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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

or

Commission file number 0-21103

Advanced Digital Information Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(425) 881-8004

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

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

Common Stock

Preferred Stock Purchase Rights

(Title of Class)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule  12b-2)    Yes  x    No  ¨

The aggregate market value of voting stock held by nonaffiliates of the registrant is $466,038,689 as of April 30, 2003, based on the closing sale price of such stock on the Nasdaq National Market on that date.

There were 63,757,183 shares of common stock outstanding as of December 31, 2003.

Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held on March 10, 2004.

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.

Company Overview

ADIC is a leading provider of intelligent storage solutions for the open systems marketplace. We design, market, sell and support hardware and software products that help a broad range of business and governmental organizations manage, access and protect their large-scale data more effectively. The data storage problem that enterprise IT departments face has passed the point where it can be solved efficiently by simply buying more commodity products, reducing the price of storage or adding raw capacity. Recognizing this fact, we apply innovative technology to provide management and automation leverage so that our customers can solve their data storage problems more easily and make more effective use of their digital assets and human resources.

Industry Background

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

The net effect is a rapid increase in the total amount of data to be stored and managed, an increase that far outpaces any change in fundamental business activity. The data storage requirements of virtually every company increase every year, whether or not the business is growing or profitable.

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

This situation makes it effectively impossible for many companies to continue to operate in the way that they have in the past, and it drives a rapidly increasing need for leveraged, higher value-add solutions aimed at the storage problem.

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

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

Strategy

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

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

We deliver our integrated data management and storage solutions through multiple sales channels, selected based on their ability to access end user customers and help us meet customer needs. We frequently sell our newest, most innovative products through our ADIC branded channels—and utilize OEM channels to get more established higher volume products to broader markets.

Products

Our principal products fall broadly into three categories: automated tape libraries, data management software and disk-based data protection solutions. These three product categories, and related service and support offerings, define the vast majority of our business.

Automated Tape Libraries

Our tape libraries are high capacity, innovative storage solutions that substantially increase the value associated with commodity tape drives by integrating them into a full system using a combination of automation technology, advanced connectivity and effective management tools. These library solutions are primarily used to back up networked data in open systems environments that deploy UNIX, Linux or Windows servers, and they integrate several tape drive technologies from different

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suppliers—today, the preferred choices are LTO, DLT/SDLT and AIT. In 2001 and 2002, Gartner Dataquest and IDC named ADIC the world’s largest supplier of products in this market segment, which is the largest in the tape automation industry.

Our automated tape libraries range in size from easy-to-use desk-top units suitable for a small office to room-sized storage networking solutions that can protect the largest data center. A typical entry-level unit contains one or two tape drives and up to 24 cartridges, whereas our large enterprise-class libraries can contain up to hundreds of drives and thousands of cartridges. All of our models designed for enterprise applications are characterized by a high level of intelligence and value-add. Our managed connectivity technology helps the libraries improve the performance, reliability and manageability of backup in SANs. We offer several different innovative scalability technologies that allow users to expand the capacity of their libraries at the same rate as their data grows. Our advanced design for reliability increases users’ level of data protection by building in component redundancy, automated failover and active monitoring and alerting functions.

Data Management Software

Our data management software provides automated, integrated management of data on different platforms, operating systems and storage media types for IT departments managing a broad range of enterprise-scale digital assets. Designed for open system computing environments, our software solutions help our customers get their products to market faster by providing shared, transparent access to data for a wide variety of high-performance applications. These end users include international leaders in science and engineering applications, workflow management and rich media distribution via the Internet and digital broadcast channels. Our data management software products provide a fully integrated management system for an organization’s digital assets throughout the life cycle of the data. ADIC software is developed to help IT departments get the maximum performance and utilization from their storage resource investment regardless of the storage environment or media types that they use. Our data management software is currently used in more than 1,000 organizations worldwide to manage some of the industry’s largest and most challenging data storage environments.

Disk-Based Data Protection Solutions

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

Recent Products

The following recent products show our innovative integration of several of our core technologies.

Scalar i2000 Automated Tape Library

The new Scalar^® i2000, with its iPlatform architecture, represents the next generation of enterprise tape library functionality and sets new industry standards. It uses ADIC connectivity, management, and I/O controller technology to integrate and simplify key backup management functions, offering built-in

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support for a broad range of data center requirements while reducing the need for external library control servers, software and management activities. Functions integrated within the library include native partitioning of a single library into multiple logical libraries, mixed media operation, native Fibre Channel connectivity, advanced performance monitoring, proactive system readiness checks, self-guided diagnostics and policy-based user alerts using standard email and pager networks. The iPlatform’s server-class embedded controller displays real-time backup performance data and gathers information to be used for future predictive analysis. The Scalar i2000 also incorporates a unique capacity-on-demand capability, allowing users to expand capacity from 100 to over 2200 cartridges and pay for added capacity only as they use it.

StorNext Management Suite

Designed for data-intensive SAN environments, the StorNext^® Management Suite (SNMS) reduces the time and total cost of managing data in SAN environments for a broad class of end users faced with the problem of large data sets and challenging distribution environments. SNMS provides a comprehensive storage solution by integrating two powerful components: StorNext File System (SNFS) and StorNext Storage Manager (SNSM). SNFS provides shared access to data across different operating systems and storage platforms, while SNSM provides automated movement of data between different storage media based user-defined policies. Together, they are designed to provide Total Data Life Management so that data—throughout its lifetime—is always accessible and protected based on levels of service defined by users. The result is a scalable, high-performance data management solution that is designed to optimize the use of SAN storage while ensuring the long-term safety and recoverability of data.

Pathlight VX Disk-to-Tape Backup Solution

Our new Pathlight VX, introduced in late 2003, is an integrated disk-to-tape solution that enhances backup and restore by giving it the performance and fault tolerance of disk—while retaining long-term retention capabilities. Pathlight VX is built around four of ADIC’s core technologies that work together to deliver a complete system. A virtualization software layer allows the disk to present itself to software applications as logical tape drives and media so it can fit easily into existing environments. ADIC’s I/O controller technology enables high performance data flow in and out of the system to boost the speed of backup and recovery operations and to allow Pathlight VX to support very large data sets. This data management software technology—based on technology from the StorNext Management Suite—gives Pathlight VX automated management of data across disk and tape and optimized streaming performance. Additionally, Pathlight VX integrates seamlessly with ADIC automated tape libraries to provide a single, fully-supported solution.

