**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**FORM 10-K**

 

| **(Mark  One)**                                                                                                                                                                |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                     |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15****(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
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| **For the fiscal year ended:  JUNE 30, 2003**                                                                                                                             |
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| **OR**                                                                                                                                                                         |
|                                                                                                                                                                           |   |   |
| **o**                                                                                                                                                                          |   | **TRANSITION REPORT PURSUANT TO SECTION 13 or 15****(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                           |   |   |
| **For  the transition period from              to             ** |
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| **Commission  File Number:  000-22071**                                                                                                                                   |

 

**OVERLAND STORAGE, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **CALIFORNIA**                                  |   | **95-3535285**                     |
|-------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation) |   | (IRS Employer  Identification No.) |

 

**4820Overland Avenue, San Diego, California 92123**

(Address ofprincipal executive offices, including zip code)

 

**(858)571-5555**

(Registrant’s telephonenumber, including area code)

 

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Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, no par value**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes     ý     No     o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.     ý

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12B-2of the Act). Yes     ý     No     o

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant as ofSeptember 16, 2003, was $129,802,000 based on the closing price reportedon such date by The NASDAQ Stock Market. Shares of Common Stock held by officers and directors and by persons whohold 5% or more of the outstanding Common Stock have been excluded from thecalculation of this amount because such persons may be deemed to beaffiliates.  This determination of affiliatestatus is not necessarily conclusive.

 

As of September 16**,**2003, the number of outstanding shares ofthe registrant’s Common Stock was 12,987,476.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the ProxyStatement to be filed in connection with registrant’s Annual Meeting ofShareholders to be held on November 17, 2003 (the “Proxy Statement”)are incorporated herein by reference into Part III of this Report.

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### **PARTI**

 

*This Report contains certainstatements of a forward-looking nature relating to future events or the futureperformance of the Company.  Words suchas*“*expects,*”**“*anticipates,*”**“*intends,*”**“*plans,*”**“*believes,*”**“*seeks,*”**“*estimates*”*and similarexpressions or variations of such words are intended to identifyforward-looking statements, but are not the only means of identifyingforward-looking statements.  Prospectiveinvestors are cautioned that such statements are only predictions and thatactual events or results may differ materially.  In evaluating such statements, prospective investors shouldspecifically consider various factors identified in this Report, including thematters set forth below under the caption*“*Risk Factors,*”*which couldcause actual results to differ materially from those indicated by suchforward-looking statements.*

 

**ITEM 1.  *Business***

#### ** **

#### **General**

 

Foundedin 1980, our primary business is the design, development, manufacture,marketing and support of magnetic tape data automation solutions.  Businesses use these solutions for backup,archival and data interchange functions in high-availability network computingenvironments.  Our products address thedata storage needs of companies, from small businesses and branch offices tolarge enterprises, that have become increasingly dependent upon their storeddigital computer data and must guarantee its integrity and availability toensure business continuity.  Our primarystorage system solutions are designed around a modular, scalable architectureto enable customers to purchase storage when they need it, and to add to thatstorage in increments that can be integrated into a single system.  This design includes redundant roboticmechanisms as well as other high-availability features that enable our systemsto provide access to data 24 hours a day, seven days a week.

 

Increasingly,the management and protection of that data has moved from a peripheral concernto a central issue in computing, due to several factors, including:

 

•     The shift from large mainframe computers tonetwork server computing;

 

•                  The exponential growth in digital content madepossible by new technologies that make it easy and cost-effective to transform,move, access and store mass amounts of digital content including graphics,video and audio; and

 

•                  The dramatic growth of the Internet andelectronic commerce, which has significantly increased stored digital content.

 

Ourstrategy is to focus on providing mid-range storage solutions, which representsthe fastest growing segment of the IT market. We have specifically designed our products to address the mid-rangemarket.  Our primary products aremodularly-scalable which give them a low cost of entry, incremental expansionability and preservation of original equipment investment.  We believe that these features areparticularly attractive for customers in difficult economic times, when ITbudgets are constrained.

 

Ourprimary products are automated tape libraries and loaders which combineelectro-mechanical robotics, electronic hardware and firmware developedinternally with an emphasis on efficiency of design, functionality andreliability.  We also distributeproducts manufactured by other original equipment manufacturers (OEMs) andmarket various other products including spare parts and tape media.  We also license a proprietary tape encodingtechnology that we developed and patented under the name Variable RateRandomizer or “VR2”®.

 

InJune 2002, we entered the software market and launched a new familyof open storage management software solutions. To date, revenues generated from the Overland Storage Resource Managerhave not been material.

 

In June 2003, weannounced the acquisition of Okapi Software, Inc., a privately-owned companybased in San Diego, California.  Throughthis acquisition, we entered the emerging market of intelligent, disk-basedappliances based on iSCSI and Serial ATA disk technologies.  The Okapi backup accelerator productcomplements our existing family of tape automation products.  In August 2003, we announced generalavailability of three new Overland-branded disk-based products based on theOkapi technology.

 

We were formerly known as Overland Data, Inc., butchanged our name on June 28, 2002 to Overland Storage, Inc. to reflect ourexpanded commitment to both hardware and software storage solutions.

 

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**Products**

 

We are the world’s largest provider of mid-rangeautomated tape storage solutions.   Ourproducts incorporate the leading tape technologies based on tape drivessupplied by other manufacturers.  Suchtechnologies include:

 

•                  LTO (Linear TapeOpen), supplied by a consortium including Hewlett-Packard Company (HP),International Business Machines Corporation (IBM) and Certance LLC, formerlySeagate Technology;

 

•                  DLTtape, thecurrent leading half-inch tape technology supplied by Quantum Corporation; and

 

•                  AIT (AdvancedIntelligent Tape), supplied by Sony Electronics, Inc.

 

Through March 2002, we also sold a line of IBMcompatible 36-track products called TapeXpress® which served the largeinstalled base of AS400 and RS6000 minicomputers.

 

•*                  Libraries* -Automated tape libraries are devices capable of managing multiple datacartridges and incorporate two or more tape drives to provide unattended backupof large quantities of data.  Wecurrently offer the following library products:

 

•*                  ScalableNeo seriesTM* – Introduced in March 2001, the Neo2000 was the firstproduct in our newest family of tape libraries and our third generation ofmodularly scalable products.  Neo offerstrue scalability so that customers can start with a single module and laterexpand their storage capacity to meet their growing business needs, whileprotecting their original Neo module investment.  In a 5U-high (8.75 inches) module, the Neo2000 supports up to twodrives and 30 media slots, representing one of the highest tape storage densitiesin the industry.  Up to eight modulesmay be configured and rack-mounted into one Neo series library system.  Each multi-module library system operates asa single virtual library.  InOctober 2001, we announced the Neo4000, which supports up to four drivesand 60 media slots and can be configured with up to four modules in a singlerack.  Customers can also configure Neosystems with a combination of Neo2000 and Neo4000 modules.  Modules may be configured with DLT8000,SuperDLT (SDLT) or LTO drives, allowing customers to optimize compatibility,capacity and performance.  Incorporatingthe third generation of our expandable, modular robotics, the Neo series may beconfigured with redundant hot swap drives, power supplies and robotics.  The distributed robotic architectureprovides separate robotics for each library in a multi-module Neo seriessystem.  The optional Neo seriesinternal Fibre Channel interface uses Small Form-Factor Pluggable transceivermodules for direct Storage Area Network (SAN) connection.  The embedded WebTLC feature enablesweb-based library monitoring, control and fail-over management via a standardremote browser.  In September 2003we announced the Neo8000, which we expect to begin shipping inDecember 2003.  The Neo8000 familyconsists of a base model with a 100 cartridge capacity which can be scaled upto 500 cartridges through a field-enabled software key.

 

•*                  PowerLoaders andLoaders* - Automated tape loaders are devices capable of managing multipledata cartridges to provide unattended backup of data.  We currently offer the following products:

 

•*                  PowerLoader –*anautomated desktop or rack mount solution with one or two tape drives and a  multi-cartridge magazine configured withLTO, SDLT, DLT 8000 or AIT drives.  Wedefine PowerLoaders as tape libraries, with one or two tape drives, whichcannot be scaled or configured with multiple modules.

 

•*                  Loader*– an automated desktop or rack mount solution with a single tape drive and amulti-cartridge magazine configured with an LTO, SDLT, DLT 8000 or AIT drive.

 

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•*                  Disk-basedProducts –* In August 2003 we began shipping our Reo SeriesTM ofdisk-based products based on the technology of Okapi Software, Inc.  The Reo product family consists of threeproducts: (i) the R2000 application backup and recovery acceleration appliance;(ii) the RA2000 backup server acceleration appliance; and (iii) the RX2000recovery expansion module for both the R2000 and the RA2000.  These backup appliances enable companies toreduce backup and restore times by backing up multiple servers simultaneouslyto disk and immediately releasing those servers back to production.  The Reo can then be seamlessly backed up totape using existing backup software. This can all be done through the use of a customer’s existing Ethernetinfrastructure, avoiding the costly and complicated installation of a dedicatedfibre channel network.

 

•*                  Drives* –These desktop or internal upgrade tape drives accommodate a single datacartridge.  We currently offer thefollowing tape drives:

 

•*                  LTO–* an LTO1 or LTO2 Ultrium drive supplied by HP.

 

•*                  DLTtape–* a DLT8000, SDLT220 or SDLT320 drive supplied by Quantum.

 

•*                  Other Productsand Services–* We have a variety of products and services supporting ourLibraries, PowerLoaders, Loaders and tape drives.  We currently offer the following additional products andservices:

 

•                  Spares and postwarranty return-to-factory and on-site service.

 

•                  Media, includingtape cartridges for DLT, SDLT, AIT and LTO formats.

 

•*                  VR2*(VariableRate Randomizer) *–*VR2**is our patented dataencodingtechnology based on Partial Response Maximum *Likelihood* (PRML).  This technology, which is embedded in anApplications Specific Integrated Circuit (ASIC) chip, is capable ofsignificantly increasing the native capacity and data transfer rate performanceof linear tape technologies without requiring any changes in tape path design,recording heads and/or media.  Thisperformance is accomplished by achieving encoding efficiency of greater than99%.  We have licensed VR2 toTandberg Data ASA for use in its Scalable Linear Recording (SLR) tape drives,to Imation Corporation as the owner of the Travan technology format, toCertance, formerly Seagate, for use in its Travan tape drive offerings, toStorage Technology Corporation (StorageTek) for use in its 9940 Eagle drivesand future tape drive products, and to Quantum.

 

Our Libraries, PowerLoaders, Loaders and tape drives are installed onspecific computer platforms with the appropriate backup, data interchange orstorage management software.  Weactively work with a number of backup and storage management software companiesto confirm that our products are properly supported. Currently, more than 80different software packages support our tape automation products. For example,on the Novell NetWare and Microsoft Windows NT platforms, the software packagesinclude products from Computer Associates International, Inc., Veritas SoftwareCorporation, Legato Systems Incorporated, and Dantz Development Corp. On UNIXplatforms, the software packages include products from Legato, IBM/Tivoli, HPand Veritas Software Corporation.  OnLinux platforms, software packages supported include Knox Software and BakBoneSoftware, Inc.  Our Neo series of tapelibraries also supports SAN attachment for one and two-gigabit fibre channelconnectivity to provide serverless backup and shared library capability.

 

**Sales and Marketing**

 

Ourstructure is optimized for our mid-range strategy in that we are not requiredto have a direct sales or service force. We sell all our products on an indirect basis, primarily throughthree channels or types of customers: (i) OEMs; (ii) commercialdistributors; and (iii) volume, consisting of systems integrators, technicaldistributors and value added resellers (VARs). Regardless of the channel through which they are sold, all of our productsare designed and manufactured to meet OEM-level requirements and reliabilitystandards.  Because the OEMqualification process can take six to 18 months to complete, we often makeinitial sales of new products to non-OEM customers that typically evaluate,integrate and adopt new technologies and products more quickly. Afterqualification and acceptance, OEM sales generally represent an increasingproportion of a product’s unit sales and are important to us in terms ofvalidating our products in the marketplace and achieving desirable productionvolumes.

 

•***                  OEM Channel***- Our significant OEM supply agreements are with HP and IBM, both of whichincorporate our products into their system offerings.  Fujitsu and NEC also purchase Neo products and sell them undertheir respective labels.  However, weare required to sell to them through their appointed reseller, and consequentlywe classify them as Volume customers rather than OEM customers.

 

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***HP***. In June 1999 after its acquisition of Digital Equipment Corp,Compaq Computer Corporation, selected us as an OEM supplier for DLT automatedstorage products supporting the leading Compaq ProLiant server line.  In June 2000, Compaq added our AITLibraryPro.  In May 2001, Compaqadded to its product line the next generation Neo series DLT automated storageproducts.  And in May 2002, afterits acquisition of Compaq, HP selected Overland to be its supplier of mid-rangetape automation products.

 

***IBM***. IBM has been our customer since fiscal year 1997, but was buying older36-track technology products that we discontinued in March 2002.  In June 2002, we were selected by adivision of IBM to supply its mid-range tape automation needs and we beganshipping Neo products under this agreement in November 2002.

 

In general, we work withour OEM customers early in a new product development cycle to design productsto meet their specifications. The OEM sales cycle is often lengthy andtypically consists of a general technology evaluation, qualification of productspecifications, verification of product performance against thesespecifications, integration testing of the product within the customers’systems, product announcement and volume shipment. As is typical in theindustry, our OEM contracts have a three year term, provide for periodic pricereviews and the customers are not required to purchase minimum quantities.  Our existing contracts with HP and IBM alsoprovide that title to inventory shipped from our warehouse into variousinventory hub locations remains with Overland until the products are shipped totheir customers.  HP, including theformer Compaq which HP acquired in May 2002, has been our largestcustomer, accounting for approximately 58%, 62% and 63% of sales in fiscalyears 2003, 2002 and 2001, respectively. No other customer accounted for more than 10% of sales in any yearduring the three-year period.

 

•***                  CommercialDistribution Channel*** - Our primary commercial distribution customersinclude Ingram Micro, Inc., Tech Data Corporation and Bell Microproducts, Inc.in the U.S. and Ideal Hardware, a division of Bell Microproducts, in theU.K.  Typically, these distributors sellour products to smaller VARs and catalogers who in turn sell to end-users.  The distribution agreements includeprovisions for stock rotation and price protection, common terms in thecommercial distribution area.  We do nothave the ability to estimate our exposure for returned product or priceadjustments, so we do not record revenue in this channel until the distributorsells the related inventory.  We supportthese distributors through a dedicated field sales force and provide furthersupport through field sales personnel who work with the smaller VARs andcatalogers to generate end-user sales and create the pull through itsdistribution customers.

 

•***                  Volume Channel***- Our volume channel includes systems integrators, technical distributors andlarger VARs.  Some of our volume channelcustomers specialize in the insurance, banking, financial, geophysical ormedical industries, and offer a variety of value-added services relating to ourproducts.  Our products frequently arepackaged by these customers as part of a complete data processing system orcombined with other storage devices, such as redundant array of independentdisks (RAID) systems, to deliver a complete storage subsystem.  These customers also recommend our productsas replacement solutions when backup systems are upgraded, and bundle ourproducts with storage management software specific to the end-user’ssystem.  We support this channel throughour field sales representatives.

 

Our products are sold both domestically and internationally and we havesales personnel located in various cities throughout the world.  We divide our sales into three geographies:(1) the Americas, consisting of North and South America; (2) Europe,Middle East and Africa (EMEA); and (3) Asia Pacific (APAC).  Primary support for customers in theAmericas is provided from our San Diego headquarters office.  EMEA is supported by our wholly-ownedsubsidiaries located in Wokingham, England; Paris, France; and Munich,Germany.  The subsidiary in Englandprovides sales, technical support and repair services, while the subsidiariesin France and Germany provide sales and technical support.  In November 2001, we opened a salesoffice in Singapore to support our APAC customers.  We assign to our international distributors the right to sell ourproducts in a country or group of countries. In addition, many domestic customers ship a portion of our products totheir overseas customers.  Our foreignsales for fiscal years 2003, 2002 and 2001 were approximately $85.1 million,$77.1 million and $73.8 million, respectively, representing 43%, 47% and 47%,respectively, of our total net revenues.

 

We support our sales efforts with various marketing programs designed tobuild our brand name and attract new customers.  Our branded channel partners are provided with a full range ofmarketing materials, including product specification literature, softwareconnectivity information and application notes.  Our sales management and engineering personnel provide support tothe channel partners and, in certain instances, visit potential customer sitesto explain and demonstrate the technical advantages of our products.  In addition, we hold annual PartnerConferences to inform our channel partners of new product developments andprograms and to discuss emerging trends in their markets.  We also maintain press relations bothdomestically and in Europe, advertise in computer systems publications targetedto our end-users and channel partners, and offer market development funds toour channel partners.  We participate innational and regional trade shows in varying degrees both domestically andinternationally, including the CeBIT show in Germany and domestically at

 

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NetWorld+Interop, PC Expo and Comdex.  We also maintain a website(http://www.overlandstorage.com) that features marketing information, productspecifications, news releases and application, service and technical supportnotes and investor relations information. We make available through this website free of charge all of ourannual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports filed pursuant to Section 13(a)or 15(d) of the Securities Exchange Act of 1934 as soon as reasonablypracticable after we file them electronically with, or furnish them to theSEC.  The content of our website is notpart of this Report.

 

**Customer Service and Support**

 

Our technical supportpersonnel are trained on our products and assist customers with “plug-and-play”compatibility between multiple hardware platforms, operating systems andbackup, data interchange and storage management software.  Our application engineers are available tosolve more complex customer problems and visit customer sites whennecessary.  Customers that need serviceand support can contact us through our toll-free telephone lines, facsimile andInternet e-mail.  Application notes anduser manuals can be obtained directly from our website.

 

We generally provide athree year advance replacement return-to-factory warranty on our Neo Series,PowerLoader and LoaderXpress products. We also provide on-site service for the first warranty year of the NeoSeries products located in the United States and Canada, for which we contractwith third-party service providers.  Formost products, we offer a program called XchangeNOW as part of ourreturn-to-factory warranty which enables customers to receive an advancereplacement unit shipped within two business days after placing a servicerequest.  The customer ships thedefective unit back to us using the shipping materials from the replacementunit.  Separately priced on-site warrantiesare offered for sale to customers of other product lines.

 

**Research and Development**

 

We currently employ 40 people in our research and development department,many of whom have extensive experience in the tape industry and significantexpertise in software architecture and design, electrical, mechanical andfirmware design.  Our R&D departmentis capable of developing both tape drives and robotic mechanisms, including thedevelopment of various aspects of data channels, data compression, intelligentinterfaces and firmware (embedded systems software).  This department also has the ability to develop and test a tapepath, the core of any tape technology. We believe that these capabilities distinguish us from our competitorsby providing us with a better understanding of data backup and recoverytechnologies in general and enabling us to provide higher value-added contentby designing reliable products which better utilize the advantages of specifictechnologies.

 

Ourlevel of R&D spending is dependent upon our product developmentcycles.  During the later stages of thecycles, including the building of alpha and beta units and design verificationtesting, significant amounts of development materials are consumed.  OEM customers also generally requireevaluation units to qualify a new design. During fiscal 2001, the majority of our R&D efforts were focused onthe final development and introduction of our “next generation” Neo series ofautomated tape libraries.  In fiscal2002, we concentrated on developing follow-on products that extend the Neoseries product line into larger systems and integrate additional tape drivetechnologies.  In fiscal 2003,development efforts centered on supporting the launch of the new HP and IBMspecific products, as well as additions to our loader product family and thedevelopment of the Neo8000.  Separately,general research will continue in the quest for future products andtechnologies.  Only a small portion ofour fiscal 2004 budget will be dedicated to software development for the newlylaunched open storage management software solutions because the majority of the code is beingobtained by license from other developers. Our company sponsored R&D expenditures amounted to $7.4 million,$6.6 million and $10.1 million in fiscal years 2003, 2002 and 2001,respectively, representing 3.8%, 4.0% and 6.5% of net revenues,respectively.  Despite our R&Defforts, we may not be able to identify, develop, manufacture, market orsupport new or enhanced products successfully or on a timely basis and any newproducts may not gain market acceptance.

 

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#### **Manufacturing**

 

We have a fullyintegrated factory in San Diego, California that is ISO 9001 certified.  Major OEM customers have also certified allof our production lines and manufacturing processes.  We perform product assembly, integration and testing, whileleaving component and piece-part manufacturing to our supplier partners.  We work closely with a group of regional,national and international suppliers, which are carefully selected based ontheir ability to provide quality parts and components that meet ourspecifications, as well as meet present and future volume requirements.  Key suppliers are under contract to providejust-in-time deliveries.  Wespecifically design a number of our parts and components that are not availableoff the shelf for integration into our products.  We maintain a minimum number of suppliers and utilize theirspecific capabilities across several product lines.

