, or OEMs, 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. In addition, 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 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, Declining Prices for Our Products and Reduced Profits. The markets for data storage solutions in general, and automated tape libraries and storage management software in particular, are intensely competitive, fragmented and characterized by rapidly changing technology and evolving standards. 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 range of open systems storage solutions, including automated tape libraries, software and storage peripherals, our competitors differ depending on the product format and performance level. Some 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.

      There is significant price competition in the markets in which we compete, especially in the market for our smaller automated libraries, and we believe that pricing pressures are likely to continue. Some competitors may reduce prices in order to preserve or gain market share. In addition, certain competitors are also manufacturers of tape drives and may be able to leverage their access to and pricing of drives to improve their competitive position. To successfully compete in this market, we must be able to manage our component and product design costs. This pricing pressure, and our potential inability to manage our component and product design costs, could result in significant price erosion, reduced gross profit margins and loss of market share, which could negatively affect our business, financial condition and operating results.

      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 Fibre Channel and iSCSI protocols and other new storage technologies and solutions. 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. Risks inherent in the development and introduction of new products include:

	•	delay in our initial shipments of new products;
	•	the difficulty in forecasting customer demand accurately;

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

      The Expected Benefits of Our Merger with Pathlight May Not be Realized. We completed our acquisition of Pathlight Technology, Inc. in May 2001. While the integration of the Pathlight business with ours is substantially complete, the potential benefits that we expect to achieve as a result of the merger with Pathlight may be more difficult to achieve than expected or may not be achievable at all. For example:

	•	our sales channels may not be able to sell or market Pathlight’s products as effectively as anticipated;
	•	we may not be able to integrate Pathlight’s technology with our library products as effectively as anticipated;
	•	anticipated cost reductions may not be available, or may be offset by unanticipated cost increases; and
	•	economies of scale may not be available — in particular, our purchasing power may not increase as a result of the merger.

      Failure of the Merger to Qualify as a Pooling-of-Interests Would Harm the Financial Results of the Combined Companies. The Pathlight merger has been accounted for as a pooling-of-interests for financial reporting purposes. The availability of pooling-of-interests accounting treatment for this merger depends upon circumstances and events occurring before and after the effective time of the merger. For example, there must not be any significant changes in the business of the combined companies, including significant dispositions of assets, for a period of two years following completion of the merger. If in the future it is determined that we must account for the merger as a purchase rather than as a pooling-of-interests, the future reported earnings of the combined companies could be harmed, which could impact the trading price of our common stock.

      The Pooling-of-Interests Method Will Adversely Affect Our Historical Comparisons/ Growth Rate, Which May Be Perceived Negatively by the Market. Following consummation of the Pathlight merger, balance sheets and other financial information of the separate companies are presented as though the companies had been combined at that date. Financial statements and financial information of the separate companies presented for prior years have also been restated on a combined basis to furnish comparative information. The market may perceive the change in historical data negatively due to the effect this will have on our historical comparisons and growth rates.

      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 digital linear tape, or DLT, and linear tape open, or LTO, and we expect to continue to derive a substantial amount of revenue from these products for the foreseeable future. As a result, our future operating results significantly depend on the continued availability and market acceptance of products employing tape drive technology. If products incorporating other technologies gain comparable or superior market acceptance, our business, financial condition and operating results would be adversely affected unless we successfully develop and market products incorporating the new technology.

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      We Depend on Certain Key Suppliers, Some of Which Are Also Our Competitors. We do not possess proprietary magnetic tape drive, optical disk, high-density disk or other storage capacity technologies and, consequently, we depend on a limited number of third-party manufacturers to supply us with the devices that we incorporate into our products. In many cases, specific versions of these tape drive products are available only from a single manufacturer. Some of these sole-source manufacturers market their own tape library products, and are thus also our competitors. In the past some manufacturers of successful drive technologies have been unable to meet demand for their products and have allocated quantities of drives among their customers. It is possible that in the future a drive or other device technology we incorporate into our products will be subject to allocation or that we will otherwise be unable to obtain it in the quantities we desire, which would adversely affect our ability to manufacture and sell products incorporating that drive or technology.