Sales and Marketing

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

ADIC Branded Sales Channels

For our ADIC branded products we utilize value-added resellers (VARs), direct marketing resellers and distributors, and we also sell directly to certain large entities and governmental agencies. We maintain a sales force operating out of our headquarters in Redmond, Washington, regional offices in

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Paris, London, and Munich, as well as numerous smaller field sales offices throughout North America, Europe and Asia.

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

In North America, consistent with industry trends, we sell a decreasing percentage of our products to large national distributors, which in turn resell our products to regional or local VARs and end users. Our primary North American distributors are Ingram Micro and Tech Data. This distribution channel currently services a small number of high volume resellers who are trending toward purchasing more products directly from us as a result of our expanding ability to configure products to order and drop ship to their end-user customers.

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

OEM Relationships

We sell our products to several companies under OEM relationships. OEMs generally resell our products under their own brand name and typically assume responsibility for product sales, end user service and support. These relationships enable us to reach end users not served by our direct sales force or our other distribution channels. They also allow us to sell into select geographic or vertical markets where specific OEMs have exceptional strength. We maintain ongoing discussions with numerous OEMs, including leading systems suppliers, regarding opportunities for our products. Our existing OEM relationships for hardware include Dell, Fujitsu-Siemens, HP, IBM and Sun Microsystems. Software OEMs include Cray and Grass Valley Group. For fiscal 2003, OEM sales represented 48% of our net sales. Total sales to Dell and IBM, which include OEM sales as well as sales of ADIC branded product to these customers, totaled 24% and 23%, respectively, of our net sales in fiscal 2003.

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

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

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End Users

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

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

Global Services

We view a comprehensive service strategy as an integral component of our total customer solution—and not as an independent profit center. We believe that service not only includes the standard activities needed to ensure successful selection, installation and on-going support of products, but also is directly concerned with innovative product design that can help minimize the need for conventional service.

Additionally, we see service as a significant purchase factor for customers considering data management and storage solutions, which is why our ability to add value to the overall customer experience through our support offerings is a significant competitive advantage. We also believe that our ability to retain long-term customer relationships and secure repeat business is frequently tied directly to our service performance. Our goal is to provide a seamless solution for the customer, so our sales and service teams partner closely, proposing appropriate hardware and software products and proper levels of training, service and support to best meet each customer’s needs. Furthermore, our support engineers typically have broad SAN expertise and take a solutions approach to solving customer issues. Understanding the complete environment, including the entire hardware and software installation, allows us to work cooperatively with other vendors and provide a more successful customer experience.

Service infrastructure and technology investment has been—and continues to be—a major priority, as we scale to meet our organizational growth and the needs of our expanding installed base. We are currently able to provide service in 180 countries, supported by 24-hour, multi-language technical support centers located in North America and Europe. We provide our customers with warranty coverage ranging from three months to three years on our products. For drives and tapes used in our products but manufactured by a third party, we provide our customers with a warranty that

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is substantially equivalent to the manufacturer’s warranty. Our customers may also purchase additional service to extend the warranty period, obtain faster response times, or both. We offer this additional support coverage at a variety of levels, up to 24-hour, seven-day-a-week, 365-day-a-year response for customers with stringent high-availability needs.

Information Technology and Infrastructure

We continue to focus on further improving our business systems and global information technology infrastructure. We have added capabilities to our worldwide Enterprise Resource Planning and Customer Relationship Management system including further automation and support for our business functions with reliable and innovative solutions. All of our key systems are integrated on a single platform that is designed to provide scalable processes, global efficiencies and comprehensive reporting. Recent initiatives include expansion of our global ERP/CRM system to field personnel and strategic business partners, enhancement of our corporate website, and implementation of the StorNext Management Suite in our corporate data center.

Manufacturing and Suppliers

We have manufacturing facilities in Colorado and Germany, which operate under ISO 9001 certification. Our Scalar 1000, Scalar i2000 and Scalar 10K tape libraries are manufactured at our Colorado facility. Our highest-capacity large libraries are built in our Germany facility. Our manufacturing strategy for these product lines is to perform product assembly, integration and testing, leaving component and piece-part manufacturing to our supplier partners. As a result of this manufacturing strategy, our compliance with environmental laws does not entail material capital expenditures.

In addition to our own manufacturing facilities, we also rely on third-party contract manufacturers to build our entry-level to mid-range libraries, including our FastStor^®, Scalar 24 and Scalar 100 product lines, as well as some of our management and connectivity appliances. In November 2003, we significantly expanded our manufacturing relationship with Benchmark Electronics, Inc, who now manufactures our FastStor 7 and Scalar 100 product lines. We believe our strategy to outsource the manufacture of our entry-level and mid-range products provides our customers the highest product quality at the lowest possible price and results in ongoing operational improvements. 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 purchase commitments with 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. In some cases, specific versions of these components and devices are customized and available only from a single source.

We carefully coordinate our inventory planning and management with our suppliers and customers to match our production to market demand. Product orders are confirmed and, in most cases, shipped to 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

Over the years, our research and development teams have developed multiple generations of ADIC’s storage management products and platforms, and it is our intention to continue innovating in existing product areas and to expand our efforts in new directions. The vast majority of our research and development expenditures are focused on product development rather than on basic research.

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Our efforts rely on the integration of multiple engineering disciplines to generate products that competitively meet market needs in a timely fashion. Our new product development is frequently stimulated by the availability of an enhanced or more cost-effective storage capacity device, the emergence of new storage protocols and evolving end-user requirements. We are constantly looking for alternative technologies that may be incorporated into our products or may disrupt the market. We identify and define new products based on their ability to meet a perceived market need in a rapidly evolving field. Our sales, marketing, product development, engineering, supply chain and global services organizations all contribute to the process of identifying and productizing advances in technology.