 

In general,Overland branded products are not manufactured until an order is received.  The typical lead-time for manufacturingproducts is three days and backlog is not a significant factor to our business.  Our two largest OEM customers, HP and IBM,both require that we maintain inventory on hand, known as buffer stock, at anygiven time sufficient to supply their forecasted requirements for the nextthree weeks.  They provide weeklyforecast information that allows us to manage both raw material and finishedgoods inventories.  The buffer stock isshipped into various distribution hubs around the world and we retain ownershipof that inventory until it is pulled by HP and IBM to fulfill customer orders,at which time we record the sale.

 

In June 2001,after making significant reductions in product lead times at our San Diegofactory, we discontinued manufacturing operations at our UK subsidiary.  All branded products are now shipped toEuropean customers from San Diego. However, the UK facility continues to serve as an inventory hub for HPwhere our product is stored, staged and then shipped directly to HP’s Europeancustomers.

 

InMarch 2002, we moved into a new headquarters building that was designed toour specifications.  The new facilityhas improved our manufacturing efficiencies, increased our manufacturingcapacity, and provides room for future growth. The building is subject to a 12-year lease with one five year extensionoption. We believe that we have the capacity to support unit production levelsseveral times greater than our current rate of production.

 

During fiscal year2003, we continued to operate a partial second shift, in addition to thetraditional single shift, to handle greater production levels, and we canfurther expand capacity by adding to the second shift or moving to a full-timefactory.  We maintain approximately 30%of our direct labor in the form of temporary staffing to accommodate normalbusiness fluctuations and control our staffing levels carefully to meetcustomer requirements at any specific time.

 

**Competition**

 

Theworldwide storage market is intensely competitive as a number of manufacturersof tape automation solutions and storage management software products competefor a limited number of customers.  Inaddition, barriers to entry are relatively low in these markets.  We currently participate in the mid-range ofthe tape backup market.  In thissegment, some of our competitors have substantially greater financial and otherresources specifically larger research and development staffs.  Our tape automation products currentlycompete with products made by Advanced Digital Information Corporation, QuantumCorporation and Storage Technology Corporation.**** Key competitive factors in the tape storage market include capacity,transfer rate, reliability, durability, scalability, compatibility and cost.Our tape storage products also compete with other storage technologies, such ashard disk drives. The ratio of price to performance for hard disk drivescontinues to decline, and if such price/performance ratio declines faster thethan price/performance ratio for our tape solutions, the competition from harddisk drives as an alternative backup solution will increase.

 

Ourdisk-based and software products currently compete with products made byInternational Business Machines Corporation, HP, Computer AssociatesInternational, Inc., EMC Corporation, Veritas Software Corporation, QuantumCorporation, Network Appliance, Inc. and numerous small startups. We believeadditional competitors are likely to enter the market.   Key competitive factors in these marketsinclude performance, functionality, scalability, availability,interoperability, connectivity, time to market enhancements and total value ofownership.

 

Themarkets for all of our products are characterized by significant pricecompetition, and we anticipate that our products will face increasing pricepressure.

 

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**Proprietary Rights**

 

#### **General -**We believe that, because of the rapid pace oftechnological change in the data storage industry, patent, copyright, trademarkand trade secret protection are less significant than factors such as theknowledge, ability and experience of our personnel, new product introductionsand product enhancements.  Despite thesefactors, we still rely on a combination of patent, copyright, trademark andtrade secret protection, non-disclosure agreements and licensing arrangementsto establish and protect our proprietary rights.  We presently hold 17United States patents and have oneUnited States patentapplication. In general, these patents have a 20 year term from the firsteffective filing date for each patent. We also hold a number of foreign patents and patent applications forcertain of our products and technologies. These rights, however, may notprevent competitors from developing substantially equivalent or superiorproducts to ours.  In addition, ourpresent and future patents may be challenged, invalidated or circumvented, reducingor eliminating our proprietary protection.

 

**VR2 Technology**– We have entered into various intellectual property licensing agreementsrelating to our VR2 technology. These agreements typically call for an initial payment to us for thedelivery of the VR2 technology platform and royalty fees based onsales by licensees of products containing VR2.  In certain instances, we may elect to sellto the licensee ASIC chips embodying VR2 priced to include the costof the chip plus an embedded royalty fee.

 

**Employees**

 

As of June 30, 2003we had 377 employees, including 111 in sales and marketing, 40 in research anddevelopment, 180 in manufacturing and operations and 46 in finance, informationsystems, human resources and other management. There are no collective bargaining contracts covering any of theemployees and we believe that our relationship with our employees is good.

 

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**RISK FACTORS**

 

*An investment in our company involves a high degree ofrisk.  In addition to the otherinformation included in this Report, you should carefully consider thefollowing risk factors in evaluating an investment in our company.  You should consider these matters inconjunction with the other information included or incorporated by reference inthisReport.*

 

**Our business is highly dependent onour level of sales to one major customer***.*

 

HewlettPackard, including the former Compaq which HP acquired in May 2002, hasbeen our largest customer accounting for approximately 58% of net revenues infiscal year 2003, 62% of net revenues in fiscal year 2002 and 63% of netrevenues in fiscal year 2001.  No othercustomer accounted for more than 10% of net revenues during the year endedJune 30, 2003.

 

Oursales to HP may be affected adversely by various factors relating to HP’sbusiness, liquidity, results of operation and financial position.  We expect that HP will continue to representa significant portion of our revenues in future periods.  Consequently, our business, liquidity,results of operation and financial position would be materially and adverselyaffected by the loss of the HP account, or the reduction, delay or cancellationof HP orders.  Neither HP nor any othercustomer is obligated to purchase a specific amount of our products or providebinding forecasts of purchases for any period.

 

**The market price of our commonstock may be very volatile***.*

 

Themarket price of our common stock has experienced significant fluctuations sinceit commenced trading in February 1997. The market price of our common stock may continue to fluctuatesignificantly in the future.  Manyfactors could cause the market price of our common stock to fluctuate,including:

 

•     announcements concerning us or our competitors;

 

•     changes in earnings estimates by analysts;

 

•     purchasing decisions of HP and other significant customers;

 

•     quarterly variations in operating results;

 

•     the introduction of new technologies or products;

 

•     changes in product pricing policies by us or our competitors; and

 

•     changes in general economic conditions.

 

Inaddition, stock markets have experienced extreme price and volume volatility inrecent years.  This volatility has had asubstantial effect on the market prices of securities of many smaller publiccompanies for reasons frequently unrelated or disproportionate to the operatingperformance of the specific companies. These market fluctuations may adversely affect the market price of ourcommon stock.

 

**Our financial results may fluctuatesubstantially for many reasons, and past results should not be relied on asindications of future performance.**

 

All ofthe markets that we serve are volatile and subject to market shifts, which wemay not be able to discern in advance. A slowdown in the demand forworkstations, mid-range computer systems, networks and servers could have asignificant adverse effect on the demand for our products in any givenperiod.  We have experienced delays inreceipt of purchase orders and, on occasion, anticipated purchase orders havebeen rescheduled or have not materialized due to changes in customerrequirements.  Our customers may cancelor delay purchase orders for a variety of reasons, including the reschedulingof new product introductions, changes in their inventory practices orforecasted demand, general economic conditions affecting our customers’markets, changes in our pricing or the pricing of our competitors, new productannouncements by us or others, quality or reliability problems related to ourproducts or selection of competitive products as alternate sources ofsupply.  In particular, our ability toforecast sales to distributors, integrators and value-added resellers isespecially limited as these customers typically provide to us relatively shortorder lead times or are permitted to change orders on short notice.  Given that a large portion of our sales aregenerated by our European channel, our first fiscal quarter (July throughSeptember) is commonly impacted by seasonally slow European orders, reflectingthe summer holiday period in Europe.

 

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Inaddition, our financial results have fluctuated and will continue to fluctuatequarterly and annually based on many other factors such as:

 

•                  changes in customer mix (e.g., OEM vs. branded);

 

•                  the level of utilization of our production capacity;

 

•                  changes in product mix;

 

•                  fluctuations in average selling prices;

 

•                  manufacturing yields;

 

•                  increases in production and engineering costs associated with initialproduction of new products;

 

•                  increases in the cost of or limitations on availability of materials;and

 

•                  labor shortages.

 

Based onall of the foregoing, we believe that our revenues and operating results willcontinue to fluctuate, and period-to-period comparisons are not necessarilymeaningful and should not be relied on as indications of futureperformance.  Furthermore, in somefuture quarters, our revenues and operating results could be below theexpectations of public market analysts or investors, which could result in amaterial adverse effect on the price of our common stock.  In addition, portions of our expenses arefixed and difficult to reduce if revenues do not meet our expectations.  These fixed expenses magnify the materialadverse effect of any revenue shortfall.

 

**We face intense competition and pricepressure, and many of our competitors have substantially greater resources thanwe do.**

 

Theworldwide storage market is intensely competitive as a number of manufacturersof tape automation solutions and storage management software products competefor a limited number of customers.  Inaddition, barriers to entry are relatively low in these markets.  We currently participate in the mid-range ofthe tape backup market.  In thissegment, some of our competitors have substantially greater financial and otherresources, larger research and development staffs, and more experience andcapabilities in manufacturing, marketing and distributing products.  Our hardware products currently compete withproducts made by Advanced Digital Information Corporation, Quantum Corporationand Storage Technology Corporation.  Our disk-based and software products currentlycompete with products made by International Business Machines Corporation, HP,Computer Associates International, Inc., EMC Corporation, Veritas SoftwareCorporation, Quantum Corporation, Network Appliance, Inc. and numerous smallstartups.  The markets for our productsare characterized by significant price competition, and we anticipate that ourproducts will face increasing price pressure. This pressure could result in significant price erosion, reduced profitmargins and loss of market share, which could have a material adverse effect onour business, liquidity, results of operation and financial position.

 

**Our business is highly dependent on thecontinued availability and market acceptance of the tape technologiesincorporated in our products.**

 

Wederive a majority of our revenue from products that incorporate tape drivespurchased from other manufacturers and based on unique formats and tape technologies.  Certain of these tape drives are onlyavailable from a single manufacturer, and we expect to continue to derive asubstantial amount of our revenue from products incorporating these tape drivesfor the foreseeable future.  Inparticular, a portion of our products incorporate DLTtape drives manufacturedby Quantum Corporation.  Quantum also isone of our competitors because Quantum markets its own tape automationproducts.  We do not have a long-termcontract with Quantum, which could cease supplying tape drives directly tous.  Although Quantum has licensedTandberg Data to be a second source manufacturer of DLTtape drives, we have notqualified Tandberg as an alternative supplier.

 

Inaddition, from time to time in the past, we have not obtained as many drives aswe have needed from various vendors due to drive shortages or qualityissues.  Any prolonged inability toobtain adequate deliveries could require us to pay more for components, partsand other supplies, seek alternative sources of supply, delay shipment ofproducts and damage relationships with current and prospective customers.  This type of delay or damage could have amaterial adverse effect on our business, liquidity, results of operation andfinancial position.  In the past, we experiencedproblems with the supply of a newly-introduced tape drives and these problemsadversely affected our sales and earnings. We cannot assure you that these

 

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or similar problems willnot reoccur, or that we will not experience similar or more serious disruptionsin supply in the future with current or new versions of tape drives.

 

Ourfuture operating results depend on the continued availability and marketacceptance of the current tape technologies that we use.  If tape drives incorporating othertechnologies gain comparable or superior market acceptance than those currentlyincorporated in our products, then we might have to modify the design of ourtape automation products to incorporate these tape drives.  Our inability to do so or to obtainsufficient quantities of these tape drives could have a material adverse effecton our business, liquidity, results of operation and financial position.

 

Our tape-based storage solutionscompete with other storage technologies, such as hard disk drives, and may facecompetition in the future from other emerging technologies. The prices of harddisk drives continue to decrease while capacity and performance have increased.If hard disk drives or products incorporating other technologies gaincomparable or superior market acceptance to tape drive technology, or theircosts decline far more rapidly than tape drive and media costs, we would faceincreased competition from these alternative technologies. If we are not ableto respond to such competition through increased performance and lower pricesfor our products, or the introduction of competitive new products incorporatingnew technologies, our business, financial condition and operating results couldbe materially and adversely affected.

 

**Our success depends on our ability toanticipate rapid technological changes and develop new and enhanced products.**

 

As anadvanced technology company, we are subject to numerous risks anduncertainties, generally characterized by rapid technological change andintense competition.  In thisenvironment, our future success will depend on our ability to anticipatechanges in technology, to develop new and enhanced products on a timely and cost-effectivebasis and to introduce, manufacture and achieve market acceptance of these newand enhanced products.  Developmentschedules for high technology products are inherently subject touncertainty.  We may not meet ourproduct development schedules, including those for products based on our VR2technology or storage management software products, and development costs couldexceed budgeted amounts.  In addition,there can be no assurance that our licensees, in the case of our VR2 technology,or our licensors, in the case of our software products, will meet their productdevelopment schedules.  Our business,liquidity, results of operation and financial position may be materially andadversely affected if the products or product enhancements that we develop aredelayed or not delivered due to developmental problems, quality issues orcomponent shortage problems, or if our products or product enhancements do notachieve market acceptance or are unreliable. The introduction, whether by us or our competitors, of new productsembodying new technologies, such as new sequential or random access massstorage devices, and the emergence of new industry standards could renderexisting products obsolete or not marketable, which may have a material adverseeffect on our business, liquidity, results of operation and financial position.

 

**We rely on outside suppliers toprovide a large number of components and subassemblies incorporated in ourproducts.**

 

Ourproducts have a large number of components and subassemblies produced byoutside suppliers.  Accordingly, wedepend greatly on these suppliers for tape drives, printed circuit boards andintegrated circuits, which are essential to the manufacture of ourproducts.  In addition, for certain ofthese items, we qualify only a single source, which can magnify the risk ofshortages and decrease our ability to negotiate with our suppliers on the basisof price.  If these shortages occur, orif we experience quality problems with suppliers, then our product shipmentscould be significantly delayed or costs significantly increased, which wouldhave a material adverse effect on our business, liquidity, results of operationand financial position.

 

**Our international operations areimportant to our business and involve unique risks.**

 

Historically,sales to customers outside of the U.S. have represented a significant portionof our sales and we expect them to continue representing a significant portionof sales.  Sales to customers outsidethe U.S. are subject to various risks, including:

 

•                  the imposition of governmental controls mandating compliance withvarious foreign and U.S. export laws;

 

•                  currency exchange fluctuations;

 

•                  political and economic instability;

 

•                  trade restrictions;

 

•                  changes in tariffs and taxes;

 

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•                  longer payment cycles (typically associated with international sales);and

 

•                  difficulties in staffing and managing international operations.

 

Furthermore,we cannot assure that we will be able to comply with changes in foreignstandards in the future, even though we endeavor to meet standards establishedby foreign regulatory bodies.  Ourinability to design products that comply with foreign standards could have amaterial adverse effect on our business, liquidity, results of operation andfinancial position.  Currently, nearlyall of our international sales are denominated in U.S. dollars and fluctuationsin the value of foreign currencies relative to the U.S. dollar could,therefore, make our products less price competitive.  Additionally, the expenses of our international subsidiaries aredenominated in their local currencies. We currently do not engage in foreign currency hedging transactions, andwe are therefore exposed to some level of currency risk.

 

**Our ability to compete effectivelydepends in part on our ability to protect effectively our intellectual propertyrights.**

 

We relyon a combination of patent, copyright, trademark, trade secret and otherintellectual property laws to protect our intellectual property rights.  These rights, however, may not preventcompetitors from developing products that are substantially equivalent orsuperior to our products. To the extent we have or obtain patents, suchpatents may not afford meaningful protection for our technology and products.Others may challenge our patents and, as a result, our patents could benarrowed, invalidated or unenforceable. In addition, current or future patentapplications may not result in the issuance of patents in the United States orforeign countries.  In addition, the laws ofcertain foreign countries may not protect our intellectual property to the sameextent as U.S. laws.  Furthermore,competitors may independently develop similar products, duplicate our productsor, if patents are issued to us, design around these patents.

 

In order to protect orenforce our patent rights, we may initiate interference proceedings,oppositions, or patent litigation against third parties, such as infringementsuits. These lawsuits could be expensive, take significant time and divertmanagement’s attention from other business concerns. The patent position ofinformation technology firms generally is highly uncertain, involves complexlegal and factual questions, and has recently been the subject of muchlitigation. No consistent policy has emerged from the U.S. Patent and TrademarkOffice or the courts regarding the breadth of claims allowed or the degree ofprotection afforded under information technology patents.

 

**Raytheon Company has sued us forpatent infringement.  This litigationsubjects us to significant liabilities, costs and expenses.**

 

InJanuary 2003, Raytheon Company filed a lawsuit against us and variousother companies in the United States District Court for the Eastern District ofTexas.  The complaint alleges that ourproducts infringe United States Patent No. 5,412,791, entitled Mass DataStorage Library.  In the complaint,Raytheon demands that the defendants stop selling infringing products, payRaytheon for their past use of the invention under the patent and payRaytheon’s costs and expenses and its reasonable attorney fees.  An adverse outcome in the Raytheonlitigation (or similar proceedings) could:

 

•                  subject us to significant liabilities;

 

•                  require us to license disputed rights from Raytheon or others; or

 

•                  require us to cease marketing or using some products.

 

Any of these events couldhave a material adverse effect on our business, liquidity, results of operationand financial position.  In addition,even if we do not experience an adverse outcome in the Raytheon litigation, orsimilar proceedings, the legal fees and other costs and expenses associatedwith litigation have and may continue to be substantial and may adverselyimpact our business, liquidity, results of operation and financial position.

 

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**Oursuccess will depend partly on our ability to operate without infringing on ormisappropriating the proprietary rights of others.**

 

In addition to theRaytheon litigation discussed above, we may be sued for infringing on thepatent rights or misappropriating the proprietary rights of others.Intellectual property litigation is costly, and, even if we prevail, the costof such litigation could adversely affect our business, financial condition andresults of operations. In addition, litigation is time consuming and coulddivert management attention and resources away from our business. If we do notprevail in any litigation, we could be required to stop the infringing activityand/or pay substantial damages. Under some circumstances in the United States,these damages could be triple the actual damages the patent holder incurs. Ifwe have supplied infringing products to third parties for marketing or licensedthird parties to manufacture, use or market infringing products, we may beobligated to indemnify these third parties for any damages they may be requiredto pay to the patent holder and for any losses the third parties may sustainthemselves as the result of lost sales or damages paid to the patent holder.

 

If a third party holdingrights under a patent successfully asserts an infringement claim with respectto any of our products, we may be prevented from manufacturing or marketing ourinfringing product in the country or countries covered by the patent weinfringe, unless we can obtain a license from the patent holder. Any requiredlicense may not be available to us on acceptable terms, or at all. Somelicenses may be non-exclusive, and therefore, our competitors may have accessto the same technology licensed to us. If we fail to obtain a required licenseor are unable to design around a patent, we may be unable to market some of ourproducts, which could have a material adverse effect on our business, financialcondition and results of operations.

 

**Our new software and disk-basedproducts involve many significant risks.**

 

In June 2002, weannounced the launch of our first software product, the Overland StorageResource Manager and in August 2003 we began shipping our Reo Series ofdisk-based products based on technology acquired from Okapi Software, Inc.  To date, our sales generated from theseproducts has not been material.

 

The success of these new products is uncertain and subject tosignificant risks, any of which could have a material adverse effect on ourbusiness, liquidity, results of operation and financial position.  We must commit significant resources tothese new products before determining whether they will result in anysuccess.  In addition, our disk-basedbusiness is highly dependent upon the general industry acceptance and adoptionof the new iSCSI standard.  If these newproducts are not adopted by customers or do not achieve anticipated saleslevels, any related intangible assets we have recorded may be impaired.  Such impairment would result in a chargeagainst earnings in the period for which impairment is determined to exist, andreduce our assets and shareholders’ equity.

 

We have not been involved previously in the development,marketing and sale of software or disk-based products, and these areas are newto many of our personnel.  We will needto continuously update and periodically upgrade these products to staycompetitive.  Any delay in thecommercial release of new or enhanced software or disk-based products couldresult in a significant loss of potential revenues and may adversely impact themarket price of our common stock.