      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, adequate quantity and high quality. We do not have long-term contracts with any of our significant suppliers. If these suppliers were to decide to pursue the tape library market directly, they may cease supplying us with tape drives and media, in which case we may be unable to obtain adequate supplies of tape drives and media at acceptable prices, if at all. The partial or complete loss of any of our suppliers could result in significant lost revenue, added costs and production delays or may otherwise harm our business, financial condition, operating results and customer relationships.

      We Have a Concentrated Branded Customer Base, and Therefore the Loss of a Single Customer Could Negatively Affect Our Operating Results. The majority of our end users purchase our branded products from value-added resellers, or VARs. For the small and mid-range libraries, many of these VARs purchase our products from large distributors such as Ingram Micro, Tech Data and others. We have no long-term orders with any of our significant customers or distributors. Generally, we sell products pursuant to purchase orders. In addition, our distributors carry competing product lines that they may promote over our products. A distributor might not continue to purchase our products or market them effectively. Moreover, 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 large 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 if any of the following factors were to occur relating to one or more of our significant resellers:

	•	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 Increase Our Focus on OEM Sales and Could Be Adversely Affected if Our OEM Sales Efforts Are Not Successful. We rely on OEMs such as Dell Computer, Fujitsu Siemens Computers and IBM and are increasing our focus on sales to OEMs. Sales to Dell Computer and IBM represented 16% and 24% of sales in fiscal 2001, respectively. 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 purchasing competing products. We do not have purchase commitments from our OEMs and a reduction in the level of sales from this channel would 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.

      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

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      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 employees;
	•	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.

      We May Not Be Able to Sustain Our Current Growth or Effectively Manage Any Future Growth. We are experiencing rapid growth. This growth has resulted in, and may possibly create in the future, additional capacity requirements, new and increased responsibilities for management personnel, and added pressures on our operating and financial systems. Our facilities, personnel and operating and financial systems may not be sufficient to manage and sustain our current or future growth, and additional growth may detract from our ability to respond to new opportunities and challenges quickly. We may not be effective in adding capacity to our current facilities. We also continue to make additions and modifications to our ERP system. We may encounter unexpected difficulties while modifying our ERP system and our business could be harmed. Our ability to manage any future growth effectively will also depend on our ability to hire and retain qualified management, sales and technical personnel. If we are unable to manage growth effectively or hire and retain qualified personnel, 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 selling and administrative costs that are based on anticipated revenue growth could harm our operating results.

      Any Inability to Meet Our Future Capital Requirements Would Limit Our Ability to Grow. We may need, or could elect, to seek additional funding in the future. In the event we need to raise additional funds, we may not be able to do so on favorable terms, if at all. Further, if we issue equity securities, shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of our existing securities. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements.

      Risks Associated with International Operations May Adversely Affect Our Business. We have significant net sales to customers outside the United States and believe that international sales will continue to represent

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	•	the imposition of governmental controls;
	•	exposure to foreign exchange risk;
	•	the need to comply with a wide variety of foreign and U.S. export laws;
	•	political and economic instability in certain international markets;
	•	trade restrictions and protectionist laws and business practices that favor local competition;
	•	changes in tariffs and tax laws;
	•	longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable;
	•	potentially lower level of protection of our intellectual property than in the United States;
	•	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;
	•	potential severance exposure related to our employee agreements with our European employees; and
	•	dependence on local vendors.

      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. 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, we recently settled litigation that Crossroads Systems, Inc. had filed against Pathlight, our wholly owned subsidiary, relating to infringement of Crossroads’ patent by certain products sold by Pathlight. In addition, in 2000 we entered into a settlement agreement with the Lemelson Medical, Education and Research Foundation, Limited Partnership regarding violation of their ownership and right to grant licenses under certain patents. While the settlement agreement with Lemelson involved only a negligible amount of money and we are not a significant user of the products and processes on which Lemelson claims ownership, we may face liability if their claims to these patents are upheld and we use these products and processes in the future in ways that are not currently anticipated.