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

Our research and development expenses totaled $40.6 million, $32.2 million and $27.8 million for fiscal 2003, 2002 and 2001, respectively. Additionally, in connection with certain business combinations, we have recorded, and may in the future record, charges for acquired in-process research and development. These charges represent acquired technology that has not reached technological feasibility and has no alternative future use. We intend to modestly increase the level of research and development spending we experienced in fiscal 2003 in order to continue investing in technology that can be leveraged into new hardware and software products.

Competition

The markets for hardware and software data storage solutions are intensely competitive and are characterized by rapidly changing technology and evolving standards. Competition may be based on sales channels, analogous technology or products, or alternative means of meeting customer data storage requirements. We have a large number of competitors that differ depending on the basis of competition. On the basis of sales channels, we compete most significantly with HP, IBM, Sun Microsystems and Dell. In the market for analogous technology or products, we compete primarily with IBM, StorageTek, Overland Storage and Quantum. We also compete with Network Appliance and other storage hardware and software manufacturers that offer alternative means of meeting customer requirements.

Some of the companies we compete with are also significant customers of ours, as well as suppliers of tape drive technologies. Competitors who manufacture tape drives may be able to leverage their access to and pricing of tape drives to improve their competitive position. Since there are relatively low barriers to entry into the automated storage 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 capability in manufacturing, marketing and distributing products than we do. Competitors may develop new technologies and products that are more effective than our products. These products may also be manufactured and marketed more successfully than ours. However, we believe that the primary competitive factors in the market for data storage solutions are performance, reliability, breadth of product line, distribution strength, product availability and price, as well as customer service, including technical and sales support. In these areas, we believe that for a company of our size, scale and scope, our offerings are competitive and have contributed to our position (as named by Gartner Dataquest and IDC) as the leading supplier of automated tape systems that use LTO, DLT/SDLT and AIT drive technologies, which are the technologies most frequently used for open systems, client-server backup.

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Intellectual Property

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

In connection with our acquisition of EMASS, Inc. in August 1998 from Raytheon E-Systems, Inc., we were granted a worldwide, royalty-free license under three patents owned by Raytheon relating to mass data storage systems. Our license under these patents includes the right to make, have made, use, develop, have developed, sell, offer for sale, distribute, export and import mass data storage products. Although we do not have any general rights to sub-license or enforce the patents, or to control actions by Raytheon in licensing or enforcing the patents, we do have certain rights relating to licensing royalties earned by Raytheon, if any, relating to these patents. We are aware that Raytheon commenced a lawsuit against a number of companies in 2003 based on alleged infringement of one of these patents and that the litigation is ongoing.

Team Members

As of October 31, 2003, we had 1,245 full-time team members, including 256 in sales and marketing, 251 in engineering and research and development, 394 in global services (which includes professional services, service operations, systems engineering and technical support) 243 in manufacturing and operations and 101 in finance, general administration and management. Certain team members have been reclassified to global services for this fiscal year end that were included in manufacturing headcount in the prior fiscal year. In November 2003, we transferred approximately 150 team members associated with manufacturing and operations to an existing supplier in connection with the expansion of an outsourced manufacturing relationship with this supplier. 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.

Available Information

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

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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.

If Recent Improvements in General Economic Conditions Do Not Continue or are Not Sustained, our Sales Levels May Be Adversely Affected.    The adverse economic conditions in the United States and throughout the world economy adversely affected our sales levels in recent periods, in particular during fiscal year 2002 and early fiscal 2003. These economic conditions began improving over the course of fiscal 2003. If this strengthening of general economic conditions does not continue or if recent gains are not sustained, we may experience a material adverse impact on our revenues, operating results and financial condition. A prolonged continuation or worsening of adverse economic conditions may require us to re-evaluate our strategy of investing in research and development and sales and marketing, or to take other actions to reduce the cost of sales and operating expenses in future periods. Any such future actions could result in special charges or adversely affect our long-term competitive position. Further, we may be unable to reduce the cost of sales and operating expenses at a rate and level consistent with such future adverse sales environment, which would have an adverse effect on our results of operations and financial condition.

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

Operating results in any period should not be considered indicative of the results investors can expect for any future period. We cannot assure you that we will be able to sustain our recent levels of quarterly revenue or that we will maintain profitability in any future period. Any unfavorable change in the factors described above or any other factors could adversely affect our operating results for a particular quarter.

Our Quarterly Revenue and Operating Results May Be Affected By Seasonal Trends.    We may experience seasonal trends in our branded sales and OEM sales. Our seasonal trends frequently

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result in lower branded revenue in the first quarter of each fiscal year compared to the fourth quarter of the previous fiscal year due to customer purchasing and budgetary practices and our sales commission and budgetary structure. By contrast, OEM sales are often quite strong during the first quarter of our fiscal year, as several of our OEM partners complete their fiscal year during our first quarter, and then may decline in the second quarter of our fiscal year. These seasonal trends in branded and OEM sales have not been very predictable in recent years and their effect on overall revenue trends is often overshadowed by other factors, such as timing of new product introductions by us and our OEM partners and overall economic conditions.

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

Competition in the Open Systems Storage Solutions Market May Lead to Reduced Market Share and Adversely Affect Our Revenues.    The markets for data storage solutions in general, and automated tape libraries, disk-based data protection solutions 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.

Our Products, Especially Our Smaller Automated Libraries, Face Pricing Pressure That Could Result in Declining Prices and Reduced Profits.    There is significant price competition in the markets in which we compete, especially in the market for our 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 new communication protocols and other new storage technologies and solutions, as well as the introduction of products and technologies that provide similar functionality to existing products

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and technologies but at dramatically reduced cost points. The introduction of new products embodying new or alternative technology or the emergence of new industry standards could render our existing products obsolete or unmarketable. Our future success will depend in part on our ability to anticipate changes in technology, to gain access to such technology for incorporation into our products and to develop new and enhanced products on a timely and cost-effective basis. For example, our recently introduced Pathlight family of disk-based data protection solutions utilizes ATA disk technology, which itself has only recently become generally available. Risks inherent in the development and introduction of new products include:

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

Our Increased Research and Development Spending May Not Yield Results That Justify the Costs Incurred.    In recent fiscal years 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 programs are not successful, our increased investment in research and development will not yield corresponding benefits to us.