 

The software industry is highly competitive.  Some of our competitors may have anadvantage due to their relationships with their customers and other thirdparties and their significantly greater financial, technical, marketing andother resources.  Our competitors alsomay have the ability to respond more quickly than we can to new or emergingtechnologies and changes in customer requirements.  This competition could seriously impede our ability to sellsoftware products on terms favorable to us. In addition, our current and potential competitors may develop andmarket new software products that render our existing or future productsobsolete, unmarketable or less competitive. Our current and potential competitors may make strategic acquisitions orestablish cooperative relationships among themselves or with other competitors,thereby increasing the availability of their services to address the needs ofour current and prospective customers. We may not be able to compete successfully against our current andfuture competitors, and competitive pressures that we encounter may seriouslyharm our business.

 

We license the majority of our software code from anothercompany and depend on that software developer for the timely delivery ofcompetitive, defect-free software that forms the basis for our softwareproducts.  In April 2003, EMCCorporation, one of our software competitors, acquired our softwarelicensor.  As a result of thisacquisition, our software licensor has available substantially greaterfinancial and other resources, including an enhanced capability to develop andmarket similar and competitive software offerings.  Although EMC Corporation announced that it intends to continueour software license relationship, our commercial arrangement may not developsuccessfully and EMC Corporation could compete more directly with us.

 

13

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If our software or disk-based products do not achieve marketacceptance or success, then the association of our brand name with theseproducts may adversely affect our reputation and our sales of other products,as well as dilute the value of our brand name.

 

**Our warranty reserves may not adequatelycover our warranty obligations.**

 

We haveestablished reserves for the estimated liability associated with our productwarranties.  However, we couldexperience unforeseen circumstances where these or future reserves may notadequately cover our warranty obligations. For example, the failure or inadequate performance of product componentsthat we purchase could increase our warranty obligations beyond these reserves.

 

**Our credit facility is collateralized by a general securityinterest in our assets.  If we were todefault, then the lender would have the right to foreclose on our assets.**

 

At June 30, 2003,our credit facility consisted of a $4.7 million five-year term note for capitalequipment purchases which matures on August 28, 2007 and a $10 milliontwo-year revolving line of credit for working capital purposes which expires onNovember 30, 2003. At June 30, 2003, $4.0 million, including $931,000due within one year, was outstanding under the term note and no amounts wereoutstanding under the line of credit. Both the term note and the line of credit are collateralized by ageneral security interest in our assets. If we were to default under our credit facility, then the lender wouldhave the right to accelerate the indebtedness outstanding under our creditfacility and foreclose on our assets in order to satisfy our indebtedness.  A foreclosure could have a material adverseeffect on our business, liquidity, results of operation and financial position.

 

**Our credit facility requires that we comply with severalfinancial and non-financial covenants. If we fail to comply with these covenants, then we will be in default ofthe credit facility.**

 

The loan agreement thatgoverns our credit facility requires us to comply with several financial andnon-financial covenants.  Our ability tocomply with these covenants may be affected by events beyond our control,including prevailing economic, financial and industry conditions.  A violation of one or more of thesecovenants would constitute a default under the credit facility, which wouldenable the lender, at its option without notice, to accelerate allthen-outstanding indebtedness under the credit facility and/or terminate thelender’s obligation to extend credit under the credit facility, either of whichcould materially and adversely impact our business, liquidity, results ofoperation and financial position.

 

**Our success depends on our abilityto attract, retain and motivate our executives and other key personnel.**

 

Ourfuture success depends in large part on our ability to attract, retain andmotivate our executives and other key personnel, many of whom have beeninstrumental in developing new technologies and setting strategic plans.  Our growth also depends in large part on ourcontinuing ability to hire, motivate and retain highly qualified management,technical, sales and marketing team members. Competition for qualifiedpersonnel is intense and there can be no assurance that we will retain existingpersonnel or attract additional qualified personnel in the future.

 

**Future mergers and acquisitions mayincrease the risks associated with our business.**

 

In thefuture, we may pursue mergers and acquisitions of complementary businesses,products or technologies as we seek to expand and increase the value-addedcomponent of our product offerings. Mergers and acquisitions involve numerous risks, including liabilitiesthat we may assume from the acquired company, difficulties in the assimilationof the operations and personnel of the acquired business, the diversion ofmanagement’s attention from other business concerns, risks of entering marketsin which we have no direct prior experience, and the potential loss of keyemployees of the acquired business.

 

Futuremergers and acquisitions by us also may result in dilutive issuances of ourequity securities and the incurrence of additional debt and amortizationexpenses related to intangible assets. Any of these factors could adversely affect our business, liquidity,results of operation and financial position.

 

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**ITEM 2.  *Properties***

 

We lease allfacilities used in our business.  Ourheadquarters are located in San Diego, California in a two-building lightindustrial complex comprising approximately 160,000 square feet. The leaseexpires in February 2014 and can be renewed for one additional five-yearperiod. This San Diego facility houses all of our research and development,manufacturing and administrative functions as well as a major portion of sales,sales administration, marketing and customer support. In our currentfacilities, we believe that we have and will have the capacity to support unitproduction levels several times greater than our current rate of production.

 

We lease a 17,000square foot facility located in Wokingham, England, which houses sales,technical support and repair services. The lease expires in January 2018.We also maintain small sales offices located close to Paris, France, Munich,Germany and Singapore.

 

The lease on thefacility located in Longmont, Colorado expires in November 2005.  We currently are working with the lessor tomitigate the rental expense as the Longmont operations have been wound-down.

 

**ITEM 3.  *LegalProceedings***

 

In January 2003,Raytheon Company filed a lawsuit against us and various other companies in theUnited States District Court for the Eastern District of Texas.  The complaint alleges that our productsinfringe United States Patent No. 5,412,791, entitled Mass Data StorageLibrary.  In the complaint, Raytheon demandsthat the defendants stop selling infringing products, pay Raytheon for theirpast use of the invention under the patent and pay Raytheon’s costs andexpenses and its reasonable attorney fees. In February 2003, Raytheon filed a First Amended Complaint statingits original claim with more particularity. We filed an Answer andCounterclaims to Raytheon’s First Amended Complaint in March 2003, denyingall material allegations in the complaint and asserting counterclaims seekingto have Raytheon’s ‘791 patent declared invalid, unenforceable and notinfringed by us.  In April 2003,Raytheon filed a Second Amended Complaint against the defendants containing thesame substantive infringement allegations and also adding a ninthdefendant.  In May 2003, we respondedto Raytheon’s Second Amended Complaint with an Answer and AmendedCounterclaims, again contesting infringement, invalidity and enforceability ofthe ‘791 patent.  This lawsuit is in itsearly stages and discovery is just commencing. The District Court held a scheduling conference in this matter inMay 2003 and has set a case schedule with trial currently set forJune 2004.

 

In addition to theforegoing matter, we are from time to time involved in various lawsuits andlegal proceedings which arise in the ordinary course of business.  We are currently not aware of any such legalproceedings or claims which we believe will have, individually or in theaggregate, a material adverse affect on our business, financial condition oroperating results.  However, litigationis subject to inherent uncertainties, and an adverse result in these or othermatters may arise from time to time that may harm our business.

 

**ITEM 4.  *Submissionof Matters to a Vote of Security Holders***

 

None

 

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**PART II**

 

**ITEM 5.  *Market forRegistrant’s Common Equity and Related Shareholder Matters***

 

Our common stock tradeson The NASDAQ National Market under the symbol “OVRL”.  As of September 23, 2003, there wereapproximately 120 shareholders of record. We have not paid any dividends on our common stock and do not anticipatepaying any dividends in the foreseeable future.  The high and low closing prices of our common stock fromJuly 1, 2001 through June 30, 2003 were as follows:

 

|               |   | **High** |   | **Low** |   |
|--------------------|--------|----------|--------|---------|--------|
|               |   |     |   |    |   |
| Fiscal  Year 2003: |   |     |   |    |   |
|               |   |     |   |    |   |
| Fourth  quarter    |   | $ 22.00  |   | $ 14.06 |   |
| Third  quarter     |   | 16.30    |   | 13.36   |   |
| Second  quarter    |   | 15.20    |   | 7.26    |   |
| First  quarter     |   | 16.59    |   | 7.81    |   |
|               |   |     |   |    |   |
| Fiscal  Year 2002: |   |     |   |    |   |
|               |   |     |   |    |   |
| Fourth  quarter    |   | $ 16.48  |   | $ 7.47  |   |
| Third  quarter     |   | 16.77    |   | 8.20    |   |
| Second  quarter    |   | 9.00     |   | 6.50    |   |
| First  quarter     |   | 7.30     |   | 4.75    |   |

 

**Equity Compensation Plan Information**

 

The following tableprovides information about our equity compensation plans as of June 30,2003:

 
| **Plan Category**                                                  |   | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** |   | **Weighted average exercise  price of outstanding  options, warrants and  rights** |   | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities to be  issued upon exercise of  outstanding options,  warrants and rights)** |   |
|--------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Equity  compensation plans approved by security holders**        |   | 3,104,655                                                                                          |   | $ 9.53                                                                             |   | 79,177                                                                                                                                                                                                |   |
| **Equity  compensation plans not approved by security holders**(1) |   | 150,586                                                                                            |   | $ 8.39                                                                             |   | 867                                                                                                                                                                                                   |   |
| **Total**                                                          |   | 3,255,241                                                                                          |   | $ 9.48                                                                             |   | 80,044                                                                                                                                                                                                |   |

 

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(1)          Consists of our 1991Non-Qualified Stock Option Plan, 1992-A Non-Qualified Stock Option Plan and2001 Supplemental Stock Option Plan, each of which has not been approved by ourshareholders.  Please see Note 8 of ourNotes to Consolidated Financial Statements for a description of these plans.

 

**Recent Sales of Securities**

 

In May 2003, we sold1,430,000 shares of common stock at $15.39 per share in a private placementtransaction. Gross proceeds to Overland were $22,008,000 with net proceedsafter commission and offering expenses of $20,623,000.  We intend to use the proceeds to fundworking capital needs in support of the growth of our business and for generalcorporate purposes. These securities were offered and sold without registrationunder the Securities Act to a limited number of accredited investors inreliance upon the exemption provided by Rule 506 of Regulation D, and may notbe offered or sold in the United States in the absence of an effectiveregistration statement or exemption from the registration requirements underthe Securities Act. An appropriate legend was placed on the shares issued. Theshares issued are included in a currently effective registration statement fortheir resale.

 

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In June 2003, weissued 134,551 shares of our common stock valued at $2,705,000 to the formershareholders of Okapi Software, Inc., as partial consideration for ouracquisition of Okapi. These securities were offered and sold withoutregistration under the Securities Act to a limited number of accredited and/orsophisticated investors in reliance upon the exemption provided by Rule 506 ofRegulation D, and may not be offered or sold in the United States in theabsence of an effective registration statement or exemption from theregistration requirements under the Securities Act. We agreed to file aregistration statement covering the resale of the shares within six monthsafter the closing date.

 

**ITEM 6.  *SelectedFinancial Data***

 

The following selectedfinancial data has been derived from our audited consolidated financialstatements and the related notes.  Thisinformation should be read in conjunction with Item 7 of this Report -“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and with our consolidated financial statements and the relatednotes set forth at the pages indicated in Item 14(a)(1) of this Report.

 
|                                          |   | **At or for  Years Ended June 30,**       |    |
|-----------------------------------------------|--------|------------------------------------------------|---------|
|                                          |   | **2003**                                       |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                          |   | **(in  thousands, except for per share data)** |    |
| **Income  Statement Data**                    |   |                                           |    |   |   |   |   |   |   |   |   |
| Net revenue                                   |   | $                                              | 195,881 |   | $ | 163,380 |   | $ | 155,696 |   | $ | 122,979 |   | $ | 92,227 |   |
| Gross profit                                  |   | 54,018                                         |    | 42,445 |   | 39,034 |   | 30,519 |   | 27,891 |   |
| Income from  operations                       |   | 10,310                                         |    | 6,516 |   | 3,699 |   | 2,811 |   | 5,614 |   |
| Income before  income taxes                   |   | 10,193                                         |    | 6,839 |   | 4,017 |   | 3,416 |   | 6,581 |   |
| Net income                                    |   | 6,682                                          |    | 4,493 |   | 2,494 |   | 2,067 |   | 3,982 |   |
| Net income per  share (1):                    |   |                                           |    |   |   |   |   |   |   |   |   |
| Basic                                         |   | $                                              | 0.59    |   | $ | 0.42 |   | $ | 0.24 |   | $ | 0.20 |   | $ | 0.39 |   |
| Diluted                                       |   | $                                              | 0.54    |   | $ | 0.40 |   | $ | 0.23 |   | $ | 0.19 |   | $ | 0.37 |   |
|                                          |   |                                           |    |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data**                       |   |                                           |    |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                    |   | $                                              | 55,020  |   | $ | 26,884 |   | $ | 10,844 |   | $ | 15,774 |   | $ | 16,199 |   |
| Working capital                               |   | 84,326                                         |    | 54,463 |   | 46,999 |   | 43,257 |   | 40,981 |   |
| Total assets                                  |   | 130,922                                        |    | 81,003 |   | 70,171 |   | 71,383 |   | 56,230 |   |
| Long-term debt,  inclusive of current portion |   | 3,957                                          |    | 4,655 |   | — |   | — |   | — |   |
| Shareholders’ equity                     |   | 93,264                                         |    | 59,266 |   | 51,679 |   | 47,497 |   | 44,807 |   |

 

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(1)   See Note 1 of Notes to Consolidated FinancialStatements for an explanation of shares used in computing net income per share.

 

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**ITEM 7.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations.***

 

*The discussion in thissection contains certain statements of a forward-looking nature relatingto future events or our future performance. Words such as*“*expects,*”**“*anticipates,*”**“*intends,*”**“*plans,*”**“*believes,*”**“*seeks,*”**“*estimates*”*and similarexpressions or variations of such words are intended to identifyforward-looking statements, but are not the only means of identifyingforward-looking statements. Such statements are only predictions and thatactual events or results may differ materially.  In evaluating such statements, you should specifically considervarious factors identified in this Report, including the matters set forthunder the caption*“*Risk Factors,*”*which could cause actual results todiffer materially from those indicated by such forward-looking statements.*

 

**Critical Accounting Policies andEstimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. The preparation of consolidated financial statementsrequires that we make estimates and judgments that affect the reported amountsof assets, liabilities, revenue and expenses, and related disclosure of contingentliabilities. On an on-going basis, we evaluate our estimates, including thoserelated to revenue recognition, bad debts, inventories, income taxes, warrantyobligations and contingencies. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

Webelieve the following accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.

 

***Revenue Recognition***

 

Revenueon direct product sales (excluding sales to commercial distributors and certainOEM customers) is recognized upon shipment of products to our customers. Thesecustomers are not entitled to any specific right of return or price protection,except for any defective product that may be returned under our warrantypolicy.  Title and risk of loss transferto the customer when the product leaves our dock. Product sales to commercialdistribution customers are subject to certain rights of return, stock rotationprivileges and price protection. Because we are unable to estimate our exposure for returned product orprice adjustments, revenue from shipments to these customers is not recognizeduntil the related products are in turn sold to the ultimate customer by thecommercial distributor. At June 30, 2003, $956,000 of product had been shipped to our commercialdistributors, but not yet shipped to their ultimate customers. As part of ourexisting agreements with certain OEM customers, we ship products to various distributionhubs around the world and retain ownership of that inventory until it is pulledby these OEM customers to fulfill their customer orders, at which time,generally the same business day, we record the sale.

 

Wehave entered into various licensing agreements relating to our VR2 technology.These agreements typically call for royalty fees based on sales by licensees ofproducts containing VR2. Royalties on sales by licensees of productscontaining VR2 are recorded when earned, generally in the periodduring which the licensee ships the products containing VR2 technology.In certain instances, the customer has elected to purchase the ASIC chips fromus embodying VR2, which are priced to include the cost of the chipplus an embedded royalty fee. In these instances, revenues on ASIC chip salesare recorded as product revenue when earned, which is upon the shipment of theunderlying ASIC chip incorporating the VR2 technology to thecustomer.

 

Insome cases, these licensing agreements include initial payments to us for thedelivery of the VR2 technology platform, consulting services orboth. We recognize revenues related to the transfer of the technology platformupon delivery and acceptance by the customer, which entitles us to the initialfee and eliminates any further obligations under the agreement.  We recognize revenue related to consultingservices as earned, typically based on time committed to the project.

 

We recognize softwarerevenues in accordance with the American Institute of Certified PublicAccountants’ (AICPA) Statement of Position 97-2, “Software Revenue Recognition”(SOP 97-2), as amended by SOP 98-9, “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions” (SOP 98-9). We licensesoftware under noncancelable perpetual agreements.  License revenues are recognized in the period in which thelicense agreement is in place, the fee is fixed and determinable, delivery ofthe technology has occurred and collectibility is probable.  Sales through our resellers are evidenced bya master agreement governing the relationship together with binding purchaseorders placed

 

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electronically on ourbusiness-to-business ordering system. We considered the license to be delivered, and the license revenue isrecognized, when the reseller is issued a license key in the name of aspecifically identified end user.

 

For software arrangementsthat include multiple elements, SOP 97-2 requires that we allocate the fee tothe individual elements based on vendor-specific objective evidence of fairvalue (VSOE), regardless of the prices stated within the contract.  VSOE is limited to the price charged whenthe element is sold separately or, for an element that is not yet sold separately,the price established by management having the relevant authority.  When there is VSOE for the undeliveredelements in multiple-element arrangements that are not accounted for usingcontract accounting, we allocate revenue to the delivered elements of thearrangement using the residual value method. Therefore, we defer revenues from the arrangement fee equal to the fairvalue of the undelivered elements and the difference between the totalarrangement fee and the amount deferred for the undelivered elements isrecognized as revenue related to the delivered elements. The fair value ofmaintenance and post contract customer support obligations are based uponseparate sales of renewals to other customers or upon renewal rates quoted inthe contracts.

 

When VSOE does not existto allocate revenue to each of the various elements of an arrangement we cannotallocate revenue using the residual value method, we defer the entire fee fromthe arrangement until the earlier of the establishment of VSOE or the deliveryof all the elements of the arrangement.

 

***Allowance for Doubtful Accounts***

 

Weprepare our estimate of allowance for doubtful accounts based on identificationof the collectibility of specific accounts and the overall condition of thereceivable portfolio. When evaluating the adequacy of the allowance fordoubtful accounts, we analyze specific trade and other receivables, historicalbad debts, customer credits, customer concentrations, customercredit-worthiness, current economic trends and changes in customers’ paymentterms and/or patterns. If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make additionalpayments, then we may need to make additional allowances. Likewise, if wedetermine that we could realize more of our receivables in the future thanpreviously estimated, we would adjust the allowance to increase income in theperiod we made this determination. We review the allowance for doubtfulaccounts on a quarterly basis and record adjustments as deemed necessary.

 

***Inventory Valuation***

 

Werecord inventories at the lower of cost or market value.  We assess the value of our inventoriesperiodically based upon numerous factors including expected product or materialdemand, current market conditions, technological obsolescence, current cost andnet realizable value. If necessary, we adjust our inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof the inventory and the estimated market value. Likewise, we record an adversepurchase commitment liability when anticipated market sales prices are lowerthan committed costs. If actual market conditions are less favorable than whatwe projected, then we may need to record additional inventory adjustments andadverse purchase commitments.

 

***Income Taxes***

 

We estimate our tax liability based on current tax laws in the statutoryjurisdictions in which we operate. These estimates include judgments aboutdeferred tax assets and liabilities resulting from temporary differencesbetween assets and liabilities recognized for financial reporting purposes andsuch amounts recognized for tax purposes, as well as about the realization ofdeferred tax assets. If we cannot realize certain deferred tax assets or if thetax laws change unfavorably, we could experience potential significant lossesin excess of provisions established. Likewise, if we can realize additionaldeferred tax assets or if tax laws change favorably, we could experiencepotential significant gains.

 

***Warranty Obligations***

 

We generallyprovide a three year advance replacement return-to-factory warranty on our NeoSeries, PowerLoader and LoaderXpress products. We also provide on-site service for the first warranty year of the NeoSeries products located in the United States and Canada, for which we contractwith third-party service providers.  Formost products, we offer a program called XchangeNOW as part of ourreturn-to-factory warranty which enables customers to receive an advancereplacement unit shipped within two business days after placing a servicerequest.  The customer ships thedefective unit back to us using the shipping materials from the replacementunit.  Separately priced on-sitewarranties are offered for sale to customers of other product lines.

 

We provide for the estimated cost of product warranties at the timerevenue is recognized. While we engage in

 

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extensive product quality programs and processes,including actively monitoring and evaluating the quality of our componentsuppliers, our warranty obligation is affected by product failure rates andmaterial usage or service delivery costs incurred in correcting a productfailure. If actual product failure rates, material usage or service deliverycosts differ from our estimates, then we would need to revise the estimatedwarranty liability.