      An adverse outcome in any intellectual property litigation could subject us to significant liabilities to third parties, require us to license technology from 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

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      We May Face Currency Risks Associated with Fluctuating Foreign Currency Valuations. Currently, almost one-half of our 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.

      We May Encounter Unexpected Difficulties Relating to the European Economic Community’s Adoption of the Euro. On January 1, 1999, certain member states of the European Economic Community fixed their respective currencies to a new currency, commonly known as the Euro. During the three years beginning January 1, 1999, business in these countries was conducted both in the existing national currency, such as the French franc or the German mark, as well as the Euro. Beginning January 1, 2002, all transactions must be recorded in Euros. We have very recently upgraded our financial and other software systems so that they are capable of processing Euro transactions, and so that the financial statements of our European subsidiaries are recorded in Euros. We do not currently expect the transition to Euro-based accounting systems or the use of the Euro for transactions to materially affect our business; however, if we encounter unexpected difficulties, our business could be harmed.

      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, except for change of control agreements with our executive officers. 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. Competition for such personnel is intense in the high-technology industry, particularly in the Seattle and Denver areas. 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. Regardless of the merits 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 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 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.

      Our Increased Research and Development Spending May Not Yield Results That Justify the Costs Incurred. We have substantially increased our research and development spending over that of prior periods. Our products and markets are technologically advanced and rapidly evolving, and we cannot be assured that these efforts will successfully provide us with new or upgraded products that will be competitive. If these

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      Undetected Software or Hardware Errors Could Increase Our Costs and Reduce Our Revenue. We may not be able to adequately control and eliminate 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. In addition, our products are combined with products from other vendors. As a result, when problems occur, it is difficult to identify the source of the problem. 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 Have Antitakeover 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 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 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 incorporation, bylaws and shareholder rights plan, as well as Washington law, and the ability of our board to issue 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.

      Our Stock Price May Be Extremely Volatile. The market price of our common stock has experienced fluctuations since it commenced trading in October 1996 and is likely to fluctuate significantly in the future. Our stock price can fluctuate for a number of reasons, including:

	•	announcements about us or our competitors;
	•	quarterly variations in operating results;
	•	the introduction of new technology or products or changes in product pricing policies by us or our competitors;
	•	comments regarding us and the data storage market made on Internet bulletin boards; and
	•	changes in earnings estimates by analysts or changes in accounting policies.

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Item 2.     Properties

      We lease two facilities in Redmond, Washington of approximately 65,000 and 78,000 square feet to house our corporate headquarters and our primary marketing, sales, customer support, research and development and systems engineering organizations. The larger of these facilities is used for manufacturing our smaller libraries. 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 customer support. We recently vacated the other, 86,000 square foot Englewood facility, and are seeking to sublease this space. We also own a manufacturing facility in Germany where we produce some of our large libraries. As a result of our acquisition of Pathlight Technology, we added a facility in Ithaca, New York where our storage network connectivity and management products are developed. We lease additional facilities throughout the United States, Asia and Europe for our regional sales offices and customer service and support personnel.

Item 3.     Legal Proceedings

      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. However, legal claims are inherently uncertain, and 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 2001.

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PART II

Item 5.     Market for Our Common Stock and Related Shareholder Matters

Common Stock

      Our common stock is traded on the Nasdaq National Market under the symbol “ADIC.” As of December 31, 2001, there were approximately 500 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. The prices included in the table have been adjusted to reflect the two-for-one split of our outstanding stock that was effected on March 14, 2000.

      We have not paid any cash dividends on our common stock during the past two fiscal years, and it is not anticipated that cash dividends will be paid on shares of our common stock in the foreseeable future.