We Rely on Tape Technology for a Substantial Portion of Our Revenue.    We derive a significant majority of our revenue from products that incorporate some form of tape technology, including linear tape open, or LTO, and digital linear tape, or DLT, 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.

We Depend on Certain Key Suppliers For Storage Capacity Technologies, 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. Because they manufacture the tape drive as well as the tape library, they may enjoy higher margins or be better able than we are to compete on the basis of price. 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

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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. 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 Depend on Contract Manufacturers For Certain Products and Components.    We are increasing our reliance on third party contract manufacturers. We currently utilize contract manufacturers to manufacture a significant portion of our entry-level and workgroup tape automation library products and some of our management and connectivity products, as well as various components and sub-assemblies of virtually all of our products. Our contract manufacturers and component suppliers have in the past been, and may in the future be, unable to meet our supply needs, including our needs for timely delivery, high quality, and adequate quantity. As a result of our increased reliance on contract manufacturers, we may not be able to be as flexible as we have been in the past in responding to specific quantity, feature and other requests from our OEM partners and other customers. Further, some of our suppliers have experienced financial difficulties. If component shortages occur, or if we experience quality problems with contract manufacturers or component suppliers, shipments of products could be significantly delayed or costs significantly increased, and as a result, our revenues and operating results could be materially and adversely affected. In addition, we utilize only a single source for many components and sub-assemblies, which magnifies the risk of future shortages. Although our agreements with our contract manufacturers do not typically include minimum volume commitments or exclusivity provisions, as a practical matter it is frequently very disruptive and time consuming to change suppliers, and therefore our business, financial condition, operating results and customer relationships could be materially adversely affected if any of our significant suppliers failed to meet our supply requirements.

We Have a Concentrated Branded Customer Base, and Therefore the Loss of a Single Customer Could Negatively Affect Our Operating Results.    We sell the majority of our branded products to value-added resellers, or VARs, and to direct marketing resellers such as CDW Corporation, who in turn sell our products to end users. For the small and mid-range libraries, VARs may 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 resellers. Generally, we sell products pursuant to purchase orders. Our resellers carry competing product lines that they may promote over our products. A reseller might not continue to purchase our products or market them effectively. 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 enterprise-class libraries, and the revenue associated with the on-site service of those libraries, are somewhat concentrated in specific customers, including government agencies and government-related companies. Our operating results could be adversely affected if any of the following factors were to occur relating to one or more of our significant resellers:

We Expect to Continue Our Focus on OEM Sales and Could Be Adversely Affected if Our OEM Sales Efforts Are Not Successful.    We rely on OEMs such as Cray, Dell, Fujitsu-Siemens, HP, IBM and Sun Microsystems and are continuing to focus on sales to OEMs. Total sales to Dell and IBM,

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which include OEM sales as well as sale of ADIC branded product to these customers, were 24% and 23%, respectively, of our sales in fiscal 2003. 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 could significantly impact revenue. Further, OEM sales typically feature lower profit margins than we have obtained in the past through our other distribution channels. If any of the OEMs decide not to continue to purchase our products, our business, financial condition and operating results may be harmed.

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

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

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

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

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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 Effectively Manage Any Future Growth.    We have experienced rapid growth in the past and anticipate continued growth in the future. This growth has resulted in, and may possibly create in the future, additional capacity requirements, new and increased responsibilities for management personnel, the need to hire additional personnel, and added pressures on our operating and financial systems. Our facilities, personnel and operating and global information systems may not be sufficient to manage and sustain our future growth, and additional growth may detract from our ability to respond to new opportunities and challenges quickly. If we are unable to manage growth effectively, our business, financial condition and operating results could be materially negatively affected. In addition, to the extent expected revenue growth does not materialize, increases in our operating costs that are based on anticipated revenue growth could harm our financial results.

Risks Associated with International Operations May Adversely Affect Our Business.    We have significant sales to customers outside the United States and believe that international sales will continue to represent a large portion of our net sales. Our international operations and sales to customers outside the United States subject us to a number of risks, including:

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

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

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We May Face Liability Associated with the Use of Products and Processes on Which Patent Ownership or Other Intellectual Property Rights Are Claimed.    While ADIC is not currently directly involved in any intellectual property litigation or proceedings, we may become involved in intellectual property litigation or proceedings in the future. We are now, and we may in the future be, subject to claims or inquiries regarding our alleged unauthorized use of a third party’s intellectual property. For example, in 2001 we settled litigation that Crossroads Systems, Inc. had filed against Pathlight prior to our acquisition, relating to infringement of Crossroads’ patent by certain products sold by Pathlight. 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 terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could harm our business, financial condition and operating results.

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

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

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

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

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

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

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

Investments in Equity Securities May be Subject to Write-Downs in the Future.    From time to time we make strategic investments in non-marketable equity securities of venture-funded companies having operations or technology in areas within our strategic focus, or in venture capital funds that invest in such companies. These investments are accounted for on a cost basis, and are adjusted for other than temporary impairments. These investments are speculative in nature and can become valueless if the companies we invest in are not able to profitably achieve their business plans or if they are not able to obtain adequate funding to do so. Over the past three fiscal years we have incurred approximately $9 million of impairment losses on some of these investments. Additionally, we may in the future incur impairment losses on our current investments or investments that we may make in the future, which would have an adverse effect on our profitability and financial condition.