 

***Impairment of Assets***

 

Wealso consider potential impairment of both tangible and intangible assets whencircumstances indicate that the carrying amount of an asset may not berecoverable. In such circumstances, we may incur material charges relating tothe impairment of such asset.  We wouldmeasure any required impairment loss as the amount by which the asset’scarrying value exceeds its fair value and we would record it as a reduction inthe carrying value of the related assets and charge it to results ofoperations.

 

**Results of Operations**

 

The following tables setforth certain financial data as a percentage of net revenues:

 
|                         |   | **Fiscal  Years Ended June 30,** |   |
|------------------------------|--------|---------------------------------------|--------|
|                         |   | **2003**                              |   | **2002** |   | **2001** |   |
| Net revenues                 |   | 100.0                                 | %      | 100.0 | % | 100.0 | % |
| Cost of revenues             |   | 72.4                                  | %      | 74.0 | % | 74.9 | % |
| Gross profit                 |   | 27.6                                  | %      | 26.0 | % | 25.1 | % |
| Operating  expenses:         |   |                                  |   |   |   |   |   |
| Sales and  marketing         |   | 13.6                                  | %      | 12.9 | % | 10.5 | % |
| Research and  development    |   | 3.8                                   | %      | 4.0 | % | 6.5 | % |
| General and  administrative  |   | 4.9                                   | %      | 5.1 | % | 5.7 | % |
|                         |   | 22.3                                  | %      | 22.0 | % | 22.7 | % |
| Income from  operations      |   | 5.3                                   | %      | 4.0 | % | 2.4 | % |
| Other (expense)  income, net |   | (0.1                                  | )%     | 0.2 | % | 0.2 | % |
| Income before  income taxes  |   | 5.2                                   | %      | 4.2 | % | 2.6 | % |
| Provision for  income taxes  |   | 1.8                                   | %      | 1.4 | % | 1.0 | % |
| Net income                   |   | 3.4                                   | %      | 2.8 | % | 1.6 | % |

 

**Fiscal Year 2003 Compared to Fiscal Year 2002**

 

***Net Revenues*.**Net revenues of $195.9 million in fiscal year 2003 were$32.5 million or 19.9% above net revenues of $163.4 million in fiscalyear 2002. This revenue growth reflects the continued strong performance of ourNeo series line of tape library products. Sales within our Library productlines (Neo, LibraryXpress®, LibraryPro, Loaders and PowerLoaders) grew 23.2% to$159.6 million, compared to $129.6 million in fiscal year 2002.Fiscal year 2003 sales to OEM customers were up 16.6 % when compared to fiscalyear 2002.  The increase in revenue fromour OEM customers was driven by the increase in revenues from HP as a result ofour product replacing HP’s legacy product subsequent to the completion of theHP/Compaq merger. Sales to HP accounted for 58.4% of total net revenues infiscal year 2003, compared to 62.5% in fiscal year 2002.

 

Netrevenues from Overland branded products during the fiscal year 2003 grew 16.6%over fiscal year 2002 from $56.5 million to $65.9 million. Excluding the36-track and DAT/Travan/Ditto products that we no longer sell, branded saleswere up 23.5% over fiscal year 2002. This increase reflects our increased focuson the Overland branded channel over the past year.  Sales of Overland branded library products increased 42.7% overfiscal year 2002, driven by Neo series library and loader revenues with thelargest increase coming from our domestic customers with additional increasescoming in the form of a new large customer in the Asia Pacific region.  Partially offsetting these increases were adecrease in sales of PowerLoader products, primarily as a result of a few largeone-time orders within our European channel in the prior year, and a decreasein revenues from our Asian region related to the discontinuation of our36-track products.

 

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Netrevenues from spare parts of $20.6 million in fiscal year 2003 were$2.9 million or 16.4% above net revenues of $17.7 million in fiscalyear 2002. This increase was driven primarily by our OEM customers.

 

VR2revenues during fiscal year 2003 amounted to $3.5 million and werecomprised of chip sales of $785,000, engineering service fees of $775,000 androyalties of $1.9 million. VR2 revenues during fiscal year 2002amounted to $2.6 million and were comprised of chip sales of $1.2 million,engineering service fees of $1.0 million and royalties of $431,000.

 

Duringthe third quarter of fiscal year 2002 we made the final shipments of our legacy36-track products as low product demand prompted us to shift the products toend-of-life status. Sales of the discontinued 36-track and DAT/Travan basedproducts were zero in fiscal year 2003 compared to $7.2 million in fiscal year2002.

 

Asummary of the sales mix by product for the periods presented in the statementof operations follows:

 
|                        |   | **Fiscal  Years Ended June 30,** |   |
|-----------------------------|--------|---------------------------------------|--------|
|                        |   | **2003**                              |   | **2002** |   | **2001** |   |
| LibraryXpress  products:    |   |                                  |   |   |   |   |   |
| Neo series                  |   | 66.1                                  | %      | 43.5 | % | 3.8 | % |
| Loaders                     |   | 7.0                                   | %      | 8.9 | % | 7.4 | % |
| PowerLoader                 |   | 8.3                                   | %      | 11.2 | % | 12.2 | % |
| LibraryXpress               |   | 0.0                                   | %      | 15.7 | % | 57.5 | % |
|                        |   |                                  |   |   |   |   |   |
|                        |   | 81.4                                  | %      | 79.3 | % | 80.9 | % |
|                        |   |                                  |   |   |   |   |   |
| Spare parts,  drives, other |   | 16.8                                  | %      | 14.6 | % | 10.0 | % |
| Discontinued  products      |   | 0.0                                   | %      | 4.5 | % | 8.3 | % |
| VR2                         |   | 1.8                                   | %      | 1.6 | % | 0.8 | % |
|                        |   |                                  |   |   |   |   |   |
|                        |   | 100.0                                 | %      | 100.0 | % | 100.0 | % |

 

***Gross Profit***.  Gross profit amounted to $54.0 million infiscal year 2003, an increase of $11.6 million or 27.3% from $42.4 million infiscal year 2002, resulting from a combination of higher sales volumes andhigher product margins.  The grossmargin percentage increased to 27.6% in fiscal year 2003, up from 26.0% infiscal year 2002.  The lower margin infiscal year 2002 was due primarily to the high cost of the initial productionvolumes of the Neo series products.  Theincrease in the gross margin percentage during fiscal year 2003 was primarilydue to material cost reductions across all products, increasing productionvolumes of the Neo series products, a slightly higher concentration of Overlandbranded product and an increase in VR2 license and chip revenueswhich carry a significantly higher margin than our revenue from productsales.  Partially offsetting these costreductions and the favorable channel mix were the unfavorable channel mix oflower margin Neo series products versus the higher margin LibraryXpressproducts and an increase in warranty expense as the installed base of Overlandbranded units increases.

 

***Sales and Marketing Expenses***.  Sales and marketing expenses amounted to$26.7 million, representing 13.6% of net revenues in fiscal year 2003, comparedto $21.0 million or 12.9% of net revenues in fiscal year 2002. The increasedexpenditures resulted primarily from salary and related expenses associatedwith the expansion of our Overland branded sales force, increased spendingassociated with lead generation activities, increased market developmentfunding related to our OEM customers, the enhancement of our internal marketingteam, and incremental expenses associated with our software products.

 

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***Research and Development Expenses.* **R&D expenses amounted to $7.4million or 3.8% of net revenues in fiscal year 2003, compared to $6.6 millionor 4.0% of net revenues in fiscal year 2002. This increase in absolute dollars was due primarily to the incrementalcosts associated with our advanced engineering team that was launched late inthe fourth quarter of fiscal year 2002. Both periods include an adjustment in our estimated liability related tothe closure of our Longmont, Colorado R&D facility.  Although we continue to pursue sub-leaseopportunities for the Longmont facility, we have concluded that is unlikelygiven the current commercial real estate market in Longmont and thereforeaccrued the remaining lease payments in full during the third quarter of fiscalyear 2003.

 

***General and Administrative Expenses***.  General and administrative expenses amountedto $9.6 million or 4.9% of net revenues in fiscal year 2003, compared to $8.4million or 5.1% of net revenues in fiscal year 2002.  This increase was due primarily to an increase in salary, bonusand related benefits expenses, which included the addition of our StorageResources Business Unit General Manager and the absence of a Vice President ofHuman Resources during a portion of the prior year.  Also contributing to this increase were the incremental legalfees associated with the Raytheon lawsuit defense and increased insurancepremiums.

 

***Interest Income***.  In fiscal year 2003, we generated interestincome of $427,000, compared to interest income of $355,000 in fiscal year2002.  The increase was due to higheraverage cash balances.

 

***Interest Expense***.  In fiscal year 2003, we generated interestexpense of $212,000, compared to interest expense of $86,000 in fiscal year2002.  The increase was the result ofhigher average balances outstanding on our long-term debt arrangement.

 

***Other Expense/Income***.  In fiscal year 2003, we generated net otherexpense of $332,000, compared to net other income of $54,000 in fiscal year2002.  These amounts primarily relate toforeign currency transaction fluctuations related to our United Kingdomoperations.

 

***Income Taxes***.  Our fiscal year 2003 provision for statefederal and foreign income taxes amounted to $3.5 million.  This equated to an effective tax rate of34.4% in fiscal year 2003, up slightly from 34.3% in fiscal year 2002.  The increase in the effective tax rate fromthe prior year is due primarily to smaller, as a percentage of taxable income,research and development tax credits.

 

**Fiscal Year 2002 Compared to Fiscal Year 2001**

 

***Net Revenues*.**Net revenues of $163.4 million in fiscal year 2002 were$7.7 million or 4.9% above net revenues of $155.7 million in fiscalyear 2001. This revenue growth reflected the strong performance of our Neoseries line of tape library products. Sales within our Library product linesgrew 2.9% to $129.6 million, compared to $125.9 million in fiscalyear 2001. Fiscal year 2002 sales to OEM customers were flat compared to fiscalyear 2001 and sales to HP were up 3.6%. The increase in HP Neo series revenues directly offset the decrease insales to HP of our predecessor LibraryXpress products and accounted for 64.6%of total library sales to HP during fiscal year 2002. Sales to HP accounted for62.5% of total net revenues in fiscal year 2002, compared to 63.0% in fiscalyear 2001.

 

Netrevenues from Overland branded products during the fiscal year 2002 grew 13.8%over fiscal year 2001 from $49.7 million to $56.5 million. Excluding theDAT/Travan/Ditto products that we no longer sell, branded sales were up 20.6%over fiscal year 2001. Reflected in this growth was the transition fromLibaryXpress to the Neo series products with the increase in Neo more thanoffsetting the decrease in LibraryXpress. Also contributing to the increase,sales of our Overland branded Autoloader products increased 50.4% when comparedto fiscal year 2001 due to an increased focus with our domestic directmarketers and a number of significant deals in Europe where the end-user is deployingthe products in multiple branch offices and other small environments.

 

Net revenues from spare parts of$17.7 million in fiscal year 2002 were $9.4 million or 112.4% abovenet revenues of $8.3 million in fiscal year 2001. This increase was dueprimarily to the sales of spare parts for our Neo series products as OEMpartners, branded channel partners and service providers placed stocking ordersof Neo series spare parts.

 

VR2revenues during fiscal year 2002 amounted to $2.6 million and werecomprised of chip sales of $1.2 million, engineering service fees of $1.0million and royalties of $431,000. VR2 revenues during fiscal year2001 amounted to $1.3 million and were comprised of chip sales of $504,000,engineering service fees of $630,000 and royalties of $168,000.

 

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Revenuesof $6.9 million from our legacy 36-track products during fiscal year 2002decreased $2.6 million or 27.0% compared to fiscal year 2001. During the thirdquarter of fiscal year 2002 we made the final shipments of our legacy 36-trackproducts as low product demand prompted to shift these products to end-of-lifestatus. Sales of our discontinued DAT/Travan based products in fiscal year 2002declined by $3.0 million or 87.1% from the prior year.

 

***Gross Profit***.  Gross profit amounted to $42.4 million infiscal year 2002, an increase of $3.4 million or 8.7% from $39.0 million infiscal year 2001, resulting primarily from higher sales volumes.  The gross margin percentage increased to 26.0%in fiscal year 2002 from 25.1% in fiscal year 2001.  This increase was despite a higher concentration of revenuesgenerated from our Neo series products, which initially generated lower grossmargins until their costs were reduced by economies realized from increasingproduction volumes.  During the firstquarter of fiscal year 2002, we consumed many of the expensive early productioncomponents and margins continued to improve throughout the fiscal year as webenefited from the lower unit costs of higher volume purchasing and costreduction programs.  Partiallyoffsetting the lower margins as a result of the high concentration of Neoseries products was an increased concentration of higher margin spare partsrevenue, an increased concentration of higher margin Overland branded productsales, and increases in VR2 contract engineering services revenue,Certance chip sales and royalties, all of which carry a significantly highermargin than our revenue from product sales.

 

***Sales and Marketing Expenses***.  Sales and marketing expenses amounted to$21.0 million, representing 12.9% of net revenues in fiscal year 2002, comparedto $16.4 million or 10.5% of net revenues in fiscal year 2001. Increasedexpenditures were due primarily to salary and related expenses associated withthe expansion of our commercial distribution channel and our continued focus onbuilding our brand name.  Alsocontributing to the increase, to a lesser extent, were the costs associatedwith the launch of our open storage management software products, whichoccurred during the fourth quarter of fiscal year 2002.

 

***Research and Development Expenses.* **R&D expenses amounted to $6.6million or 4.0% of net revenues in fiscal year 2002, compared to $10.1 millionor 6.5% of net revenues in fiscal year 2001. This decrease reflected the elimination of development expenses resultingfrom the sale of our Travan based WS-30 and EDT-40 tape drive designs inJune 2001, along with lower material and non-recurring engineering feesprimarily related to the completion of the development of the Neo seriesproducts during fiscal year 2001. Partially offsetting this decrease was a$228,000 charge reflecting an adjustment in our estimated liability related tothe closure of our Longmont, Colorado R&D facility. This adjustment wasbased upon the increased amount of time we believed would be required tosublease the facility, given the weakened real estate market in Longmont,Colorado.  Also, included in thefiscal year 2001 amount were the costs associated with the effectivetermination of the Longmont operations as a result of the sale of ourTravan-based products design and the discontinuance of the remainingTravan-based products.

 

***General and Administrative Expenses***.  General and administrative expenses amountedto $8.4 million or 5.1% of net revenues in fiscal year 2002, compared to $8.9million or 5.7% of net revenues in fiscal year 2001.  The decrease was due primarily to the absence of severanceexpenses resulting from the reduction in force in the fourth quarter of fiscalyear 2001 and legal fees related to the settlement of two lawsuits, each ofwhich were included in the fiscal year 2001 amounts.   Partially offsetting this decrease was an increase in bad debtexpense compared to fiscal year 2001 due primarily to the bankruptcy of one ofour European distributors.

 

***Interest Income***.  In fiscal year 2002, we generated interestincome of $355,000, compared to interest income of $473,000 in fiscal year2001.  The decrease was due to loweryields on our investments notwithstanding higher average cash balances.

 

***Interest Expense***.  In fiscal year 2002, we generated interestexpense of $86,000, compared to no interest expense in fiscal year 2002.  The increase was the result of balancesoutstanding on our long-term debt arrangement.

 

***Income Taxes***.  Our fiscal year 2002 provision for state,federal and foreign income taxes amounted to $2.3 million.  This equated to an effective tax rate of34.3% in fiscal year 2002, down from 37.9% in fiscal year 2001.  The decrease in the effective tax rate fromthe prior year was due primarily to increased benefit from foreign salesqualifying for foreign sales corporation treatment compared to prior years, aswell as the generation of research and development tax credits.

 

**Liquidity and Capital Resources**

 

Ourprimary source of liquidity has historically been cash generated fromoperations. In the fourth quarter of fiscal year 2003, we raised an aggregateof $20.6 million in net proceeds through the sale of our common stock.  In addition, during fiscal year 2002, wesupplemented cash generated from operations by borrowing on a term loan underour credit facility

 

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(describedbelow) to fund tenant improvements and equipment purchases for our newheadquarter facilities. During fiscal year 2003, our cash and cash equivalentsincreased by $28.1 million as inflows from financing activities of$22.7 million and operating cash inflows of $9.0 million exceededinvesting activities of $3.7 million. Financing cash inflows during fiscal year 2003 were a result of commonstock sold in a private placement, common stock sold through our employee stockpurchase plan and stock option exercises, all partially offset by payments onour long term borrowings.  Operatingcash inflows during fiscal year 2003 were primarily a result of an increase inaccounts payable and other accrued liabilities and net income for the yearpartially offset by an increase in accounts receivable. Investing activitiesduring fiscal year 2003 consisted of the $2.4 million cash portion of the Okapipurchase and capital expenditures, primarily computer and relatedequipment.  Accounts receivableincreased from $21.4 million at June 30, 2002 to $31.9 million atJune 30, 2003 due to the increased level of revenue, primarily from ourlargest customer.

 

Infiscal year 2001, we entered into a lease for our headquarters in San Diego,California. The headquarters comprise two buildings, representing approximately160,000 total square feet. The buildings were completed in March 2002 atwhich time we occupied the buildings and the lease commenced. The lease is fora period of 12 years and can be renewed for one additional five-yearperiod. The total approximate future minimum lease payments under thisagreement will be $2.7 million in fiscal 2004, $2.8 million in fiscal2005 and fiscal 2006, $2.9 million in fiscal 2007 and fiscal 2008, and atotal of $18.1 for the balance of the initial term.

 

At June 30, 2003, we had a credit facility consisting of a$4,655,000 five-year term note for capital equipment purchases that matures onAugust 28, 2007 and a $10,000,000 two-year revolving line of credit forworking capital purposes that expires on November 30, 2003.  Both the term note and the line of creditare collateralized by a general security interest in our assets.  Interest on the term note is set at variablerates equal to the bank’s prime rate (4.00% on June 30, 2003) in effectfrom time to time.  Interest on the lineof credit is set at the bank’s prime rate in effect from time to time minus0.25% or, at our option, a rate equal to LIBOR plus 2.25%.  The loan agreement that governs the creditfacility contains certain financial and non-financial covenants.  The term note provided for a nine-month drawperiod through August 28, 2002, during which period only interest waspaid.  Upon expiration of the drawperiod, all amounts outstanding under the note are payable in 60 equal paymentsof principal plus interest.  AtJune 30, 2003, $3,957,000, including $931,000 due within one year, wasoutstanding under the term note and no amounts were outstanding under the lineof credit.

 

In addition, the credit facilityrequires us to comply with several financial and non-financial covenants. Aviolation of one or more of these covenants would constitute a default underthe credit facility, which would enable the lender, at its option withoutnotice, to accelerate all then outstanding indebtedness under the creditfacility and/or terminate the lender’s obligation to extend credit under thecredit facility.

 

At June 30,2003, we had $55.0 million of cash and cash equivalents and an unused bank lineof credit of $10 million which matures in November 2003. We believethat these resources will be sufficient to fund our operations and to providefor our growth for the next twelve months and into the foreseeable future.

 

**Off-Balance Sheet Arrangements and ContractualObligations**

 

We have nooff-balance sheet arrangements or significant guarantees to third parties notfully recorded in our Balance Sheets or fully disclosed in our Notes toConsolidated Financial Statements.

 

The following schedule summarizes our contractual obligations to makefuture payments as of June 30, 2003: (in thousands)

 
|                                |   | **Payments  Due by Period** |   |
|-------------------------------------|--------|-----------------------------|--------|
| **Contractual Obligations**         |   | **Total**                   |   | **Less than  1 year** |   | **2-3 years** |   | **4-5 years** |   | **After 5  years** |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |
| Operating Leases                    |   | $                           | 36,936 |   | $ | 3,270 |   | $ | 6,434 |   | $ | 6,417 |   | $ | 20,815 |   |
| Debt                                |   | 3,957                       |   | 931 |   | 1,940 |   | 1,086 |   | — |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations |   | $                           | 40,893 |   | $ | 4,201 |   | $ | 8,374 |   | $ | 7,503 |   | $ | 20,815 |   |
|                                     |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Inflation**

 

Inflation has not had asignificant negative impact on our operations during the periodspresented.  Historically we have been ableto pass on to our customers’ increases in raw material prices caused byinflation.  We cannot however provideassurance that we will be able to continue to pass on any future increasesshould they occur.  Although ourexposure to the effects of inflation are magnified by the concentration of OEMbusiness, we believe that our continuous efforts at material and labor costreductions will minimize such effects.