Changes in Securities

      In connection with ADIC’s acquisition of Pathlight Technology on May 11, 2001, ADIC assumed all outstanding warrants to purchase shares of common stock of Pathlight. Accordingly, after applying the applicable conversion ratio to the outstanding Pathlight warrants, ADIC assumed warrants providing for the issuance of an aggregate of 308,291 shares of ADIC common stock at prices ranging from $1.235 to $7.401 per share (the “Assumed Warrants”). All of the Assumed Warrants contained provisions permitting net exercise.

      The shares of common stock issuable by ADIC upon exercise of the Assumed Warrants have not been registered under the Securities Act of 1933, as amended, and have been issued upon exercise of Assumed Warrants in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, on the basis that the Assumed Warrants were issued to, and are held by, a limited number of accredited investors. The following table sets forth information with respect to unregistered shares of ADIC common stock that were issued upon exercise of Assumed Warrants during the three months ended October 31, 2001:

(1)	Assumed Warrants were exercised using the net exercise provision. Shares were withheld in payment of the aggregate exercise price. The amount shown in the consideration paid column is based on the fair value of ADIC Common Stock on the date of exercise. For BSB Bank & Trust, an Assumed Warrant for

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	6,485 shares was exercised with 3,847 shares withheld, and with respect to David Call, an Assumed Warrant for 633 shares was exercised with 115 shares withheld.

Item 6.     Selected Consolidated Financial Data

      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, 2001. The information below has been restated to retroactively include Pathlight Technology, Inc., which was acquired May 11, 2001 in a business combination accounted for as a pooling-of-interests. Periods prior to January 1998 have not been restated to reflect the inclusion of Pathlight. Exclusion of Pathlight in prior periods does not materially effect our financial position or results of operations. 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.”

(1)	Earnings per share data have been restated to reflect two two-for-one splits of our common stock effected on August 12, 1999 and March 14, 2000.

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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 “Selected Consolidated Financial Data” 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 “Risk Factors,” as well as those discussed elsewhere herein. 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

      We provide hardware and software-based data storage solutions to the open systems marketplace. Our storage solutions integrate into a wide range of rapidly evolving network computing environments and are designed to enable organizations to organize, protect and retrieve complex mission-critical data. We design, manufacture, sell and support specialized data storage hardware and software products and provide related services. Currently, we derive substantially all of our revenue from the sale of storage libraries, connectivity and management products and related service and support. We distribute our products primarily through value-added resellers (VARs), distributors and original equipment manufacturers (OEMs), and also sell directly to large end users.

      Our general trends include significant growth in our OEM business and continued strong growth in our Scalar® product family. Our gross profit margin decreased in fiscal 2001 due to the growth in our OEM sales, which generally have lower gross margins, along with a one-time inventory charge related to the acquisition of Pathlight in May 2001. Gross profit margins depend on a number of factors, including customer and product mix, price competition and tape drive costs. We anticipate improvement in gross margin in fiscal 2002 as our multi-product OEM relationships continue to mature, our sales mix shifts to higher margin products and our branded products incorporate more software and other value added features.

      In August 1998, we acquired EMASS, Inc. for $25.0 million in cash and the assumption of $2.0 million in indebtedness. The transaction was accounted for as a purchase business combination. In connection with this acquisition we expensed $4.5 million of acquired in-process research and development. EMASS established our presence in Denver and expanded our operations in Europe. Through this acquisition we obtained certain additional product offerings, including large-scale libraries and proprietary software products designed to operate in conjunction with our hardware products and the hardware products of our competitors. Additionally, we gained a field service organization which now serves our combined business.

      In September 1999, we acquired MountainGate Imaging Systems Corporation. The transaction was accounted for as a purchase business combination. In connection with this acquisition, we issued an aggregate of 220,000 shares of common stock, paid $200,000 cash and assumed approximately $2.0 million of MountainGate’s debt. Through this acquisition we obtained CentraVision, a Storage Area Network (SAN) software technology. We expensed $2.1 million of acquired in-process research and development associated with CentraVision software.