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,

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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 been volatile in the past, and it is likely to continue to fluctuate significantly in the future. Our stock price can fluctuate for a number of reasons, including:

Item 2.    Properties

We lease a facility in Redmond, Washington of approximately 65,000 square feet to house our corporate headquarters and our primary marketing, sales, research and development and global services organizations. Additionally, we lease two facilities located in Englewood, Colorado. The larger facility, of 148,000 square feet, is used for research and development, manufacturing operations and additional service operations. In early fiscal 2002, as a result of our move to the larger facility, we vacated the other 86,000 square foot Englewood facility. We also own a facility in Germany where we manufacture some of our large libraries and perform service operations. We lease facilities for research and development centers in Ithaca, New York; Santa Clara, California; Richardson, Texas; and Burnsville, Minnesota. 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

On December 22, 2003, three former team members filed a lawsuit against ADIC in U.S. District Court for the Western District of Washington (Williams et. al vs. Advanced Digital Information Corporation). The plaintiffs allege that ADIC failed to pay wages in accordance with the Fair Labor Standards Act and the Washington Minimum Wage Act, and they also allege retaliation related to these claims and breach of contract. We believe these claims are without merit and intend to vigorously defend this lawsuit. We do not expect this litigation or any other pending or threatened litigation of which we are aware to 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. Further, regardless of the merits of any of legal claims, we could incur substantial costs in defending ourselves against them.

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 2003.

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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, 2003, there were approximately 425 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.

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, Inc. 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. At October 31, 2003, 28,263 of the Assumed Warrants remained outstanding and exercisable.

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 year ended October 31, 2003:

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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, 2003. 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. 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.”

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,” “Critical Accounting Estimates” and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed

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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

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

Our general fiscal 2003 trends include record revenues during each quarter; increased sales of software and other higher margin enterprise-level products, which increased gross profit to 31% in fiscal 2003 from 27% in fiscal 2002; and the introduction of new intelligent storage solutions like the Scalar i2000 Tape Library. During the same period, we increased our investments in research and development and sales and marketing, which has resulted in growth in our connectivity and software product offerings along with increasing our market penetration. Our general and administrative expenses increased only 4% in fiscal 2003 even as we experienced much higher revenue growth.

We will continue to grow our product offerings with a focus on elements that both differentiate our products from competitors and meet increasing customer demands in a constantly evolving and competitive industry. Our ability to serve broader markets with enterprise-level products and software will be key to our future success. We believe continued investment in sales and marketing and research and development is required in order to successfully penetrate new markets and customers and expand our offerings. The competition in our industry is strong and we must constantly work to reduce the cost of our existing products while retaining high quality standards and reliability. Certain entry-level products have been outsourced to third party manufacturers to allow us to take advantage of our suppliers’ economies of scale for our higher volume, lower margin products.

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

In October 2003, we announced the signing of a letter of intent to expand an existing outsource manufacturing relationship with Benchmark Electronics, Inc. to include a significant portion of our entry-level and workgroup tape automation product line. In connection with this expansion, which was completed in November 2003, we transferred to Benchmark approximately 150 team members associated with manufacturing, test and supply chain management for the transferred operations. Benchmark assumed the lease on our Redmond, Washington manufacturing facility and purchased inventory associated with the product line and property, plant and equipment related to the operation. In November 2003, these assets were transferred to Benchmark for $15.2 million in cash. There was no gain or loss recorded on this transaction.

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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 euro and British pound sterling. All assets are recorded in the functional currencies on the financial statements of these subsidiaries. Some U.S. dollar-denominated 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 2003 Compared to 2002

Net Sales.    Net sales increased 26% during fiscal 2003 to $424.0 million from $337.6 million in fiscal 2002. The increase is due to higher sales to both OEM and branded customers. Annual growth rates of OEM and branded sales during fiscal 2003 were 35% and 18%, respectively. Revenue from OEM customers comprised 48% of sales in fiscal 2003 compared to 45% in fiscal 2002. ADIC branded revenues represented 52% of sales in fiscal 2003 compared to 55% in fiscal 2002. The growth in OEM sales is due to a combination of increasing penetration with existing products and the addition of new products. Branded sales have increased in all major geographical markets in fiscal 2003 compared to fiscal 2002. The majority of this growth came in sales of enterprise-level products and revenues from global services. Two customers accounted for fiscal 2003 revenues of $103.3 million (24%) and $96.1 million (23%). These same two customers accounted for fiscal 2002 revenues of $63.5 million (19%) and $86.2 million (26%).

Intelligent Storage Solutions^™ (ISS) products, which include elements of our software and connectivity technology and are sold through both branded and OEM sales channels, represented 37% of sales in fiscal 2003 compared to 30% of sales in fiscal 2002. We believe that an increasing proportion of ISS sales, whether sold on a branded or OEM basis, will generally result in the likelihood of increasing gross margins as a percentage of sales, although this expected correlation may be overshadowed in any particular period by the specific mix of ISS products or other factors.

Net sales outside the United States accounted for 35% of our net sales in fiscal 2003 and 41% of our net sales in fiscal 2002. In fiscal 2002, a portion of our net sales outside the United States was due to an OEM customer for whom we maintained a revolver warehouse outside the United States. During fiscal 2003, all of the sales to this OEM customer shifted to a revolver warehouse within the United States, which caused a decline in the reported percentage of non-U.S. sales. This decline was partially offset by an increase in sales to European and Asian customers.

Cost of Sales.    Cost of sales was $292.1 million or 69% of net sales for fiscal 2003 compared to $245.8 million or 73% of net sales for fiscal 2002. Gross profit margins depend on a number of factors, including customer and product mix, fixed infrastructure costs, price competition and tape drive costs. For fiscal 2003, gross profit was $131.9 million or 31% of net sales compared to $91.8 million or 27% of net sales for fiscal 2002, an increase of 44% on a net sales increase of 26%. The increase in gross profit in fiscal 2003 compared to fiscal 2002 is primarily a result of the absolute dollar increase in branded sales, including revenue from higher margin enterprise-level products and software. This increase was partially offset by the increase in the proportion of OEM sales, which typically carry a lower gross margin than branded sales. We believe gross margin will continue to improve as our product mix continues to become more heavily weighted toward higher margin products that include elements of our proprietary storage management software and connectivity technology and as we leverage our outsourced manufacturing relationships to achieve reductions in product costs.