 

**Recent Accounting Pronouncements**

 

In January 2003, theFinancial Accounting Standards Board, or FASB, issued FASB Interpretation No.46 (FIN 46), “Consolidation of Variable Interest Entities.”  FIN 46 establishes accounting guidance forconsolidation of a variable interest entity (VIE), formerly referred to asspecial purpose entities.  FIN 46 appliesto any business enterprise both public and private, that has a controllinginterest, contractual relationship or other business relationship with aVIE.  FIN 46 provides guidance fordetermining when an entity (the Primary Beneficiary) should consolidate a VIEthat functions to support the activities of the Primary Beneficiary.  We have no contractual relationship or otherbusiness relationship with a VIE and therefore the adoption will not have aneffect on our consolidated results of operations or financial position.

** **

**ITEM 7A.  *Quantitativeand Qualitative Disclosures about Market Risk***

 

Market risk representsthe risk of loss that may impact our financial position, results of operationsor cash flows due to adverse changes in financial and commodity market pricesand rates.  We are exposed to marketrisk in the areas of changes in United States interest rates and changes inforeign currency exchange rates as measured against the U.S. dollar.  These exposures are directly related to ournormal operating and funding activities. Historically, we have not usedderivative instruments or engaged in hedging activities.

 

***Interest Rate Risk.* **Our financial instruments with marketrisk exposure are cash equivalents, short-term investments, term note and, tothe extent utilized, revolving line of credit. At June 30, 2003,$3,957,000 including $931,000 due within one year, was outstanding under theterm note and no amounts were outstanding under the line of credit. The primaryobjective of our investment activities is to preserve principal whilemaximizing yields without significantly increasing risk.  To achieve this objective, we currentlymaintain a portfolio of high-grade commercial paper and money market funds.

 

Interest on our term note is set at variable rates equalto the bank’s prime rate in effect from time to time.  Interest on the line of credit is set at the bank’s prime rate ineffect from time to time minus 0.25% or, at our option, a rate equal to LIBORplus 2.25%.  Our objective inmaintaining access to these variable rate borrowings is the flexibilityobtained regarding early repayment without penalties and lower overall costs ascompared with fixed rate borrowings.

 

Under our current policies, we do not use interestrate derivatives instruments to manage our exposure to interest ratechanges.  A hypothetical 100 basis pointadverse move in interest rates along the entire interest rate yield curve wouldresult in no material change in our pre-tax earnings and cash flow.

 

***Foreign CurrencyRisk.* **We conductbusiness on a global basis and essentially all of our products sold ininternational markets are denominated in U.S. dollars.  Historically, export sales have representeda significant portion of our sales and are expected to continue to represent asignificant portion of sales.

 

Our wholly-owned subsidiaries in the United Kingdom,France and Germany incur costs and maintain inter-company balances which aredenominated in local currencies.  Asexchange rates vary, these results when translated into U.S. dollars may varyfrom expectations and adversely impact overall expected results.  The effect of exchange rate fluctuations onour results during fiscal year 2003 was net expense of $332,000.

 

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**ITEM 8.   *FinancialStatements and Supplementary Data***

 

Our consolidatedfinancial statements and supplementary data required by this item are set forthat the pages indicated in Item 14(a)(1).

 

**ITEM 9.   *Changes inand Disagreements with Accountants on Accounting and Financial Disclosure***

 

None.

 

**ITEM 9A.   *Controls andProcedures***

 

We maintain disclosure controls and procedures designed toensure that material information related to Overland, including ourconsolidated subsidiaries, is recorded, processed, summarized and reportedwithin the time periods specified in the SEC rules and forms.

 

(a)          Asof the end of the period covered by this report, we carried out an evaluationunder the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934). Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded, as of the date of such evaluation, thatthe design and operation of such disclosure controls and procedures wereeffective.

 

(b)         No significant changeswere made in our internal controls over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recentfiscal quarter.

 

26

----

 

**PART III**

 

**ITEM 10.  *Directorsand Executive Officers of the Registrant***

 

The information requiredby this item is included under the captions entitled “Election of Directors”,“Executive Officers”, and “Section 16(a) Beneficial Ownership ReportingCompliance” in our Proxy Statement to be filed for our 2003 Annual Meeting ofShareholders and is incorporated herein by reference.

 

**ITEM 11.    *ExecutiveCompensation***

 

The information requiredby this item is included under the caption entitled “Compensation of ExecutiveOfficers”, “Non-Employee Director Compensation” and “Report of the CompensationCommittee of the Board of Directors on Executive Compensation” in our ProxyStatement to be filed for our 2003 Annual Meeting of Shareholders and isincorporated herein by reference.

 

**ITEM 12.    *SecurityOwnership of Certain Beneficial Owners and Management***

 

The informationrequired by this item is included under the caption entitled “SecurityOwnership of Certain Beneficial Owners and Management” in our Proxy Statementto be filed for our 2003 Annual Meeting of Shareholders and is incorporatedherein by reference.

 

**ITEM 13.    *CertainRelationships and Related Transactions***

 

The information requiredby this item is included under the caption entitled “Certain Relationships andRelated Transactions” in our Proxy Statement to be filed for our 2003 AnnualMeeting of Shareholders and is incorporated herein by reference.

 

27

----

 

**PART IV**

 

**ITEM 15.    *Exhibits,Financial Statement Schedules and Reports on Form 8-K***

 

(a)(1) **FinancialStatements**.  The followingConsolidated Financial Statements of Overland Storage, Inc. and Report ofIndependent Auditors are included in a separate section of this Report atthe page numbers so indicated:

 
| Report of Independent  Auditors                                                                                                   |
|-----------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheet  as of June 30, 2003 and 2002                                                                     |
| Consolidated  Statement of Operations for the Years Ended June 30, 2003, 2002 and 2001                                       |
| Consolidated  Statement of Shareholders’ Equity and Comprehensive Income for Years Ended  June 30, 2003, 2002, and 2001 |
| Consolidated Statement of  Cash Flows for the Years Ended June 30, 2003, 2002 and 2001                                       |
| Notes to  Consolidated Financial Statements                                                                                       |

 

(a)(2)  **Financial Statement Schedule.**  The following financial statement scheduleof Overland Storage, Inc. for the years ended June 30, 2003, 2002 and 2001is filed as part of this Report on the page number so indicated and should beread in conjunction with the Consolidated Financial Statements of OverlandStorage, Inc.:

 
| Schedule II - Valuation and Qualifying  Accounts |
|-------------------------------------------------------|

 

Schedules not listedabove have been omitted because they are not applicable or are not required orthe information required to be set forth therein is included in theConsolidated Financial Statements or Notes thereto.

 

(a)(3)  **Exhibits**

 
|   2.1 |   | Agreement and Plan of  Merger dated June 20, 2003 by and among Overland, Okapi Acquisition Co.,  Inc. and Okapi Software, Inc.++                   |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                    |
|   3.1 |   | Overland’s Amended and  Restated Articles of Incorporation. (11)                                                                                   |
|            |   |                                                                                                                                                    |
|   3.2 |   | Overland’s Bylaws. (6)                                                                                                                             |
|            |   |                                                                                                                                                    |
|   4.1 |   | Specimen stock  certificate. (11)                                                                                                                       |
|            |   |                                                                                                                                                    |
|   4.2 |   | Form of Purchase Agreement  dated May 12, 2003 by and between Overland and Purchaser of Common Stock  in Private Placement Transaction. (14)       |
|            |   |                                                                                                                                                    |
| 10.1            |   | Build-to-Suit Single  Tenant Lease dated October 12, 2000 by and between Overland and LBA-VIF  One, LLC. (5)                                       |
|            |   |                                                                                                                                                    |
| 10.2            |   | First Amendment to Lease  dated January 18, 2001 by and between Overland and LBA Overland, LLC, as  successor-in-interest to LBA-VIF One, LLC. (8) |
|            |   |                                                                                                                                                    |
| 10.3            |   | Second Amendment to Lease  dated March 8, 2001 by and between Overland and LBA Overland, LLC. (8)                                                  |
|            |   |                                                                                                                                                    |
| 10.4            |   | Business Loan Agreement  dated November 28, 2001 by and between Overland and Comerica  Bank-California. (10)                                       |
|            |   |                                                                                                                                                    |
| 10.5            |   | Security agreement dated  November 28, 2001 by and between Overland and Comerica Bank-California.  (10)                                            |
|            |   |                                                                                                                                                    |
| 10.6            |   | Master Revolving Note  dated November 28, 2001 by and between Overland and Comerica  Bank-California. (10)                                         |
|            |   |                                                                                                                                                    |
| 10.7            |   | Variable Rate-Single  Payment Note dated November 28, 2001 by and between Overland and  Comerica Bank-California. (10)                             |

 

28

----

 
| 10.8   |   | First Modification to  Business Loan Agreement dated August 13, 2002 by and between Overland  and Comerica Bank-California. (12)        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |
| 10.9   |   | Design Purchase and  Services Agreement dated June 15, 2001 by and between Overland and  Seagate Removable Storage Solutions LLC. (7) + |
|   |   |                                                                                                                                         |
| 10.10  |   | Supply Agreement dated  June 15, 2001 by and between Overland and Seagate Removable Storage  Solutions LLC. (7) +                       |
|   |   |                                                                                                                                         |
| 10.11  |   | VR2 Technology License  Agreement dated April 27, 2000 by and between Overland and Storage  Technology Corp. (2) +                      |
|   |   |                                                                                                                                         |
| 10.12  |   | Amendment to VR2  Technology License Agreement dated June 18, 2002 by and between Overland  and Storage Technology Corp. (11) +         |
|   |   |                                                                                                                                         |
| 10.13  |   | Corporate Purchase  Agreement dated June 7, 2000 by and between Overland and Compaq Computer  Corporation and its Affiliates. (3) +     |
|   |   |                                                                                                                                         |
| 10.14  |   | Base Agreement #4902RL1317  dated November 1, 2002 between Overland and International Business  Machines Corporation. (13) +            |
|   |   |                                                                                                                                         |
| 10.15* |   | Form of Indemnification  Agreement entered into by and between Overland and each of its directors and  officers. (10)                        |
|   |   |                                                                                                                                         |
| 10.16* |   | Form of Retention  Agreement entered into by and between Overland and each of its executive  officers. (8)                                   |
|   |   |                                                                                                                                         |
| 10.17* |   | Employment Agreement dated  March 12, 2001 by and between Overland and Christopher Calisi. (5)                                          |
|   |   |                                                                                                                                         |
| 10.18* |   | Employment Agreement dated  December 4, 2000 by and between Overland and Vernon A. LoForti. (5)                                         |
|   |   |                                                                                                                                         |
| 10.19* |   | Employment Agreement dated April 2, 2001 by and  between Overland and Chet Baffa. (8)                                                   |
|   |   |                                                                                                                                         |
| 10.20* |   | Second Amendment to 1995  Stock Option Plan. (1)                                                                                             |
|   |   |                                                                                                                                         |
| 10.21* |   | Form of Stock Option  Agreement for options granted under the 1995 Stock Option Plan. (8)                                                    |
|   |   |                                                                                                                                         |
| 10.22* |   | First Amendment to 1997  Executive Stock Option Plan. (1)                                                                                    |
|   |   |                                                                                                                                         |
| 10.23* |   | Form of Stock Option  Agreement for options granted under the 1997 Executive Stock Option Plan. (8)                                          |
|   |   |                                                                                                                                         |
| 10.24* |   | 2000 Stock Option Plan, as  amended and restated. (11)                                                                                       |
|   |   |                                                                                                                                         |
| 10.25* |   | Form of Notice of Stock Option  Award and Stock Option Award Agreement for options granted under 2000 Stock  Option Plan. (6)                |
|   |   |                                                                                                                                         |
| 10.26* |   | 2001 Supplemental Stock  Option Plan. (9)                                                                                                    |
|   |   |                                                                                                                                         |
| 10.27* |   | Form of Notice of Stock  Option Award and Stock Option Award Agreement for options granted under 2001  Supplemental Stock Option Plan. (11)  |
|   |   |                                                                                                                                         |
| 10.28* |   | First Amendment to 1996  Employee Stock Purchase Plan. (1)                                                                                   |
|   |   |                                                                                                                                         |
| 10.29* |   | Amendment No. 2 to 1996  Employee Stock Purchase Plan dated August 20, 2003.                                                            |
|   |   |                                                                                                                                         |
| 21.1   |   | Subsidiaries of the  Registrant.                                                                                                             |
|   |   |                                                                                                                                         |
| 23.1   |   | Consent of  PricewaterhouseCoopers LLP, Independent Accountants.                                                                             |

 

29

----

 
| 24.1   |   | Power of Attorney  (included on signature page).                                                                                                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of  Christopher Calisi, President and Chief Executive Officer, pursuant to Rule  13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                  |
|   |   |                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification of Vernon A.  LoForti, Vice President and Chief Financial Officer, pursuant to Rule  13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                              |
|   |   |                                                                                                                                                                                                                                                                           |
| 32.1   |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, executed by Christopher Calisi, President and Chief Executive  Officer, and Vernon A. LoForti, Vice President and Chief Financial Officer. |

 

----

(1)                                  Incorporated by reference to the Company’sForm S-8 Registration Statement No. (333-41754) filed July 19, 2000.

(2)                                  Incorporated by reference to the Company’sForm 8-K filed July 25, 2000.

(3)                                  Incorporated by reference to the Company’sForm 10-K filed September 28, 2000.

(4)                                  Incorporated by reference to the Company’sForm S-8 Registration Statement No. (333-53380) filed Jan. 8, 2001.

(5)                                  Incorporated by reference to the Company’sForm 10-Q filed February 14, 2001.

(6)                                  Incorporated by reference to the Company’sForm 10-Q filed May 15, 2001.

(7)                                  Incorporated by reference to the Company’s Form8-K filed July 2, 2001.

(8)                                  Incorporated by reference to the Company’sForm 10-K filed September 28, 2001.

(9)                                  Incorporated by reference to the Company’sForm S-8 Registration Statement No. (333-75060) filed Dec. 13, 2001.

(10)                            Incorporated by reference to the Company’sForm 10-Q filed February 13, 2002.

(11)                            Incorporated by reference to the Company’sForm 10-K filed September 27, 2002.

(12)                            Incorporated by reference to the Company’sForm 10-Q filed November 13, 2002.

(13)                            Incorporated by reference to the Company’sForm 10-Q filed May 12, 2003.

(14)                            Incorporated by reference to the Company’sForm S-3 Registration Statement (333-105414) filed May 20, 2003.

 

+                                         The Company has requested confidentialtreatment for certain portions of this Exhibit.

 

++                            Certainschedules and similar attachments to the Agreement and Plan of Merger have beenomitted pursuant to Item 601(b)(2) of Regulation S-K.  A copy of the omitted schedules and similar attachments will beprovided supplementally to the SEC upon request.

 

*                                         Management contract or compensation plan orarrangement.

 

 

(b) **Reports on Form 8-K**.  We filed the following Current Reports onForm 8-K during the fourth quarter of the year ended June 30, 2003:

 

(1)                                  CurrentReport on Form 8-K dated April 24, 2003, containing theApril 24, 2003 press release related to our announcement of third quarterfiscal 2003 results.

 

(2)                                  CurrentReport on Form 8-K dated May 15, 2003, containing the May 15,2003 press release related to our announcement of the sale of 1,430,000 sharesof common stock.

 

(3)                                  CurrentReport on Form 8-K dated June 26, 2003, containing the June 26,2003 press release related to our announcement that we acquired Okapi Software,Inc.

 

30

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis Report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                                 | OVERLAND STORAGE, INC.                   |
|--------------------------------------|------------------------------------------|
|                                 |                                     |
| Dated:  September 26, 2003 | By: /s/ CHRISTOPHER  CALISI              |   |
|                                 | Christopher Calisi                       |
|                                 | President & Chief  Executive Officer |

 

### **POWEROF ATTORNEY**

 

KNOW ALL MEN BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints Christopher Calisi and Vernon A. LoForti, jointly and severally, ashis or her attorney-in-fact, each with the power of substitution, for him orher in any and all capacities, to sign any amendments to this Annual Report onForm 10-K and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or his substitute orsubstitutes, may do or cause to be done by virtue hereof.  Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**          |   | **Title**                                                                      |   | **Date**                |
|------------------------|--------|--------------------------------------------------------------------------------|--------|-------------------------|
|                   |   |                                                                           |   |                    |
| /s/ CHRISTOPHER CALISI |   | President, Chief  Executive                                                    |   | September 26, 2003 |
| Christopher Calisi     |   | Officer and Director                                                           |   |                    |
|                   |   | (Principal Executive  Officer)                                                 |   |                    |
|                   |   |                                                                           |   |                    |
| /s/ VERNON A. LoFORTI  |   | Vice President, Chief                                                          |   | September 26, 2003 |
| Vernon A. LoForti      |   | Financial Officer and  Secretary (Principal Financial  and Accounting Officer) |   |                    |
|                   |   |                                                                           |   |                    |
| /s/ ROBERT A. DEGAN    |   | Director                                                                       |   | September 26, 2003 |
| Robert A. Degan        |   |                                                                           |   |                    |
|                   |   |                                                                           |   |                    |
| /s/ SCOTT McCLENDON    |   | Chairman of the Board                                                          |   | September 26, 2003 |
| Scott McClendon        |   |                                                                           |   |                    |
|                   |   |                                                                           |   |                    |
| /s/ JOHN MUTCH         |   | Director                                                                       |   | September 26, 2003 |
| John Mutch             |   |                                                                           |   |                    |
|                   |   |                                                                           |   |                    |
| /s/ PETER PREUSS       |   | Director                                                                       |   | September 26, 2003 |
| Peter Preuss           |   |                                                                           |   |                    |
|                   |   |                                                                           |   |                    |
| /s/ JOHN A. SHANE      |   | Director                                                                       |   | September 26, 2003 |
| John A. Shane          |   |                                                                           |   |                    |

 

31

----

 

**REPORTOF INDEPENDENT AUDITORS**

 

 

To the Board of Directorsand Shareholdersof Overland Storage, Inc.:

 

In our opinion, the consolidated financial statementslisted in the index appearing under Item 15(a)(1) present fairly, in allmaterial respects, the financial position of Overland Storage, Inc. and itssubsidiaries at June 30, 2003 and 2002, and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2003 in conformity with accounting principles generally acceptedin the United States of America.  Inaddition, in our opinion, the financial statement schedule listed in the indexappearing under Item 15(a)(2) presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
|                            |
|                            |
| San Diego, California           |
| August 7, 2003             |

 

F-1

----

 

**OVERLAND STORAGE, INC.**

##### **CONSOLIDATEDBALANCE SHEET**

(in thousands)

 
|                                                                                                                                                 |   | **June 30,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                 |   | **2003**          |    | **2002** |   |
|                                                                                                                                                 |   |              |    |   |   |
| **Assets**                                                                                                                                           |   |              |    |   |   |
|                                                                                                                                                 |   |              |    |   |   |
| Current  assets:                                                                                                                                     |   |              |    |   |   |
| Cash  and cash equivalents                                                                                                                           |   | $                 | 55,020  |   | $ | 26,884 |   |
| Accounts  receivable, less allowance for doubtful accounts of $413 and $652, respectively                                                            |   | 31,850            |    | 21,391 |   |
| Inventories                                                                                                                                          |   | 19,262            |    | 17,503 |   |
| Deferred  tax assets                                                                                                                                 |   | 4,351             |    | 3,368 |   |
| Other  current assets                                                                                                                                |   | 2,461             |    | 2,187 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  current assets                                                                                                                                |   | 112,944           |    | 71,333 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Property  and equipment, net                                                                                                                         |   | 8,171             |    | 9,171 |   |
| Intangible  assets                                                                                                                                   |   | 8,983             |    | — |   |
| Other  assets                                                                                                                                        |   | 824               |    | 499 |   |
|                                                                                                                                                 |   |              |    |   |   |
|                                                                                                                                                 |   | $                 | 130,922 |   | $ | 81,003 |   |
|                                                                                                                                                 |   |              |    |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                       |   |              |    |   |   |
|                                                                                                                                                 |   |              |    |   |   |
| Current  liabilities:                                                                                                                                |   |              |    |   |   |
| Accounts  payable                                                                                                                                    |   | $                 | 15,546  |   | $ | 8,266 |   |
| Accrued  liabilities                                                                                                                                 |   | 4,526             |    | 3,077 |   |
| Accrued  payroll and employee compensation                                                                                                           |   | 3,194             |    | 2,718 |   |
| Income  taxes payable                                                                                                                                |   | 2,292             |    | 313 |   |
| Accrued  warranty                                                                                                                                    |   | 2,129             |    | 1,720 |   |
| Current  portion of long-term debt                                                                                                                   |   | 931               |    | 776 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  current liabilities                                                                                                                           |   | 28,618            |    | 16,870 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Long-term debt                                                                                                                                       |   | 3,026             |    | 3,879 |   |
| Deferred tax liabilities                                                                                                                             |   | 4,091             |    | — |   |
| Other  liabilities                                                                                                                                   |   | 1,923             |    | 988 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  liabilities                                                                                                                                   |   | 37,658            |    | 21,737 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Commitments  and contingencies (Note 11)                                                                                                             |   |              |    |   |   |
|                                                                                                                                                 |   |              |    |   |   |
| Shareholders’  equity:                                                                                                                          |   |              |    |   |   |
| Common  stock, no par value, 25,000 shares authorized; 12,959 and 11,003 shares  issued and outstanding at June 30, 2003 and 2002, respectively |   | 63,884            |    | 36,654 |   |
| Accumulated  other comprehensive loss                                                                                                                |   | (192              | )       | (278 | ) |
| Retained  earnings                                                                                                                                   |   | 29,572            |    | 22,890 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  shareholders’ equity                                                                                                                     |   | 93,264            |    | 59,266 |   |
|                                                                                                                                                 |   |              |    |   |   |
|                                                                                                                                                 |   | $                 | 130,922 |   | $ | 81,003 |   |

 

See accompanyingnotes to consolidated financial statements.