      In May 2001, we acquired Pathlight Technology, Inc. We exchanged 10.3 million shares of ADIC common stock for all of the outstanding stock, warrants and stock options of Pathlight in the merger, which was accounted for as a pooling-of-interests. The consideration of 10.3 million shares was reduced by approximately 500,000 shares returned in connection with the settlement of certain litigation. Pathlight supplies products consisting of proprietary hardware and software that allow users to deploy advanced enterprise data storage systems called Storage Area Networks or SANs. SANs are used to solve the growing problem of providing organizations with efficient enterprise-wide access to electronic information.

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      Foreign currency gains or losses arise as a result of our operation of European subsidiaries, the functional currencies of which are the French franc, German mark and British pound sterling. All monetary assets are translated into the functional currencies on the financial statements of these subsidiaries. Some U.S. dollar receivables and payables in these subsidiaries offset each other to reduce our exposure to transaction gains and losses. To the extent that these monetary assets and liabilities do not fully offset each other and the U.S. dollar exchange rate changes with respect to these currencies, transaction gains or losses may result. For large sales denominated in other currencies, we attempt to implement appropriate hedging strategies.

Fiscal Year 2001 Compared to 2000

      Net Sales. Our net sales of $364.7 million in fiscal 2001 grew by $74.4 million or 26% over net sales of $290.3 million in fiscal 2000. The increase is primarily due to strong sales growth of Faststor® and Scalar® products to OEM customers. Total revenue from branded products remained materially consistent with fiscal 2000, however, the mix of branded revenue shifted in 2001 towards our larger products. This shift is consistent with our strategy to move the branded product mix toward larger and more complex solutions and fulfill demand for our smaller products through our OEM partners. Revenue from OEMs was $154.3 million or 42% of total revenue for fiscal 2001 and $78.5 million or 27% of total revenue for fiscal 2000. Two OEM customers accounted for fiscal 2001 revenues of $85.8 million (24%) and $60.1 million (16%). In fiscal 2000, sales to a single OEM customer accounted for $47.6 million (16%).

      Net sales outside the United States accounted for 51% of our net sales in fiscal 2001 and 35% of our net sales in fiscal 2000. The increase in net sales outside the United States in fiscal 2001 is due to an OEM customer for whom we maintain a revolver warehouse outside the United States. We believe a majority of end user sales from that warehouse are to U.S. customers. As a result, both the growth in non-U.S. shipments in 2001 and the total of 51% for 2001 significantly overstate the company’s international customer base.

      Gross Profit. Gross profit was $101.7 million or 28% of net sales for fiscal 2001 compared to $106.6 million or 37% of net sales for fiscal 2000. Gross profit in fiscal 2001 was reduced by $4.1 million for charges associated with the Pathlight acquisition relating to write-offs of certain inventory deemed non-salable due to the merger and an accrual for a contractual liability to a third party. The rapid acceleration of OEM sales has had a negative effect on gross margin in fiscal 2001. In the long term we expect that the reduction in gross margin due to the increased OEM sales will be offset by lower sales and marketing costs. We believe that the product mix and production costs for our OEM business will improve as our newer, multi-product OEM relationships mature and as our business continues to shift to higher value-added products.

      Selling and Administrative Expenses. In fiscal 2001, selling and administrative expenses were $63.7 million or 17% of net sales compared to $54.6 million or 19% of net sales for fiscal 2000. Selling and administrative expenses have increased in absolute dollars as we continue to launch new products and pursue and penetrate new sales channels. The percentage decrease is due to the increase in OEM sales, which generally have lower related sales and marketing costs. We expect to increase selling and administrative spending levels in absolute dollars as we continue to expand our sales and service channels and improve our infrastructure.

      Research and Development Expenses. Research and development expenses increased 39% to $27.8 million in fiscal 2001 compared to $20.0 million in fiscal 2000. Research and development expenses were 8% and 7% of net sales for fiscal 2001 and 2000, respectively. The increase in both absolute dollars and percent is related to added headcount, additional spending related to new products and maintaining heavy investment in software and hardware product development. We believe that significant investments in research and development are required to remain competitive and to solidify our market position in intelligent storage solutions. Consequently, we expect to incur increased research and development expenses in future periods.