Sales and Marketing Expenses.    Sales and marketing expenses were $57.8 million or 14% of net sales for fiscal 2003 compared to $48.3 million or 14% of net sales for fiscal 2002. The absolute dollar

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increase is due to continued efforts to expand our sales and services channels in order to enter new markets and new customers and to support new product offerings. During fiscal 2004, we expect sales and marketing expenses to increase both domestically and in our European and other international markets as we focus on increased penetration of markets and customers and maintain our strategy of continuing to increase our sales of enterprise-level products and software.

General and Administrative Expenses.    General and administrative expenses were $24.0 million or 6% of net sales for fiscal 2003 compared to $23.2 million or 7% of net sales for fiscal 2002. The absolute dollar increase is attributable to an increase in overall compensation as a result of the Company meeting certain incentive compensation targets and continued investments in our infrastructure, partially offset by decreases in bad debt expense. In fiscal 2002, bad debt expense was $1.3 million, the majority of which was attributed to a single customer. We expect very modest growth in general and administrative expenses during fiscal 2004.

Research and Development Expenses.    Research and development expenses were $40.6 million for fiscal 2003 compared to $32.2 million for fiscal 2002. This represents a 26% increase in our investment in research and development over our prior fiscal year. In both years, research and development expenses were 10% of net sales. The increase in absolute dollars in fiscal 2003 reflects our strategy to maintain heavy investments in software and connectivity product development and relates to added personnel resources and additional spending related to new products. Additionally, in fiscal 2003 we recorded an increase in overall compensation as a result of incentive compensation. We believe that significant investments in research and development are required to remain competitive and to solidify our market position in intelligent storage solutions. We anticipate research and development spending to increase modestly in absolute dollars during fiscal 2004 as we continue to invest in new product development and enhancements to our current product lines. Further, we believe the potential for growth in the market for storage solutions is sufficient to justify continued growth in our investment in research and development.

Acquisition Expenses.    Expenses related to our acquisition of V-Stor were $1.5 million during fiscal 2002. These one-time acquisition charges related to acquired in-process research and development and compensation to V-Stor personnel.

Other Income.    Other income primarily consists of net gain on securities transactions, interest income and net foreign currency transaction gains. Other income was $6.0 million for fiscal 2003 compared to $11.9 million for fiscal 2002. Other income in fiscal 2003 includes a gain on securities transactions of $2.7 million, which primarily relates to conversion of one of our investments in a private company to cash and marketable equity securities, and the subsequent sale of the majority of those securities. In fiscal 2002, other income included a gain on marketable securities transactions of $8.2 million, which was offset by a $750,000 charge for impairment of an investment we held in a private technology company. The gains realized in fiscal 2002 consisted of gains from the sale of derivative financial instruments on securities we held for investment as well as the sale of marketable securities. Interest income for fiscal 2003 was $2.2 million compared to $3.6 million for fiscal 2002. The decrease in interest income in fiscal 2003 is the result of lower returns on cash and investment balances during the year. This decrease in interest income is partially offset by an increase in foreign currency transaction gains resulting from stronger European currencies. We expect a decline in other income in fiscal 2004, as we do not believe that we will experience the same level of gains on securities transactions as in fiscal 2003. Additionally, our net foreign currency transaction gains (losses) are impacted by fluctuations in the currency markets, and there is no assurance that we will experience the same types of gains on these transactions as in fiscal 2003.

Provision (Benefit) for Income Taxes.    We had income tax expense of $3.0 million in fiscal 2003 compared to income tax benefit of $3.1 million in fiscal 2002. In fiscal 2003 we had an effective tax

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expense of 19% and in fiscal 2002 we had an effective tax benefit of 200%. The relatively low tax rate in fiscal 2003 reflects the tax benefits of our credit for research and development spending, our extraterritorial income exclusion and non-taxable interest income, and such rate is not expected to be sustainable as profitability increases. It is reasonable to anticipate that our long-term tax rate will be closer to statutory rates. As a result of our near breakeven taxable income in 2002, taxes paid in various federal, state and international jurisdictions were exceeded by the tax benefits related to the three items described above.

Fiscal Year 2002 Compared to 2001

Net Sales.    Net sales decreased 7% during fiscal 2002 to $337.6 million from $364.7 million in fiscal 2001. The decrease was primarily attributable to reduced sales of entry-level products. Revenue from OEMs was $150.2 million or 44% of total revenue for fiscal 2002 and $154.3 million or 42% of total revenue for fiscal 2001. OEM sales remained relatively flat in fiscal 2002 as the decrease in revenue from entry-level products was offset by an increase in revenue from our Scalar product family. Sales to branded customers decreased in fiscal 2002 to $187.4 million from $210.4 million in fiscal 2001. This decline in branded revenue was primarily due to the shift in sales of small and mid-size libraries to OEMs and weak market conditions. This decline was partially offset by an increase in revenue from global services. Two customers accounted for fiscal 2002 revenues of $86.2 million (26%) and $63.5 million (19%). These same two customers accounted for fiscal 2001 revenues of $85.8 million (24%) and $60.1 million (16%). ISS represented 30% of sales in fiscal 2002 compared to 17% of sales in fiscal 2001.

Net sales outside the United States accounted for 41% of our net sales in fiscal 2002 and 51% of our net sales in fiscal 2001. In fiscal 2001, a significant portion of our net sales outside the United States was due to an OEM customer for whom we maintained a revolver warehouse outside the United States. During fiscal 2002, a significant amount of sales to this OEM customer shifted to a revolver warehouse within the United States, which caused a decline in the reported percentage of non-U.S. sales.