 

F-2

----

 

**OVERLAND STORAGE, INC.**

##### **CONSOLIDATEDSTATEMENT OF OPERATIONS**

(in thousands, except per share amounts)

 

 
|                                           |   | **Year Ended  June 30,** |    |
|------------------------------------------------|--------|-------------------------------|---------|
|                                           |   | **2003**                      |    | **2002** |   | **2001** |   |
|                                           |   |                          |    |   |   |   |   |
| Net  revenue:                                  |   |                          |    |   |   |   |   |
| Product  sales                                 |   | $                             | 193,169 |   | $ | 161,948 |   | $ | 154,928 |   |
| License  fees and royalties                    |   | 2,712                         |    | 1,432 |   | 768 |   |
|                                           |   |                          |    |   |   |   |   |
|                                           |   | 195,881                       |    | 163,380 |   | 155,696 |   |
|                                           |   |                          |    |   |   |   |   |
| Cost  of revenue                               |   | 141,863                       |    | 120,935 |   | 116,662 |   |
|                                           |   |                          |    |   |   |   |   |
| Gross  profit                                  |   | 54,018                        |    | 42,445 |   | 39,034 |   |
|                                           |   |                          |    |   |   |   |   |
| Operating  expenses:                           |   |                          |    |   |   |   |   |
| Sales  and marketing                           |   | 26,700                        |    | 20,963 |   | 16,392 |   |
| Research  and development                      |   | 7,376                         |    | 6,553 |   | 10,093 |   |
| General  and administrative                    |   | 9,632                         |    | 8,413 |   | 8,850 |   |
|                                           |   |                          |    |   |   |   |   |
|                                           |   | 43,708                        |    | 35,929 |   | 35,335 |   |
|                                           |   |                          |    |   |   |   |   |
| Income  from operations                        |   | 10,310                        |    | 6,516 |   | 3,699 |   |
|                                           |   |                          |    |   |   |   |   |
| Other  income (expense):                       |   |                          |    |   |   |   |   |
| Interest  income                               |   | 427                           |    | 355 |   | 473 |   |
| Interest  expense                              |   | (212                          | )       | (86 | ) | — |   |
| Other  (expense) income, net                   |   | (332                          | )       | 54 |   | (156 | ) |
| Income  before income taxes                    |   | 10,193                        |    | 6,839 |   | 4,016 |   |
|                                           |   |                          |    |   |   |   |   |
| Provision  for income taxes                    |   | 3,511                         |    | 2,346 |   | 1,522 |   |
|                                           |   |                          |    |   |   |   |   |
| Net  income                                    |   | $                             | 6,682   |   | $ | 4,493 |   | $ | 2,494 |   |
|                                           |   |                          |    |   |   |   |   |
| Net  income per share:                         |   |                          |    |   |   |   |   |
| Basic                                          |   | $                             | 0.59    |   | $ | 0.42 |   | $ | 0.24 |   |
| Diluted                                        |   | $                             | 0.54    |   | $ | 0.40 |   | $ | 0.23 |   |
|                                           |   |                          |    |   |   |   |   |
| Shares used in computing net income per share: |   |                          |    |   |   |   |   |
| Basic                                          |   | 11,318                        |    | 10,641 |   | 10,382 |   |
| Diluted                                        |   | 12,314                        |    | 11,271 |   | 10,884 |   |

 

See accompanyingnotes to consolidated financial statements.

 

F-3

----

 

**OVERLAND STORAGE, INC.**

**CONSOLIDATEDSTATEMENT OF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

(in thousands)

 
|                                         |   | **Common  Stock** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Retained********Earnings** |      |       |       | **Total  Comprehensive  Income** |   |
|----------------------------------------------|--------|-------------------|--------|------------------------------------------------------|------------|------------------------------|-----------|------------|------------|----------------------------------|--------|
|                                         |   | **Shares**        |   | **Amount**                                           | ** ** | ** **                   | **Total** | ** ** | ** ** |
|                                         |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Balance at  June 30, 2000               |   | 10,270            |   | $                                                    | 31,753     |                         | $         | (159       | )          | $                                | 15,903 |   | $ | 47,497 |   |   |   |
|                                         |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Stock option and  purchase plans             |   | 243               |   | 1,058                                                |       |                         |      |       |       | 1,058                            |   |   |   |
| Stock-based  compensation                    |   |              |   | 97                                                   |       |                         |      |       |       | 97                               |   |   |   |
| Tax benefits  from exercise of stock options |   |              |   | 706                                                  |       |                         |      |       |       | 706                              |   |   |   |
| Comprehensive  income:                       |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Net income                                   |   |              |   |                                                 |       |                         |      | 2,494      |       | 2,494                            |   | 2,494 |   |
| Foreign currency  translation                |   |              |   |                                                 |       | (173                         | )         |       |       | (173                             | )      | (173 | ) |
| Balance at  June 30, 2001               |   | 10,513            |   | 33,614                                               |       | (332                         | )         | 18,397     |       | 51,679                           |   | $ | 2,321 |   |
|                                         |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Stock option and  purchase plans             |   | 490               |   | 2,755                                                |       |                         |      |       |       | 2,755                            |   |   |   |
| Stock-based  compensation                    |   |              |   | 5                                                    |       |                         |      |       |       | 5                                |   |   |   |
| Tax benefits  from exercise of stock options |   |              |   | 280                                                  |       |                         |      |       |       | 280                              |   |   |   |
| Comprehensive  income:                       |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Net income                                   |   |              |   |                                                 |       |                         |      | 4,493      |       | 4,493                            |   | 4,493 |   |
| Foreign currency  translation                |   |              |   |                                                 |       | 54                           |      |       |       | 54                               |   | 54 |   |
| Balance at  June 30, 2002               |   | 11,003            |   | 36,654                                               |       | (278                         | )         | 22,890     |       | 59,266                           |   | $ | 4,547 |   |
|                                         |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Stock option and  purchase plans             |   | 391               |   | 2,807                                                |       |                         |      |       |       | 2,807                            |   |   |   |
| Sale of common  stock                        |   | 1,430             |   | 20,623                                               |       |                         |      |       |       | 20,623                           |   |   |   |
| Stock issued for  acquisition of a business  |   | 135               |   | 2,705                                                |       |                         |      |       |       | 2,705                            |   |   |   |
| Tax benefits  from exercise of stock options |   |              |   | 1,095                                                |       |                         |      |       |       | 1,095                            |   |   |   |
| Comprehensive  income:                       |   |              |   |                                                 |       |                         |      |       |       |                             |   |   |   |
| Net income                                   |   |              |   |                                                 |       |                         |      | 6,682      |       | 6,682                            |   | 6,682 |   |
| Foreign currency  translation                |   |              |   |                                                 |       | 86                           |      |       |       | 86                               |   | 86 |   |
| Balance at  June 30, 2003               |   | 12,959            |   | $                                                    | 63,884     |                         | $         | (192       | )          | $                                | 29,572 |   | $ | 93,264 |   | $ | 6,768 |   |

 

See accompanyingnotes to consolidated financial statements.

 

F-4

----

 

**OVERLAND STORAGE, INC.**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

(in thousands)

 
|                                                                                                    |   | **Year Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                    |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Operating  activities:                                                                                  |   |                          |   |   |   |   |   |
| Net  income                                                                                             |   | $                             | 6,682  |   | $ | 4,493 |   | $ | 2,494 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities:           |   |                          |   |   |   |   |   |
| Deferred  tax (benefit) provision                                                                       |   | (602                          | )      | 450 |   | (761 | ) |
| Depreciation  and amortization                                                                          |   | 2,354                         |   | 2,109 |   | 1,915 |   |
| Bad  debt expense                                                                                       |   | 146                           |   | 230 |   | 277 |   |
| Tax  benefits from exercise of stock options                                                            |   | 1,095                         |   | 280 |   | 706 |   |
| Loss  (gain) on disposition of assets                                                                   |   | —                        |   | 24 |   | (442 | ) |
| Non-cash  compensation                                                                                  |   | —                        |   | 5 |   | 97 |   |
| Changes  in assets and liabilities:                                                                     |   |                          |   |   |   |   |   |
| Accounts  receivable                                                                                    |   | (10,577                       | )      | 2,469 |   | (1,569 | ) |
| Inventories                                                                                             |   | (1,756                        | )      | 5,826 |   | (1,221 | ) |
| Other  assets and liabilities                                                                           |   | 468                           |   | 735 |   | (1,104 | ) |
| Accounts  payable and accrued/other liabilities                                                         |   | 10,747                        |   | (1,478 | ) | (5,477 | ) |
| Accrued  payroll and employee compensation                                                              |   | 476                           |   | (58 | ) | 505 |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Net  cash provided by (used in) operating activities                                                    |   | 9,033                         |   | 15,085 |   | (4,580 | ) |
|                                                                                                    |   |                          |   |   |   |   |   |
| Investing activities:                                                                                   |   |                          |   |   |   |   |   |
| Capital expenditures                                                                                    |   | (1,354                        | )      | (6,509 | ) | (2,068 | ) |
| Proceeds  from sale of assets                                                                           |   | —                        |   | — |   | 833 |   |
| Payments  made in association with acquisition of a business                                            |   | (2,361                        | )      | — |   | — |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Net  cash used in investing activities                                                                  |   | (3,715                        | )      | (6,509 | ) | (1,235 | ) |
|                                                                                                    |   |                          |   |   |   |   |   |
| Financing activities:                                                                                   |   |                          |   |   |   |   |   |
| Proceeds  from long-term debt                                                                           |   | —                        |   | 4,655 |   | — |   |
| Payments  on long-term debt                                                                             |   | (698                          | )      | — |   | — |   |
| Proceeds  from exercise of stock options and the sales of stock under the employee  stock purchase plan |   | 2,807                         |   | 2,755 |   | 1,058 |   |
| Proceeds  from the sale of common stock                                                                 |   | 20,623                        |   | — |   | — |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Net  cash provided by financing activities                                                              |   | 22,732                        |   | 7,410 |   | 1,058 |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Effect  of exchange rate changes on cash                                                                |   | 86                            |   | 54 |   | (173 | ) |
|                                                                                                    |   |                          |   |   |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                                   |   | 28,136                        |   | 16,040 |   | (4,930 | ) |
| Cash  and cash equivalents, beginning of year                                                           |   | 26,884                        |   | 10,844 |   | 15,774 |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Cash  and cash equivalents, end of year                                                                 |   | $                             | 55,020 |   | $ | 26,884 |   | $ | 10,844 |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| **Supplemental  disclosure of cash flow information:**                                                  |   |                          |   |   |   |   |   |
| Cash  paid for income taxes                                                                             |   | $                             | 1,649  |   | $ | 1,574 |   | $ | 4,468 |   |
| Cash  paid for interest                                                                                 |   | $                             | 199    |   | $ | 86 |   | $ | — |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| **Non-cash  investing activities are as follows**:                                                      |   |                          |   |   |   |   |   |
| Common  stock issued for acquisition of a business                                                      |   | $                             | 2,705  |   |   |   |   |   |

 

See accompanyingnotes to consolidated financial statements

 

F-5

----

 

**OVERLAND STORAGE, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**General**

 

Overland Storage, Inc.(the “Company”) was incorporated on September 8, 1980 under the laws ofthe State of California.  The Companydesigns, develops, manufactures, markets and supports automated tape datastorage systems used by businesses for backup, archival and data interchangefunctions in environments from small businesses to large enterprises requiringhigh-availability networks.  Inaddition, the Company markets a family of open storage management softwaresolutions aimed at mid to large-sized enterprises.  The Company’s fiscal year ends on the Sunday closest toJune 30.  For ease of presentation,the Company’s year-end is deemed to be June 30.  Fiscal years 2003, 2002 and 2001 each included 52 weeks.

 

**Principles of Consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Overland Storage (Europe) Ltd., Overland Storage SARL, OverlandStorage GmbH, Tecmar, Inc., Okapi Acquisition Co., Inc. and Overland StorageExport Limited, a foreign sales corporation. All significant intercompany accounts and transactions have beeneliminated.

 

**Management Estimates and Assumptions**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Revenue Recognition**

 

Revenue on direct productsales (excluding sales to commercial distributors and certain OEM customers) isrecognized upon shipment of products to such customers. These customers are notsubject to any specific right of return or price protection, except for anydefective product which may be returned under the Company’s warrantypolicy.  Title and risk of loss transferto the customer when the product leaves the Company’s dock.  Product sales to commercial distributioncustomers are subject to certain rights of return, stock rotation privilegesand price protection.  Revenue fromshipments to these customers is not recognized until the related products arein turn sold to the ultimate customer by the commercial distributor.  At June 30, 2003, $956,000 of producthad been shipped to the Company’s commercial distributors, but not yet shippedto ultimate customers.  As part of itsagreement with certain OEM customers, the Company ships products to variousdistribution hubs around the world and retains ownership of that inventoryuntil it is pulled by these OEM cutomers to fulfill their customer orders, atwhich time, generally the same business day, the Overland sale is recorded.

 

The Company has entered into various licensingagreements relating to its Variable Rate Randomizer (“VR2”)®technology.  These agreements typicallycall for royalty fees based on sales by licensees of products containing VR2.Royalties on sales by licensees of products containing VR2 arerecorded when earned, generally in the period during which the licensee shipsthe products containing VR2 technology.  In certain instances, the customer has elected to purchase fromthe Company the Applications Specific Integrated Circuit (“ASIC”) chipsembodying VR2, which are priced to include the cost of the chip plusan embedded royalty fee.  In theseinstances, revenues on ASIC chip sales are recorded as product revenue whenearned, which is upon the shipment of the underlying ASIC chip incorporatingthe VR2 technology to the customer.

 

F-6

----

 

In some cases, theselicensing agreements include initial payments to the Company for the deliveryof the VR2 technology platform, consulting services or both.  The Company recognizes revenues related tothe transfer of the technology platform upon delivery and acceptance by thecustomer, which entitles the Company to the initial fee and eliminates anyfurther obligations under the agreement. The Company recognizes revenue related to consulting services as earned,typically based on time committed to the project.

 

The Company recognizessoftware revenues in accordance with the American Institute of Certified PublicAccountants’ (AICPA) Statement of Position 97-2, “Software Revenue Recognition”(“SOP 97-2”), as amended by SOP 98-9, “Modification of SOP 97-2, SoftwareRevenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”). TheCompany licenses software under noncancelable perpetual agreements.  License revenues are recognized in theperiod in which the license agreement is in place, the fee is fixed anddeterminable, delivery of the technology has occurred and collectibility isprobable.  Sales through the Company’sresellers are evidenced by a master agreement governing the relationshiptogether with binding purchase orders digitally/electronically placed on theCompany’s business-to-business ordering system.  The license is considered delivered, and the license revenue isrecognized, when the reseller is issued a license key in the name of aspecifically identified end user.

 

For software arrangementsthat include multiple elements, SOP 97-2 requires the Company to allocate thefee to the individual elements based on vendor-specific objective evidence offair value (“VSOE”), regardless of the prices stated within the contract. VSOEis limited to the price charged when the element is sold separately or, for anelement that is not yet sold separately, the price established by management havingthe relevant authority. When there is VSOE for the undelivered elements inmultiple-element arrangements that are not accounted for using contractaccounting, the Company allocates revenue to the delivered elements of thearrangement using the residual value method. Therefore, the Company defersrevenues from the arrangement fee equal to the fair value of the undeliveredelements and the difference between the total arrangement fee and the amountdeferred for the undelivered elements is recognized as revenue related to thedelivered elements. The fair value of maintenance and post contract customersupport (“PCS”) obligations are based upon separate sales of renewals to othercustomers or upon renewal rates quoted in the contracts.

 

When VSOE does not existto allocate revenue to each of the various elements of an arrangement andrevenue cannot be allocated using the residual value method, the entire feefrom the arrangement is deferred until the earlier of the establishment of VSOEor the delivery of all the elements of the arrangement.

 

#### **Shipping and Handling**

 

Amounts billed tocustomers for shipping and handling are included in product sales and costsincurred related to shipping and handling are included in cost of revenues.

 

**Research and Development Costs**

 

Research and developmentcosts are expensed as incurred.

 

#### **Advertising Costs**

 

Advertising costsare expensed as incurred.  Advertisingexpenses for 2003, 2002 and 2001 were $1,223,000, $1,539,000 and $1,689,000,respectively.

 

F-7

----

 

**Warranty Costs**

 

The Companygenerally provides a three-year advance replacement return-to-factory warrantyon its Neo Series, PowerLoader and LoaderXpress products.  The Company also provides on-site servicefor the first warranty year of the Neo Series products located in the UnitedStates and Canada, for which it contracts with third-party serviceproviders.  For most products, theCompany offers a program called XchangeNOW as part of its return-to-factorywarranty which enables customers to receive an advance replacement unit shippedwithin two business days after placing a service request.  The customer ships the defective unit backto the Company using the shipping materials from the replacement unit. TheCompany records a provision for estimated future warranty costs at the time ofshipment for both the return-to-factory and on-site warranties.  Separately priced on-site warranties areoffered for sale to customers of other product lines.  The Company contracts with outside vendors to provide servicerelating to all on-site warranties. Warranty revenues and amounts paid in advance to outside serviceorganizations are recognized in the financial statements in revenues and costof revenues, respectively, over the warranty period.

 

#### **Fair Value of Financial Instruments**

 

The Company’sfinancial instruments consist of cash and cash equivalents, trade receivablesand payables and its revolving line of credit and note payable (Note 5).  The carrying amounts of these instrumentsapproximate fair value because of their short-term maturities and variableinterest rates.

 

#### **Comprehensive Income**

 

Comprehensiveincome for the Company includes net income and foreign currency translationadjustments, which are charged or credited to accumulated other comprehensiveincome within shareholders’ equity.

 

**Segment Data**

 

The Companyreports segment data based on the management approach. The management approachdesignates the internal reporting that is used by management for makingoperating and investment decisions and evaluating performance as the source ofthe Company’s reportable segments.  TheCompany uses one measurement of profitability and does not disaggregate itsbusiness for internal reporting.  Basedon the criteria of SFAS No. 131, “ Disclosures about Segments of an Enterpriseand Related Information,” the Company has determined that it operates in onesegment providing data storage solutions for mid-range computer networks.  The Company also discloses information aboutproducts and services, geographic areas and major customers.

#### ** **

#### **Concentrations of Risks**

 

The Company’s customers include original equipmentmanufacturers, integrators, distributors, and value added resellers.  Financial instruments which potentiallysubject the Company to concentrations of credit risk are primarily accountsreceivable.  The Company performsongoing credit evaluations of its customers, generally requires no collateraland maintains allowances for potential credit losses and sales returns.

 

The Company’s largest single customer accounted forapproximately 58%, 62% and 63% of sales in fiscal years 2003, 2002 and 2001,respectively, and approximately 52%, 49% and 62% of accounts receivable atJune 30, 2003, 2002 and 2001, respectively. No other customer accountedfor 10% or more of sales in any of the three years presented.

#### ** **

#### **F-8**

#### ****

#### ** **

#### **Information about Geographic Areas**

 

The Company markets itsproducts domestically and internationally, with its principal internationalmarket being Europe.  The tables belowcontain information about the geographical areas in which the Company operates.Revenues are attributed to the location to which the product was shipped.  Long-lived assets are based on location ofdomicile.