      Crossroads Settlement Costs. During fiscal 2001, we incurred $17.0 million in litigation settlement costs. The costs included payment to Crossroads for a settlement agreement related to litigation brought against Pathlight, associated legal fees and other settlement related costs. The litigation was pending against Pathlight prior to our merger. In connection with the settlement, approximately 500,000 shares of ADIC common stock that were part of the Pathlight purchase consideration were returned to ADIC and canceled.

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      Pathlight Acquisition Costs. In fiscal 2001, we incurred charges of $8.8 million for investment banker and financial advisory fees, other professional fees, team member costs which relate to termination of certain team members with redundant job functions and relocation costs, and other merger related expenses.

      Other Income (Expense). Other income (expense) was $819,000 for fiscal 2001, a decrease of $107.7 million from $108.5 million in fiscal 2000. Included in other income (expense) in fiscal 2001 is an $8.1 million charge for impairment of investments we hold in certain private technology companies. Fiscal 2001 includes interest income of $7.6 million compared to $10.9 million in fiscal 2000. The decrease in interest income is due to reduced cash balances during the year combined with lower returns on the cash balances. In fiscal 2000, other income included the gain on sales of a majority of our equity interest in Crossroads Systems, Inc. of $102.8 million, which was offset by a $5.5 million write down of our strategic investment portfolio. Interest expense in fiscal 2001 and 2000 primarily relates to interest on operating credit lines through a German bank along with a loan payable to a German bank.

      Provision (Benefit) For Income Taxes. We had a benefit for income taxes of $(3.9) million in fiscal 2001 compared to income tax expense of $44.6 million for fiscal 2000. The (27)% effective tax rate for fiscal 2001 includes taxes paid in various federal, state and international jurisdictions. We did not get the full tax rate benefit relating to our loss in fiscal 2001 because our effective income tax rate was negatively impacted by certain one-time, non-deductible expenses associated with the acquisition of Pathlight. During fiscal 2000, the valuation allowance associated with certain deferred tax assets was eliminated due to our belief that it was more likely than not that these deferred tax assets would be realized.

Fiscal Year 2000 Compared to 1999

      Net Sales. Net sales increased 28% during fiscal 2000 to $290.3 million from $227.4 million in fiscal 1999. Strong sales growth of FastStor® and Scalar® products in both branded and OEM business accounted for most of the growth. This was offset in part by reductions in sales of larger libraries and associated service revenues in Europe. The reduction in European sales resulted in part from the strength of the dollar compared to the European currencies. Revenue from branded products increased in fiscal 2000 to $211.8 million from $188.7 million in fiscal 1999. Revenue from OEMs was $78.5 million or 27% of total revenue for fiscal 2000 and $38.7 million or 17% of total revenue for fiscal 1999. Revenue from a single OEM was 16% of net sales in fiscal 2000. These OEM sales consisted primarily of the small library FastStor® products. Net sales outside the United States accounted for 35% of our net sales in fiscal 2000 and 40% of our net sales in fiscal 1999.

      Gross Profit. Gross profit was $106.6 million or 37% of net sales for fiscal 2000 compared to $78.9 million or 35% of net sales for fiscal 1999. The dollar and percentage increases were due primarily to a combination of product mix and overall volume increase in higher-margin tape libraries.

      Selling and Administrative Expenses. Selling and administrative expenses were $54.6 million or 19% of net sales for fiscal 2000 compared to $39.6 million or 17% of net sales for fiscal 1999. The dollar and percentage increases were due to a combination of increased sales and administrative personnel both in the headquarters office and in regional offices, and marketing costs associated with launching new products and penetrating into new sales channels.

      Acquired In-Process Technology. In connection with the acquisition of MountainGate in fiscal 1999, acquired in-process technology of $2.1 million was identified and valued by an independent third party appraisal and was expensed immediately. The value of acquired in-process technology was determined by estimating the stage of development of in-process research and development projects at the date of acquisition and estimating cash flows resulting from anticipated revenues generated from such projects, and then discounting the projected net cash flow. In fiscal 2000, we continued to incur significant engineering time and material costs to develop the acquired in-process technology into a commercially viable product. Development expenses incurred subsequent to September 17, 1999, the date of acquisition, were included in research and development expenses.