Cost of Sales.    Cost of sales was $245.8 million or 73% of net sales for fiscal 2002 compared to $258.9 million or 71% of net sales for fiscal 2001. Our quarterly gross profit margins increased sequentially throughout fiscal year 2002. Our gross margin in the fourth quarter of fiscal 2002 was $24.8 million on $84.2 million of net sales compared to a gross margin of $23.8 million on $96.7 million of net sales in the first quarter of fiscal 2002. This increase in margin in the fourth quarter was primarily due to a decrease in the percentage of total sales attributable to OEMs. OEM sales in the fourth quarter were 42% versus 50% of total sales in the first quarter of fiscal 2002. Additionally, margins increased as our sales mix shifted towards ISS related revenue. An increase in fixed costs associated with our investment in our infrastructure, including our global information system and our facilities, had an offsetting impact to the trend in margin improvement.

Sales and Marketing Expenses.    Sales and marketing expenses were $48.3 million or 14% of net sales for fiscal 2002 compared to $43.7 million or 12% of net sales for fiscal 2001. The dollar and percentage increases were due to continued efforts to expand our sales and services channels to support new product offerings and improve market penetration with our more complex enterprise-level products.

General and Administrative Expenses.    General and administrative expenses were $23.2 million or 7% of net sales for fiscal 2002 compared to $20.0 million or 5% of net sales for fiscal 2001. The dollar and percentage increases were due to continued investment in our infrastructure, including our global information system, as well as increases in recession-related costs such as bad debt and severance expense. In fiscal 2002, bad debt expense was $1.3 million, the majority of which was attributed to a single customer.

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Research and Development Expenses.    Research and development expenses were $32.2 million or 10% of net sales for fiscal 2002 compared to $27.8 million or 8% of net sales for fiscal 2001. The increase in percentage and absolute dollars in fiscal 2002 reflected our strategy to maintain heavy investments in software and connectivity product development and related to added personnel resources and additional spending related to new products.

Acquisition Expenses.    In fiscal 2002, we incurred charges of $1.5 million for acquired in-process research and development and compensation to personnel in connection with our acquisition of V-Stor. In fiscal 2001, we incurred a charge reducing gross profit by $4.1 million for the write-off of certain inventory deemed non-salable due to the Pathlight merger and an accrual for contractual liability to a third party. In addition, we incurred charges of $8.8 million for investment banker and financial advisory fees, other professional fees, team member costs which related to termination of certain team members with redundant job functions and relocation costs, and other merger related expenses.

Other Income.    Other income primarily consisted of interest income, gain (loss) on securities transactions and net foreign currency transaction gains. Other income was $11.9 million for fiscal 2002 compared to $819,000 for fiscal 2001. Other income in fiscal 2002 included a gain on marketable securities transactions of $8.2 million, which was offset by a $750,000 charge for impairment of an investment we held in a private technology company. In fiscal 2001, other income included an $8.1 million write down of our strategic investment portfolio, offset by a gain on marketable securities transactions of $1.6 million. Interest income for fiscal 2002 was $3.6 million compared to $7.6 million for fiscal 2001. The decrease in interest income was the result of lower returns on cash and investment balances during fiscal 2002. This decrease in interest income was partially offset by an increase in foreign currency transaction gains resulting from stronger European currencies.

Benefit for Income Taxes.    We had a benefit for income taxes of $3.1 million in fiscal 2002 compared to $3.9 million for fiscal 2001. As a result of our near breakeven taxable income in 2002, taxes paid in various federal, state and international jurisdictions were exceeded by the tax benefits of our credit for research and development spending, our extraterritorial income exclusion and non-taxable interest income. During fiscal 2001, we did not get the full tax rate benefit relating to our loss because our effective income tax rate was negatively affected by certain non-deductible expenses associated with the acquisition of Pathlight.

Liquidity and Capital Resources

Cash flows provided by operating activities were $16.0 million for fiscal 2003 and $40.0 million for fiscal 2002. Cash flows used in operating activities were $35.6 million for fiscal 2001. In fiscal 2003, operating cash was provided by net income, depreciation and amortization and increases in accounts payable, accrued liabilities and advance payments from customers. In fiscal 2003, operating cash was used to fund increases in accounts receivable, inventories and service parts for maintenance. Accounts payable and accrued liabilities have increased primarily due to the timing of payments. Accounts receivable has increased primarily due to increased sales and the timing of such sales, and inventories and service parts for maintenance have increased as we’ve launched both new products and existing products into new channels. The increase in advance payments from customers is due to increased sales of service contracts, which are typically billed at the beginning of the contract term and recognized as revenue over the service period, and certain software licenses that require deferral under generally accepted accounting principles. In fiscal 2002, operating cash was provided by depreciation and amortization, decreases in accounts receivable and inventories, an increase in advance payments from customers, and income tax refunds. In fiscal 2002, cash from operations was used to invest in additional service parts for maintenance. In addition, gains on securities transactions in fiscal 2002 were included as a component of cash flow provided by operating activities. In fiscal 2001, operating cash was used for payment of charges related to the Crossroads settlement costs and

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acquisition expenses of $17.0 million and $8.1 million, respectively. Additionally, in fiscal 2001, operating cash was used to fund increases in accounts receivable, inventories, and service parts for maintenance and was offset by depreciation and amortization and other allowances. Inventories decreased in fiscal 2002 as we entered into certain vendor-managed inventory programs, under which ownership transfers at the time we take possession of inventory in the manufacturing process. In fiscal 2001, inventories increased to support both new products and new channels. As in fiscal 2003, the increases in service parts for maintenance during fiscal 2002 and 2001 related to new product offerings as well as maintenance of our increasing installed base of existing solutions. The increase in advance payments from customers during fiscal 2002 was, like fiscal 2003, due to increased sales of service contracts.