 

Revenues attributedto the Netherlands and the United Kingdom was primarily the result of shipmentsto Compaq/HP European distribution centers.

 
|                     |   | **Revenues**       |    | **Long Lived  Assets** |   |
|--------------------------|--------|--------------------|---------|------------------------|--------|
|                     |   | **(in thousands)** |    |
| **2003**                 |   |               |    |                   |   |
| United States            |   | $                  | 110,790 |                   | $      | 16,335 |   |
| Netherlands              |   | 352                |    | —                 |   |
| United Kingdom           |   | 52,176             |    | 819                    |   |
| Rest of Europe           |   | 20,259             |    | —                 |   |
| Other foreign  countries |   | 12,304             |    | —                 |   |
|                     |   |               |    |                   |   |
|                     |   | 195,881            |    | 17,154                 |   |
| **2002**                 |   |               |    |                   |   |
| United States            |   | 86,260             |    | 8,381                  |   |
| Netherlands              |   | 23,795             |    | —                 |   |
| United Kingdom           |   | 21,872             |    | 790                    |   |
| Rest of Europe           |   | 18,028             |    | —                 |   |
| Other foreign  countries |   | 13,425             |    | —                 |   |
|                     |   |               |    |                   |   |
|                     |   | 163,380            |    | 9,171                  |   |
| **2001**                 |   |               |    |                   |   |
| United States            |   | 81,942             |    | 3,976                  |   |
| Netherlands              |   | 29,576             |    | —                 |   |
| United Kingdom           |   | 11,739             |    | 819                    |   |
| Rest of Europe           |   | 15,494             |    | —                 |   |
| Other foreign  countries |   | 16,945             |    | —                 |   |
|                     |   |               |    |                   |   |
|                     |   | $                  | 155,696 |                   | $      | 4,795 |   |

 

**Cash Equivalents**

 

Highly liquid investmentswith original maturities of three months or less are classified as cashequivalents.

 

**Inventories**

 

Inventoriesare stated at the lower of cost (first-in-first-out method) or market.

 

F-9

----

 

#### **Property and Equipment**

 

Property and equipmentare recorded at cost.  Depreciation iscomputed using the straight-line method over the estimated useful lives of thedepreciable assets as follows:

 
| Leasehold improvements  |   | The shorter of  the estimated useful lives  of the assets or the term of the lease using  the straight-line method |
|-------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
| Machinery and equipment |   | 3-5 years                                                                                                          |
| Furniture and fixtures  |   | 5 years                                                                                                            |
| Computer equipment      |   | 3-5 years                                                                                                          |

 

Expenditures for normalmaintenance and repair are charged to expense as incurred, and improvements arecapitalized.  Upon the sale orretirement of property or equipment, the asset cost and related accumulateddepreciation are removed from the respective accounts and any gain or loss isincluded in the results of operations.

 

#### **Long-Lived Assets**

 

The Company evaluates therecoverability of long-lived assets, including property and equipment andcertain identifiable intangible assets, in accordance with SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” which itadopted on July 1, 2002. SFAS 144 requires the Company to review forimpairment of long-lived assets whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Factorsconsidered important which could trigger an impairment review include: 

 

•                  significantunderperformance relative to historical or projected future operating results; 

 

•                  significantchanges in the manner of use of the assets or the strategy for our overallbusiness; 

 

•                  significantdecrease in the market value of the assets; and 

 

•                  significantnegative industry or economic trends. 

 

When the Companydetermines that the carrying amount of long-lived assets may not be recoverablebased upon the existence of one or more of the above indicators, it assessesthe assets for impairment based on the estimated future undiscounted cash flowsexpected to result from the use of the asset and its eventual disposition. Ifthe carrying amount of an asset exceeds its estimated future undiscounted cashflows, an impairment loss is recorded for the excess of the asset’s carryingamount over its fair value. Fair value is generally determined based on theestimated future discounted cash flows over the remaining useful life of theasset using a discount rate determined by management to be commensurate withthe risk inherent in the Company’s current business model. The assumptionssupporting the cash flows, including the discount rates, are determined usingmanagement’s best estimates as of the date of the impairment review. If theseestimates or their related assumptions change in the future, the Company may berequired to record additional impairment charges for these assets and futureresults of operations could be adversely affected.  The Company has not recorded any material impairment losses.

 

**Foreign Currency Translation**

 

The financialstatements of foreign subsidiaries, for which the functional currency is thelocal currency, are translated into U.S. dollars using the exchange rate at thebalance sheet date for assets and liabilities and the weighted average exchangerate during the year for revenues, expenses, gains and losses.  Translation adjustments are recorded asaccumulated other comprehensive income within shareholders’ equity.  Gains or losses from foreign currencytransactions are recognized currently in income.  Such transactions resulted in a loss of $338,000; a gain of$29,000 and a loss of $398,000 for the years ended June 30, 2003, 2002 and2001, respectively.

 

F-10

----

 

#### **Income Taxes**

 

The Company provides forincome taxes utilizing the liability method. Under the liability method, adeferred tax asset and/or liability is computed for both the expected futureimpact of differences between the financial statement and tax bases of assetsand liabilities, and for the expected future tax benefit to be derived from taxcredits and loss carryforwards.  Currentincome tax expense or benefit represents the amount of income taxes expected tobe payable or refundable for the current year. A valuation allowance is established when, in the opinion of management,it is more likely than not that some portion or all of the deferred tax assetswill not be realized.

 

**Net Income Per Share**

 

Basic earnings per shareis computed based on the weighted average number of shares of common stockoutstanding during the period.  Dilutedearnings per share is computed based on the weighted average number of sharesof common stock outstanding during the period increased by the weighted averagenumber of dilutive common stock equivalents outstanding during the period,using the treasury stock method. Anti-dilutive common stock equivalents excluded from the computation ofdiluted earnings per share amounted to 99,000, 877,000 and 682,000 in thefiscal years ended June 30, 2003, 2002 and 2001, respectively.

 

A reconciliation of thecalculation of basic and diluted earnings per share is as follows:

 
|                                                      |   | **Year Ended  June 30,**              |   |
|-----------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                      |   | **2003**                                   |   | **2002** |   | **2001** |   |
|                                                      |   | **(in  thousands, except per share data)** |   |
|                                                      |   |                                       |   |   |   |   |   |
| Net income                                                |   | $                                          | 6,682  |   | $ | 4,493 |   | $ | 2,494 |   |
|                                                      |   |                                       |   |   |   |   |   |
| Basic:                                                    |   |                                       |   |   |   |   |   |
|                                                      |   |                                       |   |   |   |   |   |
| Weighted average  number of common shares outstanding     |   | 11,318                                     |   | 10,641 |   | 10,382 |   |
| Basic net income  per share                               |   | $                                          | 0.59   |   | $ | 0.42 |   | $ | 0.24 |   |
|                                                      |   |                                       |   |   |   |   |   |
| Diluted:                                                  |   |                                       |   |   |   |   |   |
|                                                      |   |                                       |   |   |   |   |   |
| Weighted average  number of common shares outstanding     |   | 11,318                                     |   | 10,641 |   | 10,382 |   |
| Common stock  equivalents using the treasury stock method |   | 996                                        |   | 630 |   | 502 |   |
| Shares used in  computing net income per share            |   | 12,314                                     |   | 11,271 |   | 10,884 |   |
| Diluted net  income per share                             |   | $                                          | 0.54   |   | $ | 0.40 |   | $ | 0.23 |   |

 

F-11

----

 

#### **Stock-Based Compensation**

 

The Company measurescompensation expense for its stock-based employee compensation plans using theintrinsic value method and provides pro forma disclosures of net income andearnings per share as if the fair value-based method had been applied inmeasuring compensation expense. Compensation charges related to non-employee stock-based compensationare measured using fair value methods and recognized as earned.

 

The Company accounts foremployee stock-based compensation using the intrinsic value method.  In most cases, no compensation expense hasbeen recognized for its employee stock option grants, as they have been grantedat the fair market value of the underlying Common Stock at the date ofgrant.  No compensation expense has beenrecognized for purchase rights under the ESPP as they have been granted inaccordance with the terms of the ESPP.** **Hadcompensation expense for the Company’s employee stock-based compensation awardsissued during 2003, 2002 and 2001 been determined based on a fair value method,the Company’s net income and net income per share would have been reduced tothe pro forma amounts indicated below:

 
|                                                                                                                                    |   | **Year Ended  June 30,**                 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                                    |   | **2003**                                      |   | **2002** |   | **2001** |   |
|                                                                                                                                    |   | **(in  thousands, except per share amounts)** |   |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Net income, as  reported                                                                                                                |   | $                                             | 6,682  |   | $ | 4,493 |   | $ | 2,494 |   |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |   | (4,862                                        | )      | (2,777 | ) | (3,053 | ) |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Pro forma net  income                                                                                                                   |   | $                                             | 1,820  |   | $ | 1,716 |   | $ | (559 | ) |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Earnings per  share:                                                                                                                    |   |                                          |   |   |   |   |   |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Basic - as  reported                                                                                                                    |   | $                                             | 0.59   |   | $ | 0.42 |   | $ | 0.24 |   |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Basic - pro  forma                                                                                                                      |   | $                                             | 0.16   |   | $ | 0.16 |   | $ | (0.05 | ) |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Diluted - as  reported                                                                                                                  |   | $                                             | 0.54   |   | $ | 0.40 |   | $ | 0.23 |   |
|                                                                                                                                    |   |                                          |   |   |   |   |   |
| Diluted - pro  forma                                                                                                                    |   | $                                             | 0.15   |   | $ | 0.15 |   | $ | (0.05 | ) |

 

The fair value ofeach option grant is estimated on the date of grant using a Black-Scholesoption-pricing model.  Theweighted-average estimated fair value of employee stock options granted duringfiscal years 2003, 2002 and 2001 were $13.41, $6.42 and $6.27 per share, respectively.  The weighted average assumptions used forgrants during the fiscal years 2003, 2002 and 2001 were: no dividend yield forall years, risk-free interest rates of 3.7%, 4.8% and 5.5%, respectively,expected volatility of 82%, 82% and 81%, respectively, and expected lives of7.0 years for all fiscal years.

 

The fair value of each share purchase right under theESPP is estimated at the inception of each offering period also using aBlack-Scholes option-pricing model.  Theweighted-average estimated fair value of each share purchase right grantedduring fiscal years 2003, 2002 and 2001 were $4.65, $4.36 and $4.32 per share,respectively.  The weighted averageassumptions used during fiscal years 2003, 2002 and 2001 were: no dividendyield for all years, risk-free interest rates of 3.7%, 4.8% and 5.5%,respectively, expected volatility of 79%, 106% and 94%, respectively, and anexpected life of 6 months for all fiscal years.

 

F-12

----

 

**Reclassifications**

 

Certain prior periodamounts have been reclassified to conform to the current year presentation.

 

#### **Recent Accounting Pronouncements**

 

In January 2003, theFinancial Accounting Standards Board, or FASB, issued FASB Interpretation No.46 (“FIN 46”), “Consolidation of Variable Interest Entities.”  FIN 46 establishes accounting guidance forconsolidation of a variable interest entity (VIE), formerly referred to asspecial purpose entities.  FIN 46applies to any business enterprise both public and private, that has a controllinginterest, contractual relationship or other business relationship with aVIE.  FIN 46 provides guidance fordetermining when an entity (the Primary Beneficiary) should consolidate a VIEthat functions to support the activities of the Primary Beneficiary.  The Company has no contractual relationshipor other business relationship with a VIE and therefore the adoption will nothave an effect on its consolidated results of operations or financial position.

** **

**NOTE 2 – ACQUISITION AND DISPOSITION OF CERTAIN ASSETS**

 

In June 2003, theCompany acquired all of the assets and assumed all of the liabilities of OkapiSoftware, Inc., a privately held company based in San Diego, California. Thisacquisition was accounted for as an asset acquisition in accordance with SFAS142, “Goodwill and Other Intangible Assets.” The Company’s consolidatedstatements of operations include the results of Okapi from the date ofacquisition.

 

Okapi provided intelligentdisk-based storage appliances used by Information Technology managers to reducetheir back up window, speed restores and compliment tape back up strategies allwhile fitting within existing infrastructure. Okapi’s solution combinesproprietary management software with iSCSI and ATA disk technologies to createhigh-speed, scalable and reliable disk-to-disk-to-tape solutions.  Their solution accelerates backup by 50 to90%; restores data in milliseconds; completes back up consistently and providesa quick, reliable replication of critical data to secure, remote locations toeliminate the need to transport magnetic tapes.  Okapi’s solution is an adjacent appliance that fills a customerneed and complements the Company’s existing family of tape automation products.

** **

**Theaggregate purchase price for the assets of Okapi of  $5,364,000 was comprised of the issuance of 134,551 shares ofOverland stock valued at $2,705,000, cash of $2,500,000, and $159,000 ofacquisition related costs. Of the $5,364,000 purchase price, $41,000 wasallocated to the net tangible liabilities acquired and $8,983,000, whichincludes a deferred tax liability, was allocated to acquired technology.  As this transaction was accounted for as atax-free exchange, the Company recorded a deferred tax liability of $3,578,000.  The acquired technology represented by theintangible asset will be amortized over a five year life.**

** **

**InJune 2001, the Company sold its Travan-based WS30 and EDT40 tape drivedesigns (the “Designs) to Seagate Removable Storage Solutions LLC, a Delawarelimited liability company now known as Certance LLC, in exchange for futureroyalty payments based on the sales of certain tape drive products and relatedtape media cartridges based on the Designs.**

** **

**Asa result of the sale of the Designs and the related exit of the entry-leveltape drive business in June 2001, the Company recorded a pretax chargeof  $2,535,000, including: $1,979,000 ininventory impairments; $205,000 of lease exit costs related to the Company’sLongmont facility; $160,000 of severance costs; $142,000 in fixed assetimpairments; and legal fees. All accrued amounts, with the exception of thelease exit costs, were paid during calendar year 2002.  The lease exit costs are expected to be paidover the remaining life of the lease.**

 

During the third quarterof fiscal year 2001, the Company sold certain rights and assets (including theproduct design together with all documentation, manufacturing rights, toolingand inventory) of its automated SLR loader product to Tandberg Data for apurchase price of $1,135,000. As a result of this transaction, the Companyrecorded a pre-tax gain of $810,000 within other income.  In connection with the sale, the Companyalso will receive a per unit royalty on the first 6,000 SLR loader units thatare manufactured and sold by Tandberg Data.

 

F-13

----

 

**NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENTCAPTIONS**

 
|                                            |   | **June 30,**   |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **2003**            |   | **2002** |   |
|                                            |   | **(in  thousands)** |   |
| Inventories:                                    |   |                |   |   |   |
| Raw  materials                                  |   | $                   | 8,029  |   | $ | 8,659 |   |
| Work  in process                                |   | 2,244               |   | 2,724 |   |
| Finished  goods                                 |   | 8,989               |   | 6,120 |   |
|                                            |   |                |   |   |   |
|                                            |   | $                   | 19,262 |   | $ | 17,503 |   |
|                                            |   |                |   |   |   |
| Property  and equipment:                        |   |                |   |   |   |
| Machinery  and equipment                        |   | $                   | 5,574  |   | $ | 5,894 |   |
| Computer  equipment                             |   | 7,421               |   | 6,075 |   |
| Furniture  and fixtures                         |   | 1,103               |   | 1,079 |   |
| Leasehold  improvements                         |   | 3,726               |   | 3,657 |   |
|                                            |   |                |   |   |   |
|                                            |   | 17,824              |   | 16,705 |   |
| Less  accumulated depreciation and amortization |   | (9,653              | )      | (7,534 | ) |
|                                            |   |                |   |   |   |
|                                            |   | $                   | 8,171  |   | $ | 9,171 |   |

 

Depreciation andamortization expense was $2,354,000, $2,109,000 and $1,915,000 in fiscal years2003, 2002 and 2001, respectively.

** **

**NOTE 4 – INTANGIBLE ASSETS**

 

At June 30,2003, the Company had intangible assets of $8,983,000 consisting solely of thetechnology purchased in the Okapi acquisition during fiscal year 2003 asdiscussed in Note 2.  At June 30,2002, the Company had no material intangible assets.  During fiscal year 2003, no amounts were amortized due to thetiming of the acquisition near the end of the fiscal year.  The Okapi technology will be amortized overfive years.

 

Estimated amortizationexpense for this intangible asset will be approximately $1.8 million forthe twelve months ending June 30, 2004 and each of the four fiscal yearsthereafter.

 

**NOTE 5 - LONG-TERM DEBT**

 

At June 30, 2003, the Company had a credit facilityconsisting of a $4,655,000 five-year term note for capital equipment purchasesthat matures on August 28, 2007 and a $10,000,000 two-year revolving lineof credit for working capital purposes that expires on November 30,2003.  Both the term note and the lineof credit are collateralized by the Company’s assets.  Interest on the term note is set at variable rates equal to thebank’s prime rate (4.00% on June 30, 2003) in effect from time totime.  Interest on the line of credit isset at the bank’s prime rate in effect from time to time minus 0.25% or, at theCompany’s option, a rate equal to LIBOR plus 2.25%.  The loan agreement that governs the credit facility containscertain financial and non-financial covenants. The term note provided for a nine-month draw period throughAugust 28, 2002, during which period only interest was paid.  Upon expiration of the draw period, allamounts outstanding under the note are payable in 60 equal payments ofprincipal plus interest.  AtJune 30, 2003, $3,957,000, including $931,000 due within one year, was outstandingunder the term note and no amounts were outstanding under the line of credit.

 

F-14

----

 

The aggregatematurities for long-term debt for the five years after June 30, 2003 are$931,000 for the twelve months ending June 30, 2004, $1,009,000 for thetwelve months ending June 30, 2005, $931,000 for each of the twelve monthsending June 30, 2006 and 2007, and $155,000 for the twelve months endingJune 30 2008.

** **

**NOTE 6 - INCOME TAXES**

 

The components of income before income tax provisionswere as follows:

 

|     |   | **Year ended  June 30,** |   |
|----------|--------|-------------------------------|--------|
|     |   | **2003**                      |   | **2002** |   | **2001** |   |
|     |   | **(in  thousands)**           |   |
|     |   |                          |   |   |   |   |   |
| Domestic |   | $                             | 8,371  |   | $ | 5,616 |   | $ | 3,778 |   |
| Foreign  |   | 1,822                         |   | 1,223 |   | 238 |   |
|     |   | $                             | 10,193 |   | $ | 6,839 |   | $ | 4,016 |   |

** **

The provision forincome taxes includes the following:

 

|      |   | **Year ended  June 30,** |   |
|-----------|--------|-------------------------------|--------|
|      |   | **2003**                      |   | **2002** |   | **2001** |   |
|      |   | **(in  thousands)**           |   |
| Current:  |   |                          |   |   |   |   |   |
| Federal   |   | $                             | 3,176  |   | $ | 1,382 |   | $ | 1,775 |   |
| State     |   | 653                           |   | 205 |   | 445 |   |
| Foreign   |   | 525                           |   | 309 |   | 63 |   |
|      |   | 4,354                         |   | 1,896 |   | 2,283 |   |
|      |   |                          |   |   |   |   |   |
| Deferred: |   |                          |   |   |   |   |   |
| Federal   |   | (679                          | )      | 300 |   | (649 | ) |
| State     |   | (164                          | )      | 150 |   | (156 | ) |
| Foreign   |   | —                        |   | — |   | 44 |   |
|      |   | (843                          | )      | 450 |   | (761 | ) |
|      |   | $                             | 3,511  |   | $ | 2,346 |   | $ | 1,522 |   |

 

A reconciliationof income taxes computed by applying the federal statutory income tax rate of34% to income before income taxes to the total income tax provision reported inthe Consolidated Statement of Operations is as follows:

 
|                                        |   | **Year ended  June 30,** |   |
|---------------------------------------------|--------|-------------------------------|--------|
|                                        |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                        |   | **(in thousands)**            |   |
|                                        |   |                          |   |   |   |   |   |
| U.S.  Federal income tax at statutory rate  |   | $                             | 3,466  |   | $ | 2,325 |   | $ | 1,366 |   |
| State  income taxes, net of federal benefit |   | 383                           |   | 234 |   | 190 |   |
| Extraterritorial income exclusion benefit   |   | (246                          | )      | (272 | ) | (169 | ) |
| Permanent  differences                      |   | 45                            |   | 58 |   | 39 |   |
| Other                                       |   | (137                          | )      | 1 |   | 96 |   |
| Provision  for income taxes                 |   | $                             | 3,511  |   | $ | 2,346 |   | $ | 1,522 |   |

 

F-15

----

 

Deferred income taxes at June 30, 2003 and 2002comprised:

 
|                                 |   | **June 30,**   |   |
|--------------------------------------|--------|---------------------|--------|
|                                 |   | **2003**            |   | **2002** |   |
|                                 |   | **(in  thousands)** |   |
| Deferred  tax assets:                |   |                |   |   |   |
| Inventory                            |   | $                   | 1,983  |   | $ | 1,352 |   |
| Warranty  reserves                   |   | 1,134               |   | 965 |   |
| Vacation and deferred compensation   |   | 379                 |   | 284 |   |
| State income taxes                   |   | 255                 |   | 70 |   |
| Software                             |   | 223                 |   | 256 |   |
| Reserve for doubtful accounts        |   | 164                 |   | 260 |   |
| Intangible assets                    |   | 77                  |   | — |   |
| Barter credits                       |   | —              |   | 459 |   |
| Other                                |   | 144                 |   | 6 |   |
| Gross  deferred tax asset            |   | 4,359               |   | 3,652 |   |
|                                 |   |                |   |   |   |
| Deferred  tax liabilities            |   |                |   |   |   |
| Purchased intangible assets          |   | (3,578              | )      | — |   |
| Property  and equipment depreciation |   | (477                | )      | (372 | ) |
| Other                                |   | (44                 | )      | (44 | ) |
| Gross  deferred tax liability        |   | (4,099              | )      | (416 | ) |
| Net  deferred income taxes           |   | $                   | 260    |   | $ | 3,236 |   |

 

No valuationallowance was recorded as of June 30, 2003 or 2002, as the Companybelieves it is more likely than not the deferred tax assets will be realized.