      Research and Development Expenses. Research and development expenses were $20.0 million or 7% of net sales for fiscal 2000 compared to $15.3 million or 7% of net sales for fiscal 1999. Approximately half of the

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      Other Income (Expense). Other income (expense) was $108.5 million for fiscal 2000 compared to $952,000 in fiscal 1999. Other income included the gain on sales of a majority of our equity interest in Crossroads Systems, Inc. of $102.8 million, which was offset by a $5.5 million write down of our strategic investment portfolio. Interest income, net of interest expense, for fiscal 2000 was $10.5 million compared to $400,000 for fiscal 1999. The increase in net interest income was the result of higher cash balances primarily due to the sale of Crossroads shares, as well as cash balances from the common stock offering completed in September 1999. Interest expense in fiscal 2000 related to interest on operating credit lines through a German bank. In fiscal 1999, we incurred interest associated primarily with a bank loan used to finance the acquisition of EMASS. All U.S. bank debt was paid off during fiscal 1999.

      Provision For Income Taxes. Income tax expense for fiscal 2000 was $44.6 million compared to $8.9 million for fiscal 1999. The 32% effective tax rate for fiscal 2000 included taxes paid in various federal, state and international jurisdictions. It also reflected the higher statutory federal rate of 35% associated with the higher taxable income level. During fiscal 2000, we eliminated the valuation allowance associated with certain deferred tax assets due to our belief that it was more likely than not that these deferred tax assets would be realized. Our effective income tax rate for fiscal 1999 of 39% was negatively impacted by certain one-time, non-deductible expense associated with the MountainGate acquisition.

Liquidity and Capital Resources

      Cash flows used in operating activities were $35.6 million for fiscal 2001 and $18.6 million for fiscal 2000. In fiscal 1999, cash provided by operations was $16.7 million. In fiscal 2001, operating cash was used for payment of nonrecurring charges related to the Crossroads settlement costs and the Pathlight acquisition costs of $17.0 million and $8.1 million, respectively. In fiscal 2000, taxes associated with the $97.3 million gain on sale of equity securities were paid via estimated tax payments during fiscal 2000 and are included as a component of cash flow used in operating activities. In each of the three years, operating cash was used to fund increases in accounts receivable, service parts for maintenance and inventories and was offset by depreciation and other allowances. The increase in inventory is primarily the result of the additional inventory requirements necessary to support our OEM customers, new ADIC branded product launches and sales growth. In addition, service parts for maintenance have increased in order to maintain our increasing installed base of solutions. In fiscal 1999 net income was reduced by noncash charges related to acquired in-process technology.

      Cash flows used in investing activities in fiscal 2001 were $4.8 million. During fiscal 2000 cash flows provided by investing activities were $49.9. Cash flows used in investing activities were $16.7 million for fiscal 1999. Proceeds of $15.8 million were received on sales of certain equity securities and related derivatives during fiscal 2001. Capital expenditures were $20.1 million during fiscal 2001 and were comprised primarily of manufacturing and engineering equipment along with purchases of computer hardware and software. Fiscal 2000 investing activities reflect $108.7 million of proceeds associated with the sale of equity securities, which were offset by purchases of investments in marketable equity securities of $26.8 million. In fiscal 2000, investments in property, plant and equipment included the cost of tenant improvements on our Redmond, Washington manufacturing and engineering facility and the costs of hardware and software associated with the North America implementation of a fully-integrated Enterprise Resource Planning information system. Fiscal 2001, 2000 and 1999 investing activities include purchases of other investments of $500,000, $12.0 million and $11.0 million, respectively.