Cash flows provided by investing activities were $7.4 million for fiscal 2003. Cash flows used in investing activities were $41.1 million for fiscal 2002 and $4.8 million for fiscal 2001. During fiscal 2003, we received proceeds of $38.6 million from certain securities transactions, primarily the sale of marketable equity securities and maturities of marketable debt securities. These proceeds were offset by purchases of marketable securities of $16.5 million during fiscal 2003. Capital expenditures were $14.3 million during fiscal 2003 and were comprised primarily of computer hardware and software for our global information technology infrastructure and tooling and equipment related to new product introductions. During fiscal 2002, proceeds of $41.9 million were received on sales of marketable securities and covered calls on shares owned by us and were offset by purchases of marketable securities of $52.8 million. Fiscal 2002 capital expenditures were $26.9 million and consisted primarily of computer hardware and software associated with the global implementation of a Customer Relationship Management information system and the worldwide rollout of our North American Enterprise Resource Planning information system, leasehold improvements purchased for our new Englewood, Colorado facility and tooling and equipment related to new product introductions. During fiscal 2001, proceeds of $15.8 million were received on sales of certain marketable securities and covered calls on shares owned by us. 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 2003, 2002 and 2001 investing activities include purchases of non-marketable investments in non-public technology businesses of $500,000, $3.3 million and $500,000, respectively.

Cash flows provided by financing activities were $5.1 million for fiscal 2003 and $1.1 million for fiscal 2001. Cash flows used in financing activities were $3.5 million for fiscal 2002. In fiscal 2003 we borrowed $781,000 on a credit line from a German bank, which we repaid in full during the same year. We repurchased $697,000, $7.9 million and $299,000 of our common stock in fiscal 2003, 2002 and 2001, respectively. Proceeds from the issuance of common stock under our Stock Purchase Plan and the exercise of stock options and warrants were $8.4 million, $6.5 million and $3.6 million in fiscal 2003, 2002 and 2001, respectively. Offsetting the above proceeds in all three years were certain payments on bank credit lines and long-term debt, which were $3.4 million, $2.2 million and $2.2 million in fiscal 2003, 2002 and 2001, respectively. As of October 31, 2003, our debt primarily consists of a loan payable to a German bank that we intend to repay in full no later than the June 2009 due date.

At October 31, 2003, our cash and cash equivalents totaled $180.4 million, up from $150.7 million at October 31, 2002. Our cash and cash equivalents and marketable securities totaled $201.2 million and $182.8 million at October 31, 2003 and 2002, respectively. Our working capital, the difference between current assets and current liabilities, was $276.4 million at October 31, 2003 compared to $231.7 million at October 31, 2002. The ratio of current assets to current liabilities was 3.9 to 1 and 4.3 to 1 at October 31, 2003 and 2002, respectively.

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The following table summarizes our contractual cash commitments as of October 31, 2003:

The amounts above exclude rents for a manufacturing facility in Redmond, Washington. We terminated this lease in November 2003 in connection with the Benchmark transaction described in the General section above. Included in the operating lease amounts above are the cash commitments related to a liability recorded in fiscal 2001 to reflect the anticipated costs to exit a facility. During fiscal 2002 and 2003, we incurred exit costs of $677,000 and $633,000, respectively. These costs reduced the liability to $1,641,000 and $1,008,000 at October 31, 2002 and 2003, respectively.

Other commitments not included in the contractual cash commitments summary above include funding of an investment in a venture capital fund; a potential payment that could be due upon terminating a contract with a certain supplier; and relocation costs associated with the Benchmark transaction. These commitments are discussed in detail in Note 17 to the Consolidated Financial Statements. Our October 31, 2003 balance sheet includes liabilities for our long-term debt and the anticipated exit costs accrued during fiscal 2001. None of the other commitments mentioned above require accrual at October 31, 2003. We had no other material or unusual commitments as of October 31, 2003.

Based on our strong cash position, anticipated profitable operations and planned expenditures, we believe that our existing cash and cash equivalents, marketable securities, 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.

Critical Accounting Estimates

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

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

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

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, and our ability to recognize sales to certain customers may be affected.

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

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

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

We hold equity interests in both publicly traded and private companies having operations or technology in areas within our strategic focus. The publicly traded companies may have highly volatile share prices. We also hold investment-grade marketable debt securities in government and commercial entities. We record an investment impairment charge when we obtain specific information that causes us to believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Upon our adoption of SFAS 142 in the first quarter of fiscal 2003, we ceased amortizing goodwill and performed an initial review for impairment. Goodwill impairment will be reviewed annually thereafter, or more frequently when indicators of impairment are present. We did not record an impairment charge based on this initial review or our annual review performed during the third quarter of fiscal 2003. Other intangible assets are carried and reported at acquisition cost, net of accumulated

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amortization subsequent to acquisition. The acquisition cost is amortized over the estimated useful lives of the assets, which range from 30 months to seven years. Intangible assets are reviewed for impairment whenever events or circumstances indicate impairment might exist, or at least annually. The determination of the net carrying value of goodwill and intangible assets and the extent to which, if any, there is impairment are dependent on material estimates and judgments on our part, including the useful life over which the intangible assets are to be amortized, and the estimates of the value of future net cash flows, which are based upon further estimates of future revenues, expenses and operating margins.

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

We do not currently record a valuation allowance to reduce our deferred tax assets because we believe that the assets are more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Quantitative and Qualitative Disclosures about Market Risk

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.

Currently, approximately two-thirds of our total international sales are denominated in U.S. dollars. The assets and liabilities of our non-U.S. subsidiaries have functional currencies other than the U.S. dollar and are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. A 10% appreciation in the U.S. dollar would have resulted in an approximately $1.8 million and $931,000 decrease in income before provision (benefit) for income taxes during fiscal 2003 and 2002, respectively. Such a change in income would have resulted from applying a different exchange rate to translate and revalue the financial statements of our non-U.S. subsidiaries.

At October 31, 2003, we had fixed rate debt of $1.2 million at 4.4% from a German bank. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at October 31, 2003.

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Item 8.    Index to Consolidated Financial Statements

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R EPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

Advanced Digital Information Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Advanced Digital Information Corporation and its subsidiaries at October 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2003, 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.

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

As described in Note 1 to the consolidated financial statements, effective August 1, 2003, the Company changed its method of accounting for multiple deliverable revenue arrangements as required by Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”

PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

January 22, 2004

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ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED BALANCE SHEETS

See the accompanying notes to these consolidated financial statements.

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ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

See the accompanying notes to these consolidated financial statements.

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ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended October 31, 2001, 2002 and 2003