** **

**NOTE 7 - COMMON STOCK**

 

**OnMay 15, 2003, the Company sold 1,430,000 shares of common stock in aprivate placement transaction.  Thestock was sold at $15.39, a 10 percent discount to the closing market price onMay 12, 2003. Gross proceeds to Overland were $22,008,000 with netproceeds after commission and offering expenses of $20,623,000. Proceeds willbe used by the Company to fund working capital needs in support of the growthof its business and for general corporate purposes.**

** **

**NOTE 8 -  STOCKOPTIONS**

 

The Company has seven active stock option plans,administered by the Compensation Committee of the Board of Directors, whichprovide for the issuance of options to employees, officers, directors andconsultants.  As of June 30, 2003,the Company had reserved 4,774,990 shares of common stock for issuance underthe 1991 Non-Qualified Stock Option Plan (“1991 Plan”), 1993 Stock Option Plan,1993-A Stock Option Plan, 1992-A Non-Qualified Stock Option Plan (“1992 Plan”),1995 Stock Option Plan (“1995 Plan”), 1997 Executive Stock Option Plan (“1997Plan”), 2000 Stock Option Plan (“2000 Plan”), and the 2001 Supplemental StockOption Plan (“2001 Plan”) (collectively, the “Option Plans”).  The Option Plans provide for the granting ofstock options equal to the fair market value of the Company’s Common Stock onthe date the option is granted.  TheOption Plans have been approved by shareholders with the exception of the 1991Plan, the 1992 Plan, and the 2001 Plan. Currently, the Company may grant options only from the 1995 Plan, the1997 Plan, the 2000 Plan and the 2001 Plan. Certain options issued under selected plans call for 100% vesting ofoutstanding options upon a change of control of the Company.  Options granted during the last three fiscalyears generally vest over a three year period, with monthly vesting from thedate of grant.  Options granted in prioryears generally vested at a rate of 25% per year over a four-year period fromthe date of grant.  Options expire aftera period not to exceed ten years, except in the event of termination, whereuponvested shares must be exercised generally within 30 days, or upon death ordisability, where an extended six or twelve-month exercise period isspecified.  As of June 30, 2003,approximately 3.3 million shares are reserved for issuance upon exercise ofoutstanding options and approximately 80,000 are available for grant under theOption Plans.

 

F-16

----

 

 

Option activityfor the three years ended June 30, 2003 is summarized as follows:

 
|                                       |   | **Shares** |   | **Weighted-Average  Exercise Price** |   |
|--------------------------------------------|--------|------------|--------|--------------------------------------|--------|
| Options  outstanding at June 30, 2000 |   | 1,885,358  |   | $                                    | 6.05   |   |
|                                       |   |       |   |                                 |   |
| Options granted                            |   | 1,459,050  |   | 8.52                                 |   |
| Options  exercised                         |   | (170,789   | )      | 2.67                                 |   |
| Options  forfeited                         |   | (399,898   | )      | 7.13                                 |   |
|                                       |   |       |   |                                 |   |
| Options  outstanding at June 30, 2001 |   | 2,773,721  |   | $                                    | 7.40   |   |
|                                       |   |       |   |                                 |   |
| Options granted                            |   | 634,103    |   | 8.38                                 |   |
| Options  exercised                         |   | (439,445   | )      | 5.59                                 |   |
| Options  forfeited                         |   | (177,017   | )      | 8.67                                 |   |
|                                       |   |       |   |                                 |   |
| Options  outstanding at June 30, 2002 |   | 2,791,362  |   | $                                    | 7.83   |   |
|                                       |   |       |   |                                 |   |
| Options granted                            |   | 922,500    |   | 13.41                                |   |
| Options  exercised                         |   | (350,624   | )      | 6.85                                 |   |
| Options  forfeited                         |   | (107,997   | )      | 8.96                                 |   |
|                                       |   |       |   |                                 |   |
| Options  outstanding at June 30, 2003 |   | 3,255,241  |   | $                                    | 9.48   |   |

 

The following table summarizes information about stockoptions outstanding as of June 30, 2003:

 
|                           |   | **Options  Outstanding** |   | **Options  Exercisable**                           |   |
|--------------------------------|--------|--------------------------|--------|----------------------------------------------------|--------|
| **Range of  Exercise  Prices** |   | **Shares  Outstanding**  |   | **Weighted-Average  Remaining  Contractual  Life** |   | **Weighted-Average  Exercise  Price** |   | **Shares  Exercisable** |   | **Weighted-Average  Exercise  Price** |   |
| **June 30, 2003:**        |   |                     |   |                                               |   |   |   |   |   |   |   |
| $0.20 -  3.34             |   | 87,650                   |   | 2.3                                                |   | $ | 2.03 |   | 87,650 |   | $ | 2.03 |   |
| 3.35 -  8.34              |   | 1,077,597                |   | 6.6                                                |   | 6.64 |   | 830,541 |   | 6.61 |   |
| 8.35 -10.01                    |   | 1,188,083                |   | 7.8                                                |   | 9.07 |   | 859,836 |   | 9.03 |   |
| 10.02-20.25                    |   | 901,911                  |   | 9.1                                                |   | 14.13 |   | 239,573 |   | 13.78 |   |
|                           |   |                     |   |                                               |   |   |   |   |   |   |   |
| $0.20-20.25                    |   | 3,255,241                |   | 7.6                                                |   | $ | 9.48 |   | 2,017,600 |   | $ | 8.29 |   |

 

F-17

----

 

**1996 Employee Stock Purchase Plan**

 

InFebruary 1997, the Company adopted the 1996 Employee Stock Purchase Plan(the “ESPP”) whereby 250,000 shares of Common Stock were reserved for issuanceand purchase by employees of the Company to assist them in acquiring a stockownership interest in the Company and to encourage them to remain employees ofthe Company.  In November 1998, theshareholders approved an amendment to increase the total number of shares ofCommon Stock from 250,000 to 500,000 shares. The ESPP is intended to qualify under Section 423 of the InternalRevenue Code and permits eligible employees to purchase Common Stock at adiscount through payroll deductions during specified six-month offering periods.  No employee may purchase more than $25,000worth of stock in any calendar year or 1,500 shares in any one offering period.The ESPP is administered by the Compensation Committee appointed by the Boardof Directors and provides generally that the purchase price must not be lessthan 85% of the fair market value of the Common Stock on the first or last dayof the offering period, whichever is lower.

 

During fiscalyears 2003, 2002 and 2001, a total of 40,720, 51,076 and 71,634 shares,respectively, were issued for combined proceeds of $405,000, $301,000 and$601,000, respectively.  As ofJune 30, 2003 approximately 108,000 shares were available for grant.

 

#### **NOTE 9 - 401(k) PLAN**

 

In January 1994, the Company adopted an employeesavings and retirement plan (the “401(k) Plan”) covering all of the Company’semployees.  The 401(k) Plan permits butdoes not require matching contributions by the Company on behalf of allparticipants.  The Company matchesemployee contributions at 75%, for up to 6% of an employee’s pretaxincome.  The totals of these employercontributions were $520,000, $538,000 and $562,000 in fiscal years 2003, 2002and 2001, respectively.

 

**NOTE 10 – ACCRUED RESTRUCTURING CHARGES**

** **

**Duringthe fourth quarter of fiscal year 2001, the Company recorded a pretax charge of$2,535,000, including $2,172,000 in inventory and fixed asset impairments and$363,000 of restructuring charges, related to the sale of its Travan-based WS30and EDT40 tape drive designs and related assets and the exit of the entry-leveltape drive business including the planned closure of its Longmont, Coloradofacility.**

** **

**Duringfiscal year 2002, the Company increased the restructuring accrual for facilityrent by $228,000 to reflect an adjustment in the estimated liability related tothe closure of the Longmont facility, based upon the increased amount of timethe Company believed would be required to sublease the facility, given theweakening real estate market in Longmont, Colorado.**

 

Subsequent to the termination of the Travan baseddevelopment project in May 2002, the Company temporarily used the Longmontfacility for certain engineering operations primarily related to its softwareproducts.  During the third quarter offiscal year 2003, the Company completed the relocation of all operations fromthe Longmont facility to its San Diego headquarters.  After the relocation the Company re-evaluated its accrual relatedto the Longmont facility lease.  While theCompany continues to pursue sub-lease opportunities, based upon the current commercialreal estate market in Longmont, it determined that it was unlikely that it willbe able to sub-lease the property and recorded an additional charge of $156,000as an operating expense within research and development to accrue all of theremaining payments due under the lease. The accrued facility costs are expected to be paid over the remaininglife of the lease, which expires in November 2005.

** **

**F-18**

----

 

**Thefollowing table summarizes the activity and balances of the accruedrestructuring charges through June 30, 2003: (in thousands)**

 
|                                                 |   | **Employee  Related** |   | **Lease and  Facility** |   | **Total** |   |
|------------------------------------------------------|--------|-----------------------|--------|-------------------------|--------|-----------|--------|
|                                                 |   |                  |   |                    |   |      |   |
| Restructuring  charge                                |   | $                     | 159    |                    | $      | 204       |   | $ | 363 |   |
| Cash payments                                        |   | (31                   | )      | —                  |   | (31       | )      |
|                                                 |   |                  |   |                    |   |      |   |
| Accrued  restructuring charges at June 30, 2001 |   | 128                   |   | 204                     |   | 332       |   |
|                                                 |   |                  |   |                    |   |      |   |
| Cash payments                                        |   | (128                  | )      | —                  |   | (128      | )      |
| Adjustments                                          |   | —                |   | 228                     |   | 228       |   |
|                                                 |   |                  |   |                    |   |      |   |
| Accrued  restructuring charges at June 30, 2002 |   | —                |   | 432                     |   | 432       |   |
|                                                 |   |                  |   |                    |   |      |   |
| Cash payments                                        |   | —                |   | (72                     | )      | (72       | )      |
| Adjustments                                          |   | —                |   | 156                     |   | 156       |   |
|                                                 |   |                  |   |                    |   |      |   |
| Accrued  restructuring charges at June 30, 2003 |   | $                     | — |                    | $      | 516       |   | $ | 516 |   |

 

**NOTE 11 - COMMITMENTS AND CONTINGENCIES**

 

**Leases**

 

The Company leases itsoffice, production and sales facilities under non-cancelable operating leases,which expire in various years through fiscal year 2018.  The leases provide for biennial or annualrent escalations intended to approximate increases in cost of living indices,and certain of the leases provide for rent abatement.  At June 30, 2003, future minimum lease payments under thesearrangements are as follows:

 

| **Year Ending  June 30,** |   | **Minimum  Lease  Payments** |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | **(in  thousands)**          |   |
| 2004                           |   | $                            | 3,270  |   |
| 2005                           |   | 3,243                        |   |
| 2006                           |   | 3,191                        |   |
| 2007                           |   | 3,195                        |   |
| 2008                           |   | 3,222                        |   |
| Thereafter                     |   | 20,815                       |   |
|                           |   |                         |   |
|                           |   | $                            | 36,936 |   |

 

During fiscal year 2001,the Company entered into an operating lease agreement for a new 158,000 squarefoot headquarter facility to be constructed in San Diego, California.  The lease commenced upon the Company’soccupancy of the building in February 2002.  The lease is for a period of twelve years and can be renewed forone additional five-year period.

 

As security for thelease, the Company has issued to the landlord a $1,000,000 letter of creditwhich is subject to reduction upon the maintenance of certain financialcovenants and the passage of time.

 

Rental expense isrecognized ratably over the respective lease terms and aggregated $3,843,000,$2,520,000 and $1,780,000 for fiscal years 2003, 2002 and 2001, respectively.

 

F-19

----

 

#### **Guarantees**

 

The Company’s standardwarranty is a three year advance replacement return-to-factory warranty thatcovers both parts and labor.  Forproducts that it distributes and for drives and tapes used in its products thatare manufactured by a third party, the Company passes on to the customer thewarranty provided by the manufacturer. The Company also provides on-site service for the first warranty year ofits higher-end products, for which it contracts with third-party service providers.

 

The Company provides forthe estimated cost of product warranties at the time revenue isrecognized.  The Company’s productwarranty liability reflects its best estimate of probable liability under itsproduct warranties.  The Companyestimates the warranty based on expected product failure rates, historicalexperience, and other currently available information.

 

The Company also sellsextended on-site warranties for certain products for which revenue is deferredand recognized over the warranty period.

 

Changes in theliability for product warranty and deferred revenue associated with extendedwarranties for the fiscal year ended June 30, 2003 were as follows (inthousands):

 
|                                                         |   | **Product  Warranty** |   | **Deferred  Revenue** |   |
|--------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                                         |   |                  |   |                  |   |
| Liability at  June 30, 2002                             |   | $                     | 1,720  |                  | $      | 703 |   |
|                                                         |   |                  |   |                  |   |
| Settlements made  during the period                          |   | (2,244                | )      | (1,662                | )      |
| Change in  liability for warranties issued during the period |   | 2,578                 |   | 2,539                 |   |
| Change in  liability for preexisting warranties              |   | (77                   | )      | (122                  | )      |
|                                                         |   |                  |   |                  |   |
| Liability at  June 30, 2003                             |   | $                     | 1,977  |                  | $      | 1,458 |   |

 

**Litigation**

 

The Company is subject to various legal proceedingsand claims that arise in the ordinary course of business.  In the opinion of management, the amount ofany ultimate liability with respect to these actions will not materially affectthe Company’s consolidated financial statements or results of operations.

 

On January 10, 2003, Raytheon Company filed alawsuit against the Company and various other companies in the United StatesDistrict Court for the Eastern District of Texas.  The complaint alleges that the Companies products infringe UnitedStates Patent No. 5,412,791, entitled Mass Data Storage Library.  In the complaint, Raytheon demands that thedefendants stop selling infringing products, pay Raytheon for their past use ofthe invention under the patent and pay Raytheon’s costs and expenses and itsreasonable attorney fees.  OnFebruary 6, 2003, Raytheon filed a First Amended Complaint stating itsoriginal claim with more particularity. The Company filed its Answer andCounterclaims to Raytheon’s First Amended Complaint on or about March 5,2003, denying all material allegations in the complaint and assertingcounterclaims seeking to have Raytheon’s ‘791 patent declared invalid,unenforceable and not infringed by the Company.  On or about April 22, 2003, Raytheon filed a Second AmendedComplaint against the defendants containing the same substantive infringementallegations and also adding a ninth defendant. On or about May 29, 2003, the Company responded to Raytheon’sSecond Amended Complaint with its Answer and Amended Counterclaims, againcontesting infringement, invalidity and enforceability of the ‘791 patent.  This lawsuit is in its early stages anddiscovery is just commencing.  TheDistrict Court held a scheduling conference in this matter on May 20, 2003and has set a case schedule with trial currently set for June 2004.

 

TheCompany has not recorded any accrual for contingent liability associated withthe legal proceedings described above based on the Company’s belief that aliability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.

 

F-20

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**NOTE 12 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The following tablepresents selected quarterly financial information for the periodsindicated.  This information has beenderived from the Company’s unaudited quarterly consolidated financialstatements, which in the opinion of management includes all adjustments (consistingonly of normal recurring adjustments) necessary for a fair presentation of suchinformation.  The quarterly per sharedata presented below was calculated separately and may not sum to the annualfigures presented in the Consolidated Financial Statements. These operatingresults are also not necessarily indicative of results for any future period.

 
|                               |   | **Quarters  Ended**                           |   |
|------------------------------------|--------|-----------------------------------------------|--------|
|                               |   | **Fiscal  Year 2002**                         |   | **Fiscal  Year 2003** |   |
|                               |   | **(in  thousands, except per share amounts)** |   |
|                               |   | **Sept. 30  2001**                            |   | **Dec. 31  2001** |   | **Mar. 31  2002** |   | **Jun. 30  2002** |   | **Sept. 30  2002** |   | **Dec. 31  2002** |   | **Mar. 31  2003** |   | **Jun. 30  2003** |   |
| Net sales                          |   | $                                             | 39,972 |   | $ | 45,615 |   | $ | 42,839 |   | $ | 34,954 |   | $ | 34,540 |   | $ | 48,611 |   | $ | 56,200 |   | $ | 56,530 |   |
| Gross profit                       |   | 9,323                                         |   | 11,797 |   | 12,013 |   | 9,312 |   | 9,012 |   | 13,163 |   | 15,691 |   | 16,153 |   |
| Income (loss)  from operations     |   | 1,363                                         |   | 3,118 |   | 2,795 |   | (760 | ) | (884 | ) | 2,352 |   | 3,836 |   | 5,006 |   |
| Income (loss)  before income taxes |   | 1,693                                         |   | 3,172 |   | 2,918 |   | (944 | ) | (850 | ) | 2,327 |   | 3,726 |   | 4,990 |   |
| Net income  (loss)                 |   | 1,050                                         |   | 1,967 |   | 2,102 |   | (626 | ) | (557 | ) | 1,524 |   | 2,440 |   | 3,275 |   |
|                               |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) per share:      |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                              |   | $                                             | 0.10   |   | $ | 0.19 |   | $ | 0.20 |   | $ | (0.06 | ) | $ | (0.05 | ) | $ | 0.14 |   | $ | 0.22 |   | $ | 0.27 |   |
| Diluted                            |   | 0.10                                          |   | 0.18 |   | 0.18 |   | (0.06 | ) | (0.05 | ) | 0.13 |   | 0.20 |   | 0.25 |   |

 

F-21

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**OVERLAND DATA, INC.**

**SCHEDULEII****– VALUATION AND QUALIFYING ACCOUNTS**

**FISCAL YEARS ENDED JUNE 30,2003, 2002 and 2001**

 
|                                        |   | **Balance at  Beginning  of Year** |   | **Additions  Charged to  Income** |   | **Deductions*** |   | **Deductions  Credited to  Income** |   | **Balance at  End of  Year** |   |
|---------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|-----------------|--------|-------------------------------------|--------|------------------------------|--------|
|                                        |   |                               |   |                              |   |            |   |                                |   |                         |   |
| Allowance for  Doubtful Accounts Receivable |   |                               |   |                              |   |            |   |                                |   |                         |   |
|                                        |   |                               |   |                              |   |            |   |                                |   |                         |   |
| 2003                                        |   | $                                  | 652    |                              | $      | 267             |   | $                                   | 506    |                         | $      | — |   | $ | 413 |   |
| 2002                                        |   | 603                                |   | 277                               |   | 166             |   | 69                                  |   | 652                          |   |
| 2001                                        |   | 389                                |   | 277                               |   | 63              |   | —                              |   | 603                          |   |
|                                        |   |                               |   |                              |   |            |   |                                |   |                         |   |
| Reserve for Inventory Obsolescence          |   |                               |   |                              |   |            |   |                                |   |                         |   |
|                                        |   |                               |   |                              |   |            |   |                                |   |                         |   |
| 2003                                        |   | $                                  | 3,133  |                              | $      | 3,080           |   | $                                   | 2,630  |                         | $      | — |   | $ | 3,583 |   |
| 2002                                        |   | 4,195                              |   | 1,029                             |   | 2,036           |   | 55                                  |   | 3,133                        |   |
| 2001                                        |   | 2,693                              |   | 2,996                             |   | 1,494           |   | —                              |   | 4,195                        |   |

 

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*  Amounts written off against the allowance, netof recoveries.

 

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