      Cash flows provided by financing activities were $1.1 million for fiscal 2001, $6.6 million for fiscal 2000 and $129.5 million for fiscal 1999. Proceeds from the issuance of common stock under the Company’s employee stock purchase plan and the exercise of stock options were $3.6 million for fiscal 2001 which were offset by certain payments on bank lines of credit and long-term debt. In fiscal 2000 and 1999 proceeds from the issuance of common stock were $5.0 million and $138.0 million, respectively. The proceeds from the issuance of common stock in fiscal 2000 relate to the issuance of Pathlight common stock. At October 31, 2001, we had several fully utilized credit facilities with German banks totaling $4.9 million.

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      At October 31, 2001, our cash and cash equivalents totaled $155.3 million, down from $194.3 million at October 31, 2000. Our working capital, the difference between current assets and current liabilities, was $257.4 million at October 31, 2001 compared to $262.0 million at October 31, 2000. The ratio of current assets to current liabilities was 4.8 to 1 and 4.7 to 1 at October 31, 2001 and 2000, respectively.

      During fiscal 2001, we committed to new building leases in Englewood, Colorado and Ithaca, New York. We had no material or unusual commitments as of October 31, 2001, other than annual rental commitments.

      We believe that our existing cash and cash equivalents, available bank lines of credit, debt capacity 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. 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, we have made and expect to continue to make investments in companies with whom we have identified potential synergies.

Recent Accounting Pronouncements

      In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. SFAS No. 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, that goodwill be tested for impairment at least annually, and that the amortization period of intangible assets with finite lives no longer be limited to forty years. SFAS No. 142 is required to be adopted for the Company’s financial statements for the year ending October 31, 2003. The adoption of this statement is not currently anticipated to have a material impact on our financial position or results of operations.

      In August 2001, the FASB issued SFAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets.” The provisions of SFAS No. 143 apply to all entities that incur obligations associated with the retirement of tangible long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002 and will become effective for ADIC commencing with its 2003 fiscal year. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

      In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 provides guidance on accounting for the impairment or disposal of long-lived assets. The objectives of the statement are to address issues relating to the implementation of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and to develop a model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and will become effective for ADIC commencing with its 2003 fiscal year. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

Quantitative and Qualitative Disclosures about Market Risk Management

      We are exposed to various market risks, including changes in foreign currency rates and interest rates. We may enter into various derivative transactions to manage certain of these exposures.

      The assets and liabilities of our non-U.S. subsidiaries have functional currencies other than the U.S. dollar, and are translated in 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% depreciation in the U.S. dollar would result in an approximately $550,000 increase and a $590,000 decrease in income before provision for income taxes for fiscal 2001 and 2000, respectively.

      At October 31, 2001, we had variable rate debt of approximately $3.7 million provided by German banks, and fixed rate debt of $1.2 million, also provided by a German bank. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at October 31, 2001. We have entered into an interest

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Impact of European Monetary Conversion

      We are aware of the issues associated with the changes in Europe resulting from the formation of a European economic and monetary union. One change resulting from this union required European Monetary Union, or EMU, member states to irrevocably fix their respective currencies to a new currency, the Euro, as of January 1, 1999, at which date the Euro became a functional legal currency of these countries. During the next three years, business in the EMU member states was conducted in both the existing national currency, such as the French franc or the German mark, and the Euro. As a result, companies operating or conducting business in EMU member states need to ensure that their financial and other software systems are capable of processing transactions and properly handling these currencies, including the Euro. We committed to the worldwide implementation of a fully-integrated Enterprise Resource Planning information system. The system was implemented in Europe in December 2001 and provides us the capability to meet the requirements of the EMU. The majority of the costs of this system were incurred in connection with the North America installation. Additional costs for the system implementation in Europe approximated $600,000.

Item 8. Index to Consolidated Financial Statements

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Advanced Digital Information Corporation and its subsidiaries at October 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

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ADVANCED DIGITAL INFORMATION CORPORATION

See the accompanying notes to these consolidated financial statements.

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ADVANCED DIGITAL INFORMATION CORPORATION

See the accompanying notes to these consolidated financial statements.

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ADVANCED DIGITAL INFORMATION CORPORATION